UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
AMENDMENT NO. 1
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-16185
GEOPHARMA, INC.
(Exact name of registrant as specified in its charter)
| State of Florida | 59-2600232 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 6950 Bryan Dairy Road, Largo, Florida | 33777 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (727) 544-8866
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): ¨ Yes x No
The number of shares outstanding of the Issuer’s common stock at $.01 par value as of November 11, 2009 was 19,647,374.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A of GeoPharma, Inc. (the “Company”) amends the Company’s Quarterly Report on Form 10-Q as of and for the quarterly and six month period ended September 30, 2009, as filed with the Securities and Exchange Commission on November 23, 2009 (the “Form 10-Q”), solely to file an amendment to financial statement footnote 6, Income Taxes, for the six month periods ended September 30, 2009 and 2008 as the information that is being replaced was omitted from the Form 10-Q as filed. The new financial statement footnote for Income Taxes, footnote 6, is the only change being made to the Company’s Form 10-Q. The information contained in this Amendment No. 1 does not reflect events occurring subsequent to the filing of the Form 10-Q.
PART I – FINANCIAL INFORMATION
| Item 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. |
GEOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of September 30, and March 31, 2009
| September 30, 2009 | March 31, 2009 | |||||||
| (unaudited) | (audited) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 258,548 | $ | 90,346 | ||||
Certificates of deposit | 5,459,852 | 5,377,397 | ||||||
Accounts receivable, net | 1,797,506 | 2,119,279 | ||||||
Accounts receivable, other | 279,507 | 22,055 | ||||||
Inventories, net | 5,935,374 | 6,537,937 | ||||||
Prepaid expenses and other current assets | 522,775 | 421,964 | ||||||
Deferred tax asset, net | 216,887 | — | ||||||
Assets to be disposed of | 627,824 | 4,760,100 | ||||||
Total current assets | $ | 15,098,273 | $ | 19,329,078 | ||||
Property, plant, leasehold improvements and equipment, net | 10,485,787 | 11,458,195 | ||||||
Goodwill, net | 728,896 | 728,896 | ||||||
Deferred compensation | 2,621,454 | 2,969,412 | ||||||
Intangible assets, net | 5,859,081 | 6,109,812 | ||||||
Deferred tax asset, net | 3,775,609 | 5,254,976 | ||||||
Notes receivable, net | 500,000 | 500,000 | ||||||
Investment in unconsolidated affiliate | 1,594,502 | 1,594,502 | ||||||
Other assets, net | 1,105,649 | 1,091,529 | ||||||
Assets to be disposed of | 13,004 | 1,267,722 | ||||||
Total assets | $ | 41,782,225 | $ | 50,304,122 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 8,723,094 | $ | 5,056,351 | ||||
Notes payable | 5,880,589 | 5,630,488 | ||||||
Current portion - long-term obligations | 1,036,814 | 2,826,737 | ||||||
Current portion - convertible debt | 3,700,000 | 2,800,000 | ||||||
Accrued expenses, related party and other liabilities | 6,527,214 | 4,479,289 | ||||||
<Liabilities to be disposed of | 757,727 | 7,753,051 | ||||||
Total current liabilities | $ | 26,625,438 | $ | 28,545,916 | ||||
Long-term obligations, less current portion | 3,164,504 | 2,193,747 | ||||||
Long-term obligations - convertible debt | 12,200,000 | 12,200,000 | ||||||
Total liabilities | $ | 41,989,942 | $ | 42,939,663 | ||||
Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
6% convertible preferred stock, Series B, $.01 par value (5,000 shares authorized, 478 shares issued and outstanding; liquidation preference $478,000) | 5 | 40 | ||||||
10% convertible preferred stock, Series C, $.01 par value (5,000 shares authorized, 3,498 shares issued and outstanding; liquidation preference $3,498,000) | 35 | — | ||||||
Common stock, $.01 par value; 24,000,000 shares authorized; 19,647,374 and 18,177,500 shares issued and outstanding | 196,474 | 181,775 | ||||||
Treasury stock (65,428 common shares, $.01 par value) | (654 | ) | (654 | ) | ||||
Additional paid-in capital | 67,642,925 | 66,852,176 | ||||||
Retained earnings (deficit) | (65,496,372 | ) | (57,147,538 | ) | ||||
Total GeoPharma shareholders’ equity | $ | 2,342,413 | $ | 9,885,799 | ||||
Noncontrolling interest | (2,549,530 | ) | (2,521,340 | ) | ||||
Total equity/(deficit) | $ | (207,717 | ) | $ | 7,364,459 | |||
Total liabilities and equity/(deficit) | $ | 41,782,225 | $ | 50,304,122 | ||||
2
GEOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenues: | ||||||||||||||||
Manufacturing | 3,003,103 | 4,560,758 | 7,622,861 | 10,862,924 | ||||||||||||
Pharmaceutical | 404,487 | 534,006 | 986,993 | 658,443 | ||||||||||||
Total revenues | $ | 3,407,590 | $ | 5,094,764 | $ | 8,609,854 | $ | 11,521,367 | ||||||||
Cost of goods sold: | ||||||||||||||||
Manufacturing | 2,218,627 | 3,007,286 | 5,131,059 | 7,760,100 | ||||||||||||
Pharmaceutical | 588,711 | 823,528 | 1,232,634 | 1,250,467 | ||||||||||||
Total cost of goods sold | $ | 2,807,338 | $ | 3,830,814 | $ | 6,363,693 | $ | 9,010,567 | ||||||||
Gross profit: | ||||||||||||||||
Manufacturing | 784,476 | 1,553,472 | 2,491,802 | 3,102,824 | ||||||||||||
Pharmaceutical | (184,244 | ) | (289,522 | ) | (245,641 | ) | (592,024 | ) | ||||||||
Total gross profit | $ | 600,252 | $ | 1,263,950 | $ | 2,246,161 | $ | 2,510,800 | ||||||||
Selling, general and administrative expenses: | ||||||||||||||||
Selling, general and administrative expenses | 2,857,471 | 2,915,780 | 5,463,108 | 5,701,272 | ||||||||||||
Stock compensation expense | 709,186 | 368,067 | 1,558,501 | 643,559 | ||||||||||||
Research and development | 291,202 | 500,950 | 667,319 | 1,151,901 | ||||||||||||
Depreciation and amortization | 414,194 | 539,678 | 830,430 | 1,016,244 | ||||||||||||
Total selling, general and administrative expenses | $ | 4,272,053 | $ | 4,324,475 | $ | 8,519,358 | $ | 8,512,976 | ||||||||
Operating income (loss) before other income and expense, noncontrolling interest, income taxes and discontinued operations | $ | (3,671,801 | ) | $ | (3,060,525 | ) | $ | (6,273,197 | ) | $ | (6,002,176 | ) | ||||
Other income (expense), net: | ||||||||||||||||
Interest income (expense), net | (543,666 | ) | (422,635 | ) | (998,226 | ) | (801,602 | ) | ||||||||
Other income (expense), net | 1,039,891 | 177 | 1,052,023 | 2,277 | ||||||||||||
Total other income (expense), net | $ | 496,225 | $ | (422,458 | ) | $ | 53,797 | $ | (799,325 | ) | ||||||
Income (loss) before noncontrolling interest, income taxes and discontinued operations | $ | (3,175,576 | ) | $ | (3,482,983 | ) | $ | (6,219,400 | ) | $ | (6,801,501 | ) | ||||
Noncontrolling interest benefit (expense) | (165,259 | ) | 172,688 | 28,190 | 370,424 | |||||||||||
Income tax benefit (expense) | — | 955,500 | — | 1,617,900 | ||||||||||||
Net income (loss) from continuing operations | $ | (3,340,835 | ) | $ | (2,354,795 | ) | $ | (6,191,210 | ) | $ | (4,813,177 | ) | ||||
Discontinued operations: | ||||||||||||||||
Revenues: Distribution | $ | — | $ | 10,944,987 | $ | 4,709,292 | $ | 24,543,691 | ||||||||
Cost of goods sold: Distribution | — | 9,203,811 | 4,095,792 | 19,855,501 | ||||||||||||
Gross profit(deficit):Distribution | $ | — | $ | 1,741,176 | $ | 613,500 | $ | 4,688,190 | ||||||||
Selling, general and administrative expenses: Distribution | 348,084 | 3,410,520 | 1,982,568 | 6,243,130 | ||||||||||||
Loss on the sale of BOSS assets | 661,424 | — | 661,424 | — | ||||||||||||
Distribution segment exit income (expense) | — | — | — | — | ||||||||||||
Discontinued operations net loss (net of income tax) | $ | (1,009,508 | ) | $ | (1,669,344 | ) | $ | (2,030,492 | ) | $ | (1,544,265 | ) | ||||
Net income (loss) | $ | (4,350,343 | ) | $ | (4,024,139 | ) | $ | (8,221,702 | ) | $ | (6,367,442 | ) | ||||
Preferred stock dividends | 69,129 | 137,500 | 127,129 | 287,300 | ||||||||||||
Net income (loss) available to common shareholders | $ | (4,419,472 | ) | $ | (4,161,639 | ) | $ | (8,348,831 | ) | $ | (6,654,742 | ) | ||||
Basic income (loss) per share | $ | (0.18 | ) | $ | (0.15 | ) | $ | (0.32 | ) | (0.33 | ) | |||||
Basic weighted average number of common shares outstanding | 19,319,598 | 16,396,092 | 19,275,142 | 15,544,306 | ||||||||||||
Diluted income (loss) per share | $ | (0.18 | ) | $ | (0.15 | ) | $ | (0.32 | ) | $ | (0.33 | ) | ||||
Diluted weighted average number of common shares outstanding | 19,319,598 | 16,396,092 | 19,275,142 | 15,544,306 | ||||||||||||
Basic and diluted discontinued operations income(loss) per share | $ | (0.05 | ) | $ | (0.10 | ) | $ | (0.11 | ) | $ | (0.10 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
3
GEOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| September 30, 2009 | September 30, 2008 | |||||||
| (Unaudited) | (Unaudited) | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | (8,221,702 | ) | $ | (6,367,442 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation, leasehold and intangible amortization | 1,691,460 | 1,393,009 | ||||||
Income tax expense (benefit) | — | (1,618,700 | ) | |||||
Gain on rent and interest cancellation | (1,015,853 | ) | — | |||||
Loss on sale of assets – BOSS | 661,424 | — | ||||||
Amortization of stock deferred compensation | 1,314,751 | 674,417 | ||||||
Accrued interest income | (82,455 | ) | (38,815 | ) | ||||
Common stock issued for interest payment | — | 337,546 | ||||||
Common stock issued for payment of consulting fees | — | 24,000 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | 982,679 | 3,044,388 | ||||||
Accounts receivable, other | (18,610 | ) | 21,068 | |||||
Inventories, net | 1,502,139 | 471,420 | ||||||
Prepaid expenses and other current assets | 111,232 | 725,093 | ||||||
Federal tax refund | 1,262,480 | — | ||||||
Other assets, net | 13,838 | (134,464 | ) | |||||
Accounts payable | 332,862 | (2,337,602 | ) | |||||
Accrued expenses, related party and other payables | 1,014,652 | 1,379,553 | ||||||
Net cash provided by (used in) operating activities | $ | (451,103 | ) | $ | (2,426,529 | ) | ||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property, leasehold improvements and equipment | $ | (5,427 | ) | $ | (436,412 | ) | ||
(Purchase) sale of intangible assets | — | (1,599,915 | ) | |||||
Proceeds from sale of BOSS assets | 2,223,351 | — | ||||||
Proceeds (uses) due to noncontrolling interest investment, net | (28,190 | ) | (370,424 | ) | ||||
Repayments of notes receivable | — | 12,955 | ||||||
Net cash provided by (used in) investing activities | $ | 2,189,735 | $ | (2,393,796 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from private placement – Convertible debt | $ | — | $ | 5,000,000 | ||||
Proceeds (repayments) from credit line, net | (1,818,000 | ) | 595,000 | |||||
Proceeds from issuance of long-term obligations | — | 334,130 | ||||||
Proceeds from issuance of related party obligations | 795,862 | 150,000 | ||||||
Proceeds from vested stock options exercised | — | 8,500 | ||||||
Payments for private placement fees | — | (24,603 | ) | |||||
Payments of acquisition costs | — | (10,000 | ) | |||||
Payments of short-term obligations | (210,554 | ) | (290,230 | ) | ||||
Payments of long-term obligations | (337,737 | ) | (105,104 | ) | ||||
Net cash provided by (used in) financing activities | $ | (1,570,429 | ) | $ | 5,657,693 | |||
Net increase (decrease) in cash | $ | 168,202 | $ | 837,368 | ||||
Cash at beginning of period | 90,346 | 523,802 | ||||||
Cash at end of period | $ | 258,548 | $ | 1,361,170 | ||||
SUPPLEMENTAL INFORMATION: | ||||||||
Cash paid for interest | $ | 258,548 | $ | 261,356 | ||||
Cash paid for income taxes | $ | — | $ | — | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Value of common stock to be issued to pay preferred stock dividends | $ | 201,135 | $ | 287,300 | ||||
Value of restricted common stock to be issued for deferred compensation | $ | 966,763 | $ | 2,221,771 | ||||
Increase in convertible debt for the accretion of interest payable | $ | 900,000 | $ | — | ||||
Value of common stock to be issued for payment of accrued interest expense | $ | — | $ | 865,059 | ||||
Increase in other assets and deferred revenue | $ | — | $ | 488,370 | ||||
Value of common stock issued for payment of consulting fees | $ | 154,313 | $ | 24,691 | ||||
See accompanying notes to condensed consolidated financial statements.
4
GEOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instruction to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2010. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Form 10-K as of and for the years ended March 31, 2009 and 2008 as filed with the Securities and Exchange Commission on June 30, 2009.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The condensed consolidated financial statements as of and for the three and six months ended September 30, 2009 include the 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, Inc. (“IHP Marketing”), Breakthrough Engineered Nutrition, Inc. (“Breakthrough”), Breakthrough Marketing, Inc. (“Breakthrough Marketing”), Belcher Pharmaceuticals, Inc. (“Belcher”), Belcher Capital Corporation (“Belcher Capital”), Libi Labs, Inc. (“Libi Labs”) and its 51% owned LLC, American Antibiotics, which is accounted for given the consideration of the 49% minority interest, EZ-Med Company (“EZ-Med”), Dynamic Health Products, Inc. (“BOSS”) and its 40% owned corporation Acellis Biosciences, Inc. (“Acellis”), a Florida corporation. As of March 31, 2009, BOSS and Breakthrough are accounted for as discontinued operations. All transactions relating to significant intercompany balances and transactions have been eliminated in consolidation.
b. Industry Segments
In accordance with the provisions of “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. As of and for the three and six months ended September 30, 2009, and as of March 31, 2009, the Company had two continuing industry segments that accompany corporate: manufacturing and pharmaceutical. For the three and six months ended September 30, 2008, the Company had three industry segments that accompany corporate: manufacturing, distribution and pharmaceutical. Effective March 31, 2009, the Company discontinued its Distribution segment.
Each of the continuing business segments total revenues for the three and six months ended September 30, 2009 and 2008 are presented on the face of the statements of operations. The $41,141,397 of the continuing business segment total assets as of September 30, 2009 were comprised of $13,825,095 attributable to corporate, $12,179,440 attributable to manufacturing, and $15,136,862 attributable to pharmaceutical. The $44,276,300, of total assets as of March 31, 2009 were comprised of $16,079,021 attributable to corporate, $14,280,086 attributable to manufacturing, and $13,917,193 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.
5
d. Certificate of Deposit
Certificate of deposits amounting to $5,459,852 at September 30, 2009 earn interest at a rate of 3.16% per annum, matures on October 8, 2009, and has been assigned as collateral for the $5 million note payable to First Community Bank of America, due on October 6, 2009.
e. Accounts Receivable
Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances.
f. Inventories
Inventories, net, are stated at lower of cost or market. Cost is determined using the first-in, first-out method (“FIFO”).
g. 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) and is recorded within cost of goods sold for manufacturing and pharmaceutical machinery and equipment with the balance recorded within selling, general and administrative expenses. 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.
h. Intangible Assets
Intangible assets consist primarily of goodwill, loan costs, customer lists, a distributor agreement and intellectual property (including generic drug ANDAs). “Goodwill and Other Intangibles” requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. The Company has selected January 1 as the annual date to test these assets for impairment. Also required is that intangible assets with definite useful lives be amortized over their respective estimated useful lives, and reviewed for impairment in accordance with “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. The unamortized balance of the intellectual property, including generic drug ANDAs, as of September 30, 2009 and March 31, 2009 was $4,180,780 and $5,224,979, respectively. Based on the required analyses performed as of that annual test date, an impairment loss was required to be recorded for the three and six months ended September 30, 2009 of $435,000 as related to the Distribution segment intellectual property with an impairment loss of $615,617 required to be recorded for the fiscal year ended March 31, 2009 based on discontinuance of the Distribution segment.
For the three and six months ended September 30, 2009 and 2008, amortization expense associated with goodwill was $0. The unamortized balance of goodwill at September 30, and March 31, 2009 was $728,896. No impairment loss was required to be recorded for the three and six months ended September 30, 2009 with an impairment loss of $12,696,597 required to be recorded for the year ended March 31, 2009 as related to the March 31, 2009 discontinuance of the Distribution segment.
i. Impairment of Assets
In accordance with the “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. See Note h, Intangible Assets, above for the impairment losses recorded.
j. Income Taxes
The Company utilizes the guidance provided in the “Accounting for Income Taxes”. Under this liability method, 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 or benefit is the result of changes in deferred tax assets and liabilities.
6
k. Earnings (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 reconciliation between basic and fully diluted shares for the three and six months ended September 30, 2009 and 208 are as follows:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| September 30, 2009 | September 30, 2008 | September 30, 2009 | September 30, 2008 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Net income (loss) per share – basic: | ||||||||||||||||
Net income (loss) | $ | (4,419,472 | ) | $ | (4,161,639 | ) | $ | (8,348,831 | ) | $ | (6,654,742 | ) | ||||
Weighted average shares – basic | 19,319,598 | 16,396,092 | 19,275,142 | 15,544,306 | ||||||||||||
Net income (loss) per share – basic | $ | (0.23 | ) | $ | (0.25 | ) | $ | (0.43 | ) | $ | (0.43 | ) | ||||
Net income (loss) per share – diluted: | ||||||||||||||||
Net income (loss) | $ | (4,419,472 | ) | $ | (4,161,639 | ) | $ | (8,348,831 | ) | $ | (6,654,742 | ) | ||||
Preferred stock dividends | — | — | — | — | ||||||||||||
| $ | (4,419,472 | ) | $ | (4,161,639 | ) | $ | (8,348,831 | ) | $ | (6,654,742 | ) | |||||
Weighted average shares – basic | 19,319,598 | 16,396,092 | | 19,275,142 | | 15,544,306 | ||||||||||
Effect of convertible instruments prior to conversion | — | — | — | — | ||||||||||||
Effect of warrants prior to conversion | — | — | — | — | ||||||||||||
Effect of stock options | — | — | — | — | ||||||||||||
Weighted average shares – diluted | 19,319,598 | 16,396,092 | 19,275,142 | 15,544,306 | ||||||||||||
Net income (loss) per share – diluted | $ | (0.23 | ) | $ | (0.25 | ) | $ | (0.43 | ) | $ | (0.43 | ) | ||||
For the three months ended September 30, 2009, 4,587,156 shares issuable upon conversion of convertible instruments, warrants on 1,105,923 shares of common stock and 1,866,518 shares issuable upon exercise of stock options were not included in the computation of diluted earnings (loss) per share because their effects were anti-dilutive. For the three months ended September 30, 2008, 4,587,156 shares issuable upon conversion of convertible instruments, warrants on 1,105,923 shares of common stock and 1,866,518 shares issuable upon exercise of stock options were not included in the computation of diluted earnings (loss) per share because their effects were anti-dilutive.
For the six months ended September 30, 2009, 4,587,156 shares issuable upon conversion of convertible instruments, warrants on 1,105,923 shares of common stock and 1,866,518 shares issuable upon exercise of stock options were not included in the computation of diluted earnings (loss) per share because their effects were anti-dilutive. For the six months ended September 30, 2008, 4,587,156 shares issuable upon conversion of convertible instruments, warrants on 1,105,923 shares of common stock and 1,866,518 shares issuable upon exercise of stock options were not included in the computation of diluted earnings (loss) per share because their effects were anti-dilutive.
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l. 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 September 30, 2009 and March 31, 2009, as well as the reported amounts of revenues and expenses for the three and six months ended September 30, 2009 and 2008. 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 make 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.
m. 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 from continuing operations. At September 30, 2009, three customers individually exceeded 5% of our total consolidating accounts receivable, net from continuing operations, Supplement Synergy with 17.4%, Vetquinol with 10.1% and Intelligent Beauty with 7.5% of the total of consolidated trade accounts receivable, net from continuing operations. At March 31, 2009, two customers individually exceeded 5% of our total consolidating accounts receivable, net from continuing operations, Supplement Synergy with 12% and Vetquinol with 11.7% of the total of consolidated trade accounts receivable, net from continuing operations.
For the three months ended September 30, 2009, seven customers individually exceeded 5% of our total consolidated revenues from continuing operations which included Intelligent Beauty for 12.5%, Rausche-Bekke for 12.29%, Health4Wealth for 10.9%, Central Coast Nutrition for 8.6%, Sogeval for 7.1% and IDS for 5.8%, in relation to total consolidated revenues, and for the three months ended September 30, 2008, one customers individually exceeded 5% of our total consolidated revenues from continuing operations which included Central Coast for 5%, in relation to total consolidated revenues from continuing operations.
For the six months ended September 30, 2009, six customers individually exceeded 5% of our total consolidated revenues from continuing operations which included Intelligent Beauty for 15.1%, Central Coast Nutraceuticals for 12.5%, IDS for 11.9%, Health4Wealth for 7.1%, Sogeval for 6.3% and Rausche-Bekke for 5.1%, in relation to total consolidated revenues, and for the six months ended September 30, 2008, one customer individually exceeded 5% of our total consolidated revenues from continuing operations which included Jacks Distribution for 6.3%, in relation to total consolidated revenues from continuing operations.
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The Company has no concentration of customers within specific geographic areas outside the United States that would give rise to significant geographic credit risk.
n. Revenue and Cost of Goods Sold Recognition
In accordance with “Revenue Recognition in Financial Statements”, 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.
Cost of goods sold is recognized by the Company 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. Provisions for discounts and sales incentives to customers, and returns and other adjustments are provided for in the period the related sales are recorded. All shipping and handling costs invoiced to customers are included in revenues.
o. Advertising Costs
In accordance with “Reporting on Advertising Costs”, the Company charges advertising costs, including those for catalog sales and direct mail, to expense as incurred. Advertising expenses are included in selling, general and administrative expenses for continuing operations in the statements of operations and were $0 and $4,389 for the three months ended September 30, 2009 and 2008, respectively and were $0 and $6,338 for the six months ended September 30, 2009.
p. Research and Development Costs
Costs incurred to develop our generic pharmaceutical products are expensed as incurred and charged to research and development (“R&D”). R&D expenses for the three months ended September 30, 2009 and 2008 were $291,202 and $500,950 respectively and for the six months ended September 30, 2009 and 2008 were $667,319 and $1,151,901.
q. 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.
Short-term and Long-term Obligations: The fair value of the Company’s fixed-rate short-term and long-term obligations are estimated using the discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. At September 30, 2009 and March 31, 2009, the fair value of the Company’s short-term and long-term obligations approximated their carrying value.
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Credit Line Payable: The carrying amount of the Company’s credit line payable approximates fair market value since the interest rate on this instrument corresponds to market interest rates.
r. Reclassifications
Certain reclassifications have been made to the financial statements as of March 31, 2009 and for the three and six months ended September 30, 2008 to conform to the presentation as of and for the three and six months ended September 30, 2009.
s. Stock-Based Compensation
In accordance with “Share-Based Payments”, it requires the cost relating to share-based payment transactions in which an entity exchanges its equity instruments for goods and services from either employees or non-employees be recognized in the financial statements as the goods are received or when the services are rendered. That cost will be measured based on the fair value of the equity instrument issued and applies to all of our existing outstanding vested share-based payment stock option awards as well as any and all future awards. We elected to use the modified prospective transition as opposed to the modified retrospective transition method such that financial statements prior to adoption remain unchanged. The Black-Scholes option pricing model was applied to value the Company’s stock option compensation expense as was used by the Company previously in the pro forma disclosures.
t. Liquidity and Financial Condition
As of September 30, 2009, we had a year-to-date net loss of $8.3 million and negative working capital of $11.1 million, and an accumulated deficit of $65 million. The negative working capital of $11.1 million, includes $15.9 million of convertible debt which is primarily serviced in the Company’s common stock and not in cash. Although these factors alone may raise doubts as to our operating ability for the next twelve months, the Company has taken several actions to mitigate such risk. These actions include the reduction of employee headcounts, the discontinuance of the Distribution business segment and subsequent sale of certain Distribution segment assets.
The renegotiation of the Company’s $15 million convertible debt, the release and subordination of a certain amount of accounts receivable, inventory and the building which will allow the Company to raise cash for working capital and the Company has negotiated an elimination of their $3,500,000 note payable in Exchange for a $1,000,000 principal payment, in addition to the Company’s negotiations surrounding the sale of licensed pharmaceutical finished goods in the American Antibiotics Baltimore and Belcher Pharmaceutical facilities as a bridge to receiving the U.S. Food and Drug Administration (FDA) pending drug approval. The Company expects to begin recognizing these finished goods sales revenues sometime in the fourth fiscal quarter ending March 31, 2010. The Company has received correspondence in regards to one the Company’s pending drug approvals but the Company can not give a timeline at this time as to when the FDA will grant its drug approval.
NOTE 3 – ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consist of the following:
| September 30, 2009 | March 31, 2009 | |||||||
| (Unaudited) | ||||||||
Trade accounts receivable | $ | 3,029,584 | $ | 2,875,830 | ||||
Less allowance for uncollectible accounts | (1,232,078 | ) | (756,551 | ) | ||||
| $ | 1,797,506 | $ | 2,119,279 | |||||
As of September 30, 2009, the total accounts receivable balance of $3,029,584 includes $2,305,050 related to the Company’s manufacturing segment and $724,534 related to the Company’s pharmaceutical segment. As of March 31, 2009, the total accounts receivable balance of $2,875,830 includes $2,202,697 related to the Company’s manufacturing segment and $673,133 related to the Company’s pharmaceutical segment.
As of September 30, and March 31, 2009, the allowance for doubtful accounts balance consisted of the following:
| September 30, 2009 | March 31, 2009 | |||||||
| (Unaudited) | ||||||||
Beginning balance | $ | (756,551 | ) | $ | (756,551 | ) | ||
Provision for doubtful accounts | (475,527 | ) | (— | ) | ||||
Accounts written off | — | — | ||||||
Ending balance | $ | (1,232,078 | ) | $ | (756,551 | ) | ||
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.
NOTE 4 – INVENTORIES, NET
Inventories, net, consist of the following:
| September 30, 2009 | March 31, 2009 | |||||||
| (Unaudited) | ||||||||
Processed raw materials and packaging | $ | 4,035,178 | $ | 4,771,481 | ||||
Work in process | 448,880 | 695,101 | ||||||
Finished goods | 1,591,786 | 1,076,355 | ||||||
| $ | 6,075,844 | $ | 6,542,937 | |||||
Less reserve for obsolescence | (140,470 | ) | (5,000 | ) | ||||
| $ | 5,935,374 | $ | 6,537,937 | |||||
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As of September 30, 2009, the total inventory balance of $6,075,844 includes $3,844,760 related to the Company’s manufacturing segment and $2,231,084 related to the Company’s pharmaceutical segment. As of March 31, 2009, the total inventory balance of $6,542,937 includes $4,376,036 related to the Company’s manufacturing segment and $2,166,901 related to the Company’s pharmaceutical segment.
As of September 30, and March 31, 2009, the reserve for obsolete inventory consisted of the following:
| September 30, 2009 | March 31, 2009 | |||||||
Beginning balance | $ | (5,000 | ) | $ | (5,000 | ) | ||
Provision for doubtful inventory | (135,470 | ) | (— | ) | ||||
Obsolete inventory written off | — | — | ||||||
Ending balance | $ | (140,470 | ) | $ | (5,000 | ) | ||
NOTE 5 – DEFERRED COMPENSATION
The deferred compensation of $3,412,411 and $2,969,412 as of September 30 and March 31, 2009, respectively, relates to corporate and is amortized over its three-year life, the length of the requisite service period. The deferred compensation asset relates to shares of 3-year restricted common stock issued pursuant to the 2005-2009 Compensation Incentive Plan effective beginning with the fiscal year ended March 31, 2006. The Plan documents the incentive plan and related awards for Plan achievements for the Chairman of the Board of Directors and the Company’s executive officers, which include the Chief Executive Officer, the President, the Senior Vice President/Chief Financial Officer and the Vice President/General Counsel as well as shares that are awarded by the Compensation Committee, an independent subcommittee of the Company’s Board of Directors, that are a portion of the Officers’ salaries. The asset award was recorded as of June 30, 2009 based on the number of shares awarded and the discounted fair market value of the restricted stock the date of the award and is amortized over its three-year life, the length of the requisite service period.
NOTE 6 – INCOME TAXES
Income taxes for the six months ended September 30, 2009 and 2008 differ from the amounts computed by applying the effective income tax rates to income before income taxes as a result of the following:
| September 30, 2009 | September 30, 2008 | |||||||
| (Unaudited) | (Unaudited) | |||||||
Computed tax expense (benefit) at the statutory rate (37.63%) | $ | (2,826,800 | ) | $ | (2,516,600 | ) | ||
Increase (decrease) in taxes resulting from: | ||||||||
Effect of permanent differences: | ||||||||
Non deductible | 344,000 | 9,500 | ||||||
Other, net | 1,588,289 | 417,957 | ||||||
Change in valuation allowance | 894,511 | 921,243 | ||||||
Income tax (benefit) expense | $ | 0 | $ | (1,167,900 | ) | |||
Temporary differences that give rise to deferred tax assets and liabilities are as follows: | ||||||||
Deferred tax assets: | ||||||||
Bad debts | $ | 463,631 | $ | 222,065 | ||||
Inventories | 52,859 | 37,693 | ||||||
Accrued vacation | 63,677 | 81,895 | ||||||
Deposits | 382,151 | 117,573 | ||||||
Deferred rent | 163,428 | |||||||
Net operating loss carryforwards | 6,524,844 | 6,274,500 | ||||||
Tax credit carryforward | 102,847 | |||||||
Stock option cancellation and restricted stock | 2,067,362 | 1,065,300 | ||||||
| $ | 9,657,371 | $ | 7,962,454 | |||||
Valuation allowance | (6,106,511 | ) | (2,979,154 | ) | ||||
Deferred tax asset | $ | 3,550,860 | $ | 4,983,300 | ||||
Deferred tax liabilities: | ||||||||
Fixed and intangible asset basis differences | $ | 441,636 | $ | (85,500 | ) | |||
Inventory capitalization | — | (90,900 | ) | |||||
| $ | 441,636 | $ | (176,400 | ) | ||||
Net deferred tax asset (liability) recorded | $ | 3,992,496 | $ | 4,806,900 | ||||
Less: Current net deferred tax asset | $ | 216,887 | ||||||
Net non-current deferred tax asset | $ | 3,775,609 | $ | 4,806,900 | ||||
At September 30, 2009 and 2008, the Company has a net operating loss carryforward of approximately $20,370,000 and $18,087,000, respectively, to offset future taxable income. The tax net operating loss carryforwards begin to expire in 2021.
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At September 30, 2009 and 2008, the Company has a net operating loss carryforward of approximately $20,129,265 and $13,682,000, respectively, to offset future taxable income. The tax net operating loss carryforwards begin to expire in 2021.
NOTE 7 – CONVERTIBLE DEBT AND PREFERRED STOCK
Effective October 15, 2009, GeoPharma, Inc. (the “Company”) consummated its previously reported Second Amended and Restated Note Purchase Agreement (the “Second Restated Whitebox Agreement”) with Whitebox Pharmaceutical Growth Fund, Ltd. (“Whitebox”), pursuant to which the Company has issued two Second Amended and Restated 12% Secured Convertible Promissory Notes, one in the principal amount of $5,000,000 and one in the principal amount of $10,000,000 to Whitebox (collectively, the “Second Restated Notes”). The total principal amount due to Whitebox immediately after the closing is the same as the principal amount due to Whitebox immediately prior to the closing with the exception that the $900,000 interest due accreted to the convertible debt. The Second Restated Notes replace and supersede all prior promissory notes issued to Whitebox, and the Second Restated Whitebox Agreement replaces and supersedes all prior note purchase agreements with Whitebox.
Among other things, the Second Restated Whitebox Agreement and Second Restated Notes amend the prior Whitebox agreements and notes as follows:
| • | The Second Restated Whitebox Agreement removes all financial covenants previously imposed on the Company; |
| • | The Second Restated Whitebox Agreement allows the Company to attempt to arrange a working capital loan secured by the Company’s receivables and inventory, and further provides that if the Company is able to do so, Whitebox will subordinate its existing liens and security interests on the Company’s receivables and inventory on a dollar-for-dollar basis up to $2,000,000, provided that the working capital lender and Whitebox can mutually agree upon the terms of a subordination agreement; |
| • | The Second Restated Whitebox Agreement further provides that for every $1,000,000 of Second Restated Notes that are paid off by the Company or otherwise converted into equity by Whitebox, the Company will be permitted to incur an additional $500,000 of additional working capital; |
| • | The Second Restated Whitebox Agreement allows Whitebox to exchange up to $250,000 of principal of the Second Restated Notes per month into shares of the Company’s common stock based on the closing price of the common stock at such time (the “Debt to Equity Exchange”), and provides that any amounts so exchanged will reduce the amount of the Partial Balloon Payment (as defined below) due by the Company to Whitebox on July 1, 2012 on a dollar-for-dollar basis; |
| • | The Second Restated Whitebox Agreement requires that the Company transfer its real property located at 6950 Bryan Dairy Road, Largo, Florida 33777 to Whitebox by September 1, 2009, and provides that if the Company does so (1) the outstanding principal amount of the $10,000,000 Second Restated Note will be reduced by $2,500,000 and (2) the Company will lease the property back from Whitebox pursuant to a lease to be entered into at such time; |
| • | The Second Restated Notes require that the Company: |
| • | make monthly principal payments of $100,000, collectively, in cash, commencing on January 1, 2010 (and the first day of each month thereafter) until Second Restated Notes are repaid; and |
| • | repay $2,500,000 of principal, collectively (the “Partial Balloon Payment”), in cash, on prior to July 1, 2012, provided that the Partial Balloon Payment will be reduced as a result of any Debt to Equity Exchanges, any principal being converted into equity and any prepayments of principal; |
| • | While the interest rate remains unchanged at 12%, the Second Restated Notes provide that all remaining interest payments due in 2009 will accrete to principal and, commencing January 1, 2010, one-third of the interest will be payable in cash and the remaining two-thirds will be payable, at the option of Whitebox, by accreting such amount to principal or through the payment of shares of common stock based on 95% of the trading price of the stock at such time; |
| • | The Second Restated Notes reduce the conversion price of the notes (i.e., the price at which the notes can be converted into the Company’s common stock) from $4.46 per share to $0.75 per share with respect to the $5,000,000 Second Restated Note and $1.50 per share with respect to the $10,000,000 Second Restated Note; and |
| • | The Second Restated Notes provide that all remaining outstanding principal is due in cash on October 31, 2013. |
In connection with the Second Restated Whitebox Agreement, the Company entered into and consummated an agreement with the holders of all of its outstanding 3,975 shares of series B convertible preferred stock (the “Series B Preferred Stock”), pursuant to which such holders agreed to exchange all of such shares into a total of 3,975 shares of series C convertible preferred stock (the “Series C Preferred Stock”), pursuant to a Securities Exchange Agreement dated August 5, 2009 (the “Exchange Agreement”). In connection therewith, on August 5, 2009, the Company filed an amendment to its articles of incorporation with the State of Florida to create the Series C Preferred Stock (the “Certificate of Designation”). Among others, the Series C Preferred Stock differs from the Series B Preferred Stock as follows:
| • | Immediately prior to the closing of the Exchange Agreement, the Series B Preferred Stock was paying an annual dividend of 14%. The Series C Preferred Stock pays an annual dividend of 10%. |
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| • | The Series B Preferred Stock dividend was paid quarterly in shares of common stock if the Company met certain equity conditions at that time, and if the Company did not meet those equity conditions, in cash, unless funds were not legally available to pay such dividend in cash, in which event the holder could elect (i) to waive the equity conditions and take the dividend payment in shares of stock, (ii) allow the dividend accrue to the next quarterly dividend payment or (iii) allow the dividend to be accreted to, and increase, the outstanding stated value of the Series B Preferred Stock. In contrast, the Series C Preferred Stock provides that the quarterly dividends automatically will be accreted to, and increase, the outstanding stated value of the Series C Preferred Stock until such time as the Whitebox Second Restated Notes have been repaid in full, at which time all future dividends are required to be paid in cash provided that funds are legally available for the payment of such dividends (and if funds are not so available, the dividends will again be accreted to, and increase, the outstanding stated value). |
| • | The Series B Preferred Stock was convertible into common stock at any time at the option of the holders of such shares. The Series B Preferred Stock cannot be converted by its holders until the earliest of (i) July 1, 2011, (ii) the date that the principal amount of the Whitebox Restated Notes is less than $5,000,000 and (iii) the trading price of the Company’s common stock is equal to or greater than $2 per share. |
| • | The conversion price for the Series B Preferred Stock was $6 per share of common stock. The conversion price for the Series C Preferred Stock is $1.50 per share of common stock. |
| • | The Series C Preferred Stock requires that the Company redeem $200,000 worth of Series C Preferred Stock, pro rata among all holders of such stock, on a monthly basis commencing immediately after the Whitebox Second Restated Notes have been repaid in full, and further requires the Company to redeem the balance of the Series C Preferred Stock on October 1, 2014. The Series B Preferred Stock contained no such provisions. |
The Company believes that issuance of the Second Restated Notes and the shares of common stock issuable thereunder and under the Series C Preferred Stock are exempt pursuant to Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The Company believes that exchange of the Series C Preferred Stock for the previously issued Series B Preferred Stock is exempt pursuant to Sections 3(a)(9) and 18(b)(4)(C) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made only to accredited investors and the transfer of the Second Restated Notes has been restricted in accordance with the requirements of the Securities Act. The Company received written representations from the holders thereof regarding, among other things, their accredited status and investment intent.
NOTE 8 – DISCONTINUED OPERATIONS AND SALE OF CERTAIN ASSETS
During year ended March 31, 2009, the Company adopted a plan to discontinue the Distribution segment which includes Breakthrough and BOSS. The decision further was to hold BOSS out for sale based on decreasing margins and decreasing sales and existing cash flows thus leading the segment to operate unprofitably. Additionally the Company was unable to secure credit line financing which enabled the Company to operate previously.
Presented below are the discontinued operations BOSS at March 31, 2009 and the net liabilities of the discontinued operations of Breakthrough as of September 30 and March 31, 2009. BOSS is excluded from September 30, 2009 as certain assets were sold July 1, 2009.
| September 30, 2009 | March 31, 2009 | |||||
Balance Sheet: | ||||||
Assets to be disposed of: | ||||||
Trade accounts receivable, net | $ | 8,024 | $ | 928,236 | ||
Accounts receivable, other, net | 110,128 | 511,082 | ||||
Inventory, net | 509,672 | 3,108,744 | ||||
Prepaid expenses | — | 212,038 | ||||
Total current assets to be disposed of | $ | 627,824 | $ | 4,760,100 | ||
Property, plant and equipment, net | 13,004 | 618,534 | ||||
Other assets | — | 649,188 | ||||
Total assets to be disposed of | $ | 640,828 | $ | 6,027,822 | ||
Liabilities to be disposed of: | ||||||
Accounts payable | $ | 410,269 | $ | 3,744,148 | ||
Credit line payable | — | 2,182,000 | ||||
Accrued expenses and other liabilities | 347,458 | 1,826,903 | ||||
Total liabilities to be disposed of | $ | 757,727 | $ | 7,753,051 | ||
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| For the three months ended September 30, | For the six months ended September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
Income Statement: | ||||||||||||||||
Loss from operations of the discontinued component | $ | (1,009,508 | ) | $ | (1,669,344 | ) | $ | (2,030,492 | ) | $ | (1,554,265 | ) | ||||
Income tax benefit | — | — | — | — | ||||||||||||
Net loss on discontinued operation | $ | (1,009,508 | ) | $ | (1,669,344 | ) | $ | (2,030,492 | ) | $ | (1,554,265 | ) | ||||
Net income/(loss) | $ | (4,419,472 | ) | $ | (4,161,639 | ) | $ | (8,348,831 | ) | $ | (6,654,742 | ) | ||||
On July 10, 2009, the Company completed the July 1, 2009 effective date of the sale of a substantial portion of the inventory, accounts receivable and other assets of the BOSS division of its subsidiary, Dynamic Health Products, Inc. (“BOSS”), to USA Sports, LLC (“USA”). The total sale price was $2,223,351 and at the closing out of the total sale proceeds, Wachovia Bank, National Association (“Wachovia”) received a cash payment in the amount of $1,850,000 towards the settlement of BOSS’s outstanding obligations to it. BOSS will continue to pay-down the balance of its obligations to Wachovia through the orderly liquidation of its remaining assets. The Company recorded a loss on the sale of those assets of $661,424. This sale is reflected above and in the financial statements as of and for the three and six months ended September 30, 2009. The Company has not yet finalized its plan as to the sale or conversion of the remaining Distribution segment assets and therefore will continue to present the segment relating to breakthrough as discontinued until such time that the plan for such sale or conversion is adopted as finalized.
NOTE 9 – RELATED PARTY
Mihir Taneja, the Company’s CEO, Jugal Taneja, the Company’s Chairman of the Board of Directors, together with an affiliate of both the CEO and Chairman, loaned the Company a total of $1.1 million. Interest on the note is at the rate of 10% per annum. Collateral for debt is the Company’s 51% interest in American Antibiotics. Of the $1.1 million outstanding, should the Company not be able to repay $670,000 by March 31, 2010, the 51% interest in American Antibiotics will revert to the affiliate of the Chairman. Proceeds were used for working capital.
NOTE 10 – LITIGATION
American Antibiotics, LLC, a majority owned subsidiary of GeoPharma, has reached agreement with Consolidated Pharmaceutical Group, Inc. (“CPG”), the directors of CPG and two other individuals acting on behalf of CPG (collectively, “CPG Parties”) and entered into a Settlement and Mutual Release Agreement (“Settlement Agreement”) and other documents (collectively, hereinafter referred to as “Settlement Documents”) on September 4, 2009 settling all claims against the other.
The litigation arose from and relates to certain agreements entered into between American Antibiotics and CPG, whereby American Antibiotics acquired certain business assets of CPG for the production of Beta-Lactam Antibiotics as well as all CPG’s rights, title and interest in various pharmaceutical Abbreviated New Drug Applications (“ANDAs”) associated with a Baltimore, Maryland manufacturing facility owned and formerly operated by CPG dedicated for the production of Beta-Lactam Antibiotics (“Facility”) under an ANDA Sale and Purchase Agreement (“ASPA”) dated February 7, 2005, and entered into a lease for the Baltimore Facility dated July 19, 2005 (the “Lease”).
The September 2006 lawsuit brought by the Company alleged that CPG breached the ASPA & Lease with certain misrepresentations related to the ANDA’s and failed to perform all the required improvements and modifications to the Facility under the Lease. Consolidated with American Antibiotic’s lawsuit was a separate action filed against it by CPG, alleging that American Antibiotics failed to pay rent due and owing under the Lease.
Under the terms of settlement: the AA Parties and the CPG Parties (collectively, the “Parties”) agreed to execute a new three (3) year lease for the Facility with renewable options. The new lease also confers upon American Antibiotics a three (3) year option to purchase the Facility, a 65,600 square foot manufacturing plant consisting of an approximately 40,000 square foot non-sterile area and an approximately 25,600 square foot sterile area for injectable Beta-Lactam antibiotics, and the approximately 4.4 acres on which the Facility is located.
All prior agreements, financial obligations, understandings or other commitments between the Parties were terminated, superseded and extinguished with the execution of the Settlement Documents. The Company filed a Form-8K with all required exhibits on September 11, 2009.
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On May 1, 2006 Esther Krausz and Sharei Yeshua (“Note Holders”) filed an action against Dynamic Health Products, Inc. in the Circuit Court of Broward County, Florida (Index No. 06-6187) alleging Dynamic Health Products, Inc. defaulted on note payment obligations. The face amount of the note alleged to be held by Ester Krausz totals $280,000, the face amount of the note alleged to be held by Sharei Yeshua totals $220,000. The notes contain an interest rate of 8% per annum. Preliminary discovery has been conducted. Dynamic Health Products, Inc. filed a third party action against the agent for the Note Holders seeking indemnity and that action was settled in May 2008. The Note Holders have filed a request for trial with the court but no date has been set. Dynamic Health Products, Inc. is investigating whether the purported agent made any payments to the Note Holders on behalf of Dynamic Health Products, Inc. without disclosing those payments. To date, Plaintiffs have not provided copies of the notes to Dynamic Health Products, Inc. or made a specific monetary demand. Dynamic Health Products, Inc. intends to vigorously defend itself in this action.
On April 4, 2008, Vital Pharmaceuticals, Inc. vs. Bob O’Leary Health Food Distribution Co., Inc., Case No. 08-14868, in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. Vital Pharmaceuticals, Inc. (“VPX”) sued Boss in April, 2008 for $579,274.65, plus interest, attorney’s fees, and costs. Boss counterclaimed for, amongst other things, breach of its distributorship agreement with VPX and false representations. On June 17, 2009, the Court, in a bench pronouncement not yet memorialized in a written order, ruled that: (1) Boss is granted leave to amend its Counterclaim to assert additional claims against VPX, including amongst other things for Breach of Fiduciary Duty and Unfair and Deceptive Trade Practices; and (2) VPX sold to Boss $472,274.65 in products received; and (3) VPX is prohibited from receiving that sum (if ever) until such time as Boss’s Counterclaims and Affirmative Defenses are resolved. Boss intends to continue to prosecute its Counterclaim and Affirmative Defenses and anticipates a favorable resolution to the case. The Court’s written ruling may differ from the above recitation.
From time to time the Company is subject to litigation incidental to its 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 September 30, 2009 and March 31, 2009 should have a material adverse impact on its financial condition or results of operations.
NOTE 11 – SUBSEQUENT EVENTS
On October 6, 2009, the $5 million note payable to First Community Bank of America became due and was paid in full. The source of the proceeds used for payment was the $5 million certificate of deposit that was collateralizing the note.
Effective October 15, GeoPharma, Inc. (the “Company”) consummated its previously reported Second Amended and Restated Note Purchase Agreement (the “Second Restated Whitebox Agreement”) with Whitebox Pharmaceutical Growth Fund, Ltd. (“Whitebox”), pursuant to which the Company has issued two Second Amended and Restated 12% Secured Convertible Promissory Notes, one in the principal amount of $5,000,000 and one in the principal amount of $10,000,000 to Whitebox (collectively, the “Second Restated Notes”). The total principal amount due to Whitebox immediately after the closing is the same as the principal amount due to Whitebox immediately prior to the closing with the exception that the $900,000 interest due will accrete to the convertible debt. The Second Restated Notes replace and supersede all prior promissory notes issued to Whitebox, and the Second Restated Whitebox Agreement replaces and supersedes all prior note purchase agreements with Whitebox.
Among other things, the Second Restated Whitebox Agreement and Second Restated Notes amend the prior Whitebox agreements and notes as follows:
| • | The Second Restated Whitebox Agreement removes all financial covenants previously imposed on the Company; |
| • | The Second Restated Whitebox Agreement allows the Company to attempt to arrange a working capital loan secured by the Company’s receivables and inventory, and further provides that if the Company is able to do so, Whitebox will subordinate its existing liens and security interests on the Company’s receivables and inventory on a dollar-for-dollar basis up to $2,000,000, provided that the working capital lender and Whitebox can mutually agree upon the terms of a subordination agreement; |
| • | The Second Restated Whitebox Agreement further provides that for every $1,000,000 of Second Restated Notes that are paid off by the Company or otherwise converted into equity by Whitebox, the Company will be permitted to incur an additional $500,000 of additional working capital; |
| • | The Second Restated Whitebox Agreement allows Whitebox to exchange up to $250,000 of principal of the Second Restated Notes per month into shares of the Company’s common stock based on the closing price of the common stock at such time (the “Debt to Equity Exchange”), and provides that any amounts so exchanged will reduce the amount of the Partial Balloon Payment (as defined below) due by the Company to Whitebox on July 1, 2012 on a dollar-for-dollar basis; |
| • | The Second Restated Whitebox Agreement requires that the Company transfer its real property located at 6950 Bryan Dairy Road, Largo, Florida 33777 to Whitebox by September 1, 2009, and provides that if the Company does so (1) the outstanding principal amount of the $10,000,000 Second Restated Note will be reduced by $2,500,000 and (2) the Company will lease the property back from Whitebox pursuant to a lease to be entered into at such time; |
| • | The Second Restated Notes require that the Company: |
| • | make monthly principal payments of $100,000, collectively, in cash, commencing on January 1, 2010 (and the first day of each month thereafter) until Second Restated Notes are repaid; and |
| • | repay $2,500,000 of principal, collectively (the “Partial Balloon Payment”), in cash, on prior to July 1, 2012, provided that the Partial Balloon Payment will be reduced as a result of any Debt to Equity Exchanges, any principal being converted into equity and any prepayments of principal; |
| • | While the interest rate remains unchanged at 12%, the Second Restated Notes provide that all remaining interest payments due in 2009 will accrete to principal and, commencing January 1, 2010, one-third of the interest will be payable in cash and the remaining two-thirds will be payable, at the option of Whitebox, by accreting such amount to principal or through the payment of shares of common stock based on 95% of the trading price of the stock at such time; |
| • | The Second Restated Notes reduce the conversion price of the notes (i.e., the price at which the notes can be converted into the Company’s common stock) from $4.46 per share to $0.75 per share with respect to the $5,000,000 Second Restated Note and $1.50 per share with respect to the $10,000,000 Second Restated Note; and |
| • | The Second Restated Notes provide that all remaining outstanding principal is due in cash on October 31, 2013. |
In connection with the Second Restated Whitebox Agreement, the Company entered into and consummated an agreement with the holders of all of its outstanding 3,975 shares of series B convertible preferred stock (the “Series B Preferred Stock”), pursuant to which such holders agreed to exchange all of such shares into a total of 3,975 shares of series C convertible preferred stock (the “Series C Preferred Stock”), pursuant to a Securities Exchange Agreement dated August 5, 2009 (the “Exchange Agreement”). In connection therewith, on August 5, 2009, the Company filed an amendment to its articles of incorporation with the State of Florida to create the Series C Preferred Stock (the “Certificate of Designation”). Among others, the Series C Preferred Stock differs from the Series B Preferred Stock as follows:
| • | Immediately prior to the closing of the Exchange Agreement, the Series B Preferred Stock was paying an annual dividend of 14%. The Series C Preferred Stock pays an annual dividend of 10%. |
| • | The Series B Preferred Stock dividend was paid quarterly in shares of common stock if the Company met certain equity conditions at that time, and if the Company did not meet those equity conditions, in cash, unless funds were not legally available to pay such dividend in cash, in which event the holder could elect (i) to waive the equity conditions and take the dividend payment in shares of stock, (ii) allow the dividend accrue to the next quarterly dividend payment or (iii) allow the dividend to be accreted to, and increase, the outstanding stated value of the Series B Preferred Stock. In contrast, the Series C Preferred Stock provides that the quarterly dividends automatically will be accreted to, and increase, the outstanding stated value of the Series C Preferred Stock until such time as the Whitebox Second Restated Notes have been repaid in full, at which time all future dividends are required to be paid in cash provided that funds are legally available for the payment of such dividends (and if funds are not so available, the dividends will again be accreted to, and increase, the outstanding stated value). |
| • | The Series B Preferred Stock was convertible into common stock at any time at the option of the holders of such shares. The Series B Preferred Stock cannot be converted by its holders until the earliest of (i) July 1, 2011, (ii) the date that the principal amount of the Whitebox Restated Notes is less than $5,000,000 and (iii) the trading price of the Company’s common stock is equal to or greater than $2 per share. |
| • | The conversion price for the Series B Preferred Stock was $6 per share of common stock. The conversion price for the Series C Preferred Stock is $1.50 per share of common stock. |
| • | The Series C Preferred Stock requires that the Company redeem $200,000 worth of Series C Preferred Stock, pro rata among all holders of such stock, on a monthly basis commencing immediately after the Whitebox Second Restated Notes have been repaid in full, and further requires the Company to redeem the balance of the Series C Preferred Stock on October 1, 2014. The Series B Preferred Stock contained no such provisions. |
The Company believes that issuance of the Second Restated Notes and the shares of common stock issuable thereunder and under the Series C Preferred Stock are exempt pursuant to Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The Company believes that exchange of the Series C Preferred Stock for the previously issued Series B Preferred Stock is exempt pursuant to Sections 3(a)(9) and 18(b)(4)(C) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made only to accredited investors and the transfer of the Second Restated Notes has been restricted in accordance with the requirements of the Securities Act. The Company received written representations from the holders thereof regarding, among other things, their accredited status and investment intent.
| Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
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 nutraceuticals and cosmeticeuticals, sports nutrition products, pharmaceutical and generic drugs, and prescription and non-prescription products. We also derive revenues from the distribution of our branded product lines as well as from distributing others’ product lines.
Cost of goods sold is comprised of direct manufacturing and manufacturing and distribution material product costs, 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.
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, non-manufacturing and non-pharmaceutical equipment and machinery depreciation and amortization, stock
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Interest expense, net, consists of interest expense associated with credit lines, convertible debt, borrowings to finance capital equipment expenditures and other working capital needs and is partially offset by interest income earned on our funds held at banks.
Effective March 31, 2009, we discontinued our distribution segment operations which included Breakthrough Engineered Nutrition and BOSS. For the three and six months ended September 30, 2009 and 2008, the following amounts, which are included in our consolidated statement of operations as discontinued operations, were attributable to our Distribution segment:
| • | Distribution segment revenue for the three months ended September 30, 2009 and 2008 of approximately zero and $10.9 million, respectively; |
| • | Distribution segment gross profits for the three months ended September 30, 2009 and 2008 of approximately zero and $1.7 million, respectively; |
| • | Distribution segment selling, general and administrative expenses for the three months ended 2009 and 2008 of approximately $1 million which includes a loss on the sale of certain assets of $661,000 and $3.4 million respectively. |
| • | Distribution segment revenue for the six months ended September 30, 2009 and 2008 of approximately $4.7million and $24.5 million, respectively |
| • | Distribution segment gross profits for the six months ended September 30, 2009 and 2008 of approximately $614,000 and $4.7 million, respectively; |
| • | Distribution segment selling, general and administrative expenses for the six months ended 2009 and 2008 of approximately $2.7 million which includes a loss on the sale of certain assets of $661,000 and $6.2 million respectively. |
Results of Operations
Three Months Ended September 30, 2009, Compared to Three Months Ended September 30, 2008
Our analysis of the three months ended September 30, 2009, as compared to the three months ended September 30, 2008, excludes the results of discontinued operations of the Distribution segment, discontinued on March 31, 2009.
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Revenues
Our total revenues decreased approximately $1.7 million, or 33.1%, to approximately $3.4 million for the three months ended September 30, 2009, from approximately $5.1 million for the three months ended September 30, 2008.
Manufacturing revenues decreased approximately $1.6 million, or 34.2%, to approximately $3.0 million for the three months ended September 30, 2009, as compared to approximately $4.6 million for the three months ended September 30, 2008. During the three months ended September 30, 2009, we experienced a decrease in sales volume driven by the significant weakening of demand for the products that we manufacture for our customers, due to the global economic downturn, which has negatively impacted end user demand for the products we produce in addition to the change in Company policy related to accepting manufacturing orders based on more stringent customer credit policies and related gross profits and margins. Manufacturing capacities and capabilities continue to be increased as we continue to enhance our existing core manufacturing equipment and standard operating procedures. We believe the reduction in demand for the products we produce could continue for some time. Consequently, based on continued economic uncertainty, we believe that it is possible that our manufacturing revenues may decline further in the near future.
Pharmaceutical revenues were approximately $404,000 for the three months ended September 30, 2009 as compared to approximately $534,000 for the previous three month period ended September 30, 2008. Pharmaceutical revenues were comprised of sales of Vetprofen ™, the Company’s brand of Carprofen, which was approved by the FDA during November 2007. Our Carprofen is sold in three different strengths: 25 mg, 75 mg and 100 mg. Of the total pharmaceutical revenues for the three months ended September 30, 2009, sales were comprised of 496 cases of 25 mg, zero cases of 75 mg and 250 cases of 100 mg of Carprofen. Of the total pharmaceutical revenues for the three months ended September 30, 2008, sales were comprised of 351 cases of 25 mg, 451 cases of 75 mg and 712 cases of 100 mg of Carprofen
Gross Profit
Our total gross profit decreased approximately $664,000 or 52.5%, to approximately $600,000 for the three months ended September 30, 2009, as compared to approximately $1.3 million for the three months ended September 30, 2008. Total gross margins decreased to 17.6% for the three months ended September 30, 2009 from 24.8% for the three months ended September 30, 2008.
Manufacturing gross profit decreased to approximately $785,000 for September 30, 2009 from $1.6 million in September 2008 with manufacturing gross margin decreasing to 26.1% for the three months ended September 30, 2009 from 34.1% for the three months ended September 30, 2008. Gross profits and margins decreased based on a decline in more profitable orders during what is typically a slower quarter as exacerbated by tight economic times. The Company has continued to tighten overhead costs by reducing its direct labor head count during the month of September 2009 which was is in line with our planned improvements surrounding enhanced standard operating and manufacturing procedures in all of our manufacturing plants. We expect that these improvements will continue to increase our visibility in the marketplaces that we compete in for additional business for the upcoming fiscal year.
Pharmaceutical gross profit deficit decreased approximately $106,000, or 36.4%, to a gross profit deficit of approximately ($184,000) for the three months ended September 30, 2009, as compared to approximately ($290,000) in gross profit deficit for this business segment for the three months ended September 30, 2008. This was based primarily on the Cephalasporin and Beta-Lactam facilities that have no revenue streams but have costs associated with production and laboratory direct labor costs. The Largo, Florida generic drug plant has continued manufacturing and shipping Vetprofen ™, its branded generic Carprofen, which has assisted in offsetting some of the costs associated with other production and laboratory direct costs related to the pharmaceutical segment. The Largo, Florida Cephalasporin and generic drug plants incurred approximately $317,634 of costs with the Baltimore, Maryland Beta-Lactam facility having incurred approximately $122,767 of costs with revenue offsets of approximately $404,000. The drug revenues derived were generated from our generic drug plant in Largo, Florida. We are awaiting FDA facility approval of both the Baltimore, Maryland Beta-Lactam and the Largo, Florida Cephalosporin drug facility plants and we estimate and anticipate that we will begin to derive revenues during the fourth quarter of the fiscal year ending March 31, 2010.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses consist of advertising and promotional expenses; stock 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 non- manufacturing and non-pharmaceutical machinery and equipment depreciation and amortization expenses. Selling, general and administrative expenses, inclusive of stock compensation and depreciation and amortization expenses, decreased approximately $52,000, or 1.2%, to approximately $4.2 million for the three months ended September 30, 2009, as compared to approximately $4.3 million for the three months ended September 30, 2008. A decrease of approximately $52,000 was due to the increase approximately $341,000 increase in the stock compensation expense directly related to the issuance of 3-year restricted stock awards; an increase in accounting and legal fees of $97,000; an increase in bad debts of $50,000; an increase in rent and utilities of $122,000 all of which was offset by a decrease of $210,000 in research and development expenses, a decrease of approximately $196,000 in salaries and consulting fees; a decrease of approximately $27,000 in travel related expenses, a decrease in office expense of $23,000, and a decrease in depreciation of $125,000. As a percentage of sales, selling, general and administrative expenses increased to 125.4% for the three months ended September 30, 2009, from 84.9% for the three months ended September 30, 2008.
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Operating Income (Loss)
Operating loss from continuing operations was approximately $3.3 million, or 98% of revenues for the three months ended September 30, 2009, compared to an operating loss from continuing operations of approximately $2.4 million, or 46.2% of revenues for the three months ended September 30, 2008. Although we have instituted cost reduction initiatives which include the reduction of production and office head counts, the continued economic uncertainty and potential further decline in our revenues could cause us to operate in an operating loss position in the near future.
Other Income (Expense), Net
Other income (expense), net was approximately $496,000 for the three months ended September 30, 2009, compared to approximately $(422,000) for the three months ended September 30, 2008. Interest income (expense), net, was approximately $(544,000) for the three months ended September 30, 2009, as compared to approximately $(423,000) for the three months ended September 30, 2008. The increase in interest expense was primarily attributable to interest expense associated with our convertible debt in addition to our short-term obligations issued during the current fiscal year. For the three months ended September 30, 2009, other income (expense), net, of approximately $1 million related to the legal settlement of the American Antibiotics lawsuits whereby the Company was granted debt forgiveness related to accrued rent and interest.
Six Months Ended September 30, 2009, Compared to Six Months Ended September 30, 2008
Our analysis of the six months ended September 30, 2009, as compared to the six months ended September 30, 2008, excludes the results of discontinued operations of the Distribution segment, discontinued on March 31, 2009.
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Revenues
Our total revenues decreased approximately $2.9 million, or 25.3%, to approximately $8.6 million for the six months ended September 30, 2009, from approximately $11.5 million for the six months ended September 30, 2008.
Manufacturing revenues decreased approximately $3.2 million, or 29.8%, to approximately $7.6 million for the six months ended September 30, 2009, as compared to approximately $10.9 million for the six months ended September 30, 2008. During the six months ended September 30, 2009, we experienced a decrease in sales volume driven by the significant weakening of demand for the products that we manufacture for our customers, due to the global economic downturn, which has negatively impacted end user demand for the products we produce in addition to the change in Company policy related to accepting manufacturing orders based on more stringent customer credit policies and related gross profits and margins. Manufacturing capacities and capabilities continue to be increased as we continue to enhance our existing core manufacturing equipment and standard operating procedures. We believe the reduction in demand for the products we produce could continue for some time. Consequently, based on continued economic uncertainty, we believe that it is possible that our manufacturing revenues may decline further in the near future.
Pharmaceutical revenues were approximately $987,000 for the six months ended September 30, 2009 as compared to approximately $658,000 for the previous six month period ended September 30, 2008. Pharmaceutical revenues were comprised of sales of Vetprofen ™ , the Company’s brand of Carprofen, which was approved by the FDA during November 2007. Our Carprofen is sold in three different strengths: 25 mg, 75 mg and 100 mg. Of the total pharmaceutical revenues for the six months ended September 30, 2009, sales were comprised of 989 cases of 25 mg, 502 cases of 75 mg and 500 cases of 100 mg of Carprofen. Of the total pharmaceutical revenues for the three months ended September 30, 2008, sales were comprised of 383 cases of 25 mg, 638 cases of 75 mg and 768 cases of 100 mg of Carprofen
Gross Profit
Our total gross profit decreased approximately $265,000 or 10.5%, to approximately $2.2 million for the six months ended September 30, 2009, as compared to approximately $2.5 million for the six months ended September 30, 2008. Total gross margins improved to 26.1% for the six months ended September 30, 2009 as compared to 21.8% for the same 2008 period.
Manufacturing gross profit decreased to approximately $2.5 million for September 30, 2009 from $3.1 million in September 2008 with manufacturing gross margin increasing to 32.7% for the six months ended September 30, 2009 from 28.6% for the six months ended September 30, 2008. Although gross profits decreased gross margins increased based on focusing on more profitable orders during what is typically a slower quarter as exacerbated by tight economic times. The Company has continued to tighten overhead costs by reducing its direct labor head count during the month of September 2009 which was is in line with our planned improvements surrounding enhanced standard operating and manufacturing procedures in all of our manufacturing plants. We expect that these improvements will continue to increase our visibility in the marketplaces that we compete in for additional business for the upcoming fiscal year.
Pharmaceutical gross profit deficit decreased approximately $346,000, or 58.4%, to a gross profit deficit of approximately ($246,000) for the six months ended September 30, 2009, as compared to approximately ($592,000) in gross profit deficit for this business segment for the six months ended September 30, 2008. This was based primarily on the Cephalasporin and Beta-Lactam facilities that have no revenue streams but have costs associated with production and laboratory direct labor costs. The Largo, Florida generic drug plant has continued manufacturing and shipping Vetprofen ™ , its branded generic Carprofen, which has assisted in offsetting some of the costs associated with other production and laboratory direct costs related to the pharmaceutical segment. The Largo, Florida Cephalasporin and generic drug plants incurred approximately $765,377 of costs with the Baltimore, Maryland Beta-Lactam facility having incurred approximately $164,773 of costs with revenue offsets of approximately $987,000. The drug revenues derived were generated from our generic drug plant in Largo, Florida. We are awaiting FDA facility approval of both the Baltimore, Maryland Beta-Lactam and the Largo, Florida Cephalosporin drug facility plants and we estimate and anticipate that we will begin to derive revenues during the fourth quarter of the fiscal year ending March 31, 2010.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses consist of advertising and promotional expenses; stock 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 non-manufacturing and non-pharmaceutical machinery and equipment depreciation and amortization expenses. Selling, general and administrative expenses, inclusive of stock compensation and depreciation and amortization expenses, remained constant at approximately $8.5 million, for the six months ended September 30, 2009 and 2008, decreases in research and development, depreciation and other selling and general administration costs were offset by increases of approximately $900,000 in the stock compensation expense directly related to the issuance of 3-year restricted stock awards. Various offsetting increases and decreases in selling and general administrative expenses resulted in an increase in accounting and legal fees of $10,000; an increase in bad debts of $50,000; an increase in rent and utilities of $140,000 all of which was offset by a decrease of $484,000 in research and development expenses, a decrease of approximately $327,000 in salaries and consulting fees; a decrease of approximately $70,000 in travel related expenses, a decrease in office expense of $32,000, and a decrease in depreciation of $186,000. As a percentage of sales, selling, general and administrative expenses increased to 98.9% for the six months ended September 30, 2009, from 73.9% for the six months ended September 30, 2008.
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Operating Income (Loss)
Operating loss from continuing operations was approximately $6.2 million, or 72.9% of revenues for the six months ended September 30, 2009, compared to an operating loss from continuing operations of approximately $6 million, or 52.1% of revenues for the six months ended September 30, 2008. Although we have instituted cost reduction initiatives which include the reduction of production and office head counts, the continued economic uncertainty and potential further decline in our revenues could cause us to operate in an operating loss position in the near future.
Other Income (Expense), Net
Other income (expense), net was approximately $54,000 for the six months ended September 30, 2009, compared to approximately $(799,000) for the six months ended September 30, 2008. Interest income (expense), net, was approximately $(998,000) for the six months ended September 30, 2009, as compared to approximately $(801,000) for the six months ended September 30, 2008. The increase in interest expense was primarily attributable to interest expense associated with our convertible debt in addition to our short-term obligations issued during the current fiscal year. For the six months ended September 30, 2009, other income (expense), net, of approximately $1.1 million related to the legal settlement of the American Antibiotics lawsuits whereby the Company was granted debt forgiveness related to accrued rent and interest.
Income Tax Benefit (Expense)
For the three and six months ended September 30, 2009, we had recorded approximately no income tax benefit or expense. The change in tax benefit was based on our tax calculation of temporary and permanent differences using the effective tax rates applied to our net loss for the period, changes in information gained related to underlying assumptions about our future operations, as well as the utilization of available operating loss carryforwards. In accordance with “Accounting for Income Taxes,” we have evaluated whether it is more likely than not that the deferred tax asset will be realized.
Inflation and Seasonality
We believe that there was no material effect on our operations or our financial condition as a result of inflation as of and for the three months ended September 30, 2009 and 2008. We also believe that our business is not seasonal, however significant promotional activities can have a direct impact on our sales volume in any given quarter.
Economic and Industry Conditions
We believe the global economy is in recession and we first began to see significant adverse effects of this during our quarter ended December 31, 2008, as there was a significant reduction in end user demand for the products we manufacture and distribute, primarily based on the decline of end user discretionary income available for spending. We believe our financial results for the three and six months ended September 30, 2009 reflect the continuation and acceleration of a softening of demand for our products driven by the global economic downturn. We believe the decline in our revenues generally was consistent with the decrease in overall industry demand. We believe that the significant decline in economic and industry conditions has had a negative effect, that we are unable to quantify, on our operations and our financial condition as of and for the three and six months ended September 30, 2009. There are many factors that make it difficult for us to predict future revenue trends for our business, including the duration of the global economic downturn and quarter to quarter changes in customer orders regardless of industry strength. Should there be a continued material deterioration of economic or industry conditions, our results of operations could further be impacted in any given quarter.
Strategic and Other Activities
To address the impact of the economic downturn on our business, commencing in December 2008, we have taken actions intended to improve and optimize our operating effectiveness and to reduce our costs.
We renegotiated our national freight contract which encompasses freight-in and freight-out at all levels of delivery for each of our segments. We have also reduced annual, merit-based salary increases, and taken other steps to reduce or eliminate certain discretionary expenses, including reducing our workforce. These actions, together with those indicated below, are intended to improve our operating effectiveness during the current economic downturn. We are prepared to take additional actions as needed if this soft economic environment continues or worsens.
For our manufacturing segment, we have shortened work schedules to reduce overtime costs and staggered working hours to more closely match production of our products with demand from our customers. With this approach, we retain the flexibility to ramp our production up or down to meet customer demand while managing our production costs. In addition, we have instituted certain other cost reduction initiatives during September 2009 that included workforce reductions related to direct labor and office head counts. Since we believe the skills and expertise of our employees are key to our Company’s success, our initial cost management actions have been directed at minimizing expenses and now include workforce reductions; we are prepared to take more severe actions in the future if appropriate.
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For our manufacturing segment, we have lowered our prices to be more competitive, yet are not experiencing any decrease in our product costs. We are working on changing vendor imposed purchasing requirements, as well as obtaining additional financing so that we may be able to once again take advantage of discounts related to mass volume purchases, resulting in cost savings. We are also working with our vendors to improve our product mix by obtaining products that are in greater demand by our customers.
Financial Condition, Liquidity and Capital Resources
We had approximately $259,000 of cash and cash equivalents as of September 30, 2009, a decrease from approximately $90,000 as of March 31, 2009. We had a working capital deficit of approximately $11.5 million as of September 30, 2009, inclusive of current portion of convertible and other long-term obligations. As of March 31, 2009, we had working capital deficit of approximately $9.2 million, inclusive of current portion of long-term obligations. As of September 30, 2009 and March 31, 2009, our liquidity is affected by our certificates of deposit of approximately $5.4 million for both periods which is included in current assets of which $5 million is pledged as collateral for our short-term obligation to First Community Bank of America. On October 6, 2009, the Company fully satisfied its $5 million note with a bank by liquidating the $5 million certificate of deposit.
We have financed our operations and growth primarily through cash flows from operations, borrowing under our revolving credit facility, operating leases, trade payables, the issuance of short-term obligations, and the receipt of $15 million of gross private placement proceeds based on our April 2008 $5 million and our April 2007 $10 million convertible preferred stock private placement together with our March 2004 $5 million convertible preferred stock.
On July 10, 2009, the Company completed the July 1, 2009 effective date of the sale of a substantial portion of the inventory, accounts receivable and other assets of the BOSS division of its subsidiary, Dynamic Health Products, Inc. (“BOSS”), to USA Sports, LLC (“USA”). The total sale price was $2,223,351 and at the closing out of the total sale proceeds, Wachovia Bank, National Association (“Wachovia”) received a cash payment in the amount of $1,850,000 towards the settlement of BOSS’s outstanding obligations to it. BOSS will continue to pay-down the balance of its obligations to Wachovia through the orderly liquidation of its remaining assets. The Company recorded a loss on the sale of those assets of $661,424. This sale is reflected above and in the financial statements as of and for the three and six months ended September 30, 2009. The Company has not yet finalized its plan as to the sale or conversion of the remaining Distribution segment assets and therefore will continue to present the segment as discontinued until such time that the plan for such sale of conversion is adopted as finalized.
Effective October 15, 2009, GeoPharma, Inc. (the “Company”) consummated its previously reported Second Amended and Restated Note Purchase Agreement (the “Second Restated Whitebox Agreement”) with Whitebox Pharmaceutical Growth Fund, Ltd. (“Whitebox”), pursuant to which the Company has issued two Second Amended and Restated 12% Secured Convertible Promissory Notes, one in the principal amount of $5,000,000 and one in the principal amount of $10,000,000 to Whitebox (collectively, the “Second Restated Notes”). The total principal amount due to Whitebox immediately after the closing is the same as the principal amount due to Whitebox immediately prior to the closing. The Second Restated Notes replace and supersede all prior promissory notes issued to Whitebox, and the Second Restated Whitebox Agreement replaces and supersedes all prior note purchase agreements with Whitebox.
Among other things, the Second Restated Whitebox Agreement and Second Restated Notes amend the prior Whitebox agreements and notes as follows:
| • | The Second Restated Whitebox Agreement removes all financial covenants previously imposed on the Company; |
| • | The Second Restated Whitebox Agreement allows the Company to attempt to arrange a working capital loan secured by the Company’s receivables and inventory, and further provides that if the Company is able to do so, Whitebox will subordinate its existing liens and security interests on the Company’s receivables and inventory on a dollar-for-dollar basis up to $2,000,000, provided that the working capital lender and Whitebox can mutually agree upon the terms of a subordination agreement; |
| • | The Second Restated Whitebox Agreement further provides that for every $1,000,000 of Second Restated Notes that are paid off by the Company or otherwise converted into equity by Whitebox, the Company will be permitted to incur an additional $500,000 of additional working capital; |
| • | The Second Restated Whitebox Agreement allows Whitebox to exchange up to $250,000 of principal of the Second Restated Notes per month into shares of the Company’s common stock based on the closing price of the common stock at such time (the “Debt to Equity Exchange”), and provides that any amounts so exchanged will reduce the amount of the Partial Balloon Payment (as defined below) due by the Company to Whitebox on July 1, 2012 on a dollar-for-dollar basis; |
| • | The Second Restated Whitebox Agreement requires that the Company transfer its real property located at 6950 Bryan Dairy Road, Largo, Florida 33777 to Whitebox by September 1, 2009, and provides that if the Company does so (1) the outstanding principal amount of the $10,000,000 Second Restated Note will be reduced by $2,500,000 and (2) the Company will lease the property back from Whitebox pursuant to a lease to be entered into at such time; |
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| • | The Second Restated Notes require that the Company: |
| • | make monthly principal payments of $100,000, collectively, in cash, commencing on January 1, 2010 (and the first day of each month thereafter) until Second Restated Notes are repaid; and |
| • | repay $2,500,000 of principal, collectively (the “Partial Balloon Payment”), in cash, on prior to July 1, 2012, provided that the Partial Balloon Payment will be reduced as a result of any Debt to Equity Exchanges, any principal being converted into equity and any prepayments of principal; |
| • | While the interest rate remains unchanged at 12%, the Second Restated Notes provide that all remaining interest payments due in 2009 will accrete to principal and, commencing January 1, 2010, one-third of the interest will be payable in cash and the remaining two-thirds will be payable, at the option of Whitebox, by accreting such amount to principal or through the payment of shares of common stock based on 95% of the trading price of the stock at such time; |
| • | The Second Restated Notes reduce the conversion price of the notes (i.e., the price at which the notes can be converted into the Company’s common stock) from $4.46 per share to $0.75 per share with respect to the $5,000,000 Second Restated Note and $1.50 per share with respect to the $10,000,000 Second Restated Note; and |
| • | The Second Restated Notes provide that all remaining outstanding principal is due in cash on October 31, 2013. |
In connection with the Second Restated Whitebox Agreement, the Company entered into and consummated an agreement with the holders of all of its outstanding 3,975 shares of series B convertible preferred stock (the “Series B Preferred Stock”), pursuant to which such holders agreed to exchange all of such shares into a total of 3,975 shares of series C convertible preferred stock (the “Series C Preferred Stock”), pursuant to a Securities Exchange Agreement dated August 5, 2009 (the “Exchange Agreement”). In connection therewith, on August 5, 2009, the Company filed an amendment to its articles of incorporation with the State of Florida to create the Series C Preferred Stock (the “Certificate of Designation”). Among others, the Series C Preferred Stock differs from the Series B Preferred Stock as follows:
| • | Immediately prior to the closing of the Exchange Agreement, the Series B Preferred Stock was paying an annual dividend of 14%. The Series C Preferred Stock pays an annual dividend of 10%. |
| • | The Series B Preferred Stock dividend was paid quarterly in shares of common stock if the Company met certain equity conditions at that time, and if the Company did not meet those equity conditions, in cash, unless funds were not legally available to pay such dividend in cash, in which event the holder could elect (i) to waive the equity conditions and take the dividend payment in shares of stock, (ii) allow the dividend accrue to the next quarterly dividend payment or (iii) allow the dividend to be accreted to, and increase, the outstanding stated value of the Series B Preferred Stock. In contrast, the Series C Preferred Stock provides that the quarterly dividends automatically will be accreted to, and increase, the outstanding stated value of the Series C Preferred Stock until such time as the Whitebox Second Restated Notes have been repaid in full, at which time all future dividends are required to be paid in cash provided that funds are legally available for the payment of such dividends (and if funds are not so available, the dividends will again be accreted to, and increase, the outstanding stated value). |
| • | The Series B Preferred Stock was convertible into common stock at any time at the option of the holders of such shares. The Series B Preferred Stock cannot be converted by its holders until the earliest of (i) July 1, 2011, (ii) the date that the principal amount of the Whitebox Restated Notes is less than $5,000,000 and (iii) the trading price of the Company’s common stock is equal to or greater than $2 per share. |
| • | The conversion price for the Series B Preferred Stock was $6 per share of common stock. The conversion price for the Series C Preferred Stock is $1.50 per share of common stock. |
| • | The Series C Preferred Stock requires that the Company redeem $200,000 worth of Series C Preferred Stock, pro rata among all holders of such stock, on a monthly basis commencing immediately after the Whitebox Second Restated Notes have been repaid in full, and further requires the Company to redeem the balance of the Series C Preferred Stock on October 1, 2014. The Series B Preferred Stock contained no such provisions. |
The Company believes that issuance of the Second Restated Notes and the shares of common stock issuable thereunder and under the Series C Preferred Stock are exempt pursuant to Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The Company believes that exchange of the Series C Preferred Stock for the previously issued Series B Preferred Stock is exempt pursuant to Sections 3(a)(9) and 18(b)(4)(C) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made only to accredited investors and the transfer of the Second Restated Notes has been restricted in accordance with the requirements of the Securities Act. The Company received written representations from the holders thereof regarding, among other things, their accredited status and investment intent.
On September 4, 2009, American Antibiotics, LLC, a majority owned subsidiary of GeoPharma, has reached agreement with Consolidated Pharmaceutical Group, Inc. (“CPG”), the directors of CPG and two other individuals acting on behalf of CPG (collectively, “CPG Parties”) and entered into a Settlement and Mutual Release Agreement (“Settlement Agreement”) and other documents (collectively, hereinafter referred to as “Settlement Documents”) settling all claims against the other.
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The litigation arose from and relates to certain agreements entered into between American Antibiotics and CPG, whereby American Antibiotics acquired certain business assets of CPG for the production of Beta-Lactam Antibiotics as well as all CPG’s rights, title and interest in various pharmaceutical Abbreviated New Drug Applications (“ANDAs”) associated with a Baltimore, Maryland manufacturing facility owned and formerly operated by CPG dedicated for the production of Beta-Lactam Antibiotics (“Facility”) under an ANDA Sale and Purchase Agreement (“ASPA”) dated February 7, 2005, and entered into a lease for the Baltimore Facility dated July 19, 2005 (the “Lease”).
The September 2006 lawsuit brought by the Company alleged that CPG breached the ASPA & Lease with certain misrepresentations related to the ANDA’s and failed to perform all the required improvements and modifications to the Facility under the Lease. Consolidated with American Antibiotic’s lawsuit was a separate action filed against it by CPG, alleging that American Antibiotics failed to pay rent due and owing under the Lease.
Under the terms of settlement: the AA Parties and the CPG Parties (collectively, the “Parties”) agreed to execute a new three (3) year lease for the Facility with renewable options. The new lease also confers upon American Antibiotics a three (3) year option to purchase the Facility, a 65,600 square foot manufacturing plant consisting of an approximately 40,000 square foot non-sterile area and an approximately 25,600 square foot sterile area for injectable Beta-Lactam antibiotics, and the approximately 4.4 acres on which the Facility is located.
All prior agreements, financial obligations, understandings or other commitments between the Parties were terminated, superseded and extinguished with the execution of the Settlement Documents and the Company was able to recognize $1.1 million into income as related to accrued rent and accrued interest that was extinguished.
During the six months ended September 2009, Mihir Taneja, the Company’s CEO, Jugal Taneja, the Company’s Chairman of the Board of Directors, together with an affiliate of both the CEO and Chairman, loaned the Company a total of $1.1 million. Interest on the note is at the rate of 10% per annum. Collateral for debt is the Company’s 51% interest in American Antibiotics. Of the $1.1 million outstanding, should the Company not be able to repay $670,000 by March 31, 2010, the 51% interest in American Antibiotics will revert to the affiliate of the Chairman. Proceeds were used for working capital.
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SIX MONTH ENDED SEPTEMBER 30, 2009 CASH FLOW ANALYSIS
The following table summarizes our cash flows from operating, investing and financing activities for each of the six months ended September 30, 2009 and 2008:
Three Months Ended June 30, | 2009 | 2008 | ||||||
Total cash provided by (used in): | ||||||||
Operating activities | $ | (451,103 | ) | $ | (2,426,529 | ) | ||
Investing activities | $ | 2,189,735 | $ | (2,393,796 | ) | |||
Financing activities | $ | (1,570,429 | ) | $ | 5,657,693 | |||
Increase (decrease) in cash and cash equivalents | $ | 168,202 | $ | 837,368 | ||||
Operating Activities
Net cash used in operating activities was approximately $451,000 for the six months ended September 30, 2009, as compared to net cash used in operating activities of approximately $2.4 million for the six months ended September 30, 2008.
We incurred a net loss before preferred stock dividends of approximately $8.2 million for the six months ended September 30, 2009, compared to a net loss before preferred stock dividends of approximately $6.4 million for the six months ended September 30, 2008. The changes in operating assets and liabilities were due primarily to the decrease in accounts receivable, inventories, prepaid expenses and other current assets, and an increase in accrued expenses and other payables, all of which were partially offset by the rent and interest debt foregiveness. The decrease in accounts receivable was primarily due to a decrease in credit sales and our increased collection efforts. Inventories decreased primarily due to changes in our product mix and our efforts to improve our levels of inventory on hand. The decrease in prepaid expenses and other current assets was primarily due to the timing of insurance policy renewals. The increase in accrued expenses and other payables resulted from the timing of vendor payments. The decrease in accounts payable resulted primarily from the timing of vendor payments.
Investing Activities
Net cash from investing activities was approximately $2.2 million for the six months ended September 30, 2009, as compared to net cash used of approximately $2.4 million for the six months ended September 30, 2008. The change in the six months ended September 30, 2009 was due primarily to the sale of certain distribution segment assets.
Financing Activities
Net cash used by financing activities was approximately $1.6 million for the six months ended September 30, 2009, as compared to net cash provided by financing activities of approximately $5.7 million for the six months ended September 30, 2008. The change in the six months ended September 30, 2009 was primarily attributable to short and long term obligation payments and credit line payments as partially offset by proceeds of related party debt.
We believe that cash expected to be generated from operations, current cash reserves, and existing financial arrangements is not sufficient to meet our capital expenditures and working capital needs for our operations as presently conducted. Our 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.
If we are unable to achieve consistent profitability, additional steps will have to be taken in order to maintain liquidity, including plant consolidations and additional work force reductions (see Strategic and Other Activities above). Instability in the financial markets, as a result of a recession or other factors, also may affect the cost of capital and our ability to raise capital. We are already experiencing the impact of both. The uncertainty in the capital and credit markets may hinder our ability to generate additional financing in the type or amount necessary to pursue our objectives.
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| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
We are not exposed to significant interest rate or foreign currency exchange rate risk.
| Item 4. | CONTROLS AND PROCEDURES. |
Disclosure Controls and Procedures
Our principal executive and principal financial officers have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report. They have concluded that, based on such evaluation, our disclosure controls and procedures were effective as of September 30, 2009, as further described below.
Management’s Quarterly Report on Internal Control Over Financial Reporting
Overview
Internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management has used the framework set forth in the report entitled “Internal Control — Integrated Framework” published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting was effective as of September 30, 2009.
Management’s Assessment
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives and we are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Our management evaluated, under the supervision and with the participation of our CEO and our CFO, the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009.
Based upon this evaluation, our CEO and CFO have concluded that our current disclosure controls and procedures are effective to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and accumulated and communicated to our senior management, including our CEO and CFO, to allow timely decisions regarding required disclosures. This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Quarterly Report.
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PART II – OTHER INFORMATION
| Item 1. | LEGAL PROCEEDINGS. |
American Antibiotics, LLC, a majority owned subsidiary of GeoPharma, has reached agreement with Consolidated Pharmaceutical Group, Inc. (“CPG”), the directors of CPG and two other individuals acting on behalf of CPG (collectively, “CPG Parties”) and entered into a Settlement and Mutual Release Agreement (“Settlement Agreement”) and other documents (collectively, hereinafter referred to as “Settlement Documents”) on September 4, 2009 settling all claims against the other.
The litigation arose from and relates to certain agreements entered into between American Antibiotics and CPG, whereby American Antibiotics acquired certain business assets of CPG for the production of Beta-Lactam Antibiotics as well as all CPG’s rights, title and interest in various pharmaceutical Abbreviated New Drug Applications (“ANDAs”) associated with a Baltimore, Maryland manufacturing facility owned and formerly operated by CPG dedicated for the production of Beta-Lactam Antibiotics (“Facility”) under an ANDA Sale and Purchase Agreement (“ASPA”) dated February 7, 2005, and entered into a lease for the Baltimore Facility dated July 19, 2005 (the “Lease”).
The September 2006 lawsuit brought by the Company alleged that CPG breached the ASPA & Lease with certain misrepresentations related to the ANDA’s and failed to perform all the required improvements and modifications to the Facility under the Lease. Consolidated with American Antibiotic’s lawsuit was a separate action filed against it by CPG, alleging that American Antibiotics failed to pay rent due and owing under the Lease.
Under the terms of settlement: the AA Parties and the CPG Parties (collectively, the “Parties”) agreed to execute a new three (3) year lease for the Facility with renewable options. The new lease also confers upon American Antibiotics a three (3) year option to purchase the Facility, a 65,600 square foot manufacturing plant consisting of an approximately 40,000 square foot non-sterile area and an approximately 25,600 square foot sterile area for injectable Beta-Lactam antibiotics, and the approximately 4.4 acres on which the Facility is located.
All prior agreements, financial obligations, understandings or other commitments between the Parties were terminated, superseded and extinguished with the execution of the Settlement Documents. The Company filed a Form-8K with all required exhibits on September 11, 2009.
On May 1, 2006 Esther Krausz and Sharei Yeshua (“Note Holders”) filed an action against Dynamic Health Products, Inc. in the Circuit Court of Broward County, Florida (Index No. 06-6187) alleging Dynamic Health Products, Inc. defaulted on note payment obligations. The face amount of the note alleged to be held by Ester Krausz totals $280,000, the face amount of the note alleged to be held by Sharei Yeshua totals $220,000. The notes contain an interest rate of 8% per annum. Preliminary discovery has been conducted. Dynamic Health Products, Inc. filed a third party action against the agent for the Note Holders seeking indemnity and that action was settled in May 2008. The Note Holders have filed a request for trial with the court but no date has been set. Dynamic Health Products, Inc. is investigating whether the purported agent made any payments to the Note Holders on behalf of Dynamic Health Products, Inc. without disclosing those payments. To date, Plaintiffs have not provided copies of the notes to Dynamic Health Products, Inc. or made a specific monetary demand. Dynamic Health Products, Inc. intends to vigorously defend itself in this action.
On April 4, 2008, Vital Pharmaceuticals, Inc. vs. Bob O’Leary Health Food Distribution Co., Inc., Case No. 08-14868, in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. Vital Pharmaceuticals, Inc. (“VPX”) sued Boss in April, 2008 for $579,274.65, plus interest, attorney’s fees, and costs. Boss counterclaimed for, amongst other things, breach of its distributorship agreement with VPX and false representations. On June 17, 2009, the Court, in a bench pronouncement not yet memorialized in a written order, ruled that: (1) Boss is granted leave to amend its Counterclaim to assert additional claims against VPX, including amongst other things for Breach of Fiduciary Duty and Unfair and Deceptive Trade Practices; and (2) VPX sold to Boss $472,274.65 in products received; and (3) VPX is prohibited from receiving that sum (if ever) until such time as Boss’s Counterclaims and Affirmative Defenses are resolved. Boss intends to continue to prosecute its Counterclaim and Affirmative Defenses and anticipates a favorable resolution to the case. The Court’s written ruling may differ from the above recitation.
From time to time the Company is subject to litigation incidental to its 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 September 30, 2009 and March 31, 2009 should have a material adverse impact on its financial condition or results of operations.
| Item 1A. | RISK FACTORS. |
In addition to other information set forth in this Report, you should carefully consider the risk factors previously disclosed in “Item 1A. to Part I” of our Annual Report on Form 10-K for the year ended March 31, 2009. We do not believe there have been any material changes in our risk factors since the filing of our Annual Report on Form 10-K for the year ended March 31, 2009 other than additional risks related to
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worldwide economic and industry conditions. However, we may update our risk factors in our SEC filings from time to time for clarification purposes or to include additional information, at management’s discretion, even when there have been no material changes. The following risk factor is being added to provide additional information.
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The Demand for Our Products and Our Business May be Adversely Affected by Worldwide Economic and Industry Conditions: Our business is affected by economic and industry conditions and our revenues are dependent upon demand for our products. Demand, in turn, is impacted by industry cycles and the availability of end user discretionary income, both of which can dramatically affect our business. These cycles may be characterized by decreases in product demand, excess customer inventories, and accelerated erosion of prices. The global economy is currently in recession and we first began to see adverse effects of this in our fiscal quarter ended December 31, 2008, as the reduction in end user demand for our products caused a reduction in demand for our products by our customers. We believe the further weakening of the U.S. and global economy and the continued stress in the financial markets has deepened the current economic downturn and caused a significant decrease in demand for our products during the current and previous two fiscal quarters, as our revenues decreased over 33.1% from the September 2008 fiscal quarter and over 25.3% decrease as compared to the six months ended September 30, 2008.
If global economic conditions remain uncertain or deteriorate further, we may experience additional material adverse effects on our future revenues, cash flows and financial position. A prolonged global recession may have other adverse effects on us, such as:
| • | The ability of our customers to pay their obligations to us may be adversely affected, which could cause a negative impact on our cash flows and our results of operations; |
| • | The carrying value of our goodwill and other intangible assets may decline in value, which could harm our financial position and results of operations; |
| • | Our suppliers may not be able to fulfill their obligations to us, which could harm our manufacturing process and our business; and |
| • | The uncertainty in the capital and credit markets may hinder our ability to generate additional financing in the type or amount necessary to meet our obligations or pursue our objectives. |
| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
| Item 3. | DEFAULTS UPON SENIOR SECURITIES. |
Not applicable.
| Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
Not applicable
| Item 5. | OTHER INFORMATION. |
| (a) | Not applicable. |
| (b) | None. |
| Item 6. | EXHIBITS |
Exhibits
The following Exhibits are filed as part of this Report:
| 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) | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GeoPharma, Inc. | ||||
| Date: November 24, 2009 | By: | /S/ MIHIR K. TANEJA | ||
| Mihir K. Taneja | ||||
| Chief Executive Officer, Secretary and Director | ||||
| (Principal Executive Officer) | ||||
| Date: November 24, 2009 | By: | /S/ CAROL DORE-FALCONE | ||
| Carol Dore-Falcone | ||||
| Senior Vice President, Chief Financial Officer and Director | ||||
| (Principal Financial and Accounting Officer) | ||||
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