SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended December 31, 2004 Commission file number: 000-28876
---------------
INTEGRATED BIOPHARMA, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 22-2407475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Long Avenue
Hillside, New Jersey 07205
(Address of principal (Zip Code)
executive offices)
Check whether the issuer filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer' s Common Stock as of January 31,
2005 was 12,615,690 shares.
INTEGRATED BIOPHARMA, INC.
INDEX
Part I: Financial Information
Item 1: Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm 1
Consolidated Balance Sheet as of December 31, 2004 [Unaudited] 2 .. 3
Consolidated Statements of Operations for the three
and six months ended December 31, 2004 and 2003 [Unaudited] 4
Consolidated Statement of Stockholders' Equity for the six months
ended December 31, 2004 [Unaudited] 5
Consolidated Statements of Cash Flows for six months ended
December 31, 2004 and 2003 [Unaudited] 6 .. 7
Notes to Consolidated Financial Statements [Unaudited] 8 .. 18
Item 2: Management's Discussion and Analysis or Plan of Operation 19 .. 24
Item 3: Controls and Procedures 25
Part II: Other Information 26
Signatures 28
Report of Independent Registered Public Accounting Firm
We have reviewed the accompanying consolidated balance sheets of Integrated
BioPharma, Inc. and Subsidiaries as of December 31, 2004 and for the six-month
periods then ended. This interim financial information is the responsibility of
the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with U.S. generally accepted accounting principles.
/s/ Amper, Politziner & Mattia P.C.
February 4, 2005
Edison, New Jersey
1
Part 1-FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2004
[UNAUDITED]
--------------------------------------------------------------------------------
Assets:
Current Assets:
Cash and Cash Equivalents ............... $ 2,025,868
Accounts Receivable - Net ............... 3,755,148
Inventories-Net ......................... 8,390,208
Prepaid Expenses and Other Current Assets 1,069,905
Other Assets ............................ 285,638
Deferred Income Taxes ................... 83,000
-----------
Total Current Assets .................... 15,609,767
-----------
Property and Equipment - Net ............... 7,546,383
-----------
Other Assets:
Goodwill ................................ 688,138
Intangible Assets, Net .................. 3,950,732
Investment in Joint Venture ............. 121,388
Deferred Tax Asset ...................... 71,000
Security Deposits and Other Assets ...... 246,547
-----------
Total Other Assets ...................... 5,077,805
-----------
Total Assets ............................ $28,233,955
===========
See accompanying notes to condensed consolidated financial statements.
2
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2004
[UNAUDITED]
---------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Note Payable-Bank .......................................................... $ 4,500,000
Accounts Payable ........................................................... 2,256,551
Accrued Expenses and Other Current Liabilities ............................. 856,617
Federal and State Income Taxes Payable ..................................... 28,703
Capital Lease Obligation ................................................... 1,586
Loan Payable-Trade Investment Services, LLC, related party 172,260
------------
Total Current Liabilities .................................................. 7,815,717
------------
Commitments and Contingencies (See Note 12) .................................. --
Series B 7% Redeemable Convertible Preferred Stock net of beneficial conversion
Feature, warrants issued and issuance costs - $.002 Par Value; 1,250 shares
Authorized; 700 shares issued and outstanding - Liquidation Preference of
$ 7,000,000 ............................................................... 1,626,000
Minority interest ............................................................. 370,986
Stockholders' Equity:
Preferred Stock - Authorized 1,000,000 Shares,
$.002 Par Value, No Shares Issued .......................................... --
Common Stock - Authorized 25,000,000 Shares,
$.002 Par Value, 12,605,690 Shares Issued and Outstanding .................. 25,211
Additional Paid-in-Capital ................................................. 28,231,412
Accumulated Deficit ........................................................ (9,736,032)
Less, Treasury Stock at cost, 34,900 shares ................................ (99,339)
------------
Total Stockholders' Equity ................................................. 18,421,252
------------
Total Liabilities and Stockholders' Equity ................................. $ 28,233,955
============
See accompanying notes to condensed consolidated financial statements.
3
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
--------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Sales $ 6,419,508 $ 6,849,826 $ 12,535,544 $ 11,829,832
Cost of Sales 5,867,380 4,804,299 11,466,891 8,766,979
------------- ------------- ------------- -------------
Gross Profit 552,128 2,045,527 1,068,653 3,062,853
------------- ------------- ------------- -------------
Selling and Administrative Expenses
Paxis Pharmaceuticals, Inc. Start Up Costs -- 1,051,047 -- 1,671,354
Selling and Administrative Expenses 3,110,346 1,421,646 5,413,283 2,684,713
------------- ------------- ------------- -------------
Total Selling and Administrative Expenses 3,110,346 2,472,693 5,413,283 4,356,067
------------- ------------- ------------- -------------
Operating [Loss] (2,558,218) (427,166) (4,344,630) (1,293,214)
------------- ------------- ------------- -------------
Other Income [Expense]:
Other Income 30,098 156,659 74,098 228,659
Interest Expense (39,853) (16,489) (73,552) (40,168)
Interest and Investment Income 15,088 17,545 39,334 55,802
------------- ------------- ------------- -------------
Total Other Income 5,333 157,715 39,880 244,293
------------- ------------- ------------- -------------
[Loss] Before Income Taxes
and minority interest (2,552,885) (269,451) (4,304,750) (1,048,921)
Federal and State Income Tax [Benefit] (22,620) 97,300 (22,873) 74,125
------------- ------------- ------------- -------------
Net [Loss] before minority interest (2,530,265) (366,751) (4,281,877) (1,123,046)
Minority interest in income of consolidated
subsidiary (20,986) -- (20,986) --
------------- ------------- ------------- -------------
Net [Loss] (2,551,251) (366,751) (4,302,863) (1,123,046)
Accretion of Preferred Stock Dividends -- (95,000) -- (190,000)
Deemed dividend from beneficial conversion
feature of Series B Preferred Stock (583,000) -- (1,166,000) --
Series B Preferred Stock Dividend (123,507) -- (247,014) --
------------- ------------- ------------- -------------
Net [Loss] applicable to common shareholders $ (3,257,758) $ (461,751) $ (5,715,877) $(1,313,046)
============= ============= ============= =============
Net [Loss] Income Per Common Share:
Basic $ (.26) $ (.04) $ (.46) $ (.13)
============= ============= ============= =============
Diluted $ (.26) $ (.04) $ (.46) $ (.13)
============= ============= ============= =============
Average Common Shares Outstanding 12,570,124 10,521,942 12,555,560 10,413,649
Dilutive Potential Common Shares:
Warrants and Options -- -- -- --
------------- ------------- ------------- -------------
Average Common Shares
Outstanding-assuming dilution 12,570,124 10,521,942 12,555,560 10,413,649
============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements
4
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS
ENDED DECEMBER 31, 2004
[UNAUDITED]
--------------------------------------------------------------------------------
Convertible Additional Total
Common Stock Preferred Preferred Paid-In (Accumulated Treasury Stock Stockholders'
Shares Par Value Stock Stock Capital Deficit) Shares Cost Equity
---------- --------- ----- ----- ------- -------- ------ ---- ------
Balance -
July 1, 2004 12,510,690 $25,021 $ -- $ -- $27,961,003 $(4,020,155) 25,800 $(28,831) $23,937,038
Exercise of
Stock Options
For cash 68,000 136 84,163 84,299
Issuance of
Common Stock
for consulting
fees 27,000 54 186,246 186,300
Deemed
dividend from
beneficial
conversion
feature of
Series B
Preferred Stock (1,166,000) (1,166,000)
Dividends Paid
on Series B
Preferred Stock (247,014) (247,014)
Stock
Repurchase Plan 9,100 (70,508) (70,508)
Net Loss for
the six months
ended December
31, 2004 (4,302,863) (4,302,863)
---------- ------- ----- ----- ----------- ------------ ------ --------- -----------
Balance-
December 31,
2004 12,605,690 $25,211 $ -- $ -- $28,231,412 $(9,736,032) 34,900 $(99,339) $18,421,252
========== ======= ===== ===== =========== ============ ====== ========= ===========
See accompanying notes to condensed consolidated financial statements.
5
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
--------------------------------------------------------------------------------
Six months ended
December 31,
2004 2003
---- ----
Operating Activities:
Net [Loss] ........................................... $ (4,302,863) $ (1,123,046)
------------- -------------
Adjustments to Reconcile Net (Loss) to Net Cash
[Used for] Provided by Operating Activities:
Depreciation and Amortization ...................... 739,166 226,080
Deferred Income Taxes .............................. (25,000) (3,000)
Allowance for Inventory ............................ 5,000 5,000
Bad Debt Expense ................................... 5,000 5,000
Issuance of Common Stock for consulting services ... 186,300 --
Minority Interest .................................. 20,986 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Refundable Federal Income Taxes .................... -- (14,640)
Accounts Receivable ................................ (1,334,794) (275,291)
Inventories ........................................ (1,246,408) 349,861
Deposit for Inventory .............................. -- (1,608,230)
Due From Paxis Pharmaceuticals, Inc. - Related Party -- (908,000)
Prepaid Expenses and Other Current Assets .......... (150,424) (463,111)
Security Deposits and Other Assets ................. (13,567) 105,016
[Decrease] Increase in:
Accounts Payable ................................... 319,518 63,885
Federal and State Income Taxes Payable ............. (46,822) 6,606
Accrued Expenses and Other Liabilities ............. 144,704 50,400
------------- -------------
Total Adjustments ...................................... (1,396,341) (2,460,424)
------------- -------------
Net Cash - Operating Activities ........................ (5,699,204) (3,583,470)
------------- -------------
Investing Activities:
Purchase of Intangible Assets ........................ (270,000) (275,000)
Investment in Joint Venture .......................... (25,366) (123,879)
License Fee .......................................... -- (90,000)
Goodwill ............................................. -- (483,256)
Purchase of Property and Equipment ................... (1,276,316) (2,049,996)
------------- -------------
Net Cash-Investing Activities .......................... (1,571,682) (3,022,131)
------------- -------------
Financing Activities:
Proceeds from Exercise of Stock Options .............. 84,299 96,710
Dividends Paid ....................................... (247,014) --
Treasury Stock ....................................... (70,508) --
Proceeds from Notes Payable .......................... -- 36,525
Repayment of Notes Payable ........................... (18,069) (70,149)
------------- -------------
Net Cash-Financing Activities .......................... (251,292) 63,086
------------- -------------
Net [Decrease] in Cash and Cash Equivalents ............ (7,522,178) (6,542,515)
Cash and Cash Equivalents - Beginning of Periods ....... 9,548,046 10,406,390
------------- -------------
Cash and Cash Equivalents - End of Periods ............. $ 2,025,868 $ 3,863,875
============= =============
See accompanying notes to condensed consolidated financial statements.
6
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
--------------------------------------------------------------------------------
Six months ended
December 31,
2004 2003
---- ----
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 82,944 $ 30,839
Income Taxes $ 43,173 $ 85,376
See accompanying notes to condensed consolidated financial statements.
7
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[1] Business
Basis of Reporting - The accompanying unaudited interim financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such interim
statements include all adjustments, which are considered necessary in order to
make the interim financial statements not misleading. It is suggested that these
financial statements 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 to
stockholders incorporated by reference in the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 2004. The results of operations for
the six months ended December 31, 2004 are not necessarily indicative of the
results for the entire fiscal year ending June 30, 2005.
Integrated BioPharma, Inc. (the "Company") is engaged primarily in the
manufacturing, marketing and sales of vitamins, nutritional supplements and
herbal products; the manufacture and distribution of Paclitaxel, which is the
primary chemotherapeutic agent in the treatment of breast cancer; and technical
services through its recently acquired contract research organization, InB:
Hauser Pharmaceutical Services, Inc.("Hauser CRO"). The Company's customers are
located primarily throughout the United States.
Paxis Pharmaceuticals, Inc. completed setting up its manufacturing facilities
prior to the end of fiscal 2004. The operating results of Paxis for the six
months ended December 31, 2004 have been included in the consolidated sales,
gross profit and selling and administrative expenses. Because the Paxis
subsidiary was a start up operation for the six months ended December 31, 2003,
the start up expenses were shown separately for the comparative period.
On September 16, 2004, the Company completed the purchase of substantially all
of the assets of Hauser CRO, including substantially all of its laboratories,
development and manufacturing facilities and equipment; its intellectual
property, including that related to Paclitaxel and other taxanes; goodwill,
professional staff and certain of its ongoing contracts. As part of the
transaction, the Company also acquired Hauser CRO's rights under a prior
contract to receive royalties and other payments from the Company's subsidiary,
Paxis Pharmaceuticals for Hauser CRO intellectual property used by Paxis in the
manufacture of Paclitaxel. Transactions for the period beginning September 10,
2004 through December 31, 2004 have been included in the Company's consolidated
financial statements. The acquisition price of $1,697,076 was allocated as
follows:
Inventory $ 780,524
Machinery & Equipment 916,552
----------
Total $1,697,076
==========
On October 1, 2004, the Company acquired a 51% interest in Micro Nutrition
Inc. (a newly formed entity) for a cash payment of $362,486. Micro Nutrition is
a California corporation in the mail order business selling primarily
nutritional specialty food items.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned or majority owned with an offset to minority interest. Intercompany
transactions and balances have been eliminated in consolidation.
Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing the fair value of
financial instruments to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
8
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company uses a variety
of methods and assumptions, which are based on estimates of market conditions
and risks existing at the time. For certain instruments, including cash and cash
equivalents, accounts receivable, accounts payable, and accrued expenses, it was
estimated that the carrying amount approximated fair value because of the short
maturities of these instruments. All debt is based on current rates at which the
Company could borrow funds with similar remaining maturities and approximates
fair value.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Inventories - Inventory is valued by the first-in, first-out method, at the
lower of cost or market.
Depreciation - The Company follows the general policy of depreciating the cost
of property and equipment over the following estimated useful lives:
Building 15 Years
Leasehold Improvements 15 Years
Machinery and Equipment 7 Years
Machinery and Equipment Under Capital Leases 7 Years
Transportation Equipment 5 Years
Machinery and equipment are depreciated using accelerated methods while
leasehold improvements are amortized on a straight-line basis. Depreciation
expense was $595,247 and $206,080 for the six months ended December 31, 2004 and
2003, respectively.
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 or
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition - The Company recognizes revenue upon shipment of the
product. The Company believes that recognizing revenue at shipment is
appropriate because the Company's sales policies meet the four criteria of SAB
101, which are: (i) persuasive evidence that an arrangement exists, (ii)
delivery has occurred, (iii) the seller's price to the buyer is fixed and
determinable and (iv) collectability is reasonably assured. The Company's sales
policy is to require customers to provide purchase orders establishing selling
prices and shipping terms, which are F.O.B shipping point with the title and
risk of loss passing to the customer at point of shipment. The Company evaluates
the credit risk of each customer and establishes an allowance of doubtful
accounts for any credit risk. Sales returns and allowances are estimated upon
shipment.The Company recognizes income in its Contract Research Organization
upon monthly customer invoicing. The invoice amount is based upon on time and
materials spent in the month.
The Company realized fee income from managing warehouse and office operations
for an unrelated company of $70,000 and $120,000 for the six months ended
December 31, 2004 and 2003, respectively. Such amounts are included in "Other
income."
Investment in Joint Venture - Paxis entered into a joint venture as of July 16,
2003 with Chatham Biotec, Ltd. ("Chatham"), a Canadian company which harvests
and dries biomass, to form a Canadian-based joint venture to produce extract and
intermediate precursor Paclitaxel from Canadian Taxus biomass. Chatham supplies
9
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
the Canadian bio-mass and the joint venture processes it, using Paxis'
extraction expertise in a facility currently controlled by the joint venture.
The joint venture supplies Paxis' requirements for extract at cost, from which
Paxis produces its Paclitaxel and related products. The joint venture may sell
extract and intermediate products to third parties. The Company has a 50%
interest in this joint venture. The management agreement provides for profits
and losses to be allocated based on the Company's 50% interest. As of December
31, 2004, the $121,388 represents the Company's investment. The Company can give
no assurance that the joint venture can be operated successfully. The investment
in the joint venture is reflected using the equity method. The results of
operations were not significant for the six months ended December 31, 2004.
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. The Company performed the annual
test as of May 13, 2004, and determined that there were no indications of
goodwill impairment.
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. As
of December 31, 2004, the Company believes that there is no impairment to
goodwill.
Other intangible assets consist of intellectual property, trademarks, license
fees, and unpatented technology. Amortization is being recorded on the straight
line basis over periods ranging from 10 years to 20 years based on contractual
or estimated lives.
Long-Lived Assets - The Company reviews the carrying values of its long-lived
assets for possible impairment on an annual basis and whenever circumstances
indicate the carrying amount of an asset may not be recoverable.
Advertising - Costs incurred for producing and communicating advertising are
expensed when incurred. Advertising expense was $454,589 and $127,210 for the
six months ended December 31, 2004 and 2003, respectively.
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of SFAS No.148, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plan
because the exercise price of employee stock options equals the market prices of
the underlying stock on the date of grant. Had compensation cost been determined
based on the fair value at the grant date for awards in the six months ended
December 31, 2004 and 2003, respectively, consistent with the provision of SFAS
No. 123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below.
10
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Six months ended
December 31,
2004 2003
-------------- --------------
Net (loss), income available to common
stockholders, as reported $ (4,302,863) $ (1,123,046)
Add: Stock based employee compensation
expense included in net (loss), income
net of related tax effects -- --
Deduct: Total stock based employee
compensation expense determined
Under fair value based method for all
awards, net of related tax effects (803,335) (1,542,101)
-------------- --------------
Pro forma net (loss) income available to
common stockholders $ (5,106,198) $ (2,665,147)
============== ==============
Earnings per share:
Basic-as reported $ (0.46) $ (0.13)
============== ==============
Basic-pro forma $ (0.41) $ (0.26)
============== ==============
Diluted-as reported $ (0.46) $ (0.13)
============== ==============
Diluted-pro forma $ (0.41) $ (0.26)
============== ==============
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.
As of December 31, 2004, options and warrants with exercise prices below average
market price in the amount of 4,852,595 shares and Convertible Series B
Preferred Stock in the amount of 7,000,000 shares were not included in the
computation of diluted earnings per share as they are antidilutive as a result
of net losses during the periods presented.
As of December 31, 2004, options and warrants to purchase 1,388,666 shares of
common stock were outstanding but were not included in the computation of
diluted earnings per share because their exercise price was greater that the
average market price of the common shares.
[3] Goodwill and other Intangible Assets
In accordance with SFAS No. 142, goodwill is not amortized. The Company
completed its annual impairment test prescribed by SFAS 142 at May 13, 2004 and
concluded that no impairment of goodwill existed.
At December 31, 2004, goodwill consisted of:
Goodwill - Paxis acquisition $ 542,728
Goodwill - Aloe acquisition 145,410
------------
Total $ 688,138
============
11
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[3] Goodwill and other Intangible Assets [Continued]
At December 31, 2004 intangible assets are made up of the following:
Gross Carrying Accumulated
Amount Amortization Net
------ ------------ ---
Intellectual Property $ 1,597,455 $ 157,452 $ 1,440,003
License Fee 90,000 13,500 76,500
Trade Names 1,508,000 87,967 1,420,033
Unpatented Technology 547,000 119,999 427,001
License Agreement 611,730 24,535 587,195
----------- --------- -----------
Total $ 4,354,185 $ 403,453 $ 3,950,732
=========== ========= ===========
Amortization expense recorded on the intangible assets for the six months ended
December 31, 2004 and 2003 was $143,253 and $20,000 respectively. Amortization
expense is recorded on the straight line method of periods ranging from 10 years
to 20 years.
The estimated annual amortization expense for intangible assets for the five
succeeding twelve months is as follows:
Amortization
December 31, Expense
------------ -------
2005 $ 331,649
2006 331,649
2007 331,649
2008 331,649
2009 331,649
Thereafter 2,292,487
----------
Total $3,950,732
==========
The Company records impairment losses on other intangible assets when events and
circumstances indicate that such assets might be impaired and the estimated fair
value of the asset is less than its recorded amount in accordance with 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.
12
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[4] Inventories
Inventories consist of the following at December 31, 2004:
Raw Materials $ 4,163,456
Work-in-Process 1,416,585
Finished Goods 2,810,167
-------------
Total $ 8,390,208
----- =============
[5] Property and Equipment
Property and equipment comprise the following at December 31, 2004:
Land and Building $ 1,250,000
Leasehold Improvements 2,133,845
Machinery and Equipment 8,284,195
Machinery and Equipment Under Capital Leases 162,827
Transportation Equipment 37,714
------------
Total 11,868,581
Less: Accumulated Depreciation and Amortization 4,322,198
------------
Total $ 7,546,383
----- ============
[6] Notes Payable
Notes Payable are summarized as follows at December 31, 2004:
Revolving line of credit loan provided by Bank of America dated August 6, 2003
in the amount of $4,500,000 with interest at a variable rate based on 1.25% over
the current LIBOR rate. The loan was due on September 4, 2004 and subsequently
has been renewed through September 2005. The loan is guaranteed by Mr. Carl
DeSantis, a shareholder and director of the Company. At December 31, 2004, the
interest rate was 3.67%.
[7] Loan Payable-Trade Investment Services
Demand loan provided by Trade Investment Services, LLC ("TIS"), a former
shareholder of Paxis Pharmaceuticals, Inc., dated July 1, 2002 with interest at
9%.
[8] Research and Development Expense
Research and development costs are expenses as incurred. The Company incurred $
127,934 and $37,583 for the six months ended December 31, 2004 and 2003,
respectively. Such costs are included in selling and administrative expenses.
[9] Capital Lease
The Company acquired laboratory equipment under the provisions of a short-term
lease. The lease expired in December 2004. The equipment under the capital lease
as of December 31, 2004 has a cost of $36,525 and accumulated depreciation of
$12,304 with a net book value of $24,221.
13
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[9] Capital Lease [Continued]
The future minimum lease payments under capital leases and the net present value
of the future minimum lease payments at December 31, 2004 are as follows:
Total Minimum Lease Payments $ 1,618
Amount Representing Interest (32)
---------
Present Value of Net Minimum Lease Payment 1,586
---------
Current Portion (1,586)
Long-Term Capital Lease Obligation $ -0-
---------------------------------- ========
[10] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk - Cash - The Company maintains balances
at several financial institutions. Accounts at each institution are insured by
the Federal Deposit Insurance Corporation up to $100,000. At December 31, 2004
the Company's uninsured cash balances totaled approximately $992,077. The
Company does not require collateral in relation to cash credit risk.
[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 at December 31, 2004 is $47,613.
[11] Major Customer
For the six months ended December 31, 2004 and 2003, approximately 39% and 67%
of revenues were derived from one customer. The loss of this customer would have
an adverse effect on the Company's operations. One other customer accounted for
26% of consolidated sales for the six months ended December 31, 2004 and two
other customers accounted for 11% of consolidated sales for the six months ended
December 31, 2003. Accounts receivable from these customers comprised
approximately 41% and 67% of total accounts receivable at December 31, 2004 and
2003, respectively.
[12] 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 of the Board and principal stockholder and certain family
members and 10% owned by the Company's Chief Financial Officer. The lease was
effective on January 10, 1997 and provides for a 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
six months ended December 31, 2004 and 2003 on this lease was approximately
$378,000 and $235,000, respectively, and is included in both manufacturing and
selling and administrative expenses.
Other Lease Commitments - The Company leases manufacturing and office facilities
through March 31, 2007. The lease was effective on April 1, 2002 and provided
for minimum monthly rental of $32,500 per month through March 31, 2007 plus
increases in real estate taxes and building operating expenses. Rent expense has
been straight-lined over the life of the lease. At its option, the Company has
the right to renew the lease for an additional five year period. On
14
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[12] Commitments and Contingencies [Continued]
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 six months ended
December 31, 2004 and 2003 was $182,040 and $150,471, respectively, and is
included in manufacturing expense.
The Company leases warehouse and office facilities through March 31, 2006. The
lease was effective on March 6, 2004 and provides for a minimum monthly rental
of $5,925 in year one and $6,133 in year two.
The Company leases office space through September 30, 2005. The lease was
effective on June 1, 2004, and provides for a minimum monthly rental of $2,248.
The Company leases warehouse equipment for a five-year period providing for an
annual rental of $15,847 and office equipment for a five year period providing
for an annual rental of $8,365.
The Company leases automobiles under non-cancelable operating lease agreements
which expire through 2006.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related
Lease Party Lease
December 31, Commitment Commitment Total
------------- ---------- ---------- ----------
2005 $ 427,338 $ 323,559 $ 750,897
2006 125,662 323,559 449,221
2007 11,502 323,559 335,061
2008 8,400 323,559 331,959
2009 6,300 323,559 329,859
Thereafter -- 1,802,612 1,802,612
---------- ---------- ----------
Total $ 579,202 $3,420,407 $3,999,609
========== ========== ==========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $759,000 and $446,000 for the six months ended December 31, 2004
and 2003, respectively. Rent expense is stated net of sublease income of
approximately $1,200 and $5,700 for the six months ended December 31, 2004 and
2003, respectively.
On October 14, 2004 the Company was served with a product liability complaint.
The complaint is in the early stages of litigation and has been turned over to
the Company's insurance carrier for defense.
[B] Development and Supply Agreement - On March 13, 1998, the Company signed a
development and supply agreement with Herbalife International of America, Inc.
("Herbalife") whereby the Company will develop, manufacture and supply certain
nutritional products to Herbalife. The agreement was renewed through December
31, 2006. The agreement provides that Herbalife is required to purchase a
minimum quantity of Supplied Products each year for the term of the agreement in
order to be eligible for rebate incentives. If Herbalife purchases the minimum
amount, then Herbalife will be entitled to certain rebates of an amount not
exceeding $300,000 per year. For the six months ended December 31, 2004, there
were no rebates due.
[C] Consultant Agreement- On October 20, 2003, the Company entered into a one
year consultant agreement with an investor relations consultant. The Company
paid $80,000 over the length of the agreement. In addition, the Company will
issue to the consultant 36,000 shares of common stock. On July 13, 2004 the
Company terminated the agreement. Under the terms of the termination agreement,
the Company will not be obligated to pay the $10,000 per month fee
15
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[12] Commitments and Contingencies [Continued]
after July 15, 2004. Additionally the Company will issue to the consultant
27,000 shares of common stock valued at the fair market price on the date of
issuance in lieu of the original 36,000 shares. The 27,000 shares of common
stock were valued at $186,300 and is included in consulting fee expense.
[D] Intellectual Property Agreement - In connection with the acquisition in
January 2004 of intellectual property developed by the Center for Molecular
Biotechnology of Fraunhofer USA, Inc., the Company will pay up to a maximum of
$2,500,000 for services to be performed by Fraunhofer USA, Inc. over a five year
period.
[13] Related Party Transactions
The Company has two consulting agreements with the brothers of the Company's
Chairman of the Board. One agreement is on a month to month basis for $1,100 per
month. The total consulting expense recorded per this verbal agreement for the
six months ended December 31, 2004 and 2003 was $6,600 respectively.
The second agreement is with EVJ, LLC a limited liability company controlled by
Robert Kay, a director of the Company. The total consulting expense under this
agreement was $90,000 for the six months ended December 31, 2004 and was $75,000
for the five months ended December 31, 2003.
[14] New Accounting Pronouncements
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities," as revised in December 2003 (FIN 46R) which is effective for the
first reporting period that ends after December 15, 2004. This interpretation
changes the method of determining whether certain entities should be included in
the Company's consolidated financial statements. An entity is subject to FIN 46
and is called a variable interest entity ("VIE") if it has (1) equity that is
insufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties, or (2) equity investors that
cannot make significant decisions about the entity's operations or that do not
absorb the expected losses or receive the expected returns of the entity. All
other entities are evaluated for consolidation under SFAS No. 94, "Consolidation
of All Majority-Owned Subsidiaries." A VIE is consolidated by its primary
beneficiary, which is the party involved with the VIE that has a majority of the
expected losses or a majority of the expected residual returns or both. The
Company has determined that there is no impact from the adoption of this
statement.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003. The Company has determined that there is no impact
from the adoption of this statement.
In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 ("EITF
03-06"), "Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share." EITF 03-06 addresses a number of questions
regarding the computation of earnings per share by companies that have issued
securities other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and if, it declares
dividends on its common stock. The issue also provides further guidance in
applying the two-class method of calculating earnings per share, clarifying what
constitutes a participating security and how to apply the two-class method of
computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 is effective for fiscal periods beginning after March 31,
2004. The Company does not expect the adoption of this statement to have a
material impact on its financial position or results of operations.
16
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[14] New Accounting Pronouncements [Continued]
In June 2004, the Emerging Issues Task Force ("EITF") issued EITF No. 03-01,
"The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments" ("EITF 03-01"). EITF 03-01 includes new guidance for evaluating and
recording impairment losses on debt and equity investments, as well as new
disclosure requirements for investments that are deemed to be temporarily
impaired. The accounting guidance of EITF 03-01 is effective for reporting
periods beginning after June 15, 2004, while the disclosure requirements for
debt and equity securities accounted for under SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, are effective for annual periods
ending after December 15, 2003. Adoption of EITF 03-01 will not have a material
impact on the Company's consolidated financial position or results of
operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS 151
amends ARB No. 43, "Inventory Pricing", to clarify the accounting for certain
costs as period expense. The Statement is effective for fiscal years beginning
after June 15, 2005, however, early adoption of this Statement is permitted. The
Company does not anticipate an impact from the adoption of this statement.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment, "which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS
123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The compensation cost will
be measured based on the fair value of the equity or liability instruments
issued. The Statement is effective as of the beginning of the first interim or
annual period beginning after June 15, 2005. We do not yet know the impact that
any future share-based payment transactions will have on our financial position
or results of operations.
[15] Equity Transactions
[A] Stock Option Plan and Warrants - On September 21, 2004, the Company
granted 95,238 incentive stock options and 657,262 non-statutory stock options
for a period of ten years at an exercise price equal to the market price of
$6.30 and 14,430 incentive stock options for a term of five years at $6.93
representing 110% of the market price and 110,570 non-statutory stock options
for a period of ten years at $6.93 representing 110% of the market price.
[B] Treasury Stock Purchases - Through the Company's stock repurchase plan,
the Company purchased an aggregate of 9,100 shares of its common stock for a
purchase price of $70,508 during July 2004.
[16] Segment Information
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments.
The Company has divided its operations into three reportable segments as
follows: Sales of vitamins and nutritional supplements, sales of its
pharmaceutical drug Paclitaxel and sales of technical services through its CRO.
Because Paxis Pharmaceuticals, Inc. was not acquired until fiscal 2004, the
Company operated one business segment in fiscal 2003. The international sales
for the six months ended December 31, 2004 were $2,253,957.
17
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[16] Segment Information [Continued]
Financial information relating to the six months ending December 31, 2004
operations by business segment follows:
Technical
Nutraceutical Pharmaceutical Services Total
------------ ----------- ----------- ------------
Sales
U.S. Customers $ 9,366,088 $ 605,005 $ 310,494 $ 10,281,587
International 2,253,957 -- -- 2,253,957
------------ ----------- ----------- ------------
Total Revenues 11,620,045 605,005 310,494 12,535,544
Segment operating
profit/(loss) (1,318,689) (2,388,053) (637,888) (4,344,630)
Depreciation 213,510 343,548 38,189 595,247
Capital Expenditures 28,831 314,256 932,147 1,275,234
Total assets 18,138,345 8,057,667 2,037,943 28,233,955
[17] Subsequent Events
Litigation - On February 7, 2005, the Company received a $2.5 million cash
payment in connection with a multi district class action brought on behalf of
direct purchasers of vitamin products, in which the plaintiffs have alleged
violations of Section 1 of the Sherman Antitrust Act and other wrongful
anti-competitive conduct in violation of various federal and state laws. The
first settlement payment was received in January of 2000.
18
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion should be read in conjunction with the historical
information of the Company and notes thereto.
Critical Accounting Estimates
Allowances for Doubtful Accounts and Sales Returns
The Company makes judgments as to its ability to collect outstanding receivables
and provides allowances for the portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all significant
outstanding invoices. The Company continuously monitors payments from its
customers and maintains allowances for doubtful accounts for estimated losses in
the period they become known.
The Company's sales policy is to require customers to provide purchase orders
establishing selling prices and shipping terms. Shipping terms are F.O.B.
shipping point with title and risk of loss passing to the customer at point of
shipment.
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.
Inventory Valuation
Inventories are stated at the lower of cost or market ("LCM"), which reflects
management's estimates of net realizable value. The Company is a contract
manufacturer and distributor, and only produces finished goods or purchases raw
materials on a purchase order basis. Consequently, the Company has minimal risk
for slow-moving or obsolete inventory. Raw materials are ordered from suppliers
when needed to complete customer's orders. Detail inventory levels and
composition are reviewed and evaluated for potential overstock or obsolescence
in light of current operations and sales. Any appropriate reserve is recorded on
a current 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.
Intangible 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 indicate that such assets might be impaired and the estimated fair
value of the asset is less than its recorded amount in accordance with
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Intangible Assets [Continued]
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.
Income Taxes
Net operating losses of approximately $3,013,000 will expire in 2024 for federal
purposes and 2011 for state purposes. Until sufficient taxable income to offset
the temporary timing differences attributable to operations and the tax
deductions attributable to options are assured, a valuation allowance equaling
the net operating loss is being provided.
Results of Operations
Six months ended December 31, 2004
Compared to six months ended December 31, 2003
The Company's net loss for the six months ended December 31, 2004 was
$(4,302,863) as compared to net loss of $(1,123,046) for the six months ended
December 31, 2003. This increase in net loss of approximately $3,180,000 is
primarily the result of a decrease in gross profit of approximately $2,000,000,
an increase in selling and administrative expenses of approximately $1,100,000
including the Paxis Pharmaceuticals, Inc start up costs, a decrease in other
income of approximately $200,000, and a decrease in federal income and state
income taxes of approximately $97,000.
Sales for the six months ended December 31, 2004 and 2003 were $12,535,544 and
$11,829,832, respectively, an increase of approximately $700,000 or 6%. Gross
profit for the six months ended December 31, 2004 was $1,994,200 lower than
gross profit for the six months ended December 31, 2003. This decrease in gross
profit is attributable to the inclusion of Paxis Pharmaceuticals manufacturing
expenses. Exclusive of the Paxis subsidiary, the gross profit percentage for the
six months ended December 31, 2004 was 24% as compared to 26% for the six months
ended December 31, 2003. For the six months ended December 31, 2004, the Company
had sales to one customer, who accounted for 39% of net sales in 2004 and 69% in
2003. The loss of this customer would have an adverse affect on the Company's
operations.
Manufacturing sales for the six months ended December 31, 2004 and 2003 were
$9,728,323 and $10,275,488, respectively, a decrease of $547,165 or 5%.
The Company has an agreement with DSM Nutritional Products, Inc. (a successor to
Roche Vitamins, Inc.). Sales under this agreement were $1,081,393 for the six
months ended December 31, 2004 as compared to $1,020,561 for the six months
ended December 31, 2003, an increase of $60,832 or 6%.
The Company offers distribution and sale of fine chemicals through a subsidiary,
IHT Health Products, Inc. Sales for the six months ended December 31, 2004
totaled $490,283 as compared to $536,078 for the six months ended December 31,
2003, a decrease of $45,795 or 9%.
On September 16, 2004 the Company completed the purchase of substantially all of
the assets of Hauser CRO. Sales for the three months ended December 31, 2004
were $310,494.
Paxis completed setting up its manufacturing facilities and operations and began
production in the fourth quarter of 2004. In anticipation of fulfilling orders,
Paxis has built up raw material and work in process inventories of approximately
$2,600,000. Current orders are being fulfilled on a purchase order basis. Sales
for the six months ended December 31, 2004 totaled $605,005.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Results of Operations [Continued]
Cost of sales increased to $11,466,891 for the six months ended December 31,
2004 as compared to $8,766,979 for the six months ended December 31, 2003. Cost
of sales increased as a percentage of sales to 91.5% for the six months ended
December 31, 2004 as compared to a 74.1% for the six months ended December 31,
2003. The increase in cost of sales is due to the inclusion of $2,678,280
attributable to both Paxis Pharmaceuticals, Inc. and Hauser CRO. Exclusive of
Paxis Pharmaceuticals, Inc. and Hauser CRO, cost of sales would have been 76%
for the six months ended December 31, 2004 as compared to 74% for the six months
ended December 31, 2003.
A tabular presentation of the changes in selling and administrative expenses is
as follows:
Six Months Ended
December 31,
2004 2003 Change
---------------- --------------- ----------------
Advertising Expense $ 454,589 $ 127,210 $ 327,379
Bad Debt Expense (6,047) 4,842 (10,889)
Royalty & Commission Expense 110,840 39,621 71,219
Officers Salaries 196,797 247,564 (50,767)
Auto, Travel & Entertainment 472,507 420,383 52,124
Office Salaries 1,016,899 448,344 568,555
Freight Out 292,046 98,088 193,958
Depreciation & Amortization 270,297 103,011 167,286
Consulting Fees 634,543 172,387 462,156
Regulatory Fees 10,254 14,250 (3,996)
Professional Fees 473,333 392,455 80,878
Research & Development Expense 127,974 37,583 90,391
Other selling and administrative expenses 1,359,251 578,975 780,276
Paxis Pharmaceuticals, Inc. -- 1,671,354 (1,671,354)
---------------- --------------- ----------------
Total $ 5,413,283 $ 4,356,067 $ 1,057,216
================ =============== ================
The increase in advertising expense is due to an increase in print advertising
relating to the sales of the Naturally Noni(TM), Naturally Aloe(TM) and Avera
Sport(TM) lines. Royalty and commission expense increased as a result of the
sales of the Naturally Noni(TM), Naturally Aloe(TM) and Avera Sport(TM) lines.
Office salaries have increased due to the addition of two new sales and
marketing employees and the inclusion of Paxis salary expenses reflected in the
six months. In previous quarters these costs were included in Paxis startup
expenses. The increase in freight out can be primarily attributable the sales of
the Naturally Noni(TM), Naturally Aloe(TM) and Avera Sport(TM) lines. The
increase in depreciation and amortization expenses is a result of the inclusion
of Paxis Pharmaceuticals, Inc. Consulting fees have increased as a result of the
termination of the agreement made on July 8, 2004, which resulted with the
issuance of 27,000 shares of common stock. The increase in research and
development expense is attributable to the inclusion of Paxis expenses reflected
in the six months.
Other income [expense] was $39,880 for the six months ended December 31, 2004 as
compared to $244,296 for the six months ended December 31, 2003, a decrease of
$204,416. The decrease is due to a decrease in consulting fee income of $20,000,
a decrease in other income of $134,561, a decrease in interest and investment
income of $16,468 and an increase in interest expense of approximately $33,000.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Three months ended December 31, 2004
Compared to three months ended December 31, 2003
The Company's net loss for the three months ended December 31, 2004 was
$(2,551,251) as compared to net loss of $(366,751) for the three months ended
December 31, 2003. This increase in net loss of approximately $2,100,000 is
primarily the result of a decrease in gross profit of approximately $1,500,000,
an increase in selling and administrative expenses of approximately $600,000
including the Paxis Pharmaceuticals, Inc start up costs, a decrease in other
income of approximately $150,000, and a decrease in federal income and state
income taxes of approximately $119,000.
Sales for the three months ended December 31, 2004 and 2003 were $6,419,508 and
$6,849,826, respectively, a decrease of approximately $430,000 or 6%. Gross
profit for the three months ended December 31, 2004 was $1,493,399 lower than
gross profit for the three months ended December 31, 2003. This decrease in
gross profit is attributable to the inclusion of Paxis Pharmaceuticals
manufacturing expenses. Exclusive of the Paxis subsidiary, the gross profit
percentage for the three months ended December 31, 2004 was 21% as compared to
30% for the three months ended December 31, 2003. For the six months ended
December 31, 2004, the Company had sales to one customer, who accounted for 39%
of net sales in 2004 and 67% in 2003. The loss of this customer would have an
adverse affect on the Company's operations.
Manufacturing sales for the three months ended December 31, 2004 and 2003 were
$4,577,762 and $6,238,246, respectively, a decrease of $1,660,484 or 27%.
The Company has an agreement with DSM Nutritional Products, Inc. (a successor to
Roche Vitamins, Inc.). Sales under this agreement were $548,501 for the three
months ended December 31, 2004 as compared to $470,897 for the three months
ended December 31, 2003, an increase of $77,604 or 16%.
The Company offers distribution and sale of fine chemicals through a subsidiary,
IHT Health Products, Inc. Sales for the three months ended December 31, 2004
totaled $344,805 as compared to $174,226 for the three months ended December 31,
2003, an increase of $170,579 or 98%.
On September 16, 2004 the Company completed the purchase of substantially all of
the assets of Hauser CRO. Sales for the three months ended December 31,2004 were
$310,494.
Paxis completed setting up its manufacturing facilities and operations and began
production in the fourth quarter of 2004. In anticipation of fulfilling orders,
Paxis has built up raw material and work in process inventories of approximately
$2,600,000. Current orders are being fulfilled on a purchase order basis. Sales
for the three months ended December 31, 2004 totaled $393,345.
Cost of sales increased to $5,867,380 for the three months ended December 31,
2004 as compared to $4,804,299 for the three months ended December 31, 2003.
Cost of sales increased as a percentage of sales to 91.4% for the three months
ended December 31, 2004 as compared to a 70.1% for the three months ended
December 31, 2003. The increase in cost of sales is due to the inclusion of
$1,512,291 attributable to both Paxis Pharmaceuticals, Inc. and Hauser CRO.
Exclusive of Paxis Pharmaceuticals, Inc. and Hauser CRO, cost of sales would
have been 76% for the three months ended December 31, 2004 as compared to 70%
for the three months ended December 31, 2003.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Results of Operations [Continued]
A tabular presentation of the changes in selling and administrative expenses is
as follows:
Three Months Ended
December 31,
2004 2003 Change
---------------- --------------- ----------------
Advertising Expense $ 253,757 $ 110,160 $ 143,597
Bad Debt Expense (3,393) 7,874 (11,267)
Royalty & Commission Expense 61,003 35,063 25,940
Officers Salaries 98,399 123,728 (25,329)
Auto, Travel & Entertainment 245,407 172,618 72,789
Office Salaries 461,724 264,079 197,645
Freight Out 154,750 73,442 81,308
Depreciation & Amortization 169,434 53,259 116,175
Consulting Fees 398,826 93,522 305,304
Regulatory Fees 16,496 3,750 12,746
Professional Fees 230,353 138,514 91,839
Research & Development Expense 82,906 -- 82,906
Other selling and administrative expenses 940,684 345,583 595,101
Paxis Pharmaceuticals, Inc. -- 1,051,047 (1,051,047)
---------------- --------------- ----------------
Total $ 3,110,346 $ 2,472,693 $ 637,653
================ =============== ================
The increase in advertising expense is due to an increase in print advertising
relating to the sales of the Naturally Noni(TM), Naturally Aloe(TM) and Avera
Sport(TM) lines. Royalty and commission expense increased as a result of the
sales of the Naturally Noni(TM), Naturally Aloe(TM) and Avera Sport(TM) lines.
Office salaries have increased due to the addition of two new sales and
marketing employees and the inclusion of Paxis salary expenses reflected in the
six months. In previous quarters these costs were included in Paxis startup
expenses. The increase in freight out can be primarily attributable the sales of
the Naturally Noni(TM), Naturally Aloe(TM) and Avera Sport(TM) lines. The
increase in depreciation and amortization expenses is a result of the inclusion
of Paxis Pharmaceuticals, Inc. Consulting fees have increased as a result of the
termination of the agreement made on July 8, 2004, which resulted with the
issuance of 27,000 shares of common stock. The increase in research and
development expense is attributable to the inclusion of Paxis expenses reflected
in the six months.
Other income [expense] was $5,333 for the three months ended December 31,
2004 as compared to $157,715 for the three months ended December 31, 2003, a
decrease of $152,382. The decrease is due to a decrease in other income of
$126,561, a decrease in interest and investment income of $2,457 and an increase
in interest expense of approximately $23,000.
Inventories
The inventory at December 31, 2004 increased by $1,314,078 from the inventory at
June 30, 2004. The increase can be attributable to an increase of the Naturally
Noni(TM), Naturally Aloe(TM) and Avera Sport(TM) lines of approximately
$240,000, an increase in Manhattan Drug Inc. of approximately $260,000 and the
acquisition of the Hauser CRO's inventory of approximately $800,000.
Prepaid Expenses
Prepaid expenses and other current assets increased by $131,614 from June
30, 2004. The increase is attributable to the inclusion of InB: Hauser
Pharmaceutical Services, Inc.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Results of Operations [Continued]
Liquidity and Capital Resources
At December 31, 2004 the Company's working capital was $7,794,050, a decrease of
$5,119,611 in working capital from June 30, 2004. Cash and cash equivalents were
$2,025,868 at December 31, 2004, a decrease of $7,522,178 from June 30, 2004.
The Company utilized $5,699,204 and $3,583,470 from operations for the six
months ended December 31, 2004 and 2003, respectively.
The primary reasons for the decrease in cash used in operations for the six
months ended December 31, 2004 are net loss of approximately $4,302,863, an
increase in accounts receivable of approximately $1,300,000 an increase in
inventories of approximately $1,300,000 and an increase in accounts payable of
approximately $319,000. Based upon the increase in the Company's vitamin and
supplement sales and an increase in its paxlitaxel business the Company
anticipates that cash flows from operations and existing cash balances will be
sufficient to fund operations through fiscal 2005.
The Company utilized $1,571,682 and $3,022,131 in investing activities for the
six months ended December 31, 2004 and 2003, respectively. The Company utilized
$251,292 and generated $63,086 from debt financing activities for the six months
ended December 31, 2004 and 2003, respectively.
The Company's total annual commitment at December 31, 2004 for the next five
years of $3,999,609 consists of obligations under operating leases for
facilities and lease agreements for the rental of warehouse equipment, office
equipment and automobiles.
Capital Expenditures
The Company's capital expenditures for the six months ended December 31, 2004
and 2003 were $1,276,316 and $2,049,996 respectively. The capital expenditures
during these periods are primarily attributable to the purchase of machinery and
equipment.
The Company has budgeted approximately $500,000 for capital expenditures for the
remaining six months of fiscal 2004. Such amount will be funded from current
cash balances.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
24
Item 3. Controls and Procedures
INTEGRATED BIOPHARMA, INC.
--------------------------------------------------------------------------------
(a) Evaluation of disclosure controls and procedures. An evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures within 45 days before the filing date of this
Form 10-QSB. Based on their evaluation, the Company's principal executive
officer and principal financial officer have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934 (the "Exchange Act") are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms.
(b) Changes in Internal Control Over Financial Reporting. There have been
no significant changes in the Company's internal controls over financial
reporting or in other factors that could significantly affect internal controls
subsequent to their evaluation. There were no significant deficiencies or
material weaknesses, and therefore there were no corrective actions taken.
25
Part II: Other Information
INTEGRATED BIOPHARMA, INC.
--------------------------------------------------------------------------------
Item 1: Legal Proceedings
Of the three separate actions against the Company brought by NatEx Georgia LLC,
Wolfe Axelrod Weinberger Associates, LLC and Body Systems Technology, Inc.,
respectively, each described in the Company's Annual Report on Form 10-KSB for
the year ended June 30, 2004, filed with the U.S. Securities and Exchange
Commission on September 28, 2004, only the NatEx Georgia LLC action is still
pending. This action has been remanded to state court, and the Company will file
a motion to dismiss action. The remaining two actions have been settled with no
material financial impact upon the Company.
On October 14, 2004 the Company was served with a product liability
complaint. The complaint is in the early stages of litigation and has been
turned over to the Company's insurance carrier for defense.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Periodic Report by Chief Executive Officer
Pursuant to Rules 13a-14 and 15d-14 of the Securities and Exchange
Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Periodic Report by Chief Financial Officer
Pursuant to Rules 13a-14 and 15d-14 of the Securities and Exchange
Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Periodic Report by Chief Executive Officer
Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Periodic Report by Chief Financial Officer
Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
26
Part II: Other Information
INTEGRATED BIOPHARMA, INC.
-------------------------------------------------------------------------------
(b) Reports on Form 8-K
Current Report on Form 8-K filed on October 12, 2004 pursuant to
Item 7.01 (Regulation FD) and Item 9.01 (Financial Statements and
Exhibits).
Current Report on Form 8-K filed on October 22, 2004 pursuant to
Item 7.01 (Regulation FD) and Item 9.01 (Financial Statements and
Exhibits).
Current Report on Form 8-K filed on November 10, 2004 pursuant to
Item 7.01 (Regulation FD) and Item 9.01 (Financial Statements and
Exhibits).
Current Report on Form 8-K filed on November 15, 2004 pursuant to
Item 7.01 (Regulation FD) and Item 9.01 (Financial Statements and
Exhibits).
27
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.
INTEGRATED BIOPHARMA, INC.
Date: February 14, 2005 By: /s/ E. Gerald Kay
---------------------
Chief Executive Officer
Date: February 14, 2005 By: /s/ Eric Friedman
---------------------
Eric Friedman,
Chief Financial Officer
28