UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
------
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004 Commission File Number 000-28876
INTEGRATED BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2407475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Long Avenue
Hillside, New Jersey 07205
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (973) 926-0816
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 | |
The number of shares outstanding of the issuer's common stock, as of May 3, 2004
was 10,620,890.
INTEGRATED BIOPHARMA, INC.
INDEX
--------------------------------------------------------------------------------
Part I: Financial Information
Item 1: Consolidated Financial Statements
Independent Accountant's Review Report 1
Consolidated Balance Sheet as of March 31, 2004 [Unaudited] 2 ... 3
Consolidated Statements of Operations for the three and nine months
ended March 31, 2004 and 2003 [Unaudited] 4
Consolidated Statement of Stockholders' Equity for the nine months
ended March 31, 2004 [Unaudited] 5
Consolidated Statements of Cash Flows for nine months ended
March 31, 2004 and 2003 [Unaudited] 6 ... 7
Notes to Consolidated Financial Statements [Unaudited] 8 ... 19
Item 2: Management's Discussion and Analysis or Plan of Operation 19 ... 25
Item 3: Controls and Procedures 26
Part II: Other Information 27
Signatures 28
Independent Accountants' Review Report
We have reviewed the accompanying condensed consolidated balance sheet of
Integrated BioPharma, Inc. and Subsidiaries (formerly Integrated Health
Technologies, Inc.) as of March 31, 2004, and the related condensed consolidated
statements of operations for the three and nine months ended March 31, 2004 and
2003, and condensed consolidated statements of cash flows for the nine months
ended March 31, 2004 and 2003, and condensed consolidated statement of
stockholders' equity for the nine months ended March 31, 2004. These condensed
consolidated financial statements are the responsibility of the company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/s/ Amper, Politziner & Mattia P.C.
May 3, 2004
Edison, New Jersey
1
Part 1-FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2004
[UNAUDITED]
--------------------------------------------------------------------------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,333,878
Accounts Receivable - Net 2,732,561
Deferred Income Taxes 61,000
Inventories 6,455,967
Deposit on Inventories 1,348,507
Loan Receivable 137,500
Refundable Federal Income Taxes 19,420
Prepaid Expenses and Other Current Assets 1,026,037
------------
Total Current Assets 13,114,870
------------
Property and Equipment - Net 6,784,338
------------
Other Assets:
Deferred Tax Asset 96,000
Intellectual Property 1,077,455
Patents and Unpatented Technological Expertise-Net 1,447,000
Prepaid Rent 130,000
Investment in Joint Venture 94,999
Goodwill 1,643,138
Security Deposits and Other Assets 114,947
------------
Total Other Assets 4,603,539
------------
Total Assets $ 24,502,747
============
See accompanying notes to condensed consolidated financial statements.
2
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2004
[UNAUDITED]
--------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 3,616,699
Note Payable-Bank 4,500,000
Accrued Expenses and Other Current Liabilities 624,091
Federal and State Income Taxes Payable 45,178
Customer Advances 59,518
Capital Lease Obligation 43,914
Loan Payable - Trade Investment Services, LLC, related party 172,260
------------
Total Current Liabilities 9,061,660
------------
Commitments and Contingencies --
------------
Stockholders' Equity:
Preferred Stock - Authorized 1,000,000 Shares,
$.002 Par Value, No Shares Issued --
Series A non-redeemable Convertible Preferred Stock-
Authorized 20,000 shares $.002 Par Value, 9,500 Shares Issued and
Outstanding, Liquidation preference of $9,595,000 19
Common Stock - Authorized 25,000,000 Shares,
$.002 Par Value, 10,646,690 Shares Issued, 10,620,890 Outstanding 21,293
Additional Paid-in-Capital 15,616,500
Deficit (167,894)
------------
15,469,918
Less, Treasury Stock at cost, 25,800 shares (28,831)
------------
Total Stockholders' Equity 15,441,087
------------
Total Liabilities and Stockholders' Equity $ 24,502,747
============
See accompanying notes to condensed consolidated financial statements.
3
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
--------------------------------------------------------------------------------
Three months ended March 31, Nine months ended March 31,
---------------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
Sales $ 6,560,784 $ 6,670,254 $ 18,390,616 $ 17,464,163
Cost of Sales 4,982,793 5,290,233 13,924,860 13,642,093
------------ ------------ ------------- -------------
Gross Profit 1,577,991 1,380,021 4,465,756 3,822,070
------------ ------------ ------------- -------------
Selling and Administrative Expenses
Paxis Pharmaceuticals, Inc. Start Up Costs 1,557,100 -- 3,228,454 --
Selling and Administrative Expenses 1,192,466 1,088,029 3,702,091 2,791,001
------------ ------------ ------------- -------------
Total Selling & Administrative Expenses 2,749,566 1,088,029 6,930,545 2,791,001
------------ ------------ ------------- -------------
Operating [Loss] Income (1,171,575) 291,992 (2,464,789) 1,031,069
------------ ------------ ------------- -------------
Other Income [Expense]:
Other Income 63,461 91,982 268,120 232,148
Consulting Fee Income 12,000 12,000 36,000 36,000
Interest Expense (36,432) (840) (76,600) (4,469)
Interest and Investment Income 3,919 4,491 59,721 21,799
------------ ------------ ------------- -------------
Total Other Income 42,948 107,633 287,241 285,478
------------ ------------ ------------- -------------
[Loss] Income Before Income Taxes (1,128,627) 399,625 (2,177,548) 1,316,547
Federal and State Income Tax 12,905 181,871 87,030 585,461
------------ ------------ ------------- -------------
Net [Loss] Income (1,141,532) 217,754 (2,264,578) 731,086
Accretion of Preferred Stock Dividends (95,000) -- (285,000) --
------------ ------------ ------------- -------------
Net [Loss] Income applicable to common
shareholders $(1,236,532) $ 217,754 $ (2,549,578) $ 731,086
============ ============ ============= =============
Net [Loss] Income Per Common Share:
Basic $ (.12) $ .03 $ (.24) $ .11
============ ============ ============= =============
Diluted $ (.12) $ .02 $ (.24) $ .09
============ ============ ============= =============
Average Common Shares Outstanding 10,635,924 7,543,034 10,487,202 6,660,429
Dilutive Potential Common Shares:
Warrants and Options -- 2,533,775 -- 1,551,781
------------ ------------ ------------- -------------
Average Common Shares
Outstanding-assuming dilution 10,635,924 10,076,809 10,487,202 8,212,210
============ ============ ============= =============
See accompanying notes to condensed consolidated financial statements.
4
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED MARCH 31, 2004
[UNAUDITED]
--------------------------------------------------------------------------------
Convertible Additional Total
Common Stock Preferred Preferred Paid-In Retained Treasury Stock Stockholders'
Shares Par Value Stock Stock Capital Earnings 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 135,500 271 -- -- 137,889 -- -- -- 138,160
Reduction of
paid in
capital due to
common control
accounting
related to in
acquisition of
47% of Paxis,
Inc. (2,956,068) (2,956,068)
Preferred
Stock-Accretion
of Dividends 285,000 (285,000) --
Acquisition of
3% of Paxis
Inc. 66,666 133 542,595 542,728
Acquistion of
new product
lines 203,085 406 1,725,004 1,725,410
Net Loss for
the nine
months ended
March 31, 2004 -- -- -- -- -- (2,264,578) -- -- (2,264,578)
---------- ------- -- --- ----------- ---------- ------ --------- -----------
Balance-
March 31, 200
10,646,690 $21,293 -- $19 $15,616,500 $(167,894) 25,800 $(28,831) $15,441,087
========== ======= == === =========== ========== ====== ========= ===========
See accompanying notes to condensed consolidated financial statements.
5
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
--------------------------------------------------------------------------------
Nine months ended
March 31,
2004 2003
---- ----
Operating Activities:
Net [Loss] Income $ (2,264,578) $ 731,086
------------------- --------------------
Adjustments to Reconcile Net Income (Loss) to Net Cash
[Used for] Provided by Operating Activities:
Depreciation and Amortization 480,982 341,766
Deferred Income Taxes (20,000) 30,000
Allowance for Inventory 7,500 --
Gain on Sale of Fixed Assets -- (24,346)
Bad Debt Expense 7,500 5,024
Changes in Assets and Liabilities (Net of Acquisition Costs):
[Increase] Decrease in:
Refundable Federal Income Taxes (19,420) (81,231)
Accounts Receivable (876,155) 792,475
Inventories (2,163,442) (1,573,555)
Deposit for Inventory 108,000 --
Due From Paxis Pharmaceuticals, Inc. - Related Party (908,000) 92,646
Prepaid Expenses and Other Current Assets (400,910) (547,159)
Security Deposits and Other Assets 207,194 1,141
[Decrease] Increase in:
Accounts Payable 1,198,560 289,139
Federal and State Income Taxes Payable (8,591) 97,738
Accrued Expenses and Other Liabilities 108,032 (79,486)
------------------- --------------------
Total Adjustments (2,278,750) (655,848)
------------------- --------------------
Net Cash - Operating Activities - Forward (4,543,328) 75,238
------------------- --------------------
Investing Activities:
Purchase of Intangible Assets (775,000) --
Proceeds from Sale of Fixed Assets -- 40,000
Investment in Joint Venture (94,999) --
Patents -- (355,000)
License Fee (90,000) --
Loans to Stockholders -- (9,505)
Acquisition of Paxis Pharmaceuticals, Inc., less cash received (483,256) --
Purchase of Property and Equipment (3,136,556) (325,060)
------------------- --------------------
Net Cash-Investing Activities - Forward (4,579,811) (649,565)
------------------- --------------------
Financing Activities:
Proceeds from Exercise of Stock Options 138,160 101,250
Proceeds from Notes Payable 36,525 2,255,954
Repayment of Notes Payable (124,058) (2,269,989)
------------------- --------------------
Net Cash-Financing Activities - Forward 50,627 87,215
------------------- --------------------
See accompanying notes to condensed consolidated financial statements.
6
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
--------------------------------------------------------------------------------
Nine months ended
March 31,
2004 2003
---- ----
Net Cash - Operating Activities - Forwarded $ (4,543,328) $ 75,238
Net Cash - Investing Activities - Forwarded (4,579,811) (649,565)
Net Cash - Financing Activities - Forwarded 50,627 87,215
---------------- -----------------
Net Increase / [Decrease] in Cash and Cash Equivalents (9,072,512) (487,112)
Cash and Cash Equivalents - Beginning of Periods 10,406,390 2,124,325
---------------- -----------------
Cash and Cash Equivalents - End of Periods $ 1,333,878 $ 1,637,213
================ =================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 67,187 $ 4,469
Income Taxes $ 98,625 $ 523,301
Supplemental Schedule of Investing and Financial Activities:
Common stock issued for acquisition of NuCycle Therapy, Inc. $ 175,196
Common stock issued for acquisition of Natex, LLC $ 1,598,276
Common stock issued for acquisition of 3% Paxis Pharmaceutical, Inc. $ 542,728
Common stock issued for acquisition of new product line $ 1,725,410
See accompanying notes to condensed consolidated financial statements.
7
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[1] Business
Basis of Reporting - The accompanying unaudited interim financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such interim
statements include all adjustments, which are considered necessary in order to
make the interim financial statements not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's annual report to
stockholders incorporated by reference in the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 2003. The results of operations for
the nine months ended March 31, 2004 are not necessarily indicative of the
results for the entire fiscal year ending June 30, 2004.
Integrated BioPharma, Inc. [the "Company"] is engaged primarily in the
manufacturing, marketing and sales of vitamins, nutritional supplements and
herbal products. Its customers are located primarily throughout the United
States. The Company considers all subsidiaries as one segment of business.
On July 22, 2003 the Company acquired ninety-seven (97%) percent 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.
Paxis acquired from Hauser Inc. ("Hauser") its cGMP-(company good manufacturing
practices) compliant Paclitaxel production facilities, processing equipment, and
intellectual assets. Paxis also purchased Paclitaxel intellectual property
("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 (5) trading days immediately preceding the
closing date and five (5) trading days after.
To date, Paxis has devoted the majority of its efforts to setting up the
manufacturing operation. Paxis is subject to various risks associated with a
start-up operation, including, among others, setting up and operating
manufacturing facilities, complying with regulatory requirements for
manufacturing pharmaceutical products, manufacturing cGMP API Paclitaxel,
marketing and selling the cGMP Paclitaxel to customers, and operating
profitably. The Company can give no assurance that it can be operated
profitably. The manufacturing facility is now complete and the Company has built
up a raw material inventory of approximately $1,800,000 to support
manufacturing.
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 by and 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 sales by type for the nine months ended March 31, 2004 2003
---- ----
Nutraceutical Contract Manufacturing and Distribution Sales $ 15,737,499 $ 14,628,272
Raw Material Distribution Sales $ 2,443,615 $ 2,521,761
Other $ 209,502 $ 314,130
8
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
--------------------------------------------------------------------------------
[1] Business [Continued]
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of SFAS No.123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plan
because the exercise price of employee stock options equals the market prices of
the underlying stock on the date of grant. Had compensation cost been determined
based on the fair value at the grant date for awards in the nine months ended
March 31, 2004 and 2003, respectively, consistent with the provision of SFAS No.
123, the Company `s net income and earnings per share would have been reduced to
the pro forma amounts indicated below.
Nine months ended
March 31,
2004 2003
---- ----
Net (loss), income as reported $ (2,264,578) $ 731,086
Add: Stock based employee compensation
expense included in net (loss), income
net of related tax effects -- --
Deduct: Total stock based employee
Compensation expense determined
under fair value based method for all
awards, net of related tax effects (2,790,722) --
-------------- -------------
Pro forma net (loss) income $ (5,055,300) $ 731,086
============== =============
Earnings per share:
Basic-as reported $ (.24) $ .11
============== =============
Basic-pro forma $ (.48) $ .11
============== =============
Diluted-as reported $ (.24) $ .09
============== =============
Diluted-pro forma $ (.48) $ .09
============== =============
[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. 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, accounts payable, and accrued expenses, it was
estimated that the carrying amount approximated fair value because of the short
maturities of these instruments. All debt is based on current rates at which the
Company could borrow funds with similar remaining maturities and approximates
fair value.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Inventories - Inventory is valued by the first-in, first-out method, at the
lower of cost or market.
9
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
--------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Depreciation - The Company follows the general policy of depreciating the cost
of property and equipment over the following estimated useful lives:
Building 15 Years
Leasehold Improvements 15 Years
Machinery and Equipment 7 Years
Machinery and Equipment Under Capital Leases 7 Years
Transportation Equipment 5 Years
Machinery and equipment are depreciated using accelerated methods while
leasehold improvements are amortized on a straight-line basis. Depreciation
expense was $450,982 and $291,766 for the nine months ended March 31, 2004 and
2003, respectively and amortization of patents and unpatented technology was
$30,000 and $50,000 for the nine months ended March 31, 2004 and 2003,
respectively. Amortization of equipment under capital leases is included with
the depreciation expense.
Estimates -The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts or revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition - The Company recognizes revenue upon shipment of the
product. The Company's Paxis subsidiary has completed its renovation of the
manufacturing facilities as of March 31, 2004 but Paxis has not recognized any
income to date. 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 realized fee income from managing warehouse and office operations
for an unrelated company of $180,000 and $186,721 for the nine months ended
March 31, 2004 and 2003 respectively. Such is included in "Other income."
License of Technology - The Company has a limited, non-exclusive license to use
the Technology acquired from Hauser for a term of ten years. The Company is
obligated to pay a License Fee of $90,000 payable within ten days from the date
Hauser provides the Company with written notice that it has demonstrated that
the Technology can be used to manufacture lab scale Paclitaxel from taxus
canadensis, or Canadian yew trees. In addition the Company is obligated to pay a
fee of $50,000 upon the commercial sale by the Company of products comprising
Paclitaxel extracted, isolated or purified using the Technology. The Company is
also obligated to pay an annual license maintenance fee of $250,000 (the annual
maintenance fee) one year after the first commercial sale. The Company is
further obligated to pay a royalty fee based on a percentage of sales, less the
annual maintenance fee. In December 2003, the Company made the required license
fee payment of $90,000.
At the conclusion of the License Term the Technology License shall be considered
fully paid and the Company shall have the rights granted under the Technology
License without further payment of an annual royalty.
Intellectual Property-As of March 31, 2004, $577,455 has been paid to Hauser
under the License agreement which has been recorded as intellectual property.
The Company has not amortized this amount since operations have not commenced,
but will begin amortizing over the remaining period of the 10 year agreement
when operations have commenced.
On January 1, 2004 the Company acquired intellectual property developed by the
Center for Molecular Biotechnology (CNB) of Fraunhofer USA, Inc. for a cash
payment of $500,000.
Advertising - Costs incurred for producing and communicating advertising are
expensed when incurred. Advertising expense was $165,322, of which $77,000 has
been charged to cost of goods sold, and $5,837 for the nine months ended March
31, 2004 and 2003 respectively.
10
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
--------------------------------------------------------------------------------
[3] Inventories
Inventories consist of the following at March 31, 2004:
Raw Materials $ 4,332,510
Work-in-Process 601,533
Finished Goods 1,521,924
-------------
Total $ 6,455,967
=============
[4] Deposits on Inventory
The Company has advanced $1,348,507 to Natex Georgia LLC, for the purchase of
biomass to be used by the Company for the production of Paclitaxel.
[5] Property and Equipment
Land and Building $ 1,250,000
Leasehold Improvements 2,249,180
Machinery and Equipment 6,654,155
Machinery and Equipment Under Capital Leases 195,653
Transportation Equipment 37,714
-----------------
Total 10,386,702
Less: Accumulated Depreciation and Amortization 3,602,364
-----------------
Total $ 6,784,338
=================
[6] Intangibles
At March 31, 2004 intangible assets are made up of the following:
Gross Carrying Accumulated
Amount Amortization Net
------ ------------ ---
Unamortized intangible assets
$ 90,000 $ - $ 90,000
License Fee
Aloe acquisition $ 900,000 $ - $ 900,000
Amortized intangible assets
Unpatented Technology $ 547,000 $ 90,000 $ 457,000
----------- ---------- -----------
Intangible assets
Total $ 1,537,000 $ 90,000 $ 1,447,000
=========== ========== ===========
Aggregate Amortization Expense
For the nine months ended March 31, 2004 $ 30,000
----------
For the three months ended March 31, 2004 $ 10,000
----------
The annual amortization expense for Intangible Assets is as follows:
Amortization
June 30, Expense
-------- -------------
2004 40,000
2005 40,000
2006 40,000
2007 40,000
2008 40,000
---------
Total $ 200,000
=========
All other intangible assets-net are being amortized over their estimated useful
lives.
11
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
--------------------------------------------------------------------------------
[7] Goodwill
Goodwill - Paxis acquisition $ 542,728
Goodwill - Aloe acquisition 1,100,410
------------
$ 1,643,138
============
[8] Notes Payable
Notes Payable are summarized as follows at March 31, 2004:
Commerce Bank (a) $ --
Bank of America (b) 4,500,000
------------
Total 4,500,000
Less: Current Portion 4,500,000
------------
Non-current Portion $ -0-
============
(a) Under the terms of a revolving credit note which expires on June 10, 2005,
the Company may borrow up to $1,000,000 at the prime lending rate. The loan is
collateralized by the inventory, receivables and equipment of Integrated
BioPharma, Inc. and its operating subsidiaries, and by the personal guarantee of
E. Gerald Kay, the chairman of the board of the Company. At March 31, 2004 there
were no borrowings under the revolving credit note. On April 20, 2004 the
Company terminated the revolving credit note.
On November 14, 2003 the Company signed a letter of credit agreement in the
amount of three hundred thousand dollars ($300,000) in favor of the Royal Bank
of Canada. The principal amount of the letter of credit agreement has been
carved out of the revolving credit note of $1,000,000. On April 20, 2004 the
Company terminated the revolving credit note.
The loan agreement with Commerce Bank contains certain financial covenants
relating to the maintenance of tangible net worth as defined and Debt Service
Coverage Ratios. At March 31, 2004 the Company was in compliance with its
tangible net worth covenant but not its debt service coverage ratio.
(b) Revolving line of credit loan provided by Bank of America dated August 6,
2003 in the amount of $4,500,000 with interest at a variable rate. The loan is
due on September 4, 2004. The loan is guaranteed by Mr. Carl DeSantis, a
shareholder and director of the Company. At March 31, 2004 the interest rate was
2.34%.
[9] Loan Payable-Trade Investment Services
Demand loan in the amount of $172,260 provided by Trade Investment Services, LLC
("TIS"), a former shareholder of Paxis Pharmaceuticals, Inc, dated July 1, 2002
with interest at 9%. Interest for the nine months ended March 31, 2004 has been
waived.
[10] Research and Development Expense
The Company incurred $37,583 in research and development expenses due to the
acquisition of NuCycle Therapy, Inc. in February of 2003. Such costs are
expensed as incurred and included in selling and administrative expenses.
[11] Capital Lease
The Company acquired laboratory equipment under the provisions of two (2)
short-term leases. The leases expire in January 2004 and December 2004,
respectively. The equipment under the capital leases as of March 31, 2004 has a
12
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
--------------------------------------------------------------------------------
[11] Capital Lease [Continued]
cost of $195,653 and accumulated depreciation of $7,348 with a net book value of
$188,305.
The future minimum lease payments under capital leases and the net present value
of the future minimum lease payments at March 31, 2004 are as follows:
Total Minimum Lease Payments $ 39,052
Amount Representing Interest (731)
----------
Present Value of Net Minimum Lease Payment 38,321
Current Portion (38,321)
----------
Long-Term Capital Lease Obligation $ -0-
==========
[12] 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 March 31, 2004 the
Company's uninsured cash balances totaled approximately $857,655. The Company
does not require collateral in relation to cash credit risk.
[B] Concentrations of Credit Risk - Receivables - The Company routinely assesses
the financial strength of its customers and, based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited. The Company does not require
collateral in relation to its trade accounts receivable credit risk.
The amount of the allowance for uncollectible accounts at March 31, 2004 is
$36,197.
[13] Major Customer
For the nine months ended March 31, 2004 and 2003 approximately 63% and 68% of
revenues were derived from one customer. The loss of this customer would have an
adverse effect on the Company's operations. Two other customers accounted for
18% of consolidated sales for the nine months ended March 31, 2004 and 11% of
consolidated sales for the nine months ended March 31, 2003. Accounts receivable
from these customers comprised approximately 64% and 58% of total accounts
receivable at March 31, 2004 and 2003, respectively.
[14] Commitments and Contingencies
[A] Leases
Related Party Leases - Warehouse and office facilities are leased from Vitamin
Realty Associates, L.L.C., a limited liability company, which is 90% owned by
the Company's Chairman of the Board and principal stockholder and certain family
members and 10% owned by the Company's Chief Financial Officer. The lease was
effective on January 10, 1997 and provides for a minimum annual rental of
$346,000 through January 10, 2002 plus increases in real estate taxes and
building operating expenses. At its option, the Company has the right to renew
the lease for an additional five year period. On April 28, 2000 the lease was
amended reducing the square footage and extending the lease to May 31, 2015.
Rent expense for the nine months ended March 31, 2004 and 2003 on this lease was
approximately $370,000 and $350,000 respectively.
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.
13
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[UNAUDITED]
--------------------------------------------------------------------------------
[14] Commitments and Contingencies [Continued]
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 nine months
ended March 31, 2004 was $238,184. There were no corresponding expenses in 2003
because the manufacturing and office facility was not a part of the consolidated
group.
The Company leases warehouse and office facilities through March 31, 2006. The
lease was effective on March 15, 2004 and provides for a minimum monthly rental
of $3,625 in year one and $3,833 in year two.
The Company leases warehouse equipment for a five-year period providing for an
annual rental of $15,847, telephone equipment for a five-year period providing
for an annual rental of $13,142 and office equipment for a five year period
providing for an annual rental of $8,365.
The Company leases automobiles under non-cancelable operating lease agreements
which expire through 2006.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related
Lease Party Lease
March 31, Commitment Commitment Total
--------- ---------- --------- -----
2005 $ 321,544 $ 323,559 $ 645,103
2006 311,374 323,559 634,933
2007 13,988 323,559 337,547
2008 -- 323,559 323,559
2009 -- 323,559 323,559
Thereafter -- 1,963,318 1,963,318
----------- ----------- -----------
Total $ 646,906 $ 3,581,113 $ 4,228,019
=========== =========== ===========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $692,000 and $420,000 for the nine months ended March 31, 2004 and
2003, respectively. Rent expense is stated net of sublease income of
approximately $7,975 and $6,700 for the nine months ended March 31, 2004 and
2003, respectively.
[B] Development and Supply Agreement - On March 13, 1998, the Company signed a
development and supply agreement with Herbalife International of America, Inc.
["Herbalife"] whereby the Company will develop, manufacture and supply certain
nutritional products to Herbalife through December 31, 2002. On December 31,
2002 the agreement was modified extending the term of the agreement to December
31, 2005 and providing 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 it will be entitled to certain
rebates of an amount not exceeding $300,000. Accrual of these rebates are done
quarterly. On August 1, 2003 the development supply agreement was extended
through December 31, 2006.
[C] Employment Agreement - Effective February 24, 2003 the Company entered into
an employment agreement with an executive, which expires on December 31, 2004
and provides for an aggregate annual salary of $100,000. The agreement was
terminated on February 20, 2004.
[D] Consultant Agreements- On February 10, 2004, the Company entered into a one
year consultant agreement with an investor relation's consultant. The Company is
obligated to pay $10,000 per month for the length of the agreement. In addition,
the Company will issue to the consultant 36,000 shares of Common stock on a
quarterly basis.
The Company has oral agreements with subcontractors to supply labor on an as
needed basis.
14
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[UNAUDITED]
--------------------------------------------------------------------------------
[14] Commitments and Contingencies [Continued]
[E] Collaboration Agreement-Effective December 23, 2003 the Company entered into
a collaboration agreement with the Institute For Cancer Prevention, Inc. (the
"Institute"). The Company and the Institute will jointly research, develop and
test compounds for anti-carcinogenic activity. Under the agreement, the Company
has the exclusive rights to commercialize the compounds resulting from the
research and development collaboration. The Institute will receive a fee payment
of one percent (1%) of net sales for any products developed pursuant to this
agreement.
[F] Intellectual Property Agreement-In connection with the acquisition in
January 2004 of intellectual property developed by the Center for Molecular
Biotechonlogy of Faunhofer USA, Inc., the Company will pay up to a maximum of
$2,500,000 for services to be performed by Fraunhofer USA, Inc. over a five
year period.
[15] 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
nine months ended March 31, 2004 and 2003 was $9,900 respectively.
The second agreement is with EVJ, LLC a limited liability company controlled by
Robert Kay, an employee of the Company. The total consulting expense under this
agreement was $135,000 for the nine months ended March 31, 2004.
[16] New Accounting Pronouncements
In April 2002, the Financial Accounting Standard Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13 and Technical Corrections." SFAS No. 145 provides
guidance for income statement classification of gains and losses of debt and
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. SFAS No. 145 requires that gains
and losses from extinguishment of debt be classified as extraordinary items
only if they meet the criteria in Accounting Principles Board Opinion No. 30
("Opinion No. 30"). SFAS No. 145 is effective for years beginning after December
15, 2002. There was no impact from adoption of this statement.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit of Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supersedes
EITF Issue 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
There was no impact from the adoption of this statement.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation", which amends SFAS No. 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock based compensation. It also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock based employee compensation. Finally, SFAS No. 148 amends APB Opinion No.
28, "Interim Financial Reporting", to require disclosure of those effects in
interim financial statements. SFAS No. 148 is effective for fiscal years ended
after December 15, 2002, but early adoption is permitted. Accordingly, the
Company has adopted the applicable disclosure requirements of this statement
within this report.
In November 2002, the FASB issued interpretation No. ("FIN") 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", which requires that guarantees within the
scope of FIN 45 issued or amended after December 31, 2002, a liability for the
fair value of the obligation undertaken in issuing the guarantee, be recognized
at the inception of the guarantee. Disclosures required by FIN 45 are included
in the accompanying consolidated financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities," which is effective for interim periods beginning after June 15, 2003.
This interpretation changes the method of determining whether certain entities
additional subordinated financial support from other parties, or (2) equity
investors that cannot make significant decisions about the entity's operations
15
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[UNAUDITED]
--------------------------------------------------------------------------------
[16] New Accounting Pronouncements [Continued]
or that do not absorb the expected losses or receive the expected returns of the
entity. All other entities are evaluated for Subsidiaries." A VIE is
consolidated by its primary beneficiary, which is the party involved with the
VIE that has a majority of the expected losses or a majority of the expected
residual returns or both. The Company is currently evaluating the impact of
FIN 46.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of SFAS 33 on
Derivative Instruments and Hedging Activities." SFAS 149 is intended to result
in more consistent reporting of contracts as either freestanding derivative
instruments subject to SFAS 133 in its entirety, or as hybrid instruments with
debt host contracts and embedded derivative features. In addition, SFAS 149
clarifies the definition of a derivative by providing guidance on the meaning of
initial net investments related to derivatives. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS 129
did not have a material effect on our consolidated financial position, results
of operations, or cash flows.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003. We currently do not have any such instruments. The
preferred stock issuance as discussed in Note 18 - Subsequent Events, will be
treated in accordance with this pronouncement.
[17] Equity Transactions
On October 6, 2003, the Company granted 41,666 incentive stock options for a
term of ten years at an exercise price equal to the market price of $7.90 on the
date of grant.
On December 4, 2003, the Company granted 103,500 incentive stock options and
682,500 non-statutory stock options for a period of ten years at an exercise
price equal to the market price of $9.90 and 9,182 incentive stock options for a
term of five years at $10.89 representing 110% of the market price and 90,818
non-statutory stock options for a period of ten years at $10.89 representing
110% of the market price.
Paxis Acquisition- On July 22, 2003 the Company completed its acquisition of
ninety-seven (97%) percent of the shares of common stock of Paxis
Pharmaceuticals, Inc. a Delaware corporation ("Paxis") based in Boulder,
Colorado. Paxis was organized to manufacture and distribute cGMP API Paclitaxel,
a leading cancer therapy drug. The Company acquired 47% of the shares of Paxis
in exchange for its 50% interest in Natex Georgia LLC, a company organized in
the Republic of Georgia to harvest from Gerogian government lands organic
biomass from which Paclitaxel is made. The Company acquired 50% of the shares of
Paxis from Trade Investment Services, LLC, which funded Paxis's and Natex's
development pursuant to the terms of a certain Purchase Agreement dated as of
February 1, 2003 (the "Purchase Agreement"), in consideration for TIS receiving
from the Company $500,000 and twenty-five (25%) of the after-tax profits of
Paxis until TIS has received an additional $49,500,000.
In addition, TIS assigned to the Company a loan receivable from Paxis, and the
Company assumed Paxis' loan payable in the principal amount of $4,500,000 to the
Bank of America, pursuant to an Assignment and Assumption Agreement dated as of
July 1, 2003 by and among the Company, TIS and Paxis. The Company also assumed
an obligation of $172,260 advanced by TIS to Paxis.
The accounting for the Paxis acquisition followed controlled related party
carryover basis accounting. The excess of the debt of $4,500,000 assumed plus
the $500,000 cash paid plus the $172,260 obligation assumed totaling
($5,172,260) over the net assets acquired of $2,216,171 was recorded as a
reduction of additional paid-in capital of $2,956,068. At this time, the Company
is unable to estimate the amount or timing of any potential contingent payments.
16
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[UNAUDITED]
--------------------------------------------------------------------------------
[17] Equity Transactions [Continued]
On October 8, 2003, the Company acquired the remaining three (3%) percent of
Paxis Pharmaceuticals, Inc. ("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
(5) trading days immediately preceding the closing date and five (5) trading
days after.
E. Gerald Kay, the Chief Executive Officer of INB and beneficial owner of
approximately fifty percent (50%) of the stock of INB (or, approximately
sixty-two percent (62%) if family trusts of which he is a trustee are attributed
to him), is the owner of one-third (1/3) of the equity of TIS. Robert Kay, the
brother of E. Gerald Kay a DeSantis who is a director of INB, is the owner of
one-third (1/3) of the equity of TIS.
Acquisition of new product lines- 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 by
and 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) days after the closing date.
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
Trademark 50,000
Brand Names 500,000
Artwork 100,000
Formulas 200,000
Customer List 50,000
Goodwill 1,100,410
-----------
Total $ 2,597,880
===========
[18] Subsequent Events
On April 21, 2004 the Company completed a private placement transaction for $8.5
million in gross proceeds with a group of institutional investors led by
Alexandra Investment Management, LLC.
In the Offering, the Investors purchased an aggregate of 850 shares of the
Company's Series B Redeemable Preferred Stock, par value $.002 per share (the
"Series B Preferred Shares"), for $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"). 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 850,000 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 425,000 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 $5,950,000.
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 425
additional Series B Preferred Shares (convertible into 425,000 shares of Common
Stock) and Warrants to purchase an additional 212,500 shares of Common Stock.
The Series B Preferred Shares and Warrants issuable upon exercise of the
17
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[UNAUDITED]
--------------------------------------------------------------------------------
[18] Subsequent Events [Continued]
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 $7,225,000.
The Company has agreed to register 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.
On May 3, 2004 the Company completed a private placement transaction for
$5,000,000 with one investor. The placement provided for the purchase of 500,000
shares of common stock at a price of $10 per share and warrants to purchase
50,000 shares of common stock at a price of $14 per share.
18
Item 2.
INTEGRATED BIOPHARMA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion should be read in conjunction with the historical
information of the Company and notes thereto.
Critical Accounting Estimates
Allowances for Doubtful Accounts and Sales Returns
The Company makes judgments as to its ability to collect outstanding receivables
and provides allowances for the portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all significant
outstanding invoices. The Company continuously monitors payments from its
customers and maintains allowances for doubtful accounts for estimated losses in
the period they become known.
The Company's sales policy is to require customers to provide purchase orders
establishing selling prices and shipping terms. Shipping terms are F.O.B.
shipping point with title and risk of loss passing to the customer at point of
shipment.
The Company's return policy is to only accept returns for defective products. If
defective products are returned, it is the Company's agreement with its
customers that the Company cure the defect and reship the product. The policy is
that when the product is shipped the Company makes an estimate of any potential
returns or allowances.
If the historical data the Company uses to calculate the allowance provided for
doubtful accounts does not reflect the future ability to collect outstanding
receivables, additional provisions for doubtful accounts may be needed and the
future results of operations could be materially affected. In recording any
additional allowances, a respective charge against income is reflected in the
general and administrative expenses, and would reduce the operating results in
the period in which the increase is recorded.
Inventory Valuation
Inventories are stated at the lower of cost or market ("LCM"), which reflects
management's estimates of net realizable value. The Company is a contract
manufacturer and distributor, and only produces finished goods or purchases raw
materials on a purchase order basis. Consequently, the Company has minimal risk
for slow-moving or obsolete inventory. Raw materials are ordered from suppliers
when needed to complete customer's orders. Detail inventory levels and
composition are reviewed and evaluated for potential overstock or obsolescence
in light of current operations and sales. Any appropriate reserve is recorded on
a current basis.
Mail order inventory is expiration date sensitive. The Company reviews this
inventory and considers sales levels (by SKU), term to expiration date,
potential for retesting to extend expiration date and evaluates potential for
obsolescence or overstock.
Intangible Assets
Other purchased intangibles consisting of patents and unpatented technological
expertise, 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 life of the patents (15 years).
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.
19
INTEGRATED BIOPHARMA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Intangible Assets [Continued]
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
Company reviews the value of its long-lived assets for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable or that the useful lives of these assets
are no longer appropriate. Conditions that would necessitate an impairment
assessment include material adverse changes in operations, significant adverse
differences in actual results in comparison with initial valuation forecasts
prepared at the time of acquisition, a decision to abandon certain acquired
products, services or marketplaces, or other significant adverse changes that
would indicate the carrying amount of the recorded asset might not be
recoverable.
Income Taxes
Deferred income taxes are provided in accordance with SFAS No. 109, "Accounting
for Income Taxes" for differences between financial statement and income tax
bases of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse. The Company provides a
valuation allowance on net deferred tax assets when it is more likely than not
that these assets will not be realized.
Results of Operations
Nine months ended March 31, 2004 Compared to nine months ended March 31, 2003
The Company's net loss for the nine months ended March 31, 2004 was $(2,264,578)
as compared to net income of $731,086 for the nine months ended March 31, 2003.
This decrease in net income of approximately $3,000,000 is primarily the result
of an approximately $3,500,000 decrease in operating income resulting from a
corresponding increase in gross profit of approximately $644,000, an increase in
selling and administrative expenses of approximately $4,140,000 of which
approximately $3,200,000 are made up of Paxis Pharmaceuticals, Inc. start up
costs, and a decrease in Federal and state income taxes of approximately
$500,000.
Sales for the nine months ended March 31, 2004 and 2003 were $18,390,616 and
$17,464,163, respectively, an increase of $926,453 or 5%. Gross profit for the
nine months ended March 31, 2004 was $643,686 higher than the gross profit for
the nine months ended March 31, 2003. Both the increase in sales and gross
profit can be primarily attributed to the change in the product mix. For the
nine months ended March 31, 2004 the Company had sales to one customer, who
accounted for 63% of net sales in 2004 and 68% in 2003. The loss of this
customer would have an adverse affect on the Company's operations.
Manufacturing sales for the quarter ended March 31, 2004 and 2003 were
$15,737,499 and $14,628,272 respectively, an increase of $1,109,227 or 8%. The
increase in sales can be primarily attributed to the acquisition of new product
lines from Aloe Commodities International, Inc. ("Aloe").
Retail and mail order sales for the nine months ended March 31, 2004 totaled
$47,978 as compared to $80,290 for the nine months ended March 31, 2003, a
decrease of 40%. The Company has been experiencing a decline in mail order sales
due to increased competition.
The Company has an agreement with DSM Nutritional Products, Inc. (a successor to
Roche Vitamins, Inc.). Sales under this agreement were $1,700,337 for the nine
months ended March 31, 2004 as compared to $1,687,244 for the nine months ended
March 31, 2003, an increase of $13,093 or 1%.
The Company offers distribution and sale of fine chemicals through a subsidiary,
IHT Health Products, Inc. Sales for the nine months ended March 31, 2004 totaled
$1,145,802 as compared to $1,537,835 for the nine months ended March 31, 2003, a
decrease of $392,033 or 25%.
20
INTEGRATED BIOPHARMA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Results of Operations [Continued]
On February 21, 2003 the Company acquired NuCycle Therapy, Inc. ("NuCycle").
NuCycle is engaged in the development and sale of nutritional formulations based
on plant-derived minerals through patented hyperaccumulation technology. Sales
for the nine months ended March 31, 2004 were $15,433 and grant proceeds
received for the nine months ended March 31, 2004 totaled $146,091.
Cost of sales increased to $13,924,860 for the nine months ended March 31, 2004
as compared to $13,642,093 for the nine months ended March 31, 2003. Cost of
sales decreased as a percentage of sales to 76% for the nine months ended March
31, 2004 from 78% for the nine months ended March 31, 2003. The decrease in cost
of sales as a percentage of sales is due to the Company's change in product mix.
A tabular presentation of the changes in selling and administrative expenses is
as follows:
Nine Months Ended March 31,
2004 2003 Change
---------------- ---------------- ----------------
Advertising Expense $ 88,322 $ 5,837 $ 82,485
Bad Debt Expense 7,342 5,024 2,318
Royalty & Commission Expense 79,985 48,613 31,372
Officers Salaries 358,702 361,531 (2,829)
Auto, Travel & Entertainment 595,541 394,762 200,779
Office Salaries 705,604 584,853 120,751
Depreciation & Amortization 156,650 179,432 (22,782)
Consulting Fees 256,449 323,056 (66,607)
Regulatory Fees 19,250 -0- 19,250
Professional Fees 518,141 192,834 325,307
Research & Development Expense 37,583 -0- 37,583
Other selling and administrative expenses 878,522 695,059 183,463
Paxis Pharmaceuticals, Inc. 3,228,454 -0- 3,228,454
---------------- ---------------- ----------------
Total $ 6,930,545 $ 2,791,001 $ 4,139,544
================ ================ ================
The increase in advertising expense is due to an increase in print advertising.
Royalty & Commission expense increased as a result of the sales of the Naturally
Noni(TM), Naturally Aloe(TM) and Avera Sport(TM) lines. Auto, travel and
entertainment expenses have increased because of substantially increased travel
in connection with its acquisition of Paxis and its facility located in Boulder,
Colorado, and the formation of its Canadian-based joint venture. Office salaries
have increased due to the addition of two new sales and marketing employees. The
decrease in consulting fees can be attributed to the hiring of a consulting firm
for a new water filtration system during the period ending March 31, 2003.
Regulatory fees have increased due to the Company's listing on the American
Stock Exchange in April of 2003. Professional fees have increased largely due to
increased legal fees related to recent acquisitions and to increased auditing
and accounting fees related to SEC filings. Research and development expenses
have increased due to the acquisition of NuCycle Therapy, Inc. in February 2003.
The Paxis selling and administrative expenses represent expenditures made by
Paxis for the eight months ended March 31, 2004.
21
INTEGRATED BIOPHARMA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Results of Operations [Continued]
Other income [expense] was $287,241 for the nine months ended March 31, 2004 as
compared to $285,478 for the six months ended March 31, 2003, an increase of
$1,763.
Three months ended March 31, 2004 Compared to three months ended March 31, 2003
The Company's net loss for the three months ended March 31, 2004 was
$(1,141,532) as compared to net income of $217,754 for the three months ended
March 31, 2003. This decrease in net income of approximately $1,359,000 is
primarily the result of an approximately $1,460,000 decrease in operating income
resulting from a corresponding increase in gross profit of approximately
$198,000, an increase in selling and administrative expenses of approximately
$1,662,000 (of which approximately $1,560,000 are due to Paxis start up costs)
and a decrease in Federal and state income taxes of approximately $170,000.
Sales for the three months ended March 31, 2004 and 2003 were $6,560,784 and
$6,670,254, respectively, a decrease of approximately $110,000 or 2%, but
because of the change in the product mix, gross profit for the three months
ended March 31, 2004 was $197,970 higher than the gross profit for the three
months ended March 31, 2003. For the three months ended March 31, 2004 the
Company had sales to one customer, who accounted for 53% of net sales in 2004
and 72% in 2003. The loss of this customer would have an adverse affect on the
Company's operations.
Manufacturing sales for the quarter ended March 31, 2004 and 2003 were
$5,581,884 and $5,718,933, respectively, a decrease of $137,049 or 2%.
Retail and mail order sales for the three months ended March 31, 2004 totaled
$14,417 as compared to $26,465 for the three months ended March 31, 2003, a
decrease of 46%. The Company has been experiencing a decline in mail order sales
due to increased competition.
The Company has an agreement with DSM Nutritional Products, Inc. (a successor to
Roche Vitamins, Inc.). Sales under this agreement were $533,896 for the three
months ended March 31, 2004 as compared to $679,096 for the three months ended
March 31, 2003, a decrease of $145,200 or 21%.
The Company offers distribution and sale of fine chemicals through a subsidiary,
IHT Health Products, Inc. Sales for the three months ended March 31, 2004
totaled $451,546 as compared to $570,567 for the three months ended March 31,
2003, a decrease of $119,021 or 21%.
On February 21, 2003 the Company acquired NuCycle Therapy, Inc. ("NuCycle").
NuCycle is engaged in the development and sale of nutritional formulations based
on plant-derived minerals through patented hyperaccumulation technology. Sales
for the three months ended March 31, 2004 were $6,422 and grant proceeds
received for the three months ended March 31, 2004 totaled $37,470.
Cost of sales decreased to $4,982,793 for the three months ended March 31, 2004
as compared to $5,290,233 for the three months ended March 31, 2003. Cost of
sales decreased as a percentage of sales to 76% for the three months ended March
31, 2004 from 79% for the three months ended March 31, 2003. The decrease in
cost of sales is due to the Company's change in product mix.
22
INTEGRATED BIOPHARMA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Results of Operations (Continued)
A tabular presentation of the changes in selling and administrative expenses is
as follows:
Three Months Ended March 31,
2004 2003 Change
---------------- ------------------ -----------------
Advertising Expense $ 38,112 $ 1,200 $ 36,912
Bad Debt Expense 2,500 (1,869) 4,369
Royalty & Commission Expense 40,364 -0- 40,364
Officers Salaries 111,138 117,077 (5,939)
Auto, Travel & Entertainment 175,158 123,301 51,857
Office Salaries 257,260 188,319 68,941
Depreciation & Amortization 53,639 -0- 53,639
Consulting Fees 84,062 197,128 (113,066)
Regulatory Fees 5,000 -0- 5,000
Professional Fees 125,686 87,029 38,657
Other selling and administrative expenses 299,547 375,844 (76,297)
Paxis Pharmaceuticals, Inc. 1,557,100 -0- 1,557,100
---------------- ------------------ -----------------
Total $ 2,749,566 $ 1,088,029 $ 1,661,537
================ ================== =================
The increase in advertising expense is due to an increase in print advertising.
The increase in royalty and commission expense can be attributed to the sales of
the Naturally Noni(TM), Naturally Aloe(TM) and Avera Sport(TM) lines. Auto,
travel and entertainment expenses have increased because of substantially
increased travel in connection with its acquisition of Paxis and its facility
located in Boulder, Colorado, and the formation of its Canadian-based joint
venture. Office salaries have increased due to the addition of two new sales and
marketing employees. The decrease in consulting fees can be attributed to the
hiring of a consulting firm for a new water filtration system during the period
ending March 31, 2003. Regulatory fees have increased due to the Company's
listing on the American Stock Exchange in April of 2003. Professional fees have
increased largely due to increased legal fees related to recent acquisitions and
to increased auditing and accounting fees related to SEC filings. The Paxis
selling and administrative expenses represent the expenditures made by Paxis for
the three months ended March 31, 2004. There were no corresponding expenses in
the quarter ended March 31, 2003 because the Paxis acquisition was completed on
July 22, 2003.
Other income [expense] was $42,948 for the three months ended March 31, 2004 as
compared to $107,633 for the three months ended March 31, 2003, a decrease of
$64,685. The decrease can be attributed to an increase in interest expense of
$35,592 due to the assumption of the Bank of America debt of $4,500,000 in the
Paxis transaction as well as a $24,346 gain on the sale of fixed assets made
during the period ending March 31, 2003.
Inventories
The inventory at March 31, 2004 increased by $2,155,942 from the inventory at
June 30, 2003. The increase in inventory can be attributed to an increase in raw
material inventory of approximately $2,600,000. The increase in raw material
inventory is a direct result of Paxis Pharmaceuticals, Inc. completing its
manufacturing facility which has resulted in a build up of raw materials to
support production as well as the introduction of new product lines, and a
decrease in work-in-process inventory of approximately $332,000.
23
INTEGRATED BIOPARMA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Prepaid Expenses
Prepaid expenses and other current assets increased by $277,010 from June 30,
2003. The increase is primarily attributable to an increase in prepaid
commissions of $132,085, an increase in prepaid regulatory fees of $23,750 due
to the Company's listing on the American Stock exchange, and an increase in
prepaid expenses of approximately $61,000.
Liquidity and Capital Resources
At March 31, 2004 the Company's working capital was $4,053,210, a decrease of
$14,843,706 over working capital at June 30, 2003. Cash and cash equivalents
were $1,333,878 at March 31, 2004, a decrease of $9,072,512 from June 30, 2003.
The Company utilized $4,543,328 and generated $75,238 from operations for the
nine months ended March 31, 2004 and 2003, respectively.
The primary reasons for the decrease in cash used in operations for the nine
months ended March 31, 2004 are net loss of approximately $2,200,000, an
increase in accounts receivable of approximately $876,000, an increase in
inventories of approximately $2,163,000, an advance to Paxis Pharmaceuticals,
Inc., a related party of $908,000 and an increase in accounts payable of
approximately $1,200,000.
The Company utilized $4,579,811 and $649,565 in investing activities for the
nine months ended March 31, 2004 and 2003, respectively. The Company generated
$50,627 and $87,215 from debt financing activities for the nine months ended
March 31, 2004 and 2003, respectively.
The Company has a $1,000,000 revolving line of credit agreement which bears
interest at the prime interest rate and expires on June 10, 2005. At March 31,
2004 there was no balance due under the revolving line of credit. At March 31,
2004 the Company was in compliance with its tangible net worth covenant but not
its debt service coverage ratio covenant. On April 20, 2004 the Company
terminated its revolving credit agreement.
On April 21, 2004 the Company completed a private placement transaction for
$8,500,000 with a group of investors. The placement provided for the purchase of
850 shares of Series B Redeemable Convertible Preferred Stock at a price of
$10,000 per share. The Series B Redeemable Convertible Preferred Stock is
convertible at $10 per share into shares of the Company's common stock at the
option of each investor.
On May 3, 2004 the Company completed a private placement transaction for
$5,000,000 with one investor. The placement provided for the purchase of 500,000
shares of common stock at a price of $10 per share and warrants to purchase
50,000 shares of common stock at a price of $14 per share.
The Company's total annual commitment at March 31, 2004 for the next five years
of $4,228,019 consists of obligations under operating leases for facilities and
lease agreements for the rental of warehouse equipment, office equipment and
automobiles.
Capital Expenditures
The Company's capital expenditures for the nine months ended March 31, 2004 and
2003 were $3,136,556 and $325,060 respectively. The capital expenditures during
these periods are primarily attributable to the purchase of machinery and
equipment.
The Company has budgeted approximately $300,000 for capital expenditures for the
remaining three months of fiscal 2004. Such amount includes capital expenditures
of approximately $200,000 for the Paxis facility. Such amount will be funded
from working capital.
24
INTEGRATED BIOPARMA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
25
Item 3.
INTEGRATED BIOPHARMA, INC.
--------------------------------------------------------------------------------
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. An evaluation
was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), of the effectiveness of the design
and operation of the Company's disclosure controls and procedures
within 45 days before the filing date of this Form 10-QSB. Based on
their evaluation, the Company's principal executive officer and
principal financial officer have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act") are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms.
(b) Changes in Internal Control Over Financial Reporting. There have been
no significant changes in the Company's internal controls over
financial reporting or in other factors that could significantly affect
internal controls subsequent to their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there
were no corrective actions taken.
26
Part II: Other Information
INTEGRATED BIOPHARMA, INC.
--------------------------------------------------------------------------------
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Periodic Report by Chief Executive Officer
Pursuant to Rule 13a-14 and 15d-14 of the Securities and Exchange
Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Periodic Report by Chief Financial Officer
Pursuant to Rule 13a-14 and 15d-14 of the Securities and Exchange
Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Periodic Report by Chief Executive Officer
Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Periodic Report by Chief Financial Officer
Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Current Report on Form 8-K filed on February 17, 2004 pursuant to
Item 7 (Financial Statements and Exhibits) and Item 9 (Regulation
FD Disclosure).
27
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INTEGRATED BIOPHARMA, INC.
Date: May 14, 2004 By: /s/ E. Gerald Kay
---------------------
E. Gerald Kay
Chief Executive Officer
Date: May 14, 2004 By: /s/ Eric Friedman
---------------------
Eric Friedman,
Chief Financial Officer
28