UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006 |
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to________________ |
Commission file number | 000-50960 | ||
Integrated Pharmaceuticals, Inc.
(Exact name of small business issuer in its charter)
Idaho | 04-3413196 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
310 Authority Drive
Fitchburg, MA 01420
(Address of principal executive offices) (Zip Code)
(978) 696-0020
(Issuer's telephone number, including area code)
Securities registered under Section 12(g) of the Act:
Title of class | Name of Exchange on Which Registered |
Common Stock, par value $.01 per share | None |
2006 Common Stock Purchase Warrants | None |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be filed by section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes o No o
APPLICABLE ONLY TO CORPORATE ISSUERS
As of March 28, 2006, the Issuer had 19,064,787 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yeso Noþ
INTEGRATED PHARMACEUTICALS, INC.
FORM 10-QSB
TABLE OF CONTENTS
PAGE | ||
PART I. FINANCIAL INFORMATION | 2 | |
ITEM 1 Financial Statements | 2 | |
ITEM 2 Plan of Operation; Management's Discussion and Analysis | 16 | |
ITEM 3 Controls and Procedures | 18 | |
18 | ||
PART II. - OTHER INFORMATION | ||
ITEM 1 Legal Proceedings | 18 | |
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds | 18 | |
ITEM 3 Default Upon Senior Securities | 18 | |
ITEM 4 Submission of Matters to a Vote of Security Holders | 18 | |
ITEM 5 Other Information | 18 | |
ITEM 6 Exhibits and Reports on Form 8-K | 19 | |
SIGNATURES | 20 |
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for statements of historical fact, certain information described in this document contains “forward-looking statements” that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will" and "would" or similar words. You should read the statements that contain these words carefully because these statements discuss our future expectations, contain projections of our future results of operations or of our financial position or state other "forward-looking" information. Integrated Pharmaceuticals, Inc. believes that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control. The factors listed below in the section captioned "Risk Factors," within the section “Description of Business” as well as any cautionary language in this Form, provide examples of risks, uncertainties and events that may cause our actual results and achievements expressed or implied to differ materially from the expectations we described in our forward-looking statements. Integrated Pharmaceuticals, Inc. believes that before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this Form could have a material adverse effect on our business, results of operations and financial position.
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PART I
Item 1. Financial Statements
Integrate Pharmaceuticals Inc.
Financial Statements
For The Quarter Ended March 31, 2006
(Unaudited)
CONTENTS
PAGE
3 | Balance Sheets As At March 31, 2006 and December 31, 2005 |
4 | Statements Of Operations And Income For The Three Months Ended March 31, 2006 and 2005 |
5 | Statements Of Cash Flows For The Three Months Ended March 31, 2006 and 2005 |
6 - 10 | Notes To Financial Statements - March 31, 2006 |
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INTEGRATED PHARMACEUTICALS, INC. | |||||||
(A Development Stage Company) | |||||||
BALANCE SHEETS | |||||||
March 31, | |||||||
2006 | December 31, | ||||||
(unaudited) | 2005 | ||||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash | $ | 142,985 | $ | 182,582 | |||
Accounts receivable | 50,897 | 20,173 | |||||
Inventory | 111,148 | 123,144 | |||||
Prepaid expenses | 32,193 | 58,220 | |||||
Total Current Assets | 337,223 | 384,119 | |||||
PROPERTY AND EQUIPMENT, net | 1,612,456 | 1,745,371 | |||||
OTHER ASSETS | |||||||
Investments | 2,530 | 980 | |||||
Deposits | — | 763 | |||||
Patents, net of amortization | 75,033 | 57,796 | |||||
Total Other Assets | 77,563 | 59,539 | |||||
TOTAL ASSETS | $ | 2,027,242 | $ | 2,189,029 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Accounts payable | $ | 156,524 | $ | 179,662 | |||
Accrued expenses | 182,172 | 176,118 | |||||
Related party short-term debt | 48,220 | 52,815 | |||||
Capital leases payable - current portion | — | 195 | |||||
Total Current Liabilities | 386,916 | 408,790 | |||||
COMMITMENTS AND CONTINGENCIES | — | — | |||||
STOCKHOLDERS' EQUITY | |||||||
Preferred stock, $0.10 par value, 20,000 shares authorized; no shares issued | — | — | |||||
Common stock, $0.01 par value, 75,000,000 shares authorized; 19,919,209 and 18,632,626 shares issued and outstanding, respectively | 199,220 | 186,326 | |||||
Additional paid-in capital | 7,009,232 | 6,736,346 | |||||
Other comprehensive income (loss) | 510 | (1,040 | ) | ||||
Stock options and warrants | 8,011,575 | 7,824,142 | |||||
Accumulated deficit prior to development stage | (494,624 | ) | (494,624 | ) | |||
Accumulated deficit during development stage | (13,085,587 | ) | (12,470,911 | ) | |||
Total Stockholders' Equity | 1,640,326 | 1,780,239 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 2,027,242 | $ | 2,189,029 |
The accompanying notes are an integral part of these financial statements.
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INTEGRATED PHARMACEUTICALS, INC. | ||||||||||
(A Development Stage Company) | ||||||||||
STATEMENTS OF OPERATIONS | ||||||||||
Period from | ||||||||||
February 1, 2003 | ||||||||||
Three Months Ended | (inception of | |||||||||
development stage) | ||||||||||
March 31, 2006 | March 31, 2005 | to March 31, 2006 | ||||||||
(unaudited) | (unaudited) | (unaudited) | ||||||||
REVENUES | $ | 46,258 | $ | 34,650 | $ | 123,599 | ||||
COST OF GOODS SOLD | ||||||||||
Materials and supplies | 42,989 | 5,694 | 87,967 | |||||||
Total Cost of Goods Sold | 42,989 | 5,694 | 87,967 | |||||||
GROSS PROFIT | 3,269 | 28,956 | 35,632 | |||||||
GENERAL AND ADMINISTRATIVE EXPENSES | ||||||||||
Depreciation and amortization | 66,500 | 62,030 | 590,266 | |||||||
Research and development | 43,010 | 85,323 | 792,104 | |||||||
Marketing | 2,072 | 72,047 | 573,409 | |||||||
Legal and professional fees | 46,222 | 78,091 | 1,025,000 | |||||||
Consulting | 59,359 | 201,529 | 3,093,358 | |||||||
Idle facility expense | 153,795 | 329,127 | 1,582,977 | |||||||
Occupancy | 32,936 | 103,190 | 1,059,053 | |||||||
Labor and benefits | 25,825 | 69,519 | 779,847 | |||||||
Services paid by stock options | 130,426 | 134,025 | 1,385,855 | |||||||
Office supplies and expenses | 4,881 | 11,228 | 168,229 | |||||||
Travel | 802 | 12,926 | 171,605 | |||||||
Other general and administrative expenses | 50,622 | 26,495 | 486,124 | |||||||
Total General and Administrative Expenses | 616,450 | 1,185,530 | 11,707,827 | |||||||
OPERATING INCOME (LOSS) | (613,181 | ) | (1,156,574 | ) | (11,672,195 | ) | ||||
OTHER INCOME (EXPENSES) | ||||||||||
Interest income | 73 | 816 | 10,271 | |||||||
Interest expense | (1,568 | ) | (245 | ) | (1,418,103 | ) | ||||
Other income (expense) | — | — | (5,560 | ) | ||||||
Total Other Income and Expenses | (1,495 | ) | 571 | (1,413,392 | ) | |||||
LOSS BEFORE TAXES | (614,676 | ) | (1,156,003 | ) | (13,085,587 | ) | ||||
INCOME TAXES | — | — | — | |||||||
NET LOSS | (614,676 | ) | (1,156,003 | ) | (13,085,587 | ) | ||||
OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||
Unrealized gain (loss) in market value of investments | 1,550 | (330 | ) | 510 | ||||||
COMPREHENSIVE LOSS | $ | (613,126 | ) | $ | (1,156,333 | ) | $ | (13,085,077 | ) | |
NET INCOME (LOSS) PER COMMON SHARE, BASIC AND DILUTED | $ | (0.03 | ) | $ | (0.07 | ) | ||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED | 19,343,829 | 16,479,544 |
The accompanying notes are an integral part of these financial statements.
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—
INTEGRATED PHARMACEUTICALS, INC. | ||||||||||
(A Development Stage Company) | ||||||||||
STATEMENTS OF CASH FLOWS | ||||||||||
Period from | ||||||||||
February 1, 2003 | ||||||||||
(inception of | ||||||||||
Period Ended | Period Ended | development stage) | ||||||||
March 31, 2006 | March 31, 2005 | to March 31, 2006 | ||||||||
(unaudited) | (unaudited) | (unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
Net income (loss) | $ | (614,676 | ) | $ | (1,156,003 | ) | $ | (13,085,587 | ) | |
Adjustments to reconcile net income (loss) to net cash | ||||||||||
flows provided (used) by operating activities: | ||||||||||
Depreciation and amortization | 136,219 | 129,244 | 936,273 | |||||||
Loss on disposition of assets | — | 7,024 | ||||||||
Stock and warrants issued as incentive for notes payables | — | — | 496,389 | |||||||
Stock issued for interest expense | — | — | 149,878 | |||||||
Stock issued for rent expense | 8,675 | 71,903 | 600,254 | |||||||
Stock issued for services | 4,754 | 43,227 | 1,012,375 | |||||||
Stock issued for assets and securities | — | — | 43,739 | |||||||
Stock options and warrants vested | 189,784 | 323,254 | 3,579,691 | |||||||
Recognition of noncash deferred financing expense | — | — | 578,699 | |||||||
Options and warrants issued for services and financing | — | — | 253,753 | |||||||
Noncash recovery of other income | — | — | (1,850 | ) | ||||||
Changes in assets and liabilities: | ||||||||||
Receivables | (30,724 | ) | (14,650 | ) | (34,813 | ) | ||||
Inventory | 11,996 | (41,688 | ) | (111,148 | ) | |||||
Prepaid expenses | 26,027 | (22,398 | ) | 115,366 | ||||||
Deposits | 763 | — | 6,370 | |||||||
Accounts payable | (23,138 | ) | (121,063 | ) | 57,977 | |||||
Accrued expenses | 6,054 | (43,119 | ) | (811 | ) | |||||
Net cash used by operating activities | (284,266 | ) | (831,293 | ) | (5,396,421 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
Purchase of fixed assets | — | (189,502 | ) | (2,674,098 | ) | |||||
Patent costs | (20,541 | ) | — | (84,759 | ) | |||||
Leasehold concessions received | — | — | 185,000 | |||||||
Net cash used by investing activities | (20,541 | ) | (189,502 | ) | (2,573,857 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
Sale of common stock units | 270,000 | — | 6,902,375 | |||||||
Payments on capital leases | (195 | ) | (742 | ) | (9,563 | ) | ||||
Proceeds from (payments on) related party loans | (4,595 | ) | — | (8,481 | ) | |||||
Proceeds from exercise of options | — | — | 1,080 | |||||||
Proceeds from convertible debt | — | — | 939,900 | |||||||
Net cash provided by financing activities | 265,210 | (742 | ) | 7,825,311 | ||||||
Net increase in cash | (39,597 | ) | (1,021,537 | ) | (144,967 | ) | ||||
Cash, beginning of period | 182,582 | 1,461,708 | 287,952 | |||||||
Cash, end of period | $ | 142,985 | $ | 440,171 | $ | 142,985 | ||||
SUPPLEMENTAL CASH FLOW DISCLOSURES: | ||||||||||
Income taxes paid | $ | — | $ | — | $ | — | ||||
Interest paid | $ | 1,304 | $ | — | $ | 26,304 | ||||
NON-CASH INVESTING AND FINANCING: | ||||||||||
Stock and warrants issued for convertible debt | $ | — | $ | — | $ | 1,613,076 | ||||
Stock issued for assets and securities | $ | — | $ | — | $ | 43,739 | ||||
Warrants and options issued for deferred services and financing | $ | — | $ | — | $ | 520,102 | ||||
Accounts payable paid by contributed capital | $ | — | $ | — | $ | 27,767 | ||||
Noncash recovery of other income | $ | — | $ | — | $ | 1,850 |
The accompanying notes are an integral part of these financial statements.
5
NOTE 1 - BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Integrated Pharmaceuticals, Inc., (hereinafter, “the Company”) is the successor to Advanced Process Technologies, Inc. (hereinafter, “APT”) a corporation formed on March 23, 1998 under the laws of the Commonwealth of Massachusetts. In February 2003, the Company began a new development stage whereby it began the development of technologies for the production of clinically active pharmaceutical compounds, including active small molecules and recombinant DNA technology derived products. The Company was involved in contract research for pharmaceutical companies, through January 2003, when it changed its primary focus to the development of its own technology and manufacturing capacity.
On September 5, 2000, the Company agreed to an exchange of its stock in an acquisition with Bitterroot Mining Company (hereinafter “Bitterroot”). This transaction was accounted for as an acquisition and recapitalization of an operating enterprise by a non-operating public company. The legal entity is that of Bitterroot, while the accounting entity is the operating company, which had been APT. At that time, the Company acquired new non-qualifying shareholders and automatically converted from an “S” corporation to a regular “C” corporation. On November 28, 2000, the Company changed its name to Integrated Pharmaceuticals, Inc. As a result of this transaction, Integrated Pharmaceuticals, Inc. changed it state of domicile to Idaho, and operates as an Idaho corporation.
In 2004, the Company obtained significant additional capital through a private placement of its stock and the issuance of convertible debt. Additionally, the majority of this convertible debt was converted to common stock during 2004. Management plans to use the majority of the proceeds from the financing to implement its business plan. As a result of the proceeds received from stock issuances and the conversion of debt to common stock, as well as the private placement which commenced in May 2005 and continued through April 2006, management has determined that it can continue as a going concern for at least the next twelve months.
At March 31, 2006, the Company was considered a development stage enterprise as it is devoting substantially all of its efforts to establishing a new business and substantial planned principal operations had not yet commenced.
The foregoing unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10QSB and Regulation S-B as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2005. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented. Operating results for the three-month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.
NOTE 2 - LIMITED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.
Use of Estimates
The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and
6
events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.
Development Stage Activities
The Company began a new development stage February 1, 2003, when it discontinued outside contract research as its primary focus. It is now primarily engaged in the development and production of clinically active pharmaceutical compounds, including active small molecules and recombinant DNA technology derived products.
Fair Value of Financial Instruments
The Company's financial instruments as defined by Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," include cash, receivables, and payables. All instruments are accounted for on an historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at March 31, 2006.
Inventory
The Company maintains an inventory of raw materials, work in process, and finished goods. Inventories are stated at the lower of cost or market. Cost has been determined by using the first-in first-out method. As of March 31, 2006, the Company’s raw material, work in process, and finished goods inventories totaled $54,392, $3,847, and $52,910 respectively.
Recent Accounting Pronouncements
In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140.” This statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations: a transfer of the servicer’s financial assets that meets the requirements for sale accounting; a transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities; or an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. The statement also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable and permits an entity to choose either the amortization or fair value method for subsequent measurement of each class of servicing assets and liabilities. The statement further permits, at its initial adoption, a one-time reclassification of available for sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available for sale securities under Statement 115, provided that the available for sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. This statement is effective for fiscal years beginning after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. Management believes the adoption of this statement will have no impact on the Company’s financial condition or results of operations at March 31, 2006.
In February 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments, an Amendment of FASB Standards No. 133 and 140” (hereinafter “SFAS No. 155”). This statement established the accounting for certain derivatives embedded in other instruments. It simplifies accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid instrument that contains an embedded derivative that otherwise would require bifurcation under SFAS No. 133 as well as eliminating a restriction on the passive derivative instruments that a qualifying special-purpose entity (“SPE”) may hold under SFAS No. 140. This statement allows a public entity to irrevocably elect to initially and subsequently measure a hybrid instrument that would be required to be separated into a host contract and derivative in its entirety at fair value (with changes in fair value recognized in earnings) so long as that instrument is not
7
designated as a hedging instrument pursuant to the statement. SFAS No. 140 previously prohibited a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for fiscal years beginning after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. Management believes the adoption of this statement will have no impact on the Company’s financial condition or results of operations at March 31, 2006.
In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections,” (hereinafter “SFAS No. 154”) which replaces Accounting Principles Board Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion No. 28.” SFAS No. 154 provides guidance on accounting for and reporting changes in accounting principle and error corrections. SFAS No. 154 requires that changes in accounting principle be applied retrospectively to prior period financial statements and is effective for fiscal years beginning after December 15, 2005. The Company does not expect SFAS No. 154 to have an impact on its consolidated financial position, results of operations, or cash flows at March 31, 2006.
In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations.” FIN 47 clarifies that the term “conditional asset retirement obligation,” which as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The entity must record a liability for a “conditional” asset retirement obligation if the fair value of the obligation can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Management believes the adoption of this statement will have no impact on the Company’s financial condition or results of operations at March 31, 2006.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153. This statement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that opinion, however, included certain exceptions to that principle. This statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges incurred during fiscal years beginning after the date of this statement is issued. Management believes the adoption of this statement will have no impact on the financial statements of the Company at March 31, 2006.
In December 2004, the Financial Accounting Standards Board issued a revision to Statement of Financial Accounting Standards No. 123R, “Accounting for Stock Based Compensation.” This statement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This statement does not change the accounting guidance for share based payment transactions with parties other than employees provided in Statement of Financial Accounting Standards No. 123. This statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership
8
Plans.” The Company expects no changes to its financial reporting as it is currently reporting and complying with the fair value method of SFAS No. 123.
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151, “Inventory Costs— an amendment of ARB No. 43, Chapter 4.” This statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “. . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .” This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company had previously adopted this statement for its year ended December 31, 2004. For the period ended March 31, 2006, the Company has recorded $153,795 as idle facility expense.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets ranging from 5 to 10 years. The following is a summary of property, equipment and accumulated depreciation at March 31, 2006 and December 31, 2005:
2006 | 2005 | ||||||
Equipment | $ | 1,730,815 | $ | 1,730,815 | |||
Furniture and fixtures | 120,114 | 120,114 | |||||
Leasehold improvements | 826,511 | 826,511 | |||||
2,677,440 | 2,677,440 | ||||||
Less: Accumulated depreciation | (1,064,984 | ) | (932,069 | ) | |||
Total | $ | 1,612,456 | $ | 1,745,371 |
Depreciation and amortization expense for the periods ended March 31, 2006 and December 31, 2005 were $132,915 (of which $69,719 is included in “idle facility expense”), and $528,956 (of which $276,328 is included in “idle facility expense”), respectively. The Company evaluates the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. The Company determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations.
Patents
During the first quarter of 2006 the company has filed two non-provisional patents to the United States Patent and Trade Mark office.
NOTE 4 - CAPITAL STOCK
Preferred Stock
In November 2004, the Company amended the authorized capital stock section of its articles of incorporation. The Company is authorized to issue 20,000 shares of non-assessable $0.10 par value preferred stock. As of March 31, 2006, the Company has not issued any preferred stock.
9
Common Stock
In November 2004, the Company amended the authorized capital stock section of its articles of incorporation. The Company is authorized to issue 75,000,000 shares of non-assessable $0.01 par value common stock. Each share of stock is entitled to one vote at the annual shareholders’ meeting.
In May 2005, the Company commenced a private placement offering of its common stock to accredited investors. During the first round of investment, the Company sold 1,044,166 units for $0.75 per unit, with each unit consisting of one share of common stock and 40% of a warrant to purchase an additional share of common stock, raising $783,125. The exercise price of the warrants is $1.50, and they expire on December 31, 2007. The value of the warrants attached to the stock issued was $110,454, based upon the Black-Scholes calculation.
In November 2005, during the second round of investment, the Company sold 954,001 units for $0.25 per unit, with each unit consisting of one share of common stock and 80% of a warrant to purchase an additional share of common stock, raising $238,500. The exercise price of the warrants is $0.90, and they expire on June 30, 2008. The value of the warrants attached to the stock issued was $25,540, based upon the Black-Scholes calculation.
In November 2005 individuals that had invested during the first round of the private placement offering, received additional warrants. They received 20% of the number of shares originally purchased. The exercise price of these warrants was $1.50, and they expire on December 31, 2007.
In November 2005 individuals that invested during both rounds of the private placement offering received additional warrants. They received 40% of the number of shares purchased during the first round. The exercise price of these warrants was $1.50, and they expire on December 31, 2007.
In January 2006 the Company raised an additional $100,000 from investors based on the terms of the second round of financing. The Company sold 400,000 units for $0.25 per unit, with each unit consisting of one share of common stock and 80% of a warrant to purchase an additional share of common stock. The exercise price of the warrants is $0.90, and they expire on June 30, 2008. The value of the warrants attached to the stock issued was $6,000, based upon the Black-Scholes calculation.
In March 2006 a third round of investing was started. During the period ended March 31, 2006, the Company sold 850,000 units for $.20 per unit, with each unit consisting of one share of common stock and 40% of a warrant to purchase an additional share of common stock, raising $170,000. The exercise price of the warrants is $0.45, and they expire on June 30, 2008. The value of the warrants attached to the stock issued was $21,300, based upon the Black-Scholes calculation.
The Company has a lease for its facility in Fitchburg, Massachusetts whereby the base rent is paid with $3,500 in cash, and one share of common stock for each $1.00 of remaining rent, beginning with the month ended November 30, 2005. A total of 24,324 shares, valued at approximately $8,675, were issued during the three-month period ended March 31, 2006 for payment of rent. Additionally, the Company issued 15,106 shares of common stock at an average price of $.31 per share in exchange for services.
NOTE 5 - COMMON STOCK OPTIONS AND WARRANTS
2002 Stock Plan
During the three months ended March 31, 2006, the Company recorded an expense of approximately $130,425 for vested options. Options in the amount of $29,651 were rescinded.
The following is a summary of the Company's equity compensation plans:
Plan | Number of securities to be issued upon exercise of outstanding options | Weighted-average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans | |||||||
Equity compensation plan approved by security holders (1) | 1,025,000 | $ | 0.62 | 575,000 | ||||||
Total | 1,025,000 | 575,000 |
(1) Second Amended and Restated 2002 Stock Plan
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Following is a summary of the status of the options outstanding during the periods ended December 31, 2005 and March 31, 2006.
Number of Shares | Weighted Average Exercise Price | ||||||
Outstanding at December 31, 2004 | 1,283,000 | $ | 0.96 | ||||
Granted | 2,000 | .65 | |||||
Exercised | (6,000 | ) | .18 | ||||
Rescinded | (119,000 | ) | — | ||||
Outstanding at December 31, 2005 | 1,160,000 | 0.60 | |||||
Granted | — | — | |||||
Exercised | — | — | |||||
Rescinded | (135,000 | ) | — | ||||
Options outstanding at March 31, 2006 | 1,025,000 | $ | 0.62 | ||||
Options exercisable at March 31, 2006 | 747,000 | $ | 0.70 | ||||
Weighted average fair value of options granted in 2006 | — |
Warrants
At March 31, 2006 and December 31, 2005, there were outstanding warrants to purchase 6,730,401 and 6,729,068 shares respectively, of the Company’s common stock, at prices ranging from $.45 to $2.50 per share. The warrants vest at various rates ranging up to four years and expire at various dates through 2014.
NOTE 6 - CONCENTRATIONS
Credit Risk for Cash Held at Banks
The Company maintains its cash accounts primarily at a Massachusetts bank. These funds are insured to a maximum of $100,000. At March 31, 2006, approximately $42,985 was at risk.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Patent License Agreement
During 2001, the Company entered into a license agreement, with a related party, for the rights to a patent application. The Company may further develop, make, use, sub-lease, promote, distribute, sell and market the patent product or process. The Company is responsible for the expenses of prosecuting the patent application, which matured into an issued patent in 2002. In addition, a royalty of 3% of net sales, less discounts, is obligated to be paid on a quarterly basis for the license, with minimum annual royalties of $100,000, before discounts. During the periods ended December 31, 2005 and March 31, 2006, applicable royalties were waived by the patent holder.
On October 13, 2005, the license agreement was amended. The related party agreed to waive any royalties until the Company reaches annual sales of $5,000,000. In addition, the related party agreed to waive any
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royalties if the products produced by the licensed technology don’t make a profit of more than 12.5% before payment of income taxes (EBITA). No royalties were paid or accrued during the period ended March 31, 2006.
Building Lease in Fitchburg
In September 2003, the Company signed a five-year lease agreement for a commercial real estate property in Fitchburg, Massachusetts. The base rent, which for the first year was $10,843 per month, will be paid with one share of common stock for each $1.00 of rent. The Company has the option to purchase this property in September 2006 and is obligated to do so by September 2008. If the Company has not purchased the property by September 2006, then the rent becomes payable 50% in cash and 50% in stock.
Total rental expense, including common area charges, for the periods ending March 31, 2006 and December 31, 2005 was approximately $19,176 (of which $12,784 is included in “idle facility expense”) and $169,920 (of which $113,280 is included in “idle facility expense”).
NOTE 8 -SUBSEQUENT EVENTS
Orders
The Company has an ongoing order with a customer for approximately $15,000 per month during 2006.
Patents
Subsequent to March 31, 2006 the company has filed an additional non-provisional application.
Raising of Funds
Subsequent to March 31, 2006, the Company has raised $90,000, in a private placement, from various individual accredited investors and expects to receive additional private placement proceeds in the coming months. These investors purchased restricted shares of the Company at $0.20 a share. For every five shares purchased, an investor received two warrants at $0.45 valid until the end of June 2008.
Item 2. Management’s Discussion and Analysis
The following management discussion, analysis and results of operations should be read in conjunction with the financial information set forth above in this Form 10-QSB. There are many factors which may affect our future business operations, some of which are described in the risk factors section of amendment no. 4 of our Form-10SB, filed August 19, 2005 and hereby incorporated by reference. This discussion contains forward looking statements which include our beliefs, estimates, projections and anticipated operating conditions and revenues, all of these may change in the near future due to uncertainties and risks involved in our business.
Plan of Operation
We are a development stage company. We are increasing our production capacity as we anticipate increase in demand for our products. We are also growing the intellectual property portfolio upon which we depend to manufacture products.
In the first quarter of 2006, we raised $270,000 through the sale of unregistered securities. We currently project that our cash on hand is sufficient to sustain our operations through July 2006. We anticipate raising additional capital in 2006 through the sale of common stock and warrants. Most of the capital that we have raised recently and plan to raise has been and will be used to continue operating our production facility in Fitchburg, Massachusetts. We have not hired any additional permanent employees during the first quarter of 2006 and have no plans to do so in the near term. If we succeed in increasing our revenue
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during the current fiscal year, we expect to install an additional $400,000 of equipment during the year in order to increase our production capacity.
We have filed two patent applications in the first quarter of 2006 which we believe will help us to protect our product portfolio and business expansion activities. In the first quarter of 2006 we concentrated on production of our calcium dietary supplement product. We are supplying this product in bulk to a distributor who is packaging the product as a consumer item and supplying it to a chain of about 59 grocery stores in New England. Our distributor is also in discussions with other substantial distribution channels. The product is available at the distributor’s website www.calsap.com.
Financial Condition and Results of Operations
We increased our revenue to $46,258 in the first quarter 2006 from $34,650 in first quarter 2005. We have reduced our operating loss from $1,185,530 in the first quarter of 2005 to $613,181 for the first quarter of 2006. We reduced our cost of operations in almost every aspect of our business activities. We reduced the research and development expenses because we filed fewer provisional patents in the first quarter of 2006 than in the same period in 2005. Our consulting fee expenses were reduced from $201,529 to $59,359 due to termination of all consulting agreements. Our legal fees have been reduced due to reduced filing-related activities with the SEC. In the first quarter of 2005 we were heavily involved with the preparation of Form 10 KSB to be a reporting company. Our employee labor and benefits went down in the first quarter of 2006 because of the reduction in our work force in August 2005.
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Liquidity. At the end of the year 2005 we had $182,582 of cash on hand. At the end of the 1st quarter 2006, our cash level was $142,985 and our operations cost us approximately $75,000 per month. Thus we will need to raise additional capital this year in order to keep operating, and in fact have raised an additional $90,000 during the second quarter of 2006. We expect that a combination of additional capital and additional sales orders to provide us with funds necessary to continue our operations for at least one year.
Material Commitments for Capital Expenditures. We have no such commitments outstanding. As explained earlier, we do hope to add approximately $400,000 of equipment to our Fitchburg facility, but we do not intend to order that equipment until funds are available for that purpose. We have four scientists actively engaged in research and development. We anticipate spending $30,000 in R&D activities by the end of the year if funds become available. We will be spending R&D dollars for improvements of our Calcium Supplement related products, bakery and dairy related products and our generic drug development project.
Trends and Seasonality. We are not aware of any trends that are likely to have a material impact on our liquidity, or on our net sales or revenues or income from continuing operations. We are not aware of any seasonality in our business.
Item 3. Controls and Procedures
Chinmay Chatterjee, President, CEO and Chief Financial Officer, has evaluated the Company’s disclosure controls and procedures and concluded that they are effective. He concluded that the controls and procedures provided the officers, on a timely basis, with all information necessary for them to determine that the Company has disclosed all material information required to be included in the Company's periodic reports filed with the Securities and Exchange Commission. Based upon the officer’s evaluation, there were not any significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any pending legal proceedings, nor is its property the subject of any pending legal proceeding.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company raised $270,000 through the sale of stock and warrants in a private placement during the three month period ended March 31, 2006. These shares were sold at $0.20 per share. Purchasers also received common stock purchase warrants, exercisable $0.45 per share, permitting them to purchase additional shares of common stock equal in number to 40% the shares that they purchased in the offering. It also paid base rent on its building in Fitchburg, Massachusetts in the form of common stock; and it paid a portion of its legal fees in the form of common stock.
Item 3. Default Upon Senior Securities
The Company has no senior securities outstanding.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the first quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.
Item 5. Other Information.
None.
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Item 6. Exhibits and Reports on Form 8-K
The following documents are filed as exhibits to this Form 10-QSB:
Number | Description of Exhibit |
3.1 | Amended and Restated Articles of Incorporation of Integrated Pharmaceuticals, Inc. (1) |
3.2 | Amended and Restated Bylaws of Integrated Pharmaceuticals, Inc. (2) |
4.1 | Specimen Certificate for Integrated Pharmaceuticals, Inc. Common Stock, par value $.01 per share (2) |
4.2 | Form of Common Stock Purchase Warrant (2) |
10.1 | Amended and Restated Patent License Agreement with NEC Partners (2) |
10.2 | Lease Agreement with Chantilas Properties, LLC and Advanced Process Technologies, Inc. (2) |
10.3 | Assignment and Assumption of Lease(2) |
10.4 | Consulting and Warrant Agreements with James Czirr (2) |
10.5 | 2002 Stock Plan (2) |
10.6 | Registration Rights Agreement(2) |
10.7 | First Amended and Restated Supply Agreement with Frag-Chem Corporation (3) |
10.8 | Letter dated May 5, 2005 amending the Patent License Agreement with NEC Partners (3) |
10.9 | Letter dated October 13, 2005 amending the Patent License Agreement with NEC Partners (4) |
14 | Financial Code of Ethics (5) |
21 | Subsidiaries of Integrated Pharmaceuticals (5) |
Number | Description of Exhibit |
3.1 | Amended and Restated Articles of Incorporation of Integrated Pharmaceuticals, Inc. (1) |
3.2 | Amended and Restated Bylaws of Integrated Pharmaceuticals, Inc. (2) |
4.1 | Specimen Certificate for Integrated Pharmaceuticals, Inc. Common Stock, par value $.01 per share (2) |
4.2 | Form of Common Stock Purchase Warrant (2) |
10.1 | Amended and Restated Patent License Agreement with NEC Partners (2) |
10.2 | Lease Agreement with Chantilas Properties, LLC and Advanced Process Technologies, Inc. (2) |
10.3 | Assignment and Assumption of Lease(2) |
10.4 | Consulting and Warrant Agreements with James Czirr (2) |
10.5 | 2002 Stock Plan (2) |
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10.6 | Registration Rights Agreement(2) |
10.7 | First Amended and Restated Supply Agreement with Frag-Chem Corporation (3) |
10.8 | Letter dated May 5, 2005 amending the Patent License Agreement with NEC Partners (3) |
10.9 | Letter dated October 13, 2005 amending the Patent License Agreement with NEC Partners (4) |
14 | Financial Code of Ethics (5) |
21 | Subsidiaries of Integrated Pharmaceuticals (5) |
31 | Certification of the Chief Financial Officer of the Company as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
32 | Certification of the Chief Executive Office rand Chief Financial Officer of the Company pursuant to 18 U.S.C. section 1250 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
(1) Previously filed and incorporated by reference to Amendment No. 1 to the Company's Form 10-SB Registration Statement filed with the Securities and Exchange Commission on December 3, 2004.
(2) Previously filed and incorporated by reference to the Company's Form 10-SB Registration Statement filed with the Securities and Exchange Commission on September 27, 2004.
(3) Previously filed and incorporated by reference to Amendment No. 3 to the Company's Form 10-SB Registration Statement filed with the Securities and Exchange Commission on May 12, 2005.
(4) Previously filed and incorporated by reference to the Company’s Form 10-QSB filed with the Securities Exchange Commission on November 14, 2005.
(5) Previously filed and incorporated by reference to the Company’s Form 10-KSB filed with the Securities Exchange Commission on September 29, 2005.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
/s/ Chinmay Chatterjee__________________
By: Chinmay Chatterjee
Its: CEO
Date: May 11, 2006
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