UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
------------
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2005
OR
| | Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 000-28876
INTEGRATED BIOPHARMA, INC.
(Exact name of small business registrant in its charter)
Delaware 22-2407475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Long Ave., Hillside, New Jersey 07205
(Address of principal executive offices) (Zip Code)
(888) 319-6962
(Registrant's telephone number, including Area Code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered under Section 12(b) of the Exchange Act:
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes | X | No | |
Indicate by check whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes | | No | X |
Indicate by check whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes | | No | X |
Applicable only to Corporate Issuers:
The number of shares outstanding of each of the Registrant's classes of common
equity, as of the latest practicable date:
Class Outstanding at October 27, 2005
Common Stock, $0.002 par value 12,685,790 Shares
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
FORM 10-Q QUARTELY REPORT
For the Three Months Ended September 30, 2005
INDEX
Page
Part I. Financial Information
Item 1. Condensed Consolidated Statements of
Operations for the Three Months Ended
September 30, 2005 and 2004 (unaudited) 2
Condensed Consolidated Balance Sheets
as of September 30, 2005 (unaudited)
and June 30, 2005 3
Condensed Consolidated Statements of
Changes in Stockholders' Equity
for the Year Ended June 30, 2005
and the three months ended
September 30, 2005 (unaudited) 4
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
September 30, 2005 and 2004 (unaudited) 5
Notes to Condensed Consolidated
Statements (unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15
Item 3. Quantitative and Qualitative
Disclosures about Market Risk 22
Item 4. Controls and Procedures 23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of
Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 25
Other
Signatures 26
Disclosure Regarding Forward-Looking Statements
Certain statements in the Quarterly Report on Form 10-Q may constitute
"forward-looking" statements as defined in Section 27A of the Securities Act of
1933 (the "Securities Act"), Section 21E of the Securities Act of 1934 (the
"Exchange Act"), the Private Securities Litigation Reform Act of 1995 (the
"PSLRA") or in releases made by the Securities and Exchange Commission, all as
may be amended from time to time. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Integrated BioPharma, Inc. or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Statements
that are not historical fact are forward-looking statements. Forward-looking
statements can be identified by, among other things, the use of forward-looking
language, such as the words, "plan", "believe", "expect", "anticipate",
"intend", "estimate", "project", "may", "will", "would", "could", "should",
"seeks", or "scheduled to", or other similar words, or the negative of these
terms or other variations of these terms or comparable language, or by
discussion of strategy or intentions. These cautionary statements are being made
pursuant to the Securities Act, the Exchange Act and the PSLRA with the
intention of obtaining the benefits of the "safe harbor" provisions of such
laws. The Company cautions investors that any forward-looking statements made by
the Company are not guarantees or indicative of future performance. Important
assumptions and other important factors that could cause actual results to
differ materially from those forward-looking statements with respect to the
Company, include, but are not limited to, the risks and uncertainties affecting
its businesses described in Item 1 of the Company's Annual Report filed on Form
10-KSB for the year ended June 30, 2005 and in registration statements and other
securities filings by the Company.
Although the Company believes that its plans, intentions and expectations
reflected in or suggested by such forward-looking statements are reasonable,
actual results could differ materially from a projection or assumption in any of
its forward-looking statements, are subject to change and inherent risks and
uncertainties. The forward-looking statements contained in this Quarterly Report
on Form 10-Q are made only as of the date hereof and the Company does not have
or undertake any obligation to update or revise any forward-looking statements
whether as a result of new information, subsequent events or otherwise, unless
otherwise required by law.
1
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
September 30,
----------------------------------
2005 2004
------------ -------------
Sales, net $ 14,787,107 $ 6,116,036
Cost of Sales 9,392,762 5,599,511
------------ -------------
Gross profit 5,394,345 516,525
Selling and administrative expenses 3,410,645 2,302,937
------------ -------------
Operating income (loss) 1,983,700 (1,786,412)
Other income (expense): (59,596) 34,547
------------ -------------
Income (loss) before income taxes 1,924,104 (1,751,865)
Federal and state income tax (benefit) 44,738 (253)
------------ -------------
Net income (loss) before minority interest 1,879,366 (1,751,612)
Minority interest 33,200 -
------------ -------------
Net income (loss) 1,912,566 (1,751,612)
Deemed dividend from beneficial conversion
feature of Series B Preferred stock dividend (583,000) (583,000)
Series B Preferred stock dividend (123,507) (123,507)
------------ -------------
Net income (loss) applicable to common
shareholders $ 1,206,059 $ (2,458,119)
============ =============
Net income (loss) per common share:
Basic $ 0.09 $ (0.20)
============ =============
Diluted $ 0.09 $ (0.20)
============ =============
Weighted average common shares outstanding 12,713,842 12,552,698
Dilutive potential shares:
Warrants and options 1,132,699 -
Convertible preferred stock
- -
------------ -------------
Weighted average common share outstanding -
assuming dilution 13,846,541 12,552,698
============ =============
See accompanying notes to condensed consolidated financial statements.
2
INTEGRATED BIOPHARMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
------------- -------------
2005 2005
------------- -------------
Assets
Current Assets:
Cash and cash equivalents $ 2,015,973 $ 2,427,553
Accounts receivable, net 5,602,057 4,470,927
Inventories, net 11,422,477 9,987,288
Deferred income taxes 108,000 107,000
Other assets 529,556 715,074
------------- -------------
Total current assets 19,678,063 17,707,842
Property and equipment, net 4,510,059 4,664,306
Goodwill 145,410 145,410
Intangible assets, net 3,401,393 3,473,366
Deferred income taxes 83,000 70,000
Security deposits and other assets 145,980 181,547
------------- -------------
Total Assets $ 27,963,905 $ 26,242,471
============= =============
Liabilities and Stockholders' Equity:
Current Liabilities:
Note payable - bank $ 4,500,000 $ 4,500,000
Accounts payable 3,901,867 3,986,607
Accrued expenses and other
current liabilities 1,454,252 1,612,904
Loan payable - Trade Investment
Services, LLC, related party 172,260 172,260
------------- -------------
Total Current Liabilities 10,028,379 10,271,771
Commitments and Contingencies
Series B 7% Redeemable Convertible Preferred
Stock, net of beneficial conversion feature,
warrants issued and issuance costs, $0.002
par value; 1,250 shares authorized; 700
shares issued and outstanding, liquidation
preference $7,000,000 3,375,000 2,792,000
Minority Interest 316,604 349,804
Stockholders' Equity:
Preferred Stock, $0.002 par value;1,000,000
shares authorized; no shares issued - -
Common Stock, $0.002 par value; 25,000,000
shares authorized; 12,720,690 shares issued
at September 30, 2005 and 12,685,690 at
June 30, 2005; 12,685,790 shares outstanding
at September 30, 2005 and 12,650,790 at
June 30, 2005 25,441 25,371
Additonal paid-in-capital 28,534,149 28,325,252
Accumulated deficit (14,216,329) (15,422,388)
Less: Treasury stock, at cost, 34,900 shares (99,339) (99,339)
------------- -------------
Total Stockholders' Equity 14,243,922 12,828,896
------------- -------------
Total Liabilities and Stockholders' Equity $ 27,963,905 $ 26,242,471
============= =============
See accompanying notes to condensed consolidated financial statements.
3
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED JUNE 30, 2005
AND THE THREE MONTHS ENDED SEPTEMBER 30, 2005
(Unaudited)
Series A
Convertible Additional Total
Common Stock Preferred Paid-in Accumulated Treasury Stock Stockholders'
Shares Par Value Stock Capital Deficit Shares Cost Equity
---------- -------- --------- ------------ ------------- ------ ---------- -------------
Balance, July 1, 2004 12,510,690 $ 25,021 $ - $ 27,961,003 $ (4,020,155) 25,800 $ (28,831) $ 23,937,038
Exercise of stock
options for cash 148,000 296 - 178,003 - - - 178,299
Issuance of common stock
for consulting fees 27,000 54 - 186,246 - - - 186,300
Stock repurchase plan - - - - - 9,100 (70,508) (70,508)
Dividends paid on Series
B preferred stock - - - - (490,000) - - (490,000)
Deemed dividend from
beneficial conversion
feature of Series B
preferred stock - - - - (2,332,000) - - (2,332,000)
Net Loss - - - - (8,580,233) - - (8,580,233)
---------- -------- --------- ------------ ------------- ------ ---------- -------------
Balance, June 30, 2005 12,685,690 25,371 - 28,325,252 (15,422,388) 34,900 (99,339) 12,828,896
Exercise of stock
options for cash 35,000 70 - 57,380 - - - 57,450
Dividends paid on
Series B preferred stock - - - - (123,507) - - (123,507)
Compensation expense for
employee stock options - - - 151,517 - - - 151,517
Deemed dividend from
beneficial conversion
feature of Series B
preferred stock - - - - (583,000) - - (583,000)
Net Income - - - - 1,912,566 - - 1,912,566
---------- -------- --------- ------------ ------------- ------ ---------- -------------
Balance, September 30,
2005(Unaudited) 12,720,690 $ 25,441 $ - $ 28,534,149 $(14,216,329) 34,900 $ (99,339) $ 14,243,922
========== ======== ========= ============ ============= ====== ========== =============
See accompanying notes to condensed consolidated financial statements.
4
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
September 30,
----------------------------------
2005 2004
------------- ------------
Cash flows from operating activities:
Net income (loss) $ 1,912,566 $(1,751,612)
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Depreciation and amortization 274,764 343,940
Deferred income taxes (14,000) (12,000)
Allowance for inventory 2,500 2,500
Bad debt expense 2,500 2,500
Issuance of common stock for consulting
services - 186,300
Compensation expense for employee
stock options 151,517 -
Minority interest (33,200) -
Changes in assets and liabilities (excludes
impact of acquistions):
Increase (decrease) in:
Accounts receivable (1,133,630) (754,560)
Inventories (1,437,689) (1,302,379)
Prepaid expenses and other assets 185,518 (469,963)
Security deposits and other assets 35,567 (20,480)
(Decrease) increase in:
Accounts payable (84,740) (61,851)
Income taxes payable - (450)
Accrued expenses and other liabilities (158,652) 119,810
------------- ------------
Net cash used in operating activities (296,979) (3,718,245)
------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (48,544) (1,094,220)
------------- ------------
Net cash used in investing activities (48,544) (1,094,220)
------------- ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 57,450 69,424
Repayments of notes payable - (10,771)
Purchase of treasury stock - (70,508)
Dividends paid (123,507) (123,507)
------------- ------------
Net cash used in financing activities (66,057) (135,362)
------------- ------------
Net decrease in cash and cash equivalents (411,580) (4,947,827)
Cash and cash equivalents at
beginning of period 2,427,553 9,548,046
------------- ------------
Cash and cash equivalents at
end of period $ 2,015,973 $ 4,600,219
============= ============
Supplemental disclosures of cash flow
information:
Cash paid during the periods for:
Interest $ 74,014 $ 31,659
============= ============
Income taxes $ 3,762 $ 11,389
============= ============
Supplemental disclosures of Non-cash
transactions:
Deemed dividend from beneficial conversion
feature of Series B Preferred stock $ (583,000) $ (583,000)
============= ============
See accompanying notes to condensed consolidated financial statements.
5
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
[1] Principles of Consolidation and Basis of Presentation.
The accompanying financial statements for the interim periods are unaudited and
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned or majority owned with an offset to minority interest. All
significant intercompany transactions and balances have been eliminated. The
interim financial statements have been prepared in conformity with Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission ("SEC") and therefore
do not include information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America.
However, all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the periods presented have been
included. These financial statements should be read in conjunction with the
financial statements and notes thereto, together with Management's Discussion
and Analysis or Plan of Operation, contained in the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 2005 ("10-KSB"), as filed with
the SEC. The June 30, 2005 balance sheet was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. The results of
operations for the three months ended September 30, 2005 are not necessarily
indicative of the results for the full fiscal year ending June 30, 2006 or for
any other period.
Effective July 1, 2005, the Company no longer qualifies as a small business
issuer as the result of its revenues exceeding $25.0 million for the prior two
fiscal years; hence the Company will no longer be filing as a small business
issuer with the Securities and Exchange Commission. Accordingly, effective July
1, 2005, the Company is required to comply with the reporting requirements of
Regulation S-K instead of Regulation S-B.
The Company is engaged primarily in the manufacturing, distributing, marketing
and sales of vitamins, nutritional supplements and herbal products; the
manufacture and distribution of paclitaxel, which is the primary
chemotherapeutic agent in the treatment of breast cancer; and technical services
through its recently acquired contract research organization, InB: Hauser
Pharmaceutical Services, Inc. ("Hauser"). The Company's customers are located
primarily throughout the United States.
On October 1, 2004, the Company acquired a 51% interest in Micro Nutrition Inc.
(a newly formed entity) for a cash payment of $362,486. The accounts of Micro
Nutrition are consolidated with those of the Company since such date. Micro
Nutrition, Inc. is a California corporation in the mail order business selling
primarily nutritional specialty food items.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management bases its estimates on historical experience and on
various other assumptions that are believed to be 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. The most significant estimates include:
* sales returns and allowances;
* allowance for doubtful accounts;
* inventory valuation and obsolescence;
* valuation and recoverability of long-lived and intangible assets
and goodwill, including the values assigned to acquired intangible
assets;
* income taxes and valuation allowance on deferred income taxes, and;
* accruals for, and the probability of, the outcome of current
litigation.
6
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On a continual basis, management reviews its estimates utilizing currently
available information, changes in facts and circumstances, historical experience
and reasonable assumptions. After such reviews, and if deemed appropriate, those
estimates are adjusted accordingly. Actual results could differ from those
estimates. Nothing has come our attention which would cause a change in these
estimates.
Stock-Based Compensation. At September 30, 2005, the Company has one stock-based
compensation plan. No stock-based employee compensation cost is reflected in net
income, as all options granted under this plan had an exercise price equal to
the market value of the underlying common stock on the date of grant.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation".
SFAS123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The compensation cost is
measured based on the fair value of the equity or liability instruments issued.
The Statement is effective as of July 1, 2005 and accordingly, the Company has
adopted SFAS 123(R) in the three months ended September 30, 2005. The
compensation cost of the adoption of this agreement was an additional $151,517
of compensation for the three months ended September 30, 2005. Additionally, the
Company has chosen to account for the adoption under the prospective method,
which requires compensation expense to be recorded for all unvested stock
options at the beginning of the first quarter of adoption of SFAS 123(R). The
Company will record $258,901 of compensation expense over the weighted average
vesting period of six months for the unvested portion of previously granted
awards that remain outstanding at the date of adoption. The Company previously
had elected to account for stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees". Under APB No. 25, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
Prior to the adoption of SFAS 123(R) the Company had accounted for stock-based
compensation in accordance with FASB Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." The effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation",
to stock-based employee compensation is as follows: (prior to adoption to SFAS
123(R))
Three months ended
September 30, 2004
-------------
Net (loss) available to common
stockholders, as reported $ (2,458,119)
Add: Stock-based employee compensation
expense included in net income (loss),
net of related tax effects -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1,284,726)
-------------
Pro forma net (loss) available to
common stockholders $ (3,742,845)
=============
Earnings per share:
Basic - as reported $ (0.20)
=============
Basic - pro forma $ (0.30)
=============
Diluted - as reported $ (0.20)
=============
Diluted - pro forma $ (0.30)
=============
7
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the periods prior to and subsequent to the adoption of SFAS 123(R) the
Company used the Black-Scholes option pricing model to determine stock options
fair value. The fair value for these options was estimated at the date of each
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for September 30,
2005 2004
---- ----
Risk-free interest rate 4.0% 4.0%
Expected volatility 78% 114%
Dividend yield -- --
Expected life 10 years 10 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair-value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Earnings Per Share. In accordance with FASB Statement No. 128, "Earnings Per
Share," basic earnings per common share are based on weighted average number of
common shares outstanding. Diluted earnings per share amounts are based on the
weighted average number of common shares outstanding, plus the incremental
shares that would have been outstanding upon the assumed exercise of all
potentially dilutive stock options, warrants and convertible preferred stock,
subject to antidilution limitations.
During the three months ended September 30, 2005, 3,892,998 options with
exercise prices below average market price were included in the computation of
diluted earnings per share. During the three months ended September 30, 2004,
options and warrants to purchase 4,962,621 shares of common stock were
outstanding but were not included in the computation of diluted earnings per
share as they were antidilutive as a result of net losses during the period.
During the periods ended September 30, 2005 and 2004, Convertible Series B
Preferred Stock in the amount of 7,000,000 shares were not included in the
computation of diluted earnings per share as their conversion price was greater
than the average market price of the common shares for the 2005 period and for
the 2004 period, they were antidilutive as a result of net losses.
During the three months ended September 30, 2005 and 2004, options and warrants
to purchase 2,941,930 shares and 1,321,000 shares of common stock, respectively,
were outstanding but were not included in the computation of diluted earnings
per share because their exercise price was greater than the average market price
of the common shares.
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement No 153. "Exchanges of Non monetary
Assets, an Amendment of APB Opinion No. 29" ("Statement No. 153"). Statement
No.153 is effective for non monetary asset exchanges occurring in our fiscal
year beginning July 1, 2005. Statement No. 153 requires that exchanges of
productive assets be accounted for at fair value unless fair value cannot be
reasonably determined or the transaction lacks commercial substance. Statement
No. 153 does not have a material impact on our financial statements.
8
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In May 2005, the FASB issued SFAS No 154 "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3."This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. This Statement does not change the guidance for reporting the correction
of an error in previously issued financial statements or a change in accounting
estimate. The provisions of this Statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after
December15, 2005. We are not able to assess, at this time, the future impact of
this statement on our consolidated financial position or results of operations.
[2] Goodwill and other Intangible Assets
Goodwill and intangibles with indefinite lives are tested for impairment at the
reporting unit level (operating segment or one level below an operating segment)
on an annual basis and between annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit
below its carrying value. Application of the goodwill impairment test requires
judgment, including the identification of reporting units, assignment of assets
and liabilities to reporting units, assignment of goodwill to reporting units,
and determination of the fair value of each reporting unit. The Company
performed its annual impairment test during the third quarter of fiscal 2005.
The Company concluded that the goodwill recognized on the Paxis Pharmaceutical,
Inc. acquisition was impaired and consequently wrote off $542,728 in the fiscal
year ended June 30, 2005. As of September 30, 2005 and June 30, 2005, goodwill
consisted of $145,410 from the Aloe Acquisition.
Other definite lived intangibles are amortized on a straight-line basis over
periods not exceeding 20 years. The carrying amount of acquired intangible
assets as of September 30, 2005 and June 30, 2005 is as follows:
September 30, 2005 June 30, 2005
------------------------------------- -------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
----------- --------- ----------- ----------- --------- -----------
Intellectual property $ 1,250,000 $ 156,251 $ 1,093,749 $ 1,250,000 $ 125,002 $ 1,124,998
Trade names 1,508,000 144,515 1,363,485 1,508,000 125,667 1,382,333
Unpatented technology 547,000 149,999 397,001 547,000 140,000 407,000
License agreement 611,730 64,572 547,158 611,730 52,695 559,035
----------- --------- ----------- ----------- --------- -----------
Total $ 3,916,730 $ 515,337 $ 3,401,393 $ 3,916,730 $ 443,364 $ 3,473,366
=========== ========= =========== =========== ========= ===========
Amortization expense recorded on the intangible assets for the three months
ended September 30, 2005 and 2004 was $71,973 and $69,544, respectively.
Amortization expense is recorded on the straight-line method of periods ranging
from 10 years to 20 years.
The estimated annual amortization expense for intangible assets for the five
succeeding fiscal years is as follows:
Year ended June 30, Amortization Expense
-------------------- --------------------
2006, remainder $ 215,930
2007 287,903
2008 287,903
2009 287,903
2010 287,903
Thereafter 2,033,851
-------------------- --------------------
Total $ 3,401,393
====================
9
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
[3] Inventories
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS 151
amends ARB No. 43, "Inventory Pricing," to clarify the accounting for certain
costs as period expense. The Statement is effective for fiscal years beginning
after June 15, 2005. The Company adopted SFAS 151 in the quarter ended September
30, 2005. There was no impact from the adoption of this statement.
Inventories are stated at the lower of cost or market using the first-in,
first-out method and consist of the following as of September 30, 2005 and June
30, 2005:
September 30, June 30,
2005 2005
------------- ------------
Raw materials $ 4,843,927 $ 5,577,034
Work-in-process 2,833,207 1,330,855
Finished goods 3,745,343 3,079,399
------------- ------------
Total $ 11,422,477 $ 9,987,288
============= ============
[4] Property and Equipment
Property and equipment consists of the following as of September 30, 2005 and
June 30, 2005:
September 30, June 30,
2005 2005
-------------- -------------
Land and building $ 1,250,000 $ 1,250,000
Leasehold improvements 2,164,952 2,157,321
Machinery and equipment 8,644,919 8,603,894
Machinery and equipment
under capital lease 193,086 193,086
Transportation equipment 37,714 37,714
-------------- -------------
12,290,671 12,242,015
Less: Accumulated depreciation
and amortization 7,780,612 7,577,709
-------------- -------------
Total $ 4,510,059 $ 4,664,306
============== =============
[5] Note Payable
Note payable is a promissory note provided by Bank of America dated August 6,
2003 in the amount of $4,500,000 with interest at a variable rate based on 1.25%
over the current LIBOR rate. The loan was due on September 4, 2005 and
subsequently has been renewed through November 4, 2005 with the intention of
extending the November renewal date to September 4, 2006, under the existing
terms and conditions of the prior note. The loan is guaranteed by Mr. Carl
DeSantis, a shareholder and director of the Company. At September 30 and June
30, 2005 the interest rate was 5.08% and 4.58%, respectively.
[6] Loan Payable-Trade Investment Services, related party
Loan payable-Trade Investment Services is a demand loan provided by Trade
Investment Services, LLC ("TIS"), a former shareholder of Paxis, dated July 1,
2002 with interest at 9.00%. Interest for the three months ended September 30,
2005 and 2004 was waived.
10
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
[7] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk-Cash. The Company maintains balances at
several financial institutions. Deposits at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. At September 30, 2005 and
June 30, 2005, the Company's uninsured cash balances were approximately
$1,373,315 and $1,735,000, respectively.
[B] Concentrations of Credit Risk-Receivables. The Company routinely assesses
the financial strength of its customers and, based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited. The Company does not require
collateral in relation to its trade accounts receivable credit risk. The amount
of the allowance for uncollectible accounts and other allowances at September
30, 2005 and June 30, 2005 is $59,047 and $56,547, respectively.
[C] Major Customers. For the three months ended September 30, 2005,
approximately 36% or $5,318,033, 35% or $5,241,299 and 24% or $3,545,523 of
revenues were derived from three customers. For the three months ended September
30, 2004 approximately 42% or $2,579,754 and 23% or $1,399,069 of revenues were
derived from two customers. The loss of either of these customers would have an
adverse affect on the Company's operations. Accounts receivable from these three
customers comprised approximately 77% as compared to two customers representing
41% of total accounts receivable at September 30 and June 30, 2005,
respectively.
[8] Commitments and Contingencies
[A] Leases
Related Party Leases- Warehouse and office facilities are leased from Vitamin
Realty Associates, L.L.C., a limited liability company, which is 90% owned by
the Company's chairman, president and principal stockholder and certain family
members and 10% owned by the Company's Chief Financial Officer. The lease
provides for minimum annual rental of $323,559 through May 31, 2015 plus
increases in real estate taxes and building operating expenses. On July 1, 2004,
the Company leased an additional 24,810 square feet of warehouse space on a
month-to month basis. Rent expense for the three months ended September 30, 2005
and 2004 on this lease was $163,000 and $184,000 respectively, and is included
in both manufacturing and selling and administrative expenses.
Other Lease Commitments- The Company leases manufacturing and office facilities
through March 31, 2007. The lease was effective on April 1, 2002 and provided
for minimum monthly rental of $32,500 per month through March 31, 2007 plus
increases in real estate taxes and building operating expenses. Rent expense has
been straight-lined over the life of the lease. At its option, the Company has
the right to renew the lease for an additional five year period. On August 27,
2002 the lease was amended reducing the square footage from approximately 32,500
to 22,500 and reducing the monthly rent to $22,483 per month for the balance of
the lease. Rent expense for the three months ended September 30, 2005 and 2004
was $98,588 and $116,684, respectively and is included in manufacturing
expenses.
The Company leases warehouse and office facilities through March 31, 2007. The
lease was effective on March 6, 2004, and provides for a minimum monthly rental
of $9,967. The Company leases office space through September 30, 2006. The lease
was effective on October 1, 2005, and provides for a minimum monthly rental of
$1,126. The company leases office space through December 31, 2012, and provides
for a minimum monthly rental of $18,611. The Company leases warehouse equipment
for a five (5) year period with an annual rental of $15,847 and office equipment
for a five (5) year period with an annual rental of $8,365.
11
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company leases automobiles under non-cancelable operating lease agreements,
which expire through 2008.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related Party
Year Ending Lease Lease
June 30, Commitment Commitment Total
- --------------- ----------- ----------- -----------
2006, remaining $ 498,969 $ 242,669 $ 741,638
2007 523,629 323,559 847,188
2008 207,797 323,559 531,356
2009 201,501 323,559 525,060
2010 195,201 323,559 518,760
Thereafter 482,753 1,590,832 2,073,585
- --------------- ----------- ----------- -----------
Total $ 2,109,850 $ 3,127,737 $ 5,237,587
=============== =========== =========== ===========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $425,000 and $382,000 for the three months ended September 30,
2005 and 2004, respectively.
[B] Consulting Agreement - On October 20, 2003, the Company entered into a one
year consultant agreement with an investor relations consultant. The Company
paid $80,000 over the term of the agreement. In addition, the Company initially
agreed to issue to the consultant 36,000 shares of its common stock. On July 13,
2004, the Company terminated the agreement. Under the terms of the termination
agreement, the Company was not obligated to pay the $10,000 per month fee after
July 15, 2004. Additionally, the Company issued to the consultant 27,000 shares
of common stock valued at the fair market price on the date of issuance in lieu
of the original 36,000 shares. The 27,000 shares of common stock were valued at
$186,300 and are included in selling and administrative expenses for the three
months ended September 30, 2004.
[C] Development and Supply Agreement- On March 13, 1998, the Company signed a
development and supply agreement with Herbalife International of America, Inc.
("Herbalife") whereby the Company will develop, manufacture and supply certain
nutritional products to Herbalife which, agreement was renewed through December
31, 2006. The agreement provides that Herbalife is required to purchase a
minimum quantity of Supplied Products each year of $18,000,000 for the term of
the agreement. If Herbalife purchases the minimum amount, then Herbalife will be
entitled to certain rebates of an amount not exceeding $300,000 per year. For
the three months ended September 30, 2005 and 2004, there were no rebates due.
[D] Intellectual Property Agreement - In connection with the acquisition in
January 2004 of intellectual property developed by the Center for Molecular
Biotechnology of Fraunhofer USA, Inc., the Company will pay up to a maximum of
$2,500,000 for additional intellectual property. As of September 30 and June 30,
2005, $1,250,000 has been paid and is being amortized on a straight-line basis
over a ten-year period.
[E] Legal Proceedings -NatEx Georgia LLC and Vasili Patarkalishvili v. Robert B.
Kay, E. Gerald Kay, Trade Investment Services, LLC, Paxis Pharmaceuticals, Inc.,
Dean P. Stull and Integrated BioPharma, Inc., pending in the United States
District Court for the Southern District of New York. Plaintiffs NatEx Georgia
LLC and Vasili Patarkalishvili commenced this action on July 19, 2004, alleging
claims for breach of contact, fraud and breach of the implied duty of good faith
and fair dealing arising out of an alleged failure by Paxis to provide
information necessary for NatEx to perform under the parties' agreements by
which NatEx had agreed to supply Paclitaxel extract. The complaint seeks damages
of more than $5 million. On August 18, 2004, the Company removed this action to
federal court. The plaintiffs have moved to have the matter remanded to state
court. The Company plans to file a motion to dismiss and to defend vigorously
the claims in this lawsuit. The outcome is uncertain and the Company feels that
there will be no material financial adverse effect.
12
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
[9] Related Party Transactions
The Company has two consulting agreements with the brothers of the Company's
Chairman of the Board. One agreement is on a month-to-month basis for $1,100 per
month. The total consulting expense recorded per this verbal agreement for the
three months ended September 30, 2005 and 2004 was $3,300. The second agreement
is with EVJ, LLC; a limited liability company controlled by Robert Kay, an
employee of the Company. This agreement is also on a month-to-month basis. The
total consulting expense under this agreement was $30,000 for the three months
ended September 30, 2005 and $45,000 for the three months ended September 30,
2004.
[10] Equity Transactions
[A] Stock Option Plan and Warrants - On July 19, 2005, the Company granted
25,000 incentive stock options for a period of ten years at an exercise price
equal to the market price of $2.05.
[B] Treasury Stock Purchases - On June 25, 2004 Integrated BioPharma, Inc.
adopted a stock repurchase plan giving management authority to purchase up to
$3.0 million worth of the Company's stock in open market transactions or
privately negotiated transactions at the Company's discretion. The Company
purchased an aggregate of 9,100 shares of its common stock for a purchase price
of $70,508 in July 2004.
[11] Segment Information
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments.
The Company has divided its operations into three reportable segments as
follows: Sales of vitamins and nutritional supplements, sales of its active
pharmaceutical ingredient Paclitaxel and sales of technical services through its
Hauser subsidiary. The international sales for the three months ended September
30, 2005 and 2004 were $2,046,722 and $1,658,963, respectively.
13
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial information relating to the three months ended September 30, 2005 and
2004 operations by business segment is as follows:
Technical Technical
Nutraceutical Pharmaceutical Services Total Nutraceutical Pharmaceutical Services Total
------------ ------------ ----------- ------------ ------------ ------------ ---------- ------------
Sales, net
U.S. customers $ 11,923,425 $ 9,500 $ 807,460 $ 12,740,385 $ 4,188,372 $ 211,660 $ 57,041 $ 4,457,073
International
customers 2,046,722 - - 2,046,722 1,658,963 - - 1,658,963
------------ ------------ ----------- ------------ ------------ ------------ ---------- ------------
Total Sales, net $ 13,970,147 $ 9,500 $ 807,460 $ 14,787,107 $ 5,847,335 $ 211,660 $ 57,041 $ 6,116,036
============ ============ =========== ============ ============ ============ ========== ============
Segment operating
profit (loss) $ 3,455,741 $(1,319,143) $ (152,898) $ 1,983,700 $ (445,055) $(1,269,682) $ (71,675) $(1,786,412)
============ ============ =========== ============ ============ ============ ========== ============
Depreciation $ 88,718 $ 80,890 $ 33,183 $ 202,791 $ 105,592 $ 168,803 $ - $ 274,395
============ ============ =========== ============ ============ ============ ========== ============
Captial
expenditures $ 41,023 $ - $ 7,521 $ 48,544 $ 31,433 $ 146,235 $ 916,552 $ 1,094,22
============ ============ =========== ============ ============ ============ ========== ============
As of September 30,
2005 2004
-------------------------------------------------------- -------------------------------------------------------
Total Assets $ 21,602,140 $ 4,361,774 $ 1,999,991 $ 27,963,905 $ 19,927,714 $ 8,228,470 $ 2,014,075 $30,170,259
============ ============ =========== ============ ============ ============ ========== ============
[12] Subsequent Event
On October 27, 2005, the Company closed on a $2,000,000 revolving line of credit
agreement which bears interest at 3% above the prime interest rate and expires
on October 27, 2007. The line of credit includes specific loan covenants. The
loan is collateralized by specific assets of the Company and is personally
guaranteed by the Chairman of the Board of the Company.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION
AND RESULTS OF OPERATION
Certain statements set forth under this caption constitute "forward-looking
statements." See "Disclosure Regarding Forward-Looking Statements" on page 1 of
this Report for additional factors relating to such statements. The following
discussion should also be read in conjunction with the Condensed Consolidated
Financial Statements of the Company and Notes thereto included elsewhere herein
and the Company's Annual Report on Form 10-KSB.
Effective July 1, 2005, the Company no longer qualifies as a small business
issuer as the result of its revenues exceeding $25.0 million for the prior two
fiscal years; hence the Company will no longer be filing as a small business
issuer with the Securities and Exchange Commission. Accordingly, effective July
1, 2005, the Company is required to comply with the reporting requirements of
Regulation S-K instead of Regulation S-B.
The Company is engaged primarily in the manufacturing, distributing, marketing
and sales of vitamins, nutritional supplements and herbal products; the
manufacture and distribution of paclitaxel, which is the primary
chemotherapeutic agent in the treatment of breast cancer; and technical services
through its recently acquired contract research organization, InB: Hauser
Pharmaceutical Services, Inc. ("Hauser"). The Company's customers are located
primarily throughout the United States.
The loss in the Paxis subsidiary of $1,319,143 was made up of a $500,000
inventory write down and approximately $820,000 of operating expenses. On July
1, 2005, the Company previously announced a reduction in the rate of production
of paclitaxel API and a corresponding reduction in the Company's workforce.
Critical Accounting Policies and Estimates
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management bases its estimates on historical experience and on
various other assumptions that are believed to be 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. The most significant estimates include:
* sales returns and allowances;
* allowance for doubtful accounts;
* inventory valuation and obsolescence;
* valuation and recoverability of long-lived and intangible assets
and goodwill, including the values assigned to acquired intangible
assets;
* income taxes and valuation allowance on deferred income taxes, and;
* accruals for, and the probability of, the outcome of current litigation.
On a continual basis, management reviews its estimates utilizing currently
available information, changes in facts and circumstances, historical experience
and reasonable assumptions. After such reviews, and if deemed appropriate, those
estimates are adjusted accordingly. Actual results could differ from those
estimates. There have been no material changes in the calculation of these
estimates since the audited financial statements at June 30, 2005.
15
Allowances for Doubtful Accounts and Sales Returns
The Company makes judgments as to its ability to collect outstanding receivables
and provides allowances for the portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all significant
outstanding invoices. The Company continuously monitors payments from its
customers and maintains allowances for doubtful accounts for estimated losses in
the period they become known.
The Company's sales policy is to require customers to provide purchase orders
establishing selling prices and shipping terms. Shipping terms vary depending
upon the customer. Shipping terms are either F.O.B. shipping point with title
and risk of loss passing to the customer at point of shipment or F.O.B.
destination where title and risk passes to the customer when the goods are
received.
The Company's return policy is to only accept returns for defective products. If
defective products are returned, it is the Company's agreement with its
customers that the Company cure the defect and reship the product. The policy is
that when the product is shipped the Company makes an estimate of any potential
returns or allowances.
If the historical data the Company uses to calculate the allowance provided for
doubtful accounts does not reflect the future ability to collect outstanding
receivables, additional provisions for doubtful accounts may be needed and the
future results of operations could be materially affected. In recording any
additional allowances, a respective charge against income is reflected in the
general and administrative expenses, and would reduce the operating results in
the period in which the increase is recorded.
The Company preformed a sensitivity analysis to determine the impact of
fluctuations in our estimates for our allowance for doubtful accounts. As of
September 30, 2005 the allowance was $59,047. If this number were in error by
plus or minus one percent of the account receivable balance, the impact would be
an additional $56,000 of income or expense.
Inventory Valuation
Inventories are stated at the lower of cost or market ("LCM"), which reflects
management's estimates of net realizable value. The inventory amounts are made
up of inventory in both the nutraceutical and pharmaceutical segments of
business. Because nutraceutical inventory is manufactured on a purchase order
basis, the quantity of both raw material and finished goods inventory provides
for minimal risk for potential overstock or obsolescence. Pharmaceutical
inventory is valued at the lower of cost or market.
Mail order inventory is expiration date sensitive. The Company reviews this
inventory and considers sales levels (by SKU), term to expiration date,
potential for retesting to extend expiration date and evaluates potential for
obsolescence or overstock.
The Company preformed a sensitivity analysis to determine the impact of
fluctuations in our estimates for inventory allowances. As of September 30, 2005
the allowance was $27,500. If this number were in error by plus or minus one
percent of the total inventory balance, the impact would be an additional
$114,225 of income or expense.
Long Lived Assets
Purchased intangibles consisting of patents and unpatented technological
expertise, intellectual property, license fees and trade names purchased as part
of business acquisitions are presented net of related accumulated amortization
and are being amortized on a straight-line basis over the remaining useful
lives.
16
The Company records impairment losses on other intangible assets when events and
circumstances indicated that such assets might be impaired and the estimated
fair value of the asset is less than its recorded amount in accordance with
Statement of Financial Accounting Standards ("SFAS") No 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The Company reviews the value of
its long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives of these assets are no longer appropriate.
Conditions that would necessitate an impairment assessment include material
adverse changes in operations, significant adverse differences in actual results
in comparison with initial valuation forecasts prepared at the time of
acquisition, a decision to abandon certain acquired products, services, or
marketplaces, or other significant adverse changes that would indicate the
carrying amount of the recorded asset might not be recoverable.
Goodwill and Other Intangible Assets - The Financial Accounting Standards Board
("FASB") has issued Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets". SFAS 142 requires that goodwill
and intangible assets with indefinite lives no longer be amortized against
earnings, but instead tested for impairment at least annually based on a
fair-value approach as described in SFAS 142.
Intangible assets with finite lives are amortized over their estimated useful
lives. The useful life of an intangible asset is the period over which the asset
is expected to contribute directly or indirectly to future cash flows. The
carrying value of intangible assets with finite lives is evaluated whenever
events or circumstances indicate that the carrying value may not be recoverable.
The carrying value is not recoverable when the projected undiscounted future
cash flows are less than the carrying value. Tests for impairment or
recoverability require significant management judgment, and future events
affecting cash flows and market conditions could result in impairment losses.
General - The Company recognizes revenue in accordance with the Securities and
Exchange Commission's Staff Accounting Bulletin 104. The Company recognizes
product sales revenue when title and risk of loss have transferred to the
customer, when estimated provisions for product returns, rebates, chargebacks
and other sales allowances are reasonably determinable, and when collectibility
is reasonably assured. Accruals for these items are presented in the condensed
consolidated financial statements as reductions to sales. The Company's net
sales represent gross sales invoiced to customers, less certain related charges
for discounts, returns, rebates, chargebacks and other allowances. Cost of sales
includes the cost of raw materials and all labor and overhead associated with
the manufacturing and packaging of the products. Gross margins are affected by,
among other things, changes in the relative sales mix among the Company's
products, as well as gross margins of acquired entities.
Operating results in all periods presented reflect the impact of acquisitions.
The timing of those acquisitions and the changing mix of businesses as acquired
companies are integrated into the Company may affect the comparability of
results from one period to another.
17
Results of Operations
The following table sets forth the income statement data of the Company as a
percentage of net sales for the periods indicated:
For the three months
ended September 30,
-------------------------
2005 2004
---------- ----------
Sales, net 100.0% 100.0%
Costs and expenses:
Cost of sales 63.5% 91.6%
Selling and administrative 23.1% 37.7%
---------- ----------
86.6% 129.2%
---------- ----------
Income (loss) from operations 13.4% (29.2%)
---------- ----------
Other income (expense):
Interest expense (0.5%) (0.6%)
Other income 0.1% 0.7%
Interest and investment income 0.0% 0.4%
---------- ----------
(0.4%) 0.6%
---------- ----------
Income (loss) before income taxes (benefit) 13.0% (28.6%)
Federal and state income taxes (benefit) 0.3% (0.0%)
---------- ----------
Net income (loss) before minority interest 12.7% (28.6%)
Minority interest 0.2% -
---------- ----------
Net income (loss) 12.9% (28.6%)
Deemed dividend from beneficial conversion
feature of Series B Preferred Stock (4.0%) (9.5%)
Series B Preferred Stock dividend (0.8%) (2.0%)
---------- ----------
Net income (loss) allocable to common
shareholders 8.1% (40.2%)
========== ==========
18
For the three month period ended September 30, 2005
Compared to the three month period ended September 30, 2004
Sales, net. Sales, net, for the first quarter ended September 30, 2005 and 2004
were $14,787,107 and $6,116,036, respectively, an increase of $8,671,071 or
141.8%. The increase is comprised of the following:
Three months ended Dollar Increase Percentage
September 30, (Decrease) Change
----------------------------- ----------- ----------
2005 2004 2005 vs 2004 2005 vs 2004
------------ ----------- ----------- ----------
Nutraceutical - US Customers $ 11,923,425 $ 4,188,372 $ 7,735,053 184.7%
Nutraceutical - International Customers 2,046,722 1,658,963 387,759 23.4%
------------ ----------- ----------- ----------
Total Nutraceutical 13,970,147 5,847,335 8,122,812 138.9%
Pharmaceutical 9,500 211,660 (202,160) (95.5%)
Technical Services 807,460 57,041 750,419 1,315.6%
------------ ----------- ----------- ----------
Total $ 14,787,107 $ 6,116,036 $ 8,671,071 141.8%
============ =========== =========== ==========
The Company's net income for the three months ended September 30, 2005 was
$1,912,566 as compared to net loss of $(1,751,612) for the three months ended
September 30, 2004. This increase in net income of approximately $3,660,000 is
primarily the result of an increase in gross profit of approximately $4,880,000,
an increase in selling and administrative expenses of $1,100,000, a decrease in
other income of approximately $94,000, and an increase in federal and state
income taxes of approximately $45,000.
Sales for the three months ended September 30, 2005 and 2004 were $14,787,107
and $6,116,036, respectively, an increase of approximately $8,670,000 or 142%.
This increase is the result of the continued growth of the Company's branded
proprietary nutraceutical products. Gross profit for the three months ended
September 30, 2005 was $4,877,820 higher than gross profit for the three months
ended September 30, 2004. Exclusive of the Paxis subsidiary the gross profit
percentage for the three months ended September 30, 2005 was 44% and 24% for the
three months ended September 30, 2004. For the three months ended September 30,
2005, approximately 95% of revenues were derived from three customers as
compared to two customers representing 64% of revenues for the three months
ended September 30, 2004. The loss of any of these customers would have an
adverse affect on the Company's operations.
Nutracuetical sales for the three months ended September 30, 2005 and 2004 were
$13,970,147 and $5,847,335, respectively, an increase of $8,122,812 or 139%.
Technical sales for the three months ended September 30, 2005 were $807,460
compared to $57,041 for the comparable period. This increase is primarily due to
the operations existing for the full three months of the 2005 period compared to
less than one month for the comparable period in 2004.
Cost of sales increased to $9,392,762 for the three months ended September 30,
2005 as compared to $5,599,511 for the three months ended September 30, 2004.
Cost of sales decreased as a percentage of sales to 64% for the three months
ended September 30, 2005 as compared to 92% for the three months ended September
30, 2004. The decrease in cost of sales was due to the increase in sales of the
Company's branded proprietary nutraceutical products, which yield higher profit
margins.
19
Selling and Administrative Expenses. Selling and administrative expenses were
$3,410,645 for the three months ended September 30, 2005, an increase of
$1,107,708 or 48.0% as compared with $2,302,937 for the three months ended
September 30, 2004. As a percentage of sales, net, selling and administrative
expenses were 23.1% for the three months ended September 30, 2005 and 37.6% for
the prior comparable period. A tabular presentation of the changes in selling
and administrative expenses is as follows:
Three months ended Dollar increase Percentage
September 30, (Decrease) Change
----------------------------- ------------ ------------
2005 2004 2005 vs 2004 2005 vs 2004
----------- ------------ ------------ ------------
Advertising $ 496,247 $ 200,832 $ 295,415 147.1%
Bad debt (recoveries) 2,813 (2,654) 5,467 (206.0%)
Commission 285,540 49,837 235,703 472.9%
Officers Salaries 164,231 98,398 65,833 66.9%
Auto, Travel & Entertainment 150,181 227,100 (76,919) (33.9%)
Office Salaries 485,973 555,175 (69,202) (12.5%)
Depreciation & Amortization 148,282 100,196 48,086 48.0%
Consulting 134,961 235,717 (100,756) (42.7%)
Regulatory Fees 5,786 3,758 2,028 54.0%
Professional 233,230 219,680 13,550 6.2%
Research & Development 13,934 45,068 (31,134) (69.1%)
Indirect labor 262,663 - 262,663 100.0%
Office Rent 165,237 63,831 101,406 158.9%
Employee Benefits 68,154 38,103 30,051 78.9%
Office 146,023 44,422 101,601 228.7%
Compensation expense for employee stock options 151,517 - 151,517 100.0%
Public Relations 73,310 29,900 43,410 145.2%
Other 422,563 393,574 28,989 7.4%
----------- ------------ ------------ ------------
Total $ 3,410,645 $ 2,302,937 $ 1,107,708 48.1%
=========== ============ ============ ============
The increase in advertising and commission expense is due to an increase in
sales in the Company's nutraceutical segment. Officers' salaries increased as a
result of the addition of a new Vice President of sales and marketing.
Consulting fees decreased as a result of the prior years' termination of an
agreement made on July 8, 2004, which resulted with the issuance of 27,000
shares of common stock and a consulting fee expense of $186,300. The increase in
indirect labor, office rent, office expenses and employee benefits was
attributable to the inclusion of InB:Hauser Pharmaceutical Services, Inc.'s
subsidiary expenses for the three months ended September 30, 2005. The
InB:Hauser acquisition was completed on September 16, 2004. There were no
comparable expenses in the prior period because the operations existed for less
than one month for the comparable quarter. Pursuant to SFAS No. 123(R), the
Company recognized $151,517 in compensation expenses for employee stock options.
Other income (expense). Other income (expense) was a net expense of ($59,596)
for the three months ended September 30, 2005 as compared to net income of
$34,547 for the comparable period a year ago. The decrease of $94,143 was
primarily attributable to an increase in interest expense due to the ongoing
increase in the Libor rate and a decrease in the Company's administrative fee
income.
Seasonality. Although the Company believes that its business is not seasonal in
nature, the Company has experienced, and expects to continue to experience, a
substantial variation in its net sales and operating results from quarter to
quarter. The Company believes that the factors which influence this variability
of quarterly results include general economic and industry conditions that
affect consumer spending, changing consumer demands and current news on
nutritional supplements. Accordingly, a comparison of the Company's results of
operations from consecutive periods is not necessarily meaningful, and the
Company's results of operations for any period are not necessarily indicative of
future performance.
20
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are cash
generated from operations. The Company also has a $2.0 million revolving line of
credit available through October 27, 2007. The Company's principal uses of cash
have been to finance working capital, acquisitions, capital expenditures and
preferred Series B stock dividend payments. The Company anticipates these uses
will continue to be its principal uses of cash in the future.
The following table sets forth, for the periods indicated, the Company's net
cash flows used in operating, investing and financing activities, its period end
cash and cash equivalents and other operating measures:
For the three months ended
September 30,
-------------------------------
2005 2004
------------- --------------
Net cash used in operating acitivites $ (296,979) $ (3,718,245)
============= ==============
Net cash used in investing acitivites $ (48,544) $ (1,094,220)
============= ==============
Net cash used in financing acitivites $ (66,057) $ (135,362)
============= ==============
Cash and cash equivalents at end of period $ 2,015,973 $ 4,600,219
============= ==============
Days sales in inventory 104 126
============= ==============
Inventory turnover 3.5 2.9
============= ==============
At September 30, 2005, the Company's working capital was $9,649,684, a decrease
of $792,316 over working capital at September 30, 2004. Cash and cash
equivalents were $2,015,973 at September 30, 2005, a decrease of $411,580 from
June 30, 2005. The Company utilized $296,979 and $3,718,245 of cash for
operations for the three months ended September 30, 2005 and 2004, respectively.
The primary reason for the increase in cash generated from operations is net
income of approximately $2,060,000. The Company believes that anticipated sales
for next year, current cash balances and new line of credit financing would meet
cash needs for operations for fiscal 2006.
The Company utilized $48,544 and $1,094,220 of cash in investing activities for
the three months ended September 30, 2005 and 2004, respectively. The Company
utilized $66,057 and $135,362 of cash from financing activities for the three
months ended September 30, 2005 and 2004, respectively.
The Company has a promissory note provided by Bank of America dated September 4,
2004, in the amount of $4,500,000 with interest at a variable rate based on
1.25% over the current LIBOR rate. The loan was due on September 4, 2005 and
subsequently has been renewed through November 4, 2005 with the intention of
extending the November renewal date to September 4, 2006, under the existing
terms and conditions of the prior note. The loan is guaranteed by Mr. Carl
DeSantis, a shareholder and director of the Company.
The Company's total annual commitments at September 30, 2005 for long term
non-cancelable leases of approximately $850,000 consists of obligations under
operating leases for facilities and lease agreements for the rental of warehouse
equipment, office equipment and automobiles.
The Company believes its sources of cash will be sufficient to fund its
operations and meet its cash requirements to satisfy its working capital need,
capital expenditure need, outstanding commitments, and other liquidity
requirements associated with its existing operations over the next twelve
months. The Company's ability to fund these requirements will depend on its
future operations, performance and cash flow and is subject to prevailing
economic conditions and financial, business and other factors, some of which are
beyond the Company's control. In addition, as part of the Company's strategy, it
may pursue acquisitions and investments that are complementary to its business.
Any material future acquisitions or investments will likely require additional
capital and therefore, the Company cannot predict or assure that additional
funds from existing sources will be sufficient for such future events.
21
Capital Expenditures
The Company's capital expenditures for the three months ended September 30 2005
and 2004 were $48,544 and $1,094,220, respectively. The capital expenditures in
the three months ended September 30, 2004 were primarily attributable to the
purchase of machinery and equipment in its Paxis and Hauser subsidiaries.
The Company has budgeted approximately $200,000 for capital expenditures for
fiscal 2006. The total amount will be funded from the current cash balances.
Subsequent Event
On October 27, 2005, the Company closed on a $2,000,000 revolving line of credit
agreement which bears interest at 3% above the prime interest rate and expires
on October 27, 2007. The line of credit includes specific loan covenants. The
loan is collateralized by specific assets of the Company and is personally
guaranteed by the Chairman of the Board of the Company.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting Pronouncement - refer to footnote 1 of the condensed
consolidated financial statements for the three months ended
September 30, 2005 included in Part I - Item 1.
Impact of Inflation
The Company does not believe that inflation has significantly affected its
results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is party to financial instruments
that are subject to market risks arising from changes in interest rates and
foreign currency exchange rates, primarily with respect to the Canadian Dollar
in its customer receivables. The Company's use of derivative instruments is very
limited and it does not enter into derivative instruments for trading purposes.
22
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934, or the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objective,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, we carried out an
evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our principal executive officer and
principal financial officer concluded that, as of the end of the period covered
by this report, our disclosure controls and procedures were effective at the
reasonable assurance level to ensure that information required to be disclosed
by us in reports that we file under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms. The Company has not completed its Sarbanes Oxley section 404 process, or
related assessment in the process of evaluation and testing. The Company may
identify deficiencies that may require remediation.
23
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
NatEx Georgia LLC and Vasili Patarkalishvili v. Robert B. Kay, E. Gerald Kay,
Trade Investment Services, LLC, Paxis Pharmaceuticals, Inc., Dean P. Stull and
Integrated BioPharma, Inc., pending in the United States District Court for the
Southern District of New York. Plaintiffs NatEx Georgia LLC and Vasili
Patarkalishvili commenced this action on July 19, 2004, alleging claims for
breach of contact, fraud and breach of the implied duty of good faith and fair
dealing arising out of an alleged failure by Paxis to provide information
necessary for NatEx to perform under the parties' agreements by which NatEx had
agreed to supply Paclitaxel extract. The complaint seeks damages of more than $5
million. On August 18, 2004, the Company removed this action to federal court.
On December 10, 2004, the federal court remanded the matter to state court. The
Company has since filed a motion to dismiss and plans to defend vigorously the
claims in this lawsuit. The outcome of the lawsuit is uncertain at this time,
but the Company believes that it will not have a material financial impact.
On October 14, 2004, the Company was served with a product liability complaint.
In July 2005, the parties entered into a compromise settlement, which was
approved by the court in September 2005. The compromise settlement did not have
a material financial impact.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
24
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number
31.1 Certification of pursuant to Section 302 of Section 302 of the
Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
31.2 Certification of pursuant to Section 302 of Section 302 of the
Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
32.1 Certification of periodic financial report pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
32.2 Certification of periodic financial report pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K filed July 1, 2005 pursuant to Item
7.01 (Regulation FD Disclosure) and Item 9.01 (Financial
Statements and Exhibits).
(2) Current Report on Form 8-K filed August 10, 2005 pursuant to
Item 5.02 (Departure of Directors or Principal Officers;
Election of Directors; Appointment of Principal Officers) and
Item 9.01 (Financial Statements and Exhibits).
(3) Current Report on Form 8-K filed September 29, 2005 pursuant to
Item 7.01 (Regulation FD Disclosure) and Item 9.01 (Financial
Statements and Exhibits).
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
Date: November 3, 2005 By: /s/ E. Gerald Kay
---------------------
E. Gerald Kay,
Chief Executive Officer
Date: November 3, 2005 By: /s/ Eric Friedman
---------------------
Eric Friedman,
Vice President & Chief Financial Officer
26