UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED MARCH 31, 2007
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 001-16185
GEOPHARMA, INC.
(Name of small business issuer in its charter)
| State of Florida | 59-2600232 | |
(State of or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
| 6950 Bryan Dairy Road, Largo, Florida | 33777 | |
| (Address of Principal Executive Officers) | (Zip Code) | |
Issuer’s telephone number: (727) 544-8866
Securities registered pursuant to Section 12(b) of the Exchange Act:
None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Capital Stock
(Title of Class)
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No. x
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer¨ | Accelerated filer¨ | Non-accelerated filerx |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
Issuer’s revenues for its most recent fiscal year were $59,792,137.
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 25, 2007 was $34,257,231. Number of shares outstanding of the Issuer’s common stock at $.01 par value as of June 25, 2007 was 11,285,231.
Documents Incorporated by Reference: None x
Transitional Small Business Disclosure Format: Yes x No ¨
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PART I
| ITEM 1. | DESCRIPTION OF BUSINESS |
Caution Regarding Forward-Looking Statements
Certain oral statements made by management from time to time and certain statements contained in press releases and periodic reports issued by GeoPharma, Inc. (the “Company”), as well as those contained herein, that are not historical facts are “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934 and, because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements, including those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, are statements regarding the intent, belief or current expectations, estimates or projections of the Company, its Directors or its Officers about the Company and the industry in which it operates, and are based on assumptions made by management. Forward-looking statements include without limitation statements regarding: (a) the Company’s growth and business expansion, including future acquisitions; (b) the Company’s financing plans; (c) trends affecting the Company’s financial condition or results of operations; (d) the Company’s ability to continue to control costs and to meet its liquidity and other financing needs; (e) the declaration and payment of dividends; (f) the Company’s use of proceeds from their private placement, and (g) the Company’s ability to respond to changes in customer demand and regulations. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that the anticipated results will occur. When issued in this report, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions are generally intended to identify forward-looking statements.
Important factors that could cause the actual results to differ materially from those in the forward-looking statements include, among other items, (i) changes in the regulatory and general economic environment related to the health care, generic drug and nutraceutical industry; (ii) conditions in the capital markets, including the interest rate environment and the availability of capital; (iii) changes in the competitive marketplace that could affect the Company’s revenue and/or cost and expenses, such as increased competition, lack of qualified marketing, management or other personnel, and increased labor and inventory costs; (iv) changes in technology or customer requirements, which could render the Company’s technologies noncompetitive or obsolete; (v) new product introductions, product sales mix and the geographic mix of sales and (vi) its customers’ willingness to accept its Internet platform in the future. Further information relating to factors that could cause actual results to differ from those anticipated is included but not limited to information under the headings “Business,” and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in this Form 10-K as of and for the year ended March 31, 2007. The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
History
We were incorporated as Energy Factors, Inc., a Florida corporation, in 1985. In August 1998 we changed our name to Innovative Health Products, Inc., in February 2000 we changed our name to Go2Pharmacy.com, Inc., and in September 2000 we changed our name to Go2Pharmacy, Inc., in anticipation of our merger with the Delaware corporation Go2Pharmacy.com, Inc. Our merger with Go2Pharmacy.com, Inc. was effected simultaneously with the successful completion of our initial public offering during November 2000. Effective September 6, 2002, we changed our name to Innovative Companies, Inc. and effective May 18, 2004 we changed our name to GeoPharma, Inc. We continue to conduct contract nutritional and herbal supplement product line manufacturing business under the name Innovative Health Products, Inc.
In April 2000, we formed a wholly-owned distribution subsidiary named Breakthrough Engineered Nutrition, Inc., a Florida corporation, for the purpose of marketing and distributing our own branded product lines. Breakthrough Engineered Nutrition also conducts distribution business as DelMar Labs.
In September 2000, we formed a wholly-owned manufacturing subsidiary named Belcher Pharmaceuticals, Inc., a Florida corporation, for the purpose of conducting over-the counter, and now pharmaceutical, generic drug and Cephalosporin antibiotic product line manufacturing and distribution for ourselves and others.
In March 2001, we Florida-incorporated our pharmacy benefit management company, Go2PBM Services, Inc. Go2PBM Services was created to administer drug benefits for health maintenance organizations, insurance company plans, preferred provider
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organizations, self-insured corporate health plans and Taft-Hartley self-insured labor unions. A pharmacy benefit manager is designed to oversee all member benefits in low risk plans, while taking an exclusively administrative role in higher risk plans. Our administrative services include claim processing, network management and customer service.
In September 2002, we incorporated two wholly-owned Florida corporation distribution companies, IHP Marketing, Inc. and Breakthrough Marketing, Inc., for the purpose of marketing and distributing additional branded product lines to the public in the future. IHP Marketing also conducts distribution business as Archer Stevens Pharmaceuticals and Breakthrough Marketing conducts distribution business as Bentley Labs.
In February 2004, we incorporated Belcher Capital Corporation, a Delaware corporation, for the purpose of issuing the shares of preferred stock as a part of our $10 million private placement.
In August 2005, we formed American Antibiotics LLC, a Florida limited liability corporation that will manufacture and distribute Beta-Lactam antibiotic pharmaceutical products. GeoPharma owns 51% of American Antibiotics, LLC.
In June 2006, we formed a wholly-owned manufacturing subsidiary named Libi Labs, Inc., a Florida corporation, for the purpose of conducting nutraceutical and cosmeceutical liquid, gel and cream manufacturing for ourselves and others.
Business Overview
At GeoPharma, Inc. we manufacture, package and distribute private label dietary supplements, over-the-counter and generic drugs and health and beauty products for companies worldwide under four of our Florida-incorporated companies, Innovative Health Products, Inc., Libi Labs, Belcher Pharmaceuticals, Inc. and Breakthrough Engineered Nutrition, Inc. Innovative Health Products and Libi Labs specialize in the development and manufacture of a broad range of nutritional supplements and cosmeceuticals. As a private-label contract manufacturer, we develop and manufacture for ourselves, and our customers, dietary supplements and health and beauty care products for distribution through various outlets. Belcher Pharmaceuticals, Inc is a state-of-the-art FDA-registered, drug development and manufacturing facility for generic and over-the-counter (“OTC”) drugs. Our fourth Florida corporation, Breakthrough Engineered Nutrition, Inc., develops, markets and distributes its own branded dietary supplements. DEX-L10, DEX-C20, OxyFirm and Cortiloss are Breakthrough’s current dietary supplement brands. Breakthrough’s products are distributed nationwide and internationally in specialty, food, drug and mass outlets, including Target, Wal-Mart, GNC, Walgreens, CVS, Rite Aid, Duane Reade and many others. We also have an established network of brokers and distributors strategically located across the United States and Canada. Go2PBM Services, Inc. is our pharmacy benefit management company that manages multiple health care plan members and the administration of their related pharmacy claims.
Overall Business Strategy
We are continuing to build a multi-faceted company able to maximize our efficiencies and capitalize on our synergies through vertical operations. The generic drug segment was started during the fiscal year ended March 31, 2003. While we are currently working on several Abbreviated New Drug Applications (“ANDAs”), we have procured three ANDAs from established drug development companies abroad. We have filed the ANDA transfer paperwork with the FDA. Completion of this transfer process will enable us to start manufacturing and selling these three drugs contingent only on the FDA’s approval. The Company may from time to time enter into agreements with third parties with respect to the development of new products or the purchase of new products and their related technologies. We are also working on certain drug products that may lead us to file value-added drug filings like a 505(b)2. We have in-licensed a novel peptide drug and have filed a worldwide patent on this peptide; this may lead to the potential development of a new drug thus allowing the Company to file a New Drug Application (“NDA”).
To manage our operations, we have assembled and maintained a management team with experience in manufacturing, marketing, sales and technology to assist in leading us to our sales, profit and overall business goals. Our regulatory and analytical departments have been strengthened. Our Regulatory Affairs’ department has the ability to prepare all the necessary documentation required by the FDA and any other regulatory agency. In reference to the manufacture and the distribution of generic drugs, numerous licensures have been applied for and obtained, which include a drug enforcement agency (“DEA”) license, a State of Florida prescription drug manufacturing permit, State of Florida and other specific states’ wholesale distribution licenses.
We have upgraded the analytical laboratory to support all of our development work. Additional analytical and other lab equipment have been added to conduct the required analysis of an active pharmaceutical ingredient (“API”) in addition to generating data for the ANDA work. The research, development, stability testing, clinical testing and FDA review process leading up to an approval takes approximately 12 – 36 months depending on the nature of the drug. Some of the products require little review or very little laboratory testing and hence may take only one year. In an attempt to further differentiate ourselves from other generic drug development companies, our focus remains on projects that we were able to eliminate the high barriers to entry based on our strategic alliances and other formed relationships that provide for an API source that would otherwise normally be difficult to source. The current strategy is to continue to work on drug products that can be brought to market at an even pace, as we believe this approach
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allows for immediate revenue generation and provides for a possible future, continuous revenue generation stream. Our vertical operations consist of manufacturing and distribution, sales and marketing, in-house formulation laboratory and other chemical analysis services, customer service and public relations. We will be able to support our own needs as well as those of our customers, from order processing, manufacturing through end-user distribution. We have streamlined all of our manufacturing facilities in order to continue growing both our generic and over-the-counter drug and nutraceutical manufacturing segments.
We are continuing to develop our sales and marketing strategies to build our recognition among national grocery, mass retail, major pharmaceutical drug distributors and national drug chains, long-term care facilities and other health product consumer organizations, while building brand awareness of our branded and other proprietary products as well as our private label capabilities.
We have developed several proprietary branded product lines within our distribution business segment that are currently being sold nationally. DEX-L10 is a Hoodia-based dietary supplement branded product line that has been clinically proven to suppress one’s appetite and thus aids in weight loss. Hooda is a type of cactus that is grown, harvested and imported from Africa. DEX-L10 has a number of SKUs that include an appetite-suppressant product, DEX-L10 Complete, an appetite suppressant and energy product, and now a DEX-L10 soft chew sold in two flavors, chocolate and lemon lime. We plan on further developing and expanding these lines into other flavors and packaged forms of our unique, high-protein, sugar-free foods and energy products. For both our manufacturing and distribution segments, we market our product lines using our own telemarketing efforts as well as utilizing brokers to increase the awareness and availability of our offerings and capabilities.
In the year 2000, we entered into a contract with CarePlus, to provide pharmacy benefit management services to its members through two of their health plans, through our wholly-owned subsidiary, Go2PBM Services, Inc. In addition, the agreement allowed us to be the organization’s private label over-the-counter supplier of healthcare and healthcare related products. Effective May 15, 2007, the contract was mutually terminated.
Through the development of our generic and over -the-counter drugs, private label manufacturing, branded distribution products and pharmacy benefit management efforts, we intend to provide wholesale, retail, and institutional customers with an efficient source for their generic and over-the-counter drug products, nutritional and functional convenience foods and other pharmacy-related product needs. By vertically integrating our core business operations, we believe we have, and will continue, to achieve increased brand recognition and exposure, ancillary product and service revenues, and will be able to provide competitively priced products, quick turn around and overall superior customer service.
Research and Development
Product development remains the core element of our historical as well as current and future growth strategy spanning across all of our existing business segments. Our research and development activities consist principally of:
| • | the potential for enhancing existing products or formulas, |
| • | researching and developing new product formulations and |
| • | introducing technology to improve production efficiency and enhance product quality. |
The scientific process of developing new products and obtaining FDA approval is complex, costly and time-consuming; there can be no assurance that any saleable products will be developed despite the amount of time and money spent on research and development. The development of products may be curtailed at any stage of development due to the introduction of competing generic products or for other reasons including changes in laws or regulations or for any other reason deemed necessary by management. Our generic drug and nutraceutical research and development departments develop new concepts and formulations for our generic and over-the-counter drugs, our branded distribution product lines and our customers’ nutraceutical private label products. We carefully select our products we target, keeping in view our competitive advantage, particularly as related to the source of a raw material or API, the total market size and what portion of the market is potentially available to our Company. Dr. Sekharam, our President, provides guidance and direction for our research and development teams and analytical laboratory personnel as related to product development and product manufacture. Our lab chemists perform product development, product and process improvements. Our technical staff prepares cost estimates and samples based on those resulting formulations. Prior to the final manufacture of any of our products, the team prepares documentation of the necessary custom and other operational procedures to be performed. Our chemists and our research and development regulatory staff personnel prepare all the necessary product information for label requirements.
During the fiscal years ended March 31, 2007 and 2006, Belcher Pharmaceuticals has made substantial progress in the animal and human ANDA areas and has strengthened laboratory staff, adding more analytical equipment and manufacturing machinery. The blending, tableting and liquid manufacturing areas have been expanded in line with our generic drug strategic plans. Belcher has filed
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a patent on a novel method to stabilize the drug Levothyroxine. Levothyroxine, sold under the brand names, Abbott’s Synthroid® and King Pharmaceutical’s Soloxine®/Levoxyl®, is used for humans as well as pets to treat thyroid-related conditions. Levothyroxine is the second most prescribed drug in the United States with over 13 million patients and according to NDC Health 2002, the combined retail sales for all Levothyroxine sodium tablet products was approximately $ 1.1 billion (2002). Due to unique stability problems associated with this drug, millions of tablets have been recalled per data received from the FDA. We have solved this problem by using a unique stabilizing method. Using this novel method, the stability of the drug is substantially improved. We will be applying this method to both human as well as animal versions of this drug. This is expected to offer us a competitive advantage in the market. The human version of levothyroxine sodium is in the advanced stage of development. We have contracted out the bioequivalence work on this drug to a unaffiliated third-party clinical lab. We also have developed two versions of levothyroxine drugs for the animal market. The development work includes product formulation, stability studies under accelerated and real time conditions, methods and process validation, and related analytical work required to support the Company’s filing with the FDA of an animal ANDA and a human ANDA.
Belcher filed an animal ANDA on Carprofen, a generic version for Pfizer’s Rimadyl, an arthritis and joint-ailment product for pets as Pfizer’s patent expired in 2004. We have successfully completed the development work, the animal studies, have filed with the FDA and are awaiting their approval. We have signed an exclusive arrangement with a pet drug distributor to market this drug.
On Nov. 24, 2004 the FDA provided 510(K) approval, called PMA approval to market Mucotrol, a concentrated oral gel wafer indicated for the management and relief of pain associated with oral lesions of various etiologies, including oral mucositis/stomatitis resulting from chemotherapy or radiotherapy; irritation due to oral surgery; traumatic ulcers caused by braces, ill-fitting dentures, or disease; and diffuse apthous ulcers. The 2.2 gram wafer contains compressed powder and slowly dissolves in the mouth to form a soothing and protective layer over mucosal lesions. PMA approval is based on a determination by FDA that the PMA contains sufficient valid scientific evidence to assure that the device is safe and effective for its intended use(s). An approved PMA is, in effect, a private license granting permission to market the device. Mucositis is a painful inflammation of the mucosa of the mouth that may occur due to radiation or chemotherapy. Mucositis afflicts approximately 40% of patients receiving cancer chemotherapy and 75% percent of bone marrow transplant recipients as well as 100% of patients receiving radiotherapy for cancer of the head and neck. It is estimated that approximately 300,000 cancer patients in the U.S. suffer from mucositis associated with cancer treatments. Earlier, we submitted double blind placebo controlled studies on Mucotrol to the FDA for 510(K) approval. Currently, we are continuing the multicenter clinical studies on Mucotrol. We have a marketing agreement with Cura Pharmaceuticals to promote and distribute Mucotrol in the United States and are negotiating with marketing companies abroad to take Mucotrol to markets outside the United States.
We have finalized our construction and received our certificate of occupancy in order to manufacture and distribute Cephalasporin products for ourselves and others.
We contract with outside laboratories to conduct bioequivalency studies. Bioequivalency studies must be conducted and documented in conformity with FDA standards (see “Government Regulation”) and are used to demonstrate that the rate and extent of absorption of a generic drug is not different from the corresponding brand name drug. Research and development expenses for fiscal year ended March 31, 2007 totalled approximately $1,500,000, consisting primarily of salaries, bioequivalency studies and laboratory supplies. Research and development costs are expensed as incurred. Research and development expenses for fiscal year ended March 31, 2006 totalled approximately $500,000, consisting primarily of salaries, bioequivalency studies and laboratory supplies. Research and development costs are expensed as incurred. Machinery and laboratory equipment expenditures made during the 2006 fiscal year approximated an additional $1.2 million which was capitalized and will be depreciated over their useful lives. Research and development expenses for fiscal year ended March 31, 2005 totalled approximately $263,000, consisting primarily of salaries, bioequivalency studies and laboratory supplies. Research and development costs are expensed as incurred. Machinery and laboratory equipment expenditures made during the 2005 fiscal year approximated an additional $719,000 which was capitalized and will be depreciated over their useful lives.
Our research and development laboratory is equipped with modern laboratory test equipment, including high pressure liquid chromatography, atomic absorption spectroscopy, as well as instruments to test different parameters like pH, viscosity, moisture, gradient sizing, ash, melting point, refractive index, tablet hardness, dissolution and disintegration. We also have a micro lab to test samples for microbiological loads including yeast, bacteria and fungi. The laboratory has stability chambers to test both the long-term and the accelerated shelf life of products. Our laboratory is well equipped to handle all aspects of generic drug development. We believe that our laboratory facilities are in compliance with all applicable environmental regulations.
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Our product development team works closely with the Company’s executive management as well as our customers. Working closely with management allows management to monitor adherence to our short-term, mid-term and long-range business plans; working closely with our customers assists in assuring that we provide value-added features in the final product that satisfies their ultimate needs. As our development response time is critical to capitalizing on consumer trends and preferences, we focus on meeting end-user needs as quickly as possible. We believe that this type of flexibility and attention to customer needs, while still keeping the overall strategic goals of the Company, results in more valuable and marketable products.
While we are working on these ANDA projects, we are also working simultaneously on a few long-term projects. These projects may take considerable time and effort and their commercial payoff depends on several factors on which we may not have full control. Some of these type of research outcomes may help improve existing products. If the outcome of certain projects is not within the scope of our area of expertise, our proprietary technology developed or discovered may be licensed to other companies for a fee on a royalty basis.
Marketing and Sales
Our marketing and promotion strategy is targeted toward stimulating demand for our products and service capabilities and by increasing our brand awareness. We currently employ a traditional in-house sales force that markets our branded and private label products directly to wholesale, retail and institutional customers as well our distribution and broker network. We also utilize product promotions and print media to reach new customers in targeted markets. We intend to increase these efforts significantly in the areas of direct sales, telesales, and traditional and online advertising.
We plan to hire additional marketing representatives to contact prospective customers including self-insured employers, health maintenance organizations, and other health benefit provider associations to market our manufacturing capabilities and pharmacy benefit management services in addition to pursuing contractual arrangements with pharmacies related to our future generic drug manufacturing and distribution. As a manufacturer, we have the facilities, equipment, manufacturing capacity, skilled work force and industry experience to control product processing and minimize product cost from order inception to distribution of finished products to our customers. By utilizing our manufacturing capabilities, we intend to build institutional relationships through high quality and low cost custom product lines. We are continuously seeking ways to expand our manufacturing customer base. We intend to increase our market penetration of private label manufacturing customers by increasing our outside sales and telephone sales efforts, by reducing manufacturing time with additional fully-automated high-speed manufacturing equipment, by delivering high quality products and by providing research and development support to improve our customers’ product offerings. We will also continue to develop strategic alliances with new manufacturing customers. We intend to increase our ongoing development and marketing of new products in order to capitalize on and create market opportunities in new market segments. We feel that we can differentiate ourselves from our competitors by providing customers with more value-added products. Consequently, we intend to produce and market additional, as well as enhance currently existing products and dietary supplements that integrate a variety of compounds to achieve greater bio-availability, effectiveness and product convenience. We differentiate ourselves from other dietary supplement manufacturers by providing faster and more appropriate responses to our customers. Our development response time for proprietary and private label products is critical to capitalize on consumer trends and preferences. We intend to utilize these trends and preferences to expand our customer base and provide consumers with the most timely and well adapted products for their needs.
We intend to increase telephone sales by hiring an in-house telesales group to prospect for customers for our private label manufacturing services and for our branded products that we distribute. We have increased our advertising efforts by investing in additional print ads for our branded products by implementing online sales and marketing techniques to increase brand awareness and direct traffic to our web sites,www.geopharmainc.com,www.hoodiadexL10.com andonlineihp.comand by other promotional efforts. This includes purchasing banner advertising on search engine web sites and Internet directories, as well as direct links from health related web sites. We feel that these efforts are and will continue to compliment our existing and future strategic agreements and traditional advertising efforts. Some of the sales personnel we expect to hire will devote a substantial portion of their time enhancing relationships with our customers’ key personnel, informing them of new product developments and industry trends, and aiding them in designing store displays and merchandising programs for our branded products.
We also increase the flexibility of our product offerings by extending various credit terms to our customers, subject to our credit approval process. In most cases, where credit terms are granted, we require a prepayment of 50% of the amount of the sales order, with the balance due within 30 days of shipment. Some of our customers whose sales are to regional and/or national chain stores receive payments from their customers on extended payment terms. In such cases, we grant extended payment terms, when requested, by a long-standing significant customer.
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We believe that the health care, pharmaceutical and dietary supplement industries are fragmented and currently offer attractive acquisition opportunities. We intend to pursue acquisition opportunities that will broaden our product lines, provide efficiencies in manufacturing through economies of scale, broaden our customer base, complement our existing businesses and further our overall strategic business goals.
Principal Suppliers – Nutraceutical and Herbal Supplements
We obtain all of the raw materials for the manufacture of our products from third party suppliers primarily located within the United States. We do not have contracts with any of our suppliers to provide adequate materials required for our product manufacturing.
Principal Suppliers – Generic Pharmaceuticals
Since the federal drug application process requires specification of raw material suppliers, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required. A delay of six months or more in the manufacture and marketing of the drug involved while a new supplier becomes qualified by the FDA and its manufacturing process is found to meet FDA standards could, depending on the particular product, have a material adverse effect on the Company’s results of operations and financial condition. Generally the Company attempts to minimize the effects of any such situation by providing for, where economically and otherwise feasible, two or more suppliers of raw materials for the drugs it intends to manufacture. In addition, the Company may attempt to enter into a contract with a raw material supplier in an effort to ensure adequate supply for its products.
Competition
The principal competitive factor in the generic pharmaceutical market is the ability to be the first company, or among the first companies, to introduce a generic product after the related branded patent expires. Additional competitive factors in the generic pharmaceutical market include:
| • | introduction of other generic drug manufacturers’ products in direct competition with the Company’s products, |
| • | consolidation among distribution outlets through mergers and acquisitions and the formation of buying groups, |
| • | ability of generic competitors to quickly enter the market after patent expiration or exclusivity periods, diminishing the amount and duration of significant profits, |
| • | the willingness of generic drug customers, including wholesale and retail customers, to switch among pharmaceutical manufacturers, |
| • | pricing pressure and product deletions by competitors, |
| • | a company’s reputation as a manufacturer of quality products, |
| • | a company’s level of service (including maintaining sufficient inventory levels for timely deliveries), |
| • | product appearance and |
| • | a company’s breadth of product line. |
Approvals for new products may have a synergistic effect on a company’s entire product line since orders for new products are frequently accompanied by, or bring about, orders for other products available from the same source. We believe that price is a significant competitive factor, particularly as the number of generic entrants with respect to a particular product increases. As competition from other manufacturers intensifies, selling prices typically decline. We hope to compete by selecting appropriate products, based on therapeutic segment market sizes and number of competitors manufacturing the products, and by keeping our prices competitive and by providing reliability in the timely delivery, and in the quality, of our products. Many different manufacturers can sell the same generic drug and hence there will be intense pressure on the pricing. According to the Generic Pharmaceutical Industry Association, generics typically enter the market 30% below the brand price and decline to 60 or 70% of the brand price after two years. The market for generic drugs is highly competitive. There is intense competition in the generic drug industry in the United States, which is eroding price and profit margins. We compete with numerous pharmaceutical manufacturers, including both generic and brand-name manufacturers, many of which have been in business for a longer period of time than us, have a greater number of products in the market and have considerably greater financial, technical, research, manufacturing, marketing and other resources.
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Competition related to the contract manufacture of nutraceuticals, cosmeceuticals and generic drugs in which we operate are also highly competitive. Numerous companies, many of which have greater size, financial, personnel, distribution and other resources than us, compete with us in our development, manufacture, distribution, wholesaling and retailing businesses. Our branded products face substantial competition from broad line manufacturers, large private label manufacturers, and more recently from large pharmaceutical companies. Increased competition from companies with greater financial, manufacturing, distribution and marketing capabilities than our own could have a materially adverse affect on our operations. We compete on the basis of product quality, cost and customer service. Our branded products’ success depends primarily on our increasing brand recognition across multiple distribution channels, our ability to quickly develop, advertise, market and promote new and existing products with high quality and value, and our efficient distribution of these products. Our competitors include chain drug stores, such as CVS and Walgreen’s; warehouse clubs, such as BJ’s and Costco; mail order pharmacies; major department stores, such as Macy’s and Nordstrom; and health, beauty salons, spas and Internet portals with shopping services, such as Yahoo!, Excite, and America Online.
Many of these competitors currently offer online ordering of their products. In addition, many of these online and traditional competitors have longer operating histories, greater brand recognition, and substantially greater economic, marketing and other resources than we do. These resources may provide some of these competitors with greater opportunities to form joint ventures and favorable vendor agreements as this market develops. In addition, traditional pharmacies can provide customers with the ability to see and feel products, and may be able to address immediate customer product needs in ways that we cannot.
Trademarks and Intellectual Property
We utilize the federally registered trademarks Lean Protein™, Nutrisure™, Physician Pharmaceutical™ 12-and Arth-Aid™, DEX-L10™, DEX-L10 Certified Gold™ and DEX-C20™. The Company, as assisted by our president, Dr. Kotha Sekharam, also filed for three additional patents for products already in the market with ‘patent pending’ status for our manufacturing segment. We also utilize the registered domain names hoodiadexl10.com, geopharmainc.com, and onlineihp.com. We believe that protecting our trademarks and registered domain names is crucial to our business strategy of building strong brand name recognition and that such trademarks have significant value in the marketing of our products. Our policy is to pursue registrations of all the trademarks associated with our key products. We rely on common law trademark rights to protect our unregistered trademarks. Common law trademark rights generally are limited to the geographic area in which the trademark is actually used, while a United States federal registration of a trademark enables the registrant to stop the unauthorized use of the trademark by any third party anywhere in the United States. Furthermore, the protection available, if any, in foreign jurisdictions may not be as extensive as the protection available to us in the United States. Although we seek to ensure that we do not infringe upon the intellectual property rights of others, there can be no assurance that third parties will not assert intellectual property infringement claims against us. Any infringement claims by third parties against us may have a materially adverse affect on our business, financial condition, results of operations and cash flows.
Government Regulation
Generic and over-the-counter drugs, dietary supplements and other health and beauty care products are subject to significant government regulation. These products are regulated by the Food and Drug Administration (“FDA”), Federal Trade Commission (“FTC”), Consumer Product Safety Commission, as well as other state and federal regulatory entities. While we use our best efforts to adhere to the regulatory and licensing requirements, as well as any other requirements affecting our products, compliance with these often requires subjective legislative interpretation. Consequently, we cannot assure that our compliance efforts will be deemed sufficient by regulatory agencies and commissions enforcing these requirements. Violation of these regulations may result in civil and criminal penalties, which could materially and adversely affect our operations. Recent events have suggested that the regulatory requirements governing our industry may expand in the near future.
A generic drug is identical, or bioequivalent, to a brand name drug in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use. Generic drugs can be manufactured after the expiration of patents or exclusivities associated with the drug. Although generic drugs are chemically identical to their branded counterparts, they are typically sold at substantial discounts from their branded equivalent’s price.
Brand name drugs, also called innovator drugs, generally are protected by one or more patents. When patents or other periods of exclusivity expire, manufacturers can submit an ANDA for the approval of a human generic drug and ANDA for an animal drug. The animal ANDA process does not require the drug sponsor to repeat costly animal and clinical research on ingredients or dosage forms already approved for effectiveness and safety.
To gain FDA approval, a generic drug must (a) contain the same active ingredients as the innovator drug (inactive ingredients may vary) (b) be identical in strength, dosage form, and route of administration (c) have the same use indications (d) be bioequivalent (e) meet the same batch requirements for identity, strength, purity, and quality (f) be manufactured under the same strict standards of FDA’s good manufacturing practice regulations required for innovator products.
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There are generally two types of applications that would be used to obtain FDA approval for pharmaceutical products:
New Drug Application (“NDA”): Generally, the NDA procedure is required for drugs with active ingredients and/or with a dosage form, dosage strength or delivery system of an active ingredient not previously approved by the FDA. We do not expect to submit an NDA in the foreseeable future during the fiscal year ending March 31, 2008.
Abbreviated New Drug Application (“ANDA”): The Waxman-Hatch Act established a statutory procedure for submission of ANDAs to the FDA covering generic equivalents of previously approved brand-name drugs. Under the ANDA procedure, an applicant is not required to submit complete reports of preclinical and clinical studies of safety and efficacy, but instead is required to provide bioavailability data illustrating that the generic drug formulation is bioequivalent to a previously approved drug. Bioavailability measures the rate and extent of absorption of a drug’s active ingredient and its availability at the site of drug action, typically measured through blood levels. A generic drug is bioequivalent to the previously approved drug if the rate and extent of absorption of the generic drug are not significantly different from that of the previously approved brand-name drug.
The FDA may deny an ANDA if applicable regulatory criteria are not satisfied. The FDA may withdraw product approvals if compliance with regulatory standards is not maintained or if new evidence demonstrating that the drug is unsafe or lacks efficacy for its intended uses becomes known after the product reaches the market. The timing of final FDA approval of ANDA applications depends on a variety of factors, including whether or not the maker of the applicable branded drug is entitled to the protection of one or more statutory exclusivity periods, during which the FDA is prohibited from approving generic products. FDA approval is required before each dosage form of any new drug can be marketed. Applications for FDA approval must contain information relating to bio-equivalency, product formulation, raw material suppliers, stability, manufacturing processes, packaging, labeling and quality control. FDA procedures require full-scale manufacturing equipment to be used to produce test batches for FDA approval. Validation of manufacturing processes by the FDA also is required before a company can market new products. The FDA conducts pre-approval and post-approval reviews and plant inspections to enforce these rules. Supplemental filings are required for approval to transfer products from one manufacturing site to another and may be under review for a year or more. In addition, certain products may only be approved for transfer once new bio-equivalency studies are conducted.
The FDA issued a final rule on June 18, 2003, which became effective on August 18, 2003, streamlining the generic drug approval process by limiting a drug company to only one 30-month stay of a generic drug’s entry into the market for resolution of a patent challenge. This will help maintain a balance between the innovator companies’ intellectual property rights and the desire to get generic drugs on the market in a timely fashion. The rule clarifies the types of patents that innovators must submit for listing and prohibits the submission of patents claiming packaging, intermediates or metabolite innovations. Patents claiming a different polymorphic form of the active ingredient described in a NDA must be submitted if the NDA holder has test data demonstrating that the drug product containing the polymorph will perform in the same way as the drug product described in the NDA. The final rule also clarifies the type of patent information required to be submitted and revises the declaration that NDA applicants must provide regarding their patents to help ensure that NDA applicants submit only appropriate patents.
The final rule is intended to make the patent submission and listing process more efficient, as well as enhance the ANDA and 505(b)(2) application approval process. The changes are designed to enable consumers to save billions of dollars each year by making it easier for generic drug manufacturers to get safe and effective products on the market when the appropriate patent protection expires.
In addition to the federal government, various states have laws regulating the manufacture and distribution of pharmaceuticals, as well as regulations dealing with the substitution of generic drugs for brand name drugs. The Company’s operations are also subject to regulation, licensing requirements and inspection by the states in which its operations are located and/or it conducts business.
Certain activities of the Company may also be subject to FTC enforcement. The FTC enforces a variety of antitrust and consumer protection laws designed to ensure that the nation’s markets function competitively, are vigorous, efficient and free of undue restrictions.
We are also is governed by federal and state laws of general applicability, including laws regulating matters of environmental quality, working conditions and equal employment opportunity.
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The manufacture, packaging, labeling, advertising, promotion, distribution and sale of our dietary supplements manufactured is subject to regulation by numerous governmental agencies, particularly the FDA, which regulates our products under the Federal Food, Drug and Cosmetic Act, and the FTC, which regulates the advertising of our products under the Federal Trade Commission Act. Our products are also subject to regulation by, among other regulatory agencies, the Consumer Product Safety Commission, the United States Department of Agriculture, the United States Department of Environmental Regulation and the Occupational Safety and Health Administration. The manufacture, labeling and advertising of our products is also regulated by the Occupational Safety and Health Administration through various state and local agencies where our products are distributed.
Our manufacture of dietary supplements is subject to significant labeling regulation. Labeling claims are governed by the Food and Drug Administration, the Federal Food, Drug and Cosmetic Act, and the recent Dietary Supplement Health and Education Act of 1994 (DSHEA). Our manufacture of over-the-counter drugs must comply with all Food and Drug Administration guidelines and Food and Drug Administration enforced Good Manufacturing Practices (GMP) regulations for those products as set forth in official monographs of the United States Pharmacoepia and other applicable laws enforced by the Food and Drug Administration. These include manufacturing and product information, such as claims in a product’s labeling, package inserts, and accompanying literature. The Dietary Supplement Health and Education Act of 1994 guidelines permit certain dietary supplement labeling claims without prior authorization by the Food and Drug Administration, provided that the manufacturer has substantiation for the claims and complies with certain notification and disclaimer requirements. The legislation gives dietary supplement manufacturers more freedom to market their products, while providing consumers adequate information for informed decisions on the use of supplements.
Under the Dietary Supplement Health and Education Act of 1994 and previous food labeling laws, supplement manufacturers may use three types of labeling claims, with the approval of the Food and Drug Administration. These claims include nutrient-content claims, disease claims, and nutrition-support claims, which include “structure-function claims.” Nutrient-content claims describe the level of a nutrient in a food or dietary supplement. For example, a supplement containing at least 200 mg of calcium per serving could carry the claim “high in calcium.” Disease claims show a link between a substance and a disease or health-related condition. The Food and Drug Administration authorizes disease claims based on a direct review of scientific evidence or documentation of established diet-to-health links from highly regarded scientific bodies, such as the National Academy of Sciences. For example, it is permissible to advertise a link between calcium and a lower risk of osteoporosis, if the supplement contains sufficient amounts of calcium. Nutrition-support claims describe a link between a nutrient and deficiency diseases that may result from diets lacking the nutrient. For example, the label of a Vitamin C supplement could state that Vitamin C prevents scurvy. When these types of claims are used, the label must mention the prevalence of the nutrient-deficiency disease in the United States. Finally, structure-function claims refer to the supplement’s effect on the body’s structure or function, including its overall effect on a person’s well-being. For example, a structure-function claim could state “antioxidants maintain cell integrity.” Structure-function claims must be accompanied by the disclaimer “This statement has not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease.” Manufacturers who plan to use a structure-function claim on a particular product must inform the Food and Drug Administration of the use of the claim no later than 30 days after the product is first marketed. The Food and Drug Administration may then advise the manufacturer to change or delete the claim. Claims made for our dietary supplement products may include statements of nutritional support and health and nutrient content. The Food and Drug Administration’s interpretation of what constitutes an acceptable statement of nutritional support may change in the future thereby requiring that we revise our branded labels. The Food and Drug Administration recently issued a proposed rule on what constitutes permitted structure/function claims as distinguished from prohibited disease claims. Although we believe our product claims comply with the law, depending on the content of the final regulation, we may need to revise our branded labels.
Our advertising of dietary supplement products is also subject to regulation by the Federal Trade Commission under the Federal Trade Commission Act, in addition to state and local regulation. The Federal Trade Commission Act prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. The Federal Trade Commission Act also provides that the dissemination or the causing to be disseminated of any false advertisement pertaining to drugs or foods, which would include dietary supplements, is an unfair or deceptive act or practice. Under the Federal Trade Commission’s Substantiation Doctrine, an advertiser is required to have a “reasonable basis” for all objective product claims before the claims are made. Failure to adequately substantiate claims may be considered either deceptive or unfair practices. Pursuant to this Federal Trade Commission requirement we are required to have adequate substantiation for all material advertising claims made for our products.
In recent years the Federal Trade Commission has initiated numerous investigations of dietary supplement and weight loss products and companies. The Federal Trade Commission is reexamining its regulation of advertising for dietary supplements and has announced that it will issue a guidance document to assist supplement marketers in understanding and complying with the substantiation requirement. Upon release of this guidance document we will be required to evaluate our compliance with the guideline and may be required to change our advertising and promotional practices. We may be the subject of investigation in the future. The
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Federal Trade Commission may impose limitations on our advertising of products. Any such limitations could materially adversely affect our ability to successfully market our products. The Federal Trade Commission has a variety of processes and remedies available to it for enforcement, both administratively and judicially, including compulsory processes, cease and desist orders, and injunctions. Federal Trade Commission enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, divestiture of assets, rescission of contracts and such other relief as may be deemed necessary. A violation of such orders could have a material adverse affect on our business, financial condition and results of operations.
Governmental regulations in foreign countries where our plans to commence or expand sales may prevent or delay entry into the market or prevent or delay the introduction, or require the reformulation, of certain of our products. Compliance with such foreign governmental regulations is generally the responsibility of our distributors for those countries. These distributors are independent contractors over whom we have limited control.
We manufacture certain products pursuant to contracts with customers who distribute the products under their own or other trademarks. Such private label customers are subject to government regulations in connection with their purchase, marketing, distribution and sale of such products. We are subject to government regulations in connection with our manufacturing, packaging and labeling of such products. Our private label customers are independent companies and their labeling, marketing and distribution of their products is beyond our control. The failure of these customers to comply with applicable laws or regulations could have a materially adverse effect on our business, financial condition, results of operations and cash flows.
We may be subject to additional laws or regulations by the Food and Drug Administration or other federal, state or foreign regulatory authorities, the repeal of laws or regulations which we consider favorable, such as the Dietary Supplement Health and Education Act of 1994, or more stringent interpretations of current laws or regulations, from time to time in the future. We are unable to predict the nature of such future laws, regulations, interpretations or applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. The Food and Drug Administration or other governmental regulatory bodies could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, imposition of additional record keeping requirements, expanded documentation of the properties of certain products, expanded or different labeling and scientific substantiation. Any or all of such requirements could have a materially adverse affect on our business, financial condition, results of operations and cash flows.
Innovative Health Products’ nutraceutical facility was inspected by the Department of Agriculture and the FDA in November 2004, and although we did receive an FDA 483, a written list of observations, were found to be generally in compliance with current Good Manufacturing Practices (GMP) and do not believe the observations were material. We have taken appropriate corrective actions based on the FDA inspection findings.
Belcher Pharmaceuticals facility was inspected by the FDA, the DEA and the Department of Agriculture all of which found us generally in compliance. As we have in the past, we will continue our strong focus on compliance activities at all levels of our Company in support of our current and future strategic growth plans .
As a public company, the Company is subject to certain provisions to the recently enacted Sarbanes-Oxley Act of 2002 and all of its amendments. This Act contains a variety of provisions affecting public companies, including requiring an evaluation of its internal disclosure controls and procedures surrounding the Company’s executive management, personnel, and the summarization and control over accurate financial reporting. The Company is not required to implement the applicable provisions of the Sarbanes-Oxley Act of 2002 until its fiscal year ending March 31, 2008.
Manufacturing
Our primary manufacturing facility is located in 33,222 square feet in Largo, Florida. We use this location for our executive offices and for the manufacturing, packaging and warehousing of products, laboratory services, research and development, marketing and final distribution. Our manufacturing facilities at this site utilize high-speed encapsulating, tableting, packaging and other production line equipment. The facility is large enough to handle bulk orders, but versatile enough to provide quick response to customer needs. This site also houses our graphic arts department, which assists us and our customers’ print layout and graphic needs.
Our second manufacturing facility has expanded its location adding 10,000 square feet to the already existing 10,000 square feet of leased space in Largo, Florida. This facility is registered with the United States Food and Drug Administration and is used for our laboratory services, research and development, manufacture, packaging and distribution of our over-the-counter and generic drug products. During the year ended March 31, 2007, the Company received their certificate of occupancy to operate in that additional 10,000 square foot facility in order to manufacture Cephalosporin products.
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Our third manufacturing facility is a 30,000 square foot state-of-the-art generic drug manufacturing facility and is leased. The certificate of occupancy to operate was received during the year ended March 31, 2007.
Our Beta-Lactam leased facility is located within 100,000 square feet of leased space in Baltimore, Maryland. This facility is registered with the United States Food and Drug Administration and is used for our laboratory services, research and development, manufacture, packaging and distribution of Beta-Lactam products.
Our warehousing facility is located in 55,000 square feet of leased space in Largo, Florida. We use this location for our warehousing of our distribution segments’ finished goods in addition to housing additional manufacturing packaging.
Currently, we can manufacture approximately 900 million tablets and capsules annually. For the fiscal year ended March 31, 2007, we operated at approximately 65% of our total capacity. Our manufacturing facilities normally operate two shifts per day, five days per week. Certain packaging lines or capsule and tablet production lines run longer as demand warrants. We operate flexible manufacturing lines that can shift output efficiently among various pieces of equipment depending upon factors such as batch size, tablets or capsule count, and labeling requirements. We strive to fulfill and ship all orders within 30-60 days. While we believe we can double our sales volume without expanding our current facilities, we will expand our manufacturing capacities upon receiving Food and Drug Administration registration for production of generic and other over-the-counter drugs. An increase in production would require additional space and personnel for warehousing and shipping operations, but would not necessarily require substantial capital investment. Our manufacturing revenues are generated by fulfilling sales orders received from our customers within an average turn-around time ranging from 30-60 days. Consequently, we experience a backlog for future revenues at all times. As of March 31, 2007, 2006 and 2005, we had approximately $7,650,000, $6,000,000 and $3,879,000, respectively, in backlog manufacturing sales orders.
Private Label Products-Manufacturing
Sales of our manufactured private label products accounted for approximately 45.6% of our total consolidated revenues, or $27.3 million for the year ended March 31, 2007, 36% of our total consolidated revenues, or $17.9 million for the year ended March 31, 2006 and approximately 41.4% of our total consolidated revenues, or $11.7 million for the year ended March 31, 2005. We currently manufacture products for over 400 private label customers in 47 states in the United States and ship to several countries internationally. Our private label business has a widely distributed revenue base. For the year ended March 31, 2007, we had sales of 5% or more of total consolidated revenues to three of our nonaffiliate private label customers, Spectrum Group, Inc., of which accounted for 11.4%, Berkeley Premium Nutraceuticals, Inc. which accounted for 8.6% of total consolidated revenues and Nutracea, Inc. with 5.9%. For the year ended March 31, 2006, we had sales of 5% or more of total consolidated revenues to two of our nonaffiliate private label customers, Spectrum Group, of which accounted for 12.2% and Direct Marketing, Inc. which accounted for 5% of total consolidated revenues. For the year ended March 31, 2005, we had sales of 5% or more of total consolidated revenues to one of our nonaffiliate private label customers, Spectrum Group, of which accounted for 11.2% of total consolidated revenues. For the years ended March 31, 2007, 2006 and 2005, we did not have sales of 5% or more of total consolidated revenues to any company that is a party to an exclusive manufacturing agreement with us.
Pharmaceutical
Sales of our pharmaceutical products accounted for approximately 0.5% of our total consolidated revenues, or $252,000 for the year ended March 31, 2007, approximately 1% of our total consolidated revenues, or $486,000 for the year ended March 31, 2006 and approximately 3.9% of our total consolidated revenues, or $1.1 million for the year ended March 31, 2005. Only for the year ended March 31, 2005 did we had sales of 5% or more of total consolidated revenues to one of our nonaffiliate private label customers, Proactive Labs, of which accounted for 11.2% of total consolidated revenues. For the years ended March 31, 2007, 2006 and 2005, we did not have sales of 5% or more of total consolidated revenues to any company that is a party to an exclusive manufacturing agreement with us.
Branded Products-Distribution
Sales of our branded product lines sold within our distribution segment accounted for approximately 20.3% of our total consolidated revenues, or $12.1 million for the year ended March 31, 2007, approximately 29.7% of our total consolidated revenues, or $14.7 million for the year ended March 31, 2006 as compared to approximately 14.2% of our total consolidated revenues, or $4.0 million for the year ended March 31, 2005. For the year ended March 31, 2007, one customer exceeded 5% of our consolidated revenues, General Nutrition Distribution with 16.2%. For the year ended March 31, 2006, one customer exceeded 5% of our consolidated revenues, General Nutrition Distribution with 15.3% and for the year ended March 31, 2005, our distribution product line has a widely distributed revenue base whereas for the year ended March 31, 2005, no one customer accounted for more than 5% of total consolidated revenues.
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Pharmacy Benefit Management
Sales generated from our pharmacy benefit management subsidiary accounted for approximately 33.7% of our total consolidated revenues, or $20.1 million for the year ended March 31, 2007, approximately 33.3% of our total consolidated revenues, or $16.5 million for the year ended March 31, 2006 and accounted for 40.5% of our total consolidated revenues, or $11.4 million for the year ended March 31, 2005. 100% of the Company’s pharmacy benefit management revenues are derived from a contract with CarePlus Health, an affiliate of the Company based on a relationship with Joseph Zappala, a former board member who resigned from the Company’s board on December 3, 2004. Effective May 15, 2007, this contract was mutually terminated.
Employees
As of March 31, 2007 we had 180 employees as compared to 150 employees as of March 31, 2006. Of these 180 employees as of March 31, 2007, four were engaged in marketing and sales, 151 were devoted to production, laboratory and distribution and 25 were responsible for management and administration. As compared to these 150 employees as of March 31, 2006, where four were engaged in marketing and sales, 121 were devoted to production, laboratory and distribution and 25 were responsible for management and administration. None of our employees are covered by a collective bargaining agreement. We believe we have good relations with our employees. Employees are permitted to participate in employee benefit plans of the Company that may be in effect from time to time, to the extent eligible, and employees may be entitled to receive an annual bonus as determined at the sole discretion of the Company’s Board of Directors based on the Board’s evaluation of the employee’s performance and the financial performance of the Company.
| Item 1A. | Risk Factors |
New or Amended Government Regulation Could Adversely Impact Our Business and Operations: We may be subject to additional laws or regulations by the Food and Drug Administration or other federal, state or foreign regulatory authorities, subject to the repeal of laws or regulations which we consider favorable, such as the Dietary Supplement Health and Education Act of 1994, or subject to more stringent interpretations of current laws or regulations, from time to time in the future. We are unable to predict the nature of such future laws, regulations, interpretations or applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. We also can not predict what effect these regulations, and the related publicity from promulgation of such regulations, could have on consumer perceptions related to the nutraceutical market in which we operate. The Company, and its customers, depend on positive publicity as it relates to the efficacy and overall health benefits derived from certain products we manufacture for others. This could have a materially adverse affect on our business, financial condition, results of operations and cash flows. The Food and Drug Administration has also announced that it is considering promulgating new Good Manufacturing Practices regulations, specific to dietary supplements. Such regulations, if promulgated, may be significantly more rigorous than currently applicable regulations and contain quality assurance requirements similar to Good Manufacturing Practices regulations for drug products. Therefore, we may be required to expend additional capital resources on upgrading manufacturing processes and/or equipment in the future in order to comply with the law. The Food and Drug Administration or other governmental regulatory bodies could require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, imposition of additional record keeping requirements, expanded documentation of the properties of certain products and expanded or different labeling and scientific substantiation. Any or all of such requirements could have a materially adverse affect on our business, financial condition, results of operations and cash flows. Our failure to comply with applicable Food and Drug Administration regulatory requirements could result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines, and possible criminal prosecutions.
Product Acceptance into the Generic Drug Market:Certain manufacturers of brand name drugs and/or their affiliates have introduced generic pharmaceutical products equivalent to their brand name drugs at relatively lower prices or partnered with generic companies to introduce generic products. Such actions have the effect of reducing the potential market share and profitability of generic products developed by the Company and may inhibit it from developing and introducing generic pharmaceutical products comparable to certain brand name drugs. This price competition has led to an increase in customer demand for downward price adjustments by the manufacturers of generic pharmaceutical products, including the Company, for certain products that may have planned to manufacture in the future. There can be no assurance that such price reductions for these products or others, will not continue, or even increase, and therefore could have a material adverse effect on the Company’s revenues, gross margins, income generated from operations and cash flows.
The Unavailability of Raw Materials When Needed Could Adversely Impact Our Business and Operations: Since the federal drug application process requires specification of raw material suppliers as related to the production of generic drugs, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required. A delay of six months or more in the manufacture and marketing of the drug involved while a new supplier becomes qualified by the FDA and its
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manufacturing process is found to meet FDA standards could, depending on the particular product, have a material adverse effect on the Company’s results of operations and financial condition. Generally the Company attempts to minimize the effects of any such situation by providing for, where economically and otherwise feasible, two or more suppliers of raw materials for the drugs it manufactures.
FDA Approvals: The Company plans to submit generic drug human and animal ANDA for the FDAs approval to manufacture generic drugs for animals and humans in the future. The Company can not predict, nor guarantee, that the FDA will approve any or all applications submitted, nor can the Company predict when such applications will be reviewed or approved. Failure for the FDA to approve certain generic drug products as they are submitted by the Company could have an adverse effect on future revenues, cash flows and financial position.
We Can Not Predict the Effects of Terrorism on the Economy or on our Company: The terrorist attacks on September 11, 2001, exacerbated an already fragile economic situation and have added to a growing level of uncertainty and caution in the marketplace. The adverse impacts to our business may include, but are not limited to, a delay in placing or a decrease in the size of orders, a lengthening of sales cycles and increased credit risks. We can give no estimate of how long these effects may last. The occurrence of any future terrorist activity will further exacerbate these effects.
The Unavailability of Additional Funds When Needed Could Adversely Impact Our Business and Operations: Management believes that cash expected to be generated from operations, current cash reserves, and existing financial arrangements will be sufficient for the Company to meet its capital expenditures and working capital needs for its operations as presently conducted. In addition, the Company may require more significant capital to expand operations or complete cash based acquisitions. If cash flows from operations, current cash reserves and available credit facilities are not sufficient, it will be necessary for the Company to seek additional financing. There can be no assurance that such financing would be available in amounts and on terms acceptable to the Company.
The Company has not completed the implementation of Section 404 of Sarbanes-Oxley: The Company is currently implementing the rules and regulations of the Securities Exchange Commission (the “SEC”, “Commission”) associated with Section 404 Sarbanes-Oxley which require a reporting company to, among other things, annually review and disclose its internal controls over financial reporting, and evaluate and disclose changes in its internal controls over financial reporting quarterly. Under Section 404 a reporting company is required to document and evaluate such internal controls in order to allow its management to report on, and its independent auditors to attest to, these controls. We are required to comply with Section 404 for our fiscal year ending March 31, 2008 so that our independent registered accountants can opine as of March 31, 2009 as to whether our internal controls are effective over financial reporting. We are currently evaluating our strategy and have began performing the system and process documentation surrounding our controls and procedures, including those over our financial reporting. In the course of our ongoing evaluation, we may identify additional areas of our internal controls requiring improvement, and will plan to design enhanced processes and controls to address issues that might be identified through this ongoing review. Following that review, we will be evaluating and testing the significant controls identified in order to comply with the management certification and auditor attestation requirements of Section 404. As a result of the initial year of implementation ending March 31, 2008, we expect to incur additional expenses and diversion of management’s time. We cannot be certain as to the timing of completion of our documentation, evaluation, testing and possible remediation actions or the impact of the same on our operations, and may not be able to ensure that the processes are effective or that the internal controls are or will be effective in a timely manner as prescribed by Section 404 of Sarbanes-Oxley. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent auditors may not be able to certify as to the effectiveness of our internal control over financial reporting for the fiscal year ending March 31, 2009 as required, and we may be subject to sanctions or investigation by regulatory authorities, such as the Commission. As a result, there could be an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and in the hiring of additional personnel. Any such actions could adversely affect our results of operations, cash flows and financial condition
Litigation: On September 29, 2006, Schering Corporation (“Schering”) filed an action in the United States District Court for the District of New Jersey, against Belcher Pharmaceuticals, Inc. and GeoPharma, Inc. (along with nineteen other defendants) alleging that the filing of Belcher Pharmaceuticals’ Abbreviated new Drug Application (“ANDA”) for 5 mg Desloratadine Tablets, AB-rated to Clarinex®, infringed U.S. Patent No. 6,100,274 (“the ‘274 patent”) Case No. 3:06-cv-04715-MLC-TJB. On November 8, 2006, Belcher filed a motion to dismiss in the New Jersey case for lack of jurisdiction. On October 5, 2006 Schering filed an action in the United States District Court for the Middle District of Florida, Tampa Division, Case No. 8:06-cv-01843-SCB-EAJ, against Belcher Pharmaceuticals, Inc. and Geopharma, Inc. alleging that the filing of Belcher Pharmaceuticals’ ANDA for 5 mg Desloratadine Tablets, AB-rated to Clarinex®, infringed the ‘274 patent. Company management and Belcher disputes Schering’s claims in the two actions and believes its proposed desloratadine product does not infringe the ‘274 patent. The possible outcome cannot be determined at this time.
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Litigation concerning patents and proprietary rights is possible and often expensive. Pharmaceutical companies with patented brand products are increasingly suing companies that produce generic forms of their patented brand name products for alleged patent infringement or other violations of intellectual property rights, which may delay or prevent the entry of such generic products into the market. There is a risk that a branded pharmaceutical company may sue the filing person for alleged patent infringement or other manufacturing, developing and/or selling the same generic pharmaceutical products may similarly file lawsuits against the Company or its strategic partners claiming patent infringement or invalidity. Such litigation is time consuming, and could result in a substantial delay in, or prevent, the introduction and/or marketing of products, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
During September 2006, the Company, through its 51% owned subsidiary, American Antibiotics, LLC, filed in the Circuit Court for Anne Arundel County, Maryland, Case No. C-06-117230, naming defendents Consolidated Pharmaceutical Group (“CPG”), the directors of CPG and two other individuals acting on behalf of CPG (collectively “the Defendents”). The litigation arises from and relates to agreements entered into between American Antibiotics and CPG for the purchase by American Antibiotics all of CPG’s rights, title and interest in various pharmaceutical Abbreviated New Drug Applications (“ANDAs”) and for the Baltimore, Maryland facility lease (the “Lease”). The suit brought by the Company alleges that the Defendents breached the ANDA agreement with certain misrepresentations and by failing to perform all the required improvements and modifications to the Baltimore, Maryland facility. The case is scheduled for trial in the first calendar quarter of 2008. To date, no counterclaims have been asserted against American Antibiotics.
Potential fluctuations in our quarterly financial results may make it difficult for investors to predict our future performance:Our quarterly operating results may fluctuate significantly in the future as a result of a variety of factors including but not limited to, the termination of the PBM contract on May 15, 2007, the level and timing of incurring research and development expenses, any delays in receiving any Food and Drug Administration’s approvals, and possible increases in generic drug competition, many of these and other conditions may be outside our control and may adversely effect the Company’s financial condition and results of operations and cash flows.
Our Insurance Coverage May not be Sufficient to Cover All Risk Exposure: The Company has maintained its insurance coverages for its directors and officers, general liability insurance, and product liability insurance at levels deemed adequate by the Company’s Board of Directors. The Company can not guarantee that these same levels of insurance, at premiums acceptable to the Company, will be available in the future. As related to product liability insurance, a reduction in coverage or an exclusion for one or more key raw materials, may adversely affect our ability to continue our business as currently conducted. In addition, a loss of one or more of any of these insurance policies, or a claim-related loss in excess of insured limits will adversely affect our ability to continue our business as currently conducted.
Such factors above may create other risks affecting our long-term success. We believe that quarter-to-quarter comparisons of our historical operating results may not be a good indication of our future performance, nor would our operating results for any particular quarter be indicative of our future operating results.
| ITEM 2. | DESCRIPTION OF PROPERTY |
We own our corporate headquarters located in Largo, Florida. In addition, we have other manufacturing, distribution and warehouse facilities in Largo, Florida and Baltimore, Maryland all of which are leased. Following is a description of these facilities as of March 31, 2007.
Location | Purpose | Approx. Sq. Ft. | Annual Rent | ||||
6950 Bryan Dairy Road; Largo, FL 33777 | Corporate headquarters, distribution, sales and marketing, analytical, research and development, nutraceutical manufacturing and warehousing | 33,222 | $ | 0(owned) | |||
6901 Bryan Dairy Road; Ste. 130, Largo, FL 33777 | Nutrceutical and cosmeceutical manufacturing and storage | 6,000 | $ | 41,500 | |||
6911 Bryan Dairy Road; Ste. 210 | Generic drug manufacturing, analytical, research and development, regulatory affairs | 30,000 | $ | 211,000 | |||
8145 Bryan Dairy Road, Largo, FL 33777 | Manufacturing and distribution warehousing | 55,000 | $ | 212,000 | |||
12393 Belcher Road; Ste. 420 Largo, FL 33773 | Medical device and generic drug manufacturing | 10,000 | $ | 79,000 | |||
12393 Belcher Road, Ste. 430 Largo, FL 33773 | Cephalosporin manufacturing, analytical, research and development | 10,000 | $ | 79,000 | |||
6110 Robinwood Road; Baltimore, MD 21225 | Beta-Lactum manufacturing, analytical, research and development, regulatory affairs and warehousing | 55,000 | $ | 522,000 | |||
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| ITEM 3. | LEGAL PROCEEDINGS |
On September 29, 2006, Schering Corporation (“Schering”) filed an action in the United States District Court for the District of New Jersey, against Belcher Pharmaceuticals, Inc. and GeoPharma, Inc. (along with nineteen other defendants) alleging that the filing of Belcher Pharmaceuticals’ Abbreviated new Drug Application (“ANDA”) for 5 mg Desloratadine Tablets, AB-rated to Clarinex®, infringed U.S. Patent No. 6,100,274 (“the ‘274 patent”) Case No. 3:06-cv-04715-MLC-TJB. On November 8, 2006, Belcher filed a motion to dismiss in the New Jersey case for lack of jurisdiction. On October 5, 2006 Schering filed an action in the United States District Court for the Middle District of Florida, Tampa Division, Case No. 8:06-cv-01843-SCB-EAJ, against Belcher Pharmaceuticals, Inc. and Geopharma, Inc. alleging that the filing of Belcher Pharmaceuticals’ ANDA for 5 mg Desloratadine Tablets, AB-rated to Clarinex®, infringed the ‘274 patent. Company management and Belcher disputes Schering’s claims in the two actions and believes its proposed desloratadine product does not infringe the ‘274 patent. The possible outcome cannot be determined at this time.
During September 2006, the Company, through its 51% owned subsidiary, American Antibiotics, LLC, filed in the Circuit Court for Anne Arundel County, Maryland, Case No. C-06-117230, naming defendents Consolidated Pharmaceutical Group (“CPG”), the directors of CPG and two other individuals acting on behalf of CPG (collectively “the Defendents”). The litigation arises from and relates to agreements entered into between American Antibiotics and CPG for the purchase by American Antibiotics all of CPG’s rights, title and interest in various pharmaceutical Abbreviated New Drug Applications (“ANDAs”) and for the Baltimore, Maryland facility lease (the “Lease”). The suit brought by the Company alleges that the Defendents breached the ANDA agreement with certain misrepresentations and by failing to perform all the required improvements and modifications to the Balitmore, Maryland facility. The case is scheduled for trial in the first calendar quarter of 2008. To date, no counterclaims have been asserted against American Antibiotics.
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From time to time we are subject to litigation incidental to our business including possible product liability claims. Such claims, if successful, could exceed applicable insurance coverage. From time to time the Company is subject to litigation incidental to its business. Such claims, if successful, could exceed applicable insurance coverage. The Company is not currently a party to any material legal proceedings other than what is currently disclosed herein.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
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| ITEM 5. | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
Market For Securities
The Company’s $.01 par value common stock, is listed on the NASDAQ Capital Market under the symbol “GORX” and on the Boston Stock Exchange under the symbol “GORX”. The Company began its initial trading November 14, 2000; its high and low sales prices for the past three fiscal years, by quarter-ended date, are as follows:
| High | Low | |||||
June 30, 2004 | $ | 7.00 | $ | 4.10 | ||
September 30, 2004 | $ | 5.89 | $ | 2.85 | ||
December 31, 2004 | $ | 11.25 | $ | 3.36 | ||
March 31, 2005 | $ | 5.45 | $ | 2.53 | ||
June 30, 2005 | $ | 3.11 | $ | 1.54 | ||
September 30, 2005 | $ | 5.00 | $ | 1.76 | ||
December 31, 2005 | $ | 5.38 | $ | 2.92 | ||
March 31, 2006 | $ | 4.89 | $ | 3.57 | ||
June 30, 2006 | $ | 4.70 | $ | 4.02 | ||
September 30, 2006 | $ | 4.15 | $ | 2.95 | ||
December 31, 2006 | $ | 4.41 | $ | 3.35 | ||
March 31, 2007 | $ | 4.67 | $ | 4.01 | ||
As of June 25, 2007, there were approximately 1641 stockholders of record according to ADP and our stock transfer agent, Registrar and Transfer Company, Inc. located in Cranford, New Jersey.
Dividend Policy
As of March 31, 2007 and 2006, our subsidiary, Belcher Capital Corporation paid $0 using a combination of cash and the Company’s common stock and as of March 31, 2005, our subsidiary, Belcher Capital Corporation paid $203,333 using a combination of cash and the Company’s common stock, in preferred dividends as related to the 6%, Series A, $5 million convertible preferred stock issued to Laurus Master Fund, Ltd. Dividends were due the first of every month. The 6% Series A, $5 million convertible preferred stock was issued on February 10, 2004 as a part of a private placement. During December 2004, the holders of the Series A preferred stock converted all of their outstanding shares in exchange for 800,000 shares of the Company’s, $.01 par value, common stock.
As of March 31, 2007 and 2006, we paid $300,000 in each of the years and as of March 31, 2005, we paid $318,429 using the Company’s $.01 par value common stock, in preferred dividends as related to the 6%, Series B, $5 million convertible preferred stock issued to MidSummer Capital and Omicron Capital Master Funds. Dividends are due the first day of the last month of every quarter. The 6% Series B, $5 million convertible preferred stock was issued during March 2004 as a part of a private placement. Effective March 31, 2007, the dividend rate increases from 6% to 8%.
We have not paid any cash dividends on our common stock and we currently intend to retain any future earnings to fund the development and growth of our business. Any future determination to pay dividends on our common stock will depend upon our results of operations, financial condition and capital requirements, applicable restrictions under any credit facilities or other contractual arrangements and such other factors deemed relevant by the Company’s board of directors.
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| ITEM 6. | SELECTED FINANCIAL DATA |
SELECTED FISCAL YEAR DATA – STATEMENTS OF OPERATIONS AND CASH FLOWS
For the fiscal year ended | For the fiscal year ended | For the fiscal year ended | For the fiscal year ended | For the fiscal year ended | ||||||||||||||||
Net sales | $ | 59,792,137 | $ | 49,743,545 | $ | 28,230,240 | $ | 22,969,844 | $ | 14,731,514 | ||||||||||
Gross profit | $ | 16,868,020 | $ | 12,456,964 | $ | 5,778,493 | $ | 5,957,492 | $ | 4,018,809 | ||||||||||
SGA | $ | 12,840,307 | $ | 9,701,193 | $ | 6,071,411 | $ | 4,310,711 | $ | 3,283,280 | ||||||||||
Stock option expense | $ | 1,581,703 | $ | — | $ | — | $ | — | $ | — | ||||||||||
Depreciation & amortization | $ | 1,163,748 | $ | 748,532 | $ | 605,697 | $ | 447,582 | $ | 381,352 | ||||||||||
Other income/ (expense), net | $ | 257,289 | $ | 280,148 | $ | (184,975 | ) | $ | 231,610 | $ | 648,732 | |||||||||
Minority interest benefit | $ | 1,310,052 | $ | 582,610 | $ | — | $ | — | $ | — | ||||||||||
Income tax benefit/ (expense) | $ | (342,951 | ) | $ | (1,080,800 | ) | $ | 201,898 | $ | (311,800 | ) | $ | 147,900 | |||||||
Preferred dividends | $ | 300,000 | $ | 300,000 | $ | 521,762 | $ | 111,890 | $ | 120,031 | ||||||||||
Net income/(loss) available to common shareholders | $ | 2,206,652 | $ | 1,489,197 | $ | (1,403,454 | ) | $ | 1,007,119 | $ | 1,030,778 | |||||||||
Basic earnings (loss) per share | $ | 0.22 | $ | 0.17 | $ | (0.17 | ) | $ | 0.13 | $ | 0.15 | |||||||||
Basic weighted average number of common shares outstanding | 9,875,332 | 9,041,106 | 8,111,851 | 7,682,258 | 7,073,266 | |||||||||||||||
Net cash provided (used) in operating activities | $ | 2,026,176 | $ | 914,916 | $ | (2,300,318 | ) | $ | 414,471 | $ | 1,198,711 | |||||||||
Net cash provided (used) in investing activities | $ | (3,613,592 | ) | $ | (6,822,976 | ) | $ | (3,120,038 | ) | $ | (770,429 | ) | $ | (271,774 | ) | |||||
Net cash provided (used) in financing activities | $ | 1,116,399 | $ | 681,066 | $ | (1,314,398 | ) | $ | 13,049,690 | $ | (845,542 | ) | ||||||||
| SELECTED FINANCIAL DATA—BALANCE SHEETS | ||||||||||||||||||||
| March 31, 2007 | March 31, 2006 | March 31, 2005 | March 31, 2004 | March 31, 2003 | ||||||||||||||||
Cash | $ | 735,000 | $ | 1,206,017 | $ | 6,433,011 | $ | 13,167,765 | $ | 474,033 | ||||||||||
Accounts receivable, net | $ | 8,055,147 | $ | 7,465,025 | $ | 2,256,189 | $ | 1,674,312 | $ | 879,454 | ||||||||||
Inventory, net | $ | 7,356,295 | $ | 5,767,056 | $ | 3,743,063 | $ | 3,225,683 | $ | 2,140,709 | ||||||||||
Property, plant, leasehold improvements and equipment, net | $ | 9,659,063 | $ | 8,024,651 | $ | 4,485,767 | $ | 1,813,430 | $ | 1,477,726 | ||||||||||
Goodwill | $ | 728,896 | $ | 728,896 | $ | 728,896 | $ | 728,896 | $ | 728,896 | ||||||||||
Intellectual property and other intangible assets | $ | 6,916,581 | $ | 4,384,842 | $ | 521,499 | $ | 510,974 | $ | 231,151 | ||||||||||
Total assets | $ | 38,168,566 | $ | 32,097,141 | $ | 21,671,043 | $ | 23,655,216 | $ | 8,085,716 | ||||||||||
Accounts payable | $ | (4,793,483 | ) | $ | (4,882,107 | ) | $ | (1,759,512 | ) | $ | (2,063,254 | ) | $ | (919,710 | ) | |||||
Current portion of long-term debt | $ | (1,771,884 | ) | $ | (1,016,789 | ) | $ | (1,818,812 | ) | $ | (1,527,335 | ) | $ | (369,066 | ) | |||||
Accrued expenses and other current liabilities | $ | (4,658,756 | ) | $ | (3,466,353 | ) | $ | (855,364 | ) | $ | (544,425 | ) | $ | (681,576 | ) | |||||
Long term obligations | $ | (3,085,172 | ) | $ | (1,666,667 | ) | $ | (1,562,569 | ) | $ | (2,764,896 | ) | $ | (225,282 | ) | |||||
Total liabilities | $ | (14,309,295 | ) | $ | (11,276,716 | ) | $ | (5,996,257 | ) | $ | (7,063,810 | ) | $ | (3,041,650 | ) | |||||
Total shareholders’ equity | $ | (24,771,935 | ) | $ | (21,403,035 | ) | $ | (15,675,686 | ) | $ | (16,691,406 | ) | $ | (4,594,066 | ) | |||||
Book value per share | $ | 2.55 | $ | 2.37 | $ | 1.93 | $ | 2.17 | $ | 0.65 | ||||||||||
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION |
The statements contained in this Report that are not historical are forward-looking statements, including statements regarding the Company’s expectations, intentions, beliefs or strategies regarding the future. Forward- looking statements include the Company’s statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward-looking statements included in this Report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. It is important to note that the Company’s actual results could differ materially from those in such forward-looking statements. Additionally, the following discussion and analysis should be read in conjunction with the Financial Statements and notes thereto appearing elsewhere in this Report. The discussion is based upon such financial statements which have been prepared in accordance with U.S. Generally Accepted Accounting Principles and the Standards of the Public Company Accounting Oversight Board (United States).
Management’s Discussion and Analysis of Financial Condition and Results of Operations
We derive our revenues from developing, manufacturing and distributing a wide variety of cosmetics, over-the-counter, pharmaceutical and generic drugs, and prescription and non-prescription products. We also derive revenues from the distribution of our branded product lines, CarbSlim, Lean Protein and from our branded dietary supplement product lines that this year include DEX-C20 and Hoodia DEX-L10 as well as from distributing others’ product lines. In addition, we derive revenues from the services provided in connection with pharmacy benefit management. Service revenues are billed and recognized once the service has been provided. The PBM’s revenues are comprised of amounts billed and recognized based on the number of eligible plan members enrolled in the HMO insurance programs, plan member claims caused by the fulfillment of an eligible HMO member’s drug prescription and related administration costs for pharmacy’s fulfilling drug prescriptions for the number of members and the number of claims for the period.
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Cost of goods sold is comprised of direct manufacturing and manufacturing and distribution material product costs, contracted service fees, direct personnel compensation and other statutory benefits and indirect costs relating to labor to support product manufacture, distribution and the warehousing of production and other manufacturing overhead. In addition, for the distribution segment, the cost of all free goods for the purpose of product introduction or other incentive-based product costs are also recorded. The PBM cost of sales amounts recognized represent the direct and indirect costs of the prescription drug claims arising from the pharmacy’s fulfillment of HMO member drug prescriptions that were filled, completed and received by eligible HMO insurance plan members for the period.
Research and development expenses that benefit us and that benefit our customers are charged against either cost of goods sold or included within selling, general and administrative expenses as incurred dependent upon whether the R&D relates to direct product materials expended, direct laboratory and manufacturing production costs or whether it relates to indirect or more facility and administrative type costs representing indirect salaries.
Selling, general and administrative expenses include management and general office salaries, taxes and benefits, advertising and promotional expenses, depreciation and amortization, stock option compensation, insurance expenses, rents, legal and accounting costs, sales and marketing and other indirect operating costs.
Interest expense, net, consists of interest expense associated with borrowings to finance capital equipment expenditures and other working capital needs and non-cash interest expense as related to amortization of the Company’s convertible debt discount as partially offset by interest income earned on our funds held at banks. For the fiscal years ended March 31, 2007 and 2006, interest expense, net, was further reduced by interest expense incurred that was capitalizable based on pharmaceutical leasehold construction projects in process.
Other income (expense) net, consists of amounts received from an insured loss that occurred on August 27, 2002, where a commercial building where one of our manufacturing facilities is located, was involved in a fire. Although this fire was not in our leased space, nor was the fire caused by the Company or any of its related parties, our facility was exposed to and incurred smoke and water damage. The company that had the fire is not a related party. The Company had adequate insurance coverage that covered replacement cost of the facilities’ contents which included inventory and leasehold improvements, in addition to business interruption insurance which covered lost profits based on certain coverage formulas and policy limits. As of March 31, 2006, the final financial assessment has been made by our Company and by our insurance company which resulted in additional proceeds of approximately $1.3 million of which approximately $800,000 was recognized and recorded as other income.
Upon consummation of the merger of the Florida corporation, Go2Pharmacy, Inc. and the Delaware corporation, Go2Pharmacy.com, Inc. on November 7, 2000, the Company charged $23,625,000 to marketing expense representing the issuance of 3,000,000 shares of the Company’s stock at the initial public offering price of $7.875. This was reflected in the Company’s financial statements as a noncash, nonrecurring marketing expense and was included in the operations of the Company for the year ended March 31, 2001 and is carried forward in subsequent years as a charge within shareholders’ equity.
Effective May 15, 2007, the Company mutually terminated it’s PBM contract with Amerigroup, formerly known as CarePlus Health. Therefore, after the contract termination date, the Company will not receive nor record PBM segment revenues nor incur or record related PBM contract expenses. The Company does not expect to incur contract termination or any related exit costs associated with this contract termination.
Results of Operations
The following table sets forth selected consolidated statements of operations data as a percentage of revenues for the periods indicated.
| Year Ended March 31, | |||||||||
| 2007 | 2006 | 2005 | |||||||
Revenues | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of goods sold (excluding depreciation and amortization) | 71.8 | % | 75.0 | % | 79.5 | % | |||
Gross profit | 28.2 | % | 25.0 | % | 20.5 | % | |||
Depreciation and amortization | 2.0 | % | 1.5 | % | 2.2 | % | |||
Stock option compensation expense | 2.7 | % | 0.0 | % | 0.0 | % | |||
Selling, general and administrative expenses | 21.5 | % | 19.5 | % | 21.5 | % | |||
Other income (expense), net | 0.4 | % | 0.6 | % | (.7 | )% | |||
Income (loss) before minority interest, income taxes and preferred dividends | 4.8 | % | 5.8 | % | (3.8 | )% | |||
Minority interest | 2.2 | % | 1.2 | % | 0.0 | % | |||
Income tax (expense) / benefit | (0.6 | )% | (2.2 | )% | .1 | % | |||
Preferred dividends | 0.5 | % | 0.6 | % | 1.9 | % | |||
Net income (loss) | 3.7 | % | 3.0 | % | (5.0 | )% | |||
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Fiscal Year Ended March 31, 2007, Compared to Fiscal Year Ended March 31, 2006
Revenues. Total consolidated revenues increased approximately $10.1 million, or 20.2%, to approximately $59.8 million for the fiscal year ended March 31, 2007, as compared to approximately $49.7 million for the fiscal year ended March 31, 2006.
Manufacturing revenues increased approximately $9.3 million, or 52.1%, to approximately $27.3 million for the fiscal year ended March 31, 2007, as compared to approximately $17.9 million for the corresponding period. Overall, manufacturing capacities and capabilities continue to be increased as we have added additional more advanced, higher speed production equipment. Our customer base and their related order volumes are increasing also.
Distribution revenues decreased approximately $2.6 million or 17.7% to approximately $12.1 million for the fiscal year ended March 31, 2007, as compared to $14.7 million for the fiscal year ended March 31, 2006. Overall, sales prices vary for all product lines dependent upon a customer’s individual as well as aggregate purchase volumes in addition to the number of distribution points of sale and advertising dollars projected to be spent. For the fiscal year ended March 31, 2007, 23,648 cases of Hoodia DexL-10 were sold versus 15,031 cases sold for the fiscal year ended March 31, 2006. This 57.3% case increase is in part based on the timing of new product line extensions and introduction and transfer of the brand from an unrelated third party during February 2006 in addition to on-going new store and mass retail chain entrances. The DEX-L10 product line is comprised of DEX-L10, DEX-L10 Complete, DEX-L10 chews, in chocolate and lemon-lime in addition to various sizes and counts of all of the product offerings mentioned. During the quarter ended March 31, 2007, DEX-C20 product line was introduced and has sold 470 cases during that period. For the fiscal year ended March 31, 2007, 167 cases of CarbSlim were sold versus 9,301 cases sold for the fiscal year ended March 31, 2006. CarbSlim is comprised of ten SKUs, two sizes of: peanut butter crunch, chocolate caramel crunch, mint, peanut butter cookie dough, chocolate chip cookie dough. The Lean Protein Bites product line is comprised of four SKUs, milk chocolate, white chocolate, peanut butter and lemon. For the fiscal year ended 2007, 109 total cases were sold as compared to the fiscal year ended 2006, where 3,805 total cases were sold. The decrease in both food product case sales are due to the decrease in the number of national and regional distribution points in addition to the Company has shifted its focus more towards their branded dietary supplements rather than its food product lines based on more favorable margins. The total distribution revenues for the year ended March 31, 2007 were derived from over 99% dietary supplement sales as compared to the corresponding period in 2006 whereas 98% of distribution revenues were derived from dietary supplement case sales. Although case sales on the dietary product lines increased, food product sales have declined coupled with Company and retail store-level new dietary supplement product introduction discounts.
Pharmacy benefit management revenues increased 21.5% or approximately $3.6 million to $20.1 million for the fiscal year ended March 31, 2007, as compared to $16.6 million for the fiscal year ended March 31, 2006. The increase results from the increase in overall membership and prescriptions filled in the two health plans as compared to the fiscal year ended March 31, 2006. Revenue per member remained constant for both of the fiscal years.
Pharmaceutical revenues decreased 48.2% to approximately $234,000 for the fiscal year ended March 31, 2007 as compared to $486,000 in sales for this business segment for the fiscal year ended March 31, 2006. The pharmaceutical business segment generated its revenues based solely on manufacturing sales of contract repackaged products for others.
Gross Profit. Total gross profit increased approximately $4.4 million or 35.4%, to $16.9 million for the fiscal year ended March 31, 2007, as compared to $12.5 million for the fiscal year ended March 31, 2006. Total gross margins increased to 28.2% for the fiscal year ended March 31, 2007 from 25.0% for the fiscal year ended March 31, 2006.
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Manufacturing gross profit increased approximately $4.4 million, or 64.3%, to approximately $11.3 million for the fiscal year ended March 31, 2007, as compared to approximately $6.8 million in the corresponding period in 2006. For the fiscal year ended March 31, 2007 manufacturing gross margin increased to 41.3%, from 38.2% in the corresponding period in 2006. Sales and gross profits have increased proportionately as partially offset by higher costs due to continued increases in freight charges due to increased fuel costs, increases in resin and plastic-based packaging component costs as well as increased labor costs. Current increases in this type of labor-based direct overhead costs are in line with the Company’s planned improvements surrounding enhanced standard operating and manufacturing procedures in all its manufacturing plants. The Company expects that these improvements will continue to increase the Company’s visibility in the marketplaces that the Company competes in for new and expanded business for the upcoming fiscal year.
Distribution gross profits increased 45.3% or approximately $2.5 million to approximately $8.1 million for the fiscal year ended March 31, 2007, as compared to approximately $5.6 million for the fiscal year ended March 31, 2006, with distribution gross margins increasing to 66.7% for the fiscal year ended March 31, 2007 as compared to 37.8% for the fiscal year ended March 31, 2006. Although sales decreased, gross profits and gross margins improved based on a change in the sales mix from food products to branded dietary supplements which have a higher per unit sales prices and higher gross margins.
Pharmacy Benefit Management gross profit increased approximately $19,000 or 14.2% to approximately $155,000 for the fiscal year ended March 31, 2007, as compared to approximately $136,000 for the fiscal year ended March 31, 2006. Pharmacy benefit management gross margin was 0.8% for the fiscal year ended March 31, 2007 and 2006. Gross profit and margins remain flat based on continued industry pressure on controlling per member and per claim revenues as they continue to decline coupled with growing membership, rising number of claims in addition to the rising prescription costs.
Pharmaceutical gross profits decreased $2.5 million to approximately a gross profit deficit of $(2.6) million for the fiscal year ended March 31, 2007 as compared to $(103,000) in gross profit deficit for this business segment for the fiscal year ended March 31, 2006. This was based primarily on the Beta-Lactam facility located in Baltimore, Maryland and the Belcher facilities located in Largo, Florida that have no revenue streams but have costs associated with product development and production and laboratory direct labor costs. The Baltimore facility incurred $725,000 of costs with no revenue offset with the balance of $1.9 million attributable to the Belcher facilities. The facility expects to derive revenues from their Beta-Lactams during the quarter ended December 31, 2007 with the Belcher facilities beginning to recognize revenues during the quarter ended September 30, 2007.
Selling, General and Administrative Expenses. Selling, general and administrative (“SGA”) expenses consist of advertising and promotional expenses; stock and stock option compensation costs, insurance costs, research and development costs associated with the generic drug segment, personnel costs related to general management functions, finance, accounting and information systems, payroll expenses and sales commissions; professional fees related to legal, audit and tax matters; and depreciation and amortization expenses. Selling, general and administrative expenses, inclusive of stock option and depreciation and amortization expenses, increased approximately $5.1 million, or 49.0%, to approximately $15.6 million for the fiscal year ended March 31, 2007, as compared to approximately $10.4 million in the corresponding 2006 period. The increase is primarily attributable to additional pharmaceutical-related costs of $1.7 million, stock option compensation expense of $1.6 million which was not required to be recorded for the fiscal year ended March 31, 2006; depreciation and amortization increased $450,000 due to the increase in purchased depreciable assets related to generic drug, cosmeceutical and nutraceutical manufacturing; approximately $300,000 in additional advertising and promotional expenses associated with promoting our distribution segment and related branded product lines, including Hoodia DEX-L10 and DEX-C20, approximately $580,000 in increased legal and accounting expenses due to our on going litigation with Schering-Plough and other legal patent costs. Of the $580,000 increase, accounting costs increased $80,000 due to the Company’s IRS tax audit for the 2004-2003 tax years whereby the results of that IRS audit resulted in no amendments being necessary to the Company’s tax returns as filed for those tax years. Combined insurance costs have increased $262,000 in total, including health, general and product liability insurances; health insurance increased primarily due to an increase in the cost per employee and the number of employees; in addition to external insurance market influences surrounding higher premium costs for all of the Company’s business segments based on our increasing sales revenues. Consulting, officer and employee salaries have increased $470,000 in total based on increases in the number of personnel in addition to merit increases and bonuses received. Approximately $600,000 in rent and utility increases based on additional facilities leased as located in Baltimore, Maryland and Largo, Florida for manufacturing, warehousing and distribution as required with growing manufacturing and distribution segments. As a percentage of sales, selling, general and administrative expenses increased to 26.1% for the fiscal year ended March 31, 2007 from 21.0% in the corresponding period in 2006.
Other Income (Expense), Net. For the fiscal year ended March 31, 2007, the balance in other income/(expense), net, remained consistent with an other income, net of $257,000 for the fiscal year ended 2007 as compared to other income, net of $280,000 for the fiscal year ended 2006. The other income, net in the prior year was primarily due to the $800,000 in insurance proceeds received
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based on an August 2002 fire as partially offset by $628,000 in interest expense based on convertible debt outstanding as compared to the current fiscal year ended 2007 which represents interest and other income income not offset by any interest expense as the current year’s interest expense of $230,000 was able to be capitalized based on the Company’s on going drug facility related construction. The decrease in interest expense was due the Company paying off the remaining balance of the 6% interest convertible debt due to Laurus in the amount of $2.4 million during February 2006.
Income Tax (Expense) Benefit. At March 31, 2007, the Company had recorded $(343,000) of income tax expense as compared to income tax expense of $(1,080,800) for the fiscal year ended March 31, 2006. The expense is based on effective rate calculations as applied to our net income earned versus the prior period where the deferred tax benefit was calculated based on temporary and permanent differences using the effective tax rates applied to our net loss amounts this fiscal year, changes in information gained related to underlying assumptions about the future operations of the Company as well as the utilization of available operating loss carryforwards in addition to the outcome of the IRS audit for the Company’s tax years 2004-2003 whereby additional net operating losses and overpayments were identified.
Management believes that there was no material effect on operations or the financial condition of the Company as a result of inflation as of and for the year ended March 31, 2007. Management also believes that its business is not seasonal, however significant promotional activities can have a direct impact on sales volume in any given quarter.
Fiscal Year Ended March 31, 2006, Compared to Fiscal Year Ended March 31, 2005
Revenues. Total consolidated revenues increased approximately $21.5 million, or 76.2%, to approximately $49,744,000 for the fiscal year ended March 31, 2006, as compared to approximately $28,230,000 for the fiscal year ended March 31, 2005.
Manufacturing revenues increased approximately $6.2 million, or 53.3%, to approximately $17.9 million for the fiscal year ended March 31, 2006, as compared to approximately $11.7 million for the corresponding period. Overall, manufacturing capacities and capabilities continue to be increased as we have added additional more advanced, higher speed production equipment. Our customer base and their relate order volumes are increasing also.
Distribution revenues increased approximately $10.7 million or 268.4% to approximately $14.7 million for the fiscal year ended March 31, 2006, as compared to $4.0 million for the fiscal year ended March 31, 2005. Overall, sales prices vary for all product lines dependent upon a customer’s individual as well as aggregate purchase volumes in addition to the number of distribution points of sale and advertising dollars projected to be spent. For the fiscal year ended March 31, 2006, 15,031 cases of Hoodia DEX-L10 were sold versus no cases sold for the fiscal year ended March 31, 2005 based on the product introduction and the transfer of the brand from an unrelated third party during February 2006. For the fiscal year ended March 31, 2006, 9,301 cases of CarbSlim were sold versus 53,552 cases sold for the fiscal year ended March 31, 2005, a 82.6% case-sale decrease. CarbSlim is comprised of ten SKUs, two sizes of: peanut butter crunch, chocolate caramel crunch, mint, peanut butter cookie dough, chocolate chip cookie dough. The Lean Protein Bites product line is comprised of four SKUs, milk chocolate, white chocolate, peanut butter and lemon. For the fiscal year ended 2006, 3,805 total cases were sold as compared to the fiscal year ended 2005, where 7,534 total cases were sold, a case-sale decline of approximately 49.5%. The decrease in both food product case sales are due to the decrease in the number of national and regional distribution points in addition to the Company has shifted its focus more towards their branded dietary supplements rather than its food product lines based on more favorable margins. The total distribution revenues for the year ended March 31, 2006 were derived from 98% dietary supplement sales with only 2% of total distribution revenues being derived from consumer foods as compared to the corresponding period in 2005 whereas 23% of distribution revenues were derived from dietary supplement case sales with 77% of distribution revenues being derived from our consumer food products.
Pharmacy benefit management revenues increased 45.0% or approximately $5.15 million to $16.59 million for the fiscal year ended March 31, 2006, as compared to $11.4 million for the fiscal year ended March 31, 2005. The increase results from the increase in overall membership and prescriptions filled in the two health plans as compared to the fiscal year ended March 31, 2005. Revenue per member remained constant for both of the fiscal years.
Pharmaceutical revenues decreased to approximately $486,000 for the fiscal year ended March 31, 2006 as compared to $1.1 million in sales for this business segment for the fiscal year ended March 31, 2005. The pharmaceutical business segment generated its revenues based solely on manufacturing sales of Belcher’s branded Levothyroxine as compared to the year ended March 31, 2005 where over-the-counter contract repackaging sales of ephedrine of $602,000 in addition to a $500,000 licensing fee received from a European company for licensing our brand of Levothyroxine.
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Gross Profit. Total gross profit increased approximately $6.7 million or 115.6%, to $12.5 million for the fiscal year ended March 31, 2006, as compared to $5.8 million for the fiscal year ended March 31, 2005. Total gross margins increased to 25.0% for the fiscal year ended March 31, 2006 from 20.5% for the fiscal year ended March 31, 2005.
Manufacturing gross profit increased approximately $3.3 million, or 94.7%, to approximately $6.8 million for the fiscal year ended March 31, 2006, as compared to approximately $3.5 million in the corresponding period in 2005. For the fiscal year ended March 31, 2006 manufacturing gross margin increased to 38.2%, from 30.1% in the corresponding period in 2005. Sales and gross profits have increased proportionately as partially offset by higher costs due to increases in freight charges due to increased fuel costs, increases in resin and plastic-based packaging component costs as well as increased labor costs. Current increases in this type of labor-based direct overhead costs are in line with the Company’s planned improvements surrounding enhanced standard operating and manufacturing procedures in all its manufacturing plants. The Company expects that these improvements will continue to increase the Company’s visibility in the marketplaces that the Company competes in for new and expanded business for the upcoming fiscal year.
Distribution gross profits increased 360.8% or approximately $4.4 million to approximately $5.6 million for the fiscal year ended March 31, 2006, as compared to approximately $1.2 million for the fiscal year ended March 31, 2005, with distribution gross margins increasing to 37.8% for the fiscal year ended March 31, 2006 as compared to 30.2% for the fiscal year ended March 31, 2005. Gross profits and gross margins improved based on a change in the sales mix from food products to branded dietary supplements which have a higher per unit sales prices and higher gross margins.
Pharmacy Benefit Management gross profit decreased approximately $124,000 or 47.8% to approximately $136,000 for the fiscal year ended March 31, 2006, as compared to approximately $260,000 for the fiscal year ended March 31, 2005. Pharmacy benefit management gross margin was 0.8% for the fiscal year ended March 31, 2006 as compared to 2.3% for the fiscal year ended March 31, 2005. Gross profit and margin decreased based on continued industry pressure on controlling per member and per claim revenues as they continue to decline coupled with growing membership, rising number of claims in addition to the rising prescription costs in addition to the fiscal year ended March 31, 2005 the Company received a non-recurring contract renewal fee of $225,000.
Pharmaceutical gross profits decreased $894,000 to approximately a gross profit deficit of $(103,000) for the fiscal year ended March 31, 2006 as compared to $791,000 in gross profits for this business segment for the fiscal year ended March 31, 2005. Pharmaceutical gross margins were at a deficit of (21.2)% for the fiscal year ended 2006 as compared to 71.8% for the fiscal year ended March 31, 2005. This was based primarily on the Beta-Lactam facility located in Baltimore, Maryland that has no revenue stream but has costs associated with product development and production and laboratory direct labor costs. The Baltimore facility incurred $314,000 of costs with no revenue offset. The facility expects the derive revenues from their Beta-Lactams during the third quarter ended December 31, 2006. The Belcher facility gross profit, excluding the Baltimore facility, derived $212,000 in gross profits and gross margins of 56.4%.
Selling, General and Administrative Expenses. Selling, general and administrative (“SGA”) expenses consist of advertising and promotional expenses; insurance costs, research and development costs associated with the generic drug segment, personnel costs related to general management functions, finance, accounting and information systems, payroll expenses and sales commissions; professional fees related to legal, audit and tax matters; and depreciation and amortization expenses. Selling, general and administrative expenses, inclusive of depreciation and amortization, increased approximately $3.7 million, or 56.0%, to approximately $10.4 million for the fiscal year ended March 31, 2006, as compared to approximately $6.7 million in the corresponding 2005 period. The increase is primarily attributable to additional advertising and promotional expenses associated with promoting our distribution segment and related branded product lines, including Hoodia DEX-L10, CarbSlim and Lean Protein. Increased legal expenses associated with our class action and derivative lawsuits both of which were dismissed. All insurance costs have increased, including health, general and product liability insurances; health insurance increased primarily due to an increase in the cost per employee and the number of employees; in addition to external insurance market influences surrounding higher premium costs for all of the Company’s business segments based on our increasing sales revenues. Officer and employee salaries have increased in total based on increases in the number of personnel in addition to merit increases. Rents increased based on additional facilities leased as located in Baltimore, Maryland and Largo, Florida for manufacturing, warehousing and distribution as required with growing manufacturing and distribution segments. As a percentage of sales, selling, general and administrative expenses decreased to 21.0% for the fiscal year ended March 31, 2006 from 23.7% in the corresponding period in 2005.
Other Income (Expense), Net. For the fiscal year ended March 31, 2006, the balance in other income/(expense), net, changed from a net other expense in 2005 to a net other income in 2006 fluctuating approximately $465,000 or 251.5%, to $280,000 as compared to $(185,000) for the corresponding 2005 period. For the fiscal year ended 2006, the $280,000 was primarily comprised of $374,000 of interest expense in addition to non-cash interest expense consisting of the write-off of approximately $300,000 related to the pay off of the convertible debt and the debt discount as offset by other income of $908,000. The other income was based on $1.3
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million being received as final settlement of our fire insurance claim that was filed August 2002. Cash-related interest expense, net of interest income, decreased approximately $117,000 to approximately $374,000 for the fiscal year ended March 31, 2006, from approximately $491,000 for the fiscal year ended March 31, 2005. The decrease in interest expense was due the Company paying off the remaining balance of the 6% interest convertible debt due to Laurus in the amount of $2.4 million during February 2006.
Income Tax (Expense) Benefit. At March 31, 2006, the Company had recorded $(1,080,800) of income tax expense as compared to a deferred income tax benefit of $212,800 for the fiscal year ended March 31, 2005. The expense is based on effective rate calculations as applied to our net income earned versus the prior period where the deferred tax benefit was calculated based on temporary and permanent differences using the effective tax rates applied to our net loss amounts this fiscal year, changes in information gained related to underlying assumptions about the future operations of the Company as well as the utilization of available operating loss carryforwards.
Management believes that there was no material effect on operations or the financial condition of the Company as a result of inflation as of and for the year ended March 31, 2006. Management also believes that its business is not seasonal, however significant promotional activities can have a direct impact on sales volume in any given quarter.
Financial Condition, Liquidity and Capital Resources
The Company has financed its operations through available borrowings under its credit line facilities, cash provided from operations and receipt of $15 million of gross private placement proceeds based on a $10 million 6% convertible preferred stock private placement together with a total of 412,500 warrants at exercise prices ranging from $6.29 to $8.51 exercisable through February 2011 and a $5 million convertible 6%, three-year term debt together with a total of 150,000 warrants at exercise prices ranging from $7.34 to $8.62 exercisable through January 2011 closed during the months of January 2004 through March 2004. Approximately $4,800,000 of the proceeds from the sale of the 6% convertible preferred stock were placed in a restricted account. During December 2004, the holders of the $5 million Series A convertible preferred stock converted all of their preferred shares outstanding in exchange for 800,000 of the Company’s $.01 par value common stock thus releasing the restrictions surrounding the $4.8 million cash received January 2004.
As a direct result of issuing warrants with the $5 million 6% convertible debt in January 2004, the Company recorded $932,365 discount on the three-year term note based on applying a Black-Scholes valuation which lowered the gross amount of the note payable with the $932,365 offset recorded within Additional Paid in Capital (“APIC”). The $932,365 discount will be straight-line amortized to interest expense over the three-year life of the note. As a direct result of issuing warrants with the $10 million 6% convertible preferred stock in February and March, the Company recorded a total of $3,580,963 discount on the $10 million 6% convertible preferred stock based on applying a Black-Scholes valuation which resulted in a net reclassification of $3,580,963 lowering retained earnings and increasing APIC. All Black-Scholes valuations referenced and related entries are noncash transactions. During February 2006, the Company paid off the remaining $2.4 million 6% interest convertible debt balance along with all fees and penalties by issuing approximately 530,000 shares and simultaneously wrote-off approximate $300,000 to interest expense representing the debt discount remaining balance.
During February 2007, the Company closed on a $2 million capital lease line facility and a $5 million line of credit with a bank both at LIBOR+1.5%. As of March 31, 2007, $850,000 was outstanding on the capital lease line facility and nothing was outstanding on the $5 million line of credit.
On April 5, 2007, the Company closed on $12.5 million financing comprised of 8% , 6 year Convertible Debt together with $2.5 million of the Company’s $0.01 par value common stock with the together with 400,000 warrants as related to the $2.5 million in common stock. The $10 million of debt is convertible into the Company’s common stock at $4.36 with the 400,000 warrants convertible into the Company’s common stock at $5.26.
The Company had working capital of approximately $8.6 million at March 31, 2007, inclusive of current portion of long-term obligations, as compared to a working capital of approximately $8.4 at March 31, 2006.
During March 2005, the Company negotiated with an international media company to exchange excess CarbSlim inventory for future credit for use on custom print, radio and television advertising. Based on the Company’s expansion into its own branded consumer product lines coupled with the decline in customer demand for low-carb products, this excess inventory was able to be redeemed with the media credits having a three-year life. The media credits were recorded based on the net cost of CarbSlim inventory that was exchanged. For the year ended March 31, 2007, the Company wrote off approximately $514,000 to Cost of Sales based on the one year remaining of useful life.
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MARCH 31, 2007 FISCAL YEAR ENDED CASH FLOW ANALYSIS
Net cash provided by operating activities was $2.0 million for the fiscal year ended March 31, 2007, as compared to net cash used by operating activities of $915,000 for the fiscal year ended March 31, 2006. Cash provided was primarily attributable to a net income before preferred dividends of approximately $2.5 million based on consolidated gross profits increases of approximately $4.4 million, depreciation and amortization of $1.2 million, stock option expense of $1.6 million, media credit expense of $514,000, increase in amounts due from affiliates based on increased credit trade sales and from tax expense of $342,000 and $160,000 decrease in other accounts receivable , all of which is partially offset by increases in trade accounts receivable of $590,000 based on increased trade credit sales, increases in inventory of $1.6 million based on increased purchases of distribution finished goods and manufacturing raw material and packaging components to meet open customer orders, increases in prepaid expenses based on timing of payments for ANDA bioequivalency work, timing of insurance renewals and manufacturing equipment in transit that is not ready for manufacturing use, increases in net deferred tax assets based on the Company’s timing of deductible expenses, increases of $1.1 million in intangible assets based on purchases of generic drug related intellectual property.
Net cash used in investing activities was $(3.6) million for the fiscal year ended March 31, 2007 as compared to the net cash used of $(6.8) million for the fiscal year ended March 31, 2006. Investing activities represented the R&D related purchases and upgrades of plant and laboratory equipment for generic drug manufacturing and distribution plants, Belcher Pharmaceuticals and American Antibiotics, of $(2.7) million, $1.3 million in use of proceeds related to the minority interest associated with American Antibiotics plant in Baltimore, Maryland as partially offset by $433,000 of proceeds received from a certificate of deposit.
Net cash provided by financing activities was $1.1 million for the fiscal year ended March 31, 2007 as compared to cash provided by financing activities of $681,000 for the fiscal year ended March 31, 2006. The 2007 financing activity cash provided was primarily attributable to $1.9 million of proceeds received from $850,000 received in capital lease line funds, $750,000 in equipment loans with the balance relating to insurance premium loans and $110,000 of proceeds received from vested stock option exercises all of which was partially offset by $905,000 of equipment and insurance premium loan payments.
MARCH 31, 2006 FISCAL YEAR ENDED CASH FLOW ANALYSIS
Net cash provided by operating activities was $915,000 for the fiscal year ended March 31, 2006, as compared to net cash used by operating activities of $(2,300,000) for the fiscal year ended March 31, 2005. Cash provided was primarily attributable to a net income before preferred dividends of approximately $1.8 million based on consolidated gross profits increases of approximately $6.7 million, increases in trade accounts payable and accrued expenses of $5.9 million, depreciation of $749,000 and amortization of debt discount of $563,000 as partially offset by increases in SGA expenses of $3.6 million and increases in trade accounts receivable of $5.2 million, increases in inventory of $2 million as based on increased credit sales and those purchases required to meet open manufacturing and distribution orders, cash payments for income taxes of $840,000 and changes in deferred taxes of $240,000, and $620,000 in prepaid expenses, primarily for insurance premiums, and $1.0 million in other asset purchases related to the DEX-L10 brand transfer for $600,000 and approximately $400,000 as related to prepaid ANDA bioequivalency work.
Net cash used in investing activities was $(6.8) million for the fiscal year ended March 31, 2006 as compared to the net cash used of $(3.1) million for the fiscal year ended March 31, 2005. Investing activities represented the R&D related purchases and upgrades of plant and laboratory equipment for generic drug manufacturing and distribution plants, Belcher Pharmaceuticals and American Antibiotics, of $(7.2) million as partially offset by net proceeds received from the minority interest associated with American Antibiotics.
Net cash provided by financing activities was $681,000 for the fiscal year ended March 31, 2006 as compared to cash used by financing activities of $(1.3) million for the fiscal year ended March 31, 2005. The 2006 financing activity cash provided was primarily attributable to $221,000 of proceeds received from vested stock option exercises, the $3 million note for the Company’s 51% American Antibiotics investment as partially offset by payments of $2.5 million on long-term obligations.
Management believes that cash expected to be generated from operations, current cash reserves, and existing financial arrangements will be sufficient for the Company to meet its capital expenditures and working capital needs for its operations as presently conducted. The Company’s future liquidity and cash requirements will depend on a wide range of factors, including the level of business in existing operations, expansion of facilities, expected results from recent procedural changes surrounding the acceptance of manufacturing sales orders, and possible acquisitions. In particular, we have added additional manufacturing lines and have purchased additional fully automated manufacturing equipment to meet our present and future growth. Our plans may require the leasing of additional facilities and/or the leasing or purchase of additional equipment in the future to accommodate further expansion of our manufacturing, warehousing and related storage needs.
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If cash flows from operations, current cash reserves and available credit facilities are not sufficient, it will be necessary for the Company to seek additional financing. There can be no assurance that such financing would be available in amounts and on terms acceptable to the Company.
Capital Expenditure Commitments
The Company has no contractual commitments as related to capital expenditures as of March 31, 2007 and 2006. However, during February 2007, the Company entered into a 5 year, $2 million capital lease line with a bank at LIBOR+1.5%. As of March 31, 2007, $850,000 was outstanding on this line.
Payments Due by Period
The following table illustrates our outstanding debt, purchase obligations, and related payment projections as of March 31, 2007:
Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 3-5 Years | ||||||||
Series B convertible preferred stock (1) | $ | 5,000,000 | $ | — | $ | 5,000,000 | $ | — | ||||
Series B preferred stock dividends (1) | 1,200,000 | 400,000 | 800,000 | — | ||||||||
Loan payable | 2,500,000 | 1,666,667 | 833,333 | — | ||||||||
Trade payables | 4,793,483 | 4,793,483 | — | — | ||||||||
Other liabilities and accrued expenses | 7,015,812 | 7,015,812 | — | — | ||||||||
Subtotal | 20,509,295 | 13,875,962 | 6,633,333 | — | ||||||||
Purchase obligations | — | — | — | — | ||||||||
Capital leases | 850,000 | — | — | 850,000 | ||||||||
Operating leases | 2,318,886 | 386,481 | 772,962 | 1,159,443 | ||||||||
Total | $ | 23,678,181 | $ | 14,262,443 | $ | 7,406,295 | $ | 2,009,443 | ||||
Footnotes:
| (1) | The payments to be made are eligible to be paid in cash or in the form of the Company’s $0.01 par value common stock at the Company’s option. |
Critical Accounting Policies and Estimates
We have identified the policies and significant estimation processes below as critical to our business operations and the understanding of our financial position, results of operations and related cash flows. The following list is not intended to be a comprehensive list and in some cases, the accounting treatment of a particular transaction is specifically dictated by U.S. generally accepted accounting principles thus there is no need for management’s judgment in their application. In some cases however, management is required to exercise judgment in the application of accounting principles with respect to particular transactions. The impact and any associated risks related to these policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to Consolidated Financial Statements for the fiscal years ended March 31, 2007, 2006 and 2005 included in this Form 10K report. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates and such differences could be significant.
Principles of Consolidation:The consolidated financial statements as of March 31, 2007 and 2006 and for the years ended March 31, 2007, 2006 and 2005 include the corporate, manufacturing and distribution accounts of GeoPharma, Inc. (the “Company”), (“GeoPharma”), which is continuing to do manufacturing business as Innovative Health Products, Inc. (“Innovative”), and its wholly owned subsidiaries IHP Marketing, Breakthrough, Breakthrough Marketing, Belcher, Belcher Capital, Go2PBM Services, Inc., Libi Labs and its 51% owned LLC, American Antibiotics. Significant intercompany balances and transactions have been eliminated in consolidation.
Industry Segments:In accordance with the provisions of Statement of Financial Accounting Standards No. 131, (SFAS 131), Disclosures about Segments of an Enterprise and Related Information, a company is required to disclose selected financial and other related information about its operating segments. Operating segments are components of an enterprise about which separate financial information is available and is utilized by the chief operating decision maker (“CODM”) related to the allocation of resources and in the resulting assessment of the segment’s overall performance. The measure used by the Company’s CODM is a business segment’s gross profit.
Cash and Cash EquivalentsFor purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
InventoriesInventories are stated at lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method.
Property, Plant, Leasehold Improvements and EquipmentDepreciation is provided for using the straight-line method, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives (asset categories range from three to thirty-nine years). Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Leased equipment under capital leases is amortized using the straight-line method over the lives of the respective leases or over the service lives of the assets, whichever is shorter, for those leases that substantially transfer ownership. Accelerated depreciation methods are used for tax purposes.
Intangible AssetsIntangible assets consist primarily of goodwill and intellectual property. Effective April 1, 2002 with the adoption of SFAS 142, “Goodwill and Other Intangibles”, intangible assets with an indefinite life, namely goodwill and the intellectual property, are not amortized. Intangible assets with a definite life are amortized on a straight-line basis with estimate useful
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lives ranging from 1 to 3 years. Indefinite lived intangible assets will be tested for impairment yearly and will be tested for impairment between the annual tests should an event occur or should circumstances change that would indicate that the carrying amount may be impaired. The Company has selected January 1, as the annual date to test these assets for impairment. Based on the required analyses performed as of that annual test date, no impairment loss was required to be recorded for the fiscal year ended March 31, 2007, 2006 or 2005.
Impairment of AssetsIn accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company’s policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets, certain identifiable intangibles and goodwill when certain events have taken place that indicate the remaining unamortized balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of related undiscounted cash flows. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows. There have been no impairment losses recorded for the fiscal years ended March 31, 2007, 2006 and 2005.
Income TaxesThe Company utilizes the guidance provided by Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. Under the liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities.
Earning (Loss) Per Common ShareEarnings (loss) per share are computed using the basic and diluted calculations on the face of the statement of operations. Basic earnings (loss) per share are calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method.
Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles, requires management to make estimates, assumptions and apply certain critical accounting policies that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at March 31, 2007 and 2006, as well as the reported amounts of revenues and expenses for the fiscal years ended March 31, 2007, 2006 and 2005. Estimates and assumptions used in our financial statements are based on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions also require the application of certain accounting policies, many of which require estimates and assumptions about future events and their effect on amounts reported in the financial statements and related notes. We periodically review our accounting policies and estimates and makes adjustments when facts and circumstances dictate. Actual results may differ from these estimates under different assumptions or conditions. Any differences may have a material impact on our financial condition, results of operations and cash flows.
Revenue and Cost of Sales RecognitionIn accordance with SAB 101, Revenue Recognition, revenues are recognized by the Company when the merchandise is shipped which is when title and risk of loss has passed to the external customer. The Company analyzes the status of the allowance for uncollectible accounts based on historical experience, customer history and overall credit outstanding. For our distribution segment, any charge backs or other sales allowances immediately reduce the gross receivable with the corresponding reduction effected through increases in sales allowances which directly reduce sales revenue. For our PBM segment, service revenues are recognized once the member service of completing and fulfilling delivery of the members’ prescription. Cost of Sales is recognized for the manufacturing and distribution business segments simultaneously with the recognition of revenues with a direct charge to cost of goods sold and with an equal reduction to inventory at FIFO cost. For the PBM segment, cost of sales is recognized based on actual costs incurred and are recognized as the related revenue is recognized.
Advertising CostsThe Company charges advertising costs to expense as incurred.
Research and Development CostsCosts incurred to develop our generic pharmaceutical products for the Company are expensed.
Fair Value of Financial InstrumentsThe Company, in estimating its fair value disclosures for financial instruments, uses the following methods and assumptions: Cash, Accounts Receivable, Accounts Payable and Accrued Expenses: The carrying amounts
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reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses approximate their fair value due to their relatively short maturity. Long-term Obligations: The fair value of the Company’s fixed-rate long-term obligations is estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. At March 31, 2007, 2006 and 2005, the fair value of the Company’s long-term obligations approximated its carrying value. Credit Lines Payable: The carrying amount of the Company’s credit lines payable approximates fair market value since the interest rate on these instruments corresponds to market interest rates.
Stock-Based CompensationThe Company has adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 123 allows companies which have stock-based compensation arrangements with employees to adopt a new fair-value basis of accounting for stock options and other equity instruments, or to continue to apply the existing accounting required by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company intends to continue to account for stock-based compensation arrangements under APB Opinion No. 25. The Company has also adopted the disclosure provisions of SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure.” This pronouncement requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. Effective April 1, 2006, the Company was required to adopt Statement of Financial Accounting Standards (“SFAS”) No. 123R “Accounting for Stock-Based Compensation”—Revised (“SFAS 123R”).
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and also establishes a framework for measuring fair value. The provisions of this Statement are effective for fiscal years beginning after November 15, 2007. At this time we cannot determine whether or not the adoption of this Statement will have a material impact on our financial statements.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
We are not exposed to significant interest rate or foreign currency exchange rate risk.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
All financial information required by this Item is attached hereto beginning on Page 53. The Company’s unaudited selected quarterly data for each of the quarters for the fiscal years ended March 31, 2007, 2006 and 2005 are presented as follows:
| SELECTED QUARTERLY DATA | |||||||||||||||
Quarter ended: June 30, 2006 | Sept. 30, 2006 | Dec. 31, 2006 | Mar. 31, 2007 | ||||||||||||
Net sales | $ | 14,396,367 | $ | 16,678,796 | $ | 14,284,493 | $ | 14,432,481 | |||||||
Gross profit | $ | 3,472,239 | $ | 4,664,984 | $ | 4,516,429 | $ | 4,214,368 | |||||||
SGA | $ | 2,609,526 | $ | 3,307,757 | $ | 2,967,892 | $ | 3,955,132 | |||||||
Stock option compensation expense | $ | 427,675 | $ | 427,675 | $ | 427,675 | $ | 298,678 | |||||||
Depreciation & amortization | $ | 236,062 | $ | 245,565 | $ | 347,385 | $ | 334,736 | |||||||
Other income/ (expense), net | $ | 30,120 | $ | 140,993 | $ | (34,200 | ) | $ | 120,376 | ||||||
Minority interest | $ | 348,294 | $ | 327,057 | $ | 319,998 | $ | 314,703 | |||||||
Income tax benefit/ (expense) | $ | (304,000 | ) | $ | (284,000 | ) | $ | (300,000 | ) | $ | 545,049 | ||||
Preferred dividends | $ | 75,000 | $ | 75,000 | $ | 75,000 | $ | 75,000 | |||||||
Net income/(loss) available to common shareholders | $ | 194,900 | $ | 793,037 | $ | 684,275 | $ | 534,440 | |||||||
Basic earnings (loss) per share | $ | 0.02 | $ | 0.08 | $ | 0.07 | $ | 0.05 | |||||||
Basic weighted average number of common shares outstanding | 9,868,409 | 9,927,195 | 9,818,924 | 9,875,332 | |||||||||||
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SELECTED QUARTERLY DATA
Quarter ended: June 30, 2005 | Sept. 30, 2005 | Dec. 31, 2005 | Mar. 31, 2006 | |||||||||||||
Net sales | $ | 11,770,746 | $ | 12,221,708 | $ | 12,369,321 | $ | 13,381,770 | ||||||||
Gross profit | $ | 3,285,298 | $ | 2,779,340 | $ | 3,297,397 | $ | 3,094,929 | ||||||||
SGA | $ | 2,453,465 | $ | 2,594,337 | $ | 2,188,404 | $ | 2,464,987 | ||||||||
Depreciation & amortization | $ | 161,635 | $ | 172,926 | $ | 195,947 | $ | 218,024 | ||||||||
Other income/ (expense), net | $ | (7,252 | ) | $ | 712,201 | $ | (113,780 | ) | $ | (311,021 | ) | |||||
Income tax benefit/ (expense) | $ | (72,000 | ) | $ | (212,000 | ) | $ | (567,193 | ) | $ | (229,607 | ) | ||||
Preferred dividends | $ | 75,000 | $ | 75,000 | $ | 75,000 | $ | 75,000 | ||||||||
Net income/(loss) available to common shareholders | $ | 515,946 | $ | 513,604 | $ | 364,518 | $ | 95,129 | ||||||||
Basic earnings (loss) per share | $ | 0.06 | $ | 0.06 | $ | 0.04 | $ | 0.01 | ||||||||
Basic weighted average number of common shares outstanding | 8,746,145 | 8,901,724 | 9,005,134 | 9,041,106 | ||||||||||||
| SELECTED QUARTERLY DATA | ||||||||||||||||
Quarter ended: June 30, 2004 | Sept. 30, 2004 | Dec. 31, 2004 | Mar. 31, 2005 | |||||||||||||
Net sales | $ | 6,913,616 | $ | 6,039,352 | $ | 6,930,721 | $ | 8,346,551 | ||||||||
Gross profit | $ | 1,627,377 | $ | 1,351,455 | $ | 964,586 | $ | 1,835,075 | ||||||||
SGA | $ | 1,197,917 | $ | 1,321,911 | $ | 1,538,271 | $ | 2,013,312 | ||||||||
Depreciation & amortization | $ | 144,975 | $ | 147,230 | $ | 156,038 | $ | 157,454 | ||||||||
Other income/ (expense), net | $ | (103,134 | ) | $ | 76,733 | $ | (104,825 | ) | $ | (53,749 | ) | |||||
Income tax benefit/ (expense) | $ | (14,442 | ) | $ | — | $ | — | $ | 216,340 | |||||||
Preferred dividends | $ | 150,833 | $ | 170,095 | $ | 125,833 | $ | 75,000 | ||||||||
Net income/(loss) available to common shareholders | $ | 16,076 | $ | (211,048 | ) | $ | (960,381 | ) | $ | (248,101 | ) | |||||
Basic earnings (loss) per share | $ | 0.00 | $ | (0.03 | ) | $ | (0.12 | ) | $ | (0.02 | ) | |||||
Basic weighted average number of common shares outstanding | 7,713,899 | 7,724,475 | 8,188,452 | 8,111,851 | ||||||||||||
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of our management, including the chief executive officer or CEO, and the chief financial officer, or CFO, of the effectiveness of the design and operation of our disclosure procedures. Based on management’s evaluation as the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (an defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), were effective to ensure that the information required to the disclosed by us in the reports that we filed under the Exchange Act gathered, analyzed and disclosed with adequate timelines, accuracy and completeness and to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
Changes in internal controls. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above, nor were there any significant deficiencies or material weaknesses in our internal controls. Accordingly, no corrective actions were required or undertaken.
| ITEM 9B. | OTHER INFORMATION |
None.
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| ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Our executive officers, directors and key employees and their ages and their respective positions as of March 31, 2007 were as follows:
Name | Age | Position | ||
| Jugal K. Taneja | 63 | Chairman of the Board and Director | ||
| Mihir K. Taneja | 32 | Chief Executive Officer, Secretary and Director | ||
| Kotha S. Sekharam, Ph.D | 56 | President and Director | ||
| Carol Dore-Falcone | 42 | Vice President and Chief Financial Officer | ||
| Barry H. Dash, Ph.D | 75 | Director | ||
| William L. LaGamba | 48 | Director | ||
| Shan Shikarpuri | 56 | Director | ||
| George L. Stuart, Jr. | 61 | Director | ||
| A. Theodore Stautberg | 60 | Director | ||
| Rafick Henein, Ph.D. | 67 | Director |
JUGAL K. TANEJA has served as our Chairman of the Board since June 1998. Until June 1998, he also served as Chief Executive Officer for Dynamic. From November 1991 until December 1998, he also served as the Chairman of the Board and Chief Executive Officer of NuMed Home Health Care, Inc., a provider of home health care services and contract staffing of health care employees. From June 1993 until March 1998, he was also the Chief Executive Officer of National Diagnostics, Inc., a provider of medical diagnostic services. NuMed Home Health Care, Inc and National Diagnostics, Inc., are publicly traded companies. Since April 1996, Mr. Taneja is also a Director of DrugMax, Inc., a public company operating as an online business to business wholesaler and retailer of pharmaceuticals, over-the-counter drugs, health and beauty care products and private label dietary supplements. Although he devotes substantial time to our operations and business, Mr. Taneja does not devote his full time to our business. Mr. Taneja is the father of Mihir K. Taneja, our chief executive officer.
MIHIR K. TANEJA has served as our Chief Executive Officer, Secretary and a Director since November 1999. Prior to this he served as our Vice President of Marketing since June 1998. He also served as Dynamic’s Vice President of Marketing from July 1996 to November 1999. Prior to joining Dynamic, Mr. Taneja served as a market and financial analyst for Bancapital Corporation from 1994 to 1996. Mr. Taneja holds Bachelor of Arts degrees in finance and marketing from the University of Miami. Mr. Taneja is the son of Jugal K. Taneja, the Company’s Chairman of the Board.
DR. KOTHA S. SEKHARAM currently serves as our President and a Director. Prior to this, Dr. Sekharam was a founder and director of Nu-Wave Health Products, Inc., a developer and manufacturer of over-the-counter analgesic roll-ons and creams, dietary supplements and health and beauty care products. Dynamic acquired 80% of Nu-Wave in September 1995 and the additional 20% of Nu-Wave in July 1997. Dr. Sekharam served as President of Nu-Wave from June 1996 through March 1998 and Vice President of Nu-Wave from September 1995 until June 1996. From 1992 until September 1995, he served as Director of Research and Development of Energy Factors, Inc., our predecessor. He has served as President of Dynamic since June 1996 and served as our President since June 1998. Presently, he continues to serve as our President and as President of Dynamic. Dr. Sekharam holds a Ph.D. in food sciences from Central Food Technological Research Institute, Mysore, India, a United Nations university center and has been employed in the food and health industry since 1982.
CAROL DORE-FALCONE has served as our Vice President and Chief Financial Officer since August 1999. She has also served as Vice President and Chief Financial Officer of Dynamic from August 1999 until November 7, 2000. Prior to joining us, Ms. Dore-Falcone was employed as an audit manager with Deloitte & Touche, Certified Public Accountants, where she had served in various capacities since January 1990. Ms. Dore-Falcone is a certified public accountant and holds a B.S. degree in Accounting from Montclair State University and an M.B.A. from the University of Tampa.
DR. BARRY H. DASH has served as a Director since January 2004. In addition, Dr. Dash has been President of Dash Associates, LLC since 1995, where he provides consulting to the pharmaceutical and health and beauty aid industries. Prior to this he served 31 years as Senior Vice President of American Home Products Corporation, Whitehall-Robins Healthcare, now Wyeth; and served as a professor at Columbia University College of Pharmaceutical Sciences from 1956-1962. Dr. Dash holds a Ph.D. in Medicinal Chemistry and Pharmaceutics from the University of Florida, MS in Pharmacy and a BS in Pharmaceutical Sciences both from Columbia University.
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WILLIAM L. LaGAMBA has served as a Director since July 2005 and has served as President and Chief Operating Officer of DrugMax, Inc. since October 2000 until August 2005. From March 2000 to March 2000, he served as the Company’s Chief Executive Officer. From November 1999 to October 2000, he also served as the Company’s Secretary and Treasurer. From June 1998 until joining the company in November 1999, Mr. LaGamba served as Chief Executive Officer of Dynamic. He was also a founder and the President of Becan Distributors, Inc. from its inception in January 1997 until it was acquired by the Company in November 1999. For 14 years prior to January 1997, Mr. LaGamba served in various capacities for McKesson Drug Company, a large distributor of pharmaceuticals, health and beauty care products and services, and FoxMeyer Drug Company.
SHAN SHIKARPURI has served as a Director since November 2003. In addition, he is the founding principal of his Palm Harbor accounting firm, Shan Shikarpuri & Associates, P.A., which has been doing business in Florida for the past twenty years. Shan earned three degrees from Florida State University, has taught accounting and income tax law at the University of South Florida and the University of Virginia, and had trained auditors at the Office of Inspectors General in Washington, D.C. He is a past president of the Palm Harbor Chamber of Commerce, is active in many civic organizations and is a frequent speaker on tax and accounting issues. Shan is a member of the Tampa Bay Regional Planning Council representing Pinellas County. He has served on the board of directors of the Sun Coast Chapter of the Florida Institute of CPAs and is currently on the board of numerous privately held corporations and not-for-profit organizations in the Tampa Bay area.
GEORGE L. STUART, JR. has served as a Director since March 2000. Since 2005, Mr. Stuart has served a Senior Vice President of Mirabilis Ventures, Inc. a merger and acquisition company headquartered in Orlando, Florida. Mr. Stuart is the President of George Stuart & Associates, a management consulting firm. In addition, Mr. Stuart was the Chief Executive Officer of DoctorSurf.com, Inc. from December 1, 1999 to July 2000. From July 1997 to December 1999, Mr. Stuart was Vice President and a Director of Leapfrog Smart Products, Inc., a high-technology smart card development company in Orlando, Florida. From January 1995 to July 1997, Mr. Stuart was a partner in Stuart/Cloud Enterprises, Ltd. A government relations business development and organizational consulting firm in Tallahassee, Florida. Mr. Stuart was a Florida State Senator from 1978 through 1990. From January 1991 to January 1995, Mr. Stuart served as the Secretary and Chief Executive Officer of the State of Florida’s Department of Business and Professional Regulation. Mr. Stuart holds a B.A. degree in Economics from the University of Florida and an M.B.A. from Harvard University’s Graduate School of Business.
A. THEODORE STAUTBERG, JR. has served as director since October 2006. Mr. Stautberg is the President, founder and a director of Triumph Resources Corporation and the Chairman of Triumph Securities Corporation. Mr. Stautberg also serves as director of Camterra Resources and serves as a director for several energy companies. Prior to forming Triumph in 1981, Mr. Stautberg was Vice President of Butcher & Singer, Inc. and was an attorney with the Securities and Exchange Commission in Washington D.C. Mr. Stautberg is a graduate of the University of Texas and University of Texas School of Law.
Dr. RAFICK HENEIN has served as a director since March 2007. Dr. Henein started his career at Ayerst Laboratories, Inc. in 1971 and served as Senior Vice President, Plant and Distribution Operations from 1983 to 1988. He then joined Novopharm Limited (Canada), first as Executive Vice President, and subsequently as President and Chief Operating Officer before being named President and Chief Executive Officer of Novopharm International. In 1997, Dr. Henein joined IVAX Pharmaceuticals Inc., and served as its President and Chief Executive Officer until 2006. Dr. Henein holds a PhD in pharmaceutical technology from the Academy of Sciences of Hungary and a MSc in pharmaceutical sciences from the Budapest University of Medicine in Hungary. He also has a MBA and a Diploma of Management from McGill University in Montreal, Quebec, Canada. A graduate of the Faculty of Pharmacy, Cairo University, Dr. Henein is a member of the Ontario College of Pharmacists and the Order of Pharmacists of Quebec.
Committees of the Board of Directors
The Board of Directors have formed the following committees with each of its respective members listed: Audit Committee consists of Mssrs. LaGamba, Stuart, Jr., and Shikarpuri, with Mssr. Shikarpuri representing the audit committee financial expert, Nominating Committee: Mssrs. Dash, Stuart and Shikarpuri, Executive Committee: Mssrs. Dash, Sekharam and M. Taneja with the compensation committee consisting of Mssrs. Dash, Stuart and Stautberg.
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The Board met 6 times during the fiscal year March 31, 2007.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5, and amendments thereto, furnished to the Company during fiscal year 2007, 2006 and 2005, the Company is not aware of any director, officer or beneficial owner of more than ten percent of the Company’s Common Stock that failed to file reports required by Section 16(a) of the Securities Exchange Act of 1934 on a timely basis during those fiscal years.
Code of Ethics
We plan to adopt a Code of Business Conduct and Ethics, within the meaning of Item 406(b) of Regulation S-K, that applies to our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Upon adoption, a complete copy of the proposed Code of Ethics will be posted at our website at www.geopharmainc.com under “Investor Info.” Any amendments to, or waivers of, the Code of Ethics will be promptly disclosed on our website.
| ITEM 11. | EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
The objectives of GeoPharma’s compensation program are as follows:
| • | Reward performance that drives substantial increases in shareholder value, as evidenced through both future increases in revenues, improvements in our operating profits, penetration into new target markets and increased market price of our common shares; and |
| • | Attract, hire and retain our experienced executives given our specialized industries in which we operate and have targeted to operate in and our overall risk profile. |
The compensation level of our Chief Executive Officer (“CEO”), our President and our Chief Financial Officer (“CFO”) in general is comparable to other industry executives, and reflects the CEO’s, our President’s and CFO’s unique position and incentive to positively affect our future operating performance and shareholder value. Our CEO’s, our President’s and CFO’s compensation is heavily weighted toward equity compensation, primarily through restricted stock grants, to provide a relatively strong personal economic incentive for these executives to increase our revenue, our profits as well as increase the market price of our common shares. Specific salary and bonus levels, as well as the amount and timing of equity incentive grants, has been developed in the Company’s Compensation Incentive Plan (“CIP”). Executive compensation is primarily paid or granted pursuant to the Company’s CIP and each executive’s formal compensation agreement. Compensation adjustments are made occasionally based on changes in an executive’s level of responsibility or on changed local and specific executive employment market conditions.
Employment Arrangements
During February 2004, effective April 1, 2004 , GeoPharma renewed all officers’ three-year employment agreements with Mihir K. Taneja, Chief Executive Officer, Kotha S. Sekharam, President, and Carol Dore-Falcone, Vice President and Chief Financial Officer, at annual salaries for the fiscal year ended March 31, 2007 of $240,000, $170,000 and $160,000, plus benefits, respectively. In addition, the Company renewed the consulting agreement with the Chairman of the Board, Jugal K. Taneja, pursuant to which he is paid an annual fee of $300,000.
Officers and employees are permitted to participate in our benefits and employee benefit plans that may be in effect from time to time, to the extent eligible, and each employee is entitled to receive an annual bonus as determined in the sole discretion of our Compensation Committee and the Board of Directors annually based on the Committee and the Board’s evaluation of the officer’s or employee’s performance as well as GeoPharma’s financial performance as documented in the Company’s Compensation Incentive Plan.
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate cash compensation paid during the two years ended March 31, 2007 and 2006 to GeoPharma’s Chief Executive Officer and our two most highly compensated executive officers other than our Chief Executive Officer. Other than as listed below, the Company had no executive officers whose total annual salary and bonus exceeded $100,000 for that fiscal year
Name and Principal Position | Year | Salary $ | Bonus $ | Stock Awards $ (2) | Option Awards $ (4) | Total $ (8) | ||||||||||||||
Mihir Taneja Chief Executive Officer | 2007 2006 | $ $ | 235,018 196,425 | $ | 200,000 | (1) (2) | $ | 120,000 | (1) (3) | $ $ | 0 487,500 | (5) | $ $ | 235,018 883,925 | ||||||
Kotha S. Sekharam, PhD. President | 2007 2006 | $ $ | 181,784 159,076 | $ | 160,000 | (1) (2) | $ | 96,000 | (1) (3) | $ $ | 0 292,500 | (6) | $ $ | 181,784 611,576 | ||||||
Carol Dore-Falcone Vice President and Chief Financial Officer | 2007 2006 | $ $ | 163,295 151,053 | $ | 150,000 | (1) (2) | $ | 90,000 | (1) (3) | $ $ | 0 243,750 | (7) | $ $ | 163,295 544,803 | ||||||
Summary Compensation Table Footnotes
| (1) | In accordance with the compensation committee’s Compensation Incentive Plan, the Bonus is determined based on audited results for the March 31 fiscal year end. Based on that Compensation Plan and the Company’s operating results, it is projected that management will be awarded 100% of their 2007 salary which will take the form of 60% 3-year restricted stock and 40% in cash as received over the months July – December 2007. |
| (2) | In accordance with the compensation committee’s Compensation Incentive Plan, (the “CIP”), the Bonus is determined based on audited results for the March 31 fiscal year end. The Bonus amount is comprised of 40% cash and 60% in 3-year restricted stock. The compensation committee based their approval for the bonus awarded as set forth in the criteria outlined in the CIP and is included as an Exhibit to this report. The timing of the determination and the issuance of the CIP bonus award is contingent on the completion of the audit of the Company financial statements and is therefore paid out prorate over the subsequent months of July through December for the previous fiscal year ended March 31. The date of the CIP bonus award was June 12, 2006 and the closing price on Nasdaq Capital Market of the Company’s common stock on that date was $4.12. |
| (3) | As noted in footnote (2) above, the amount represents 60% of the bonus awarded and is awarded in the form of the Company’s common stock with a three-year minimum restrictive legend. |
| (4) | Effective March 31, 2007, pursuant to the Compensation Committee’s Stock Option Conversion Plan, the Company exchanged all unvested stock options issued under its 1999 Employee and NonEmployee Stock Option Plans, based on an exchange formula that, among other things, was based on the exercise price on the date of grant and the market value on the March 31, 2007 effective date. Therefore, no stock options were reflected as issued for the fiscal year ended March 31, 2007. |
| (5) | The amount represents 250,000 stock option granted at an exercise price of $1.95, the closing price of the Nasdaq Capital Market on the date of grant, June 12, 2006. The options vest equally over three years. 50,000 of the 250,000 stock options granted represent board of director options granted. |
| (6) | The amount represents 150,000 stock option granted at an exercise price of $1.95, the closing price of the Nasdaq Capital Market on the date of grant, June 12, 2006. The options vest equally over three years. 50,000 of the 150,000 stock options granted represent board of director options granted. |
| (7) | The amount represents 125,000 stock option granted at an exercise price of $1.95, the closing price of the Nasdaq Capital Market on the date of grant, June 12, 2006. |
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| (8) | The total omits the value presented in “Stock Awards” column as that amount in included in column of the dollar value presented in “Bonus” column. |
GRANTS OF PLAN-BASED AWARDS
The following table sets forth the equity-based awards during the year ended March 31, 2007 to GeoPharma’s Chief Executive Officer and our two most highly compensated executive officers other than our Chief Executive Officer.
Name and Principal Position | Grant date(3) | All other (1)(3) | |||
Mihir K. Taneja Chief Executive Officer | 06/12/2006 03/31/2007 | (1) (2) | 52,863 107,500 | ||
Kotha S. Sekharam, PhD. President | 06/12/2006 03/31/2007 | (1) (2) | 42,291 70,833 | ||
Carol Dore-Falcone Vice President and Chief Financial Officer | 06/12/2006 03/31/2007 | (1) (2) | 39,648 48,333 |
Grants of Plan-based Awards Footnotes
| (1) | In accordance with the Compensation Committee’s Compensation Incentive Plan, (the “CIP”), the bonus is determined based on audited results for the March 31, 2006 fiscal year end. The bonus amount is comprised of 40% cash and 60% in 3-year restricted stock. The compensation committee based their approval for the bonus awarded as set forth in the criteria outlined in the CIP and is included as an Exhibit to this report. The timing of the determination and the issuance of the CIP bonus award is contingent on the completion of the audit of the Company financial statements. The date of the CIP bonus award was June 12, 2006 and the closing price on Nasdaq Capital Market of the Company’s common stock on that date was $4.12. |
| (2) | Effective March 31, 2007, pursuant to the Compensation Committee’s Stock Option Conversion Plan, the Company exchanged all unvested stock options issued under its 1999 Employee and NonEmployee Stock Option Plans, based on an exchange formula that, among other things, was based on the exercise price on the date of grant and the market value on the March 31, 2007 effective date. |
| (3) | In accordance with the Compensation committee’s Compensation Incentive Plan, (the “CIP”) the bonus is determined based on audited results for the fiscal year ended March 31, 2007. Based on the date of this filing, the bonus has not been determined. For further information see Note (1) above. |
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information regarding unexercised options, unvested shares of common stock and any awards under an equity incentive plan as of March 31, 2007 for GeoPharma’s Chief Executive Officer and our two most highly compensated executive officers other than the Chief Executive Officer.
Name | Number of Securities Underlying Unexercised Options # Exercisable | Number of Securities Underlying Unexercised Options # Unexercisable (3) | Option Exercise Price $ | Option Expiration Date | ||||||
Mihir K. Taneja | 54,000 | 0 | $ | 2.00 | 12/01/2010 | |||||
Chief Executive Officer | 30,000 | 0 | $ | 1.00 | 04/01/2011 | |||||
| 21,500 | 0 | $ | 0.80 | 04/01/2012 | ||||||
| 100,000 | 0 | $ | 0.85 | 06/20/2012 | ||||||
| 25,000 | 0 | $ | 0.80 | 04/01/2013 | ||||||
| 16,667 | 0 | $ | 6.15 | 04/01/2014 | ||||||
| 133,333 | 0 | $ | 4.55 | 09/01/2014 | ||||||
| 83,334 | 0 | $ | 1.95 | 06/07/2015 | ||||||
| 463,834 | (1) | |||||||||
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Name | Number of # | Number of # | Option $ | Option Expiration Date | ||||||
Kotha S. Sekharam | 54,000 | 0 | $ | 2.00 | 12/01/2010 | |||||
President | 30,000 | 0 | $ | 1.00 | 04/01/2011 | |||||
| 25,000 | 0 | $ | 0.80 | 04/01/2012 | ||||||
| 50,000 | 0 | $ | 0.85 | 06/20/2012 | ||||||
| 25,000 | 0 | $ | 0.80 | 04/01/2013 | ||||||
| 16,667 | 0 | $ | 6.15 | 04/01/2014 | ||||||
| 100,000 | 0 | $ | 4.55 | 09/01/2014 | ||||||
| 50,000 | 0 | $ | 1.95 | 06/07/2015 | ||||||
| 350,667 | (2) | |||||||||
Carol Dore-Falcone | 36,600 | 0 | $ | 2.00 | 12/01/2010 | |||||
Vice President and Chief Financial Officer | 33,333 | 0 | $ | 0.85 | 06/20/2012 | |||||
| 66,666 | 0 | $ | 4.55 | 09/01/2014 | ||||||
| 41,667 | 0 | $ | 1.95 | 06/07/2015 | ||||||
| 178,266 | ||||||||||
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Outstanding Equity Awards at Fiscal Year-end Footnotes
| (1) | Of the 463,834 vested stock options, 113,834 stock options represent options issued as a member of the Board of Directors. |
| (2) | Of the 350,667 vested stock options, 117,334 stock options represent options issued as a member of the Board of Directors. |
| (3) | Effective March 31, 2007, pursuant to the Compensation Committee’s Stock Option Conversion Plan, the Company exchanged all unvested stock options issued under its 1999 Employee and NonEmployee Stock Option Plans, based on an exchange formula that, among other things, was based on the exercise price on the date of grant and the market value on the March 31, 2007 effective date. Therefore, no stock options were unvested as of the fiscal year ended March 31, 2007. |
DIRECTOR COMPENSATION
GeoPharma reimburses each of our directors for reasonable expenses incurred in attending meetings of our Board of Directors. Each non-employee director receives compensation in the form of a fee of $2,500 per quarter. Additionally, all directors are eligible to receive stock options under the Company’s 1999 Stock Option Plan. Effective with the term beginning April 2005, the Company established a policy providing that all directors will receive 50,000 stock options and non officer directors are eligible to receive 5,000 shares of restricted stock per fiscal year if they attend at least two meetings in such fiscal year. The options granted under this policy to directors are exercisable in accordance with a three-year vesting schedule from date of grant, provided that should any director resign prior to the end of the relevant term of office, the options granted for during such fiscal term shall be immediately forfeited. Effective March 31, 2007, the Company exchanged all unvested stock options into the Company’s restricted common stock based on an exchange formula pursuant to the Company’s Compensation Committee Plan.
As of March 31, 2007, see the table as follows for nonemployee directors; Dr. Kotha Sekharam, the Company’s President, and Mihir K. Taneja, the Company’s Chief Executive Officer, are both officers and directors of the Company and they are therefore not included in the table below as their compensation details are include in the tables elsewhere.
Name | Fees $ | Stock $ (2) | Option (2) | Total $ | |||||||||
Jugal K. Taneja, Chairman of the Board | $ | 10,000 | $ | 66,000 | $ | 0 | $ | 76,000 | |||||
Shan Shikarpuri, Director | $ | 10,000 | $ | 66,000 | $ | 0 | $ | 76,000 | |||||
George Stuart, Jr., Director | $ | 10,000 | $ | 66,000 | $ | 0 | $ | 76,000 | |||||
Dr. Barry Dash, Director | $ | 10,000 | $ | 66,000 | $ | 0 | $ | 76,000 | |||||
William LaGamba, Director | $ | 10,000 | $ | 66,000 | $ | 0 | $ | 76,000 | |||||
A. Theodore Stautberg, Director | $ | 2,500 | (1) | $ | 66,000 | $ | 0 | $ | 68,500 | ||||
Dr. Rafick Henein, Director | $ | 0 | (3) | $ | 0 | $ | 0 | $ | 0 | ||||
Director Compensation Footnotes
| (1) | Compensation was $2,500 based on the timing of the nomination of the director to the Company’s Board of Directors on December 12, 2006. |
| (2) | The Stock Award included not only the 5,000 restricted shares given as a part of the Board member’s compensation as described above but in addition, includes the exchange of all of the unvested stock options into the Company’s restricted common stock based on an exchange formula pursuant to the Company’s Compensation Committee Plan. For the year ended March 31, 2007, the 10,000 restricted shares were issued with the closing price on March 31, 2007 of $4.40 per share. |
| (3) | No compensation was received based on the nomination to the Company’s Board of Directors on March 15, 2007. |
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Employee and Non-Employee Stock Option Plans
1999 Employee Stock Option Plan
On September 30, 1999, our Board of Directors and our sole stockholder at that time adopted our 1999 Stock Option Plan. The 1999 plan will enable us to attract and retain top-quality employees, officers, directors and consultants and to provide such employees, officers, directors and consultants with an incentive to enhance stockholder return. The 1999 plan will allow the grant of options to purchase a maximum aggregate of 1,000,000 shares of common stock to our officers, directors, or other key employees and consultants. The plan was amended on May 18, 2004 based on shareholder approval, increasing the number of shares to a total of 1,500,000 shares of common stock.
The Board of Directors or a committee of the Board may administer the 1999 plan, and has complete discretion to select the optionees and terms and conditions of each option, subject to the provisions of the 1999 plan. Options granted under the 1999 plan may be “incentive stock options” as defined in Section 411 of the Internal Revenue Code of 1986 or so-called nonqualified options.
The exercise price of incentive stock options may not be less than 100% of the fair market value of the common stock as of the date of grant (110% of the fair market value if the grant is to an employee who owns more than 10% of the total combined voting power of all classes of capital stock of the company). The Internal Revenue Code currently limits to $100,000 the aggregate value of common stock that may be acquired in any one year pursuant to incentive stock options under the 1999 plan or any other option plan adopted by a company.
Nonqualified options may be granted under the 1999 plan at an exercise price of not less than 100% of the fair market value of the common stock on the date of grant. Nonqualified options also may be granted without regard to any restriction on the amount of common stock that may be acquired pursuant to such options in any one year.
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Subject to the limitations contained in the 1999 plan, options become exercisable at such times and in such installments (but not less than 20% per year) as the Committee shall provide in the terms of each individual stock option agreement. The Committee must also provide in the terms of each stock option agreement when the option expires and becomes unexercisable, and may also provide the option expires immediately upon termination of employment for any reason. No option held by directors, executive officers or other persons subject to Section 16 of the Securities Exchange Act of 1934 may be exercised during the first six months after such option is granted.
Unless otherwise provided in the applicable stock option agreement, upon termination of employment of an optionee, all options that were then exercisable would terminate three months (twelve months in the case of termination by reason of death or disability) following termination of employment. Any options which were not fully vested and exercisable on the date of such termination would immediately be cancelled concurrently with the termination of employment.
Options granted under the 1999 plan may not be exercised more than ten years after the grant (five years after the grant if the grant is an incentive stock option to an employee who owns more than 10% of the total combined voting power of all classes of capital stock of the company). Options granted under the 1999 plan are not transferable and may be exercised only by the respective grantees during their lifetime or by their heirs, executors or administrators in the event of death. Under the 1999 plan, shares subject to cancelled or terminated options are reserved for subsequently granted options. The number of options outstanding and the exercise price thereof are subject to adjustment in the case of certain transactions such as mergers, recapitalizations, stock splits or stock dividends. The 1999 plan is effective for ten years, unless sooner terminated or suspended.
Employees
The following represents the employees’ common stock options outstanding as of March 31, 2007:
Option balance outstanding, March 31, 2006 | 648,417 | ||
Granted | — | ||
Exercised | (38,667 | ) | |
Forfeited | (216,667 | ) | |
Option balance outstanding, March 31, 2007 | 393,083 | ||
Effective March 31, 2007, the Compensation Committee adopted the Stock Option Conversion Plan whereby all unvested stock options were to be converted to 3-year restricted stock based on a predetermined exchange formula. Of the total 216,667 forfeited, the 66,667 stock options forfeited is the result of this exchange with the Company charging $298,678 in the current year to stock option expense; the $298,678 charged to stock option expense represents the excess value of the restricted stock received versus the value of the unvested stock option forfeited. $1,536,947 was recorded as a deferred compensation asset that will be amortized over three years, the life of the restricted stock. Therefore, as of March 31, 2007 no stock options were unvested with the remaining 393,083 stock options outstanding being vested.
The following represents the employees’ common stock options outstanding as of March 31, 2006:
Option balance outstanding, March 31, 2005 | 633,200 | ||
Granted | 150,000 | ||
Exercised | (101,783 | ) | |
Forfeited | (33,000 | ) | |
Option balance outstanding, March 31, 2006 | 648,417 | ||
Effective January 1, 2006, the board approved the grant of 150,000 options to a Company employee hired as President for Belcher. The exercise price of the granted options was $3.60 which was the closing price of the Company’s stock on January 3, 2006. Forfeited options represent options granted to one or more employees of record whose employment is terminated, voluntarily or involuntarily, and based on their termination date, such options were considered nonvested. As of March 31, 2006, of the 648,417 options outstanding, 371,417 options were vested with 277,000 options being nonvested.
The following represents the employees’ common stock options outstanding as of March 31, 2005:
Option balance outstanding, March 31, 2004 | 507,219 | ||
Granted | 200,000 | ||
Exercised | (39,300 | ) | |
Forfeited | (34,719 | ) | |
Option balance outstanding, March 31, 2005 | 633,200 | ||
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On September 1, 2004, the board approved the grant of 200,000 options to Company employees. The exercise price of the granted options was $4.55 which was the closing price of the Company’s stock. Forfeited options represent options granted to one or more employees of record whose employment is terminated, voluntarily or involuntarily, and based on their termination date, such options were considered nonvested. As of March 31, 2005, of the 633,200 options outstanding, 351,134 options were vested with 282,066 options being nonvested.
Officers
The following represents the officers’ common stock options outstanding as of March 31, 2007:
Option balance outstanding, March 31, 2006 | 1,144,933 | ||
Granted | — | ||
Exercised | — | ||
Forfeited | (650,001 | ) | |
Option balance outstanding, March 31, 2007 | 494,932 | ||
Effective March 31, 2007, the Compensation Committee adopted the Stock Option Conversion Plan whereby all unvested stock options were to be converted to 3-year restricted stock based on a predetermined exchange formula. The 650,001 stock options forfeited is the result of this exchange with the Company charging $298,678 in the current year to stock option expense; the $298,678 charged to stock option expense represents the excess value of the restricted stock received versus the value of the unvested stock option forfeited. $1,536,947 was recorded as a deferred compensation asset that will be amortized over three years, the life of the restricted stock. Therefore, as of March 31, 2007 no stock options were unvested with the remaining 494,932 stock options outstanding being vested.
On June 7, 2005, the board awarded the officers of the Company 375,000 options at an exercise price of $1.95 which was the closing price of the Company’s stock on the date of the grant. As of March 31, 2006, of the 1,144,933 options outstanding, 469,933 of those options were vested with 675,000 options being nonvested.
The following represents the officers’ common stock options outstanding as of March 31,2006:
Option balance outstanding, March 31, 2005 | 769,933 | |
Granted | 375,000 | |
Exercised | — | |
Forfeited | — | |
Option balance outstanding, March 31, 2006 | 1,144,933 | |
On June 7, 2005, the board awarded the officers of the Company 375,000 options at an exercise price of $1.95 which was the closing price of the Company’s stock on the date of the grant. As of March 31, 2006, of the 1,144,933 options outstanding, 469,933 of those options were vested with 675,000 options being nonvested.
The following represents the officers’ common stock options outstanding as of March 31,2005:
Option balance outstanding, March 31, 2004 | 323,333 | ||
Granted | 450,000 | ||
Exercised | (3,400 | ) | |
Forfeited | — | ||
Option balance outstanding, March 31, 2005 | 769,933 | ||
On September 1, 2004, the board awarded the officers of the Company 450,000 options at an exercise price of $4.55 which was the closing price of the Company’s stock on the date of the grant. As of March 31, 2005, of the 769,933 options outstanding, 319,933 of those options were vested with 459,000 options being nonvested.
1999 Non-Employee Stock Option Plan
On September 30, 1999, our Board of Directors and sole stockholder adopted our 1999 non-employee stock option plan. The 1999 non-employee plan enables us to attract and retain top-quality directors and consultants and to provide such directors and consultants with an incentive to enhance stockholder return. The 1999 non-employee plan allows the grant of options to purchase a
40
maximum aggregate of 500,000 shares of common stock to non-employee directors. The plan was amended on May 18, 2004 based on shareholder approval, increasing the number of shares to a total of 1,000,000 shares of common stock.
The Board of Directors or a committee of the Board may administer the 1999 non-employee plan, and has complete discretion to select the optionees and terms and conditions of each option, subject to the provisions of the 1999 non-employee plan. Options granted under the 1999 non-employee plan will not be “incentive stock options” as defined in Section 411 of the Internal Revenue Code of 1986, they will be so-called nonqualified options.
Nonqualified options may be granted under the 1999 non-employee plan at an exercise price of not less than 100% of the fair market value of the common stock on the date of grant. Nonqualified options also may be granted without regard to any restriction on the amount of common stock that may be acquired pursuant to such options in any one year.
Subject to the limitations contained in the 1999 non-employee plan, options become exercisable at such times and in such installments as the Committee shall provide in the terms of each individual stock option agreement. The Committee must also provide in the terms of each stock option agreement when the option expires and becomes unexercisable, and may also provide the option expires immediately upon termination of services for us or for any other reason. No option held by persons subject to Section 16 of the Securities Exchange Act of 1934 may be exercised during the first six months after such option is granted.
Unless otherwise provided in the applicable stock option agreement, upon termination of engagement of an optionee, all options that were then exercisable would terminate three months (twelve months in the case of termination by reason of death or disability) following termination of services. Any options which were not fully vested and exercisable on the date of such termination would immediately be cancelled concurrently with the termination.
Options granted under the 1999 non-employee plan may not be exercised more than ten years after the grant. Options granted under the 1999 non-employee plan are not transferable and may be exercised only by the respective grantees during their lifetime or by their heirs, executors or administrators in the event of death. Under the 1999 non-employee plan, shares subject to cancelled or terminated options are reserved for subsequently granted options.
The number of options outstanding and the exercise price thereof are subject to adjustment in the case of certain transactions such as mergers, recapitalizations, stock splits or stock dividends. The 1999 non-employee plan is effective for ten years, unless sooner terminated or suspended. We will not grant any options under the 1999 non-employee plan until the plan is appropriately registered pursuant to Florida Statutes or an exemption therefrom is available.
The following represents the nonemployee common stock options outstanding as of March 31, 2007:
Option balance outstanding, March 31, 2006 | 1,418,497 | ||
Granted | 400,000 | ||
Exercised | (61,665 | ) | |
Forfeited | (736,663 | ) | |
Option balance outstanding, March 31, 2007 | 1,020,169 | ||
Effective March 31, 2007, the Compensation Committee adopted the Stock Option Conversion Plan whereby all unvested stock options were to be converted to 3-year restricted stock based on a predetermined exchange formula. The 736,663 stock options forfeited is the result of this exchange with the Company charging $298,678 in the current year to stock option expense; the $298,678 charged to stock option expense represents the excess value of the restricted stock received versus the value of the unvested stock option forfeited. $1,536,947 was recorded as a deferred compensation asset that will be amortized over three years, the life of the restricted stock. Therefore, as of March 31, 2007 no stock options were unvested with the remaining 1,020,169 stock options outstanding being vested.
On June 7, 2005 the board of directors were granted 650,000 options at an exercise price of $1.95 based on the Company’s stock closing price on the date of grant. As of March 31, 2006, of the 1,418,497 options outstanding, 338,499 of those options were vested with 1,069,998 options being nonvested.
The following represents the nonemployee common stock options outstanding as of March 31, 2006:
Option balance outstanding, March 31, 2005 | 866,665 | ||
Granted | 650,000 | ||
Exercised | (98,168 | ) | |
Forfeited | — | ||
Option balance outstanding, March 31, 2006 | 1,418,497 | ||
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On June 7, 2005 the board of directors were granted 650,000 options at an exercise price of $1.95 based on the Company’s stock closing price on the date of grant. As of March 31, 2006, of the 1,418,497 options outstanding, 338,499 of those options were vested with 1,069,998 options being nonvested. The following represents the nonemployee common stock options outstanding as of March 31, 2005:
Option balance outstanding, March 31, 2004 | 729,531 | ||
Granted | 460,000 | ||
Exercised | (220,866 | ) | |
Forfeited | (102,000 | ) | |
Option balance outstanding, March 31, 2005 | 866,665 | ||
On April 1, 2004 the board of directors were granted 210,000 options at an exercise price of $6.15 based on the Company’s stock closing price on the date of grant. Forfeited options represent those options that were not vested upon resignation of one director and one consultant. As of March 31, 2005, of the 866,665 options outstanding, 134,332 of those options were vested with 732,333 options being nonvested.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Equity Compensation Plan Information
See Note 15 to our consolidated financial statements on page 65 for a description of our 1999 Employee, NonEmployee and Officer Stock Option Plans (the “1999 Plans”). The following table provides information as of March 31, 2007 regarding compensation plans under which our equity securities are authorized for issuance.
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of to the left | |||||
Equity compensation plans approved by shareholders | 1,908,184 | $ | 1.50 | — | |||
Equity compensation plans not approved by shareholders | — | — | — | ||||
Total | 1,908,184 | $ | 1.50 | — | |||
Security Ownership of Certain Beneficial Owners and Management of GeoPharma
The following table sets forth certain information regarding beneficial ownership of GeoPharma’s securities as of May 11, 2007 and on that date, 11,259,727 shares were outstanding:
| • | by each person who is known by us to beneficially own more than 5% of our securities; |
| • | by each of our officers and directors; and |
| • | by all of our officers and directors as a group. |
Title Of Class | Name And Address Of Beneficial Owner (1) (3) | Amount And Nature Of Beneficial Ownership (2) | Approximate Percent of Class (%) | ||||
Common | Jugal K. Taneja | 2,355,471 | 20.4 | % | |||
Common | Mihir K. Taneja | 1,072,359 | 9.1 | % | |||
Common | Kotha S. Sekharam, PhD | 681,987 | 5.9 | % | |||
Common | Carol Dore-Falcone | 332,747 | 2.9 | % | |||
Common | William L. LaGamba | 122,994 | 1.1 | % | |||
Common | Shan Shikarpuri, CPA | 104,334 | 0.9 | % | |||
Common | Barry H. Dash, PhD | 97,334 | 0.9 | % | |||
Common | George Stuart, Jr. | 82,865 | 0.7 | % | |||
Common | Carnegie Capital | 582,537 | 5.2 | % | |||
Common | A. Theodore Stautburg | 18,000 | 0.2 | % | |||
Common | Joseph Zappala | 765,550 | 6.8 | % | |||
Common | Rafick Henein, PhD | — | 0 | % | |||
Common | All officers and directors as a group (10 persons) | 4,868,091 | 43.2 | % |
| (1) | Except as noted above, the address for the above identified officers and directors of the Company is c/o GeoPharma, Inc., 6950 Bryan Dairy Road, Largo, Florida 33777. |
| (2) | Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to the shares shown. Except where indicated by footnote and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of voting securities shown as beneficially owned by them. Percentages are based upon the assumption that each shareholder has exercised all of the currently exercisable options he or she owns which are currently exercisable or exercisable within 60 days and that no other shareholder has exercised any options he or she owns. The individual beneficial ownership amounts presented include |
42
exercisable, vested stock options within the beneficial owners total amount owned as follows: Jugal Taneja includes 306,667 vested options; Mihir Taneja includes 463,834 vested options; Kotha Sekharam includes 350,667 vested options; Carol Dore-Falcone includes 178,266 vested options; William LaGamba includes 16,667 vested options; Shan Shikarpuri includes 66,667 vested options; Barry Dash includes 56,667 vested options and George Stuart, Jr. includes 44,000 vested options. |
| (3) | The following factors have been taken into consideration in calculating the amount and nature of beneficial ownership in GeoPharma: |
| • | Dr. Kotha Sekharam’s beneficially owned shares include approximately 50,578 shares beneficially owned by Madhavi Sekharam, Dr. Sekharam’s wife, as to which Dr. Sekharam exercises no investment or voting power and disclaims beneficial ownership. |
| • | Jugal K. Taneja’s beneficially owned shares include approximately 595,383 shares beneficially owned by his wife Manju Taneja. Mr. Taneja exercises no investment or voting power over any of the shares owned by his wife, and disclaims beneficial ownership of those shares. |
| • | Jugal K. Taneja’s beneficially owned shares also include 911,552 shares beneficially owned by Carnegie Capital, Ltd, and approximately 70,858 shares beneficially owned by First Delhi Trust. Mr. Taneja is the general partner of both Carnegie Capital, Ltd. and First Delhi Trust, and holds sole voting and investment power over these shares. |
| • | Includes 658,100 shares owned by Michele LaGamba, Mr. LaGamba’s wife, as to which Mr. LaGamba exercises no investment or voting power and disclaims beneficial ownership. Also includes 505,000 shares held by Mr. LaGamba as custodian for their minor children. |
| • | Joseph Zappala’s beneficially owned shares exclude 300,500 shares held by Mr. Zappala’s spouse; Mr. Zappala was previously member of the board who resigned December 2004. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The Company has entered into transactions and business relationships with certain of our officers, directors and principal stockholders or their affiliates.
Revenues: For the fiscal years ended March 31, 2007, 2006 and 2005, manufacturing revenues of approximately $94,910, $172,901 and $414,073 respectively, were recorded from sales by the Company to subsidiaries or joint ventures of Dynamic Health Products, an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder. For the fiscal years ended March 31, 2007, 2006 and 2005, revenues of $723,696, $673,544 and $348,156 respectively, were recorded from sales by the Company to Vertical Health Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder.
For the fiscal years ended March 31, 2007, 2006 and 2005, distribution revenues of approximately $0, $0 and 22,176, respectively, were recorded from sales by the Company to subsidiaries or joint ventures of Dynamic Health Products.
For the fiscal years ended March 31, 2007, 2006 and 2005, pharmacy benefit management revenues of approximately $20,145,817, $16,587,701 and $11,437,659, respectively, were recorded from sales by the Company to CarePlus Health Plan, an affiliate of the Company’s former board member Mssr. Zappala. Our wholly-owned subsidiary, Go2PBMServices, Inc., derives 100% of its revenues from this contract.
Trade Accounts Receivable/ Trade Accounts Payable—Amounts due to affiliates and amounts due from affiliates represent balances owed by or amounts owed to the Company for sales occurring in the normal course of business. Amounts due to and amounts due from these affiliates are in the nature of trade payables or receivables and fluctuate based on sales volume and payments received.
As of March 31, 2007 and 2006, for the manufacturing segment, $25,302 and $25,888 was due from subsidiaries of Dynamic Health Products and $182,199 and $140,038 was due from Vertical Health, Inc.
As of March 31, 2007 and 2006, for the pharmacy benefit management segment, $369,267 and $995,452 was due from CarePlus Health.
Lease / Debt Obligations—For each of the years ended March 31, 2007, 2006 and 2005, rent expense of $0, $0 and $128,529 was paid to Dynamic Health Products, Inc. Monthly rents were approximately $18,333 per month. The Company and Dynamic were parties to a ten-year, triple net operating lease that would have expired in the year 2009; however, on October 28, 2004 the Company purchased this leased facility for the independent appraised value of $1,925,000.
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Mssr. Shikarpuri is the Audit Committee’s Financial Expert as defined by the Securities and Exchange Commission. Mssrs. J. Taneja, M. Taneja, Sekharam and Henein, are each not “Independent” as that term is defined of the National Association of Securities Dealers Automated Quotations (“NASDAQ”).
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit Fees. The aggregate fees billed by BBK, for professional services rendered for the audit of the Company’s annual financial statements included in the Company’s Annual Report on Form 10K as of March 31, 2007 and 2006 and for the years ended March 31, 2007, 2006 and 2005 and for the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-QSB during such fiscal years were approximately $65,000, $58,000 and $49,000 respectively.
Audit Related Fees. The Company did not engage BBK to provide professional services to the Company regarding audit related matters during the fiscal years ended March 31, 2007, 2006 and 2005.
Tax Fees. The aggregate fees billed by BBK, for professional services rendered for tax advice and related return preparation to the Company for the years ended March 31, 2007, 2006 and 2005 were approximately $85,000, $12,900 and $12,000, respectively.
All Other Fees. The aggregate fees billed by BBK for services rendered to the Company, other than the services covered above for all fiscal years ended March 31, 2007, 2006 and 2005 were $0.
| ITEM 15. | EXHIBITS AND REPORTS ON FORM 8-K |
The Company filed Form-8K with the Securities and Exchange Commission during the fiscal year ended March 31, 2007 through the date of this filing are as follows:
Date of Form-8K filing: | Filing Topic: | |
August 11, 2006 | Earnings release - first quarter June 30, 2006 | |
November 16, 2006 | Earnings release - second quarter September 30, 2006 | |
February 14, 2007 | Earnings release - third quarter December 31, 2006 | |
April 10, 2007 | Entry into a Material Definitive Agreement | |
May 3, 2007 | Termination of a Material Definitive Agreement | |
May 17, 2007 | Entry into a Material Definitive Agreement | |
June 14, 2007 | Other Event | |
June 29, 2007 | Earnings release - fiscal year ended March 31, 2007 |
44
Exhibits
The following Exhibits are filed as part of this Report:
Exhibit Number | Description | |
| 2.1 | Agreement and Plan of Reorganization dated June 12, 1998, effective June 15, 1998, by and among Nu-Wave Health Products, Inc., Nu-Wave Acquisition, Inc., Energy Factors, Inc., U.S. Diversified Technologies, Inc., Paul Santostasi, Chris Starkey, and Marvin Deutsch. ** | |
| 2.2 | Agreement and Plan of Reorganization by and among GeoPharma, Inc., Florida Merger Subsidiary Corp. and Dynamic Health Products, Inc. (3) | |
| 3.1 | Articles of Incorporation of Energy Factors, Inc., filed September 3, 1985.** | |
| 3.2 | By-Laws of Energy Factors, Inc.** | |
| 3.3 | Articles of Incorporation of Nu-Wave Acquisition, Inc., dated June 11, 1998 and filed June 12, 1998. ** | |
| 3.4 | Articles of Amendment to Articles Innovative changing name.** | |
| 3.5 | Agreement with holder of Series A preferred stock dated as of March 25, 2002.** | |
| 3.6 | Certificate of Designation of Series B preferred stock (2)** | |
| 4.1 | Specimen Stock Certificate of the Company ** | |
| 4.2 | Form of Underwriters’ Warrant ** | |
| 10.1 | Promissory note in favor of Nu-Wave Health Products, Inc. from Energy Factors, Inc., dated May 13, 1998.** | |
| 10.2 | Form of 1999 Stock Option Plan ** | |
| 10.3 | Innovative Health Products, Inc. 1999 Stock Option Plan.** | |
| 10.4 | Form of Employment Agreement with Kotha S. Sekharam, Ph.D. ** | |
| 10.5 | Form of Employment Agreement with Mihir K. Taneja ** | |
| 10.6 | Form of Employment Agreement with Carol Dore-Falcone ** | |
| 10.7 | Lease of Company’s facility at 6950 Bryan Dairy Road, Largo, Florida 33777 ** | |
| 10.8 | Acquisition Agreement between Go2Pharmacy.com, Inc. (Florida) and Go2Pharmacy.com, Inc. (Delaware) ** | |
| 10.9 | Agreement between Go2Pharmacy.com, Inc. (Delaware) and CarePlus dated as of March 23, 2000.** | |
| 10.10 | Agreement between Go2Pharmacy.com, Inc. (Delaware) and the Greater New York Health Care Association dated June 27, 2000. ** | |
| 10.11 | Consulting Agreement between Go2Pharmacy.com, Inc. and Joseph Zappala** | |
| 10.12 | Promissory Note between Go2Pharmacy, Inc. and First Community Bank of America dated March 8, 2001 in the amount of $551,512 ** | |
| 10.13 | Revolving Line of Credit Promissory Note between Go2Pharmacy, Inc. and First Community Bank of America dated March 8, 2001 in the amount of $650,000** | |
| 10.14 | Consulting Agreement with Jugal K. Taneja dated February 2001.** | |
| 10.15 | Sublease and Consent** | |
| 10.16 | Revolving line of Credit Promissory Note between Breakthrough Engineered Nutrition, Inc. and First Community Bank of America dated March 29, 2002 in the amount of $100,000** | |
45
Exhibit Number | Description | |
| 10.17 | Revolving line of Credit Promissory Note between Innovative and First Community Bank of America dated March 2003 in the amount of $900,000.** | |
| 10.18 | Securities Purchase Agreement between the Company and Laurus Master Fund, Ltd. dated as of January 30, 2004 (1)** | |
| 10.19 | Registration Rights Agreement between the Company and Laurus Master Fund, Ltd. dated as of January 30, 2004.(1)** | |
| 10.20 | Form of 6% Secured Convertible Term Notes between the Company and Laurus Mater Fund, Ltd. dated as of January 30, 2004.(1)** | |
| 10.21 | Form of Common Stock Purchase Warrant between the Company and Laurus Master Fund, Ltd. dated as of January 30, 2004(1)** | |
| 10.22 | Stock Pledge Agreement between the Company and Laurus Master Fund, Ltd. dated January 30, 2004(1)** | |
| 10.23 | Subsidiary Guarantee between the Company and Laurus Master Fund, Ltd. dated January 30, 2004(1)** | |
| 10.24 | Series A Bank Escrow Agreement between the Company and Laurus Master Fund, Ltd.(1)** | |
| 10.25 | Security Agreement between the Company and Laurus Master Fund, Ltd.(1)** | |
| 10.26 | Series A Securities Purchase Agreement between the Company and Laurus Master Fund, Ltd. dated as of February 10, 2004(1)** | |
| 10.27 | Series A Registration Rights Agreement between the Company and Laurus Master Fund, Ltd. dated as of February 10, 2004(1)** | |
| 10.28 | Form of Common Stock Purchase Warrant between the Company and Laurus Master Fund, Ltd. dated as of February 10, 2004(1)** | |
| 10.29 | Securities Purchase Agreement between the Company, Midsummer Capital Ltd. and Omicron Master Trust dated as of March 5, 2004(2)** | |
| 10.30 | Registration Rights Agreement between the Company, Midsummer Capital Ltd. and Omicron Master Trust dated as of March 5, 2004(2)** | |
| 10.31 | Form of Common Stock Purchase Warrant between the Company, Midsummer Capital Ltd. and Omicron Master Trust dated as March 5, 2004(2)** | |
| 10.32 | Media Credit Agreement between the Company and Icon International, Inc.** | |
| 10.33 | Compensation Performance Incentive Plan | |
| 21.1 | GeoPharma, Inc.—List of Subsidiaries. | |
| 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended | |
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended | |
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) | |
| 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) | |
| ** | Previously filed |
| 1. | Filed as an Exhibit to the Company’s Form 8-K dated as of January 30, 2004. |
| 2. | Filed as an exhibit to the Company’s Form 8-K dated as of March 5, 2004. |
| 3. | Filed as an exhibit to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 17, 2007 and incorporated herein by reference. |
46
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: June 29, 2007
| GEOPHARMA, INC. |
/s/ Mihir K. Taneja, |
| Mihir K. Taneja, |
| Chief Executive Officer, Secretary and Director |
/s/ Kotha S. Sekharam, Ph.D |
| Kotha S. Sekharam, Ph.D |
| President and Director |
/s/ Carol Dore-Falcone |
| Carol Dore-Falcone |
| Vice President, Chief Financial Officer (Chief Accounting Officer) |
In accordance with Exchange Act this report has been signed below by the following persons on behalf of the registrant in the capacities as on June 29, 2007.
/s/ Jugal K. Taneja |
| Jugal K. Taneja |
| Chairman of the Board of Directors |
/s/ Barry H. Dash, PhD |
| Barry H. Dash, PhD |
| Director |
/s/ William L. LaGamba |
| William L. LaGamba |
| Director |
/s/ George L. Stuart, Jr. |
| George L. Stuart, Jr. |
| Director |
/s/ Shan Shikarpuri |
| Shan Shikarpuri, CPA |
| Director |
/s/ A. Theodore Stautberg |
| A. Theodore Stautberg |
| Director |
/s/ Rafick Henein |
| Rafick Henein, PhD |
| Director |
47
GEOPHARMA, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 AND 2005
| 49 | ||
FINANCIAL STATEMENTS | ||
| 50 | ||
| 52 | ||
| 53 | ||
| 55 | ||
| 56 | ||
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
GeoPharma, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of GeoPharma, Inc, and subsidiaries as of March 31, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal-control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of GeoPharma, Inc. and subsidiaries as of March 31, 2007 and 2006 and the consolidated results of operations and cash flows for each of the three years in the period ended March 31, 2007, in conformity with U.S. generally accepted accounting principles.
BRIMMER, BUREK & KEELAN LLP |
Certified Public Accountants |
Tampa, Florida
June 28, 2007
49
GEOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2007 | March 31, 2006 | |||||
Current assets: | ||||||
Cash and cash equivalents | $ | 735,000 | $ | 1,206,017 | ||
Certificate of deposit | — | 433,273 | ||||
Accounts receivable, net | 8,055,147 | 7,465,025 | ||||
Accounts receivable, other | 474,073 | 634,684 | ||||
Inventories, net | 7,356,295 | 5,767,056 | ||||
Prepaid expenses and other current assets | 2,605,995 | 1,324,339 | ||||
Due from affiliates | 576,768 | 1,162,416 | ||||
Total current assets | $ | 19,803,278 | $ | 17,992,810 | ||
Property, plant, leaseholds and equipment, net | 9,659,063 | 8,024,651 | ||||
Goodwill, net | 728,896 | 728,896 | ||||
Intangible assets, net | 6,916,581 | 4,384,842 | ||||
Media Credits, net | 286,166 | 799,748 | ||||
Deferred tax asset, net | 576,595 | — | ||||
Other assets, net | 197,987 | 166,194 | ||||
Total assets | $ | 38,168,566 | $ | 32,097,141 | ||
See accompanying notes to consolidated financial statements
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LIABILITIES AND SHAREHOLDERS’ EQUITY
March 31, 2007 | March 31, 2006 | |||||||
Current liabilities: | ||||||||
Accounts payable | $ | 4,793,483 | $ | 4,882,107 | ||||
Current portion of long-term obligations | 1,771,884 | 1,016,789 | ||||||
Accrued expenses, other liabilities and related party obligations | 4,658,756 | 3,466,353 | ||||||
Total current liabilities | $ | 11,224,123 | $ | 9,365,249 | ||||
Long-term obligations, less current portion | 3,085,172 | 1,666,667 | ||||||
Deferred tax liability | — | 244,800 | ||||||
Total liabilities | $ | 14,309,295 | $ | 11,276,716 | ||||
Commitments and contingencies | ||||||||
Minority interest | (912,664 | ) | 390,984 | |||||
Shareholders’ equity: | ||||||||
6% convertible preferred stock, Series B, $.01 par value (5,000 shares authorized, 5,000 shares issued and outstanding (liquidation preference $5,000,000) | 50 | 50 | ||||||
Common stock, $.01 par value; 24,000,000 shares authorized; 10,232,985 and 10,051,775 shares issued and outstanding | 102,330 | 100,518 | ||||||
Treasury stock (110,379 and 189,617 common shares, $.01 par value) | (1,104 | ) | (1,896 | ) | ||||
Additional paid-in capital | 47,753,274 | 45,620,036 | ||||||
Retained earnings (deficit) | (23,082,615 | ) | (25,289,267 | ) | ||||
Total shareholders’ equity | $ | 24,771,935 | $ | 20,429,441 | ||||
Total liabilities and shareholders’ equity | $ | 38,168,566 | $ | 32,097,141 | ||||
See accompanying notes to consolidated financial statements.
51
GEOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Revenue | ||||||||||||
PBM (a related party activity) | $ | 20,145,817 | $ | 16,587,701 | $ | 11,437,659 | ||||||
Distribution | 12,143,397 | 14,754,861 | 4,004,560 | |||||||||
Manufacturing | 27,251,078 | 17,915,170 | 11,685,484 | |||||||||
Pharmaceutical | 251,845 | 485,813 | 1,102,537 | |||||||||
Total revenue | $ | 59,792,137 | $ | 49,743,545 | $ | 28,230,240 | ||||||
Cost of goods sold | ||||||||||||
PBM | 19,990,927 | 16,452,039 | 11,177,585 | |||||||||
Distribution | 4,043,336 | 9,179,513 | 2,794,712 | |||||||||
Manufacturing (exclusive of depreciation and amortization shown below) | 15,997,840 | 11,066,402 | 8,168,262 | |||||||||
Pharmaceutical | 2,892,014 | 588,627 | 311,188 | |||||||||
Total cost of goods sold | $ | 42,924,117 | $ | 37,286,581 | $ | 22,451,747 | ||||||
Gross profit | ||||||||||||
PBM | 154,890 | 135,662 | 260,074 | |||||||||
Distribution | 8,100,061 | 5,575,348 | 1,209,848 | |||||||||
Manufacturing | 11,253,238 | 6,848,768 | 3,517,222 | |||||||||
Pharmaceutical | (2,640,169 | ) | (102,814 | ) | 791,349 | |||||||
Total gross profit | $ | 16,868,020 | $ | 12,456,964 | $ | 5,778,493 | ||||||
Selling, general and administrative expenses: | ||||||||||||
Selling, general and administrative expenses | 12,840,307 | 9,701,193 | 6,071,411 | |||||||||
Stock option compensation expense | 1,581,703 | — | — | |||||||||
Depreciation and amortization | 1,163,748 | 748,532 | 605,697 | |||||||||
Operating income (loss) before other income (expense) | $ | 1,282,262 | $ | 2,007,239 | $ | (898,615 | ) | |||||
Other income (expense): | ||||||||||||
Interest income (expense), net | 73,324 | (628,109 | ) | (490,859 | ) | |||||||
Other income (expense), net | 183,965 | 908,257 | 305,884 | |||||||||
Total other income (expense) | $ | 257,289 | $ | 280,148 | $ | (184,975 | ) | |||||
Income (loss) before income taxes, minority interest and preferred dividends | $ | 1,539,551 | $ | 2,287,387 | $ | (1,083,590 | ) | |||||
Minority interest benefit (expense) | 1,310,052 | 582,610 | — | |||||||||
Income tax benefit (expense) | (342,951 | ) | (1,080,800 | ) | 201,898 | |||||||
Net income (loss) | $ | 2,506,652 | $ | 1,789,197 | $ | (881,692 | ) | |||||
Preferred stock dividends | 300,000 | 300,000 | 521,762 | |||||||||
Net income (loss) available to common shareholders | $ | 2,206,652 | $ | 1,489,197 | $ | (1,403,454 | ) | |||||
Basic income (loss) per share | $ | 0.22 | $ | 0.17 | $ | (0.17 | ) | |||||
Basic weighted average number of common shares outstanding | 9,875,332 | 9,041,106 | 8,111,851 | |||||||||
Diluted income (loss) per share | $ | 0.19 | $ | 0.14 | $ | (0.17 | ) | |||||
Diluted weighted average number of common shares outstanding | 13,230,014 | 12,478,786 | 8,111,851 | |||||||||
See accompanying notes to consolidated financial statements.
52
GEOPHARMA, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
MARCH 31, 2007
| Preferred Stock | Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||
| Shares | Dollars | |||||||||||||||||||||||||||||||||||
| Series A | Series B | Series A | Series B | Shares | Dollars | Shares | Dollars | Additional paid in capital | Retained earnings (deficit) | Total Shareholders’ equity (deficit) | ||||||||||||||||||||||||||
Balances at March 31, 2004 | 5,000,000 | 5,000 | $ | 50,000 | $ | 50 | 7,989,551 | $ | 79,896 | (960 | ) | $ | (10 | ) | $ | 44,457,293 | $ | (27,895,823 | ) | $ | 16,691,406 | |||||||||||||||
Purchase of treasury shares | — | — | — | — | — | — | (152,900 | ) | (1,529 | ) | (694,288 | ) | — | (695,817 | ) | |||||||||||||||||||||
Payment of preferred stock private placement expenses | — | — | — | — | — | — | — | — | (6,000 | ) | — | (6,000 | ) | |||||||||||||||||||||||
Exercise of stock options | — | — | — | — | 264,566 | 2,646 | — | — | 275,077 | — | 277,723 | |||||||||||||||||||||||||
Amortization of debt and preferred stock warrants | — | — | — | — | — | — | — | — | 684,187 | (684,187 | ) | — | ||||||||||||||||||||||||
Issuance of stock awards | — | — | — | — | — | — | 160,000 | 1,600 | 112,686 | — | 114,286 | |||||||||||||||||||||||||
Receipt of shares in a legal settlement | — | — | — | — | — | — | (500,000 | ) | (5,000 | ) | (3,200,000 | ) | 3,205,000 | |||||||||||||||||||||||
401(k) employee match | — | — | — | — | — | — | 10,840 | 109 | 41,204 | — | 41,313 | |||||||||||||||||||||||||
Preferred stock dividends (in cash and common stock) | — | — | — | — | 73,339 | 733 | — | — | 343,439 | (521,762 | ) | (177,590 | ) | |||||||||||||||||||||||
Payment of convertible debt and interest | — | — | — | — | 54,025 | 540 | — | — | 311,517 | — | 312,057 | |||||||||||||||||||||||||
Conversion of Series A Preferred Stock | (5,000,000 | ) | — | $ | (50,000 | ) | — | 800,000 | 8,000 | 42,000 | — | |||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | (881,692 | ) | (881,692 | ) | |||||||||||||||||||||||
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Balances at March 31, 2005 | — | 5,000 | $ | — | $ | 50 | 9,181,481 | $ | 91,815 | (483,020 | ) | $ | (4,830 | ) | $ | 42,367,115 | $ | (26,778,464 | ) | $ | 15,675,686 | |||||||||||||
Exercise of stock options | — | — | — | — | 184,949 | 1,849 | — | — | 220,063 | — | 221,912 | |||||||||||||||||||||||
Issuance of stock awards | — | — | — | — | 50,000 | 500 | 280,000 | 2,800 | 266,200 | — | 269,500 | |||||||||||||||||||||||
401(k) employee match | — | — | — | — | — | — | 13,403 | 134 | 48,767 | — | 48,901 | |||||||||||||||||||||||
Preferred stock dividends | — | — | — | — | 104,876 | 1,049 | — | — | 298,951 | (300,000 | ) | — | ||||||||||||||||||||||
Payment of convertible debt of series A Preferred Stock | — | — | — | — | 530,469 | 5,305 | — | — | 2,418,940 | — | 2,424,245 | |||||||||||||||||||||||
Net Income | — | — | — | — | — | — | — | — | — | 1,789,197 | 1,789,197 | |||||||||||||||||||||||
Balances at March 31, 2006 | 5,000 | $ | $ | 50 | 10,051,775 | $ | 100,518 | (189,617 | ) | $ | (1,896 | ) | $ | 45,620,036 | $ | (25,289,267 | ) | $ | 20,429,441 | |||||||||||||||
Exercise of stock options | — | — | — | — | 100,332 | 1,003 | — | — | 108,986 | — | 109,989 | |||||||||||||||||||||||
Stock Option Compensation Expense | 1,283,025 | 1,283,025 | ||||||||||||||||||||||||||||||||
Receipt of shares due to an employment termination | — | — | — | — | — | — | (150,000 | ) | (1,500 | ) | (58,938 | ) | — | (60,438 | ) | |||||||||||||||||||
Issuance of stock awards | — | — | — | — | — | — | 229,238 | 2,292 | 500,974 | — | 503,266 | |||||||||||||||||||||||
Preferred stock dividends | — | — | — | — | 80,878 | 809 | — | — | 299,191 | (300,000 | ) | — | ||||||||||||||||||||||
Net Income | — | — | — | — | — | — | — | — | — | 2,506,652 | 2,506,652 | |||||||||||||||||||||||
Balances at March 31, 2007 | 5,000 | $ | $ | 50 | 10,232,985 | $ | 102,330 | (110,379 | ) | $ | (1,104 | ) | $ | 47,753,274 | $ | (23,082,615) | $ | 24,771,935 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
54
GEOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
March 31, 2007 | March 31, 2006 | March 31, 2005 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income (loss) | $ | 2,506,652 | $ | 1,789,197 | $ | (881,692 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | ||||||||||||
Depreciation, leasehold and intangible amortization | 1,163,748 | 748,530 | 605,697 | |||||||||
Income tax expense | 342,951 | 1,080,800 | (216,342 | ) | ||||||||
Amortization of stock option deferred compensation | 1,581,703 | 50,707 | 37,865 | |||||||||
Amortization of debt discount to interest expense | — | 563,014 | 308,455 | |||||||||
Accrued interest income | — | (7,346 | ) | (6,936 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (590,122 | ) | (5,208,835 | ) | (631,878 | ) | ||||||
Accounts receivable, other | 160,611 | (48,520 | ) | (210,164 | ) | |||||||
Inventory | (1,589,239 | ) | (2,023,993 | ) | (517,380 | ) | ||||||
Prepaid expenses and other current assets | (1,281,656 | ) | (620,188 | ) | (181,271 | ) | ||||||
Deferred tax asset | (576,595 | ) | — | — | ||||||||
Deferred compensation, net | (182,254 | ) | — | — | ||||||||
Intangible and other assets | (1,124,887 | ) | (965,698 | ) | (45,718 | ) | ||||||
Media credits, net | 513,582 | — | (799,748 | ) | ||||||||
Accounts payable | (88,624 | ) | 3,122,593 | (303,741 | ) | |||||||
Accrued expenses | 602,411 | 2,730,398 | 278,010 | |||||||||
Due from affiliates, net | 587,895 | (295,743 | ) | 264,525 | ||||||||
Net cash provided (used) by operating activities | $ | 2,026,176 | $ | 914,916 | $ | (2,300,318 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Purchases of property, leaseholds and equipment | $ | (2,736,805 | ) | $ | (7,220,366 | ) | $ | (1,195,038 | ) | |||
Purchase of land and building | — | — | (1,925,000 | ) | ||||||||
Proceeds from certificate of deposit | 433,273 | — | — | |||||||||
Proceeds (use) from minority interest, net | (1,310,060 | ) | 397,390 | — | ||||||||
Net cash used by investing activities | $ | (3,613,592 | ) | $ | (6,822,976 | ) | $ | (3,120,038 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Purchase of treasury stock | $ | — | $ | — | $ | (695,817 | ) | |||||
Proceeds from stock option exercise | 109,989 | 221,909 | 277,723 | |||||||||
Proceeds from issuance of long-term obligations | 1,912,392 | 3,000,000 | 60,301 | |||||||||
Payments for private placement fees | — | — | (6,000 | ) | ||||||||
Payments of long-term obligations | (905,982 | ) | (2,540,843 | ) | (798,105 | ) | ||||||
Payment of preferred stock dividends | — | — | (152,500 | ) | ||||||||
Net cash provided (used) by financing activities | $ | 1,116,399 | $ | 681,066 | $ | (1,314,398 | ) | |||||
Net increase (decrease) in cash | $ | (471,017 | ) | $ | (5,226,994 | ) | $ | (6,734,754 | ) | |||
Cash at beginning of period | 1,206,017 | 6,433,011 | 13,167,765 | |||||||||
Cash at end of period | $ | 735,000 | $ | 1,206,017 | $ | 6,433,011 | ||||||
SUPPLEMENTAL INFORMATION: | ||||||||||||
Cash paid for interest | $ | 62,305 | $ | 188,570 | $ | 87,899 | ||||||
Cash paid for taxes | $ | — | $ | 840,000 | $ | — | ||||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||
Conversion value of preferred stock to common stock | $ | — | $ | — | $ | 5,000,000 | ||||||
Payment of preferred stock dividends with common stock | $ | 300,000 | $ | 300,000 | $ | 344,172 | ||||||
Payment of debt principal and interest with common stock | $ | — | $ | 2,424,424 | $ | 312,057 | ||||||
Equity reclassification related to warrants issued with the $10 million preferred stock | $ | — | $ | — | $ | 684,187 | ||||||
Debt discount amortization related to warrants issued with the $5 million convertible debt | $ | — | $ | 563,014 | $ | 308,455 | ||||||
See accompanying notes to consolidated financial statements.
55
GEOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007, 2006 and 2005
NOTE 1—BACKGROUND INFORMATION
We were incorporated in 1985 as Energy Factors, Inc., a Florida corporation. In August 1998 we changed our name to Innovative Health Products, Inc., and in February 2000 we changed our name to Go2Pharmacy, Inc., in anticipation of our merger with the Delaware corporation Go2Pharmacy.com, Inc. In September 2002, we changed our name to Innovative Companies, Inc. (“Innovative”). On May 18, 2004, based on majority shareholder vote, the Company changed its name to GeoPharma, Inc. Currently, GeoPharma continues to do manufacturing business under the name Innovative Health Products, Inc. as it represents our manufacturing arm of the Company. Prior to November 7, 2000 Go2Pharmacy, Inc., the Florida corporation was a wholly-owned subsidiary of Dynamic Health Products, Inc. (“Dynamic”).
On November 7, 2000, the Securities and Exchange Commission declared the Company’s registration of 1,000,000 shares of the common stock to be effective. The registration was affected through the filing of Registration Statement No. 333-92849 on Form SB-2 with the Securities and Exchange Commission. The Company’s initial public offering, pursuant to this registration, was successfully completed on November 14, 2000. In conjunction with this offering, 1,000,000 shares of common stock, $.01 par value, were sold to the public for net proceeds of $6,655,705. Simultaneously with and conditioned upon the offering, Go2 merged with Go2Pharmacy.com, Inc., a Delaware corporation, in exchange for 3,000,000 shares of its common stock. Other than the $250,000 gross cash capital contribution, Go2Delaware had no assets with any assignable value thus creating no goodwill.
In April 2000, Breakthrough Engineered Nutrition, Inc. (“Breakthrough”), a Florida corporation, which also conducts distribution business as Delmar Labs, was formed as a wholly-owned subsidiary to market and distribute its own functional foods and dietary supplement product lines to national and mass retailers, wholesalers and other retail outlets stores using a network of brokers and distributors throughout the United States and Canada.
In September 2000, we formed a wholly-owned subsidiary, Belcher Pharmaceuticals, Inc. (“Belcher”), a Florida corporation, in order to manufacture and distribute private label over the counter products.
In March 2001, we formed a wholly-owned subsidiary, Go2PBM Services, Inc., (“PBM”), a Florida corporation, for the purpose of providing pharmacy benefit management services. PBM administers drug benefits for health maintenance organizations, insurance company plans, preferred provider organizations, self-insured corporate health plans and self-insured labor unions. As a pharmacy benefit manager, we manage all member benefits in low risk plans, while taking an exclusively administrative role in higher risk plans. Our administrative services include claim processing, network management and customer service. We have entered into an agreement to provide our pharmacy benefit management services to a New York State Health Maintenance Organization. Through the development of our manufacturing and pharmacy benefit management efforts, we intend to provide health plans and institutional customers with an efficient source for their pharmacy product needs.
In September 2002, we Florida-incorporated two wholly-owned distribution companies, IHP Marketing, Inc., which also does business as Archer Stevens Pharmaceuticals, and Breakthrough Marketing, Inc., which also does business as Bentley Labs, for the purpose of marketing and distributing additional proprietary brands to the public.
In February 2004, we incorporated a wholly-owned company, Belcher Capital Corporation (“Belcher Capital”), a Delaware corporation, as a result of a $10 million preferred stock and $5 million convertible debt private placement.
In August 2005, we formed American Antibiotics LLC, a Florida limited liability corporation that will manufacture and distribute Beta-Lactam antibiotic pharmaceutical products.
In June 2006, we formed a wholly-owned manufacturing subsidiary named Libi Labs, Inc., a Florida corporation, for the purpose of conducting nutraceutical and cosmeceutical liquid, gel and cream manufacturing for ourselves and others.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements as of March 31, 2007 and 2006 and for the years ended March 31, 2007, 2006 and 2005 include the corporate, manufacturing and distribution accounts of GeoPharma, Inc. (the “Company”), (“GeoPharma”), which is continuing to do manufacturing business as Innovative Health Products, Inc. (“Innovative”), and its wholly owned subsidiaries IHP Marketing, Breakthrough, Breakthrough Marketing, Belcher, Belcher Capital, Go2PBM Services, Inc., Libi Labs and its 51% owned LLC, American Antibiotics. Significant intercompany balances and transactions have been eliminated in consolidation.
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b. Industry Segment
In accordance with the provisions of Statement of Financial Accounting Standards No. 131, (SFAS 131), Disclosures about Segments of an Enterprise and Related Information, a company is required to disclose selected financial and other related information about its operating segments. Operating segments are components of an enterprise about which separate financial information is available and is utilized by the chief operating decision maker (“CODM”) related to the allocation of resources and in the resulting assessment of the segment’s overall performance. The measure used by the Company’s CODM is a business segment’s gross profit. For the years ended March 31, 2007, 2006 and 2005, the Company had four industry segments that accompany corporate: manufacturing, distribution, pharmacy benefit management and pharmaceutical. Each of the business segments total revenues for the fiscal years ended March 31, 2007, 2006 and 2005 are presented on the face of the statements of operations. The $38,168,566 of total assets as of March 31, 2007 were comprised of $3,167,367 attributable to corporate, $14,179,674 attributable to manufacturing, $6,301,940 attributable to distribution, $420,249 attributable to pharmacy benefit management and $14,099,336 attributable to pharmaceutical. The $32,097,141 of total assets as of March 31, 2006 were comprised of $1,367,236 attributable to corporate, $10,735,828 attributable to manufacturing, $6,540,047 attributable to distribution, $1,496,380 attributable to pharmacy benefit management and $11,957,650 attributable to pharmaceutical.
c. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
e. Inventories
Inventories are stated at lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method.
f. Property, Plant, Leasehold Improvements and Equipment
Depreciation is provided for using the straight-line method, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives (asset categories range from three to thirty-nine years). Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Leased equipment under capital leases is amortized using the straight-line method over the lives of the respective leases or over the service lives of the assets, whichever is shorter, for those leases that substantially transfer ownership. Accelerated depreciation methods are used for tax purposes.
g. Intangible Assets
Intangible assets consist primarily of goodwill and intellectual property. Effective April 1, 2002 with the adoption of SFAS 142, “Goodwill and Other Intangibles”, intangible assets with an indefinite life, namely goodwill and the intellectual property, are not amortized. Intangible assets with a definite life are amortized on a straight-line basis with estimate useful lives ranging from 1 to 3 years. Indefinite lived intangible assets will be tested for impairment yearly and will be tested for impairment between the annual tests should an event occur or should circumstances change that would indicate that the carrying amount may be impaired. The Company has selected January 1, as the annual date to test these assets for impairment. The unamortized balance of goodwill as of the date of the initial test and still as of March 31, 2007 was $728,896 with the unamortized balance of the intellectual property for the same period was $1,555,115. Based on the required analyses performed as of that annual test date, no impairment loss was required to be recorded for the fiscal year ended March 31, 2007, 2006 or 2005.
h. Impairment of Assets
In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company’s policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets, certain identifiable intangibles and goodwill when certain events have taken place that indicate the remaining unamortized balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of related undiscounted cash flows. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows. There have been no impairment losses recorded as of and for the fiscal years 2006 and 2005.
57
i. Income Taxes
The Company utilizes the guidance provided by Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. Under the liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities.
j. Earning (Loss) Per Common Share
Earnings (loss) per share are computed using the basic and diluted calculations on the face of the statement of operations. Basic earnings (loss) per share are calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. The effect of the preferred stock conversion, the convertible debt warrants and stock options are antidilutive at March 31, 2005 and are therefore excluded from the fully diluted calculation. Convertible debt and preferred stock warrants, officer, employee and nonemployee stock options and warrants are considered potentially dilutive and are included in the fully diluted share calculation at March 31, 2006. The reconciliation between basic and fully diluted shares are as follows:
| 2007 | 2006 | 2005 | ||||||||
Net income (loss) per share — basic | ||||||||||
Net income (loss) | $ | 2,206,652 | $ | 1,489,197 | $ | (1,403,454 | ) | |||
Weighted average shares — basic | 9,875,332 | 9,041,106 | 8,111,851 | |||||||
Net income (loss) per share — basic | $ | 0.22 | $ | 0.17 | $ | (.17 | ) | |||
Net income (loss) per share — diluted: | ||||||||||
Net income (loss) | $ | 2,206,652 | $ | 1,489,197 | $ | (1,403,454 | ) | |||
Preferred dividends | 300,000 | 300,000 | — | |||||||
| $ | 2,506,652 | $ | 1,789,197 | $ | (1,403,454 | ) | ||||
Weighted average shares outstanding — basic | 9,875,332 | 9,041,106 | 8,111,851 | |||||||
Effect of preferred stock prior to conversion | 833,333 | 833,333 | — | |||||||
Effect of preferred stock and convertible debt warrants prior to conversion | 562,500 | 562,500 | — | |||||||
Dilutive effect of stock options | 2,041,847 | 2,041,847 | — | |||||||
Weighted average shares — diluted | 13,230,014 | 12,478,786 | 8,111,851 | |||||||
Net income (loss) per share — diluted | $ | 0.19 | $ | 0.14 | $ | (.17 | ) | |||
k. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles, requires management to make estimates, assumptions and apply certain critical accounting policies that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at March 31, 2007 and 2006, as well as the reported amounts of revenues and expenses for the fiscal years ended March 31, 2007, 2006 and 2005. Estimates and assumptions used in our financial statements are based on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions also require the application of certain accounting policies, many of which require estimates and assumptions about future events and their effect on amounts reported in the financial statements and related notes. We periodically review our accounting policies and estimates and makes adjustments when facts and circumstances dictate. Actual results may differ from these estimates under different assumptions or conditions. Any differences may have a material impact on our financial condition, results of operations and cash flows.
l. Concentration of Credit Risk
Concentrations of credit risk with respect to trade accounts receivable are customers with balances that exceed 5% of total consolidated trade accounts receivable, net at March 31, 2007. Four customers, General Nutrition Distribution with 31.5%, Spectrum Group with 20.9%, Berkeley Premium Nutraceuticals with 16.4% and CVS with 5.3% of the total of trade accounts receivable. Concentrations of credit risk with respect to trade accounts receivable are customers with balances that exceed 5% of total consolidated trade
58
accounts receivable, net at March 31, 2006. Four customers, General Nutrition Distribution with 31.4%, Spectrum Group with 21.4%, NutraCea with 10% and Rite Aid Corporation with 7.9% of the total of trade accounts receivable. Concentrations of credit risk with respect to trade accounts receivable are limited due to the distribution of sales over a large customer base as of March 31, 2005.
For the year ended March 31, 2007, five customers individually exceeded 5% of our total consolidated revenues which included General Nutrition Distribution for 16.2%, Spectrum Group for 11.4%, Berkely Premium Nutraceuticals for 8.6%, NutraCea, Inc. for 5.9% and CarePlus Health, a related party, for 33.3%. For the year ended March 31, 2006, four customers individually exceeded 5% of our total consolidated revenues which included General Nutrition Distribution for 15.3%, 12.2% for Spectrum Group, 5% for Direct Marketing, Inc. and 33.3% for CarePlus Health in relation to total consolidated revenues and for the year ended March 31, 2005, two customers, Spectrum Group and CarePlus Health accounted for 11.2% and 40.5% in relation to total consolidated revenues.
The Company has no concentration of customers within specific geographic areas outside the United States that would give rise to significant geographic credit risk.
As of March 31, 2007, 2006 and 2005 the Company maintained cash balances in excess of federally insured limits of approximately $0, $1,000,000 and $6,500,000 respectively.
m. Revenue and Cost of Sales Recognition
In accordance with SAB 101, Revenue Recognition, revenues are recognized by the Company when the merchandise is shipped which is when title and risk of loss has passed to the external customer. The Company analyzes the status of the allowance for uncollectible accounts based on historical experience, customer history and overall credit outstanding. For our distribution segment, any charge backs or other sales allowances immediately reduce the gross receivable with the corresponding reduction effected through increases in sales allowances which directly reduce sales revenue. For our PBM segment, service revenues are recognized once the member service of completing and fulfilling delivery of the members’ prescription.
Cost of Sales is recognized for the manufacturing and distribution business segments simultaneously with the recognition of revenues with a direct charge to cost of goods sold and with an equal reduction to inventory at FIFO cost. For the PBM segment, cost of sales is recognized based on actual costs incurred and are recognized as the related revenue is recognized.
n. Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising expense was $1,211,387, $1,611,617 and $391,141 for the years ended March 31, 2007, 2006 and 2005, respectively.
o. Research and Development Costs
Costs incurred to develop our generic pharmaceutical products for the Company are expensed as incurred and charged to research and development (“R&D”). R&D expenses for the years ended March 31, 2007, 2006 and 2005 were approximately $1,500,000, $500,000 and $263,000, respectively.
p. Fair Value of Financial Instruments
The Company, in estimating its fair value disclosures for financial instruments, uses the following methods and assumptions:
Cash, Accounts Receivable, Accounts Payable and Accrued Expenses: The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses approximate their fair value due to their relatively short maturity.
Long-term Obligations: The fair value of the Company’s fixed-rate long-term obligations is estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. At March 31, 2007, 2006 and 2005, the fair value of the Company’s long-term obligations approximated its carrying value.
Credit Lines Payable: The carrying amount of the Company’s credit lines payable approximates fair market value since the interest rate on these instruments corresponds to market interest rates.
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q. Reclassifications
Certain reclassifications have been made to the financial statements as of and for the fiscal year ended March 31, 2006 and 2005 to conform to the presentation as of and for the year ended March 31, 2007.
r. Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 123 allows companies which have stock-based compensation arrangements with employees to adopt a new fair-value basis of accounting for stock options and other equity instruments, or to continue to apply the existing accounting required by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company intends to continue to account for stock-based compensation arrangements under APB Opinion No. 25. The Company has also adopted the disclosure provisions of SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure.” This pronouncement requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. The additional required disclosure is found in Note 15. Effective April 1, 2006, the Company was required to adopt Statement of Financial Accounting Standards (“SFAS”) No. 123R “Accounting for Stock-Based Compensation”—Revised (“SFAS 123R”). See Note 15.
s. Registration Agreement
The Company entered into registration rights agreements with regard to the January 29, 2004 convertible debt financing on January 29, 2004, and with regard to the February 10, 2004 convertible preferred stock Series A financing on February 10, 2004 and with regard to the March 5, 2004 convertible stock Series B on March 5, 2004. Pursuant to all of the registration rights agreements, we agreed to file a resale registration statement covering the resale of the shares issuable to the investors upon the exercise of their warrants and conversion of their debentures and preferred stock by February 29, 2004, March 10, 2004 and April 5, 2004 respectively. At inception, the registration rights agreements required us to pay monthly liquidated damages if a registration statement was not declared effective on or prior to April 29, 2004, May 10, 2004 and September 5, 2004 respectively or after declared effective if the registration statements cease for any reason to remain continuously effective as to all registrable securities for which it is required to be effective or the investors are not permitted to utilize the prospectus therein to resell such registrable securities for 20 consecutive calendar days but no more than an aggregate of 30 calendar days during any 12 month period. The amount of monthly liquidating damages equals 1%, 1% and 2% respectively of the aggregate purchase price paid by the investors for any registrable securities held by the investors. Any late payment beyond seven days is subject to interest at an annual rate of 18%. The Company filed its registration statement with regard to the Series A and B preferred stock, the convertible debt and debentures on April 2, 2004 and it was declared effective on April 23, 2004. Therefore, the Company has met the registration requirements and will continue to do so in the future. Under FASB Staff Position EITF 00-19-2 “Accounting for Registration Payment Agreements”, the Company has reviewed the status of the registration agreement and has determined that the likelihood of the issuer having to make any payments under the arrangement is remote.
NOTE 3—ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consist of the following at March 31,:
| 2007 | 2006 | |||||||
Trade accounts receivable | $ | 8,319,002 | $ | 7,557,309 | ||||
Less allowance for uncollectible accounts | (263,855 | ) | (92,284 | ) | ||||
| $ | 8,055,147 | $ | 7,465,025 | |||||
As of March 31, 2007, the total accounts receivable balance of $8,319,002 includes $4,198,976 related to the Company’s manufacturing segment and $4,120,026 related to the Company’s distribution segment. As of March 31, 2006, the total accounts receivable balance of $7,557,309 includes $3,545,079 related to the Company’s manufacturing segment and $4,012,230 related to the Company’s distribution segment.
The Company recognizes revenues for product sales when title and risk of loss pass to its external customers and analyzes the status of the allowance for uncollectible accounts based on historical experience, customer history and overall credit outstanding. For our distribution segment, any charge backs or other sales allowances immediately reduce the gross receivable with the corresponding reduction effected through increases in sales allowances which directly reduce sales revenue.
NOTE 4—ACCOUNTS RECEIVABLE, OTHER
Accounts receivable, other, consist of the following at March 31,:
| 2007 | 2006 | |||||
Accounts receivable, other | $ | 474,073 | $ | 537,686 | ||
Income tax receivable | — | 96,998 | ||||
| $ | 474,073 | $ | 634,684 | |||
As of March 31, 2007 and 2006, accounts receivable, other primarily represented contract reimbursable amounts due from unrelated third party based on expenses incurred by the Company for certain pharmaceutical research and development projects in process.
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NOTE 5—INVENTORIES, NET
Inventories, net, consist of the following March 31,:
| 2007 | 2006 | |||||||
Processed raw materials and packaging | $ | 4,838,639 | $ | 4,517,472 | ||||
Work in process | 646,158 | 318,462 | ||||||
Finished goods | 1,912,314 | 1,094,862 | ||||||
| $ | 7,397,111 | $ | 5,930,796 | |||||
Less reserve for obsolescence | (40,816 | ) | (163,740 | ) | ||||
| $ | 7,356,295 | $ | 5,767,056 | |||||
As of March 31, 2007, the total inventory balance of $7,397,111 includes $5,404,217 related to the Company’s manufacturing segment, $736,338 related to the Company’s distribution segment and $1,256,556 as related to the pharmaceutical segment. As of March 31, 2006, the total inventory balance of $5,930,796 includes $4,840,536 related to the Company’s manufacturing segment, $697,073 related to the Company’s distribution segment and $393,187 as related to the pharmaceutical segment. In addition, for the manufacturing segment, approximately $719,866 and $316,696 of factory overhead has been capitalized in inventory as of March 31, 2007 and 2006, respectively.
NOTE 6—PROPERTY, PLANT, LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET
Property, plant, leasehold improvements and equipment, net, consists of the following March 31,:
| 2007 | 2006 | |||||||
Land | $ | 579,767 | $ | 579,767 | ||||
Building and building improvements | 1,615,309 | 1,439,714 | ||||||
Machinery and equipment | 5,557,125 | 5,009,298 | ||||||
Furniture, fixtures and equipment | 685,252 | 586,432 | ||||||
Leasehold improvements | 5,037,823 | 3,123,260 | ||||||
| $ | 13,475,276 | $ | 10,738,471 | |||||
Less accumulated depreciation and amortization | (3,816,213 | ) | (2,713,820 | ) | ||||
| $ | 9,659,063 | $ | 8,024,651 | |||||
Depreciation and amortization expense totaled $1,163,748, $681,482 and $538,755 for the years ended March 31, 2007, 2006 and 2005, respectively primarily attributable to manufacturing and corporate depreciable assets.
Of the $13,475,276 as of March 31, 2007, $5,609,562 was attributable to manufacturing segment, $7,830,351 was attributable to pharmaceutical segment with $35,363 was attributable to distribution segment. Of the $10,738,471 as of March 31, 2006, $4,983,608 was attributable to manufacturing segment, $5,739,581 was attributable to pharmaceutical segment with $15,282 was attributable to distribution segment. Of the $6,518,105 as of March 31,2005, $5,302,321 was attributable to manufacturing segment, $1,200,502 was attributable to pharmaceutical segment with $15,282 was attributable to distribution segment.
For each of the years ended March 31, 2007, 2006 and 2005, total rent expense was $1,149,358, $734,094 and $457,782; included in the $734,094 and $457,782 of rent expense for the fiscal years ended 2006 and 2005, amounts paid to Dynamic were approximately $117,831 and $128,529, respectively.
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NOTE 7—GOODWILL, NET
Goodwill, net, consists of the following at March 31,:
| 2007 | 2006 | |||||||
Goodwill | $ | 901,727 | $ | 901,727 | ||||
Less accumulated amortization | (172,831 | ) | (172,831 | ) | ||||
| $ | 728,896 | $ | 728,896 | |||||
As of March 31, 2007, 2006 and 2005, goodwill represented an intangible asset attributable to the manufacturing segment. Goodwill is analyzed each January 1 for impairment as it has an indeterminant life. Based on the Company’s analyses performed, no impairment losses were required to have been recorded during the fiscal years ended March 31, 2007, 2006 and 2005.
NOTE 8—INTANGIBLE ASSETS, NET
Intangible assets, net, consist of the following at March 31,:
| 2007 | 2006 | |||||||
Loan and lease costs | $ | 26,025 | $ | 200,525 | ||||
Intellectual property | 1,571,767 | 895,696 | ||||||
Generic drug ANDAs | 3,402,666 | 3,387,403 | ||||||
Deferred compensation expense | 1,971,931 | 100,583 | ||||||
Patents | 9,554 | 9,454 | ||||||
| $ | 6,981,943 | $ | 4,593,661 | |||||
Less accumulated amortization | (65,362 | ) | (208,819 | ) | ||||
| $ | 6,916,581 | $ | 4,384,842 | |||||
As of March 31, 2007, 2006 and 2005, loan and lease costs, and patents represented identifiable intangible assets attributable to the manufacturing segment with the intellectual property balance, not identifiable related to service life, is an intangible attributable to the distribution segment. The generic drug ANDAs are attributable to the pharmaceutical segment and also do not have an identifiable life (See note 12). The deferred compensation expense, and the lease and loan costs, and the patents are amortized based on their useful life as determined by the life of the three-year life of the restricted stock award for deferred compensation expense; over the life of the directly-related loan or lease and over the lives of the patents.
As there is an indeterminant life as related to the intellectual property and the generic drug ANDAs, this asset is analyzed each January 1 for impairment. Based on that analysis, no impairment loss was required to be recorded as of or for the fiscal year ended March 31, 2007, 2006 or 2005.
NOTE 9—MEDIA CREDITS, NET
Media credits, net, consist of the following at March 31,:
| 2007 | 2006 | |||||||
Media credits | $ | 452,079 | $ | 1,269,350 | ||||
Deferred revenue | (165,913 | ) | (469,602 | ) | ||||
| $ | 286,166 | $ | 799,748 | |||||
During March 2005, the Company negotiated with an international media company to exchange excess CarbSlim inventory for future credit for use on custom print, radio and television advertising. Based on the Company’s distribution segment expansion into its own branded consumer product lines coupled with the decline in customer demand for low-carb products, this excess inventory was able to be redeemed with the media credits having a three-year life. The media credits were recorded based on the net cost of CarbSlim inventory that was exchanged. During March 31, 2007, the media credits balance was reduced by a net charge to Cost of Sales of $513,000 with the remaining balance to be used throughout the fiscal years ending March 31, 2008.
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NOTE 10—OTHER ASSETS, NET
Other assets, net, consist of the following at March 31,:
| 2007 | 2006 | |||||||
Deposits | $ | 161,404 | $ | 129,550 | ||||
Other assets | 74,583 | 67,644 | ||||||
| $ | 235,987 | $ | 197,194 | |||||
Less allowance for uncollectible accounts | (38,000 | ) | (31,000 | ) | ||||
| $ | 197,987 | $ | 166,194 | |||||
As March 31, 2007, 2006 and 2005, other assets, net are attributable to the manufacturing segment. As of March 31, 2007 and 2006, other assets consisted of approximately $74,583 and $67,644 of two customer’s returned checks respectively. Although the Company has begun legal action against the customers, an allowance of $38,000 and $31,000 has been established, respectively. The Company intends to continue to pursue collection efforts until such time that management has deemed collection efforts as futile based on ongoing cost versus benefit analyses.
NOTE 11—LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at March 31,:
| 2007 | 2006 | |||||||
8%, One year, $5 million line of credit, LIBOR + 1.5% | $ | — | $ | — | ||||
8% Five year, $2 million capital lease line with interest due monthly, LIBOR + 1.5% | 850,000 | — | ||||||
5% Three year installment loan, due in annual principle and interest payments; principle payments of $833,333 are due each August 2006-2008 (See further consideration in the foot note below) | 2,500,000 | 2,500,000 | ||||||
Deferred compensation | 1,169,000 | — | ||||||
Other | 338,056 | 183,456 | ||||||
| $ | 4,857,056 | $ | 2,683,456 | |||||
Less current maturities | (1,771,884 | ) | (1,016,789 | ) | ||||
| $ | 3,085,172 | $ | 1,666,667 | |||||
The deferred compensation relates to approximately 488,000 shares of the Company’s common stock that have yet to be issued in connection with the conversion of all unvested stock options to three-year restricted stock as discussed further in Note 15.
The $4,857,056 of total debt outstanding as of March 31, 2007, $2,260,710 related to corporate, distribution represents $40,879, $55,467 relates to manufacturing and $2,500,000 relates to pharmaceutical. The $2,683,456 of total debt outstanding as of March 31, 2006, $183,456 related to corporate and $2,500,000 relates to pharmaceutical. During August 2005, the Company finalized its agreement with an unrelated third party to purchase 51% of American Antibiotics LLC (See Note 12 and Note 17) and entered into a three-year 6% loan payable in $833,333 annual installments after the initial $500,000 down payment.
At March 31, 2007, aggregate maturities of long-term obligations are as follows:
Year ending March 31, | |||
2008 | $ | 1,771,884 | |
2009 | 2,621,884 | ||
2010 | — | ||
2011 | — | ||
2012 | 850,000 | ||
Thereafter | — | ||
| $ | 4,857,056 | ||
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NOTE 12—AMERICAN ANTIBIOTICS LLC
On August 12, 2005, the Company, through American Antibiotics LLC, a newly-formed subsidiary which is 51% owned by the Company, acquired substantially all of the assets of Consolidated Pharmaceutical Group, Inc., (the “Sellers”), an antibiotic manufacturer located in Baltimore, Maryland. The acquisition was made through American Antibiotics LLC, a newly formed Florida limited liability company. American Antibiotics began with five ANDAs in 10 dosage forms; Amoxicillin 250mg and 500mg oral capsule, Amoxicillin 125mg / 5ml and 250mg / 5ml suspensions, Ampicillin 250mg and 500mg oral capsule, Ampicillin 125mg / 5ml and 250mg / 5ml suspensions, and Penicillin V. Potassium 125mg / 5ml and 250mg / 5ml suspension.
GeoPharma has a 51% controlling interest in American Antibiotics LLC in exchange for $3,000,000. In accordance with the Purchase Agreement, the $3,000,000 note was immediately reduced based on a $500,000 cash down payment with the balance due of $2,500,000 amortized over three years at 5% interest with principal and interest serviced annually. In addition, the manufacturing facility located Baltimore, Maryland remains rent free for the longer of twelve months or until the Sellers have brought the Facility to current FDA and cGMP standards.
As of March 31, 2007 and 2006, due to the fact that the Facility is not yet to current FDA and cGMP standards, the note payment of $833,333 and related interest due August 2006 and any related monthly rent payments have not been made. The amounts due under the loan are recorded as a part of the current portion of long-term obligations on the Company’s balance sheet with the monthly rents continuing to accrue in accordance with U.S. generally accepted accounting priniciples.
Both the Company and the Sellers are continuing to work together on bringing the Facility to FDA and cGMP standards. See further consideration at Note 16.
NOTE 13—RELATED PARTY TRANSACTIONS
The Company has entered into transactions and business relationships with certain of our officers, directors and principal stockholders or their affiliates.
Revenues: For the fiscal years ended March 31, 2007, 2006 and 2005, manufacturing revenues of approximately $94,910, $172,901 and $414,073 respectively, were recorded from sales by the Company to subsidiaries or joint ventures of Dynamic Health Products, an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder. For the fiscal years ended March 31, 2007, 2006 and 2005, revenues of $723,696, $673,544 and $348,156 respectively, were recorded from sales by the Company to Vertical Health Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder.
For the fiscal years ended March 31, 2007, 2006 and 2005, distribution revenues of approximately $0, $0 and 22,176, respectively, were recorded from sales by the Company to subsidiaries or joint ventures of Dynamic Health Products.
For the fiscal years ended March 31, 2007, 2006 and 2005, pharmacy benefit management revenues of approximately $20,145,817, $16,587,701 and $11,437,659, respectively, were recorded from sales by the Company to CarePlus Health Plan, an affiliate of the Company’s former board member Mssr. Zappala. Our wholly-owned subsidiary, Go2PBMServices, Inc., derives 100% of its revenues from this contract.
Trade Accounts Receivable/ Trade Accounts Payable—Amounts due to affiliates and amounts due from affiliates represent balances owed by or amounts owed to the Company for sales occurring in the normal course of business. Amounts due to and amounts due from these affiliates are in the nature of trade payables or receivables and fluctuate based on sales volume and payments received.
As of March 31, 2007 and 2006, for the manufacturing segment, $25,302 and $25,888 was due from subsidiaries of Dynamic Health Products and $182,199 and $140,038 was due from Vertical Health, Inc.
As of March 31, 2007 and 2006, for the pharmacy benefit management segment, $369,267 and $995,452 was due from CarePlus Health.
Lease / Debt Obligations—For each of the years ended March 31, 2007, 2006 and 2005, rent expense of $0, $0 and $128,529 was paid to Dynamic Health Products, Inc. Monthly rents were approximately $18,333 per month. The Company and Dynamic were parties to a ten-year, triple net operating lease that would have expired in the year 2009; however, on October 28, 2004 the Company purchased this leased facility for the independent appraised value of $1,925,000.
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NOTE 14—INCOME TAXES
Income taxes as of and for the years ended March 31, 2007 and 2006 differ from the amounts computed by applying the effective income tax rates to income before income taxes as a result of the following:
| March 31, 2007 | March 31, 2006 | |||||||
Computed tax expense at the statutory rate (37.63%) | $ | 1,072,306 | $ | 860,700 | ||||
Increase (decrease) in taxes resulting from: | ||||||||
Effect of permanent differences: | ||||||||
Permanent differences | 25,800 | 388,000 | ||||||
Other adjustments for permanent differences | (42,600 | ) | 82,100 | |||||
Valuation allowance | (208,700 | ) | (250,000 | ) | ||||
Effect of IRS audit adjustments | (503,855 | ) | — | |||||
Income tax (benefit) expense | $ | 342,951 | $ | 1,080,800 | ||||
Temporary differences that give rise to deferred tax assets and liabilities are as follows:
| March 31, 2007 | March 31, 2006 | |||||||
Deferred tax assets: | ||||||||
Bad debts | $ | 99,189 | $ | 4,600 | ||||
Inventories | 15,359 | 61,600 | ||||||
Accrued vacation | 38,591 | 23,000 | ||||||
Deposits | 123,733 | 69,900 | ||||||
Stock option cancellation | 417,442 | — | ||||||
Net operating loss carryforwards | 214,690 | — | ||||||
| $ | 909,004 | $ | 159,100 | |||||
Valuation Allowance | (208,700 | ) | — | |||||
Deferred tax asset | $ | 700,304 | $ | 159,100 | ||||
Deferred tax liabilities: | ||||||||
Fixed asset basis differences | 125,983 | (348,800 | ) | |||||
Amortization | (249,692 | ) | (55,100 | ) | ||||
| $ | (123,709 | ) | $ | (403,900 | ) | |||
Net deferred tax asset (liability) recorded | $ | 576,595 | $ | (244,800 | ) | |||
At March 31, 2007, 2006 and 2005, the Company has a tax net operating loss carryforward of approximately $570,000, $650,000 and $1,200,000 to offset future taxable income. In addition, the Company has research and development credit carryforwards of approximately $0, $0 and $85,000 to offset future tax liability. The tax net operating loss and research and development credit carryforwards begin to expire in 2021. During the year ended March 31, 2007, the Internal Revenue Service completed their review of the Company’s tax returns for 2004 and 2003 which resulted in a change in the NOL available in the current year. The tax effect of the benefit was approximately $504,000.
NOTE 15—SHAREHOLDERS’ EQUITY
Common Stock
As of March 31, 2007 and 2006, the number of shares of $.01 par value Common Stock outstanding was 10,232,985 and 10,051,775 before treasury shares of 110,379 and 189,617 for the same periods. The increase in common shares outstanding is a direct result of stock option exercises, payment of preferred stock dividends, and employee stock awards. During June 2006 and 2005, the Company’s management was awarded a total of 160,000 and 130,000 restricted, three-year vesting shares from the treasury shares held by the Company and as a direct result of such grant, recorded a non-cash deferred compensation expense of approximately $520,370 and $92,820 included within other assets and has amortized $67,129 and $23,000 to selling, general and administrative expenses.
On March 31, 2007, the Company’s Compensation Committee adopted the unvested stock option plan that exchanged, based on a predetermined exchange formula using grant date and exercise price, all unvested stock options to three-year restricted stock. The NASDAQ closing price on that date was $4.40. Based on an independent valuation, 488,666 was the total number of unvested stock options with a total value of $1,109,272 was recorded as a deferred compensation asset with $1,109,272 recorded as a deferred compensation liability representing the pending issuance of the Company’s 488,000 three-year restricted stock. During the fiscal year ended March 31, 2006, 1,161,000 employee, officer and nonemployee stock options were granted with 332,286 employee, officer and nonemployee stock options exercised. During the fiscal year ended March 31, 2005, 1,110,000 employee, officer and nonemployee stock options were granted with 264,566 employee, officer and nonemployee stock options exercised.
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Subject to preferences that might be applicable to any Preferred Stock, the holders of the Common Stock are entitled to receive dividends when, as, and if declared from time to time by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution, or winding up of the Company, holders of the Common Stock are entitled to share ratably in all assets remaining after payment of liabilities subject to prior distribution rights of any Preferred Stock then outstanding. The Common Stock has no preemptive or conversion rights and is not subject to call or assessment by the Company. There are no redemption or sinking fund provisions applicable to the Common Stock.
Preferred Stock
On March 5, 2004, we entered into a Securities Purchase Agreement with two Funds under which we issued a total of 5000 shares, 6% Series B Convertible Preferred Stock together with warrants to purchase 262,500 shares of the company’s common stock for $5,000,000; 131,250 warrants are at a price equal to $6.29, 131,250 warrants are at a price equal to $6.57. All of the warrants are exercisable until March 5, 2011. The 6% Series B Convertible Preferred Stock is convertible into the Company’s common stock. The conversion price of the preferred stock is $6.00 per share. The series B convertible preferred stock has a liquidation value of $1,000 per share.
During February 2006, the Company fully satisfied its approximate $2.424 million debt outstanding by issuing 530,469 common shares and simultaneously wrote off to interest expense the $300,000 unamortized debt discount. Based on the conversion price of $5.37, all warrants outstanding as related to Series A and Series B Preferred Stock was adjusted to equal $5.37 as in the 2004 Preferred Stock Agreements.
| Warrants | Outstanding | Warrants | Exercisable | |||||||||
Exercise Prices | Number Outstanding 03/31/07 | Weighted Average Remaining Contractual Life (years) | Weighted Average Price 03/31/07 | Options exercisable at March 31, 2007 | Weighted Average Exercise Prices | |||||||
$5.37 | 562,500 | 4 | $ | 5.37 | 562,500 | $ | 5.37 | |||||
Stock Option Plans
The Employee Plan
Effective March 31, 2007, all Stock Option Plans’ unvested options were exchanged for 3-year restricted stock. See each Plan detailed below. The total unvested options forfeited for all Plans was 1,453,331 unvested options in exchange for 488,666 3-year restricted common stock. As a result, $1,581,703 stock option expense was recorded for the year ended March 31, 2007 with an $1,109,272 deferred compensation asset and an $1,109,272 deferred compensation liability representing the excess value of the stock options exchanged over the value of the 3-year stock yet to be issued. The compensation asset will be amortized over 3 years, the life of the restricted stock.
On September 30, 1999, the Company adopted a Stock Option Plan, which provides for the grant to employees of incentive or non-qualified options to purchase up to 1,000,000 shares of Common Stock; on May 18, 2004, based on a majority shareholder vote, the plan was increased by 500,000, for a total of 1,500,000. The exercise price represents the closing price of the Company’s Common Stock at the time of the grant. All outstanding options vest equally over three years or sooner upon the change in control of the Company. Options granted under the Plan expire not later than ten years after the date granted or sooner in the event of death, disability, retirement, or termination of employment.
The Non-Employee Plan
The Non-Employee Plan originally provided for the grant of nonqualified stock options to purchase up to 500,000 shares of Common Stock to members of the Board of Directors who are not employees of the Company. On May 18, 2004, the shareholders
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approved the amendment to the Plan increasing the total shares to 1,000,000. On the date on which a new non-employee director is first elected or appointed, he will automatically be granted options to purchase 50,000 shares of Common Stock for each year of his initial term. All options have an exercise price equal to the fair market value of the Common Stock on the date of grant. The options vest over a three-year vesting schedule with the first year’s vesting period ending one year from date of grant. The following summarizes the non-employee common stock options outstanding as of March 31, 2007, 2006 and 2005:
| 2007 | 2006 | 2005 | |||||||||||||||||||
Non-Employee Stock Options | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||||||||||
Outstanding, beginning of year | 1,418,497 | $ | 4.71 | 866,665 | $ | 4.31 | 729,531 | $ | 3.06 | ||||||||||||
Granted | 400,000 | $ | 4.40 | 650,000 | $ | 5.28 | 460,000 | $ | 5.28 | ||||||||||||
Exercised | (61,665 | ) | $ | (2.97 | ) | (98,168 | ) | $ | (2.97 | ) | (220,866 | ) | $ | (2.97 | ) | ||||||
Forfeited | (736,663 | ) | $ | (4.40 | ) | — | $ | (102,000 | ) | $ | (2.64 | ) | |||||||||
Outstanding, end of year | 1,020,169 | $ | 1.52 | 1,418,497 | $ | 4.31 | 866,665 | $ | 4.31 | ||||||||||||
Options vested, end of year | 1,020,169 | $ | 1.52 | 338,499 | $ | 1.52 | 134,332 | $ | 1.52 | ||||||||||||
The Employee Plan
The following table summarizes information about the employee stock option activity for the years ended March 31, 2007, 2006 and 2005:
| 2007 | 2006 | 2005 | |||||||||||||||||||
Employee Stock Options | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||||||||||
Outstanding, beginning of year | 648,417 | $ | 2.46 | 633,200 | $ | 1.71 | 507,219 | $ | 1.71 | ||||||||||||
Granted | — | $ | — | 150,000 | $ | 4.55 | 200,000 | $ | 4.55 | ||||||||||||
Exercised | (38,667 | ) | $ | 0.85 | (101,783 | ) | $ | (0.85 | ) | (39,300 | ) | $ | (0.85 | ) | |||||||
(Forfeited) | (216,667 | ) | $ | (4.55 | ) | (33,000 | ) | $ | (1.59 | ) | (34,719 | ) | $ | (1.59 | ) | ||||||
Outstanding, end of year | 393,083 | $ | 1.57 | 648,417 | $ | 2.46 | 633,200 | $ | 2.46 | ||||||||||||
Options vested, end of year | 393,083 | $ | 1.57 | 371,417 | $ | 1.57 | 351,134 | $ | 1.57 | ||||||||||||
During the year March 31, 2006, the Company granted 150,000 shares as a hiring incentive based on the January 3, 2006 closing price the date the employee accepted and during the year March 31, 2007, that employee was terminated and those options were forfeited.
During the fiscal year ended March 31, 2005, September 1, 2004, the board of directors approved the granting of 200,000 options to be allocated amongst the Company’s employees of record as of that date. The exercise price of the options is $4.55 based on the closing price, the day of the grant. Grants were allocated based on years if service and salary.
| 2007 | 2006 | 2005 | ||||||||||||||||||
Officer Stock Options | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | ||||||||||||||
Outstanding, beginning of year | 1,144,933 | $ | 1.71 | 769,933 | $ | 1.71 | 323,333 | $ | 1.62 | |||||||||||
Granted | — | $ | — | 375,000 | $ | 4.55 | 450,000 | $ | 4.55 | |||||||||||
Exercised | — | $ | — | — | $ | (0.85 | ) | (3,400 | ) | $ | (0.85 | ) | ||||||||
Forfeited | (650,001 | ) | $ | (4.55 | ) | — | — | — | — | |||||||||||
Outstanding, end of year | 494,932 | $ | 1.41 | 1,144,933 | $ | 1.71 | 769,933 | $ | 1.71 | |||||||||||
Options vested, end of year | 494,932 | $ | 1.41 | 469,933 | $ | 1.41 | 319,933 | $ | 1.41 | |||||||||||
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On June 7, 2005, the board approved the grant of 375,000 to the officers of the Company. The exercise price was $1.95 which was the closing price on the date of the grant.
On September 1, 2004, the board of directors approved the granting a total of 450,000 to be allocated to each of the Company’s officers of record as of that date. The exercise price was $4.55 per share based on the closing price on the date of grant.
Employee Stock Options
The weighted-average fair value of options granted for the years ending March 31, 2007, 2006 and 2005 was $0, $3.35 and $4.36. The estimated fair value for the above options was determined using the Black-Scholes method with the following weighted-average assumptions used for grants in 2006 and 2005 were as follows:
| 2006 | 2005 | |||||
Dividend Yield | 0.00 | % | 0.00 | % | ||
Option Term | 10 years | 10 years | ||||
Expected volatility | 122.39 | % | 122.39 | % | ||
Risk-free interest rate | 4.13 | % | 4.13 | % |
Officers’ Stock Options
The weighted-average fair value of options granted for the years ending March 31, 2007, 2006 and 2005 was $0, $4.68 and $4.68. The estimated fair value for the above options was determined using the Black-Scholes method with the following weighted-average assumptions used for grants in 2006 and 2005; with no grants were made in 2007:
| 2007 | 2006 | 2005 | ||||||
Dividend Yield | — | 0.00 | % | 0.00 | % | |||
Option Term | — | 10 years | 10 years | |||||
Expected volatility | — | 120.92 | % | 120.92 | % | |||
Risk-free interest rate | — | 4.62 | % | 4.62 | % |
The Company has adopted only the disclosure provision of SFAS No. 123, as it related to employee awards. APB No. 25 is applied in accounting for the plan. Accordingly, no compensation expense is recognized related to the employee and nonemployee director stock based compensation plans although, $66,000 and $51,000 compensation expense has been included in the results from operations for the fiscal year ended March 31, 2006 and 2005 for nonemployee consultants granted stock options under the Company’s nonemployee stock option plan. Effective April 1, 2006, the Company adopted the provisions of SFAS 123R, Share Based Payments—Revised, and as a result has recorded the fair value of all unvested stock options with a stock option compensation expense recorded of $1,581,703 and therefore no proforma differences will be reflected. The pro forma net earnings (loss) per common share, if the Company had elected to account for its employee and nonemployee director plan consistent with the methodology prescribed by SFAS No. 123, are shown in the following for the fiscal years 2007, 2006 and 2005:
| 2007 | 2006 | 2005 | |||||||||
Net income (loss): | |||||||||||
As reported | $ | 2,206,652 | $ | 1,489,197 | $ | (1,403,454 | ) | ||||
Pro forma | $ | 2,206,652 | $ | 439,480 | $ | (2,721,616 | ) | ||||
Net income per common share: | |||||||||||
Basic income (loss) per share: | |||||||||||
As reported | $ | 0.22 | $ | 0.17 | $ | (0.17 | ) | ||||
Pro forma | $ | 0.22 | $ | 0.00 | $ | (0.34 | ) | ||||
Diluted income (loss) per share: | |||||||||||
As reported | $ | 0.19 | $ | 0.14 | $ | (0.17 | ) | ||||
Pro forma | $ | 0.19 | $ | (0.03 | ) | $ | (0.34 | ) | |||
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| Options | Outstanding | Options | Exercisable | |||||||||
Range of Exercise Prices | Number Outstanding 03/31/06 | Weighted Average Remaining Contractual Life (years) | Weighted Average Price 03/31/06 | Options exercisable at March 31, 2006 | Weighted Average Exercise Prices | |||||||
$0.80 - $2.00 | 1,884,814 | 5 | $ | 1.36 | 859,814 | $ | 1.38 | |||||
$2.99 - $4.55 | 1,067,000 | 8 | $ | 4.54 | 203,519 | |||||||
$5.00 - $6.44 | 260,000 | 8 | $ | 6.19 | ||||||||
$0.80 - $6.44 | 3,211,814 | 8 | $ | 3.17 | ||||||||
| Options | Outstanding | Options | Exercisable | |||||||||
Range of Exercise Prices | Number Outstanding 03/31/05 | Weighted Average Remaining Contractual Life (years) | Weighted Average Price 03/31/05 | Options exercisable at March 31, 2005 | Weighted Average Exercise Prices | |||||||
$0.80 - $2.00 | 1,099,798 | 6.28 | $ | 1.36 | 805,399 | $ | 1.38 | |||||
$2.99 - $4.55 | 930,000 | 9.00 | $ | 4.54 | ||||||||
$5.00 - $6.44 | 240,000 | 9.00 | $ | 6.19 | ||||||||
$0.80 - $6.44 | 2,269,798 | 9.09 | $ | 3.17 | 805,399 | $ | 1.38 | |||||
NOTE 16—COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has operating leases for facilities and certain machinery and equipment that expire at various dates through 2012. Certain leases provide an option to extend the lease term. Certain leases provide for payment by the Company of any increases in property taxes, insurance, and common area maintenance over a base amount and others provide for payment of all property taxes and insurance by the Company. Future minimum lease payments, by year and in aggregate under non-cancelable operating leases, consist of the following at March 31, 2007:
Year ending March 31, | |||
2007 | $ | 386,481 | |
2008 | 386,481 | ||
2009 | 386,481 | ||
2010 | 386,481 | ||
2011 | 386,481 | ||
Thereafter | 386,481 | ||
| $ | 2,318,886 | ||
Rent Expense on the above leases totaled $1,149,358, $734,094 and $457,782 in each of the years ended March 31, 2007, 2006 and 2005, respectively.
Litigation
On September 29, 2006, Schering Corporation (“Schering”) filed an action in the United States District Court for the District of New Jersey, against Belcher Pharmaceuticals, Inc. and GeoPharma, Inc. (along with nineteen other defendants) alleging that the filing of Belcher Pharmaceuticals’ Abbreviated new Drug Application (“ANDA”) for 5 mg Desloratadine Tablets, AB-rated to Clarinex®, infringed U.S. Patent No. 6,100,274 (“the ‘274 patent”) Case No. 3:06-cv-04715-MLC-TJB. On November 8, 2006, Belcher filed a motion to dismiss in the New Jersey case for lack of jurisdiction. On October 5, 2006 Schering filed an action in the United States District Court for the Middle District of Florida, Tampa Division, Case No. 8:06-cv-01843-SCB-EAJ, against Belcher Pharmaceuticals, Inc. and Geopharma, Inc. alleging that the filing of Belcher Pharmaceuticals’ ANDA for 5 mg Desloratadine Tablets, AB-rated to Clarinex®, infringed the ‘274 patent. Company management and Belcher disputes Schering’s claims in the two actions and believes its proposed desloratadine product does not infringe the ‘274 patent. The possible outcome cannot be determined at this time.
During September 2006, the Company, through its 51% owned subsidiary, American Antibiotics, LLC, filed in the Circuit Court for Anne Arundel County, Maryland, Case No. C-06-117230, naming defendents Consolidated Pharmaceutical Group (“CPG”), the directors of CPG and two other individuals acting on behalf of CPG (collectively “the Defendents”). The litigation arises from and relates to agreements entered into between American Antibiotics and CPG for the purchase by American Antibiotics all of CPG’s rights, title and interest in various pharmaceutical Abbreviated New Drug Applications (“ANDAs”) and for the Baltimore, Maryland facility lease (the “Lease”). The suit brought by the Company alleges that the Defendents breached the ANDA agreement with certain misrepresentations and by failing to perform all the required improvements and modifications to the Balitmore, Maryland facility. The case is scheduled for trial in the first calendar quarter of 2008. To date, no counterclaims have been asserted against American Antibiotics.
In December 2004 and January 2005 five securities class action lawsuits were filed in the Federal District Court, Southern District of New York against GeoPharma and certain of its officers, alleging violations of federal securities laws in connection with certain press releases issued by the Company relating to Belcher Pharmaceuticals’ planned introduction of Mucotrol: Mat eVentures v. Kotha Sekharam and GeoPharma, Inc. (SDNY 04 Civ. 9463); Moshayedi v. GeoPharma, Inc., Jugal Taneja, Mihir Taneja, and Kotha Sekharam (SDNY 04 Civ. 9736); Sarno v. Mihir Taneja, Kotha Sekharam, and GeoPharma, Inc. (SDNY 04 Civ. 9975); Farwell v. Kotha Sekharam and GeoPharma, Inc. (SDNY 05 Civ. 188); and Taylor v. Kotha Sekharam and GeoPharma, Inc. (SDNY 05 Civ. 258). Plaintiffs, on behalf of themselves and all others similarly situated, seek unspecified damages allegedly suffered in
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connection with their respective purchases and sales of the Company’s securities during the Class period. On March 9, 2005 the Court consolidated the actions and appointed lead plaintiff and lead counsel. On April 18, 2005 plaintiffs filed a Consolidated Amended Class Action Complaint. On June 6, 2005 defendants filed a Motion to Dismiss the action. By Opinion and Order dated September 30, 2005 the Court granted defendents’ motion and dismissed the action without prejudice, with leave to replead. On October 24, 2005 plaintiffs filed a Consolidated Second Amended Class Action Complaint in the action. The Company again moved to dismiss the Second Amended Consolidated Complaint, and after the issues were fully briefed by the parties, by Opinion and Order dated January 27, 2006 the Court again dismissed Plaintiffs’ action, this time with prejudice.
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The company received a letter dated April 11, 2005 addressed to its Board of Directors, constituting a shareholder demand pursuant to Florida Statute Sec. 607.07401 from a San Diego law firm representing an alleged shareholder of GeoPharma, Inc. Such letter demanded that the company commence legal proceedings against each Board member and each officer of the company for alleged breaches of fiduciary duty arising out of and/or evidenced by the same actions and circumstances involved in the class action referred to above. At its Board meeting of June 7, 2005, the Board of Directors appointed a committee of independent directors to investigate the allegations outlined in such letter and as such, the investigation is currently underway. On December 29, 2005, Imelda Hoeft, derivatively on behalf of the Company, instituted an action in the Circuit Court of the 6th Judicial Circuit in and for Pinellas County, Florida against the Company and all the Company’s officers and directors asserting claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The action sought unspecified damages and other relief. On April 21, 2006, plaintiff agreed to dismiss the action, and filed with the Court a Notice of Voluntary Dismissal without Prejudice.
On April 11, 2003 the company filed a lawsuit against Joseph Zappala, a member of the company’s Board of Directors in the Sixth Judicial Circuit in and for Pinellas County, Florida. The lawsuit sought to rescind a purported agreement between the company and Mr. Zappala, breach of a consulting agreement between the company and Mr. Zappala and related claims involving those agreements. Mr. Zappala denied the material allegations against him and has filed a counterclaim against the Company for breach of the consulting agreement.
On April 20, 2004, the Company and Mr. Zappala entered into an agreement (“Settlement Agreement”) pursuant to which each party expressly disclaimed any liability and each party released the other (and all related parties) from all claims, and liabilities arising from the Merger Agreement, the Consulting Agreement and/or the subject matter of the Company’s lawsuit against Mr. Zappala and Go2 (“Lawsuit”), and the parties agreed to dismiss the Lawsuit with prejudice. As provided by the Settlement Agreement: (i) Mr. Zappala transferred ownership of 500,000 shares of the Company’s common stock to the Company; (ii) the Consulting Agreement was terminated without further liability to either party; and (iii) Mr. Zappala agreed, that during his tenure as a Director of the Company, he would not sell his remaining shares of Company common stock, unless another Director of the Company sells shares of Company common stock. The Company filed Form 8-K on April 26, 2004. On December 3, 2004, Mr. Zappala resigned from the Company’s board of directors.
From time to time we are subject to litigation incidental to our business including possible product liability claims. Such claims, if successful, could exceed applicable insurance coverage.
The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company believes that none of the claims that were outstanding as of March 31, 2007 should have a material adverse impact on its financial condition or results of operations.
Employment Agreements
Effective April 1, 2004, the Company renegotiated and renewed executive management’s three year employment agreements with the Chief Executive Officer, the President and the Vice President/Chief Financial Officer at annual salaries for fiscal year ended March 31, 2007 of $240,000, $170,000 and $160,000 plus benefits respectively.
Directors’ Compensation
The Company pays directors fees of $2,500 each per quarter. In addition, each non-employee director receives options to purchase shares of common stock for each year completed of the director’s term and is eligible for a restricted stock award. See further consideration within Note 14 above.
Common Stock
On April 11, 2003 the Company filed a lawsuit against Joseph Zappala, a member of the Company’s Board of Directors in the Sixth Judicial Circuit in and for Pinellas County, Florida. The lawsuit seeks to rescind a purported agreement between the Company and Mr. Zappala, breach of a consulting agreement between the Company and Mr. Zappala and related claims involving those agreements. Mr. Zappala has denied the material allegations against him and has filed a counterclaim against the Company for breach of the consulting agreement.
On April 20, 2004, the Company and Mr. Zappala entered into an agreement (“Settlement Agreement”) pursuant to which each party expressly disclaimed any liability and each party released the other (and all related parties) from all claims, and liabilities arising from the Merger Agreement, the Consulting Agreement and/or the subject matter of the Company’s lawsuit against Mr. Zappala and Go2 (“Lawsuit”), and the parties agreed to dismiss the Lawsuit with prejudice. As provided by the Settlement Agreement: (i) Mr. Zappala transferred ownership of 500,000 shares of the Company’s common stock to the Company; (ii) the Consulting Agreement was terminated without further liability to either party; and (iii) Mr. Zappala agreed, that during his tenure as a Director of the Company, he would not sell his remaining shares of Company common stock, unless another Director of the Company sells shares of Company common stock. The Company filed Form 8-K with the Securities and Exchange Commission on April 26, 2004. On December 3, 2004, Mr. Zappala resigned from the Company’s board of directors.
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NOTE 17—SUBSEQUENT EVENTS
On April 5, 2007, GeoPharma, Inc. (the “Company”) entered into a Note Purchase Agreement, Securities (Common Stock) Purchase Agreement, Convertible Promissory Note, Warrant, and two related Registration Rights Agreements with Whitebox Pharmaceutical Growth Fund, Ltd. (“Whitebox”). In connection with the Whitebox financing, the Company paid a fee to Rodman & Renshaw, LLC equal to $750,000.00 in cash and a warrant to purchase up to 143,403 shares of the Company’s common stock at an exercise price of $5.23. The transactions contemplated by such agreements were consummated on April 5, 2007, at which time the Company issued the following securities to Whitebox for the following consideration:
| • | 573,395 shares of common stock, $.01 par value (the “Common Stock”), at a sales price of $4.36 per share (the “Common Stock Purchase Price”), for a total of $2,500,000; |
| • | A Convertible Promissory Note (the “Note”), with maturity date of April 5, 2013, in the original principal amount of $10,000,000, which amount is convertible into up to 2,293,578 shares of Common Stock at a price of $4.36 per share, subject to certain adjustments as set forth in the Note (the “Conversion Price”); and |
| • | A Warrant to purchase up to 400,000 shares of Common Stock at an exercise of $5.23 per share, subject to certain adjustments as set forth in the Warrant, with a termination date of April 5, 2014. |
The Note accrues interest at the rate of 8% per annum, payable on a quarterly basis on January 1, April 1, July 1 and October 1 of each year, beginning on July 1, 2007. Until April 5, 2009, interest is payable by adding the accrued interest to the principal amount of the Note. Following April 5, 2009, interest is payable on each quarterly interest payment date as follows: (i) if funds are legally available for the payment of interest and the Equity Conditions (as defined in the Note and summarized below) have not been met, in cash; (ii) if funds are legally available for the payment of interest and the Equity Conditions have been met, at the sole election of the Company, in cash or shares of Common Stock, which shall be valued solely for such purpose at 95% of the average of the VWAP (as defined below) for the 5 trading days immediately prior to such interest payment date; (iii) if funds are not legally available for the payment of interest and the Equity Conditions have been met, in shares of Common Stock which shall be valued at 95% of the average of the VWAP for the 5 trading days immediately prior to such interest payment date; (iv) if funds are not legally available for the payment of interest and the Equity Conditions have been waived by Whitebox, in shares of Common Stock which shall be valued at 95% of the average of the VWAP for the 5 trading days immediately prior to the interest payment date; and (v) if funds are not legally available for the payment of interest and the Equity Conditions have not been met, then, at the election of Whitebox, such interest payment shall accrue to the next interest payment date or shall be accreted to the outstanding accreted principal amount.
Notwithstanding anything else to the contrary, in the event that (i) the Company’s earnings before interest, income taxes, depreciation, amortization and stock expense, as reported on the Company’s most recent Form 10-Q or Form 10-K (as applicable) is less than $1,250,000 for such quarter, or (ii) the Company’s earnings before interest, income taxes, depreciation, amortization and stock expense for the trailing four quarters is less than $4,000,000 in the aggregate, or (iii) an event or condition that would constitute a Material Adverse Effect (as such term is defined in the Note Purchase Agreement) for the Company shall have occurred, or (iv) the Company shall not have filed its latest Form 10-Q or Form 10-K within the timeframe required by the SEC and the rules and regulations set forth in the Exchange Act, Whitebox shall have the option, in its sole discretion, to require that any interest, for the next subsequent quarterly payment period, be paid in cash. The Company filed Form 8-K on April 10, 2007.
On May 14, 2007, the Company and Dynamic Health Products, Inc. (“Dynamic Health”) entered into a definitive agreement (the “Merger Agreement”) under which Dynamic Health will merge with and into a Florida Merger Subsidiary Corporation (“Merger Sub”) a wholly-owned subsidiary of the Company that was formed to facilitate the merger, in a stock transaction (the “Merger”).
Under the terms of the Merger Agreement, the Company will exchange approximately 0.1429 shares of its common stock for each share of Dynamic Health common stock and fractional shares will be rounded up to the nearest whole share. Based on an average 10-day market closing price of the Company’s common stock from May 1-14, 2007 of $4.24 per share, the transaction would be valued at $14 million, based on an estimated 3.3 million shares of the Company’s common stock to be issued to the shareholders of Dynamic Health in the Merger. The actual value at consummation of the Merger will be based on the Company’s share price at that time.
Completion of the Merger of the Dynamic Health into Florida Merger Sub and the issuance of the Company’s common shares to the shareholders of Dynamic Health is subject to the approval of the transaction by the shareholders of both companies, the conversion of Dynamic Health’s convertible notes prior to the closing of the Merger, the receipt of required regulatory approvals, and the satisfaction of usual and customary closing conditions. The Merger Agreement contains certain termination rights for both the Company and Dynamic Health.
Director and executive officers of the Company beneficially own and are entitled to vote approximately 43% of the shares of the Company’s common stock outstanding. Directors and executive officers of the Dynamic Health beneficially own and are entitled to vote approximately 47% of the shares of Company common stock outstanding. On May 15, 2007, Dynamic Health and the Company filed with the Securities and Exchange Commission (the “SEC”) a joint proxy statement/prospectus on Form S-4, in connection with the proposed acquisition of the Dynamic Health by the Company, pursuant to the terms of the definitive Merger Agreement.
Effective May 15, 2007, the PBM contract by and between Go2PBM Services, Inc and Amerigroup (formerly know as Careplus Health) was terminated. The Company was paid $10,000 for the termination with no contract termination fee expenses paid. Therefore, subsequent to that date, the Company will no longer earn or record revenues nor incur or pay any expenses related to that contract or the related PBM business segment. The Company filed Form 8-K on May 3, 2007.
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