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 December 31, 2006
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 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)
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|
The number of shares outstanding of each of the Registrant's classes of common
equity, as of the latest practicable date:
Outstanding at
Class January 30, 2007
Common Stock, $0.002 par value 13,582,781 Shares
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
For the Quarterly Period Ended December 31, 2006
INDEX
Part I. Financial Information
Page
Item 1. Financial Statements: 2
Condensed Consolidated Statements of Operations
for the Six and Three Months Ended
December 31, 2006 and 2005 (unaudited) 2
Condensed Consolidated Balance Sheets as of December 31, 2006
(unaudited) and June 30, 2006 3
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended December 31, 2006 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 2006 and 2005 (unaudited) 5
Notes to Condensed Consolidated Statements 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 24
Item 4. Controls and Procedures 24
Part II. Other Information
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits 26
Other
Signatures 27
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-K for the year ended June 30, 2006 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 Six months ended
December 31, December 31,
---------------------------------------------------------------------
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
Sales, net $ 20,852,080 $ 12,968,294 $ 33,763,318 $ 27,755,401
Cost of sales 14,110,416 7,989,170 22,642,003 17,381,932
--------------- --------------- --------------- ---------------
Gross profit 6,741,664 4,979,124 11,121,315 10,373,469
Selling and administrative expenses 4,722,379 3,613,109 8,734,014 7,023,754
--------------- --------------- --------------- ---------------
Operating income 2,019,285 1,366,015 2,387,301 3,349,715
Other expense (165,977) (37,030) (193,313) (96,626)
--------------- --------------- --------------- ---------------
Income before income taxes 1,853,308 1,328,985 2,193,988 3,253,089
Federal and state income tax 755,410 20,876 965,592 65,614
--------------- --------------- --------------- ---------------
Income before minority interest 1,097,898 1,308,109 1,228,396 3,187,475
Minority interest - 83,916 37,590 117,116
--------------- --------------- --------------- ---------------
Net income 1,097,898 1,392,025 1,265,986 3,304,591
Deemed dividend from beneficial conversion feature
of Series B Preferred stock dividend (1,220,546) (583,000) (1,783,046) (1,166,000)
Series B Preferred stock dividends (1,430,106) (123,507) (1,549,202) (247,014)
--------------- --------------- --------------- ---------------
Net (loss) income applicable to common shareholders $ (1,552,754) $ 685,518 $ (2,066,262) $ 1,891,577
=============== =============== =============== ===============
Net (loss) income per common share:
Basic $ (0.11) $ 0.05 $ (0.15) $ 0.15
=============== =============== =============== ===============
Diluted $ (0.11) $ 0.05 $ (0.15) $ 0.13
=============== =============== =============== ===============
Weighted average common shares outstanding 13,565,538 12,726,849 13,419,822 12,720,345
Dilutive potential shares:
Warrants and options - 1,160,673 - 1,456,084
Convertible preferred stock - - - -
--------------- --------------- --------------- ---------------
Weighted average common share outstanding
- assuming dilution 13,565,538 13,887,522 13,419,822 14,176,429
=============== =============== =============== ===============
See accompanying notes to condensed consolidated financial statements.
2
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2006 2006
---------------- ---------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 5,628,180 $ 5,746,836
Restricted cash 2,000,000 -
Accounts receivable, net 5,095,405 5,717,012
Inventories, net 14,255,285 10,972,843
Deferred income taxes 3,107,000 2,976,000
Other current assets 1,562,508 1,531,988
---------------- ---------------
Total current assets 31,648,378 26,944,679
Property and equipment, net 4,083,917 4,173,357
Goodwill 145,410 145,410
Intangible assets, net 3,910,523 4,015,596
Deferred income taxes 1,869,000 2,182,000
Security deposits and other assets 185,580 143,822
---------------- ---------------
Total Assets $ 41,842,808 $ 37,604,864
================ ===============
Liabilities and Stockholders' Equity:
Current Liabilities:
Revolving credit facility $ 13,500,000 $ -
Note payable - bank - 4,497,290
Accounts payable 3,895,759 4,123,646
Accrued expenses and other current liabilities 2,222,024 2,505,390
State income taxes payable 875,228 573,685
Loan payable - Trade Investment Services, LLC, related party - 172,260
---------------- ---------------
Total Current Liabilities 20,493,011 11,872,271
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; 25 shares issued and outstanding at December 31, 2006 and 675 shares
issued and outstanding at June 30, 2006; liquidation preference
of $250,000 at December 31, 2006 and $6,750,000 at June 30, 2006 224,689 4,941,643
Minority Interest - 156,025
Stockholders' Equity:
Common Stock, $0.002 par value; 25,000,000 shares authorized; 13,587,511 shares
issued at December 31, 2006 and 13,200,961 at June 30, 2006; 13,552,611 shares
outstanding at December 31, 2006 and 13,166,061 at June 30, 2006 27,175 26,402
Additonal paid-in-capital 33,136,276 30,580,604
Accumulated deficit (11,939,004) (9,872,742)
Less: Treasury stock, at cost, 34,900 shares (99,339) (99,339)
---------------- ---------------
Total Stockholders' Equity 21,125,108 20,634,925
---------------- ---------------
Total Liabilities and Stockholders' Equity $ 41,842,808 $ 37,604,864
================ ===============
See accompanying notes to condensed consolidated financial statements.
3
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2006
Additional Total
Common Stock Paid-in- Accumulated Treasury Stock Stockholders'
Shares Par Value Capital Deficit Shares Cost Equity
---------- ------- ----------- ------------- ------ --------- -----------
Balance, June 30, 2006 13,200,961 $26,402 $30,580,604 $ (9,872,742) 34,900 $(99,339) $20,634,925
Exercise of stock options for cash 366,500 733 732,342 - - - 733,075
Restricted stock award 20,050 40 152,585 - - - 152,625
Compensation expense for employee stock options - - 148,714 - - - 148,714
Income tax benefit from exercise of stock options - - 343,733 - - - 343,733
Dividends paid on Series B preferred stock - - - (370,904) - - (370,904)
Deemed preferred dividends from issuance of warrants - - 1,178,298 (1,178,298) - - -
Deemed dividend from beneficial conversion
feature of Series B preferred stock - - - (1,783,046) - - (1,783,046)
Net income - - - 1,265,986 - - 1,265,986
---------- ------- ----------- ------------- ------ --------- -----------
Balance December 31, 2006 (Unaudited) 13,587,511 $27,175 $33,136,276 $(11,939,004) 34,900 $(99,339) $21,125,108
========== ======= =========== ============= ====== ========= ===========
See accompanying notes to condensed consolidated financial statements.
4
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
December 31,
----------------------------------
2006 2005
------------ ------------
Cash flows from operating activities:
Net income $ 1,265,986 $ 3,304,591
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 629,045 549,906
Deferred income taxes 525,733 (30,000)
Loss on investment in Micro Nutrition, Inc. 171,529 -
Allowance for inventory 25,000 -
Allowance for doubtful accounts (recoveries) (13,362) 5,200
Issuance of common stock for consulting services 186,344 -
Compensation expense for employee stock options 148,714 221,614
Minority interest (37,590) (117,116)
Changes in assets and liabilities (excludes impact of acquistions):
(Increase) decrease in:
Accounts receivable 634,969 (1,115,994)
Inventories (3,307,442) (1,086,831)
Prepaid expenses and other current assets (64,239) 199,519
Security deposits and other assets (41,758) 4,177
(Decrease) increase in:
Accounts payable (227,887) (276,728)
Income taxes payable 301,543 -
Accrued expenses and other liabilities (321,592) 326,892
------------ ------------
Net cash (used in) provided by operating activities (125,007) 1,985,230
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (364,024) (87,862)
Purchase of intangible assets (322,246) (250,000)
------------ ------------
Net cash used in investing activities (686,270) (337,862)
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 733,075 71,900
Repayments of notes payable-bank (4,497,290) -
Repayments of notes payable-TIS (172,260) -
Proceeds from revolving credit facility 13,500,000 -
Funding of restricted cash under revolving credit facility (2,000,000) -
Redemption of Preferred Stock Series B (6,500,000) -
Dividends paid (370,904) (247,014)
------------ ------------
Net cash provided by (used in) financing activities 692,621 (175,114)
------------ ------------
Net (decrease) increase in cash and cash equivalents (118,656) 1,472,254
Cash and cash equivalents at beginning of period 5,746,836 2,427,553
------------ ------------
Cash and cash equivalents at end of period $ 5,628,180 $ 3,899,807
============ ============
Supplemental disclosures of cash flow information: Cash paid during the periods for:
Interest $ 78,900 $ 113,210
============ ============
Income taxes $ 141,000 $ 23,762
============ ============
Supplemental disclosures of Non-cash transactions:
Deemed dividend from beneficial conversion feature of Series B Preferred stock $(1,783,046) $(1,166,000)
============ ============
Deemed preferred dividends from issuance of warrants $(1,178,298) $ -
============ ============
Restricted stock awards $ 152,625 $ -
============ ============
See accompanying notes to condensed consolidated financial statements.
5
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 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 of Financial Condition and Results of Operations, contained in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2006
("10-K"), as filed with the SEC. The June 30, 2006 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 six months ended December 31, 2006 are not
necessarily indicative of the results for the full fiscal year ending June 30,
2007 or for any other period.
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 pharmaceutical
technical services through its contract research organization, and the
biotechnologies business that uses its patented plant-based technology to
produce vaccines and therapeutic antibodies. The Company's customers are located
primarily throughout the United States.
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:
o sales returns and allowances;
o allowance for doubtful accounts;
o inventory valuation;
o valuation and recoverability of long-lived and intangible assets and
goodwill, including the values assigned to acquired intangible assets;
o income taxes and valuation allowance on deferred income taxes, and;
o 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. Nothing has come to our attention which would cause a change in these
estimates.
6
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 and six months ended December 31, 2006, options and warrants to
purchase 4,398,818 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 available to common shareholders during the period. During
the three and six months ended December 31, 2005, 4,361,595 options with
exercise prices below average market price were included in the computation of
diluted earnings per share.
During the three and six months ended December 31, 2006, Convertible Series B
Preferred Stock in the amount of 250,000 common share equivalents were not
included in the computation of diluted earnings per share as they were
antidilutive as a result of net losses available to common shareholders. During
the three and six months ended December 31, 2005, 700,000 common share
equivalents 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.
During the three and six months ended December 31, 2006 and 2005, options and
warrants to purchase 1,493,500 shares of common stock and 2,564,333 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 July 2006, the FASB issue FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" ("FIN
48"), which clarifies the accounting for uncertainty in income tax positions.
FIN 48 requires that we recognize in our financial statements, the impact of a
tax position that is more likely than not to be sustained upon examination based
on the technical merits of the position. The provisions of FIN 48 will be
effective for us as of the beginning of our fiscal year ending June 30, 2008,
with the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. We are currently evaluating the impact
of adopting FIN 48 on our financial statements.
In September 2006, the FASB issue SFAS No. 157, "Fair Value Measurement" ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 17, 2007 and interim periods within those fiscal years. We are
evaluating the impact of adopting SFAS 157 on our consolidated financial
position, results of operations and cash flows.
Note 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 2006. As
of December 31, 2006 and June 30, 2006, goodwill consisted of $145,410 from the
Aloe Acquisition.
7
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2006 and June 30, 2006 is as follows:
December 31, 2006 June 30, 2006
----------------------------------------- -----------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------------ ---------- ----------- ------------ ---------- -----------
Intellectual property $ 2,100,000 $ 370,414 $ 1,729,586 $ 1,850,000 $ 271,667 $ 1,578,333
Trade names and patents 1,821,381 267,848 1,553,533 1,749,135 216,139 1,532,996
Unpatented technology 547,000 200,000 347,000 547,000 179,999 367,001
License agreement 347,000 66,596 280,404 637,467 100,201 537,266
------------ ---------- ----------- ------------ ---------- -----------
Total $ 4,815,381 $ 904,858 $ 3,910,523 $ 4,783,602 $ 768,006 $ 4,015,596
============ ========== =========== ============ ========== ===========
During the three month period ended December 31, 2006, the Company made a
payment of $250,000 under its intellectual property agreement with the Center
for Molecular Biotechnology of Fraunhofer USA, Inc. entered into in January
2004, and subsequent amendments thereto. Amortization expense, recorded on other
intangible assets for the three and six months ended December 31, 2006 and 2005,
was $93,965 and $76,136, and $187,591 and $148,109, respectively. Amortization
expense is recorded on the straight-line method over periods ranging from 10
years to 20 years. During the three months ended December 31, 2006, the Company
disposed of license agreements owned by Micro Nutrition, Inc. in the amount of
$239,728 in connection with its disposition of Micro Nutrition, Inc.
The estimated annual amortization expense for intangible assets for the five
succeeding fiscal years is as follows:
Year Ending Amortization
June 30, Expense
--------------- --------------
2007, remaining $ 215,200
2008 377,100
2009 377,100
2010 377,100
2011 377,100
Thereafter 2,186,923
--------------
Total $ 3,910,523
==============
Note 3. Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method and consist of the following as of December 31, 2006 and June
30, 2006:
December 31, June 30,
2006 2006
---------------- ----------------
Raw materials $ 7,468,041 $ 5,484,485
Work-in-process 1,851,305 1,803,532
Finished goods 4,935,939 3,684,826
---------------- ----------------
Total $ 14,255,285 $ 10,972,843
================ ================
8
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Property and Equipment
Property and equipment consists of the following as of December 31, 2006 and
June 30, 2006:
December 31, June 30,
2006 2006
--------------- ---------------
Land and building $ 1,250,000 $ 1,250,000
Leasehold improvements 2,176,599 2,157,321
Machinery and equipment 6,816,345 6,544,096
Transportation equipment 67,847 37,714
--------------- ---------------
10,310,791 9,989,131
Less: Accumulated depreciation
and amortization (6,226,874) (5,815,774)
--------------- ---------------
Total $ 4,083,917 $ 4,173,357
=============== ===============
Note 5. Note and Loan Payable
Note payable is a promissory note provided by Bank of America dated August 6,
2003 in the amount of $4.5 million with interest at a variable rate based on
1.25% over the current LIBOR rate. The loan was renewed through January 4, 2007
under the existing terms and conditions of the Note. The Note was guaranteed by
Mr. Carl DeSantis, a shareholder and director of the Company. As of June 30,
2006 the interest rate was 6.60%. As of December 31, 2006, the note was paid in
full.
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%. The Company had accrued and unpaid interest of
$45,661 as of June 30, 2006.
In September 2006, the Company paid off the Note and Loan Payable with proceeds
from a $15.0 million revolving credit facility it secured with a bank. (See Note
6. Revolving Credit Facility.)
Note 6. Revolving Credit Facility and Restricted Cash
On September 1, 2006, the Company entered into a loan agreement with Amalgamated
Bank, a financial institution. The loan agreement provides for a one-year
secured revolving credit facility of up to $15.0 million. Concurrently, the
Company paid off its $4.5 million note to the Bank of America, its obligation to
Trade Investments Services, LLC and other miscellaneous obligations, including
the costs associated with securing the facility with $5.0 million of borrowings
under the facility. On October 13, 2006, the Company borrowed an additional $8.5
million under this facility and as of December 31, 2006 had $13.5 million
outstanding under this facility.
The interest rate under the credit facility is equal to, at the Company's
option, either (1), the lender's publicly announced base rate, or (2) 1.5% plus
the applicable LIBOR rate. Interest is payable monthly, quarterly or
semi-annually, at the Company's election, in arrears not later than the end of
each such period. As of December 31, 2006, the weighted average interest rate
was 6.90% and the Company had accrued and unpaid interest of approximately
$244,000. The facility also has a commitment fee equal to 0.50% per annum
calculated on the unused amount of the facility. As of December 31, 2006, the
Company had approximately $7,600 in accrued and unpaid commitment fees.
The credit facility requires that all principal be repaid in full on the first
anniversary of the closing date, which may be extended for up to one year at the
lender's option. The facility is secured by a first priority lien on our
accounts receivable, equipment, inventory and certain deposit accounts.
9
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The credit facility contains covenants restricting our ability to, among other
things: (1) incur or guarantee additional debt; (2) make any investments (other
than in the ordinary course of business); (3) engage in any asset sales or
dispose of any assets (other than in the ordinary course of business); (4)
engage in transactions with affiliates; (5) incur liens; and (6) declare or pay
dividends on its common stock. The credit facility also requires us not to
exceed a maximum total leverage ratio, to maintain a minimum consolidated
earnings before income taxes and depreciation and amortization ("EBITDA"), to
maintain a minimum fixed charge coverage ratio and to maintain a minimum deposit
balance with the lender (unless certain revenue and EBITDA thresholds are met).
On September 1, 2006, the Company deposited $2.0 million with the lender to
satisfy this covenant.
The credit facility also provides for customary events of default, including
non-payment defaults and covenant defaults. The Company was in compliance with
its loan covenants from inception (September 1, 2006) through December 31, 2006.
Note 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 December 31, 2006, the
Company's uninsured cash balances were approximately $8.2 million.
(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 December 31,
2006 and June 30, 2006 is $111,651 and $125,013, respectively.
(c) Major Customers. For the six months ended December 31, 2006, approximately
32% or $11.0 million, 27% or $9.0 million and 17% or $5.8 million of revenues
were derived from three customers. For the six months ended December 31, 2005,
approximately 37% or $10.3 million, 27% or $7.5 million and 26% or $7.2 million
of revenues were derived from three customers. For the three months ended
December 31, 2006, approximately 36% or $7.5 million, 27% or $5.7 million and
17% or $3.6 million of revenues were derived from three customers. For the three
months ended December 31, 2005, approximately 43% or $5.6 million, 28% or $3.6
million and 17% or $2.2 million of revenues were derived from three customers.
The loss of any of these customers would have an adverse affect on the Company's
operations. Accounts receivable from these three customers comprised
approximately 83% of total accounts receivable at December 31, 2006.
(d) Business Risks. The Company insures it business and assets against insurable
risks, to the extent that it deems appropriate, based upon an analysis of the
relative risks and costs.
The raw materials used by the Company are primarily commodities and
agricultural-based products. Raw materials used by the Company in the
manufacture of its nutraceutical products are purchased from independent
suppliers. Raw materials are available from numerous sources and the Company
believes that it will continue to obtain adequate supplies.
Approximately 32% of the Company's employees, located in its New Jersey
facility, are covered by a union contract. The contract was renewed in August
2006 and will expire in August 2010.
10
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 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 an employee of the Company. 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 and six months ended December 31, 2006 and
2005, on these leases were $170,000 and $158,000 and $357,000 and $321,000,
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. 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 and six months
ended December 31, 2006 and 2005, was $92,000 and $98,000 and $184,000 and
$197,000, respectively and is included in manufacturing expenses. The Company is
currently negotiating renewal terms with the landlord of this lease.
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 is currently exploring its options regarding this leased
facility and expects to lease more space at substantially the same rent per
square foot. In September 2006, the Company leased additional warehouse space
under a three-year lease commitment with minimum monthly rental payments of
$12,008. The Company leases additional office space on a month-to-month basis;
minimum monthly rental payments are $1,126. 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 $17,000 and office equipment for a five (5) year
period with an annual rental of $8,400.
The Company leases automobiles under non-cancelable operating lease agreements,
which expire through 2009.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related Party
Year ending Lease Lease
June 30, Commitments Commitments Total
------------------- --------------- --------------- --------------
2007, remaining $ 305,700 $ 161,800 $ 467,500
2008 398,200 323,600 721,800
2009 380,100 323,600 703,700
2010 236,300 323,600 559,900
2011 205,800 323,600 529,400
Thereafter 292,900 1,267,100 1,560,000
--------------- --------------- --------------
Total $ 1,819,000 $ 2,723,300 $ 4,542,300
=============== =============== ==============
Total rent expense, including real estate taxes and maintenance charges, was
approximately $423,600 and $448,000 and $834,600 and $873,000 for the three and
six months ended December 31, 2006 and 2005, respectively.
11
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(b) Intellectual Property Agreement - In connection with the acquisition in
January 2004, and subsequent amendments thereto; of intellectual property
developed by the Center for Molecular Biotechnology of Fraunhofer USA, Inc., the
Company will pay up to a maximum of $3.2 million for certain technology
developed by Fraunhofer USA, Inc. over a five-year period. As of December 31 and
June 30, 2006, $2.1 million and $1.8 million, respectively have been paid and is
being amortized on a straight-line basis over a ten-year period.
(c) 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 Supreme Court
for the State of New York, New York County. 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
$5.0 million. By order dated January 6, 2006, the Court granted in part
Defendants' motion to dismiss. The Court dismissed all of the claims against all
defendants, except for the breach of contract claim against Paxis. Plaintiffs
have filed a notice of appeal of that decision. Certain of the Defendants,
including the Company, have filed counter-claims against Plaintiffs for breach
of a July 2003 agreement with NatEx and to collect on an $1.3 million note,
though the Company is doubtful of collection on that note. Paxis plans to defend
vigorously the remaining claim and prosecute its claims.
The Pom Wonderful LLC v. Agrolabs, Inc. matter described in our previous public
filings has been settled by all parties without material financial impact on our
Company. The matter was dismissed by the United States District Court for the
Central District of California on January 18, 2007.
Note 9. Related Party Transactions
The Company has a consulting agreement with Eugene Kay, a former employee of the
Company and a brother of E. Gerald Kay, the Company's Chairman of the Board.
This 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 and
six months December 31, 2006 and 2005 was $3,300 and $6,600, respectively. The
Company has another consulting agreement with EVJ, LLC, a limited liability
company controlled by Robert Kay, a director of the Company, the Chairman of its
subsidiary, InB: Paxis, and a brother of E. Gerald Kay and Eugene Kay. This
agreement was assumed by and became a liability of the Company as a part of the
Company's acquisition of Paxis Pharmaceuticals Inc. in fiscal year ended June
30, 2004. The total consulting expense under this agreement was $30,000 for the
three months ended December 31, 2006 and 2005 and $60,000 and $70,000 for the
six months ended December 31, 2006 and 2005, respectively.
Note 10. Equity Transactions
(a) Stock Option Plan and Warrants - There were no stock options or warrants
issued in the periods ended December 31, 2006.
(b) Restricted Stock Award - On August 3, 2006, the Company entered into a
separate one-year financial services agreement with a financial advisor whereby
it is to issue an initial 12,500 shares of its common stock and will issue
additional shares worth $15,000, on a monthly basis, calculated on the third day
of each month by dividing $15,000 by the prior ten (10) day volume-weighted
average closing share price of the common stock of the Company.
As of December 31, 2006, the Company was obligated to issue 20,050 shares of its
common stock under this agreement.
The shares of common stock have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), and were issued and sold in reliance
upon the exemption from registration contained in Section 4(2) of the Securities
Act and Regulation D promulgated thereunder. These shares of common stock may
not be offered or sold in the United States in the absence of an effective
registration statement or exemption from the registration requirements under the
Securities Act.
12
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(c) Series B Redeemable Convertible Preferred Stock - On October 16, 2006, the
Company redeemed 650 shares of its Series B Redeemable Convertible Preferred
Stock ("Preferred Stock") at a redemption price of $6.7 million. In addition to
the cash consideration, equal to the face amount of the Preferred Stock and the
related dividend, the Company also agreed to issue to the holder 100,000
additional Warrants to purchase common stock of the Company at a purchase price
of $12 per share exercisable until October 2011 and agreed to adjust the
Warrants issued in 2004 in connection with the initial purchase of the Preferred
Stock to conform to the new Warrants. The amended Warrants issued in 2004, along
with the additional Warrants issued in October 2006, resulted in additional
non-cash dividends on the Preferred Stock of approximately $1.2 million.
The early redemption of the Preferred Stock extinguished all rights and
preferences pertinent to the 650 shares of Preferred Stock, including actual
dividends, deemed dividends (which are required to be deducted in the
calculation of net income attributable to common shareholders and resulted in
decreases in net income of approximately $2.3 million in each of the last two
fiscal years), liquidation preferences and the right to convert the Preferred
Stock into 650,000 shares of the Company's common stock at $10 per share.
Subsequent to this redemption, only 25 shares of Preferred Stock held by another
party remain outstanding.
Note 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: Nutraceuticals, Pharmaceuticals and Biotechnologies. The international
sales, concentrated primarily in Mexico and Europe, for the three and six months
ended December 31, 2006 and 2005, were $4.6 million and $2.2 million and $8.5
million and $4.2 million, respectively.
13
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Financial information relating to, the three and six months ended December 31,
2006 and 2005, operations by business segment is as follows:
For the Three Months Ended
December 31,
--------------------------------------------------------------------------------------------------------------
2006 2005
----------------------------------------------------- ------------------------------------------------------
Nutra- Pharma- Biotech- Nutra- Pharma- Biotech-
ceuticals ceuticals nologies Total ceuticals ceuticals nologies Total
----------- ------------ ---------- ----------- ----------- ------------ ---------- -----------
Sales, net
U.S. customers $14,666,243 $ 1,336,858 $ 238,339 $16,241,440 $10,151,121 $ 628,229 $ 3,396 $10,782,746
International
customers 4,478,775 131,865 - 4,610,640 2,179,809 5,739 - 2,185,548
----------- ------------ ---------- ----------- ----------- ------------ ---------- -----------
Total Sales, net $19,145,018 $ 1,468,723 $ 238,339 $20,852,080 $12,330,930 $ 633,968 $ 3,396 $12,968,294
=========== ============ ========== =========== =========== ============ ========== ===========
Segment operating
profit (loss) $ 3,416,168 $ (990,722) $(406,161) $ 2,019,285 $ 2,530,759 $ (966,800) $(197,944) $ 1,366,015
=========== ============ ========== =========== =========== ============ ========== ===========
Depreciation $ 105,850 $ 120,606 $ - $ 226,456 $ 83,226 $ 115,669 $ - $ 198,895
=========== ============ ========== =========== =========== ============ ========== ===========
Capital
expenditures $ 237,689 $ 19,278 $ - $ 256,967 $ 14,475 $ 29,843 $ - $ 44,318
=========== ============ ========== =========== =========== ============ ========== ===========
For the Six Months Ended
December 31,
--------------------------------------------------------------------------------------------------------------
2006 2005
----------------------------------------------------- ------------------------------------------------------
Nutra- Pharma- Biotech- Nutra- Pharma- Biotech-
ceuticals ceuticals nologies Total ceuticals ceuticals nologies Total
----------- ------------ ---------- ----------- ----------- ------------ ---------- -----------
Sales, net
U.S. customers $22,421,273 $ 2,517,144 $ 354,886 $25,293,303 $22,068,971 $ 1,450,928 $ 8,971 $23,528,870
International
customers 7,943,218 526,797 - 8,470,015 4,226,531 - - 4,226,531
----------- ------------ ---------- ---------- ----------- ------------ ----------- ----------
Total Sales, net $30,364,491 $ 3,043,941 $ 354,886 $33,763,318 $26,295,502 $ 1,450,928 $ 8,971 $27,755,401
============ ============ ========== =========== =========== ============ =========== ===========
Segment operating
profit (loss) $ 4,254,925 $(1,248,466) $(619,158) $ 2,387,301 $ 6,073,242 $(2,438,841) $(284,686) $ 3,349,715
=========== ============ ========== =========== =========== ============= ========== ===========
Depreciation $ 200,984 $ 240,471 $ - $ 441,455 $ 146,443 $ 229,742 $ - $ 376,185
=========== ============ ========== =========== =========== ============ ========== ===========
Capital
expenditures $ 321,351 $ 42,673 $ - $ 364,024 $ 55,498 $ 32,364 $ - $ 87,862
=========== ============ ========== =========== =========== ============ ========== ===========
As of December 31, As of June 30,
----------------------------------------------------- ------------------------------------------------------
2006 2005
----------------------------------------------------- ------------------------------------------------------
Total Assets $32,882,189 $ 6,852,166 $2,108,453 $41,842,808 $29,911,297 $ 5,868,804 $1,824,763 $37,604,864
=========== ============ ========== =========== =========== ============ ========== ===========
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 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-K for the year ended June 30, 2006.
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 pharmaceutical
technical services through its contract research organization. The Company's
customers are located primarily throughout the United States.
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:
o sales returns and allowances;
o allowance for doubtful accounts;
o inventory valuation;
o valuation and recoverability of long-lived and intangible assets
and goodwill, including the values assigned to acquired intangible
assets;
o income taxes and valuation allowance on deferred income taxes, and;
o 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, 2006.
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 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.
15
We performed a sensitivity analysis to determine the impact of fluctuations in
our estimates for our allowance for doubtful accounts. As of December 31, 2006
the allowance was $111,651. If this number were in error by plus or minus one
percent of the account receivable balance, the impact would be an additional
$52,100 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
composed primarily of inventory items in both the nutraceutical and
pharmaceutical segments of business. As a result of our nutraceutical inventory
being manufactured primarily on a purchase order basis, the quantity of both raw
materials and finished goods inventory provides for minimal risk for potential
overstock or obsolescence. Pharmaceutical inventory is valued at market values,
which is lower than our cost basis.
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.
We performed a sensitivity analysis to determine the impact of fluctuations in
our estimates for inventory allowances. As of December 31, 2006 the allowance
was $25,000. If this number were in error by plus or minus one percent of the
total inventory balance, the impact would be an additional expense of $142,800.
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.
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.
16
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.
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 For the six months
ended December 31, ended December 31,
-------------------------------- -----------------------------
2006 2005 2006 2005
---------------- ------------ ------------ --------------
Sales, net 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 67.7% 61.6% 67.1% 62.6%
Selling and administrative 22.6% 27.9% 25.9% 25.3%
---------------- ------------ ------------ --------------
90.3% 89.5% 92.9% 87.9%
---------------- ------------ ------------ --------------
Income from operations 9.7% 10.5% 7.1% 12.1%
---------------- ------------ ------------ --------------
Other income (expense):
Interest expense (1.0%) (0.5%) (0.9%) (0.4%)
Other income 0.1% 0.2% 0.1% 0.1%
Interest and investment income 0.1% 0.0% 0.2% 0.0%
---------------- ------------ ------------ --------------
(0.8%) (0.3%) (0.6%) (0.3%)
---------------- ------------ ------------ --------------
Income before income taxes 8.9% 10.2% 6.5% 11.8%
Federal and state income taxes 3.6% 0.2% 2.9% 0.2%
---------------- ------------ ------------ --------------
Income before minority interest 5.2% 10.0% 3.6% 11.6%
Minority interest 0.0% 0.7% 0.1% 0.4%
---------------- ------------ ------------ --------------
Net income 5.2% 10.7% 3.7% 12.0%
Deemed dividend from beneficial conversion
feature of Series B Preferred Stock (5.9%) (4.4%) (5.3%) (4.2%)
Series B Preferred Stock dividend (6.9%) (1.0%) (4.6%) (1.0%)
---------------- ------------ ------------ --------------
Net (loss) income allocable to common
shareholders (7.5%) 5.3% (6.1%) 6.8%
================ ============ ============ ==============
17
For the six month period ended December 31, 2006 compared to the six month
period ended December 31, 2005
Sales, net. Sales, net, for the six months ended December 31, 2006 and 2005 were
$33.8 million and $27.8 million, respectively, an increase of $6.0 million or
21.6%. The increase is comprised of the following:
Six months ended Dollar Increase Percentage
December 31, (Decrease) Change
------------------------------------- ----------------------------------
2006 2005 2006 vs 2005 2006 vs 2005
----------------- ---------------- ----------------- --------------
Nutraceutical - US Customers $ 22,421,273 $ 22,068,971 $ 352,302 1.6%
Nutraceutical - International Customers 7,943,218 4,226,531 3,716,687 87.9%
----------------- ---------------- ----------------- --------------
Total Nutraceutical 30,364,491 26,295,502 4,068,989 15.5%
----------------- ---------------- ----------------- --------------
Pharmaceutical - US Customers 2,517,144 1,423,004 1,094,140 76.9%
Pharmaceutical - International Customers 526,797 27,924 498,873 1,786.5%
----------------- ---------------- ----------------- --------------
Total Pharmaceutical 3,043,941 1,450,928 1,593,013 109.8%
----------------- ---------------- ----------------- --------------
Biotechnologies 354,886 8,971 345,915 3,855.9%
----------------- ---------------- ----------------- --------------
Total $ 33,763,318 $ 27,755,401 $ 6,007,917 21.6%
================= ================ ================= ==============
This increase is primarily the result of an increase in our Nutraceutical
Segment sales of approximately 15.5% or $4.1 million. Our international sales
increased by $3.7 million, representing 91.3% of the increased sales in our
Nutraceutical Segment, as a result of increased sales to Mexico from our
contract manufacturing business. Our sales to US Customers increased in our
Nutraceuticals Segment by $352,000 and is offset, in part, by an increase in our
promotional advertising cost of $1.6 million, from $2.2 million in the six
months ended 2005 to $3.8 million in the six months ended December 31, 2006,
absent this advertising cost, sales to US Customers increased by $1.9 million or
7.9%.
Pharmaceuticals sales for the six months ended December 31, 2006 were $3.0
million compared to $1.5 million for the comparable period. This increase is
primarily due to increased sales of approximately $290,000 of our API in the six
months ended December 31, 2006 compared to the six months ended December 31,
2005. Additionally, our CRO business had increased sales of approximately $1.3
million in the six months ended December 31, 2006 compared to the six months
ended December 31, 2005. These increased sales are a result of the Segment
implementing its sales and marketing strategy in the fiscal year ended June 30,
2006.
Our Biotechnologies Segment did not significantly contribute to our net sales
and gross profits in the six month periods ended December 31, 2006 and 2005.
For the six months ended December 31, 2006, approximately 76% of revenues were
derived from three customers as compared 90% of revenues for the six months
ended December 31, 2005. The loss of any of these customers would have an
adverse affect on our operations. We continue to expand our customer base by
expanding from selling its propriety branded nutraceutical products primarily to
"club" stores to the retail sales segment and expanding its sales in the
international market.
Cost of sales. Cost of sales increased to $22.6 million for the six months ended
December 31, 2006 as compared to $17.4 million for the six months ended December
31, 2005. Cost of sales increased as a percentage of sales to 67% for the six
months ended December 31, 2006 as compared to 63% for the six months ended
December 31, 2005. The increase of approximately four percent (4.0%) in our cost
of sales is primarily a result of our increased promotional advertising costs of
$1.6 million in the six months ended December 31, 2006 to $3.8 million from $2.2
million in the six months ended December 31, 2005, which are netted against
sales. If these advertising costs were not netted in sales, our costs of sales
as a percentage of sales, as adjusted, would have been 60.3% for the six months
ended December 31, 2006 compared to 58.0% for the six months ended December 31,
2005.
18
Selling and Administrative Expenses. Selling and administrative expenses were
$8.7 million for the six months ended December 31, 2006, an increase of $1.7
million or 24.3% as compared with $7.0 million for the six months ended December
31, 2005. As a percentage of sales, net, selling and administrative expenses
were 25.9% for the six months ended December 31, 2006 and 25.3% for the prior
comparable period. A tabular presentation of the changes in selling and
administrative expenses is as follows:
Six months ended Dollar Increase Percentage
December 31, (Decrease) Change
----------------------------------- --------------- ---------------
2006 2005 2006 vs 2005 2006 vs 2005
---------------- ---------------- --------------- ---------------
Salaries $ 1,706,329 $ 1,381,806 $ 324,523 23.5%
Advertising 1,471,605 1,042,553 429,052 41.2%
Consulting and other professional fees 774,161 824,083 (49,922) (6.1%)
Indirect expenses 662,638 516,616 146,022 28.3%
Commissions 563,854 514,980 48,874 9.5%
Insurance 374,112 324,777 49,335 15.2%
Depreciation & Amortization 358,103 296,383 61,720 20.8%
Auto, Travel & Entertainment 356,815 342,520 14,295 4.2%
Employee Benefits 344,298 282,714 61,584 21.8%
Office Rent 276,050 332,131 (56,081) (16.9%)
Marketing 263,407 51,914 211,493 407.4%
Research & Development 223,923 14,508 209,415 1,443.4%
Office 219,146 140,980 78,166 55.4%
Loss on investment in Micro Nutrition, Inc. 171,529 - 171,529 100.0%
Compensation expense for
employee stock options 148,714 221,614 (72,900) (32.9%)
Other 819,330 736,175 83,155 11.3%
---------------- ---------------- --------------- ---------------
Total $ 8,734,014 $ 7,023,754 $ 1,710,260 24.3%
================ ================ =============== ===============
Salaries increased approximately $324,500 in the six months ended December 31,
2006 or 23.5% as a result of hiring an investor relations officer at the end of
our fiscal year ended June 30, 2006. In addition to his base salary, in the six
months ended December 31, 2006, this employee earned a performance bonus based
on a transaction which occurred in the six months ended December 31, 2006, his
combined compensation was approximately $262,500 with no comparable expense in
the six months ended December 31, 2005. The balance of the increase or $62,000
represents a 4.5% increase over salaries in the six months ended December 31,
2005 as a result of net new employees and general salary increases. A decrease
in consulting and other professional fees of $49,900 offset the increase in
salaries, in part.
Advertising expense increased approximately $429,000 or 41.2% in the six months
ended December 31, 2006 as part of our marketing plan to increase advertising to
support our proprietary branded nutraceutical products. We spent $795,000 in
media advertisements such as radio, in store commercials, magazines and
newspaper ads in the six months ended December 31, 2006 compared to $459,000 in
the comparable prior period, an increase of $336,000, and increased other trade
advertising expenses by $93,000.
We also incurred additional marketing expenses of $211,000 in the six months
ended December 31, 2006 on the design and printing of new marketing materials
used in the general marketing of our products as compared to the six months
ended December 31, 2005.
Indirect expenses increased by approximately $146,000 in the six months ended
December 31, 2006 to $662,600 from $516,600 in the comparable 2005 period as a
result of increased sales in our Hauser subsidiary increasing its billable hours
to clients. Indirect expenses include costs that are not billable to clients,
including non-billable time, laboratory expenses and other related costs.
Commissions increased approximately $48,900 or 9.5%. Commissions as a percentage
of sales that commissions are owed was 3.3% of such sales in the six months
ended December 31, 2006 compared to 2.9% of such sales in the six months ended
December 31, 2005. Our commission payout rates range from three to five percent
of qualifying sales. The increase in the payout rate from the six months ended
December 31, 2005 to the six months ended December 31, 2006 is a result of an
increase in sales qualifying for a five percent commission payment.
19
Research and Development costs increased approximately $210,000 in the six
months ended December 31, 2006 to $224,000 from $15,000 in the comparable 2005
period as a result of reaching milestones established in our research agreement
with Fraunhofer, which triggered payments of $200,000.
Other expense, net. Other expense, net was $193,300 for the six months ended
December 31, 2006 as compared to $96,600 for the comparable period a year ago.
The increase of $96,700 was primarily attributable to an increase in interest
expense of $162,000 due to the increase in the amount of the debt outstanding,
offset in part, by an increase in interest and other income of approximately
$65,100.
Federal and state income tax, net. Federal and state income tax increased from
$65,600 in the six months ended December 31, 2005 to $965,600 in the six months
ended December 31, 2006. Our effective tax rate increased from 2.0% to 44.0%.
The dollar amount increase and the increase in our effective tax rates are
primarily a result of increased state taxes of approximately $380,000 owed in
certain states where our subsidiaries file separate tax returns and do not have
operating losses from our other subsidiaries to offset their taxable income in
such states. Additionally, in the six months ended December 31, 2006, we had a
deferred and current federal tax expense of approximately $585,000 with no
federal tax expense in the six months ended December 31, 2005 as a result of
offsetting valuation allowances recorded in such period.
Net income. The Company's net income for the six months ended December 31, 2006
was $1.3 million as compared to net income of $3.3 million for the six months
ended December 31, 2005. This decrease in net income of approximately $2.0
million is primarily the result of an increase in selling and administrative
expenses of $1.7 million, an increase in other expense of approximately $96,600,
and an increase in federal and state income taxes of approximately $900,000,
offset by an increase in gross profit of approximately $748,000.
For the three month period ended December 31, 2006 compared to the three month
period ended December 31, 2005
Sales, net. Sales, net, for the quarter ended December 31, 2006 and 2005 were
$20.8 million and $13.0 million, respectively, an increase of $7.9 million or
60.8%. The increase is comprised of the following:
Three months ended Dollar Increase Percentage
December 31, (Decrease) Change
------------------------------------ -------------- -------------
2006 2005 2006 vs 2005 2006 vs 2005
---------------- ---------------- -------------- --------------
Nutraceutical - US Customers $ 14,666,243 $ 10,151,121 $ 4,515,122 44.5%
Nutraceutical - International Customers 4,478,775 2,179,809 2,298,966 105.5%
---------------- ---------------- -------------- --------------
Total Nutraceutical 19,145,018 12,330,930 6,814,088 55.3%
---------------- ---------------- -------------- --------------
Pharmaceutical - US Customers 1,336,858 628,229 708,629 112.8%
Pharmaceutical - International Customers 131,865 5,739 126,126 2,197.7%
---------------- ---------------- -------------- --------------
Total Pharmaceutical 1,468,723 633,968 834,755 131.7%
---------------- ---------------- -------------- --------------
Biotechnologies 238,339 3,396 234,943 6,918.2%
---------------- ---------------- -------------- --------------
Total $ 20,852,080 $ 12,968,294 $ 7,883,786 60.8%
================ ================ ============== ==============
This increase is primarily the result of an increase in our Nutraceutical
Segment sales of approximately $6.8 million or 55.3%. Our sales to US Customers
increased in our Nutraceutical Segment by $4.5 million and is offset, in part,
by an increase in our promotional advertising expenses of $1.9 million, from
$1.5 million in the three months ended December 31, 2005 to $3.4 million in the
three months ended December 31, 2006, absent this advertising cost, sales to US
Customers increased by $6.4 million or 55.1%. Our international sales increased
by $2.3 million, representing 33.7% of the increased sales in our Nutraceutical
Segment, resulting from increased sales to Mexico from our contract
manufacturing business.
20
Pharmaceuticals sales for the three months ended December 31, 2006 were $1.5
million compared to $634,000 for the comparable period. This increase is
primarily due to increased sales of approximately $820,000 in the quarter ended
December 31, 2006 compared to the quarter ended December 31, 2005 in our CRO
business. These increased sales are a result of the Segment implementing its
sales and marketing strategy in the fiscal year ended June 30, 2006.
Our Biotechnologies Segment did not significantly contribute to our net sales
and gross profits in the quarters ended December 31, 2006 and 2005.
For the three months ended December 31, 2006, approximately 80% of revenues were
derived from three customers as compared 88% of revenues for the three months
ended December 31, 2005. The loss of any of these customers would have an
adverse affect on the Company's operations. The Company continues to expand its
customer base by expanding from selling its propriety branded nutraceutical
products primarily to "club" stores to the retail sales segment and expanding
its sales in the international market.
Cost of sales. Cost of sales increased to $14.1 million for the three months
ended December 31, 2006 as compared to $8.0 million for the three months ended
December 31, 2005. Cost of sales increased as a percentage of sales to 68% for
the three months ended December 31, 2006 as compared to 62% for the three months
ended December 31, 2005. The increase of approximately six percent (6.0%) in
cost of sales is primarily a result of our increased promotional advertising
costs of $1.9 million in the three months ended December 31, 2006 to $3.4
million from $1.5 million in the three months ended December 31, 2005, which is
netted against sales. If these advertising costs were not netted in sales, our
costs of sales as a percentage of sales, as adjusted, would have been 58.1% for
the three months ended December 31, 2006 compared to 55.1% for the six months
ended December 31, 2005.
Selling and Administrative Expenses. Selling and administrative expenses were
$4.7 million for the three months ended December 31, 2006, an increase of $1.1
million or 30.7% as compared with $3.6 million for the three months ended
December 31, 2005. As a percentage of sales, net, selling and administrative
expenses were 22.6% for the three months ended December 31, 2006 and 27.9% 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
December 31, (Decrease) Change
--------------------------------- ---------------- ---------------
2006 2005 2006 vs 2005 2006 vs 2005
--------------- --------------- ---------------- ---------------
Advertising $ 790,673 $ 546,306 $ 244,367 44.7%
Salaries 777,644 711,515 66,129 9.3%
Consulting and other professional fees 424,225 376,796 47,429 12.6%
Commissions 413,573 228,864 184,709 80.7%
Indirect expenses 327,972 253,953 74,019 29.1%
Insurance 234,426 287,794 (53,368) (18.5%)
Research & Development 223,225 5,662 217,563 3,842.5%
Auto, Travel & Entertainment 205,185 192,805 12,380 6.4%
Depreciation & Amortization 179,231 148,101 31,130 21.0%
Loss on investment in Micro Nutrition, Inc. 171,529 - 171,529 100.0%
Employee Benefits 143,323 128,825 14,498 11.3%
Compensation expense for
employee stock options 60,096 70,097 (10,001) (14.3%)
Marketing 56,228 22,457 33,771 150.4%
Other 715,049 639,934 75,115 11.7%
--------------- --------------- ---------------- ---------------
Total $ 4,722,379 $ 3,613,109 $ 1,109,270 30.7%
=============== =============== ================ ===============
Salaries increased approximately $66,100 in the three months ended December 31,
2006 or 9.3% as a result of net new employees and general salary increases.
Advertising expense increased approximately $244,000 or 44.7% in the three
months ended December 31, 2006 as part of our marketing plan to increase
advertising to support our proprietary branded nutraceutical products. We spent
$660,000 in media advertisements such as radio, in store commercials, magazines
and newspaper ads in the three months ended December 31, 2006 compared to
$222,000 in the comparable prior period, an increase of $438,000, offset by a
reduction in other trade advertising of $193,000.
21
We also incurred additional marketing expenses of $33,800 in the three months
ended December 31, 2006 on the design and printing of new marketing materials
used in the general marketing of our products as compared to the three months
ended December 31, 2005.
Commissions increased approximately $184,700 or 80.7%. Commissions as a
percentage of sales that commissions are owed was 3.4% of such sales in the
three months ended December 31, 2006 compared to 2.9% of such sales in the three
months ended December 31, 2005. Our commission payout rates range from three to
five percent of qualifying sales. The increase in the payout rate from the three
months ended December 31, 2005 to the three months ended December 31, 2006 is a
result of an increase in sales qualifying for a five percent commission payment.
Research and Development costs increased approximately $218,000 in the three
months ended December 31, 2006 to $223,000 from $5,700 in the comparable 2005
period as a result of reaching milestones established in our research agreement
with Fraunhofer, which triggered payments of $200,000.
Other expense, net. Other expense, net was $166,000 for the three months ended
December 31, 2006 as compared to $37,000 for the comparable period a year ago.
The increase of $129,000 was primarily attributable to an increase in interest
expense of $140,800 due to the increase in the amount of the debt outstanding,
offset in part, by an increase in interest and other income of approximately
$12,000.
Federal and state income tax, net. Federal and state income tax increased from
$20,900 in the three months ended December 31, 2005 to $755,400 in the three
months ended December 31, 2006. Our effective tax rate increased from 1.6% to
40.8%. The dollar amount increase and the increase in our effective tax rates
are primarily a result of increased state taxes of approximately $225,000 owed
in certain states where our subsidiaries file separate tax returns and do not
have operating losses from our other subsidiaries to offset their taxable income
in such states. Additionally, in the three months ended December 31, 2006, we
had current and deferred federal tax expense of approximately $509,000 with no
federal tax expense in the three months ended December 31, 2005 as a result of
offsetting valuation allowances recorded in such period.
Net income. The Company's net income for the three months ended December 31,
2006 was $1.1 million as compared to net income of $1.4 million for the three
months ended December 31, 2005. This decrease in net income of approximately
$300,000 is primarily the result of an increase in gross profit of approximately
$1.76 million, offset by increases in selling and administrative expenses of
$1.1 million increases in other expense of approximately $128,900, and an
increase in federal and state income taxes of approximately $734,500.
Seasonality. The Company's results of operations in its Pharmaceuticals and
Biotechnologies segments are not significantly affected by seasonal factors. The
Nutraceutical business segment tends to be seasonal. The Company has found that
in its first fiscal quarter ending in September, orders for its branded
proprietary nutraceutical products slow (absent the addition of new customers
with a significant first time order), as buyers in their markets may have
purchased sufficient inventory to carry them through the summer months.
Conversely, in the Company's second fiscal quarter, ending in December, orders
for its products increase as the demand for the Company's branded nutraceutical
products seems to increase in late December to early January as consumers become
health conscious as they enter the new year.
The Company believes that there are other non-seasonal factors that also may
also influence the variability of quarterly results including, but not limited
to, general economic and industry conditions that affect consumer spending,
changing consumer demands and current news on nutritional supplements. In
addition, our recent growth has caused additional variability in our quarterly
results. 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 periods.
22
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are cash
generated from operations. The Company also has a $15.0 million revolving line
of credit available through September 1, 2007 with a one-year renewal option
available at the lender's option. The Company's principal uses of cash have been
to finance working capital, acquisitions, capital expenditures and Preferred
Series B Stock dividend payments and the redemption of its Preferred Series B
Stock. The Company anticipates these uses will continue to be its principal uses
of cash in the future, except that subsequent to October 2006, the Company's use
for Preferred Series B Stock dividend payments will not be a significant use as
it redeemed 650 shares in October 2006 and the cash dividends on the remaining
25 shares will be approximately $9,700 for the remainder of fiscal 2007 and none
thereafter as the shares will be either converted or redeemed by its maturity
date of April 20, 2007.
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 six months ended
December 31,
---------------------------------------
2006 2005
---------------- -----------------
Net cash (used in) provided by operating acitivites $ (125,007) $ 1,985,230
================ =================
Net cash used in investing acitivites $ (686,270) $ (337,862)
================ =================
Net cash provided by (used in) financing acitivites $ 692,621 $ (175,114)
================ =================
Cash and cash equivalents at end of period $ 5,628,180 $ 3,899,807
================ =================
Days sales in inventory 68 69
================ =================
Inventory turnover 5.4 5.3
================ =================
At December 31, 2006, the Company's working capital was $11.2 million, a
decrease of $3.9 million over working capital at June 30, 2006 of $15.1 million.
Cash and cash equivalents were $5.6 million at December 31, 2006, a decrease of
$119,000 from June 30, 2006. The Company used $125,000 and provided $2.0 million
of net cash from operations for the six months ended December 31, 2006 and 2005,
respectively. The primary reason for the increase in cash used in operating
activities of $2.1 million is the increase in cash used in inventories. Our
inventory levels increased by $3.3 million in the six months ended December 31,
2006 based on our increased sales orders for future shipments, including
additional raw materials for new products. The Company believes that anticipated
sales for next year, current cash balances and its revolving credit facility
should meet its cash needs for operations for fiscal 2007.
The Company utilized $686,300 and $337,900 of cash in investing activities for
the six months ended December 31, 2006 and 2005, respectively. The Company
provided for net cash of $692,600 and utilized $175,100 of cash from financing
activities for the six months ended December 31, 2006 and 2005, respectively.
The net cash provided by financing activities of $692,600 was the result of
borrowing $13.5 million under its revolving credit facility offset, in part by
the paydown of notes payable ($4.7 million), early redemption of 650 shares of
our Series B Preferred stock ($6.5 million) and a required deposit of $2.0
million, in an interest bearing certificate of deposit, with our lender in
connection with our $15.0 million revolving credit facility.
The Company's total annual commitments at December 31, 2006 for long term
non-cancelable leases of approximately $722,000 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 needs,
capital expenditure needs, 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.
23
Capital Expenditures
The Company's capital expenditures for the six months ended December 31, 2006
and 2005 were $364,00 and $87,900, respectively. The Company has budgeted
approximately $500,000 for capital expenditures for fiscal 2007. The total
amount is expected to be funded from cash provided from its operations.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting Pronouncements - refer to footnote 1 of the condensed
consolidated financial statements for the six months ended December 31, 2006
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.
We performed a sensitivity analysis to determine the impact of fluctuations in
interest rates relating to our outstanding variable debt. If interest rates
varied by plus or minus one percent our income before taxes would be higher or
lower in the amount of $135,000 per annum.
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.
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 and is not required
to do so until our fiscal year ending June 30, 2008. The Company may identify
deficiencies that may require remediation in the process of its evaluation and
testing.
24
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 Supreme Court for the State of New
York, New York County. 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 $5.0 million. By
order dated January 6, 2006, the Court granted in part Defendants' motion to
dismiss. The Court dismissed all of the claims against all defendants, except
for the breach of contract claim against Paxis. Plaintiffs have filed a notice
of appeal of that decision. Certain of the Defendants, including the Company,
have filed counter-claims against Plaintiffs for breach of a July 2003 agreement
with NatEx and to collect on an $1.3 million note, though the Company is
doubtful of collection on that note. Paxis plans to defend vigorously the
remaining claim and prosecute its claims.
The Pom Wonderful LLC v. Agrolabs, Inc. matter described in our previous public
filings has been settled by all parties without material financial impact on our
Company. The matter was dismissed by the United States District Court for the
Central District of California on January 18, 2007.
Item 1A. RISK FACTORS
The risks described in Item 1A, Risk Factors, in our Annual Report on Form 10-K
for the year ended June 30, 2006, could materially and adversely affect our
business, financial condition and results of operations. The risk factors
discussed in that Form 10-K do not identify all risks that we face because our
business operations could also be affected by additional factors that are not
presently known to us or that we currently consider to be immaterial to our
operations.
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
Two matters were submitted for a vote at the Company's Annual Meeting of
Stockholders held on November 22, 2006 by holders of record of the Company's
common stock, par value $.002 per share at the close of business on October 30,
2006 (the "Record Date"), which was determined to be 13,537,419 shares of common
stock. The holders of 10,057,199 shares of common stock, a majority, were
present in person or represented by proxy at the meeting. The two matters and
the results of the voting at the Annual Meeting are as follows:
1. To elect three Class I directors for a three year term to serve until
the 2009 Annual Meeting of Stockholders. The number of votes cast at
the meeting for the election of the three (3) directors for a three
year term to the 2009 Annual Meeting of Stockholders were as follows:
For Withheld
E. Gerald Kay 9,865,907 191,292
Ms. Riva Sheppard 9,866,314 190,885
Mr. Carl DeSantis 9,870,265 186,934
2. To ratify the appointment of Amper Politziner & Mattia, P.C. as the
Company's independent auditors. The number of votes cast at the meeting
for the proposal to ratify Amper Politziner & Mattia, P.C. as the
Company's independent auditors were as follows:
For Against Abstain
10,052,199 1,700 3,300
25
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
Exhibit
Number Description
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.
26
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: February 14, 2007 By: /s/ E. Gerald Kay
---------------------
E. Gerald Kay,
Chief Executive Officer
Date: February 14, 2007 By: /s/ Dina L. Masi
---------------------
Dina L. Masi,
Senior Vice President & Chief Financial Officer
27