SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended December 31, 2003
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the
transition period from _____ to _____
Commission file number 0-26362
ADVANCED NUTRACEUTICALS, INC.
-----------------------------
(Exact name of small business issuer as specified in its charter)
Texas 76-0642336
----- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
106 South University Blvd., Unit 14
Denver, CO 80209
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(Address of Principal Executive Offices)
(303) 722-4008
--------------
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of February 5, 2004 there were 4,992,789 shares of common stock,
$0.01 par value per share, outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
ADVANCED NUTRACEUTICALS, INC.
Index
PART 1 - Financial Information
Page
Item 1. Financial Statements
Advanced Nutraceuticals, Inc.
Consolidated Balance Sheet at December 31, 2003 3
Consolidated Statements of Operations For the
Three Months Ended December 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 8
Item 3. Controls and Procedures 10
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
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ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
(Unaudited)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 920,764
Receivables, net 4,854,553
Inventories 2,626,929
Prepaid expenses and other assets 128,488
-----------
Total Current Assets 8,530,734
Property and equipment, net 4,507,298
Goodwill 7,563,913
Other assets 416,099
-----------
$ 21,018,044
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 2,807,724
Accrued compensation 101,171
Accrued expenses and other liabilities 112,880
Credit facility 248,600
Current portion of long-term debt 76,635
-----------
Total Current Liabilities 3,347,010
Long-term debt:
Credit facility 3,075,752
Other long-term debt 2,314,193
-----------
Total Liabilities 8,736,955
-----------
Commitments and contingencies --
Stockholders' Equity:
Preferred stock; $.001 par value; 1,000,000 authorized; none outstanding --
Common stock; $.01 par value; 20,000,000 shares authorized; 4,992,789
outstanding 49,928
Additional paid-in capital 20,322,048
Accumulated deficit (8,090,887)
----------
Total Stockholders' Equity 12,281,089
----------
$ 21,018,044
=============
See accompanying notes to unaudited condensed consolidated financial statements.
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ADVANCED NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months
Ended December 31,
2003 2002
---- ----
Net sales $ 6,756,551 $ 6,637,736
Cost of sales 4,867,780 4,431,756
----------- -----------
Gross profit 1,888,771 2,205,980
General and administrative expenses 1,544,526 1,827,703
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Operating income (loss) 344,245 378,277
----------- -----------
Other income (expense):
Interest expense (180,656) (167,701)
Other, net 35,707 6,758
----------- -----------
(144,949) (160,943)
----------- -----------
Income (loss) from operations before income
tax expense 199,296 217,334
Income tax expense -- --
----------- -----------
Net income (loss) $ 199,296 $ 217,334
=========== ===========
Basic and diluted income (loss) per common share:
Net income (loss) $ 0.04 $ 0.04
=========== ===========
Weighted average common shares outstanding:
Basic 4,992,789 4,992,789
Diluted 5,001,834 5,178,086
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
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ADVANCED NUTRACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months
Ended December 31,
----------------------------
2003 2002
---- ----
Net cash provided by (used in) operating activities $ (50,791) $ 748,629
Net cash provided by (used in) investing activities (49,193) 170,034
Net cash provided by (used in) financing activities (48,010) (505,434)
----------- ------------
Net increase (decrease) in cash and cash equivalents (147,994) 413,229
Cash and cash equivalents at beginning of period 1,068,758 793,023
----------- ------------
Cash and cash equivalents at end of period $ 920,764 $ 1,206,252
=========== ============
See accompanying notes to unaudited condensed consolidated financial statements.
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ADVANCED NUTRACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements of Advanced Nutraceuticals, Inc. (the
"Company" or "ANI") have been prepared in accordance with the instructions to
quarterly reports on Form 10-QSB. In the opinion of Management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in financial position
at December 31, 2003, and for all periods presented have been made. Certain
information and footnote data necessary for fair presentation of financial
position and results of operations in conformity with accounting principles
generally accepted in the United States of America have been condensed or
omitted. It is therefore suggested that these financial statements be read in
conjunction with the summary of significant accounting policies and notes to
financial statements included in the Company's Annual Report on Form 10-K.
Certain amounts in the Company's prior year financial statements have been
reclassified to conform to the presentation used in the current year. The
results of operations for the period ended December 31, 2003 are not necessarily
an indication of operating results for the full year.
NOTE 1--INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
Segments
The Company's business segments are divided into distinct manufacturing
areas in two geographic locations. Bactolac Pharmaceutical Inc. ("Bactolac") is
a private label contract manufacturer of vitamins and supplements located in
Hauppauge, New York. ANI Pharmaceuticals, Inc. ("ANIP") is a contract and
private label manufacturer of over-the-counter liquid and powder pharmaceutical
products, primarily liquid stomach remedies, located in Gulfport, Mississippi.
The Company determines its segment results consistent with its management
reporting and consolidated accounting policies. Selected financial information
from the Company's business segments is as follows (ooo's):
Vitamins and Pharmaceutical Corporate \
Supplements Products Overhead Totals
------------ -------------- ------------ ---------
Three months ended December 31, 2003:
Net sales $ 4,075 $ 2,682 $ -- $ 6,757
Gross profit 1,329 560 -- 1,889
General and administrative
expenses 487 844 214 1,545
Operating income (loss) 842 (284) (214) 344
Interest expense (33) (125) (23) (181)
Net income (loss) 809 (405) (205) 199
Capital expenditures 49 -- -- 49
Depreciation and amortization 64 79 1 144
Identifiable assets 14,343 6,433 242 21,018
Three months ended December 31, 2002:
Net sales $ 3,081 $ 3,557 $ -- $ 6,638
Gross profit 1,219 987 -- 2,206
General and administrative
expenses 534 1,099 195 1,828
Operating income (loss) 685 (112) (195) 378
Interest expense (29) (135) (4) (168)
Net income (loss) 656 (240) (199) 217
Capital expenditures 12 2 -- 14
Depreciation and amortization 53 138 1 192
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Major Customers
Other than as detailed under foreign sales, the Company's revenues are
generated from customers located in the United States. One customer comprised
more than 10% of the Company's sales for the three-month periods ended December
31, 2003 and 2002. That customer represented 16.3% and 19.5% of sales for the
2003 and 2002 periods.
Foreign Sales
Export sales were approximately $335,000 and $510,000 for the three months
ended December 31, 2003 and 2002. The Company has no foreign assets.
NOTE 2 - DEBT AGREEMENTS
As of March 21, 2003, the Company completed the refinancing of its Senior
Debt Facility with a new lender. The new debt agreement provides the Company
with a $5.5 million facility, consisting of a $4.0 million revolver, a $1.0
million equipment term loan and a $500,000 equipment acquisition line. The
three-year agreement which matures in March 2006, is collateralized by
substantially all of the Company's assets, and bears interest at rates that
fluctuate with the Prime Rate, with the revolver at 2% over prime (not to be
less than a total rate of 6.5%) and the equipment lines at 4.75% over prime (not
to be less than a total rate of 9.25%). As a result of the "floor" amount of the
interest rates under the facility, those rates represented the period-end
interest rates as well as the effective interest rates for the period. The term
loan portion of the agreement requires monthly payments of principal totaling
approximately $21,000. Due to the fact that the agreement extends for a
three-year term, the obligation, other than the portion payable within the next
twelve months, is classified as a long-term liability on the accompanying
consolidated balance sheet. The Agreement contains a number of covenants, which
include among other items; maintenance of specified minimum net worth and fixed
charge ratios, as well as limitations on capital expenditures. As of December
31, 2003, the total balance outstanding under the facility, including $1,073,000
outstanding under the term loan portion, amounted to $3,324,000, of which
$248,600 has been classified as a current liability.
NOTE 3 - STOCK BASED COMPENSATION AND EARNINGS PER SHARE
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its stock-based
employee compensation plans. During the quarter ended December 31, 2003, the
Company issued 30,000 options under its plans. The following table illustrates
the effect on net income (loss) and income (loss) per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation to its stock-based employee plans.
Three Months
Ended December 31,
2003 2002
--------- ---------
Net income (loss), as reported $ 199,000 $ 217,000
Add: Stock-based compensation
expense included in reported net income
(loss), net of related tax effects -- --
Deduct: Total stock-based employee compen-
sation expense determined under fair value
based method for awards granted, modified
or settled, net of related tax effects (52,000) (49,000)
--------- ---------
Pro forma net income (loss) $ 147,000 $ 168,000
========= =========
Earnings (loss) per share:
Basic and diluted - as reported $ 0.04 $ 0.04
========= =========
Basic and diluted - pro forma $ 0.03 $ 0.03
========= =========
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ITEM 2.
ADVANCED NUTRACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Comparison of the Presented Results of Operations for the Three Months
Ended December 31, 2003 to the Three Months Ended December 31, 2002.
The Company's operations are conducted through two operating subsidiaries;
Bactolac Pharmaceutical Inc. ("Bactolac"), a private label contract manufacturer
of vitamins and supplements, and ANI Pharmaceuticals, Inc. ("ANIP"), a contract
and private label manufacturer of over-the-counter liquid and powder
pharmaceutical products.
Net sales for the 2003 period increased $119,000 or 1.8% over the 2002
period. The increase was attributable to a $994,000 increase in the sales at
Bactolac which was offset by an $875,000 decrease in sales at ANIP. The Bactolac
increase consisted of increases in revenue to and sales of additional products
to existing customers with the ANIP decrease attributable to reduced export
sales and overall lower sales to existing customers for the period.
Gross profit for the 2003 period decreased to $1,889,000, a $317,000
decrease over the 2002 amount. Gross profit as a percentage of net sales
decreased to 28.0% in 2003, as compared to 33.2% in the 2002 period. Gross
profit at Bactolac decreased to 32.6% from 39.6% in the 2002 period. The
majority of the decline resulted from variations in the product mix during the
period. Gross profits at the ANIP operation decreased to 20.9% in 2003 from
27.7% in the 2002 period primarily due to lower sales levels and changes in the
customer and product mix.
Total operating expenses decreased to $1,545,000 in 2003 from $1,828,000 in
2002. This represents a decrease of $283,000, or 15.5%. The majority of the
decrease relates to lower variable sales and marketing expenses incurred,
primarily commissions and freight expenses incurred due to the lower sales
levels at ANIP.
No income tax expense was recorded on the income for the three months ended
December 31, 2003 and 2002, due to the net operating loss carry forwards
available.
Liquidity and Capital Resources
During the last two fiscal years, ANI has met its working capital and
capital expenditure requirements, including funding for debt repayments, mainly
through the net cash provided under the Company's revolving line of credit.
Based upon recent revenue increases, primarily from growth at Bactolac and cost
reductions that have been implemented, a significant portion of its current
working capital needs are being met out of cash generated from operating
activities. ANIP continues to incur losses as current monthly sales levels are
still below amounts required to break-even at current margins and product mix.
Management continues to closely monitor the performance of this subsidiary,
while exploring possible alternative strategic opportunities to best enhance the
performance and value of the Company. Management plans to continue to strive to
restore profitability to meet currently anticipated funding requirements.
At December 31, 2003, the Company had working capital of $5,184,000.
Borrowings under the revolving portion of the secured credit facility totaled
$2,251,000, with additional borrowings available of approximately $1,588,000, at
that point, based upon accounts receivable and inventory levels. The Company's
line of credit includes a $500,000 capital expenditure line that can be used for
equipment additions in loan amounts exceeding $100,000 per advance, of which
$243,000 was advanced during 2003.
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As of March 21, 2003, the Company completed the refinancing of its Senior
Debt Facility with a new lender. The new debt agreement provides the Company
with a $5.5 million facility, consisting of a $4.0 million revolver, a $1.0
million equipment term loan and a $500,000 equipment acquisition line. The
three-year agreement which matures in March 2006, is collateralized by
substantially all of the Company's assets, and bears interest at rates that
fluctuate with the Prime Rate, with the revolver at 2% over prime (not to be
less than a total rate of 6.5%) and the equipment lines at 4.75% over prime (not
to be less than a total rate of 9.25%). As a result of the "floor" amount of the
interest rates under the facility, those rates represented the period-end
interest rates as well as the effective interest rates for the period. The term
loan portion of the agreement requires monthly payments of principal totaling
approximately $21,000. Due to the fact that the agreement extends for a
three-year term, the obligation, other than the portion payable within the next
twelve months, is classified as a long-term liability on the accompanying
consolidated balance sheet. The Agreement contains a number of covenants, which
include among other items; maintenance of specified minimum net worth and fixed
charge ratios, as well as limitations on capital expenditures. As of December
31, 2003, the total balance outstanding under the facility, including $1,073,000
outstanding under the term loan portion, amounted to $3,324,000, of which
$248,600 has been classified as a current liability.
Operating Activities
Net cash flows from operating activities consumed approximately $51,000 in
2003 and generated approximately $749,000 in 2002. The net cash flow consumed in
2003 consisted primarily of approximately a $596,000 increase in accounts
receivable combined with $235,000 increase in inventory and a $302,000 decrease
in accrued expenses. This was offset by approximately a $655,000 increase in
accounts payable and $144,000 in depreciation expense.
The net cash flow generated in 2002, consisted primarily of approximately
$480,000 increase in accounts payable, relating primarily to higher production
in the period ended December 31, 2002, and an $180,000 increase in deferred
revenue. This was offset by approximately $278,000 in increases to accounts
receivable. In addition, net earnings of $217,000 combined with depreciation
expense of $192,000 contributed to cash generated.
Investing Activities
Investing activities consumed approximately $49,000 in 2003. This consisted
of $49,000 in cash used for additions to equipment.
Investing activities generated approximately $170,000 in 2002. This
consisted of $184,000 collected on the NFLI Note receivable net of $14,000 in
additions to equipment.
Financing Activities
Financing activities consumed approximately $48,000 in 2003. This consisted
mainly of net repayments under the Company's credit facility and other debt
obligations.
Financing activities consumed approximately $505,000 in 2002, primarily in
net repayments under the Company's debt obligations.
Capital expenditures, primarily for manufacturing and facility improvement
costs for the fiscal year ending September 30, 2004, are anticipated to total
approximately $250,000 to $400,000. It is expected that funding for the capital
additions will be provided out of the new credit facility with a portion funded
out of working capital.
Recent Accounting Pronouncements
Variable Interest Entities - In January 2003, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities and in December 2003, FIN 46 was revised. FIN 46
clarifies the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, for certain entities which do not have sufficient equity
at risk for the entity to finance its activities without additional subordinated
financial support from other parties or in which equity investors do not have
the characteristics of a controlling financial interest ("variable interest
entities"). Variable interest entities will be required to be consolidated by
their primary beneficiary. The primary beneficiary of a variable interest entity
is determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both, as a result of
holding variable interests, which are ownership, contractual, or other pecuniary
interests in an entity. FIN 46 applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period ending after December 15, 2003, to variable interest
entities in which an enterprise holds a variable interest. FIN 46 applies to
public enterprises as of the beginning of the applicable interim or annual
period. The Company does not have any variable interest entities, and therefore
the adoption of the provisions of FIN 46 did not have any impact on the Company.
-9-
Financial Instruments - In May 2003 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. This statement establishes standards for how an issuer classifies and
measures in its financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with this
standard, financial instruments that embody obligations of the issuer are
required to be classified as liabilities. SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003. For existing
financial instruments, SFAS No. 150 is effective at the beginning of the Company
fiscal quarter commencing July 1, 2003. The Company has adopted the applicable
provisions of SFAS No. 150, however, numerous provisions have been delayed and
will be adopted in the future. Management believes that the adoption of the
delayed provisions will not have a material impact on the Company's operations
or financial condition.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
Certain statements in Management's Discussion and Analysis of Results of
Operations and Financial Condition and other portions of this report are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbor created
thereby. These statements relate to future events or the Company's future
financial performance and involve known and unknown risks, uncertainties and
other factors that may cause the actual results, levels of activity, performance
or achievements of the Company or its industry to be materially different from
those expressed or implied by any forward-looking statements. In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "could," "would," "should," "expect," "plan," "anticipate," "intend,"
"believe," "estimate," "predict," "potential" or other comparable terminology.
Please see the "Cautionary Note Regarding Forward-Looking Statements" on page 2
of the Company's Form 10-K for the year ended September 30, 2002 for a
discussion of certain important factors that relate to forward-looking
statements contained in this report. Although the Company believes that the
expectations reflected in these forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct. Unless
otherwise required by applicable securities laws, the Company disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The management of the Company, including the Chief Executive Officer and
the Chief Financial Officer, has conducted an evaluation of the effectiveness of
the Company's disclosure controls and procedures pursuant to Rule 13a-14 under
the Securities Exchange Act of 1934 as of a date (the "Evaluation Date") within
90 days prior to the filing date of this report. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures were
effective in ensuring that all material information relating to the Company
required to be filed in this quarterly report has been made known to them in a
timely manner.
(b) Changes in Internal Controls
There have been no significant changes made in the Company's internal
controls or in other factors that have significantly affected internal controls
subsequent to the Evaluation Date.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 31.1, 31.2 and 32 are furnished.
(b) Reports on Form 8-K.
None
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ADVANCED NUTRACEUTICALS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED NUTRACEUTICALS, INC.
(Registrant)
By: /s/ Jeffrey M. McGonegal
-----------------------------
Jeffrey G. McGonegal
Senior Vice President--Finance and
Chief Financial Officer
Dated: February 17, 2004
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