UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
------------
FORM 10-KSB
Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2005 Commission File Number 000-28876
INTEGRATED BIOPHARMA, INC.
(Exact name of small business registrant in its charter)
Delaware 22-2407475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Long Ave., Hillside, New Jersey 07205
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (888) 319-6962
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.002 American Stock Exchange
par value per share
Securities registered under Section 12(g) of the Exchange Act: None
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 mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Yes | X | No | |
Registrant's revenues for the fiscal year ended June 30, 2005 were $32,735,813.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the trading price of the Registrant's Common Stock on
September 19, 2005 was $8,163,638.
The number of shares outstanding of each of the Registrant's classes of common
equity, as of the latest practicable date:
Class Outstanding at September 19, 2005
Common Stock, $.002 par value 12,685,790 Shares
DOCUMENTS INCORPORATED BY REFERENCE
The information required by part III will be incorporated by reference from
certain portions of a definitive Proxy Statement which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
FORM 10-KSB ANNUAL REPORT
INDEX
Part I Page
Item 1. Description of Business 1
Item 2. Description of Property 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Common Equity, Related Stockholder Matters 10
and Small Business Issuer Purchases of Equity Securities
Item 6. Management's Discussion and Analysis or Plan of Operation 14
Item 7. Financial Statements 18
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
Item 8 A. Controls and Procedures 18
Item 8 B. Other Information 18
Part III
Item 9. Directors and Executive Officers of the Registrant 19
Item 10. Executive Compensation 19
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 19
Item 12. Certain Relationships and Related Transactions 19
Item 13. Exhibits, List and Reports on Form 8-K 19
Item 14. Principal Accountant Fees and Services 21
Signatures
PART I
Disclosure Regarding Forward-Looking Statements
All statements other than statements of historical fact, in this Form 10-KSB,
including without limitation, the statements under "Management's Discussion and
Analysis of Plan of Operation" and "Description of Business" are, or may be
deemed to be, forward-looking statements. 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. Such factors including, among others, changes in general economic
and business conditions; loss of market share through competition; introduction
of competing products by other companies; the timing of regulatory approval and
the introduction of new products by Integrated BioPharma, Inc.; changes in
industry capacity; pressure on prices from competition or from purchasers of
Integrated BioPharma, Inc.'s products; regulatory changes in the pharmaceutical
manufacturing industry and nutraceutical industry; regulatory obstacles to the
introduction of new technologies or products that are important to Integrated
BioPharma, Inc.; availability of qualified personnel; the loss of any
significant customers or suppliers; and other factors both referenced and not
referenced in this Report. When used in this Report, the words "estimate",
"project", "anticipate", "except", "intend", "believe" and similar expressions
are intended to identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
Item 1. Description of Business
General
Integrated BioPharma, Inc., a Delaware corporation (together with its
subsidiaries, the "Company") is engaged primarily in manufacturing,
distribution, marketing and sales of vitamins, nutritional supplements and
herbal products, including vitamins sold as single entity supplements, in
multi-vitamin combinations and in varying potency levels and in different
packaging sizes. The Company was previously known as Integrated Health
Technologies, Inc. and, prior to that, as Chem International, Inc. The Company
was reincorporated in its current form in Delaware in 1995. Effective for the
first quarter of Fiscal 2006 the registrant will no longer be a small business
filer.
The Company's subsidiary, InB:Manhattan Drug Company, Inc. ("Manhattan Drug"),
manufactures the vitamins and nutritional supplements for sale to distributors,
multilevel marketers and specialized health-care providers. The Company also
manufactures such products for sale under its own private brand, "Vitamin
Factory", through mail order. On August 31, 2000, the Company began the
distribution and sale of fine chemicals through its subsidiary IHT Health
Products, Inc.
On February 21, 2003, the Company completed a merger with NuCycle Acquisition
Corp. (together with its wholly-owned subsidiary NuCycle Therapy, Inc.,
"NuCycle") pursuant to which the Company acquired NuCycle in exchange for the
shareholders of NuCycle receiving from the Company 368,833 shares of its common
stock and 25% of the after-tax profits of NuCycle until the shareholders of
NuCycle have received, in the aggregate, an additional $5,000,000 commencing
with the first fiscal quarter following the date of the merger. As of June 30,
2005 the likelihood of such additional payments was not probable and
accordingly, no such amount was recorded or accrued. NuCycle is engaged in the
development and sale of nutritional formulations based on plant-derived minerals
through patented hyperaccumulation technology. The NuCycle transaction also
allows the Company to enter the field of genetically engineered human
therapeutics through NuCycle's expertise.
On February 1, 2003 and July 22, 2003, the Company acquired an aggregate of 97%
of the shares of common stock of Paxis Pharmaceuticals, Inc. ("Paxis"). Paxis
manufactures and distributes Paclitaxel, which is the primary chemotherapeutic
agent in the treatment of breast cancer, at its Boulder, Colorado manufacturing
facility. Paxis acquired from Hauser Inc. ("Hauser") its cGMP-(current good
manufacturing practices) compliant Paclitaxel production facilities, processing
equipment, and intellectual assets. Paxis also purchased intellectual property
(the "Technology") from Hauser. On October 8, 2003, the Company acquired the
remaining three (3%) percent of Paxis in exchange for 66,666 shares of its
common stock valued at $542,728. The stock was valued on the basis of the
average closing price as reported on the American Stock Exchange for the five
trading days immediately preceding the closing date and five trading days after.
1
As of June 30, 2005, Paxis has built up a raw material inventory of
approximately $1,300,000 and an inventory of work in process and finished goods
of approximately $1,900,000. Paxis has had minimal revenues to date. The Company
can give no assurance that Paxis can be operated profitably. As a result of
Paxis' continued losses the Company announced on July 1, 2005, a reduction in
the rate of production of paclitaxel API and a corresponding reduction in the
Company's workforce. The Company concluded that it would recognize an impairment
loss on the difference between the carrying value and fair value of the assets.
The Company conducted an appraisal of the fixed assets. At June 30, 2005 the
Paxis subsidiary recorded an impairment charge of $3,665,132 made up of the
following:
Description Carrying Amount Fair Value Impairment Loss
----------- --------------- ---------- ---------------
Fixed Assets $ 4,218,388 $1,629,947 $ 2,588,441
Goodwill 542,728 -- 542,728
Intellectual Property 461,963 -- 461,963
License Fee 72,000 -- 72,000
----------- --------------- ---------- ---------------
Total $ 5,295,079 $1,629,947 $ 3,665,132
----------- =============== ========== ===============
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 the Canadian biomass
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 can give no assurance that
the joint venture can be operated successfully. The joint venture has
temporarily shut down operations and the Company believes that the assets have
been impaired and consequently the investment in the joint venture of $121,388
was written off during fiscal 2005.
On October 22, 2003, the Company completed the acquisition of various assets
related to the Naturally Aloe(TM), Naturally Noni(TM) and Avera Sport(TM)
product lines from Aloe Commodities International, Inc. ("Aloe"). The assets
included trademarks, copyrights, art work, formula for the products, labels,
customer lists, goodwill, inventories and books and records. Pursuant to the
terms of a purchase agreement dated October 22, 2003 between the Company and
Aloe, the purchase price for the Transferred Assets was $2,597,880, with
$872,470 paid at closing and $1,725,410 paid in 203,085 shares of the Company's
common stock valued on the basis of the average closing price as reported on the
American Stock Exchange for the five (5) trading days immediately preceding the
closing date and five (5) trading days after.
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's rights under a prior contract to
receive royalties and other payments from the Company's subsidiary, Paxis
Pharmaceuticals, for Hauser intellectual property used by Paxis in the
manufacture of Paclitaxel. Transactions for the period beginning September 16,
2004 through June 30, 2005 have been included in the Company's consolidated
financial statements. The acquisition price of $1,697,076, with $916,552
allocated to machinery and equipment based upon appraised values and $780,524
allocated to inventory. No other assets were recorded.
2
Listing of Common Stock on American Stock Exchange
On April 16, 2003, the common stock of the Company began trading on the American
Stock Exchange under the trading symbol, "INB."
Offering of Series B Redeemable Convertible Preferred Stock
On April 20, 2004, in connection with its private offering of its Series B
Convertible Preferred Stock, par value $0.002 per share (the "Series B"), the
Company issued 750 shares of the Series B, at a purchase price of $10,000 per
share of Series B, and warrants for 375,000 shares of its common stock with an
exercise price of $14.00 per share. The Series B are convertible at the option
of each Investor into shares of common stock at a conversion price of $10.00 per
share, subject to anti-dilution and other customary adjustments. To date, 50
shares of Series B have been converted into common stock. The Series B are
redeemable by the Company on the third anniversary of the issuance. The Company
also issued Additional Investment Rights to the Investors, entitling them over
the next 18 months to purchase an aggregate of 375 additional Series B Preferred
Shares and Warrants to purchase an additional 187,500 shares of common stock.
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
develops, manufactures and supplies certain nutritional products to Herbalife,
which agreement was renewed through December 31, 2006. The agreement provides
that Herbalife is required to purchase a minimum quantity of supplied products
each year of $18,000,000 for the term of the agreement. If Herbalife purchases
the minimum amount, then Herbalife will be entitled to certain rebates of an
amount not exceeding $300,000 per year. For the fiscal years ended June 30, 2005
and 2004, there were no rebates due.
Risk of Reduction of Significant Revenues from Major Customer
The Company derives a significant portion of its sales from two customers. For
the years ended June 30, 2005 and 2004 approximately 76% and 71% respectively
were derived from these two customers. For the year ended June 30, 2005 the two
customers accounted for 37% and 39% of sales and 58% and 13% for the year ended
June 30, 2004. Accounts receivable from these customers comprised approximately
64% and 47% of total accounts receivable at June 30, 2005 and 2004,
respectively. The loss of either customer would have an adverse affect on the
Company's operations.
Dependence on Key Personnel
The Company is highly dependent on the experience of its management in the
continuing development of its manufacturing and retail operations. The loss of
the services of certain individuals, particularly E. Gerald Kay, Chairman of the
Board, and Chief Executive Officer of the Company, would have a material adverse
effect on the Company's business. The Company has obtained key-man life
insurance in the amount of $1,000,000 on the life of Mr. Kay, with the Company
as the named beneficiary.
Raw Materials
The principal raw materials used in the manufacturing process in the company's
nutraceutical segment are natural and synthetic vitamins, minerals, herbs,
related nutritional supplements, gelatin capsules, coating materials, and the
necessary components for packaging the finished products. The principal raw
materials used in the company's pharmaceutical segment are made up of a variety
of materials used to develop and manufacture Paclitaxel. The raw materials are
available from numerous sources within the United States and abroad. The gelatin
capsules and coating materials and packaging materials are similarly widely
available. Raw materials are generally purchased by the Company without
long-term commitments, on a purchase order basis. The Company's principal
suppliers are DM Marketing, Inc., Triarco Industries, Inc., and DSM Nutritional
Products, Inc.
3
Botanical materials derived from the Canadian yew tree, or Taxus canadensis, are
used to produce Paclitaxel. Canadian yew trees are in limited supply. Paxis has
entered into a joint venture with Chatham Biotec, Ltd. to produce extract and
intermediate precursor Paclitaxel from Canadian yew trees. The Company can give
no assurance that the joint venture will be successful in producing such
Paclitaxel extracts or intermediates, or that the Company can locate alternate
sources of yew trees.
Seasonality
The Company's results of operations are not significantly affected by seasonal
factors.
Intellectual Property
The Company has established an intellectual property position in two primary
areas of plant-related technology: i) Production of proteins in a variety of
plant-based expression systems utilizing a range of different vectors and
approaches, with an emphasis on transient or sustained gene expression using
viral vectors; and ii) Nutritional formulations based on plant-derived minerals
and methods for producing the formulations.
In the area of protein production in plants, the Company has eleven patent
applications pending before the U.S. Patent and Trademark Office or scheduled to
enter the national phase in the U.S. in the upcoming months. The patents cover a
range of technology platforms including transient expression of genes in plants
using viral vectors and vector systems, trans-activation of gene expression in
plants, production of pharmaceutically active proteins in sprouted seedlings
with a focus on viral vectors, clonal plant tissues and cultures developed
utilizing viral vectors, methods to facilitate purification of proteins
expressed in plants, and improved plant transformation systems. Specific areas
covered include production of vaccine antigens and multi-subunit proteins such
as antibodies. The Company recently received a Notice of Allowance on a patent
application directed to Virus-Induced Gene Silencing in Plants, technology that
is expected to be of use in improving levels of protein expression using viral
vectors in plants. The Company has pending foreign filings corresponding to many
of these patent applications.
In the area of nutritional formulations, the Company is the owner of nine issued
and one recently allowed U.S. patents and several foreign patents directed to
methods for accumulating metals in plant seedlings and nutritional formulations
produced using the plant seedlings, or has rights to these patents in the field
of nutritional supplements. Two of these patents relate to nutritional
supplements containing methylselenocysteine.
Government Regulations
The manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by a number of federal
agencies, including the Food and Drug Administration ("FDA"), the Federal Trade
Commission ("FTC"), the United States Postal Service, the Consumer Product
Safety Commission and the United States Department of Agriculture. The Company's
activities are also regulated by various state and local agencies in which the
Company's products are sold. The FDA is primarily responsible for the regulation
of the manufacturing, labeling and sale of the Company's products. The operation
of the Company's vitamin manufacturing facility is subject to regulation by the
FDA as a food manufacturing facility. The United States Postal Service and the
FTC regulate advertising claims with respect to the Company's products. In
addition, the Company manufactures and markets certain of its products in
compliance with the guidelines promulgated by the United States Pharmacopoeia
Convention, Inc. ("USP") and other voluntary standard organizations.
4
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was enacted on
October 25, 1994. The Dietary Supplement Act amends the Federal Food, Drug and
Cosmetic Act ("FFD&CA") by defining dietary supplements, which include vitamins,
minerals, nutritional supplements and herbs, and by providing a regulatory
framework to ensure safe, quality dietary supplements and the dissemination of
accurate information about such products. Dietary supplements are regulated as
foods under the DSHEA and FDA is generally prohibited from regulating the active
ingredients in dietary supplements as food additives, or as drugs unless product
claims trigger drug status. It requires the FDA to regulate dietary supplements
so as to guarantee consumer access to beneficial dietary supplements, allowing
truthful and proven claims. Generally, dietary ingredients that were on the
market before October 15, 1994 may be sold without FDA pre-approval and without
notifying the FDA. However, new dietary ingredients (those not used in dietary
supplements marketed before October 15, 1994) require pre-market submission to
the FDA of evidence of a history of their safe use, or other evidence
establishing that they are reasonably expected to be safe. There can be no
assurance that the FDA will accept the evidence of safety for any new dietary
ingredient that the Company may decide to use. FDA's refusal to accept such
evidence could result in regulation of such dietary ingredients as food
additives, requiring FDA pre-approval based on newly conducted, costly safety
testing.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements effective January 1, 1997. The Dietary Supplement Act permits
substantiated, truthful and non-misleading statements of nutritional support to
be made in labeling, such as statements describing general well being from
consumption of a dietary ingredient or the role of a nutrient or dietary
ingredient in affecting or maintaining structure or function of the body. FDA
requires the Company to notify the agency of such statements. There can be no
assurance that the FDA will not consider particular labeling statements used by
the Company to be drug claims rather than acceptable statements of nutritional
support, necessitating approval of a costly new drug application, or re-labeling
to delete such statements. It is also possible that FDA could allege false
statements were submitted to it if structure/function claim notifications was
either non-existent or so lacking in scientific support as to be plainly false.
In addition, the DSHEA authorizes the FDA to promulgate Current Good
Manufacturing Practices ("cGMP") specific to the manufacture of dietary
supplements, to be modeled after food cGMP. The Company currently manufactures
its dietary supplement products pursuant to food cGMP.
Dietary supplements are also subject to the Nutrition, Labeling and Education
Act ("NLEA"), which regulates health claims, ingredient labeling and nutrient
content claims characterizing the level of a nutrient in a product. NLEA
prohibits the use of any health claim for dietary supplements unless the health
claim is supported by significant scientific agreement and is pre- approved by
the Food and Drug Administration.
In certain markets, including the United States, claims made with respect to
dietary supplements may change the regulatory status of the Company's products.
For example, in the United States, the FDA could possibly take the position that
claims made for some of the Company's products make those products new drugs
requiring pre-approval by FDA. FDA could also place those products within the
scope of its over-the-counter ("OTC") drug regulations and require it to comply
with a published FDA OTC monograph. OTC monographs dictate permissible
ingredients, appropriate labeling language and require the marketer or supplier
of the products to register and file annual drug listing information with FDA.
The Company does not at present sell OTC drug products. If the FDA were to
assert that the Company's product claims cause them to be considered new drugs
or fall within the scope of over-the-counter regulations, the Company would be
required to either file a new drug application, comply with the applicable
monographs, or change the claims made in connection with those products.
5
The FTC regulates the marketing practices and advertising of all the Company's
products. In recent years, FTC instituted enforcement actions against several
dietary supplement companies for false and misleading marketing practices and
advertising of certain products. These enforcement actions have resulted in
consent decrees and monetary payments by the companies involved. Under FTC
standards, the dissemination of any false advertising constitutes an unfair or
deceptive act or practice actionable under Section 45 of the Fair Trade
Commission Act and a false advertisement actionable under Section 52 of that
Act. A false advertisement is one that is "misleading in a material respect." In
determining whether an advertisement or labeling information is misleading in a
material respect, FTC determines not only whether overt representations and
implied representations are false but also whether the advertisement fails to
reveal material facts. Under FTC's standard, any health benefit representation
made in advertising must be backed by "competent and reliable scientific
evidence" by which FTC means:
tests, analyses, research studies, or other evidence based upon the
expertise of professionals in the relevant area, that have been
conducted and evaluated in an objective manner by persons qualified to
do so, using procedures generally accepted by the profession to yield
accurate and reliable results.
The FTC has increased its review of the use of the type of testimonials that may
be used to market the Company's products. FTC requires competent and reliable
evidence substantiating claims and testimonials at the time that such claims of
health benefit are first made. The failure to have this evidence when product
claims are first made violates the Federal Trade Commission Act. Although FTC
has never threatened an enforcement action against the Company for the
advertising of its products, there can be no assurance that FTC will not
question the advertising for the Company's products in the future.
The Company believes that it is currently in compliance with all applicable
government regulations. The Company cannot predict what new legislation or
regulations governing the Company's operations will be enacted by legislative
bodies or promulgated by agencies that regulate its activities. The Company
recognizes that its industry has come under increased scrutiny, principally due
to FDA's investigation of the use of ephedrine alkaloids (ephedra). FDA is
expected to increase its enforcement activity against dietary supplements that
the Agency considers violative of FFD&CA. In particular, FDA is increasing its
enforcement of DSHEA provisions. Those activities will be enhanced by the
appropriation for increased FDA budgets for dietary supplement regulation
enforcement.
The Company believes it may become subject to additional laws or regulations
administered by FDA or other federal, state, or foreign regulatory authorities.
It also believes the laws or regulations which are consideed favorable may be
repealed, or more stringent interpretations of current laws or regulations may
be implemented. Any or all of such requirements could be a burden to the
Company. Future regulations could require the Company to:
o change the way it conducts business;
o use expanded or different labeling;
o recall, reformulate or discontinue certain products;
o keep additional records;
o increase the available documentation of the properties of its products;
and/or
o increase the scientific proof of product ingredients, safety, and/or
usefulness.
Competition
The business of manufacturing, distributing and marketing vitamins and
nutritional supplements is highly competitive. Many of the Company's competitors
are substantially larger and have greater financial resources with which to
manufacture and market their products. In particular, the retail segment is
highly competitive. Many direct marketers not only focus on selling their own
branded products, but offer national brands at discounts as well. Many
competitors have established brand names recognizable to consumers. In addition,
major pharmaceutical companies offer nationally advertised multivitamin
products.
6
Many of the Company's competitors in the retailing segment have the financial
resources to advertise freely to promote sales and to produce sophisticated
catalogs. In many cases, such competitors are able to offer price incentives for
retail purchasers and offer participation in frequent buyers programs. Some
retail competitors also manufacture their own products whereby they have the
ability and financial incentive to sell their own product.
The Company intends to compete by stressing the quality of its manufacturing
product, providing prompt service, competitive pricing of products in its
marketing segment and by focusing on niche products in the international retail
markets.
Product Liability Insurance
The Company, like other manufacturers, wholesalers and distributors of vitamin
and nutritional supplement products, faces an inherent risk of exposure to
product liability claims if, among other things, the use of its products result
in injury. Accordingly, the Company currently maintains product liability
insurance policies which provide a total of $5 million of coverage per
occurrence and $5 million of coverage in the aggregate. There can be no
assurance that the Company's current level of product liability insurance will
continue to be available or, if available, will be adequate to cover potential
liabilities.
Research and Development Activities
The Company currently conducts research and development activities at its
manufacturing facility and at privately owned research facilities. Its research
and development activities are primarily involved in the research, development
and commercialization of nutraceuticals, or naturally derived substances with
nutritional or pharmacological properties. In the fiscal years ended June 30,
2005, and 2004, the Company spent $389,254 and $37,700 respectively on research
and development activities.
Environmental Compliance
The Company is subject to regulation under Federal, state and local
environmental laws.
During the fiscal year ended June 30, 2003, the Company engaged an environmental
consultant to assist in obtaining a no further action letter from the New Jersey
Department of Environmental Protection ("NJDEP") with respect to its facility
located at 201 Route 22, Hillside, New Jersey. The facility is used to blend
vitamins and nutritional supplements for human consumption. The site contained
two underground heating oil tanks ("USTs") which were abandoned and closed prior
to 1986. The consultant has investigated the site and on February 4, 2004 filed
a Preliminary Assessment/Site Investigation (PA/ST) Report. On July 29, 2004,
the State of New Jersey's Department of Environmental Protection made the
determination that no further action is necessary for the remediation of the
site, and issued a NFA/CNS letter. As of June 30, 2005, the Company has spent
approximately $28,000 in remediation costs.
While the Company believes that it is in material compliance with applicable
environmental laws, continued compliance may require substantial capital
expenditures.
7
Employees
As of June 30, 2005, the Company had approximately 157 full time employees of
whom 51 belong to the local unit of the Teamsters Union and are covered by a
collective bargaining agreement which expires August 31, 2006. Approximately 51
employees are administrative and professional personnel, 28 are laboratory
personnel and 78 employees are production and shipping personnel. Among the
professional personnel, 2 employees are engaged in research and development. The
Company considers its relations with its employees to be good.
Subsidiaries
The Company has the following subsidiaries which are currently active: (i)
InB:Manhattan Drug Company, Inc., a New York corporation; (ii) IHT Health
Products, Inc., a Delaware corporation; (iii) AgroLabs, Inc., a New Jersey
corporation (f/k/a Ideas, Inc.); (iv) IHT Properties Corp., a Delaware
corporation; (v)InB:BioTechnologies, Inc. a New Jersey corporation (f/k/a
NuCycle Therapy, Inc.,); (vii) Vitamin Factory, Inc., a Delaware corporation ;
(viii) InB: Paxis Pharmaceuticals, Inc., a Delaware corporation (f/k/a Paxis
Pharmaceuticals, Inc.) and (ix) InB:Hauser Pharmaceutical Services, Inc., a
Delaware corporation (f/k/a Hauser Technical Services, Inc.).
Available Information
The Company files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). These
filings are available to the public via the Internet at the SEC's website
located at http://www.sec.gov. You may also read and copy any document the
Company files with the SEC at the SEC's public reference room located at 450
Fifth Street, N.W., Washington, D.C. 20549. For more information, please call
the SEC at 1-800-SEC-0330.
The Company's website is located at www.ibiopharma.com. You may request a copy
of the Company's filings with the SEC (excluding exhibits) at no cost by writing
or telephoning us at the following address or telephone number:
Integrated BioPharma, Inc.
225 Long Avenue
Hillside, New Jersey 07205
Tel: 888-319-6962
Attn: Investor Relations
8
Item 2. Description of Property
On January 10, 1997, the Company entered into a lease agreement for
approximately 75,000 square feet of factory, warehouse and office facilities in
Hillside, New Jersey. The 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 expires May 31,
2015 and provides for a base annual rental of $323,559 plus increases in real
estate taxes and building expenses. At its option, the Company has the right to
renew the lease for an additional five year period.
The Company owns a 40,000 square foot manufacturing facility in Hillside, New
Jersey. The space is utilized for Manhattan Drug's tablet manufacturing
operations.
Paxis presently leases a manufacturing facility in Boulder, Colorado from Yew
Tree Investments Ltd., LLP. The facility is comprised of 22,483 square feet
located at 5555 Airport Blvd., Suite 200, Boulder, Colorado 80301. The lease
expires on March 31, 2007.
INB: Hauser Pharmaceutical Services, Inc. leases two offices made up of
approximately 22,800 square feet used for both scientific laboratories and
storage. The offices are located at 6880 North Broadway Units A-L, Denver,
Colorado 80221 and 6820 North Broadway Units R-S, Denver Colorado 80221. Both
offices are leased through December 31, 2005. On July 20, 2005, the lease was
renewed through December 31, 2012.
On March 6, 2004, the Company entered into a two year lease agreement for
approximately 10,000 square feet of warehouse space in Grapevine, Texas. In June
2004, the Company modified the lease to increase the warehouse space to 16,000
square feet and in April 2005, the Company modified the lease to increase the
warehouse space to 26,000 square feet and changed the expiration date of the
lease term to March 2007. The space is used for the storage of inventory for the
Company's AgroLabs, Inc. subsidiary.
In May 2004, the Company leased approximately 350 square feet of office space in
Kennett Square, Pennsylvania, which expires on September 30, 2005. The space is
used to house the Company's InB:Biotechnologies, Inc. offices.
Item 3. Legal Proceedings
NatEx Georgia LLC and Vasili Patarkalishvili v. Robert B. Kay, E. Gerald Kay,
Trade Investment Services, LLC, Paxis Pharmaceuticals, Inc., Dean P. Stull and
Integrated BioPharma, Inc., pending in the United States District Court for the
Southern District of New York. Plaintiffs NatEx Georgia LLC and Vasili
Patarkalishvili commenced this action on July 19, 2004, alleging claims for
breach of contact, fraud and breach of the implied duty of good faith and fair
dealing arising out of an alleged failure by Paxis to provide information
necessary for NatEx to perform under the parties' agreements by which NatEx had
agreed to supply Paclitaxel extract. The complaint seeks damages of more than $5
million. On August 18, 2004, the Company removed this action to federal court.
On December 10, 2004, the federal court remanded the matter to state court. The
Company has since filed a motion to dismiss and plans to defend vigorously the
claims in this lawsuit. The outcome of the lawsuit is uncertain at this time,
but the Company believes that it will not have a material financial impact.
On October 14, 2004, the Company was served with a product liability complaint.
In July 2005, the parties entered into a compromise settlement, which was
approved by the court in September 2005. The compromise settlement did not have
a material financial impact.
9
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 2005.
PART II
Item 5. Market for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities
Market Information
On April 16, 2003, the Company began trading on the American Stock Exchange
using the symbol INB for its common stock.
Set forth below are the high and low closing prices of the Common Stock as
reported on the American Stock Exchange:
COMMON STOCK [INB] HIGH LOW
------------------ --------- ---------
FISCAL YEAR ENDED JUNE 30, 2004
First Quarter .......................... $ 9.10 $ 6.65
Second Quarter ......................... $ 12.28 $ 7.84
Third Quarter .......................... $ 13.15 $ 10.25
Fourth Quarter ......................... $ 15.12 $ 7.91
FISCAL YEAR ENDED JUNE 30, 2005
First Quarter .......................... $ 9.34 $ 4.78
Second Quarter ......................... $ 9.30 $ 6.60
Third Quarter .......................... $ 7.50 $ 5.30
Fourth Quarter ......................... $ 5.72 $ 3.79
Holders
As of June 30, 2005, there were approximately 925 holders of record of the
Company's Common Stock.
Dividends
The Company has not declared or paid a dividend with respect to its Common Stock
during fiscal year ended June 30, 2005 or June 30, 2004 nor does the Company
anticipate paying dividends in the foreseeable future.
The Company has paid dividends of $490,000 with respect to its Series B
Redeemable Convertible Preferred Stock during the fiscal year ended June 30,
2005.
10
The following table provides information as of June 30, 2005 about the Company's
equity compensation plans.
Equity Compensation Plan Information
Number of securities to Weighted-average exercise Number of securities remaining
be issued upon exercise price of outstanding available for future issuance
of outstanding options, options, warrants and under equity compensation plans
warrants and rights rights (excluding securities reflected
(a) (b) in column (a))
----------------------- ------------------------- -------------------------------
Equity compensation plans
approved by security
holders 6,407,928 $3.13 830,072
Equity compensation plans
not approved by security
holders -- -- --
----------------------- ------------------------- -------------------------------
Total 6,407,928 $3.13 830,072
======================= ========================= ===============================
Recent Sales of Unregistered Securities
None.
Factors that May Affect the Future Results of the Company's Business
Our revenue would decline significantly if we lose one or more of our most
significant customers, which could have a significant adverse impact on us.
A significant portion of our revenues are concentrated among two customers. For
the year ended June 30, 2005, these customers represented approximately 76% of
total revenue. The loss of these customers could have a significant adverse
impact on us.
We depend on our senior management, the loss of whom would have an adverse
effect on us.
We presently are dependent upon the executive abilities of our Chairman of the
Board, President and Chief Executive Officer, E. Gerald Kay, and our other
executive officers. Our business and operations to date chiefly have been
implemented under the direction of these individuals, who presently are, and in
the future will be, responsible for the implementation of our anticipated plans
and programs. While we have obtained key-man life insurance in the amount of
$1,000,000 on the life of Mr. Kay, with our company as the named beneficiary,
the loss or unavailability of the services of one or more of our principal
executives would have an adverse effect on us. We may encounter difficulty in
our ability to recruit and ultimately hire any replacement or additional
executive officers having similar background, experience and qualifications as
those of our current executive officers.
There is no assurance that we will remain listed on an active trading market.
11
Although our common stock is quoted on the American Stock Exchange, there can be
no assurance that we will, in the future, be able to meet all the requirements
for continued quotation on that exchange. In the absence of an active trading
market or if our common stock cannot be traded on the American Stock Exchange,
our common stock could instead be traded on the OTC Bulletin Board or in the
Pink Sheets. In such event, the liquidity and stock price in the secondary
market may be adversely affected. In addition, in the event our common stock was
delisted, broker-dealers have certain regulatory burdens imposed upon them which
may discourage broker-dealers from effecting transactions in our common stock,
further limiting the liquidity of our common stock.
We may not receive approval for our pending patent applications for nutritional
supplements, which could enable our competitors to use similar methods and
processes.
We are the registered owner of nine issued and one recently allowed U.S. patents
and several foreign patents directed to methods for accumulating metals in plant
seedlings and nutritional formulations produced using the plant seedlings, or
have rights to these patents in the field of nutritional supplements. In the
area of protein production in plants, we also have eleven patent applications
pending before the U.S. Patent and Trademark Office or scheduled to enter the
national phase in the U.S. in the upcoming months. We can give no assurance that
we will be granted such patents. To the extent we are not granted such patents,
our competitors could more easily produce plant-based proteins similar to ours.
We have entered into several transactions with entities controlled by some of
our officers and directors, which could pose a conflict of interest.
We have entered into several agreements and arrangements described in our SEC
public filings incorporated by reference in this prospectus, including the lease
of real property from Vitamin Realty Associates, L.L.C., the merger with NuCycle
Acquisition Corp., and the acquisition of the Paxis business from Trade
Investment Services, LLC, that all involved transactions with entities
significantly owned by members of the Kay family, who collectively own a
majority of our shares of common stock. Although we believe that these
transactions were advantageous to us and were on terms no less favorable to us
than could have been obtained from unaffiliated third parties, transactions with
related parties can potentially pose a conflict of interest.
Our executive officers and directors have majority voting power and may take
actions that may not be in the best interest of other stockholders, but in their
own interest.
Our executive officers and directors beneficially own approximately 80% of our
outstanding shares. If these stockholders act together, they may be able to
exert significant control over our management and affairs requiring stockholder
approval, including approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a
change in control and might adversely affect the market price of our common
stock. This concentration of ownership may not be in the best interests of all
our stockholders.
We have a staggered board of directors, which could impede an attempt to acquire
us or remove our management.
Our board of directors is divided into three classes, each of which serves for a
staggered term of three years. This division of our board of directors could
have the effect of impeding an attempt to take over our company or change or
remove management, since only one class will be elected annually. Thus, only
approximately one-third of the existing board of directors could be replaced at
any election of directors.
Our product liability insurance may be insufficient to cover possible claims
against us.
In view of the nature of our nutritional supplements business, we are subject to
the inherent risk of product liability claims in the event that among other
things, the use or ingestion of any of our products results in sickness or
injury. We currently maintain product liability insurance under an umbrella
policy in the amount of $5 million per occurrence and $5 million in the
aggregate, which we deem adequate to cover risks associated with such use.
However, there can be no assurance that existing or future insurance coverage
will be sufficient to cover any possible product liability risks or that such
insurance will continue to be available to us on economically feasible terms.
12
The Company's products consist of vitamins, minerals, herbs and other
ingredients that the Company regards as safe when taken as recommended by the
Company and that various scientific studies have suggested may involve health
benefits. The Company could be adversely affected if any of the Company's
products or any similar products distributed by other companies should prove or
be asserted to be harmful to consumers or should scientific studies provide
unfavorable findings regarding the effectiveness of the Company's products.
There is no assurance that we will be able to produce and sell Paclitaxel.
Our Paxis Pharmaceuticals, Inc. subsidiary uses botanical materials derived from
the yew tree, or taxus canadensis, to produce Paclitaxel, a cancer therapy drug.
Yew trees are in limited supply. Paxis has formed a joint venture with Chatham
Biotec, Ltd. to produce extract and intermediate precursor Paclitaxel from
Canadian Taxus trees. We can give no assurance that the joint venture will be
successful in producing such Paclitaxel or that we can locate alternate sources
of yew trees. We have sold a limited amount of Paclitaxel and can give no
assurance concerning future sales, nor can we be assured that we will be able to
sell our inventory or liquidate our equipment at their recorded values.
13
Item 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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.
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 vary depending
upon the customer. Shipping terms are either F.O.B. shipping point with title
and risk of loss passing to the customer at point of shipment or F.O.B.
destination where title and risk passes to the customer when the goods are
received.
The Company's return policy is to only accept returns for defective products. If
defective products are returned, it is the Company's agreement with its
customers that the Company cure the defect and reship the product. The policy is
that when the product is shipped the Company makes an estimate of any potential
returns or allowances.
If the historical data the Company uses to calculate the allowance provided for
doubtful accounts does not reflect the future ability to collect outstanding
receivables, additional provisions for doubtful accounts may be needed and the
future results of operations could be materially affected. In recording any
additional allowances, a respective charge against income is reflected in the
general and administrative expenses, and would reduce the operating results in
the period in which the increase is recorded.
The Company preformed a sensitivity analysis to determine the impact of
fluctuations in our estimates for our allowance for doubtful accounts. As of
June 30, 2005 the allowance was $56,547. If this number were in error by plus or
minus one percent of the account receivable balance, the impact would be an
additional $45,000.
Inventory Valuation
Inventories are stated at the lower of cost or market ("LCM"), which reflects
management's estimates of net realizable value. The inventory amounts are made
up of inventory in both the nutraceutical and pharmaceutical segments of
business. Because nutraceutical inventory is manufactured on a purchase order
basis, the quantity of both raw material and finished goods inventory provides
for minimal risk for potential overstock or obsolescence. Pharmaceutical
inventory is valued at the lower of cost or market.
Mail order inventory is expiration date sensitive. The Company reviews this
inventory and considers sales levels (by SKU), term to expiration date,
potential for retesting to extend expiration date and evaluates potential for
obsolescence or overstock.
The Company preformed a sensitivity analysis to determine the impact of
fluctuations in our estimates for inventory allowances. As of June 30, 2005 the
allowance was $30,000. If this number were in error by plus or minus one percent
of the total inventory balance, the impact would be an additional $99,872.
14
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.
Deferred Taxes
The Company accounts for income taxes pursuant to SFAS No.109, "Accounting for
Income Taxes" ("SFAS No. 109"). SFAS No. 109 is an asset-and-liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected tax consequences of events that have been recognized in the Company's
financial statements or tax returns.
Results of Operations
Year ended June 30, 2005 Compared to the Year ended June 30, 2004
The Company's net loss for the year ended June 30, 2005 was $(8,580,233) as
compared to net loss of $(5,340,147) for the year ended June 30, 2004. This
increase in net loss of approximately $3,240,000 is primarily the result of a
decrease in gross profit of approximately $3,900,000, an increase in selling and
administrative expenses of approximately $1,600,000, and an increase in other
income of approximately $2,150,000 and a decrease in federal income and state
income taxes of approximately $115,000.
Sales for the years ended June 30, 2005 and 2004 were $32,735,813 and
$25,282,790, respectively, an increase of approximately $7,450,000 or 29%. This
increase was due to the introduction of new nutraceutical products and the
increase in sales related to the InB:Paxis Pharmaceuticals, Inc. and InB:Hauser,
Inc. subsidiaries. Gross profit for the year ended June 30, 2005 was $3,900,167
lower than gross profit for the year ended June 30, 2004. This decrease in gross
profit was attributable to the inclusion of Paxis manufacturing expenses of
$4,397,440 and an impairment loss of $2,542,885. Exclusive of the Paxis
subsidiary, the gross profit percentage for the year ended June 30, 2005 was 26%
and 23% for the year ended June 30, 2004. For the year ended June 30, 2005 and
2004, approximately 76% and 71% of revenues were derived from two customers. The
loss of these customers would have an adverse affect on the Company's
operations.
Nutraceutical sales for the year ended June 30, 2005 and 2004 were $31,125,294
and $25,282,790, respectively, an increase of $5,842,504 or 23%.
On September 16, 2004 the Company completed the purchase of substantially all of
the assets of Hauser Technical Services, Inc. and Hasuer, Inc. Sales for the ten
months ended June 30, 2005 were $1,060,512.
15
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
$3,200,000. Sales for the year ended June 30, 2005 totaled $550,007.
Cost of sales increased to $30,743,847 in fiscal 2005 as compared to $19,390,657
for fiscal 2004. Cost of sales increased as a percentage of sales to 94% for the
year ended June 30, 2005 as compared to 77% for the year ended June 30, 2004.
The increase in cost of sales was due to the inclusion of $5,002,743
attributable to both Paxis and Hauser and to the impairment loss of $2,542,885.
Exclusive of Paxis and Hauser, cost of sales would have been 74% for the year
ended June 30, 2005.
A tabular presentation of the changes in selling and administrative expenses is
as follows:
Year Ended June 30,
2005 2004 Change
------------ ------------ -------------
Advertising Expense $ 840,662 $ 175,728 $ 664,934
Bad Debt Expense 581,496 5,858 575,638
Royalty & Commission Expense 377,224 141,132 236,092
Officers Salaries 469,548 455,609 13,939
Auto, Travel & Entertainment 959,746 808,979 150,767
Office Salaries 2,182,852 995,681 1,187,171
Depreciation & Amortization 611,873 306,426 305,447
Consulting Fees 867,642 287,055 580,587
Regulatory Fees 43,834 65,762 (21,928)
Professional Fees 860,847 679,200 181,647
Research & Development Expense 389,254 37,672 351,582
Indirect labor 746,931 -- 746,931
Office Rent 514,117 146,615 367,502
Employee Benefits 465,042 188,391 276,651
Other 2,071,152 1,010,126 1,061,026
Paxis Pharmaceuticals, Inc.-Start up -- 6,197,244 (6,197,244)
Impairment Loss 1,122,247 -- 1,122,247
------------ ------------ -------------
Total $ 13,104,467 $ 11,501,478 $ 1,602,989
============ ============ =============
The increase in advertising expense is due to an increase in print advertising
relating to the sales in the company's Agrolabs, Inc. subsidiary. The increase
in bad debt expense is due to an accounts receivable balance that was
determined to be uncollectible. Royalty and commission expense increased as a
result of increased sales in the company's nutraceutical segment. Office
salaries have increased due to the inclusion of Paxis and Hauser salary expenses
reflected in the twelve months. The increase in depreciation and amortization
expense was a result of the inclusion of Paxis expenses. Consulting fees
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 and an
increase in sales promotion costs. The increase in research and development
expense was attributable to the inclusion of Paxis expenses reflected in the
twelve months and the acquisition of NuCycle Therapy, Inc. in February of 2003.
The increase in indirect labor, office rent and employee benefits is due to the
InB:Hauser Pharmaceutical Services, Inc. acquisition in September 16, 2004.
16
Other income (expense) was $2,505,747 for the year ended June 30, 2005 as
compared to $356,886 for the same period a year ago, an increase of $2,147,861.
The increase was primarily attributable to a $2,475,322 cash payment in
connection with a multidistrict class action brought on behalf of the Company
and other direct purchasers of vitamin products, in which the plaintiffs alleged
violations of Section 1 of the Sherman Antitrust Act and other wrongful
anticompetitive conduct violation of various federal and state laws and a
decrease in other income of $240,217.
Liquidity and Capital Resources
At June 30, 2005 the Company's working capital was $7,436,071 a decrease of
$5,477,590 over working capital at June 30, 2004. Cash and cash equivalents were
$2,427,553 at June 30, 2005, a decrease of $7,120,493 from June 30, 2004. The
Company utilized $4,538,126 and $7,216,690 of cash for operations for the years
ended June 30, 2005 and 2004, respectively. The primary reasons for the decrease
in cash generated from operations are net loss of approximately $8,580,000,
impairment loss of approximately $3,665,000, depreciation and amortization
expense of approximately $1,585,000, an increase in accounts receivable of
approximately $2,100,000, an increase in inventory of approximately $2,850,000,
a decrease in prepaid expenses of approximately $490,000 an increase in accounts
payable of approximately $2,050,000 and an increase in accrued expenses of
approximately $900,000. The Company believes that anticipated sales for next
year and current cash balances will meet cash needs for operations for fiscal
2006.
The Company utilized $2,180,503 and $5,811,334 of cash in investing activities
for the years ended June 30, 2005 and 2004, respectively. The Company utilized
$401,864 and generated $12,169,680 of cash from financing activities for the
years ended June 30, 2005 and 2004, respectively. The decrease in cash generated
from financing activities is primarily due to the issuance of Series B
Redeemable Convertible Preferred Stock and the issuance of the Company's common
stock during fiscal 2004.
The Company has a promissory note provided by Bank of America dated September 4,
2004 in the amount of $4,500,000 with interest at a variable rate based on 1.25%
over the current LIBOR rate. The loan was due on September 4, 2005 and
subsequently has been renewed through November 4, 2005 with the intention of
extending the November renewal date to September 4, 2006, under the existing
terms and conditions of the prior note. The loan is guaranteed by Mr. Carl
DeSantis, a shareholder and director of the Company.
The Company's total annual commitments at June 30, 2005 for long term
non-cancelable leases of $893,034 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 during the fiscal year ended 2005 and 2004
were $1,649,756 and $3,519,586, respectively. The capital expenditures during
these periods are primarily attributable to the purchase of machinery and
equipment in its Paxis and Hauser subsidiary.
The Company has budgeted approximately $200,000 for capital expenditures for
fiscal 2006. The total amount will be funded from the current cash balances.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Accounting Pronouncement - refer to footnote 2 of the consolidated financial
statements for the year ended June 30, 2005.
Impact of Inflation
The Company does not believe that inflation has significantly affected its
results of operations.
17
Item 7. Financial Statements
For a list of financial statements filed as part of this report, see the index
to financial statements at page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Item 8 A. Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934, or the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objective,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, we carried out an
evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our principal executive officer and
principal financial officer concluded that, as of the end of the period covered
by this report, our disclosure controls and procedures were effective at the
reasonable assurance level to ensure that information required to be disclosed
by us in reports that we file under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.
There have been no changes in our internal controls over financial reporting
during the year ended June 30, 2005, that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
Item 8 B. Other Information
None.
18
PART III
Item 9. Directors and Executive Officers of the Registrant.
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2005.
Item 10. Executive Compensation
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2005.
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2005.
Item 12. Certain Relationships and Related Transactions
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2005.
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits and Index
(1) A list of the financial statements filed as part of this report is
set forth in the index to financial statements at Page F-1 and is
incorporated herein by reference.
(2) An index of exhibits incorporated by reference or filed with this
Report is provided below.
Number Description
------ -----------
2.1 Purchase Agreement dated as of February 1, 2003 by and between Integrated
Health Technologies, Inc. (n/k/a Integrated BioPharma, Inc.) and Trade
Investment Services, L.L.C. re: Natex Georgia, LLC. (1)
2.2 Purchase Agreement dated as of February 1, 2003 by and between Integrated
Health Technologies, Inc. (n/k/a Integrated BioPharma, Inc.) and Trade
Investment Services, L.L.C. re: TisorEx, Inc. (n/k/a Paxis
Pharmaceuticals, Inc.). (1)
2.3 Assignment Agreement dated as of July 1, 2003 by and between Integrated
BioPharma, Inc., Trade Investment Services L.L.C., Vasili
Patarkalishvili, VAP LLC, The James S. Friedlander Revocable Trust, Aqela
LLC and Natela Patarkalishvili (2)
2.4 Assignment and Assumption Agreement dated as of July 1, 2003 by and among
Integrated BioPharma, Inc., Trade Investment Services L.L.C., and Paxis
Pharmaceuticals, Inc. (2)
2.5 Agreement and Plan of Merger dated as of February 21, 2003 between and
among Integrated BioPharma, Inc. (f/k/a Integrated Health Technologies,
Inc.), NAC-NJ Acquisition Corp. and NuCycle Acquisition Corp. (3)
19
3.1 Certificate of Incorporation of Integrated BioPharma, Inc., as
amended (4)
3.2 By-Laws of Registrant (5)
4.1 Certificate of Designation of Series and Determination of Rights and
Preferences of Series A Convertible Preferred Stock of Integrated
BioPharma, Inc. dated June 25, 2003 (4).
4.2 Certificate of Designations, Preferences and Rights of Series B
Redeemable Convertible Preferred Stock of Integrated BioPharma, Inc.
dated April 20, 2004 (6).
4.3 Form of Warrant for Series B Redeemable Convertible Preferred Stock
investors (6).
4.4 Form of Additional Investment Right for Series B Redeemable Convertible
Preferred Stock investors (6).
10.1 Lease Agreement, dated August 3, 1994, between the Company and Hillside
22 Realty Associates, L.L.C. (7)
10.2 Lease Agreement between the Company and Vitamin Realty Associates, dated
January 10, 1997 (8)
10.3 Manufacturing Agreement between Chem International, Inc. and Herbalife
International of America, Inc. dated April 9, 1998 (9)
10.4 Integrated Health Technologies, Inc. 2001 Stock Option Plan (10)
10.5 Subscription Agreement dated June 25, 2003 by and between Integrated
BioPharma, Inc. and Carl DeSantis re: Series A Convertible Preferred
Stock Offering (4).
10.6 Investor Rights Agreement dated as of June 25, 2003 by and between
Integrated BioPharma, Inc. and Carl DeSantis re: Series A Convertible
Preferred Stock Offering (4).
10.7 Warrant Agreement by and between Integrated BioPharma, Inc. and Carl
DeSantis dated June 30, 2003 (4)
10.8 Promissory Note dated August 6, 2003 by and between Integrated BioPharma,
Inc. and Bank of America (4)
10.9 Securities Purchase Agreement dated April 19, 2004 by and between
Integrated BioPharma, Inc. and the Buyers listed therein re: Series B
Redeemable Convertible Preferred Stock Offering (6).
10.10 Registration Rights Agreement dated April 19, 2004 by and between
Integrated BioPharma, Inc. and the Buyers listed therein re: Series B
Redeemable Convertible Preferred Stock Offering (6).
14 Code of Ethics (11)
21 Subsidiaries of the Registrant (12)
31.1 Certification of Periodic Report by Chief Executive Officer Pursuant to
Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (12).
31.2 Certification of Periodic Report by Chief Financial Officer Pursuant to
Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (12).
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 (12).
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 (12).
--------------------------
20
(1) Incorporated herein by reference to the Company's Current Report on
Form 8-K filed with the SEC on February 26, 2003.
(2) Incorporated herein by reference to the Company's Current Report on Form
8-K filed with the SEC on August 6, 2003.
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K filed with the SEC on February 24, 2003.
(4) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 2003, filed with the SEC on
September 29, 2003.
(5) Incorporated herein by reference to the Company's Registration Statement
on Form SB-2, Registration No. 333-5240-NY.
(6) Incorporated herein by reference to the Company's Current Report on Form
8-K filed with the SEC on April 21, 2004.
(7) Incorporated herein by reference to Amendment No. 1 to the Company's
Registration Statement on Form SB-2, Registration No. 333-5240-NY.
(8) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1997, filed with the SEC on
September 29, 1997.
(9) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1998, filed with the SEC on
September 24, 1998.
(10) Incorporated herein by reference to the Company's Registration Statement
on Form S-8, filed with the SEC on May 1, 2002.
(11) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 2004, filed with the SEC on
September 28, 2004, as amended on November 10, 2004.
(12) Filed herewith.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K filed April 29, 2005 pursuant to Item 5.02
(Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers) and Item 9.01 (Financial Statements
and Exhibits).
(2) Current Report on Form 8-K filed May 17, 2005 pursuant to Item 7.01
(Regulation FD Disclosure) and Item 9.01 (Financial Statements and
Exhibits).
(3) Current Report on Form 8-K filed June 13, 2005 pursuant to Item 7.01
(Regulation FD Disclosure) and Item 9.01 (Financial Statements and
Exhibits).
Item 14. Principal Accountant Fees and Services
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2005.
21
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
INDEX
Item 7: Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm.........F-2
Consolidated Balance Sheet as of June 30, 2005..................F-3 ... F-4
Consolidated Statements of Operations for the years
ended June 30, 2005 and 2004 ...................................F-5
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 2005 and 2004 ...................................F-6 ... F-7
Consolidated Statements of Cash Flows for the years ended
June 30, 2005 and 2004 .........................................F-8 ... F-9
Notes to Consolidated Financial Statements .....................F-10 ... F-24
F-1
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of Integrated
BioPharma, Inc. and Subsidiaries as of June 30, 2005, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended June 30, 2005 and 2004. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Integrated
BioPharma, Inc. and subsidiaries as of June 30, 2005, and the results of
their operations and their cash flows for the years ended June 30, 2005 and
2004, in conformity with U.S. generally accepted accounting principles.
September 27, 2005
Edison, New Jersey
F-2
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2005
Assets:
Current Assets:
Cash and Cash Equivalents $ 2,427,553
Accounts Receivable - Net 4,470,927
Inventories-Net 9,987,288
Prepaid Expenses and Other Current Assets 715,074
Deferred Tax Assets 107,000
--------------
Total Current Assets 17,707,842
--------------
Property and Equipment - Net 4,664,306
--------------
Other Assets:
Goodwill 145,410
Other Intangible Assets, net 3,473,366
Deferred Tax Assets 70,000
Security Deposits and Other Assets 181,547
--------------
Total Other Assets 3,870,323
--------------
Total Assets $ 26,242,471
==============
See accompanying notes to consolidated financial statements.
F-3
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2005 (Continued)
Liabilities and Stockholders' Equity:
Current Liabilities:
Note Payable - Bank $ 4,500,000
Accounts Payable 3,986,607
Accrued Expenses and Other Current Liabilities 1,612,904
Loan Payable - Trade Investment Services, LLC, related party 172,260
--------------
Total Current Liabilities 10,271,771
--------------
Commitments and Contingencies
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 2,792,000
Minority interest 349,804
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, 12,685,690 Shares Issued 25,371
Additional Paid-in-Capital 28,325,252
Accumulated Deficit (15,422,388)
Less: Treasury Stock at cost, 34,900 shares (99,339)
--------------
Total Stockholders' Equity 12,828,896
--------------
Total Liabilities and Stockholders' Equity $ 26,242,471
==============
See accompanying notes to consolidated financial statements.
F-4
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
2005 2004
-------------- --------------
Sales $ 32,735,813 $ 25,282,790
Cost of Sales (Including
Impairment of $2,542,885 in 2005) 30,743,847 19,390,657
-------------- --------------
Gross Profit 1,991,966 5,892,133
Selling and Administrative Expenses
Paxis Pharmaceuticals, Inc. Start Up Costs -- 6,197,244
Impairment 1,122,247 --
Selling and Administrative Expenses 11,982,220 5,304,234
-------------- --------------
Total Selling & Administrative Expenses 13,104,467 11,501,478
-------------- --------------
Operating [Loss] (11,112,501) (5,609,345)
-------------- --------------
Other Income [Expense]:
Gain on settlement of Lawsuit 2,475,322 --
Other Income 135,903 376,120
Interest Expense (164,292) (94,632)
Interest and Investment Income 57,814 75,398
-------------- --------------
Total Other Income 2,504,747 356,886
-------------- --------------
[Loss] Before Income Tax (Benefit) and
minority interest (8,607,754) (5,252,459)
Federal and State Income Tax (Benefit) (27,325) 87,688
-------------- --------------
[Loss] before minority interest (8,580,429) (5,340,147)
Minority interest 196 --
-------------- --------------
Net [Loss] (8,580,233) (5,340,147)
Deemed dividend from beneficial conversion
feature of Series B Preferred Stock (2,332,000) (960,000)
Series B Preferred Stock Dividend (490,000) (101,692)
-------------- --------------
Net [Loss] applicable to common
shareholders $ (11,402,233) $ (6,401,839)
============== ==============
Net [Loss] Per Common Share:
Basic $ (.90) $ (.58)
============== ==============
Diluted $ (.90) $ (.58)
============== ==============
Weighted Average Common Shares Outstanding 12,610,975 11,107,520
Dilutive Potential Common Shares:
Warrants and Options -- --
Convertible Preferred Stock -- --
-------------- --------------
Weighted Average Common Shares
Outstanding 12,610,975 11,107,520
============== ==============
See accompanying notes to consolidated financial statements.
F-5
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
Series A Retained
Convertible Additional Earnings Total
Common Stock Preferred Paid-In (Accumulated) Treasury Stock Stockholders'
Shares Par Value Stock Capital Deficit) Shares Cost Equity
---------- ---------- ------- ----------- ------------- ------ --------- -------------
Balance-
July 1, 2003 10,241,439 $ 20,483 $ 19 $15,882,080 $ 2,381,684 25,800 $(28,831) $ 18,255,435
Exercise of
Stock Options
for Cash 262,000 524 -- 363,796 -- -- -- 364,320
Reduction of
paid in
capital due
to common
control
accounting
related to
acquisition
of 47% of
Paxis, Inc. -- -- -- (2,956,068) -- -- -- (2,956,068)
Acquisition
of 3% of
Paxis, Inc. 66,666 133 -- 542,595 -- -- -- 542,728
Acquisition
of new
product lines 203,085 406 -- 1,725,004 -- -- -- 1,725,410
Beneficial
conversion,
warrants and
additional
investment
rights in
connection
of issuance
of series B
Redeemable
Convertible
Preferred
Stock net of
issuance
costs of
$581,948 -- -- -- 6,918,052 -- -- -- 6,918,052
Issuance of
Common
Stock for Cash 500,000 1,000 -- 4,988,000 -- -- -- 4,989,000
Conversion of
Series A
Preferred
Stock to
Common Stock 1,187,500 2,375 (19) (2,356) -- -- -- --
Conversion of
Series B
Preferred
Stock to
Common Stock 50,000 100 -- 499,900 -- -- -- 500,000
Dividends
Paid on
Series B
Preferred Stock -- -- -- -- (101,692) -- -- (101,692)
Deemed
dividend from
beneficial
conversion
feature of
Series B
Preferred stock -- -- -- -- (960,000) -- (960,000)
Net Loss -- -- -- -- (5,340,147) -- (5,340,147)
---------- ---------- ------- ----------- ------------- ------ --------- -------------
Balance-
June 30, 2004 12,510,690 $ 25,021 $ -- $27,961,003 $ (4,020,155) 25,800 $(28,831) $ 23,937,038
========== ========== ======= ========== ============= ====== ========= =============
See accompanying notes to consolidated financial statements.
F-6
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 (Continued)
Series A Retained
Convertible Additional Earnings Total
Common Stock Preferred Paid-In (Accumulated) Treasury Stock Stockholders'
Shares Par Value Stock Capital Deficit) Shares Cost Equity
---------- ---------- ------- ----------- ------------- ------ --------- -------------
Balance-
June 30, 2004 12,510,690 $ 25,021 $ -- $27,961,003 $ (4,020,155) 25,800 $(28,831) $ 23,937,038
Exercise of
Stock Options
for Cash 148,000 296 -- 178,003 -- -- -- 178,299
Issuance of
Common Stock
for
consulting
fees 27,000 54 -- 186,246 -- -- -- 186,300
Stock
Repurchase
Plan -- -- -- -- -- 9,100 (70,508) (70,508)
Dividends
Paid on
Series B
Preferred
Stock -- -- -- -- (490,000) -- -- (490,000)
Deemed
dividend
from
beneficial
conversion
feature
of Series B
Preferred
stock -- -- -- -- (2,332,000) -- -- (2,332,000)
Net Loss -- -- -- -- (8,580,233) -- -- (8,580,233)
---------- ---------- ------- ----------- ------------- ------ --------- -------------
Balance-
June 30, 2005 12,685,690 $ 25,371 $ -- $28,325,252 $(15,422,388) 34,900 $(99,339) $ 12,828,896
========== ========== ======= =========== ============= ====== ========= =============
See accompanying notes to consolidated financial statements.
F-7
INTEGRATED BIOPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
2005 2004
-------------- --------------
Operating Activities:
Net (Loss) $ (8,580,233) $ (5,340,147)
-------------- --------------
Adjustments to Reconcile Net [Loss]
to Net Cash Used for Operating Activities:
Impairment 3,122,404 --
Impairment - Goodwill 542,728 --
Investment in Joint Venture 121,388 --
Depreciation and Amortization 1,585,026 952,531
Deferred Income Taxes (48,000) 8,000
Allowance for Inventory 10,000 10,000
Bad Debt Expense 10,000 10,000
Write off of deposit of inventory -- 1,348,507
Issuance of Common Stock for
consulting services 186,300 --
Minority Interest (196) --
Changes in Assets and Liabilities
(excludes impact of acquisitions)
[Increase] Decrease in:
Accounts Receivable (2,055,573) (485,112)
Inventories (2,848,488) (2,376,112)
Due from Paxis Pharmaceuticals, Inc.
related party -- (908,000)
Prepaid Expenses and Other Current Assets 490,045 260,907
Security Deposits and Other Assets 51,433 6,548
[Decrease] Increase in:
Accounts Payable 2,049,574 (756,153)
Income Taxes Payable (75,525) 21,756
Accrued Expenses and Other Liabilities 900,991 30,585
-------------- --------------
Total Adjustments 4,042,107 (1,876,543)
-------------- --------------
Net Cash - Operating Activities (4,538,126) (7,216,690)
-------------- --------------
Investing Activities:
Investment in Joint Venture (25,366) (96,022)
Acquisition of product line -- (872,470)
Purchase of Intangibles (500,000) (750,000)
Acquisition of Paxis, less cash received -- (483,256)
License Fee -- (90,000)
Purchase of Property and Equipment (1,655,137) (3,519,586)
-------------- --------------
Net Cash-Investing Activities (2,180,503) (5,811,334)
-------------- --------------
See accompanying notes to consolidated financial statements.
F-8
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended June 30,
2005 2004
-------------- --------------
Financing Activities:
Exercise of Stock Options $ 178,299 $ 364,320
Treasury Stock (70,508) --
Repayment of Notes Payable (19,655) --
Dividends Paid (490,000) (101,692)
Issuance of Series B Redeemable
Preferred Stock -- 6,918,052
Issuance of Common Stock -- 4,989,000
-------------- --------------
Net Cash-Financing Activities (401,864) 12,169,680
-------------- --------------
Net [Decrease] in Cash and Cash Equivalents (7,120,493) (858,344)
Cash and Cash Equivalents - Beginning of Year 9,548,046 10,406,390
-------------- --------------
Cash and Cash Equivalents - End of Year $ 2,427,553 $ 9,548,046
============== ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 173,684 $ 85,241
Income Taxes $ 87,015 $ 98,625
Supplemental Schedule of Non-cash transactions:
Common stock issued for acquisition of 3%
Paxis Pharmaceutical, Inc. $ -- $ 542,728
Common stock issued for acquisition of
new product line $ -- $ 1,725,410
Deemed dividend from beneficial conversion
feature of Series B Preferred stock $ 2,332,000 $ 960,000
See accompanying notes to consolidated financial statements.
F-9
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] Business
As of February 13, 2003, the Company amended its corporate charter and changed
its name to "Integrated BioPharma, Inc."(formerly Integrated Health
Technologies, Inc.). Effective April 16, 2003, the Company began trading on the
American Stock Exchange using the symbol INB for its common stock.
The Company is engaged primarily in the manufacturing, distributing, marketing
and sales of vitamins, nutritional supplements and herbal products; the
manufacture and distribution of paclitaxel, which is the primary
chemotherapeutic agent in the treatment of breast cancer; and technical services
through its recently acquired contract research organization, InB: Hauser
Pharmaceutical Services, Inc. ("Hauser"). The Company's customers are located
primarily throughout the United States.
InB:Paxis Pharmaceuticals, Inc. ("Paxis"), the Company's paclitaxel
manufacturing and distribution subsidiary, completed setting up its
manufacturing facilities prior to the end of fiscal 2004. Because the Paxis
subsidiary was a start up operation for the year ended June 30, 2004, the start
up expenses were shown separately for the comparative period.
On October 1, 2004, the Company acquired a 51% interest in Micro Nutrition Inc.
(a newly formed entity) for a cash payment of $362,486. The accounts of Micro
Nutrition are consolidated with those of the Company since such date. Micro
Nutrition, Inc. is a California corporation in the mail order business selling
primarily nutritional specialty food items.
[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
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, notes 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- Inventories are valued by the first-in, first-out method, at the
lower of cost or market. Allowances for obsolete and overstock inventories are
estimated based on "expiration dating" of inventory and projection of sales.
F-10
Depreciation and Amortization- The Company follows the general policy of
depreciating and amortizing the cost of property and equipment over the
following estimated useful lives:
Building 15 Years
Leasehold Improvements Various
Machinery and Equipment 7 Years
Machinery and Equipment Under Capital Leases 7 Years
Transportation Equipment 5 Years
Leasehold improvements are being amortized over various periods not to exceed
its useful lives or the lease terms whichever is shorter.
Machinery and equipment are depreciated using accelerated methods while
leasehold improvements are amortized on a straight-line basis. Depreciation
expense was $1,268,368 and $753,389 for the years ended June 30, 2005 and 2004,
respectively.
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. 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 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 Hauser subsidiary
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 $130,000 and $240,000 for the years ended June 30,
2005 and 2004 respectively. Such is included in "Other income."
Investment in Joint Venture - Paxis has 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 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
June 30, 2005, the $121,388 investment was written off. The results of
operations were not significant for the year ended June 30, 2005. 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.
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 11, 2005, and recognized a goodwill impairment loss of $542,728,
which is included in selling and administrative expenses.
F-11
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.
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 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.
The Company recorded a non-cash pre-tax charge for the impairment of long-lived
assets of $3,122,404 in the fourth quarter of 2005. This loss resulted from the
difference between the carrying amount of assets in the Company's Paxis
Pharmaceuticals, Inc. subsidiary and the fair value of the assets. The assets
were made up of intellectual property, license fees, machinery and equipment and
leasehold improvements. The value of the fixed assets was determined by
appraisal. The intellectual property and license fees were deemed to have no
value and were written off. Charges of $2,542,885 are included in cost of sales
and charges of $1,122,247 are included in selling and administrative expenses.
Research and Development Costs - Research and Development costs are expensed as
incurred. The Company incurred $389,254 in 2005 and $37,672. in 2004 in research
and development expenses.
Advertising- Costs incurred for producing and communicating advertising are
expensed when incurred. Advertising expense was $840,662 and $175,728 for the
years ended June 30, 2005 and 2004.
Stock-Based Compensation- The Company has elected to account for stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees". Under APB
No. 25, compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of the grant over
the amount an employee must pay to acquire the stock.
At June 30, 2005, the Company has one stock-based compensation plan, which is
described more fully in Note 14A. No stock-based employee compensation cost is
reflected in net income, as all options granted under this plan had an exercise
price equal to the market value of the underlying common stock on the date of
grant.
F-12
In accordance with FASB Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
FASB Statement No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation is as follows:
Year Ended June 30,
2005 2004
-------------- --------------
Net (loss) income available to common
stockholders, as reported $ (11,402,233) $ (6,401,839)
Add: Stock-based employee compensation expense
included in net income (loss), net of
related tax effects -- --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (4,603,599) (4,075,449)
-------------- --------------
Pro forma net (loss) income available to
common stockholders $ (16,005,832) $ (10,477,288)
============== ==============
Loss per share:
Basic - as reported $ (.90) $ (0.58)
============== ==============
Basic - pro forma $ (1.27) $ (0.94)
============== ==============
Diluted - as reported $ (.90) $ 0.58)
============== ==============
Diluted - pro forma $ (1.27) $ (0.94)
============== ==============
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee's stock options
under the fair-value method. The fair value for these options was estimated at
the date of each grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for June 30:
2005 2004
-------------- --------------
Risk-free interest rate 4.0% 4.0%
Expected volatility 114% 110%
Dividend yield -- --
Expected life 10 years 10 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair-value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Earnings Per Share - In accordance with FASB Statement No. 128, "Earnings Per
Share,", basic earnings per common share are based on weighted average number of
common shares outstanding. Diluted earnings per share amounts are based on the
weighted average number of common shares outstanding, plus the incremental
shares that would have been outstanding upon the assumed exercise of all
potentially dilutive stock options, warrants and convertible preferred stock,
subject to antidilution limitations.
During the year ended June 30, 2005, options and warrants with exercise prices
below average market price in the amount of 4,356,569 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.
During the year June 30, 2005, options and warrants to purchase 1,636,859 shares
and 1,321,000 shares of common stock, respectively, were outstanding but were
not included in the computation of diluted earnings per share because their
exercise price was greater that the average market price of the common shares.
F-13
Recent Accounting Pronouncements
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".
SFAS123(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 July 1, 2005. The compensation cost of
the adoption of this agreement will be an additional $307,539 of compensation
for the year ended June 30, 2006.
In December 2004, the FASB issued Statement No 153. "Exchanges of Non monetary
Assets, an Amendment of APB Opinion No. 29" ("Statement No. 153"). Statement
No.153 is effective for non monetary asset exchanges occurring in our fiscal
year beginning July 1, 2005. Statement No. 153 requires that exchanges of
productive assets be accounted for at fair value unless fair value cannot be
reasonably determined or the transaction lacks commercial substance. Statement
No. 153 is not expected to have a material impact on our financial statements.
In May 2005, the FASB issued SFAS No 154 "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3."This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. This Statement does not change the guidance for reporting the correction
of an error in previously issued financial statements or a change in accounting
estimate. The provisions of this Statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005. We are not able to assess at this time the future impact of
this statement on our consolidated financial position or results of operations.
[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, 2005. The
Company concluded in June 2005 that the goodwill recognized on the Paxis
Pharmaceutical, Inc. acquisition was impaired and consequently wrote off
$542,728. The loss has been included in selling and administrative expenses.
At June 30, 2005, goodwill consisted of:
Balance Impairment Balance
Description July 1, 2004 Loss June 30, 2005
----------- ------------ ---------- --------------
Paxis $ 542,728 $(542,728) $ --
Aloe Aquisition 145,410 -- 145,410
------------ ---------- --------------
Total $ 688,138 $(542,728) $ 145,410
============ ========== ==============
At June 30, 2005, other intangible assets are made up of the following:
Gross
Carrying Accumulated
Amount Amortization Net
------------ ---------- --------------
Intellectual Property $ 1,250,000 $ 125,002 $ 1,124,998
Trade Names 1,508,000 125,667 1,382,333
Unpatented Technology 547,000 140,000 407,000
License Agreement 611,730 52,695 559,035
------------ ---------- --------------
Total $ 3,916,730 $ 443,364 $ 3,473,366
============ ========== ==============
F-14
Amortization expense recorded on the intangible assets for the years ended June
30, 2005 and 2004 was $316,658 and $200,200 respectively. Amortization expense
is recorded on the straight line method of periods ranging from 10 years to 20
years.
The estimated annual amortization expense for intangible assets for the five
succeeding fiscal years is as follows:
Year ended Amortization
June 30, Expense
----------- -----------
2006 $ 287,903
2007 287,903
2008 287,903
2009 287,903
2010 287,903
Thereafter 2,033,851
-----------
Total $ 3,473,366
===========
[4] Inventories
Raw Materials $ 5,577,034
Work-in-Process 1,330,855
Finished Goods 3,079,399
--------------
Total $ 9,987,288
==============
[5] Property and Equipment
Land and Building $ 1,250,000
Leasehold Improvements 2,157,321
Machinery and Equipment 8,603,894
Machinery and Equipment Under Capital Leases 193,086
Transportation Equipment 37,714
--------------
Total 12,242,015
Less:Accumulated Depreciation and Amortization 7,577,709
--------------
Total $ 4,664,306
==============
F-15
[6] Note Payable
Promissory note provided by Bank of America dated August 6, 2003 in the amount
of $4,500,000 with interest at a variable rate based on 1.25% over the current
LIBOR rate. The loan was due on September 4, 2005 and subsequently has been
renewed through November 4, 2005 with the intention of extending the November
renewal date to September 4, 2006, under the existing terms and conditions of
the prior note. The loan is guaranteed by Mr. Carl DeSantis, a shareholder and
director of the Company. At June 30, 2005 the interest rate was 4.58%.
[7] Loan Payable-Trade Investment Services, related party
Demand loan provided by Trade Investment Services, LLC ("TIS"), a former
shareholder of Paxis, dated July 1, 2002 with interest at 9%. Interest for the
years ended June 30, 2004 and 2005 has been waived.
[8] Income Taxes
Deferred tax attributes resulting from differences between financial accounting
amounts and tax basis of assets and liabilities at June 30, 2005 follow:
Deferred Tax Assets
Net operating loss $ 3,218,000
Impairment loss 1,250,000
Start-up expenses 823,000
Other 33,000
Depreciation 70,000
Inventory overhead capitalization 74,000
Valuation allowance (5,291,000)
--------------
Total deferred tax asset 177,000
Less current portion 107,000
--------------
Net long-term deffered asset $ 70,000
==============
Certain tax benefits for option exercises totaling $634,200 are deferred and
will be credited to additional-paid-in-capital when existing net operating
losses are used. Net operating losses of approximately $9,463,000 will expire
starting in 2024 for federal purposes and 2011 for state purposes. The
ending balance of the deferred tax assets for net operating losses, start-up
expense and impairment loss have been fully reserved reflecting the
uncertainties of future utilization.
F-16
The provision for income taxes consists of the following for the year ended:
June 30,
2005 2004
-------------- --------------
Deferred tax $ (48,000) $ 8,000
Current tax expense 20,675 79,688
-------------- --------------
$ (27,325) $ 87,688
============== ==============
A reconciliation of the statutory tax rate to the effective tax rate for the
year ended June 30 is as follows:
2005 2004
-------------- --------------
Expected Federal Tax benefit at the statutory tax (34)% (34)%
Change in valuation allowance 38% 39%
State tax benefit (net of Federal benefit) (6)% (6)%
Non-deductible expenses 0 0
Other 2% 3%
-------------- --------------
0% 2%
============== ==============
[9] Profit-Sharing Plan
The Company maintains a profit-sharing plan, which qualifies under Section
401(k) of the Internal Revenue Code, covering all nonunion employees meeting age
and service requirements. Contributions are determined by matching a percentage
of employee contributions. The total expense for the years ended June 30, 2005
and 2004 was $118,163 and $99,858 respectively.
[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 June 30, 2005, the
Company's uninsured cash balances totaled approximately $1,735,000.
[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 June 30,
2005 is $56,547. The Company's bad debt expense for the years ended June 30,
2005 and 2004 respectively were $581,346 and $5,858.
[C] Major Customers - For the years ended June 30, 2005 and 2004 approximately
76% or $25,000,000 and 71% or $18,000,000 of revenues were derived from two
customers. The loss of either customer would have an adverse affect on the
Company's operations. Accounts receivable from these customers comprised
approximately 64% and 47% of total accounts receivable at June 30, 2005 and
2004, respectively.
[11] Commitments and Contingencies
[A] Leases
Related Party Leases- Warehouse and office facilities are leased from Vitamin
Realty Associates, L.L.C., a limited liability company, which is 90% owned by
the Company's chairman, president and principal stockholder and certain family
members and 10% owned by the Company's Chief Financial Officer. The lease
provides for minimum annual rental of $323,559 through May 31, 2015 plus
increases in real estate taxes and building operating expenses. On July 1, 2004,
the Company leased an additional 24,810 square feet of warehouse space on a
month-to month basis Rent expense for the years ended June 30, 2005 and 2004 on
this lease was $800,000 and $490,000 respectively, and is included in both
manufacturing and selling and administrative expenses. The increase in rent
expense is due to the increase in square footage and to an increase in utility
costs.
F-17
Other Lease Commitments- The Company leases manufacturing and office facilities
through March 31, 2007. The lease was effective on April 1, 2002 and provided
for minimum monthly rental of $32,500 per month through March 31, 2007 plus
increases in real estate taxes and building operating expenses. Rent expense has
been straight-lined over the life of the lease. At its option, the Company has
the right to renew the lease for an additional five year period. On August 27,
2002 the lease was amended reducing the square footage from approximately 32,500
to 22,500 and reducing the monthly rent to $22,483 per month for the balance of
the lease. Rent expense for the year ended June 30, 2005 was $339,748 as
compared to $318,513 for the year ended June 30, 2004.
The Company leases warehouse and office facilities through March 31, 2007. The
lease was effective on March 6, 2004, and provides for a minimum monthly rental
of $9,967. The Company leases office space through September 30, 2005. The lease
was effective on June 1, 2004, and provides for a minimum monthly rental of
$2,248. The company leases office space through December 31, 2005, and provides
for a minimum monthly rental of $24,704. The Company leases warehouse equipment
for a five (5) year period with an annual rental of $15,847 and office equipment
for a five (5) year period with an annual rental of $8,365.
The Company leases automobiles under non-cancelable operating lease agreements,
which expire through 2007.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related
Year Ending Lease Party Lease
June 30, Commitment Commitment Total
-------- ---------- ---------- ----------
2006 $ 569,475 $ 323,559 $ 893,034
2007 326,178 323,559 649,737
2008 14,602 323,559 338,161
2009 8,400 323,559 331,959
2010 2,100 323,559 325,659
Thereafter -- 1,590,832 1,590,832
---------- ---------- ----------
Total $ 920,755 $3,208,627 $4,129,382
========== ========== ==========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $1,597,003 and $955,868 for the years ended June 30, 2005 and
2004, respectively. Rent expense is stated net of sublease income of
approximately $2,600 and $9,500 for the years ended June 30, 2005 and 2004,
respectively.
[B] Consulting Agreement - On October 20, 2003, the Company entered into a one
year consultant agreement with an investor relations consultant. The Company
paid $80,000 over the term of the agreement. In addition, the Company initially
agreed to issue to the consultant 36,000 shares of its common stock. On July 13,
2004, the Company terminated the agreement. Under the terms of the termination
agreement, the Company will not be obligated to pay the $10,000 per month fee
after July 15, 2004. Additionally the Company issued to the consultant 27,000
shares of common stock valued at the fair market price on the date of issuance
in lieu of the original 36,000 shares. The 27,000 shares of common stock were
valued at $186,300 and are included in selling and administrative expenses.
[C] Development and Supply Agreement- On March 13, 1998, the Company signed a
development and supply agreement with Herbalife International of America, Inc.
("Herbalife") whereby the Company will develop, manufacture and supply certain
nutritional products to Herbalife which, agreement was renewed through December
31, 2006. The agreement provides that Herbalife is required to purchase a
minimum quantity of Supplied Products each year of $18,000,000 for the term of
the agreement. If Herbalife purchases the minimum amount, then Herbalife will be
entitled to certain rebates of an amount not exceeding $300,000 per year. For
the fiscal year ended June 30, 2005 and 2004, there were no rebates due.
F-18
[D] Intellectual Property Agreement - In connection with the acquisition in
January 2004 of intellectual property developed by the Center for Molecular
Biotechnology of Fraunhofer USA, Inc., the Company will pay up to a maximum of
$2,500,000 for additional intellectual property. As of June 30, 2005, $1,250,000
has been paid.
[E] Legal Proceedings -NatEx Georgia LLC and Vasili Patarkalishvili v. Robert B.
Kay, E. Gerald Kay, Trade Investment Services, LLC, Paxis Pharmaceuticals, Inc.,
Dean P. Stull and Integrated BioPharma, Inc., pending in the United States
District Court for the Southern District of New York. Plaintiffs NatEx Georgia
LLC and Vasili Patarkalishvili commenced this action on July 19, 2004, alleging
claims for breach of contact, fraud and breach of the implied duty of good faith
and fair dealing arising out of an alleged failure by Paxis to provide
information necessary for NatEx to perform under the parties' agreements by
which NatEx had agreed to supply Paclitaxel extract. The complaint seeks damages
of more than $5 million. On August 18, 2004, the Company removed this action to
federal court. The plaintiffs have moved to have the matter remanded to state
court. The Company plans to file a motion to dismiss and to defend vigorously
the claims in this lawsuit. The outcome is uncertain and the Company feels that
there will be no material financial adverse effect.
Wolfe Axelrod Weinberger Associates, LLC v. Integrated BioPharma, Inc., pending
before the American Arbitration Association. On July 2, 2004, Wolfe Axelrod
Weinberger Associates, LLC, a company which had provided investor relations
services to the Company in 2000 and 2001, served a Demand for Arbitration and a
Statement of Claim alleging that the Company had failed to include Company
securities held by Wolfe in the Company's Registration Statement filed with the
United States Securities and Exchange Commission in May 2004 and that the
Company was required to register such shares based on an agreement between the
parties. The complaint seeks the registration of the securities and damages of
more than $1.2 million. The complaint was settled in December 2004 with no
material financial impact.
[12] 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
years ended June 30, 2005, and June 30, 2004 was $13,200 for each year. The
second agreement is with EVJ, LLC a limited liability company controlled by
Robert Kay, an employee of the Company. This agreement is on a month to month
basis. The total consulting expense under this agreement was $180,000 for the
year ended June 30 2005 and $165,000 for the year ended June 30, 2004.
See Note 11 - Leases for related party lease transactions. See Note 7 - Note
Payable related party.
[13] Equity Transactions
[A] Stock Option Plan and Warrants - The Company has adopted a stock option plan
for the granting of options to employees, officers, directors and consultants of
the Company that originally provided to purchase up to 7,000,000 shares of
common stock, at the discretion of the Board of Directors. During fiscal year
2004, the Board of Directors and stockholders approved an additional 2,000,000
common stock shares available for grant, for a total of 9,000,000 shares of
common stock available for grant. Stock option grants may not be priced less
than the fair market value of the Company's common stock at the date of grant.
Options granted are generally for ten year periods, except that options granted
to a 10% stockholder (as defined) are limited to five year terms.
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.
On March 24, 2005, the Company granted 34,723 incentive stock options for a term
of ten years at an exercise price equal to the market price of $6.36 and 9,277
of non-statutory stock options for a period of ten years at an exercise price
equal to the market price of $6.36 on the date of grant.
F-19
On April 11, 2005, the Company granted 5,000 non-statutory stock options for a
term of ten years at an exercise price equal to the market price of $5.29 on the
date of grant.
On April 20, 2005, the Company granted 19,120 incentive stock options for a term
of ten years at an exercise price equal to the market price of $5.23 at the date
of grant and 105,880 non-statutory stock options for a term of ten years at an
exercise price equal to the market price of $5.23 at the date of grant.
All of the above options vest twelve months from the date of issuance.
A summary of the Company's stock option activity, and related information for
the years ended June 30, follows:
Weighted Weighted
Average Average Stock Options
Exercise Number of Exercise Available
Options Price Exercisable Price for Grant
--------- ----- --------- ----- -----------
Outstanding
June 30, 2003 5,118,201 $0.99 3,425,201 $1.18 696,799
Additional shares reserved 2,000,000
Granted 937,666 9.97 (937,666)
Exercised (262,000) 1.40
Terminated (110,606) 1.70 110,606
--------- ---------
Outstanding
June 30, 2004 5,683,261 2.41 4,745,595 .91 1,869,739
Additional shares reserved --
Granted 1,051,500 6.23 (1,051,500)
Exercised (148,000) 1.20
Terminated (11,833) 8.19 11,833
Expired (167,000) .55
--------- ---------
Outstanding
June 30, 2005 6,407,928 $3.13 5,357,428 $2.52 830,072
========= ===== ========= ===== ===========
Weighted-average fair value of
options granted during the year 2005 2004
------ ------
Where exercise price equals stock price $6.15 $9.86
Where exercise price exceeds stock price 6.93 10.89
Where stock price exceeds exercise price -- --
F-20
Following is a summary of the status of stock options outstanding at June 30,
2005:
Outstanding Options Exercisable Options
------------------------------------------------ ------------------------------
Weighted Average
Exercise Remaining Weighted Average Weighted Average
Price Range Number Contractual Life Exercise Price Number Exercise Price
------------- --------- --------------- ---------------- --------- ----------------
$ 0.08 25,000 6.3 $ 0.08 25,000 $ 0.08
$ 0.33 - 0.36 1,045,000 7.3 0.34 1,045,000 0.34
$ 0.50 - 0.55 1,328,000 4.84 0.52 1,328,000 0.53
$ 0.75 - 0.85 1,275,000 6.2 0.80 1,275,000 0.80
$ 1.37 10,000 .4 1.37 10,000 1.10
$ 1.50 - 1.65 219,998 3.3 1.50 219,998 1.50
$ 1.75 25,000 .5 1.75 25,000 1.75
$ 3.50 - 3.85 502,597 1.3 3.55 502,597 3.55
$ 5.23 - 5.29 130,000 9.8 5.23 0 0
$ 6.30 - 6.93 920,500 9.2 6.37 0 0
$ 7.90 33,333 8.3 7.90 33,333 0
$ 9.90 -10.89 883,500 8.4 10.01 883,500 0
$14.90 10,000 8.8 14.90 10,000 0
------------- --------- --------------- ---------------- --------- ----------------
$ 0.05 -14.90 6,407,928 6.5 $ 3.13 5,357,428 $ 2.52
As of June 30, 2005, the Company has 636,000 warrants outstanding to purchase
shares of common stock at prices ranging from $5.40 to $14.00. All outstanding
warrants are currently exercisable.
[B] Treasury Stock Purchases - On June 25, 2004 Integrated BioPharma, Inc.
adopted a stock repurchase plan giving management authority to purchase up to $3
million worth of the Company's stock in open market transactions or privately
negotiated transactions at the Company's discretion. The Company purchased an
aggregate of 9,100 shares of its common stock for a purchase price of $70,508
during July 2004.
[C] Series B Redeemable Convertible Preferred Stock and Private Placement
On April 20, 2004, the Company raised $7,500,000 in gross proceeds from the sale
of 750 shares of the Company's Series B Redeemable Convertible Preferred Stock,
par value $.002 per share (`the "Series B Preferred Shares'), at a purchase
price of $10,000 per share.
Dividends of the Series B Preferred Shares are 7% per annum, payable by the
Company in cash or, in certain instances, in shares of the Company's Common
Stock, par value $.002 per share (the "Common Stock"). Accordingly, the Company
paid dividends of $490,000 in fiscal 2005 and $101,692 in fiscal 2004. The
Series B Preferred Shares are convertible at the option of each Investor into
shares of Common Stock at a conversion price of $10.00 per share, subject to
anti-dilution and other customary adjustments. Upon conversion, the Investors
would receive an aggregate of 750,000 shares of Common Stock. The Company also
has the option to force such conversion in the event that it meets certain
performance milestones. The Series B Preferred Shares are redeemable by the
Company on the third anniversary of issuance. The Investors can also force
redemption upon the occurrence of certain events of default.
The Company also issued to the Investors warrants (the "Warrants") to purchase
an aggregate of 375,000 shares of Common Stock, exercisable over a five-year
period. The exercise price is $14.00 per share, subject to anti-dilution and
other customary adjustments. Assuming no such adjustments, the exercise of all
Warrants could result in additional gross proceeds to the Company of $5,250,000.
The Warrants are callable by the Company in the event that it meets certain
performance milestones.
Finally, the Company issued Additional Investment Rights to the Investors,
entitling them over the next 18 months to purchase an aggregate of 375
additional Series B Preferred Shares (convertible into 375,000 shares of Common
Stock) and Warrants to purchase an additional 187,500 shares of Common Stock.
The Series B Preferred Shares and Warrants issuable upon exercise of the
Additional Investment Rights have the same terms as the securities issued at
closing. Assuming no anti-dilution or other adjustments, the exercise of all
Additional Investment Rights followed by the exercise of all Warrants issuable
upon exercise of the Additional Investment Rights could result in additional
gross proceeds to the Company of $6,375,000.
F-21
The Company recorded the relative fair value of all of the warrants and
Additional Investment Rights in connection with this transaction of $2,904,400
against the amount of the redeemable convertible preferred stock as of April 20,
2004, which was calculated using the Black-Scholes valuation method, as well as
$4,595,600 for a beneficial conversion feature in accordance with EITF 00-27.
Such amounts are being accreted over a three year period until the mandatory
redemption date of the Preferred Stock, the third anniversary of closing. The
Company recorded accretion of $2,332,000 in fiscal 2005 and $960,000 in fiscal
2004.
The Company registered the Common Stock underlying the Series B Preferred Shares
and the Warrants, including the Series B Preferred Shares and the Warrants
issuable upon exercise of the Additional Investment Rights, for resale under the
Securities Act of 1933 and applicable state securities laws.
[D] Acquisition - Agrolabs, Inc. Transaction - On October 22, 2003, the Company
completed the acquisition of various assets related to the Naturally Aloe(TM),
Naturally Noni(TM) and Avera Sport(TM) product lines from Aloe Commodities
International, Inc. ("Aloe"). The assets included trademarks, copyrights, art
work, formula for the products, labels, customer lists, goodwill, inventories
and books and records. Pursuant to the terms of a purchase agreement dated
October 22, 2003 between the Company and Aloe, the purchase price for the
Transferred Assets was $2,597,880, with $872,470 paid at closing and $1,725,410
paid in 203,085 shares of the Company's common stock valued on the basis of the
average closing price as reported on the American Stock Exchange for the five
(5) trading days immediately preceding the closing date and five (5) trading
days after. Such shares shall be held in escrow for a period of one (1) year
from the closing date and released pursuant to the terms of and Escrow Agreement
between and among the Company, Aloe and Vial, Hamilton, Koch & Knox, L.L.P. The
allocation of the purchase price was as follows:
Inventory, Trade Receivables and Prepaid Items $ 597,470
Trade Names 1,508,000
Goodwill 145,410
License Agreement 347,000
--------------
Total $ 2,597,880
==============
[14] Gain on Settlement of Lawsuit
In January 2005 the Company received a
$2,475,322 cash payment in connection with a multidistrict class action brought
on behalf of direct purchases of vitamin products, in which the plaintiffs
alleged violations of Section 1 of the Sherman Antiturst Act and other wrongful
anti-competitive conduct violations of various federal and state laws.
[15] Segment Information
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments.
The Company has divided its operations into three reportable segments as
follows: Sales of vitamins and nutritional supplements, sales of its active
pharmaceutical ingredient Paclitaxel and sales of technical services through its
Hauser subsidiary. The international sales for fiscal 2005 were $5,807,611.
Financial information relating to fiscal 2005 operations by business segment
follows:
Technical
Nutraceutical Pharmaceutical Services Total
------------- -------------- ------------- -------------
Revenues
U.S. Customers $ 25,317,683 $ 550,007 $ 1,060,512 $ 26,928,202
International 5,807,611 -- -- 5,807,611
------------- -------------- ------------- -------------
Total Revenues $ 31,125,294 $ 550,007 $ 1,060,512 $ 32,735,813
Segment operating
profit/(loss) $ (349,785) $ (5,308,118) $ (1,789,466) $ (7,447,369)
Depreciation $ 433,644 $ 724,685 $ 110,040 $ 1,268,369
Capital Expenditures $ 84,614 $ 563,770 $ 1,012,899 $ 1,661,283
Total assets $ 19,378,818 $ 4,953,434 $ 1,906,293 $ 26,238,545
F-22
Financial information relating to fiscal 2004 operations by business segment
have not been presented because the Pharmaceutical and Technical services
segments were not part of the consolidated group during such period.
[16] Subsequent Events
On July 20, 2005, the InB: Hauser Pharmaceutical Services, Inc. subsidiary
renewed its building lease under substantially the same terms through December
31, 2012.
F-23
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: September 28, 2005 By: /s/ E. Gerald Kay
---------------------
E. Gerald Kay,
Chief Executive Officer
Date: September 28, 2005 By: /s/ Eric Friedman
---------------------
Eric Friedman,
Chief Financial Officer
F-24