INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS, Continued
(in
thousands)
|
|
|
Year Ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid during the periods for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,303
|
|
$
|
657
|
|
$
|
99
|
|
|
Income
Taxes
|
|
$
|
—
|
|
$
|
15
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Investing and Financing Activities
:
|
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit in connection with exercise of stock options
|
|
$
|
—
|
|
$
|
79
|
|
$
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B-1 dividends paid with common stock
|
|
$
|
696
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
C-1 dividends paid with common stock
|
|
$
|
454
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in exchange for subscription
receivable
|
|
$
|
—
|
|
$
|
133
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of equipment deposits to building and equipment
|
|
$
|
410
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of machinery and equipment in exchange for
capital
lease payable
|
|
$
|
156
|
|
$
|
128
|
|
$
|
—
|
|
|
Declaration
of Series A-1 preferred dividends:
|
|
$
|
—
|
|
$
|
124
|
|
$
|
303
|
|
|
Accrual
of Series B-1 preferred dividends
|
|
$
|
206
|
|
$
|
78
|
|
$
|
—
|
|
|
Accrual
of Series C-1 preferred dividends
|
|
$
|
206
|
|
$
|
—
|
|
$
|
—
|
|
|
Repayment
of debt with proceeds from new credit f
acility
|
|
$
|
—
|
|
$
|
20,445
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate swap
|
|
$
|
(88
|
)
|
$
|
98
|
|
$
|
—
|
|
|
Conversion
of preferred stock to common stock:
|
|
|
|
|
|
|
|
|
|
|
|
Series
C
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2
|
|
|
Series
K
|
|
$
|
—
|
|
$
|
15
|
|
$
|
3
|
|
The
accompanying notes are an integral part of these consolidated
financial
statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies
Nature
of Business
Interpharm
Holdings, Inc. and Subsidiaries (the “Company”), through one of its wholly-owned
subsidiaries, Interpharm, Inc., is in the business of developing,
manufacturing
and marketing generic prescription strength and over-the-counter
pharmaceutical
products for wholesale distribution throughout the United States.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Interpharm
Holdings,
Inc. and its wholly-owned subsidiaries and have been prepared
in accordance with
accounting principles generally accepted in the United States.
All intercompany
transactions and balances are eliminated in consolidation.
Revenue
Recognition
The
Company recognizes product sales revenue when title and risk
of loss have
transferred to the customer, when estimated provisions for chargebacks
and other
sales allowances including discounts, rebates, etc., are reasonably
determinable, and when collectibility is reasonably assured.
Accruals for these
provisions are presented in the consolidated financial statements
as reductions
to revenues. Accounts receivable are presented net of allowances
relating to the
above provisions of $4,865 and $2,315 at June 30, 2007 and 2006,
respectively.
The
Company purchased raw materials from one supplier for the year
ended June 30,
2007 and two suppliers for the years ended June 30, 2006 and
2005, which are
manufactured into finished goods and sold back to this supplier
as well as to
other customers. The Company can, and does, purchase raw materials
from other
suppliers. Pursuant to Emerging Issues Task Force, (“EITF”) No. 99-19,
“Reporting Revenue Gross as a Principal Versus Net as an Agent,” the Company
recorded sales to, and purchases from, this supplier on a gross
basis. Sales and
purchases were recorded on a gross basis since the Company (i)
has a risk of
loss associated with the raw materials purchased, (ii) converts
the raw material
into a finished product based upon Company developed specifications,
(iii) has
other sources of supply of the raw material, and (iv) has credit
risk related to
the sale of such product to the suppliers. For the year ended
June 30, 2007, the
Company purchased raw materials from this supplier totaling approximately
$10,714, and sold finished goods to this supplier totaling approximately
$1,054.
For the years ended June 30, 2006 and 2005, the Company purchased
raw materials
from two suppliers, which were manufactured into finished goods
and sold back to
these suppliers totaling approximately $10,608 and $9,251, respectively,
and
sold finished goods to such suppliers totaling approximately
$6,110, and
$17,414, respectively. These purchase and sales transactions
are recorded at
fair value in accordance with EITF Issue No. 04-13, “Accounting for Purchases
and Sales of Inventory with the Same Counterparty”.
In
addition, the Company is party to supply agreements with certain
pharmaceutical
companies under which, in addition to the selling price of the
product, the
Company receives payments based on sales or profits associated
with these
products realized by its customer. The Company recognizes revenue
related
to the initial selling price upon shipment of the products as
the selling price
is fixed and d
eterminable
and no right of return exists. The additional revenue component
of these
agreements are recognized by the Company at the time its customers
record their
sales and is based on pre-defined formulas contained in the agreements.
Receivables related to this revenue of $594 and $620 at June
30, 2007 and 2006,
respectively, are included in “Accounts receivable, net” in the accompanying
Consolidated Balance Sheets.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies
,
continued
Sales
Returns and Allowances
At
the
time of sale, the Company simultaneously records estimates for
various costs,
which reduce product sales. These costs include estimates of
chargebacks and
other sales allowances. In addition, the Company records allowances
for rebates,
including Medicaid rebates and shelf-stock adjustments when the
conditions are
appropriate. Estimates for sales allowances such as chargebacks
are based on a
variety of factors including actual return experience of that
product or similar
products, rebate arrangements
for
each
product, and estimated sales by our wholesale customers to other
third parties
who have contracts with the Company. Actual experience associated
with any of
these items may be different than the Company’s estimates. The Company regularly
reviews the factors that influence its estimates and, if necessary,
makes
adjustments when it believes that actual product returns, credits
and other
allowances may differ from established reserves.
Sales
Incentives
In
accordance with the terms and conditions of an agreement entered
into during the
fiscal year ended June 30, 2006, the Company has offered a sales
incentive to
one of its customers in the form of an incentive volume price
adjustment. The
Company accounts for sales incentives in accordance with EITF
01-9, "Accounting
for Consideration Given by a Vendor to a Customer (Including
a Reseller of
Vendor's Products)" (“EITF 01-9”). The terms of this volume based sales
incentive required the customer to purchase a minimum quantity
of the Company's
products during a specified period of time. The incentive offered
was based upon
a fixed dollar amount per unit sold to the customer. The Company
made an
estimate of the ultimate amount of the incentive the customer
would earn based
upon past history with the customer and other facts and circumstances.
The
Company had the ability to estimate this volume incentive price
adjustment, as
there did not exist a relatively long period of time for the
particular
adjustment to be earned. Any change in the estimated amount of
the volume
incentive was recognized immediately using a cumulative catch-up
adjustment. In
accordance with EITF 01-9, the Company recorded the provision
for this sales
incentive when the related revenue is recognized. The Company's
sales incentive
liability may prove to be inaccurate, in which case the Company
may have
understated or overstated the provision required for these arrangements.
Therefore, although the Company makes its best estimate of its
sales incentive
liability, many factors, including significant unanticipated
changes in the
purchasing volume of its customer, could have significant impact
on the
Company's liability for sales incentives and the Company's reported
operating
results. The specific terms of this agreement which related to
sales incentives
expired in October 2006. For the year ended June 30, 2007, the
Company
recognized previously deferred sales incentive revenue of $3,399
related to this
agreement.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies
,
continued
Earnings
Per Share
Basic
earnings (loss) per share (“EPS”) of common stock is computed by dividing net
income (loss) attributable to common stockholders by the weighted
average number
of shares of common stock outstanding during the period. Diluted
EPS reflects
the amount of net income (loss) for the period available to each
share of common
stock outstanding during the reporting period, giving effect
to all potentially
dilutive shares of common stock from the potential exercise of
stock options and
warrants and conversions of convertible preferred stocks. In
accordance with
Emerging Issues Task Force (“EITF”) Issue No. 03-6, “Participating Securities
and the Two-Class Method Under FASB Statement No. 128, Earnings
Per Share,”
during the fiscal year ended June 30, 2006, in periods when there
was net income
and Series K preferred stock was outstanding, the Company used
the Two-Class
Method to calculate the effect of the participating Series K
on the calculation
of basic EPS and the if-converted method was used to calculate
the effect of the
participating Series K on diluted EPS. In periods when there
was a net loss, the
effect of the participating Series K was excluded from both basic
and diluted
EPS. Additionally, in May 2006, the Series K preferred stock
was converted into
the Company’s common stock; therefore the use of the Two-Class Method is
not
required for the year ended June 30, 2007.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers
all short-term
investments with original maturities of three months or less
to be cash
equivalents. From time to time the Company maintains cash balances
in excess of
the FDIC insurance limit.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts reflects management’s best estimate of probable
losses inherent in the account receivable balance. Management
determines the
allowance based on known troubled accounts, historical experience
and other
currently available evidence.
Inventories
Inventories
are valued at the lower of cost (first-in, first-out basis) or
market value.
Losses from the write-down of damaged, nonusable, or otherwise
nonsalable
inventories are recorded in the period in which they occur.
Land,
Building and Equipment
Land,
building and equipment is recorded at cost. Maintenance and repairs
are charged
to expense as incurred, costs of major additions and betterments
are
capitalized. When equipment is sold or otherwise disposed of,
the cost and
related accumulated depreciation is eliminated from the accounts
and any
resulting gain or loss is reflected in operations.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies
,
continued
Depreciation
and Amortization
Depreciation
is recorded on a straight-line basis over the estimated useful
lives of the
related assets. Leasehold improvements are amortized on a straight-line
basis
over the shorter of their useful lives or
the
terms
of the respective leases.
Capitalization
of Interest and Other Costs
The
Company capitalizes interest on borrowings and certain other
direct costs during
the active construction period of major capital projects. Capitalized
costs are
added to the cost of the underlying assets and will be depreciated
over the
useful lives of the assets. In connection with its capital improvements
to the
Brookhaven, NY facility, the Company capitalized approximately
$907, including
interest approximating $517, during the fiscal year ended June
30, 2006. The
Company did not incur any interest on borrowings related major
capital projects
for the year ended June 30, 2007.
Comprehensive
(Loss) Income
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 130,
“Reporting Comprehensive Income,” the Company reports comprehensive (loss)
income in addition to net (loss) income. Comprehensive (loss)
income is a more
inclusive financial reporting methodology that includes disclosure
of certain
financial information that historically has not been recognized
in the
calculation of net (loss) income.
Use
of
Estimates in the Financial Statements
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 of revenue
and expenses during
the reporting period. These estimates are often based on judgements,
probabilities, and assumptions that management believe are reasonable,
but that
are not inherently uncertain and unpredictable. As a result,
actual results
could differ from those estimates. Management periodically evaluates
estimates
used in the preparation of the consolidated financial statements
for continued
reasonableness. Appropriate adjustments, if any, to the estimates
used are made
prospectively based on such periodic evaluations.
Derivative
Instruments
The
Company uses derivative instruments on a limited basis, principally
to manage
its exposure to changes in interest rates. Derivative instruments
are recorded
at their fair value on the balance sheet, while changes in the
fair value of the
instrument are included in other comprehensive income (loss).
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
thousands, except per share data)
NOTE
1
- Summary of Significant Accounting Policies, continued
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever
events or changes
in circumstances indicate that the carrying amount of the assets
may not be
fully recoverable. To determine if impairment exists, the Company
compares the
estimated future undiscounted cash flows from the related long-lived
assets to
the net carrying amount of such assets. Once it has been determined
that
impairment exists, the carrying value of the asset is adjusted
to fair value.
Factors considered in the determination of fair value include
current operating
results, trends and the present value of estimated expected future
cash
flows.
Income
Taxes
The
Company accounts for income taxes using the liability method
which requires the
determination of deferred tax assets and liabilities based on
the differences
between the financial and tax bases of assets and liabilities
using enacted tax
rates in effect for the year in which differences are expected
to reverse. The
Company and its subsidiaries file a consolidated income tax return.
The
Company’s management assesses realization of its deferred tax assets
based on
all available evidence in order to conclude whether it is more
likely than not
that some portion or all of the deferred tax asset will not be
realized.
Available evidence considered by the Company includes, but is
not limited to,
the Company’s historic operation results, projected future operating earnings
results, reversing temporary differences and changing business
circumstances.
When there is a change in circumstances that cause a change in
judgement about
the realizability of the deferred tax assets, the Company may
adjust all or a
portion of the applicable valuation allowance in the period when
such change
occurs.
Management
evaluates the realizability of the deferred tax assets and the
need for
additional valuation allowances quarterly.
Shipping
Costs
The
Company’s shipping and handling costs are included in selling, general
and
administrative expenses. For the years ended June 30, 2007, 2006
and 2005,
shipping and handling costs approximated $827, $668, and $434,
respectively.
Research
and Development
Pursuant
to SFAS No. 2 “Accounting for Research and Development Costs,” research and
development costs are expensed as incurred or at the date payment
of
non-refundable amounts become due, whichever occurs first. Research
and
development costs, which consist of salaries and
related
costs of research and development personnel, fees paid to consultants
and
outside service providers, raw materials used specifically in the
development of its new products and bioequivalence studies. Pre-approved
milestone payments due under contract research and development
arrangements are
expensed when the milestone is achieved.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
thousands, except per share data)
NOTE
1
- Summary of Significant Accounting Policies, continued
Concentrations
and Fair Value of Financial Instruments
Financial
instruments that potentially subject the Company to concentrations
of credit
risk consist principally of cash investments and accounts receivable.
Concentrations of credit risk with respect to accounts receivable
are disclosed
in Note 15. The Company performs ongoing credit evaluations of
its customers’
financial conditions and, generally, requires no collateral from
its customers.
Unless otherwise disclosed, the fair values of financial instruments
approximate
their recorded value.
Reclassification
Certain
reclassifications have been made to the 2006 financial statements
to conform to
the 2007 presentation. These reclassifications have no effect
on previously
reported operations.
The
Company reclassified certain components of stockholders’ equity section to
reflect the elimination of deferred compensation arising from
unvested
share-based compensation pursuant to the requirements of Staff
Accounting
Bulletin No. 107, regarding Statement of Financial Accounting
Standards No.
123(R), “Share-Based Payment.” This deferred compensation was previously
recorded as an increase to additional paid-in capital with a
corresponding
reduction to stockholders’ equity for such deferred compensation. This
reclassification has no effect on net income or total stockholders’ equity as
previously reported. The Company will record an increase to additional
paid-in
capital as the share-based payments vest.
Stock
Based Compensation
Effective
July 1, 2005, the Company adopted the fair value recognition provisions
of
Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised
2004), “Share-Based Payment,” (“SFAS No. 123(R)”), using the
modified-prospective-transition method. As a result, the Company’s net income
before taxes for the years ended June 30, 2007 and 2006 were
$1,070 and $1,195
lower than if it had continued to account for share-based compensation
under
Accounting Principles Board (“APB”) opinion No. 25, “Accounting for Stock Issued
to Employees” (“APB No. 25”).
Recently
Issued Accounting Pronouncements
In
November 2006, The Emerging Issues Task Force (“EITF”) reached a final consensus
in EITF Issue 06-6 “Debtor’s Accounting for a Modification (or Exchange) of
Convertible Debt Instruments” (“EITF 06-6”). EITF 06-6 addresses the
modification of a convertible debt instrument that changes the
fair value of an
embedded conversion option and the subsequent recognition of
interest expense
for the associated debt instrument when the modification does
not result in a
debt extinguishment pursuant to EITF 96-19, “Debtor’s Accounting for a
Modification or Exchange of Debt Instruments,”. The consensus should be
applied to modifications or exchanges of debt instruments occurring
in interim
or annual periods beginning after November 29, 2006. The adoption of EITF
06-6
did
not have a material effect on the Company’s consolidated financial position,
results of operations or cash flows.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
thousands, except per share data)
NOTE
1
- Summary of Significant Accounting Policies, continued
In
November 2006, The Financial Accounting Standards Board (“FASB”) ratified EITF
Issue No. 06-7, “Issuer’s Accounting for a Previously Bifurcated Conversion
Option in a Convertible Debt Instrument When the Conversion Option
No Longer
Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting
for
Derivative Instruments and Hedging Activities” (“EITF 06-7”). At the time of
issuance, an embedded conversion option in a convertible debt
instrument may be
required to be bifurcated from the debt instrument and accounted
for separately
by the issuer as a derivative under of Financial Accounting Standards
(“FAS”)
133, based on the application of EITF 00-19. Subsequent to the
issuance of the
convertible debt, facts may change and cause the embedded
conversion
option to no longer meet the conditions for separate accounting
as a derivative
instrument,
such as when the bifurcated instrument meets the conditions of
Issue 00-19 to be
classified in stockholders’ equity. Under EITF 06-7, when an embedded conversion
option previously accounted for as a derivative under FAS 133
no longer meets
the bifurcation criteria under that standard, an issuer shall
disclose a
description of the principal changes causing the embedded conversion
option to
no longer require bifurcation under FAS 133 and the amount of
the liability for
the conversion option reclassified to stockholders’ equity. EITF 06-7 should be
applied to all previously bifurcated conversion options in convertible
debt
instruments that no longer meet the bifurcation criteria in FAS
133 in interim
or annual periods beginning after December 15, 2006,
regardless
of whether the debt instrument was entered into prior or subsequent
to the
effective date of EITF 06-7. Earlier application of EITF 06-7
is permitted in
periods for which financial statements have not yet been issued.
The adoption of
EITF 06-7 did not have a material effect on the Company’s consolidated financial
position, results of operations or cash flows.
In
February 2006, the FASB issued SFAS No. 155 ''Accounting for
Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133
and 140'' (''SFAS
155''). SFAS 155 clarifies certain issues relating to embedded
derivatives and
beneficial interests in securitized financial assets. The provisions
of SFAS 155
are effective for all financial instruments acquired or issued
after fiscal
years beginning after September 15, 2006. The Company is currently
assessing the
impact that the adoption of SFAS 155 will have on its financial position
and results of operations.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes”, (“FIN 48”). This interpretation clarified the accounting for
uncertainty in income taxes recognized in accordance with SFAS
No. 109,
“Accounting for Income Taxes” (“SFAS No.109”). Specifically, FIN 48 clarifies
the application of SFAS No. 109 by defining a criterion that
an individual tax
position must meet for any part of the benefit of that position
to be recognized
in an enterprise’s financial statements. Additionally, FIN 48 provides guidance
on measurement, derecognition, classification, interest and penalties,
accounting in interim periods of income taxes, as well as the
required
disclosure and transition. This interpretation is effective for
fiscal years
beginning after December 15, 2006. The Company is currently assessing
the impact
that the adoption of FIN 48 will
have
on
its financial position and results of operations.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
thousands, except per share data)
NOTE
1
- Summary of Significant Accounting Policies, continued
In
March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets” (“
SFAS
156
”),
which
amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities”, with respect to the accounting for separately
recognized servicing assets and servicing liabilities.
SFAS
156
permits the choice of the amortization method or the fair value
measurement
method, with changes in fair
value
recorded in income, for the subsequent measurement for each class
of separately
recognized servicing assets and servicing liabilities. The statement
is
effective for years beginning after September 15, 2006, with earlier
adoption permitted. The Company is currently evaluating the
effect that adopting this statement will have on
the Company's financial position and results of
operations.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS
157"). SFAS 157 defines fair value, establishes a framework for
measuring fair
value in generally accepted accounting principles, and expands
disclosures about
fair value measurements. It codifies the definitions of fair
value included in
other authoritative literature; clarifies and, in some cases,
expands on the
guidance for implementing fair value measurements; and increases
the level of
disclosure required for fair value measurements. Although SFAS
157 applies to
(and amends) the provisions of existing authoritative literature,
it does not,
of itself, require any new fair value measurements, nor does
it establish
valuation standards. SFAS 157 is effective for financial statements
issued for
fiscal years beginning after November 15, 2007, and interim periods
within those
fiscal years. This statement will be effective for the Company's
fiscal year
beginning July 2008. The Company will evaluate the impact of
adopting SFAS 157
but does not expect that it will have a material impact on the
Company's
consolidated financial position, results of operations or cash
flows.
In
September 2006, the staff of the Securities and Exchange Commission
issued Staff
Accounting Bulletin No. 108 ("SAB 108") which provides interpretive
guidance on
how the effects of the carryover or reversal of prior year misstatements
should
be considered in quantifying a current year misstatement. SAB
108 became
effective in fiscal 2007. Adoption of SAB 108 did not have a
material impact on
the Company's consolidated financial position, results of operations
or cash
flows.
In
December 2006, the FASB issued FASB Staff Position (“FSP”) EITF 00-19-2
“Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”) which
specifies that the contingent obligation to make future payments
or otherwise
transfer consideration under a registration payment arrangement
should be
separately recognized and measured in accordance with SFAS No. 5,
“Accounting for Contingencies.” Adoption of FSP EITF 00-19-02
is required for fiscal years beginning after December 15, 2006. The Company
does not expect the adoption of FSP EITF 00-19-2 to have a material
impact on
its consolidated financial position, results of operations or
cash
flows.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
thousands, except per share data)
NOTE
1
- Summary of Significant Accounting Policies, continued
In
February 2007, the FASB issued Statement (“SFAS”) No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities - including
an amendment
of FASB Statement No. 115
”
(“SFAS
159”). This Statement permits entities to choose to measure many
financial
instruments and certain other items at fair value. The objective
is to improve
financial reporting by providing entities with the opportunity
to mitigate
volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge
accounting
provisions. The fair value option established by this Statement
permits all
entities to choose to measure eligible items at fair value at
specified election
dates. A business entity shall report unrealized gains and losses
on items for
which the fair value option has been elected in earnings (or
another performance
indicator if the business entity does not report earnings) at
each subsequent
reporting date. Most of the provisions of this Statement apply
only to entities
that elect the fair value option. However, the amendment to FASB
Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities,
applies
to all entities with available-for-sale and trading securities.
Some
requirements apply differently to entities that do not report
net income. This
Statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. The Company does not expect the
adoption of SFAS
No. 159 to have a material impact on its consolidated financial
statements.
In
June
2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue
No. 07-3, Accounting for Advance Payments for Goods or Services
to be Received
for Use in Future Research and Development Activities. EITF 07-3
provides
clarification surrounding the accounting for nonrefundable research
and
development advance payments, whereby such payments should be
recorded as an
asset when the advance payment is made and recognized as an expense
when the
research and development activities are performed. EITF 07-3
is effective for
annual periods beginning after December 15, 2007. The Company
records these
advance payments in accordance with EITF 07-3 and therefore does
not have any
impact on its consolidated financial statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
thousands, except per share data)
NOTE
2
- Management’s Liquidity Plan
At
June
30, 2007 the Company had an accumulated deficit of $18,831 and
operating
activities used $14,105 of cash for the year then ended. In an
effort to meet
the Company’s cash requirements and generate positive cash flows from operations
management has taken various actions and steps to revise its
operating and
financial requirements, including:
|
|
·
|
Seeking
additional financing from our existing shareholders
and other strategic
investors, including $8,000 raised in November 2007
(see Note 18 -
Subsequent Events)
|
|
|
·
|
Reducing
headcount to an efficient level while still carrying
out the Company’s
future growth plan
|
|
|
·
|
Increasing
revenue through the launch of new products, identifying
new customers and
expanding relationships with existing
customers
|
|
|
·
|
Scaling
back the Company’s research and development activities to the extent
necessary to be able to fund operations and continue
to execute the
Company’s overall business
plan
|
Management
believes that the plans and initiatives described above will
result in
sufficient liquidity to meet cash requirements at least through
June 30, 2008.
However, there can be no assurance that the Company will achieve
its cash flow
and profitability goals, or that it will be able to raise additional
capital
sufficient to meet operating expenses or implement its plans.
In such event, the
Company may have to revise its plans and significantly reduce
its operating
expenses, which could have an adverse effect on revenue and operations
in the
short term.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
3 -
Accounts
Receivable
Accounts
receivable are comprised of amounts owed to the Company through
the sales of its
products throughout the United States. These accounts receivable
are presented
net of allowances for doubtful accounts, sales returns, discounts,
rebates and
customer chargebacks. Allowances for doubtful accounts were approximately
$30
and $101 at June 30, 2007 and 2006, respectively. The allowance
for doubtful
accounts is based on a review of specifically identified accounts,
in addition
to an overall aging analysis. Judgments are made with respect
to the
collectibility of accounts receivable based on historical experience
and current
economic trends. Actual losses could differ from those estimates.
Allowances
relating to discounts, rebates, and customer chargebacks were
$4,865 and $2,315
at June 30, 2007 and June 30, 2006, respectively. The
Company
sells some of its products indirectly to various government agencies
referred to
below as “indirect customers.” The Company enters into agreements with its
indirect customers to establish pricing for certain products.
The indirect
customers then independently select a wholesaler from which to
actually purchase
the products at these agreed-upon prices. The Company will provide
credit to the
selected wholesaler for the difference between the agreed-upon
price with the
indirect customer and the wholesaler’s invoice price if the price sold to the
indirect customer is lower than the direct price to the wholesaler.
This credit
is called a chargeback. The provision for chargebacks is based
on expected
sell-through levels by the Company’s wholesale customers to the indirect
customers, and estimated wholesaler inventory levels. As sales
to the large
wholesale customers increase, the reserve for chargebacks will
also generally
increase. However, the size of the increase depends on the product
mix.
The
Company continually monitors the reserve for chargebacks and
makes adjustments
to the reserve as deemed necessary. Actual chargebacks may differ
from estimated
reserves.
The
changes in the allowance for doubtful accounts are summarized
as follows:
|
|
|
Year
Ended
June
30,
|
|
|
|
|
2007
|
|
2006
|
|
|
Beginning
balance
|
|
$
|
101
|
|
$
|
66
|
|
|
Provision
for doubtful accounts
|
|
|
55
|
|
|
46
|
|
|
Charge-offs
|
|
|
(126
|
)
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
30
|
|
$
|
101
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
3 -
Accounts
Receivable
,
continued
The
changes in the allowance for customer chargebacks, discounts
and other credits
that reduced gross revenue for each of the fiscal years ended
June 30, 2007 and
2006:
|
|
|
Year
Ended
|
|
|
|
|
June
30,
|
|
|
|
|
2007
|
|
2006
|
|
|
Reserve
balance - beginning
|
|
$
|
2,315
|
|
$
|
425
|
|
|
|
|
|
|
|
|
|
|
|
Actual
chargebacks, discounts and other credits taken in the
current period
(a)
|
|
|
(11,934
|
)
|
|
(5,277
|
)
|
|
|
|
|
|
|
|
|
|
|
Current
provision related to current period sales
|
|
|
14,484
|
|
|
7,167
|
|
|
Reserve
balance
–
ending
|
|
$
|
4,865
|
|
$
|
2,315
|
|
(a)
Actual chargebacks, discounts and other credits are determined
based upon the
customer’s application of amounts taken against the accounts receivable
balance.
NOTE
4 -
Inventories
Inventories
consist of the following:
|
|
|
June
30,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Finished
goods
|
|
$
|
3,085
|
|
$
|
1,781
|
|
|
Work
in process
|
|
|
7,260
|
|
|
3,685
|
|
|
Raw
materials
|
|
|
6,286
|
|
|
2,928
|
|
|
Packaging
materials
|
|
|
664
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,295
|
|
$
|
8,706
|
|
The
Company reduces the carrying value of inventories to a lower
of cost or market
basis for inventory whose net book value is in excess of market.
Aggregate
reductions in the carrying value with respect to inventories
still on hand at
June 30, 2007 that were determined to have a carrying value in
excess of market
was $1,157. As a result, the Company reduced the carrying value
of inventory on
hand to its market value by this amount as of June 30, 2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
5 -
Land,
Building and Equipment
Land,
building and equipment consists of the following:
|
|
|
June
30,
|
|
Estimated
Useful
|
|
|
|
|
2007
|
|
2006
|
|
Lives
|
|
|
Land
|
|
$
|
4,924
|
|
$
|
4,924
|
|
|
N/A
|
|
|
Building
|
|
|
12,460
|
|
|
12,460
|
|
|
39
Years
|
|
|
Machinery and equipment
|
|
|
16,881
|
|
|
12,643
|
|
|
5-7
Years
|
|
|
Computer equipment
|
|
|
2,065
|
|
|
151
|
|
|
5
Years
|
|
|
Construction in Progress
|
|
|
186
|
|
|
587
|
|
|
N/A
|
|
|
Furniture and fixtures
|
|
|
953
|
|
|
660
|
|
|
5
Years
|
|
|
Leasehold improvements
|
|
|
4,386
|
|
|
3,206
|
|
|
5-15
Years
|
|
|
|
|
|
41,855
|
|
|
34,631
|
|
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
7,357
|
|
|
5,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land,
Building and Equipment, net (a)
|
|
$
|
34,498
|
|
$
|
29,069
|
|
|
|
|
|
(a)
|
Includes
assets not yet placed in service of approximately $2,305
and $4,123 for
June 30, 2007 and 2006,
respectively.
|
Depreciation
and amortization expense for the years ended June 30, 2007, 2006
and 2005 was
approximately $2,423, $1,534 and $1,248, respectively
.
NOTE
6 -
Accounts
Payable, Accrued Expenses and Other Current Liabilities
Accounts
payable, accrued expenses and other current liabilities consist
of the
following:
|
|
|
June
30,
|
|
|
|
|
2007
|
|
2006
|
|
|
Inventory
purchases
|
|
$
|
9,525
|
|
$
|
5,734
|
|
|
Research
and development expenses
|
|
|
3,003
|
|
|
2,068
|
|
|
Other
|
|
|
6,014
|
|
|
4,848
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,542
|
|
$
|
12,650
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
7 -
Debt
Long-term
Debt
|
|
|
June
30,
2007
|
|
June
30,
2006
|
|
|
|
|
|
|
|
|
|
Revolving
credit facility
|
|
$
|
9,866
|
|
$
|
—
|
|
|
Real
estate term loan
|
|
|
10,933
|
|
|
11,734
|
|
|
Machinery
and equipment term loans
|
|
|
5,601
|
|
|
3,833
|
|
|
Capital
lease
|
|
|
183
|
|
|
72
|
|
|
|
|
|
26,583
|
|
|
15,639
|
|
|
Less:
amount representing interest on capital lease
|
|
|
38
|
|
|
1
|
|
|
Total
debt
|
|
|
26,545
|
|
|
15,638
|
|
|
|
|
|
|
|
|
|
|
|
Less:
current maturities
|
|
|
12,057
|
|
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
$
|
14,488
|
|
$
|
13,952
|
|
A
summary
of the outstanding long-term debt is as follows:
On
February 9, 2006, the Company entered into a four-year financing
arrangement
with Wells Fargo Business Credit (“WFBC”). This financing agreement provided a
maximum credit facility of $41,500 comprised of:
·
$22,500
revolving credit facility
·
$12,000
real estate term loan
·
$
3,500
machinery and equipment (“M&E”) term loan
·
$
3,500
additional / future capital expenditure facility
The
funds
made available through this facility paid down, in its entirety,
the $20,445
owed on the previous credit facility. The WFBC revolving credit
facility
borrowing base is calculated as (i) 85% of the Company’s eligible accounts
receivable plus the lesser of 50% of cost or 85% of the net orderly
liquidation
value of its eligible inventory. The advances pertaining to inventory
are capped
at the lesser of 100% of the advance from accounts receivable
or $9,000. As of
June 30, 2007, the remaining availability under the revolving
credit facility
was $6,708. The $12,000 loan for the real estate in Brookhaven,
NY is payable in
equal monthly installments of $67 plus interest through February
2010 at which
time the remaining principal balance is due. The $3,500 M&E loan is payable
in equal monthly installments of $58 plus interest through February
2010 at
which time the remaining principal balance is due. With respect
to additional
capital expenditures, the Company is permitted to borrow 90%
of the cost of new
equipment purchased to a maximum of $3,500 in borrowings amortized
over 60
months. As of June 30, 2007, there is approximately $150 available
for
additional capital expenditure borrowings.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
Under
the
terms of the WFBC agreement, three stockholders, all related
to the Company’s
Chairman of the Board of Directors, one of whom is an Executive
Vice President,
were required to provide limited personal guarantees, as well
as pledge
securities with a minimum aggregate value of $7,500 as security
for a portion of
the $22,500 credit facility. The Company was required to raise
a minimum of
$7,000 through the sale of equity or subordinated debt by June
30, 2006. The
shareholders’ pledges of marketable securities would be reduced by WFBC either
upon the Company raising capital, net of expenses in excess of
$5,000 or
achieving certain milestones. As a result of the Company completing
the sale of
$10,000 of Series B-1 convertible preferred stock in May 2006
(See Note 10), the
limited personal guarantees were reduced by $3,670. In September
2006, the
Company consummated a $10,000 sale of Series C-1 Convertible
preferred stock
(see Note 16), which eliminated the balance of the personal pledges
of
marketable securities of $3,830.
The
revolving credit facility and term loans bear interest at a rate
of the prime
rate less 0.5% or, at the Company’s option, LIBOR plus 250 basis points. At June
30, 2007, the interest rate on this debt was 7.75%. Pursuant
to the requirements
of the WFBC agreement, the Company has put in place a lock-box
arrangement. The
Company will incur a fee of 25 basis points per annum on any
unused amounts of
this credit facility.
The
WFBC
credit facility is collateralized by substantially all of the
assets of the
Company. In addition, the Company is required to comply with
certain financial
covenants. As of June 30, 2007, the Company had defaulted under
the Senior
Credit Agreement with respect to (i) financial reporting obligations,
including
the submission of its annual audited financial statements for
the fiscal year
ending June 30, 2007, and (ii) financial covenants related to
minimum net cash
flow, maximum allowable leverage ratio, maximum allowable total
capital
expenditures and unfinanced capital expenditures for the fiscal
year ended June
30, 2007 (collectively, the “Existing Defaults”). WFBC has agreed to waive the
Existing Defaults based upon the Company’s consummation and receipt of $8,000
related to the issuance of subordinated debt described in Note
18 - Subsequent
Events.
In
connection with WFBC credit facility, the Company incurred deferred
financing
costs of $482, which are being amortized over the term of the
WFBC credit
facility and are included in Other Assets. Of this amount, $131
and $50 have
been recognized as amortization expense for the years ended June
30, 2007 and
2006, respectively.
With
respect to the real estate term loan and the $3,500 M&E loan, the Company
entered into interest rate swap contracts (the “swaps”), whereby the Company
pays a fixed rate of 7.56% and 8.00% per annum, respectively.
The swaps
contracts mature in 2010. The swaps are a cash flow hedge (i.e.
a hedge against
interest rates increasing). As all of the critical terms of the
swaps and loans
match, they are structured for short-cut accounting under SFAS
No. 133,
“Accounting For
Derivative
Instruments and Hedging Activities’” and by definition, there is no hedge
ineffectiveness
or
a need
to reassess effectiveness. Fair value of the interest rate swaps
at June 30,
2007 and 2006 was approximately $10 and $98 and is included in
Other
Assets.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
8 -
Related
Party Transactions
Rents
The
Company leases one of its business premises located in Hauppauge,
New York,
(“Premises”) from an entity owned by three stockholders (“Landlord”) under a
noncancelable lease expiring in October 2019. For the years ended
June 30, 2007
and 2006, the rent paid in accordance with this lease was $690
and
$480.
Under
the
terms of the lease for the Premises, upon a transfer of a majority
of the issued
and outstanding voting stock of Interpharm, Inc., which occurred
on May 30,
2003, and every three years thereafter, the annual rent may be
adjusted to fair
market value, as determined by an independent appraiser.
In
June
2007, the Company executed a Settlement Agreement with the Landlord,
whereas,
effective May 1, 2006, the Company would pay the Landlord a base
rent of $660
annually. The Company recorded an additional $30 to properly
account for the
increase in base rent through June 30, 2007.
Future
annual minimum rental payments under this operating lease are
as follows:
|
For the Year Ending June 30,
|
|
|
Amount
|
|
|
2008
|
|
$
|
660
|
|
|
2009
|
|
|
660
|
|
|
2010
|
|
|
660
|
|
|
2011
|
|
|
660
|
|
|
2012
|
|
|
660
|
|
|
Thereafter
|
|
|
4,840
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,140
|
|
The
lease
does not grant the Company the option to purchase the Premises
at any time
during the lease term nor at its termination, nor will the Company
share in any
proceeds that may result from sale or disposition of the Premises.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
8 -
Related
Party Transactions, continued
Sale
of Subsidiary
On
April
25, 2007 the Company completed the sale of its subsidiary, Interpharm
Development Private Limited (“IDPL”) located in Ahmedabad, India to an entity
partially owned by two officers of the Company for $161. As previously
disclosed
the Company elected not to move forward with the construction
of a research and
development facility in Ahmedabad, India. During the quarter
ended March 31,
2007 management committed to a plan to dispose of its interest
in the entity
which was incorporated specifically for the construction project
in Ahmedabad.
As a result, in accordance with SFAS 144 the Company recorded
an impairment
charge of $101 in the quarter ended March 31, 2007 to write down
the carrying
value of the net asset to the selling price. Therefore, no gain
or loss on
disposal was recorded in the three months ended June 30, 2007.
Assets
and liabilities of IDPL at the time of sale consisted of the
following:
|
Cash
|
|
$
|
233
|
|
|
Land
|
|
|
305
|
|
|
Assets
|
|
|
538
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
205
|
|
|
Due
to related party
|
|
|
172
|
|
|
Net
book value
|
|
|
161
|
|
|
Selling
price
|
|
|
(161
|
)
|
|
Gain
(loss) on sale of asset
|
|
$
|
—
|
|
Investment
in APR, LLC
In
February and April 2005, the Company purchased 5 Class A membership
interests
(“Interests”) from each of Cameron Reid (“Reid”), the Company’s Chief Executive
Officer, and John Lomans (“Lomans”), who has no affiliation with the Company,
for an aggregate purchase price of $1,023 (including costs of
$23) of APR, LLC,
a Delaware limited liability company primarily engaged in the
development of
complex bulk pharmaceutical products (“APR”). The purchases were made pursuant
to separate Class A Membership Interest Purchase Agreements dated
February 16,
2005 between the Company and Reid and Lomans (the “Purchase Agreements”). At the
time of the purchases, Reid and Lomans owned all of the outstanding
Class A
membership interests of APR, which had, outstanding, 100 Class
A membership
interests and 100 Class B membership interests. As a result,
the Company owns 10
of the 100 Class A membership Interests outstanding. The two
classes of
membership interests have different economic and voting rights,
and the Class A
members have the right to make most operational decisions. The
Class B interests
are held by one of the Company’s major customers and suppliers.
NOTE
8 -
Related
Party Transactions, continued
In
accordance with the terms of the Purchase Agreements, the Company
has granted to
Reid and Lomans each a proxy to vote 5 of the Interests owned
by the Company on
all matters on which the holders of Interests may vote.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
The
Board
of Directors approved the purchases of Interests at a meeting
held on February
15, 2005, based on an analysis and advice from an independent
investment banking
firm. Reid did not participate during the Company’s deliberations on this
matter. The Company is accounting for its investment in APR pursuant
to the cost
method of accounting.
Purchase
from APR, LLC
During
the year ended June 30, 2007, the Company placed an order valued
at $160 for a
certain raw material from APR. The Company currently purchases
the same raw
material from an overseas supplier at a price 37% greater than
the price APR is
currently willing to offer. The Company believes sourcing the
raw material from
APR would not only resolve intermittent delays in obtaining this
material from
overseas but would also improve gross margins on products using
the raw
material. Supply of this raw material is being coordinated with
the Company’s
requirement projections for the fiscal year ended June 30, 2008.
As of June 30,
2007, the Company has advanced $80 to APR in connection with
this
order.
Separation
Agreements
As
of
September 10, 2007, the Company entered into separation agreements
in connection
with the termination of employment of Bhupatlal K. Sutaria, the
brother of the
Chairman of the Company’s Board of Directors and the Company’s former President,
Vimla Sutaria, the wife of the Chairman of the Company’s Board of Directors, and
Jyoti Sutaria, the wife of Bhupatlal K. Sutaria. In connection
with his
separation agreement, Bhupatlal K. Sutaria received six months
of salary
aggregating $138, accelerated vesting of 200 stock options and
a “cashless”
exercise feature with respect to all of his 700 vested options
which will expire
on December 10, 2007.
In
connection with her separation agreement, Jyoti Sutaria received
accelerated
vesting of 100 stock options and a “cashless” exercise feature with respect to
all of her 400 vested options which will expire on December 10,
2007.
In
connection with her separation agreement, Vimla Sutaria received
accelerated
vesting of 88 stock options and a “cashless” exercise feature with respect to
all of her 350 vested options which will expire on December 10,
2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
9 -
Income
Taxes
At
June
30, 2007 the Company has remaining Federal net operating losses
(“NOLs”) of
$32,250 available through 2027. As of June 30, 2007, as a result
of changes in
New York State tax law, the benefit of the future utilization
of State NOLs has
been eliminated resulting in deferred state tax expense of $195
in fiscal 2007.
Pursuant to Section 382 of the Internal Revenue Code regarding
substantial
changes in Company ownership, utilization of the Federal NOLs
is limited.
$31,382 of these NOLs are available in fiscal 2008, and utilization
of $868 of
these NOLs is limited and becomes available after fiscal 2008.
The limitations
lapse at the rate of $2,690 per year, through fiscal 2009. As
a result of losses
incurred in fiscal years 2005, 2006 and 2007, which indicate
uncertainty as to
the Company’s ability to generate future taxable income, the
“more-likely-than-not” standard has not been met and therefore some amount of
the Company’s deferred tax asset may not be realized. As such, a
valuation
allowance
of
$5,554 decreased the total accumulated net deferred tax asset
of $11,529 to
$5,975 at June 30, 2007. In addition, at June 30, 2007, the Company
has
approximately $986 of New York State investment tax credit carry
forwards,
expiring in various years through 2022. These carry forwards
are available to
reduce future New York State income tax liabilities. However,
the Company has
reserved 100% of the investment tax credit carry forward, which
the Company does
not anticipate utilizing.
In
calculating its tax provision for the year ended June 30, 2007
and 2006, the
Company applied aggregate effective tax rates of approximately
1.4% and (31%),
respectively, thereby creating income tax expense of $190
and
an
income tax benefit of $1,700, respectively, and adjusted its
deferred tax assets
accordingly.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
9 -
Income
Taxes, continued
The
income tax (benefit) expense is comprised of the following:
|
|
|
Year
Ended
June
30,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
$
|
|
|
$
|
|
|
|
State
|
|
|
(5
|
)
|
|
(22
|
)
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current
|
|
|
(5
|
)
|
|
(22
|
)
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
(1,739
|
)
|
|
(71
|
)
|
|
State
|
|
|
195
|
|
|
61
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deferred
|
|
|
195
|
|
|
(1,678
|
)
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Income Tax Expense (Benefit)
|
|
$
|
190
|
|
$
|
(1,700
|
)
|
$
|
(73
|
)
|
The
Company’s effective income tax rate differs from the statutory U.S. Federal
income tax rate as a result of the following:
|
|
|
Year
Ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Statutory
U.S. federal tax rate
|
|
(34.0
|
)%
|
(34.0
|
)%
|
(34.0
|
)%
|
|
Increase
in valuation allowance
|
|
33.0
|
|
|
|
|
|
|
State
taxes
|
|
|
0.0
|
|
|
0.7
|
|
|
(3.0
|
)
|
|
Stock
based compensation
|
|
|
0.8
|
|
|
1.9
|
|
|
|
|
|
Permanent
differences
|
|
|
0.0
|
|
|
0.2
|
|
|
4.0
|
|
|
Change
in New York State tax law
|
|
|
1.4
|
|
|
|
|
|
|
|
|
Other
|
|
|
0.2
|
|
|
0.2
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
1.4
|
%
|
|
(31.0
|
)%
|
|
(32.7
|
)%
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
9 -
Income
Taxes, continued
The
components of deferred tax assets and liabilities consist of
the following:
|
|
|
June
30,
|
|
|
|
|
2007
|
|
2006
|
|
|
Deferred
Tax Assets, Current Portion
|
|
|
|
|
|
|
|
|
Capitalized
inventory
|
|
$
|
114
|
|
$
|
31
|
|
|
Receivable
allowance and reserves
|
|
|
10
|
|
|
36
|
|
|
Other
|
|
|
39
|
|
|
50
|
|
|
Deferred
revenue
|
|
|
0
|
|
|
1,204
|
|
|
Deferred
Tax Assets, current
|
|
|
163
|
|
|
1,321
|
|
|
Less:
Valuation Allowance
|
|
|
(142
|
)
|
|
—
|
|
|
Net
Deferred Tax Assets, current
|
|
$
|
21
|
|
$
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Assets, Non-Current Portion
|
|
|
|
|
|
|
|
|
Other
|
|
$
|
44
|
|
$
|
45
|
|
|
Stock
based compensation
|
|
|
550
|
|
|
314
|
|
|
Investment
tax credits
|
|
|
986
|
|
|
835
|
|
|
Net
operating loss carry forwards (“NOLs”)
|
|
|
10,886
|
|
|
5,068
|
|
|
Deferred
Tax Assets, non-current
|
|
|
12,466
|
|
|
6,262
|
|
|
Less:
Valuation Allowance
|
|
|
(5,412
|
)
|
|
(884
|
)
|
|
Net
Deferred Tax Assets, Non-Current
|
|
|
7,054
|
|
|
5,378
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities, Non-Current Portion
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(1,004
|
)
|
|
(529
|
)
|
|
Other
|
|
|
(96
|
)
|
|
—
|
|
|
Deferred
Tax Assets, non-current, net
|
|
$
|
5,954
|
|
$
|
4,849
|
|
During
the years ended June 30, 2007 and 2006, stock options were exercised
which
generated approximately $191 and $216 of income tax deductions,
respectively,
resulting in tax benefits of approximately $65 and $79. The benefits
with
respect to the June 30, 2006 stock option exercises were credited
to additional
paid in capital. For the June 30, 2007 stock option exercises,
a valuation
allowance has been established against the NOL attributable to
stock option
expense, i
n
accordance with the Company’s adoption of the alternative method of calculating
the additional paid in capital pool as defined in SFAS No. 123
(R).
When these NOLs are utilized, the valuation allowance
will be
reversed and additional paid in capital will be credited for
the benefit. The
Company will receive a benefit when taxes payable is reduced
in the future.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
9 -
Income
Taxes, continued
The
change in the valuation allowance for deferred tax assets are
summarized as
follows:
|
|
|
Years
Ended June 30
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Beginning
Balance
|
|
$
|
884
|
|
$
|
702
|
|
|
Change
in Allowance
|
|
|
4,670
|
|
|
182
|
|
|
Ending
Balance
|
|
$
|
5,554
|
|
$
|
884
|
|
NOTE
10 -
Earnings
Per Share
The
calculations of basic and diluted EPS are as follows: (in thousands,
except
share data)
|
|
|
Year
Ended
June
30,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(14,058
|
)
|
$
|
(3,790
|
)
|
$
|
(149
|
)
|
|
Less:
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
—
|
|
|
68
|
|
|
—
|
|
|
Series
A-1
|
|
|
166
|
|
|
166
|
|
|
166
|
|
|
Series
B-1
|
|
|
825
|
|
|
78
|
|
|
—
|
|
|
Series
C-1
|
|
|
660
|
|
|
—
|
|
|
—
|
|
|
Less:
Series B-1 beneficial conversion
feature
|
|
|
—
|
|
|
1,418
|
|
|
—
|
|
|
Less:
Series C-1 beneficial conversion
feature
|
|
|
1,094
|
|
|
—
|
|
|
—
|
|
|
Numerator
for basic EPS
|
|
|
(16,803
|
)
|
|
(5,520
|
)
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to
Series
K preferred stockholders
|
|
|
—
|
|
|
—
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for diluted EPS
|
|
$
|
(16,803
|
)
|
$
|
(5,520
|
)
|
$
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic EPS
weighted
average shares outstanding
|
|
|
65,242
|
|
|
36,521
|
|
|
25,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Series K preferred stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Convertible
Series A, B, B-1, C and J
preferred
stocks
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Stock
options
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted EPS
|
|
$
|
(0.26
|
)
|
$
|
(0.15
|
)
|
$
|
(0.01
|
)
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
10 -
Earnings
Per Share, continued
Stock
options, warrants and convertible preferred stock, equivalent
to 29,540, 20,906
and 44,035 shares of the Company’s common stock, were not included in the
computation of diluted earnings per share for the years ended
June 30, 2007,
2006 and 2005, respectively, as their inclusion would be
antidilutive.
As
of
June 30, 2007, the total number of common shares outstanding
and the number of
common shares potentially issuable upon exercise of all outstanding
stock
options and conversion of preferred stocks (including contingent
conversions) is
as follows:
|
Common
stock outstanding
|
|
|
65,886
|
|
|
Stock
options outstanding (see Note 13)
|
|
|
11,930
|
|
|
Warrants
outstanding (see Notes 11 and 12)
|
|
|
4,564
|
|
|
Common
stock issuable upon conversion of preferred stocks:
|
|
|
|
|
|
Series
A
|
|
|
—
|
|
|
Series
A-1 (maximum contingent conversion) (a)
|
|
|
4,855
|
|
|
Series
B
|
|
|
—
|
|
|
Series
B-1
|
|
|
6,520
|
|
|
Series
C
|
|
|
6
|
|
|
Series
C-1
|
|
|
6,520
|
|
|
|
|
|
|
|
|
Total
(b)
|
|
|
100,281
|
|
|
|
(a)
|
As
described in Note 12, the Series A-1 shares are convertible
only if the
Company reaches $150,000 in annual sales or upon a
merger, consolidation,
sale of assets or similar
transaction.
|
|
|
(b)
|
Assuming
no further issuance of equity instruments, or changes
to the equity
structure of the Company, this total represents the
maximum number of
shares of common stock that could be outstanding through
April 30, 2017
(the end of the current vesting and conversion
periods).
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
11 -
Series
B-1 Redeemable Convertible Preferred Stock
In
May
2006, the Company entered into a Securities Purchase Agreement
(the “Agreement”)
with Tullis-Dickerson Capital Focus III, L.P. (“Tullis”). Under the Agreement,
the Company agreed to issue and sell to Tullis, and Tullis agreed
to purchase
from the Company, for a purchase price of $10,000 (net proceeds
of $9,858) an
aggregate of 10 shares of a newly designated series of the Company’s preferred
stock (“B-1”), together with 2,282 warrants to purchase shares of common
stock
of the Company with an exercise price of $1.639 per share. The
warrants have a
five year term. The Series B-1 Stock and warrants sold to Tullis
are convertible
and/or exercisable into a total of 8,802 shares of common stock.
The B-1 shares
are convertible into common shares at a conversion price of $1.5338,
and have an
annual dividend rate of 8.25%, payable quarterly, which can be
paid, at the
Company’s option, in cash or the Company’s common stock. In addition, the B-1
shareholders have the right to require the Company to redeem
all or a portion of
the B-1 shares upon the occurrence of certain triggering events,
at a price per
preferred share to be calculated on the day immediately preceding
the date of a
triggering event. A triggering event shall be deemed to have
occurred at such
time as any of the following events: (i) failure to cure a conversion
failure by
delivery of the required number of shares of common stock within
ten trading
days; (ii) failure to pay any dividends, redemption price, change
of control
redemption price, or any other amounts when due; (iii) any event
of default with
respect to any indebtedness, including borrowings under the WFBC
Credit and
Security Agreement, under which the oblige of such indebtedness
are entitled to
and do accelerate the maturity of at least an aggregate of $3,000
in outstanding
indebtedness; and (iv) breach of any representation, warranty,
covenant or other
term or condition in the Series B-1 Transaction Document.
Through
June 30, 2007, the Company issued 420 shares of common stock
as payment of $697
of previously accrued dividends. At June 30, 2007, the Company
had accrued $206
of Series B-1 dividends, which was paid in July 2007 through
the issuance of 148
shares of the Company’s common stock.
With
respect to the Company’s accounting for the preferred stock, EITF Topic D-98,
paragraph 4, states that Rule 5-02.28 of Regulation S-X requires securities
with redemption features that are not solely within the control
of the issuer to
be recorded outside of permanent equity. As described above,
the terms of the
Preferred Stock include certain redemption features that may be triggered
by events that are not solely within the control of the Company,
such as a
potential default with respect to any indebtedness, including
borrowings under
the WFBC financing arrangement. Accordingly, the Company has
classified the B-1
shares as temporary equity and the value ascribed to the B-1
shares upon initial
issuance in May 2006 was the amount received in the transaction
less the
relative fair value ascribed to the warrants and direct costs
associated with
the transaction. The Company allocated $1,704 of the gross proceeds
of the sale
of B-1 shares to the warrants based on estimated fair value.
In accordance with
EITF Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain
Convertible
Instruments," ("EITF 00-27") the Company recorded a non-cash
charge of $1,418 to
accumulated deficit during the quarter ended June 30, 2006. The
non-cash charge
measures the difference between the relative fair value of the
B-1 shares and
the fair market value of the
Company's
common stock issuable pursuant to the conversion terms on the
date of issuance.
As of June 30, 2007, the Company had defaulted under the Senior
Credit Agreement
with respect to the Existing Defaults, as described in Note 7
- Debt, and WFBC
has agreed to waive the Existing Defaults. The Company does not
expect to be in
default in the future under its credit facility (the only redemption
feature
outside of its control), nor does it plan to redeem the Series
B-1 preferred
stock. As such the Company believes it is not probable that the
Series B-1
preferred stock will become redeemable.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
11 -
Series
B-1 Redeemable Convertible Preferred Stock, continued
In
addition, in May 2006, in connection with the sale of the B-1
shares the Company
entered into a Registration Rights Agreement, as amended, with
Tullis. Under the
terms of this Registration Rights Agreement the Company is subject
to penalties
(a) if, within 60 days after a request to do so is made by the
holders of such
preferred stock, the Company does not timely file with the
Securities
and Exchange Commission a registration statement covering the
resale of shares
of its common stock issuable to such holders upon conversion
of the preferred
stock, (b) if a registration statement is filed, such registration
statement is
not declared effective within 180 days after the request is made
or (c) if after
such a registration is declared effective, after certain grace
periods the
holders are unable to make sales of its common stock because
of a failure to
keep the registration statement effective or because of a suspension
or
delisting of its common stock from the American Stock Exchange
or other
principal exchange on which its common stock is traded. The penalties
will
accrue on a daily basis so long as the Company is in default
of the Registration
Rights Agreement. The maximum amount of a registration delay
penalty as defined
in the Registration Rights Agreement is 18% of the aggregate
purchase price of
Tullis’ registrable securities included in the related registration statement.
Unpaid registration delay penalties shall accrue interest at
the rate of 1.5%
per month until paid in full. If the Company fails to get a registration
statement effective penalties shall accrue at an amount equal
to 1.67% per month
of the aggregate purchase price of Tullis’ registrable securities included in
the related registration statement. If the effectiveness failure
continues for
more than 180 days the penalty rate shall increase to 3.33%.
In addition, if the
Company fails to maintain the effectiveness of a registration
statement,
penalties shall accrue at a rate of 3.33% per month of the aggregate
purchase
price of the registrable securities included in the related registration.
The
Company is also subject to penalties if there is a failure to
timely deliver to
a holder (or credit the holder’s balance with Depository Trust Company if the
common stock is to be held in street name) a certificate for
shares of our
common stock if the holder elects to convert its preferred stock
into common
stock. Therefore, upon the occurrence of one or more of the foregoing
events the
Company’s business and financial condition could be materially adversely
affected and the market price of its common stock would likely
decline.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
11 -
Series
B-1 Redeemable Convertible Preferred Stock, continued
The
Company’s Series B-1 redeemable convertible preferred stock is summarized
as
follows at
June
30,
2007:
|
|
|
Shares
Issued
|
|
|
|
|
|
|
Shares
|
|
And
|
|
Par
Value
|
|
Liquidation
|
|
|
Authorized
|
|
Outstanding
|
|
Per
Share
|
|
Preference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
10
|
|
$
|
100
|
|
$
|
10,000
|
|
As
of
June 30, 2007, the Company was in default under the Securities
Purchase
Agreement due to (A) the failure of the Company to timely file
with the
Securities and Exchange Commission (and deliver to Tullis) its
Annual Report on
Form 10-K for the year ended June 30, 2007; and (B) the failure
of the Company
to prevent the suspension of trading of its Common Stock on the
American Stock
Exchange as a result of (A). Tullis provided the Company with
a waiver of these
defaults based upon the Company’s consummation and receipt of $8,000 related to
the issuance of subordinated debt described in Note 18 - Subsequent
Events.
NOTE
12 -
Series
C-1 Redeemable Convertible Preferred Stock
On
September 11, 2006, the Company entered into a Securities Purchase
Agreement
(the “C-1 Agreement”) with Aisling Capital, L.P. (the “Buyer”). Under the C-1
Agreement, the Company agreed to issue and sell to the Buyer,
and the Buyer
agreed to purchase from the Company, for a purchase price of
$10,000 (net
proceeds of $9,993) an aggregate of 10 shares of a newly designated
series of
the Company’s preferred stock (“C-1”), together with 2,282 warrants to purchase
shares of common stock of the Company with an exercise price
of $1.639 per
share. The warrants have a five year term. The Series C-1 Stock
and warrants
sold to the Buyer are convertible and/or exercisable into a total
of 8,802
shares of common stock. The C-1 shares are convertible into common
shares at a
conversion price of $1.5338, and have an annual dividend rate
of 8.25%, payable
quarterly, which can be paid, at the Company’s option, in cash or the Company’s
common stock. In addition, the C-1 shareholders have the right
to require the
Company to redeem all or a portion of the C-1 shares upon the
occurrence of
certain triggering events, as defined, at a price per preferred
share to be
calculated on the day immediately preceding the date of a triggering
event. A
triggering event shall be deemed to have occurred at such time
as any of the
following events: (i) failure to cure a conversion failure by
delivery of the
required number of shares of common stock within ten trading
days; (ii) failure
to pay any dividends, redemption price, change of control redemption
price, or
any other amounts when due; (iii) any event of default with respect
to any
indebtedness, including borrowings under the WFBC Credit and
Security Agreement,
under which the oblige of such indebtedness are entitled to and
do accelerate
the maturity of at least an aggregate of $3,000 in outstanding
indebtedness; and
(iv) breach of any representation, warranty, covenant or other
term or condition
in the Series C-1 Transaction Document.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
12 -
Series
C-1 Redeemable Convertible Preferred Stock
,
continued
Through
June 30, 2007, the Company issued 245 shares of common stock
as payment of $454
of previously accrued dividends. At June 30, 2007, the Company
had accrued $206
of Series C-1 dividends, which was paid in July 2007 through
the issuance of 148
shares of the Company’s common stock.
With
respect to the Company’s accounting for the preferred stock, EITF Topic D-98,
paragraph 4, states that Rule 5-02.28 of Regulation S-X requires securities
with redemption features that are not solely within the control
of the issuer to
be recorded outside of permanent equity. As described above,
the terms of the
Preferred Stock include certain redemption features that may be triggered
by events that are not solely within the control of the Company,
such as a
potential default with respect to any indebtedness, including
borrowings under
the WFBC financing arrangement. Accordingly, the Company has
classified the C-1
shares as temporary equity and the value ascribed to the C-1
shares upon initial
issuance in September 2006 was the amount received in the transaction
less the
relative fair value ascribed to the warrants and direct costs
associated with
the transaction. The Company allocated $1,641of the gross proceeds
of the sale
of C-1 shares to the warrants based on estimated fair value.
In accordance with
EITF Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain
Convertible
Instruments," ("EITF 00-27") the Company recorded a non-cash
charge of $1,094 to
Accumulated deficit during the quarter ended September 30, 2006.
The non-cash
charge measures the difference between the relative fair value
of the C-1 shares
and the fair market value of the Company's common stock issuable
pursuant to the
conversion terms on the date of issuance. As of June 30, 2007,
the Company had
defaulted under the C-1 Agreement with respect to the Existing
Defaults, as
described in Note 6 - Debt, and WFBC has agreed to waive the
Existing Defaults.
The Company does not expect to be in default in the future under
its credit
facility (the only redemption feature outside of its control),
nor does it plan
to redeem the Series C-1 preferred stock. As such the Company
believes it is not
probable that the Series C-1 preferred stock will become
redeemable.
In
addition, on September 11, 2006, in connection with the sale
of the C-1 shares
the Company entered into a Registration Rights Agreement, as
amended, with the
Buyer. Under the terms of this Registration Rights Agreement
the Company is
subject to penalties (a) if, within 60 days after a
request
to do so is made by the holders of such preferred stock, the
Company does not
timely file
with
the
Securities and Exchange Commission a registration statement covering
the resale
of shares of its common stock issuable to such holders upon conversion
of the
preferred stock, (b) if a registration statement is filed, such
registration
statement is not declared effective within 180 days after the
request is made or
(c) if after such a registration is declared effective, after
certain grace
periods the holders are unable to make sales of its common stock
because of a
failure to keep the registration statement effective or because
of a suspension
or delisting of its common stock from the American Stock Exchange
or other
principal exchange on which its common stock is traded. The penalties
will
accrue on a daily basis so long as the Company is in default
of the Registration
Rights Agreement. The maximum amount of a registration delay
penalty as defined
in the Registration
Rights
Agreement is 18% of the aggregate purchase price of the Buyers
registrable
securities included in the related registration statement. Unpaid
registration
delay penalties shall accrue interest at the rate of 1.5% per
month until paid
in full. If the Company fails to get a registration statement
effective
penalties shall accrue at an amount equal to 1.67% per month
of the aggregate
purchase price of the Buyers registrable securities included
in the related
registration statement. If the effectiveness failure continues
for more than 180
days the penalty rate shall increase to 3.33%. In addition, if
the Company fails
to maintain the effectiveness of a
registration
statement, penalties shall accrue at a rate of 3.33% per month
of the aggregate
purchase price of the registrable securities included in the
related
registration. The Company is also subject to penalties if there
is a failure to
timely
deliver to a holder (or credit the holder’s balance with Depository Trust
Company if the common stock is to be held in street name) a certificate
for
shares of our common stock if the holder elects to convert its
preferred stock
into common stock. Therefore, upon the occurrence of one or more
of the
foregoing events the Company’s business and financial condition could be
materially adversely affected and the market price of its common
stock would
likely decline.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
12 -
Series
C-1 Redeemable Convertible Preferred Stock
,
continued
The
Company’s Series C-1 redeemable convertible preferred stock is summarized
as
follows at June 30, 2007:
|
|
|
Shares
Issued
|
|
|
|
|
|
|
Shares
|
|
And
|
|
Par
Value
|
|
Liquidation
|
|
|
Authorized
|
|
Outstanding
|
|
Per
Share
|
|
Preference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
10
|
|
$
|
100
|
|
$
|
10,000
|
|
As
of
June 30, 2007, the Company was in default under the C-1 Agreement
due to (A) the
failure of the Company to timely file with the Securities and
Exchange
Commission (and deliver to the Buyer) its Annual Report on Form
10-K for the
year ended June 30, 2007; and (B) the failure of the Company
to prevent the
suspension of trading of its Common Stock on the American Stock
Exchange as a
result of (A). The Buyer provided the Company with a waiver of
these defaults
based upon the Company’s consummation and receipt of $8,000 related to the
issuance of subordinated debt described in Note 18 - Subsequent
Events.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
13 -
Equity Securities
Preferred
Stocks
The
Company’s preferred stocks consist of the following at June 30,
2007:
|
|
|
|
|
Shares
Issued
|
|
|
|
|
|
|
|
|
Shares
|
|
and
|
|
|
|
Liquidation
|
|
|
June
30, 2007:
|
|
Authorized
|
|
Outstanding
|
|
Par
Value
|
|
Preference
|
|
|
Preferred
Stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Series
C convertible
|
|
|
350
|
|
|
277
|
|
|
3
|
|
|
277
|
|
|
Series A-1 cumulative convertible
|
|
|
5,000
|
|
|
4,855
|
|
|
48
|
|
|
3,311
|
|
|
Total
preferred stocks issued and outstanding
|
|
|
5,350
|
|
|
5,132
|
|
$
|
51
|
|
$
|
3,588
|
|
*
Classes
of preferred stock assumed in the ATEC reverse merger
One
condition of the Agreement was to convert all outstanding
shares of Series A
Cumulative Convertible Preferred Stock (the “Series A”) and Series B Convertible
Stock (the Series B”) into the Company’s common stock. As such, in June, 2006,
the Company filed an Information Statement pursuant to
Section 14 (c) of the
Securities and Exchange Act of 1934, as amended, (the
“Information Statement”).
The Information Statement informs stockholders of actions
to approve the
amendments to the Certificate of Incorporation of the
Company of actions taken
and approved in May, 2006, by the holders of (a) voting
stock of the Company
holding shares entitling such holders to cast more than
a majority of the votes
entitled to be cast with respect to such actions, (b)
a majority of the
outstanding shares of Series A and (c) more than two-thirds
of the outstanding
shares of Series B, to make all of the Series A and Series
B convertible into
the Company’s common stock. Another condition of the Agreement required
the
Company to increase its authorized common shares from
70,000 shares to 150,000
shares.
Originally,
each share of Series A was convertible at the option
of the holder into shares
of common stock at the conversion rate in effect at the
time the holder elects
to convert. The conversion rate was subject to adjustment
upon the occurrence of
certain events, including, among other things, subdivisions
or combinations of
the Company’s common stock, the payment by the Company of stock dividends
on the
common stock, and the issuance of shares of common stock
for a consideration
below an amount calculated under a formula.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
13 -
Equity Securities, continued
On
July
18, 2006, the Company filed an amendment to its Article
of Incorporation which
had the effect of (i) automatically converting each outstanding
share of the
Company’s Series A into two shares of common stock or an aggregate
of 8 common
shares. A Series A shareholder elected to have his 3
shares canceled.
Accordingly, no shares of the Company’s common stock were issued to him as part
of this conversion; (ii) eliminating the Series A from
the Articles of
Incorporation; (iii) automatically converting each of
the 2 outstanding shares
of the Company’s Series B into one share of common stock, thus issuing
2 common
shares; and (iv) eliminating the Series B from the Articles
of Incorporation.
These amendments were approved by written consent of
a majority of the
Company’s outstanding common stock and Series A Cumulative Convertible
Preferred
Stock and by the holder of all of the outstanding Series
B Convertible Preferred
shares.
In
2003
the Company authorized the satisfaction of loans due
to the Company’s then Chief
Executive Officer and one of its stockholders, by issuing
5 shares of a Series
A-1 cumulative convertible preferred (the Series A-1”). The A-1 shares convert
on a 1:1 basis into Company common stock subject to the definitive terms
in
the list of designations upon (i) the Company reaching
$150,000 in sales or (ii)
a merger, consolidation, sale of assets or similar transaction.
The holders of
shares shall not be entitled to any voting rights and
have dissolution rights
upon liquidation of $0.682 per share. The Series A-1
shares have a cumulative
annual dividend of $0.0341 per share. In November 2006,
the Company paid $124 of
declared dividends for the period January 2006 through
September 2006. As of
June 30, 2007 the Company’s Board of Directors had not declared any dividend on
the Series A-1 shares for the period October 1, 2006
through June 30, 2007. Such
undeclared dividends amounted to $124.
On
June
4, 2004, the Company was deemed by AMEX to be in compliance
with applicable
listing standards, and as a result, a “Triggering Event” occurred. Upon the
occurrence of the Triggering Event, the holders of the
Series K Convertible
preferred shares (the “K shares”) (entities owned by certain relatives of the
Company’s Chairman of the Board of Directors), in accordance
with a defined
formula and through May 2006, converted all of the K
shares into 43,923
restricted shares of the Company’s common stock The holders of the K shares had
demand registration rights with respect to the common
stock to be issued upon
conversion. As of June 30, 2007 the former Series K stockholders
own or control
approximately 50,179 shares or 76% of the total shares
outstanding of the
Company.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
13 -
Equity Securities, continued
Common
Stock
During
the year ended June 30, 2007, the Company issued shares
of its common stock as
follows:
·
675
shares, resulting in $393 proceeds, in connection with
exercises of options to
purchase the Company’s common stock;
·
63
shares were issued to Series B-1 preferred stock shareholders
in settlement of
dividends earned for the quarter ended June 30, 2006;
·
357
and 245 shares were issued to Series B-1 and C-1 preferred
stock shareholders,
respectively, in settlement of dividends earned through
the nine months ended
March 31, 2007;
·
8
and 2 shares were issued to Series A and B shareholders,
respectively, in
connection with the conversion of Series A and B resulting
from the July 18,
2006, amendment to the Company’s Article of Incorporation.
·
In
July 2007, 148 shares were issued to both Series B-1
and C-1 preferred stock
shareholders in settlement on dividends earned for the
quarter ended June 30,
2007.
Stock
Options and Appreciation Rights
In
2003,
Interpharm, Inc., as a part of the ATEC reverse merger
transaction, assumed
options to acquire ATEC’s common stock which were granted previously by ATEC
pursuant to two Stock Option Plans. The two option plans
are the 1997 Stock
Option Plan (“1997 Plan”) and the 2000 Flexible Stock Option Plan (“2000 Plan”).
Both plans provide for the issuance of qualified and
non-qualified options as
those terms are defined by the Internal Revenue Code.
The
1997
Plan provides for the issuance of 6,000 shares of common
stock. All options
issued, pursuant to the 1997 Plan, cannot have a term
greater than ten years.
Options granted under this plan vest over periods established
in option
agreements. As of June 30, 2007
,
1,317 options are outstanding
under this plan. No additional shares can be granted
under this plan.
The
2000
Plan provides for the issuance of 10,000 shares of common
stock plus an annual
increase, effective on the first day of each calendar
year, equal to 10% of the
number of outstanding shares of common stock as of the
first day of such
calendar year, but in no event, more than 20,000 shares
in the aggregate. All
options issued, pursuant to the 2000 Plan, cannot have
a term greater than ten
years. Options granted under the 2000 Plan vest over
periods established in
option agreements. As of June 30, 2007, the 2000 Plan
provides for the issuance
of 20,000 shares of common stock. As of that date, 10,613
options are
outstanding under this plan
.
The
Company recognized approximately $13 in income in connection
with 100 previously
issued stock appreciation rights (“SARs”). The SARs must be exercised between
July 1, 2008 and December 31, 2008. The SARs are recorded
at fair value and are
marked to market at each reporting period. As of June
30, 2007, the total
liability related to the SARs is $46;
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
13 -
Equity Securities, continued
During
the fiscal year ended June 30, 2007, 1,685 options were granted,
as
follows:
·
162
options to purchase the Company’s common stock were issued to members of the
Company’s Board of Directors at the market price on the date of the grant
and
had vesting periods ranging from immediate to one year from the
date of
issuance;
·
in
connection with separation agreements involving two employees,
the Company
extended the exercise period of 155 options, 10 of which were
exercised prior to
December 31, 2006; 90 were forfeited as of December 31, 2006,
the balance of 55
has been extended to September 20, 2008. As a result of the modification
of
these options, the Company recognized an additional $12 expense
for the year
ended June 30, 2007.
·
1,243
options to purchase the Company’s common stock were issued to employees of the
Company at the market price on the date of the grant and vest
over 3.28 years
from the date of issuance. Of this amount, 445 were performance-based
options,
which were not earned as of June 30, 2007 and therefore, were
forfeited. The
performance based criteria were related to the Company achieving
specific sales,
gross profit, and ANDA filing requirements for the year ended
June 30, 2007.
·
100
options to purchase the Company’s common stock were issued to an officer of the
Company at the market price on the date of the grant and vest
over 4.81 years
from the date of issuance.
·
25
options to purchase the Company’s common stock were issued to an employee of the
Company at the market price on the date of the grant and vest
over 5.17 years
from the date of issuance.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
13 -
Equity Securities, continued
The
following table summarizes the options activity for the period
July 1, 2004 to
June 30, 2007.
|
|
|
Number
of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
10,489
|
|
$
|
1.62
|
|
|
|
|
|
Options
outstanding at July 01, 2004
|
|
|
|
|
|
|
|
|
|
|
|
Granted
(a)
|
|
|
8,116
|
|
$
|
1.53
|
|
|
|
|
|
Exercised
|
|
|
(1,097
|
)
|
$
|
0.57
|
|
|
|
|
|
Forfeited
(a)
|
|
|
(4,854
|
)
|
$
|
3.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2005
|
|
|
12,654
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
430
|
|
$
|
1.16
|
|
|
|
|
|
Exercised
|
|
|
(700
|
)
|
$
|
0.68
|
|
|
|
|
|
Forfeited
|
|
|
(301
|
)
|
$
|
1.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
|
12,083
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,685
|
|
$
|
1.55
|
|
|
|
|
|
Exercised
|
|
|
(904
|
)
|
$
|
0.84
|
|
|
|
|
|
Expired
|
|
|
(240
|
)
|
$
|
1.87
|
|
|
|
|
|
Forfeited
|
|
|
(694
|
)
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2007
|
|
|
11,930
|
|
$
|
1.08
|
|
$
|
3,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2007
|
|
|
9,545
|
|
$
|
1.07
|
|
$
|
3,011
|
|
(a)
Includes 4,854 options repriced at June 30, 2005
For
all
of the Company’s stock-based compensation plans, the fair value of each grant
was estimated at the date of grant using the Black-Scholes option-pricing
model.
Black-Scholes utilizes assumptions related to volatility, the
risk-free interest
rate, the dividend yield (which is assumed to be zero, as the
Company has not
paid any cash dividends) and employee exercise behavior. Expected
volatilities
utilized in the model are based mainly on the historical volatility
of the
Company’s stock price and other factors. The risk-free interest rate
is derived
from the U.S. Treasury yield curve in effect in the period of
grant. The model
incorporates exercise assumptions based on an analysis of historical
data. The
Company does not have a reasonable basis for estimating stock
option
forfeitures, so it assumes zero forfeitures in estimating the
financial impact
of granting options to purchase its common stock. The expected
life of the
fiscal 2007 grants is derived from historical and other factors.
As a policy,
the Company issues shares for exercised options upon receipt
of the required
funds, as stated in the Stock Option Agreement, and a properly
executed
intent-to-exercise form.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
13 -
Equity Securities, continued
The
following table summarizes information concerning outstanding
and exercisable
stock options as of June 30, 2007:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Average
|
|
Weighted
|
|
Number
|
|
Weighted
|
|
|
|
|
Outstanding
|
|
Remaining
|
|
Average
|
|
Exercisable
|
|
Average
|
|
|
Range
of
|
|
At
|
|
Contractual
|
|
Exercise
|
|
at
|
|
Exercise
|
|
|
Exercise
Prices
|
|
June
30, 2007
|
|
Life
|
|
Price
|
|
June
30, 2007
|
|
Price
|
|
|
$0.45
- $0.68
|
|
|
5,220
|
|
|
5.05
|
|
$
|
0.64
|
|
|
4,135
|
|
$
|
0.63
|
|
|
$1.21
- $1.99
|
|
|
6,558
|
|
|
3.62
|
|
$
|
1.33
|
|
|
5,258
|
|
$
|
1.29
|
|
|
$3.13
- $6.80
|
|
|
152
|
|
|
1.30
|
|
$
|
5.76
|
|
|
152
|
|
$
|
5.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,930
|
|
|
4.22
|
|
|
|
|
|
9,545
|
|
|
|
|
For
the
year ended June 30, 2007, the fair values of Company common stock
options
granted to employees were estimated on the date of grant using
the Black-Scholes
option-pricing model with the following assumptions: (1) expected
volatility
ranging from 65% to 85% (2) risk-free interest rate ranging from
4.21% to 4.85%
(3) Weighted-average volatility of 79% and (4) expected average
lives ranging
from 1.2 to 7.6 years.
The
total
unearned compensation cost of $1,767 for the total nonvested
options as of June
30, 2007 of 2,401 will be recognized over a weighted average
period of 2.88
years.
NOTE
14 -
401K Plan
In
January 2006, the Company initiated a pre-tax savings plan covering
substantially all employees, which qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, eligible employees may
contribute a
portion of their pre-tax salary, subject to certain limitations.
The Company
contributes and matches 100% of the employee pre-tax contributions,
up to 3% of
the employee’s compensation plus 50% of pre-tax contributions that exceed
3% of
compensation, but not to exceed 5% of compensation. The Company
may also make
profit-sharing contributions in its discretion which would be
allocated among
all eligible employees, whether or not they make contributions.
Company
contributions were approximately $317 for the year ended June
30, 2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
15 -
Commitments and Contingencies
Legal
Proceedings
An
action
was commenced on June 1, 2006, by Ray Vuono (“Vuono”) in the Supreme Court of
the State of New York, County of Suffolk (Index No. 13985/06). The action
alleged that plaintiff was owed an amount exceeding $10,000 in
unpaid “finder’s
fees” under an advisory agreement between plaintiff and Atec Group,
Inc.
By
motion
dated July 26, 2006, the Company moved to dismiss Vuono’s complaint in its
entirety. Vuono cross-moved to disqualify the Company's counsel due to
an
alleged conflict of interest. By recent decision and order dated March 29,
2007, the Court dismissed Vuono’s claims as they pertain to any fees claimed by
Vuono related to a reverse merger of Interpharm, Inc. and the
Company and
declined to dismiss other claims. The dismissed claims represent
approximately $7,000 of the total of $10,000 claimed by Vuono.
The Court
deferred its decision on Vuono’s motion to disqualify counsel, and held a
hearing on the matter on September 24, 2007. A final decision
on the motion to
disqualify is not expected until early 2008. The action, including
all
discovery, is stayed pending the Court’s decision.
The
Company will continue to vigorously defend the action.
In
November 2006, a former employee commenced an action against us in the
Supreme Court of the State of New York, County of Suffolk (Index
No.
06/31481). As of October 15, 2007, the action was voluntarily dismissed
with prejudice, and without costs, expenses, or fees to either
party. The
complaint alleged violations of the New York State Human Rights
Law and other
unidentified rules, regulations, statutes and ordinances.
In
May
2007, a former employee commenced an action against the Company with the
New York State Division of Human Rights. The complaint against the Company
alleges claims of race discrimination. The total sought by the
former employee
in the action is unspecified. The Company believes that the claims are
without merit and the Company is vigorously defending the action.
Currently, the Company cannot predict with certainty the outcome
of this
litigation.
On
October 8, 2007, Leiner Health Products LLC and the Company entered
into a
Settlement Agreement and Release (“Settlement”) in connection with an October
2005 manufacturing and supply agreement for ibuprofen tablets.
As part of the
Settlement, Leiner executed a Promissory Note for the amount
it owed the
Company. On October 12, 2007, the Company notified Leiner that
one lot of this
product was subject to a voluntary recall. Leiner has subsequently
threatened to
hold any additional payments under the Settlement until they
receive reasonable
assurances from the Company that the additional lots in their
possession would
not be subject to the recall as well. If all lots were recalled,
Leiner would be
entitled to a reimbursement by the Company of approximately $256.
However, the
Company does not believe any further lots will be recalled.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
15 -
Commitments and Contingencies
, continued
The
testing, manufacturing and marketing of pharmaceutical products
subject the
Company to the risk of product liability claims. The Company
believes that it
maintains an adequate amount of product liability insurance,
but no assurance
can be given that such insurance will cover all existing and
future claims or
that it will be able to maintain existing coverage or obtain
additional coverage
at reasonable rates.
From
time
to time, the Company is a party to litigation arising in the
normal course of
its business operations. In the opinion of management, it is
not anticipated
that the settlement or resolution of any
such
matters will have a material adverse impact on the Company’s financial
condition, liquidity or results of operations.
Operating
Lease
Property
Lease
In
January 2007 the Company entered into a seven year non-cancellable
operating
lease for approximately 20 square feet of office space. The lease
provides the
Company an option to extend the lease for a period of three years.
According to
the terms of the lease the base annual rental for the first year
will be $261
and will increase by 3% annually thereafter. Further, the Company
is required to
pay for renovations to the facility, currently estimated at approximately
$300.
Rent
is
recorded on a straight line basis over the life of the lease.
Deferred rent
relating this lease at June 30, 2007 was $5. Future non-cancellable
payments
under this operating lease are as follows:
|
For
the Year Ending June 30,
|
|
Amount
|
|
|
2008
|
|
$412
|
|
|
2009
|
|
270
|
|
|
2010
|
|
278
|
|
|
2011
|
|
|
287
|
|
|
2012
|
|
|
295
|
|
|
Thereafter
|
|
|
591
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,133
|
|
Significant
Contracts
Tris
Pharmaceuticals, Inc
During
February 2005, the Company entered into an agreement (“Solids Agreement”), for
solid dosage products (“solids”) with Tris. In July 2005, the Solids Agreement
was amended. According to the terms of the Solids Agreement,
as amended, the
Company will collaborate with Tris on the development, manufacture
and marketing
of eight solid oral dosage generic products. The amendment to
this agreement
requires Tris to deliver Technical Packages for two soft-gel
products and one
additional solid dosage product. Some of the products included
in this
agreement, as amended, may require the Company to challenge the
patents for the
equivalent branded products.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
15 -
Commitments and Contingencies
, continued
This
agreement, as amended, provides for payments of an aggregate
of $4,800 to Tris,
whether or not regulatory approval is obtained for any of the
solids products.
The Solids Agreement also provides for an equal sharing of net
profits for each
product, except for one product, that is successfully sold and
marketed, after
the deduction and reimbursement of all litigation-related and
certain other
costs. The excluded product provides for a profit split of 60%
for the Company
and 40% for Tris. Further, this agreement provides the Company
with a perpetual
royalty-free license to use all technology necessary for the
solid products in
the United States, its territories and possessions.
In
April
2006, the Company and Tris further amended the Solids Agreement.
This second
amendment required Tris to deliver a Technical Package for one
additional solid
dosage product.
Further,
terms of this second amendment required the Company to pay to
Tris an additional
$300 associated with the original agreement.
During
October 2006, the Company entered into a new agreement (“New Liquids Agreement”)
with Tris Pharma, Inc. (“Tris”), which terminated the agreement entered into in
February 2005, which was for the development and licensing of
up to twenty-five
liquid generic products (“Liquids Agreement”). According to the terms of the New
Liquids Agreement, Tris will, among other things, be required
to develop and
deliver the properties, specifications and formulations (“Product Details”) for
fourteen generic liquid pharmaceutical products (“Liquid Products”). The Company
will then utilize this information to obtain all necessary approvals.
Further,
under the terms of the New Liquids Agreement Tris will manufacture,
package and
label each product for a fee. The Company was required to pay
Tris $1,000,
whether or not regulatory approval is obtained for any of the
liquid products.
The Company has paid in full the $1,000; $250 having been paid
during the term
of the initial Liquids Agreement; $500 paid upon the execution
of the New
Liquids Agreement, and the balance of $250 paid December 15,
2006. In addition,
Tris is to receive 40% of the net profits, as defined, in accordance
with the
terms in the New Liquids Agreement.
The
Company further amended the Solids Agreement in October 2006,
modifying the
manner in which certain costs will be shared as well as clarifying
the parties’
respective audit rights.
For
the
years ended June 30, 2007, 2006 and 2005, the Company recorded
as research and
development expense approximately $1,915, $2,110, and $1,400,
respectively, in
connection with these agreements. Further, since inception, we
have incurred
approximately $5,425 of research and development costs associated
with the Tris
agreements of which the Company has paid the full amount due
as of June 30,
2007. The combined costs of these agreements could aggregate
up to $5,800. The
balance on the solids agreement, as amended, of $375 could be
paid within two
years if all milestones are reached. There is no outstanding
balance to be paid
related to the liquid agreement as of June 30, 2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
15 -
Commitments and Contingencies
, continued
Watson
Pharmaceuticals, Inc
.
On
October 3, 2006, the Company entered into a termination and release
agreement
(the “Termination Agreement”) with Watson Laboratories, Inc. (“Watson”)
terminating the Manufacturing and Supply Agreement dated October
14, 2003 (the
“Supply Agreement”) pursuant to which the Company manufactured and supplied and
Watson distributed and sold generic Vicoprofen® (7.5 mg hydrocodone
bitartrate/200 mg ibuprofen) tablets, (the “Product”). Watson was required to
return all rights and agreements to the Company thereby enabling
it to market
the Product. Further, Watson was required to turn over to the
Company its
current customer list for this Product and agreed that, for a
period of six
months from closing, neither Watson nor any of its affiliates
is to solicit
sales for this product from its twenty largest customers. In
accordance with
the
Termination Agreement, Watson returned approximately $141 of
the Product and the
Company in turn invoiced Watson $42 for repacking. The net affect was a
reduction of $99 to the Company’s net sales during the year ended June 30,
2007. In consideration of the termination of Watson’s rights under the
Supply Agreement, the Company is to pay Watson $2,000 payable
at the rate of
$500 per year over four years from the first anniversary of the
effective date
of the termination agreement. Upon entering the Termination Agreement,
the
Company determined the net present value of the obligation and
accordingly
increased Accounts payable, accrued expenses and other liabilities
and Contract
termination liability by $367 and $1,287, respectively. The imputed
interest of
$345 will be amortized over the remaining life of the obligation
using the
effective interest rate method. At June 30, 2007, contract termination
liability
of $386 and $1,356 are included in Accounts payable, accrued
expenses and other
liabilities and Contract termination liability, respectively.
In
February 2007 the Company entered into a termination and release
agreement with
Watson terminating the Manufacturing and Supply Agreement dated as of
July
1, 2003 pursuant to which the Company manufactured and supplied
and Watson
distributed and sold Reprexain® (5.0 mg hydrocodone bitartrate/200 mg ibuprofen)
tablets. Further, in February 2007 the Company entered into an
intellectual
property purchase agreement with Watson whereby the Company acquired
the
registered trademark, domain name, and website content relating to the
pharmaceutical product Reprexain® (5.0 mg hydrocodone bitartrate/200 mg
ibuprofen) tablets as described in the agreement. As consideration
the Company shall pay Watson, on a quarterly basis, 1.5% of net
sales derived
from sales of 5.0 mg hydrocodone bitartrate/200 mg ibuprofen tablets
sold under the Reprexain® trademark.
Centrix
Pharmaceutical, Inc.
On
October 27, 2006, the Company amended its agreement with Centrix
Pharmaceuticals, Inc., (“Centrix”) wherein Centrix has agreed to purchase over a
twelve month period, 40% more bottles of the Company’s female hormone therapy
products than the initial year of the agreement, commencing November
2006.
The parties will share net profits, as defined in the agreement,
with the
Company’s share being paid within 45 days of the end of each calendar
month.
The amendment has a one year term, after which time the original
Centrix
agreement shall again be in full force and effect.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
15 -
Commitments and Contingencies
, continued
Applied
Pharma, LLC
In
October 2006 the Company entered into a consulting agreement
with Applied
Pharma, LLC in which the consultant agreed to provide the Company
with, among
other things, analytical method development services relating
to the Company’s
oral contraceptive products. The Agreement is for thirty six
months and may be
terminated by either party with 90 days written notice. The agreement
calls for
monthly payments of $25, which aggregate to a maximum of $900
along with a $75
payment which was issued upon the execution of the agreement.
The principal of
Applied Pharma, LLC holds a minority interest in APR, LLC.
Software
license
During
2005, the Company entered into a four year software license agreement
which will
require the Company to make quarterly payments of $29 plus applicable
sales
taxes through December 31, 2008.
On
December 28, 2006, the Company extended the terms as set forth
above to extend
the subscription term through year five which will require quarterly
payments of
$25 through December 31, 2009.
Future
minimum annual payments for the software license are as follows:
|
For
the Year
Ended
June 30,
|
|
|
Amount
|
|
|
2008
|
|
|
116
|
|
|
2009
|
|
|
108
|
|
|
2010
|
|
|
50
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
274
|
|
Employment
Agreements
The
Company has entered into employment arrangements with certain
key employees as
follows:
In
June
2005, the Company entered into a three year employment agreement
with its CEO,
under which his annual base salary is presently $300. The
CEO received an
initial annual base salary of $200 together with reimbursement
of certain
expenses. He will be eligible to receive an annual incentive
bonus based on
achievement of performance goals set by the Board of Directors
or Compensation
Committee each year and the incentive bonus for fiscal 2007.
He has received
fully vested options to purchase 3,000 shares of common stock
at $1.23. If his
employment is terminated for the remaining contract term
by the Company without
cause or he resigns for good reason (as defined in the employment
agreement), he
will receive an amount equal to 3 months base salary (currently
totaling $75)
and the continuation of health benefits for a period of 3
months.
In
January 2007, the Company entered into a three year employment
agreement with
its CFO. The agreement provides for a base salary of $237,
a sign-on bonus of
$35 and reimbursement of certain expenses. The agreement
includes a target
annual incentive opportunity of not less than 50% of the
salary (the
“
Target
Annual Bonus
”).
The
amount actually paid shall be determined on the basis of
objective performance
measures. In addition he was awarded an option for 100 shares
of common stock
exercisable at $1.62 per share which vest over 5 years. In
July 2007, the CFO
was also elected as the Chief Operating Officer and his compensation
was
increased to $275.
In
January 2005, the Company entered into a three year employment
agreement
beginning April 2005 with its Vice President of Sales and
Marketing. In 2006,
this individual was promoted to Executive Vice President.
The agreement provides
for a base salary of $236 and reimbursement of certain expenses.
In
February 2005, the Company entered into a five year employment
agreement with
its Vice President of Intellectual Property. In 2006, this
individual was
promoted to Vice President - General Counsel. The agreement
originally provided
for a base salary of $237 (which was subsequently increased
to $250), and
reimbursement of certain expenses.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
16 -
Economic Dependency
Major
Customers
The
Company had the following customer revenue concentrations for
the years ended
June 30, 2007, 2006 and 2005:
|
|
|
Year
Ended
June
30,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Customer
A
|
|
|
15
|
%
|
|
13
|
%
|
|
*
|
|
|
Customer
B
|
|
|
15
|
%
|
|
*
|
|
|
*
|
|
|
Customer
C
|
|
|
12
|
%
|
|
13
|
%
|
|
*
|
|
|
Customer
D
|
|
|
10
|
%
|
|
10
|
%
|
|
11
|
%
|
|
Customer
E
|
|
|
10
|
%
|
|
17
|
%
|
|
*
|
|
|
Customer
F
|
|
|
*
|
|
|
*
|
|
|
22
|
%
|
|
Customer
G
|
|
|
*
|
|
|
*
|
|
|
23
|
%
|
*Sales
to
customers were less than 10%
The
Company complies with its supply agreement to sell various strengths
of
Ibuprofen, and commencing October 2005, various strengths of
Naproxen, to the
Department of Veteran Affairs through two intermediary wholesale
prime vendors
whose data are combined and reflected in Customer “C” above.
|
|
|
Accounts
Receivable
|
|
|
|
|
June
30,
|
|
|
|
|
2007
|
|
2006
|
|
|
Customer
A
|
|
$
|
3,161
|
|
$
|
5,959
|
|
|
Customer
B
|
|
|
1,202
|
|
|
—
|
|
|
Customer
C
|
|
|
1,536
|
|
|
906
|
|
|
Customer
D
|
|
|
1,480
|
|
|
3,521
|
|
|
Customer
E
|
|
|
610
|
|
|
2,374
|
|
|
Customer
F
|
|
|
131
|
|
|
494
|
|
|
Customer
G
|
|
|
91
|
|
|
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
16 -
Economic Dependency, continued
The
table
below sets forth sales for those products or classes of products
that accounted
for 10% or more of our total product sales for the years ended
June 30, 2007,
2006 and 2005:
|
|
|
Year
Ended
June
30,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Ibuprofen
|
|
$
|
31,149
|
|
$
|
33,836
|
|
$
|
27,970
|
|
|
Bactrim
|
|
|
17,471
|
|
|
*
|
|
|
*
|
|
|
Naproxen
|
|
|
12,221
|
|
|
9,401
|
|
|
*
|
|
|
Esterified
Estrogen
|
|
|
11,199
|
|
|
8,100
|
|
|
*
|
|
|
Atenolol
|
|
|
*
|
|
|
*
|
|
|
4,819
|
|
*
Sales
of products were less than 10%
Major
Suppliers
The
Company purchased materials from four suppliers during the year
ended June 30,
2007 totaling approximately 67%, two suppliers during the year
ended June 30,
2006 totaling approximately 59%, and three suppliers during the
year ended June
30, 2005 totaling approximately 70%. At June 30, 2007 and 2006,
amounts due to
these suppliers included in accounts payable were approximately
$6,348 and
$3,900, respectively.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
17 -
Quarterly Financial Data (Unaudited)
Summarized
quarterly financial information consists of the following:
|
|
|
Sept.
30, 2006
|
|
Dec.
31, 2006
|
|
March
31, 2007
|
|
June
30, 2007
|
|
|
Sales,
net
|
|
$
|
22,827
|
|
$
|
17,479
|
|
$
|
19,910
|
|
$
|
15,371
|
|
|
Gross
profit
|
|
|
8,977
|
|
|
4,036
|
|
|
6,375
|
|
|
2,279
|
|
|
Net
income (loss)
|
|
|
1,630
|
|
|
(4,124
|
)
|
|
(1,852
|
)
|
|
(9,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
(0.00
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
$
|
(0.15
|
)
|
|
Diluted
EPS
|
|
$
|
(0.00
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
$
|
(0.15
|
)
|
|
|
|
Sept.
30, 2005
|
|
Dec.
31, 2005
|
|
March
31, 2006
|
|
June
30, 2006
|
|
|
Sales,
net
|
|
$
|
14,547
|
|
$
|
16,213
|
|
$
|
16,110
|
|
$
|
16,485
|
|
|
Gross
profit
|
|
|
3,983
|
|
|
5,179
|
|
|
3,999
|
|
|
4,267
|
|
|
Net
income (loss)
|
|
|
(447
|
)
|
|
609
|
|
|
(1,499
|
)
|
|
(2,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
(0.01
|
)
|
$
|
0.02
|
|
$
|
(0.05
|
)
|
$
|
(0.08
|
)
|
|
Diluted
EPS
|
|
$
|
(0.01
|
)
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
(0.08
|
)
|
During
the fourth quarter of 2007, the Company reduced the carrying
value of inventory
on hand by $1,157 that was determined to have a carrying value
in excess of
market.
The
unaudited interim financial information reflects all adjustments,
which in the
opinion of management, are necessary to fairly present the results
of the
interim periods presented. All adjustments are of a normal recurring
nature. The
sum of the quarterly EPS amounts may not equal the full year
amounts due to
rounding.
NOTE
18 -
Subsequent Events
On
October 26, 2007, the Company and Wells Fargo Business Credit
finalized a
Forbearance Agreement that terminates on December 31, 2007, which
was
subsequently amended on November 12, 2007. As of June 30, 2007,
the Company had
defaulted under the Senior Credit Agreement with respect to (i)
financial
reporting obligations, including the submission of its annual
audited financial
statements for the fiscal year ending June 30, 2007, and (ii)
financial
covenants related to minimum net cash flow, maximum allowable
leverage ratio,
maximum allowable total capital expenditures and unfinanced capital
expenditures
for the fiscal year ended June 30, 2007 (collectively, the “Existing Defaults”).
In accordance with the Forbearance Agreement, WFBC has agreed
to waive the
Existing Defaults based upon the Borrower’s consummation and receipt of $8,000
related to the issuance of subordinated debt described below.
The parties have
agreed to establish financial covenants for fiscal year 2008
prior to the
conclusion of the Forbearance Period.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
18 -
Subsequent Events, continued
On
November 7, 2007 and November 14, 2007, as required by the Forbearance
Agreement, the Company received a total of $8,000 in gross proceeds
from the
issuance and sale of subordinated debt.
On
November 7, 2007, Dr. Maganlal K. Sutaria, the Chairman of the
Company’s Board
of Directors, and Vimla M. Sutaria, his wife, loaned $3,000 to
the Company
pursuant to a Junior Subordinated Secured 12% Promissory Note
due 2010 (the
“Sutaria Note”). Interest of 12% per annum on the Sutaria Note is payable
quarterly in arrears, and for the first 12 months of the note’s term, may be
paid in cash, or additional notes (“PIK Notes”), at the option of the Company.
Thereafter, the Company is required to pay at least 8% interest
in cash, and the
balance, at its option, in cash or PIK Notes.
Repayment
of the Sutaria Notes is secured by liens on substantially all
of the Company’s
property and real estate. Pursuant to intercreditor agreements,
the Sutaria
Notes are subordinated to the liens held by WFBC and the holders
of the STAR
Notes described below.
On
November 14, 2007, the Company issued and sold an aggregate of
$5,000 of Secured
12% Promissory Notes Due 2009 (the “STAR Notes”) in the following amounts to the
following parties:
|
Tullis-Dickerson
Capital Focus III, L.P. (“Tullis”)
|
|
$
|
833
|
|
|
Aisling
Capital II, L.P. (“Aisling”)
|
|
$
|
833
|
|
|
Cameron
Reid (“Reid”)
|
|
$
|
833
|
|
|
Sutaria
Family Realty, LLC (“SFR”)
|
|
$
|
2,500
|
|
The
$5,000 proceeds were deposited in escrow on November 14, 2007
and will be
released from escrow upon the Company receiving the waiver of
the Existing
Defaults from WFBC in writing in accordance with the terms of
the Forbearance
Agreement.
Tullis
is
an investor in the Company and the holder of its Series B-1 Convertible
Preferred Stock. Aisling is also an investor in the Company and
the holder of
its Series C-1 Convertible Preferred Stock. Reid is the Company’s Chief
Executive Officer and SFR is owned by Company shareholders who
control
approximately 54% of the Company’s voting stock (the “Major Shareholders”),
including Raj Sutaria, who is a Company Executive Vice President.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
18 -
Subsequent Events, continued
Interest
of 12% per annum on the STAR Notes is payable quarterly in arrears,
and may be
paid, at the option of the Company, in cash or PIK Notes. Upon
the Company
obtaining stockholder approval and ratification of the issuance
of the STAR Note
financing and making the necessary filings with the SEC in connection
therewith
(the “Stockholder Approval”), which is to occur no earlier than January 18, 2008
and no later than the later of February 28, 2008 or such later
date as may be
necessary to address SEC comments on the Company’s Information Statement on
Schedule 14C, the STAR Notes shall be exchanged for:
|
|
·
|
Secured
Convertible 12% Promissory Notes due 2009 (the “Convertible Notes”) in the
original principal amount equal to the principal and
accrued interest on
the STAR Notes through the date of exchange. The conversion
price of the
Convertible Notes is to be $0.95 per share and interest
is to be payable
quarterly, in arrears, in either cash or PIK Notes,
at the option of the
Company;
|
|
|
·
|
Warrants
to acquire an aggregate of 1,842 shares of Common Stock
(the “Warrants”)
with an exercise price of $0.95 per
share.
|
Each
of
the Convertible Notes and Warrants are to have anti-dilution
protection with
respect to issuances of Common Stock, or common stock equivalents
at less than
$0.95 per share such that their conversion or exercise price
shall be reset to a
price equal to 90% of the price at which shares of Common Stock
or equivalents
are deemed to have been issued.
The
repayment of the STAR and Convertible Notes is secured by a second
priority lien
on substantially all of the Company’s property and real estate. Pursuant to
intercreditor agreements, the STAR Note financing liens are subordinate
to those
of WFBC, but ahead, in priority, of the Sutaria Notes.
Also,
upon the Company obtaining the Stockholder Approval, the Series
B-1 and Series
C-1 Convertible Preferred Stock held by Tullis and Aisling shall
be exchangeable
for shares of a new Series D-1 Convertible Preferred Stock, which
shall be
substantially similar to the B-1 and C-1 Convertible Preferred
Stock other than
the Conversion price which is to be $0.95 per share instead of
$1.5338 per
share.
Pursuant
to the terms of the Securities Purchase Agreements for the Company’s Series B-1
and C-1 Convertible Preferred Stock, the consent of Tullis and
Aisling was
required for the issuance of the Sutaria Notes and for the STAR
Note financing.
In consideration for that consent, the Company has agreed to
exchange 2,282
warrants to purchase Company Common Stock held by each of Tullis
and Aisling
with an exercise price of $1.639 per share for new warrants with
an exercise
price of $0.95 per share. In addition, the Major Shareholders
have agreed to
give Tullis and Aisling tag along rights on certain sales of
Company common
stock.