Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
____________________
FORM
10-K
____________________
x ANNUAL
REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
Fiscal Year Ended June 30, 2007
o TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
Commission
File Number 0-22710
INTERPHARM
HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
13-3673965
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|
(State
or other jurisdiction of
corporation
or organization)
|
|
(IRS.
Employer
Identification
Number)
|
| |
|
|
|
75
Adams Avenue Hauppauge, New York
|
|
11788
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(Address
of principal executive offices)
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(Zip
Code)
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Issuer’s
telephone number, including area code (631)
952-0214
Securities
registered pursuant to Section 12(b) of the Act: Common
Stock $.01 par value
Securities
registered pursuant to Section 12(g) of the Act: Series
A
Preferred Stock $.01 par value
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirement
for
the past 90 days.
YES
x
NO o
Indicate
by check mark if disclosure of delinquent filer pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.
YES
oNO
x
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Act.)
YES
oNO
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.)
YES
oNO
x
On
December 31, 2006, the aggregate market value of the voting common equity of
Interpharm Holdings, Inc., held by non-affiliates of the Registrant was $31,287
based on the closing price of $2.09 for such common stock on said date as
reported by the American Stock Exchange.
On
November 12, 2007, we had 66,190 shares of common stock
outstanding.
INTERPHARM
HOLDINGS, INC.
Form
10-K
Fiscal
Year Ended June 30, 2007
Table
of Contents
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PART
I
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Page
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Item
1
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Business
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1
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Item
1A
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Risk
Factors
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14
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Item
1 B
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Unresolved
Staff Comments
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25
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Item
2.
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Properties
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26
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Item
3.
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Legal
Proceedings
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26
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Item
4.
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Submission
of Matters to a Vote of
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Security
Holders
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28
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PART
II
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Item
5.
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Market
for Common Stock
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and
Related Stockholder Matters
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28
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Item
6.
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Selected
Financial Data
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34
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Item
7.
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Management's
Discussion and Analysis of
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Financial
Condition and Results of Operations
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35
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Item
7A.
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Quantitative
and Qualitative Disclosure
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About
Market Risk
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64
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Item
8.
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Financial
Statements and Supplementary Data
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65
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Item
9.
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Changes
in and Disagreements with
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Accountants
on Accounting and
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Financial
Disclosures
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65
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Item
9A.
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Controls
and Procedures
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65
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Item
9B
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Other
Information
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65
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PART
III
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Item
10.
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Directors
and Executive Officers
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of
the Registrant.
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66
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Item
11.
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Executive
Compensation
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71
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Item
12.
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Security
Ownership of Certain Beneficial
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Owners
and Management and Related
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Stockholder
Matters
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86
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Item
13.
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Certain
Relationships and Related
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Transactions
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90
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Item
14.
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Principal
Accounting Fees and Services
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91
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Item
15.
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Exhibits,
Financial Statement Schedules
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and
Reports on Form 8-K
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92
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Signatures
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94
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Financial
Statements
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F-1
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FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISK
Certain
statements in this Report, and the documents incorporated by reference herein,
constitute "forward-looking statements" within the meaning of Section 27A of
the
Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934
and
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause deviations in actual results, performance or achievements to
be
materially different from any future results, performance or achievements
expressed or implied. Such factors include but are not limited to: the
difficulty in predicting the timing and outcome of legal proceedings, the
difficulty of predicting the timing of U.S. Food and Drug Administration ("FDA")
approvals; court and FDA decisions on exclusivity periods; competitor's ability
to extend exclusivity periods past initial patent terms; market and customer
acceptance and demand for our pharmaceutical products; our ability to market
our
products; the successful integration of acquired businesses and products into
our operations; the use of estimates in the preparation of our financial
statements; the impact of competitive products and pricing; the ability to
develop and launch new products on a timely basis; the regulatory environment;
compliance with bank financial covenants; fluctuations in operating results,
including spending for research and development and sales and marketing
activities; and, other risks detailed from time-to-time in our filings with
the
Securities and Exchange Commission.
The
words
"believe, expect, anticipate, intend and plan" and similar expressions identify
forward-looking statements. These statements are subject to risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Readers are cautioned not to place undue reliance
on
these forward-looking statements, which speak only as of the date the statement
was made.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
PART
I
ITEM
1. - BUSINESS
Company
History
Interpharm
Holdings, Inc., (the "Company" or "Interpharm"), through its operating
wholly-owned subsidiary, Interpharm, Inc., ("Interpharm, Inc." and collectively
with Interpharm, "we" or "us") has been engaged in the business of developing,
manufacturing and marketing generic prescription strength and over-the-counter
pharmaceuticals since 1984.
We
currently sell our products under (i) our own label to the major retailers,
wholesalers, managed care organizations and national distributors, and (ii)
under private label to wholesalers, distributors, repackagers, and other
manufacturers. As of June 30, 2007, we manufactured and marketed thirty six
generic pharmaceutical products, which represent various oral dosage strengths
for eleven unique products and different dosage strengths for twenty-five of
these products.
Our
Business and Expansion Plan
In
our
current phase of expansion, we are continuing the process of transforming the
Company into a full service generic pharmaceuticals provider and increasing
our
line of products, revenues and gross margins. During the fiscal year ended
June
30, 2007, we increased our revenues by $12,200 over the prior year. During
the
fiscal year ended June 30, 2007, our gross margins were 28.7%, as compared
to
27.5% during the prior year.
The
most
critical component of our expansion plan is the investment in research and
development to continue to add new products to our product portfolio. Over
the
past two fiscal years, we have spent a total of $29,600 on research and
development.
Another
critical component of our plan is an emphasis on sales. During fiscal 2007,
our
sales strategy has been successful and we are now selling products to the major
chains, wholesalers, distributors, managed care entities and government
agencies. We are now well positioned to launch new products in these sales
channels which should result in increasing sales.
During
fiscal 2007, we produced a total of approximately 4.3 billion tablets. We are
making further improvements to our efficiencies in manufacturing, and have
completed the build out of our Yaphank, New York facility.
Recent
Developments
As
set
forth in detail below in Management’s Discussion and Analysis under the heading
“Liquidity and Capital Resources,” as of June 30, 2007, we defaulted under the
terms of our credit facility with Wells Fargo Business Credit (“WFBC”) due to a
lack of adequate working capital resulting from increased expenses and losses
during the fiscal year ended June 30, 2007. Although these defaults gave WFBC
the right to liquidate our assets and business, WFBC instead waived the defaults
and amended our covenants upon our raising an additional $8,000 of debt
financing (the “Financing”). The details of the Financing are also described
below.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
During
our negotiations with WFBC and with the lenders for the $8,000 in financing,
we
were delayed in filing this Annual Report on Form 10-K, which, as disclosed
in
our Current Report on Form 8-K filed on October 17, 2007, caused the American
Stock Exchange to halt trading in our common stock from October 17, 2007 until
November 15, 2007.
In
connection with prior financings in 2006, we sold shares of our Series B-1
and
C-1 convertible Preferred Stock to Tullis-Dickerson Capital Focus III, L.P.
(“TD
III”) and Aisling
Capital II, L.P. (“Aisling”) from which a waiver is required to issue any
securities if no registration statement is effective for the sale of the common
stock into which the Series B-1 and C-1 Preferred Stock is convertible. No
such
registration statement is yet effective, and therefore, we were required to
seek
the consent of TD III and Aisling in order to effect the Financing.
On
November 7, 2007, we entered into a Waiver and Consent Agreement (the “Waiver”)
with TD III, Aisling and the Parties to the Financing which provided us with
the
necessary waiver from Tullis and Aisling. In addition, the pursuant to the
Waiver, Perry Sutaria, P&K
Holdings
I, LLC, Rametra Holdings I, LLC, Rajs Holdings
I, LLC and Raj Sutaria, the holders of 54%
of
our issued and outstanding common stock (the “Proxy Shares”) agreed to, and did
give a voting proxy to a committee comprised of Perry Sutaria and a
representative from each of TD III and Aisling to vote the Proxy
Shares:
| |
1.
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For
the election of directors; and
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| |
2.
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With
respect to any changes in the Company
by-laws.
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In
addition, the holders of the Proxy Shares gave TD III and Aisling tag along
rights on the Proxy Shares such that in the event of any sale, other than
certain exempted sales, of the Proxy Shares, the holders of the Proxy Shares
will have an obligation to have the buyer purchase a proportionate number of
shares held by TD III and Aisling.
As
consideration for the Waiver, the conversion price of the Series B-1 and C-1
Preferred Stock was reduced from $1.5338 to $0.95 and the exercise price of
an
aggregate of 4,563 warrants held by TD III and Aisling was reduced from $1.639
to $0.95. The decreased conversion and exercise prices could adversely impact
our earnings per share and the market price of our common stock.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Research
and Development
During
the fiscal year ended June 30, 2007, we filed ten Abbreviated New Drug
Applications ("ANDAs") and two additional ANDAs owned by the Company but in
the
name of Tris Pharma, Inc., with which we have the development agreements
described below. In addition during fiscal 2007, we obtained FDA approval for
the following twelve ANDAs for five unique products which we plan to launch
in
FY 2008:
|
40-754
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Hydrocodone
Bitartrate and Acetaminophen Tablets, USP 7.5 mg / 650
mg
|
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40-757
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Hydrocodone
Bitartrate and Acetaminophen Tablets, USP 10 mg / 650
mg
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40-729
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Hydrocodone
Bitartrate and Acetaminophen Tablets, USP 5 mg / 500 mg
|
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40-736
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Hydrocodone
Bitartrate and Acetaminophen Tablets, USP 5 mg / 325 mg
|
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40-746
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Hydrocodone
Bitartrate and Acetaminophen Tablets, USP 10 mg / 325
mg
|
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40-748
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Hydrocodone
Bitartrate and Acetaminophen Tablets, USP 7.5 mg / 500
mg
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40-769
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Hydrocodone
Bitartrate and Acetaminophen Tablets, USP 7.5 mg / 750
mg
|
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77-824
|
Ranitidine
Hydrochloride Tablets, USP
150
mg, 300 mg
|
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77-289
|
Citalopram
Hydrobromide Tablets
10
mg, 20 mg, 40 mg
|
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40-813
|
Hydrocodone
Bitartrate and Acetaminophen Tablets, USP 10 mg / 500
mg
|
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78-432
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Naproxen
Sodium Tablets, USP
275
mg, 550 mg
|
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78-558
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Ibuprofen
Tablets, USP
400
mg, 600 mg, 800 mg
|
New
product development continues to focus on the following six areas: Female
Hormone Products, Scheduled Narcotic Products, Soft Gelatin Capsule Products,
Oral Liquid Products, Products Coming Off Patent and Special Release Products.
Facilities
Our
primary manufacturing activities are located at our 100 square foot facility
in
Hauppauge, New York. In January 2007, we leased from an unrelated third party
20
square feet of office space in a building next door to our Hauppauge
manufacturing facility. The renovation of our 108 square foot facility located
in Yaphank, New York has been completed and we are conducting all of our
research and development activities there. The specialized facilities for oral
contraceptives,
soft gels and high potency products, which are within the Yaphank facility,
are
now operational. We are now also manufacturing and packaging commercial
quantities of some of our current products at the Yaphank facility.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Strategic
Alliances
Tris
Pharma, Inc.
On
February 24, 2005, we entered into two agreements with Tris for the development
and licensing of up to twenty-five immediate release liquid generic products
(First Liquids Agreement”) and seven solid oral dosage generic pharmaceutical
products (the "Solids Contract"). We subsequently amended the Solids Contract
to
include an additional solid oral dosage product and two soft gel products.
In
April 2006, we entered into a second amendment to the Solids Contract to add
one
additional special release product. On October 4, 2006, we entered into an
agreement with Tris that supersedes the First Liquids Agreement (“Second Liquids
Agreement”). The Second Liquids Agreement covers the development and licensing
of up to fourteen immediate release liquid generic products. To date, we have
filed two ANDAs for products developed under the Solids Contract and two ANDAs
have been filed for products developed under the Second Liquids Agreement.
Centrix
Pharmaceutical, Inc.
As
previously reported, we commenced shipments in August 2005 pursuant to an
agreement with Centrix whereby Centrix has had exclusive distribution rights
in
the United States to a female hormone product that is manufactured and supplied
by Interpharm. 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 shared net profits equally, as defined in the
agreement. During fiscal 2007, we recognized $11,583 in net sales from the
Centrix agreement. Effective November 1, 2007, the original Centrix agreement
is
again in full force and effect.
Marketing
Strategy
We
have
made significant progress on our marketing strategy since the implementation
of
our expansion plan. Our current marketing strategy focuses on offering an array
of products within product categories that require distinct capabilities in
manufacturing, facilities, regulatory or release technology. These limitations
can be characterized by high initial capital expenditures, qualified personnel
or specific technological capabilities. By selecting products within these
higher barrier to entry product categories, we believe we can offer a unique
breadth of products to the marketplace, further penetrate the direct sales
channel and reach a larger customer base.
We
believe that a broader customer base will enable us to achieve more stable
sales
and production cycles for both our existing products and new product launches.
By making more direct
sales, we believe that we can maximize value and profits by eliminating
intermediaries as well as offer better customer service and stronger customer
relationships.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
We
have
started development on products in all of our five primary targeted product
areas and are continuing to target and file ANDAs for products in our sixth
area
- products coming off patent and for which patents have expired. Each of these
product areas was chosen because of the higher margins that are available and
because we anticipate limited competition. We continue to focus on developing
product lines in our five primary targeted product areas, which are: Female
Hormone Products, Scheduled Narcotic Products, Soft Gelatin Capsule Products,
Special Release Characteristic Products and Liquid Products. This should allow
us to further increase gross margins and per tablet revenues.
Products:
The
following is the list of generic pharmaceutical products which are marketed
or
are planned to be marketed by the Company as of June 30, 2007. With the
exception of Reprexain(R), the names of all of the products under the caption
"Brand-Name Products" are registered trademarks in which the holders of the
registered trademarks are non-affiliated pharmaceutical
manufacturers.
|
PRODUCT
NAME
|
|
BRAND-NAME
PRODUCTS
|
| |
|
|
|
1.
Ibuprofen, 200mg White Tablets
|
|
Advil(R)
|
| |
|
|
|
2.
Ibuprofen, 200mg Brown Tablets
|
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Advil(R)
|
| |
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|
3.
Ibuprofen, 200mg Orange Tablets
|
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Motrin(R)
|
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4.
Ibuprofen, 200mg Brown Caplets
|
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Advil(R)
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| |
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5.
Ibuprofen, 200mg Orange Caplets
|
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Motrin(R)
|
| |
|
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|
6.
Ibuprofen, 400mg White Tablets
|
|
Motrin(R)
|
| |
|
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|
7.
Ibuprofen, 600mg White Tablets
|
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Motrin(R)
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| |
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8.
Ibuprofen, 800mg White Tablets
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Motrin(R)
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| |
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9.
Isometheptene Mucate, Dichloralphenazone
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Midrin(R)
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Acetaminophen,
Red/Red Capsule,
|
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65mg/100mg/325mg
|
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| |
|
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|
10.
Naproxen, 250mg White Tablets
|
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Naprosyn(R)
|
| |
|
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|
11.
Naproxen, 375mg White Tablets
|
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Naprosyn(R)
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
|
12.
Naproxen, 500mg White Tablets
|
|
Naprosyn(R)
|
| |
|
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|
13.
Hydrocodone Bitartrate and
|
|
Vicoprofen(R)
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Ibuprofen
Tablets, 7.5 mg / 200 mg
|
|
|
| |
|
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|
14.
Hydrocodone Bitartrate and
|
|
Reprexain(R)
|
|
Ibuprofen
Tablets, 5 mg / 200 mg
|
|
|
| |
|
|
|
15.
Sulfamethoxazole
& Trimethoprim
|
|
Bactrim
(R)
|
|
Tablets,
400 mg / 80 mg
|
|
|
| |
|
|
|
16.
Sulfamethoxazole
& Trimethoprim
|
|
Bactrim
DS (R)
|
|
Tablets
(Double Strength), 800 mg / 160 mg
|
|
|
|
|
|
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|
17.
Esterified Estrogens and Methyltestosterone
|
|
Estratest
|
|
Tablets,
0.625 mg / 1.25 mg
|
|
|
| |
|
|
|
18.
Esterified Estrogens and Methyltestosterone
|
|
Estratest
|
|
Tablets,
1.25 mg / 2.50 mg
|
|
|
| |
|
|
|
19.
Hydrocodone Bitartrate and Acetaminophen
|
|
Norco
(R)
|
|
Tablets,
USP 5 mg / 325 mg
|
|
|
| |
|
|
|
20.
Hydrocodone Bitartrate and Acetaminophen
|
|
Norco
(R)
|
|
Tablets,
USP 10 mg / 325 mg
|
|
|
| |
|
|
|
21.
Hydrocodone Bitartrate and Acetaminophen
|
|
Vicodin(R)
|
|
Tablets,
USP 5 mg / 500 mg
|
|
|
| |
|
|
|
22.
Hydrocodone Bitartrate and Acetaminophen
|
|
Lortab
(R)
|
|
Tablets,
USP 7.5 mg / 500 mg
|
|
|
| |
|
|
|
23.
Hydrocodone Bitartrate and Acetaminophen
|
|
Lortab
(R)
|
|
Tablets,
USP 10 mg / 500 mg
|
|
|
| |
|
|
|
24.
Hydrocodone Bitartrate and Acetaminophen
|
|
Lorcet
Plus(R)
|
|
Tablets,
USP 7.5 mg / 650 mg
|
|
|
| |
|
|
|
25.
Hydrocodone Bitartrate and Acetaminophen
|
|
Lorcet
(R)
|
|
Tablets,
USP 10 mg / 650 mg
|
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
|
26.
Hydrocodone Bitartrate and Acetaminophen
|
|
Vicodin
ES(R)
|
|
Tablets,
USP 7.5 mg / 750 mg
|
|
|
| |
|
|
|
27.
Ranitidine Hydrochloride Tablets, USP 150 mg
|
|
Zantac
(R)
|
| |
|
|
|
28.
Ranitidine Hydrochloride Tablets, USP 300 mg
|
|
Zantac
(R)
|
| |
|
|
|
29.
Naproxen Sodium Tablets, USP 275 mg
|
|
Anaprox
(R)
|
| |
|
|
|
30.
Naproxen Sodium Tablets, USP 550 mg
|
|
Anaprox
(R)
|
| |
|
|
|
31.
Gabapentin Capsules 100 mg
|
|
Neurontin(R)
|
| |
|
|
|
32.
Gabapentin Capsules 300 mg
|
|
Neurontin(R)
|
| |
|
|
|
33.
Gabapentin Capsules 400 mg
|
|
Neurontin(R)
|
| |
|
|
|
34.
Metformin HCl Tablets, USP 500 mg
|
|
Glucophage(R)
|
| |
|
|
|
35.
Metformin HCl Tablets, USP 850 mg
|
|
Glucophage(R)
|
| |
|
|
|
36.
Metformin HCl Tablets, USP 1000 mg
|
|
Glucophage(R)
|
Competition
The
generic pharmaceutical industry is intensely competitive. The primary means
of
competition involve manufacturing capabilities and efficiencies, innovation
and
development, timely FDA approval, product quality, marketing, reputation, level
of service, including the maintenance of sufficient inventory levels to assure
timely delivery of products, product appearance and price. Often, price is
the
key factor in the generic pharmaceutical business. Therefore, to compete
effectively and remain profitable, a generic drug manufacturer must manufacture
its products in a cost effective manner. We believe that in most instances,
we
maintain adequate levels of inventories to meet customer demand. In the first
half of fiscal 2007, we had experienced raw material supply issues, which
created backorders, which were fulfilled during the second half of the fiscal
year.We believe that our expansion and modernization of our facility, hiring
of
experienced personnel, including logistics and operations personnel, and
implementation of quality control programs have improved our competitive
position during fiscal 2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
During
the past several years the number of chain drug stores and wholesaler customers
have declined due to industry consolidation. In addition, the remaining chain
drug stores and wholesaler
customers have instituted buying programs that have caused them to buy more
products from fewer suppliers. At the same time, mail-order prescription
services and managed care organizations have grown in importance and they also
limit the number of vendors. The reduction in the number of our customers and
limitation on the number of vendors by the remaining customers has increased
competition among generic drug marketers. During fiscal year ended June 2007,
this has caused us to reduce pricing on some products in certain segments of
the
market. However, these pressures have not had a material adverse impact on
our
business and we believe that we have good relationships with our key
customers.
As
is the
case with many generic pharmaceutical manufacturers, many of our competitors
have longer operating histories and greater financial resources than us.
Consequently, some of these competitors may have larger production capabilities,
may be able to develop
products at a significantly faster pace at a reduced cost, and may be able
to
devote far greater resources to marketing their product lines.
Certain
manufacturers of brand-name drugs and/or their affiliates have been introducing
generic pharmaceutical products equivalent to such brand-name drugs at
relatively low prices (so-called “authorized generics”). Such pricing, with its
attendant diminished profit margins, could have the effect of inhibiting us
and
other manufacturers of generic pharmaceutical products from developing and
introducing generic pharmaceutical products comparable to certain brand-name
drugs. Also, consolidation among wholesalers, distributors, and repackagers,
and
technological advances in the industry and pricing pressures from large buying
groups, may create pricing pressure, which could reduce our profit margins
on
our product lines.
In
addition, increased price competition among manufacturers of generic
pharmaceutical products, resulting from new generic pharmaceutical products
being introduced into the market and other generic pharmaceutical products
being
reintroduced into the market, has led to an increase in demands by customers
for
downward price adjustments by the manufacturers of generic pharmaceutical
products. No assurance can be given that such price adjustments, which reduce
gross profit margins, will not continue, or even increase, with a consequent
adverse effect on our earnings.
Brand-name
companies also pursue other strategies to prevent or delay generic competition.
These strategies may include: seeking to establish regulatory and legal
obstacles that would make it more difficult to demonstrate bioequivalence,
initiating legislative efforts in various states to limit the substitution
of
generic versions of certain types of brand-name pharmaceuticals, instituting
legal action that automatically delays approval of an ANDA and may require
certifications that the brand-name drug's patents are invalid or unenforceable,
or introducing "second generation" products prior to the expiration of market
exclusivity for the reference product, obtaining extensions of market
exclusivity by conducting trials of brand-name drugs, persuading the FDA to
withdraw the approval of brand-name drugs, for which the patents are about
to
expire, thus allowing the brand-name company to obtain new patented products
serving as substitutes for the products withdrawn, or seeking to obtain new
patents on drugs for which patent protection is about to expire.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
The
ability of brand-name companies to successfully delay generic competition in
any
of our targeted new product lines may adversely affect our ability to enter
into
the desired product line or may impact our ability to attain our desired market
share for that product.
The
Food
and Drug Modernization Act of 1997 includes a pediatric exclusivity provision
that may provide an additional six months of market exclusivity for indications
of new or currently marketed drugs if certain agreed upon pediatric studies
are
completed by the applicant. Brand-name companies are utilizing this provision
to
extend periods of market exclusivity.
Backlog
We
do not
have a significant backlog, as we normally deliver products purchased by our
customers on a timely basis.
Patents
and Trademarks
We
do not
own any patents. Interpharm owns the registered trademark REPRAXIN.
Industry
The
Generic Drug Market and Necessary Approvals
Pharmaceutical
products in the United States are generally marketed as either "brand-name"
or
"generic" drugs. Brand-name products are drugs generally sold by the holder
of
the drug's patent or through an exclusive marketing arrangement. A company
that
receives approval for a new drug application ("NDA") from the U.S. Food and
Drug
Administration ("FDA"), usually the patent holder, has the exclusive right
to
produce and sell the drug during the life of the patent. This market exclusivity
generally provides brand-name products the opportunity to build-up physician
and
customer loyalties.
Once
a
patent on a drug expires, another manufacturer can obtain FDA approval to market
a "generic" version. A generic drug is therefore usually marketed after the
patent on a brand drug expires. However, a generic product may be marketed
prior
to the brand product’s patent expiration if that patent is shown to be invalid
or not infringed by the generic product.
The
FDA
requires that generic drugs have the same quality, strength, purity, identity
and efficacy as brand-name drugs. While comparable to brand-name drugs, generic
drugs are usually far less costly than brand-name drugs, resulting in
substantial savings to consumers, healthcare providers and hospitals. These
cost
savings have resulted in sustained growth of the generic pharmaceutical industry
in the United States. According to a Congressional Budget Office study, "How
Increased Competition from Generic Drugs has Affected Prices and Returns in
the
Pharmaceutical Industry," 1
in 1984,
19% of prescription drugs sold in the United States were generic. According
to a
Federal Trade Commission Study in July, 2002, "Generic Drug Entry Prior to
Patent Expiration,"2
that
figure reached more than 47%. Moreover, Generic Pharmaceutical Association
statistics indicate that generic drug products were dispensed 56% of the time
in
2005.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
(See
HTTP://WWW.GPHAONLINE.ORG/CONTENT/NAVIGATIONMENU/ABOUTGENERICS/STATISTICS/STATISTICS.HTM.
(1)
HTTP://WWW.CBO.GOV/SHOWDOC.CFM?INDEX=655&SEQUENCE=0
(2)
HTTP://WWW.FTC.GOV/OS/2002/07/GENERICDRUGSTUDY.PDF
Much
of
the growth of the generic pharmaceutical industry has been attributed to The
Drug Price Competition and Patent Term Restoration Act of 1984 (the
"Waxman-Hatch Act") which encourages generic competition. Before the
Waxman-Hatch Act, generic drug manufacturers had to put their products through
an approval process similar to that for the original approval for brand-name
drugs. Waxman-Hatch created an accelerated approval process in which the generic
manufacturer needs only to demonstrate to the FDA that, among other things,
the
generic product is bioequivalent to the brand-name product through the filing
of
an abbreviated new drug application ("ANDA"). The ANDA may rely on information
from the brand-name drug's application with the FDA instead of spending its
resources, time and money to collect the same information to support an FDA
approval to market its generic product.
On
June
12, 2003, the FDA announced new regulations and procedures to improve
implementation of the Waxman-Hatch Act. The new regulations and procedures
are
aimed at reducing the time it takes to bring generic drugs to the market and
expanding educational programs to assist health care practitioners and consumers
to get accurate information about the availability of generic drugs. The FDA
has
estimated that the new regulations and procedures will reduce the typical time
for generic drug approvals by three months or more during the three to five
year
period following implementation and will save consumers approximately
$35,000,000 over 10 years.
Government
Regulation
FDA
approval is required before any generic drug can be marketed through an ANDA.
While the FDA has significantly streamlined the process of obtaining ANDA
approval for generic drugs, it is difficult to predict how long the process
will
take for any specific drug. In fact, the length of time necessary to bring
a
product to market can vary significantly and can depend on, among other things,
availability of funding, problems relating to formulation, safety or efficacy,
patent issues associated with the product or barriers to market entry from
brand-name product manufacturers. Therefore, there is always the risk that
the
introduction of new products can be delayed.
The
ANDA
process requires that a company's manufacturing procedures and operations
conform to FDA requirements and guidelines, generally referred to as current
Good Manufacturing Practices ("cGMP"). The requirements for FDA approval
encompass all aspects of the production process, including validation and record
keeping, and involve changing and evolving standards. Compliance with cGMP
regulations requires substantial expenditures of time, money and effort in
such
areas as production and quality control to ensure full technical compliance.
The evolving and complex nature of these regulatory requirements, the broad
authority and discretion of the FDA and the generally high level of regulatory
oversight result in a continuing possibility that we may be adversely affected
by regulatory actions despite our efforts to comply with regulatory
requirements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
The
ANDA
process also requires bioequivalence studies to show that the generic drug
is
bioequivalent to the approved drug. Bioequivalence studies compare the
bioavailability of one drug product, e.g., the generic, with that of another
formulation containing the same active ingredient, e.g., the brand. When
established, bioequivalence confirms that the rate of absorption and levels
of
concentration in the bloodstream of a formulation of the approved drug and
the
generic drug are equivalent as defined by the FDA. Bioavailability indicates
the
rate and extent of absorption and levels of concentration of a drug product
in
the bloodstream needed to produce the same therapeutic effect.
We
contract with outside laboratories to conduct bioequivalence studies.
Historically, the vast majority of our research and development expenditures
have been on these studies. While we strive to engage reputable and experienced
companies to perform these studies, there can be no assurance that they will
use
the proper due diligence or that their work will otherwise be
accurate.
Supplemental
ANDAs are required for approval of various types of changes to an approved
application, and these supplements may be under review for six months or more.
In addition, certain types of changes may only be approved once new
bioequivalency studies are conducted or other requirements are satisfied.
The
scientific process of developing new products and obtaining FDA approval is
complex, costly and time consuming and there can be no assurance that any
products will be developed and approved despite the amount of time or money
spent on research and development. Product development may be curtailed in
the
early or later stages of development due to the introduction of competing
generic products or for other strategic or technical reasons.
Even
if
an ANDA is approved, brand-name companies can impose substantial barriers to
market entry which may include: receiving new patents on drugs whose original
patent protection is about to expire; developing patented controlled-release
products or other improvements to the original product; marketing
over-the-counter versions of the brand-name product that will soon face generic
competition; and commencement of marketing initiatives, regulatory activities
and litigation. While none of these actions have been taken against us to date,
there can be no assurance that they will not be taken in the future,
particularly as we significantly expand our product development
efforts.
In
addition to the Federal government, individual states have laws regulating
the
manufacture and distribution of pharmaceuticals, as well as regulations
pertaining to the substitution of generic drugs for brand-name drugs. Our
operations are subject to regulation, licensing requirements and inspection
by
the states in which we are located or conduct business.
We
must
also comply with federal, state and local laws of general applicability, such
as
laws regulating working conditions and equal opportunity employment.
Additionally, we are subject,
as are all manufacturers, to various federal, state and local environmental
protection laws and regulations, including those governing the discharge of
materials into the environment.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Historically,
the costs of complying with such environmental provisions have not had a
material adverse effect on our earnings, cash requirements or competitive
position, and we do not expect such costs to have any such material adverse
effect in the foreseeable future. However, if changes to such environmental
provisions are made that require significant changes in our operations or the
expenditure of significant funds, such changes could have a material adverse
effect on our earnings, cash requirements or competitive position.
As
a
public company, we are subject to the Sarbanes-Oxley Act of 2002 (the "SOX
Act"). The SOX Act contains a variety of provisions affecting public companies,
including the relationship with its auditors, prohibiting loans to executive
officers and requiring an evaluation of its disclosure controls and procedures
and internal controls. We have retained an outside consultant to assist us
with
the process of becoming compliant with Section 404 of the SOX Act by the
deadline for such compliance.
The
federal government established the Medicaid drug reimbursement as part of the
Omnibus Budget Reconciliation Act of 1990 ("OBRA"). Generally, OBRA provides
that a generic drug manufacturer must offer the states an 11% rebate on drugs
dispensed under the Medicaid program and must enter into a formal drug rebate
agreement with the Centers for Medicare and Medicaid Services (CMS).
In
the U.S., there have been a number of legislative and regulatory changes that
impact the pricing of our products. In particular, the Deficit Reduction Act
of
2005 and specific guidance issued by CMS changed the methodology as it is
applied to the underlying data for Medicaid rebates of pharmaceutical products.
Although
not required under OBRA, we have also entered into similar agreements with
various states.
Continuing
studies of the proper utilization, safety and efficacy of pharmaceutical
products are being conducted by the pharmaceutical industry, government agencies
and others. Such studies, which increasingly employ sophisticated methods and
techniques, can call into question the utilization, safety and efficacy of
previously marketed products. There can be no assurances that these studies
will
not, in the future, result in the discontinuance of product
marketing.
Raw
Materials
Most
of
the raw materials that we use in the manufacturing of our products consist
of
pharmaceutical chemicals in various forms, which are available from various
sources. FDA approval is required in connection with the process of selecting
active ingredient suppliers. In selecting a supplier, we consider not only
their
status as an FDA approved supplier, but consistency of their products,
timeliness of delivery, price and patent position.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Employees
As
of
June 30, 2007, we had approximately six hundred and seventy full time employees.
We believe we have a strong relationship with our employees. None of our
employees are represented by a union. Subsequent to June 30, 2007, we reduced
the number of employees to approximately five hundred and seventy in conjunction
with the various actions to improve profitability and cash flows generated
from
operations which is discussed in “Liquidity and Capital
Resources”.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
ITEM
1A.
Risk
Factors
We
operate in a highly competitive environment in which there are numerous factors
which can influence our business, financial position or results of operations
and which can also cause the market value of our common stock to decline. Many
of these factors are beyond our control and therefore, are difficult to predict.
The following section sets forth what we believe to be the principal risks
that
could affect us, our business or our industry, and which could result in a
material adverse impact on our financial results or cause the market price
of
our common stock to fluctuate or decline.
Risks
Related to Our Business
Our
future success is dependent on our ability to develop, manufacture and
commercialize new generic drug products.
Our
current business and expansion plan is dependent on our ability to successfully
develop, manufacture and commercialize new generic drugs. There are numerous
factors which can delay or prevent us from developing, manufacturing or
commercializing new products, including:
| |
·
|
inability
to obtain requisite FDA approvals on a timely basis for new generic
products;
|
| |
·
|
reliance
on partners for development of certain
products;
|
| |
·
|
the
availability, on commercially reasonable terms, of raw materials,
including active pharmaceutical ingredients and other key
ingredients;
|
| |
·
|
competition
from other generic drug companies offering the same or similar
products;
|
| |
·
|
inadequate
funding available for product marketing and
sales;
|
| |
·
|
failure
to obtain market acceptance for new generic products;
|
| |
·
|
failure
to succeed in patent challenges;
|
| |
·
|
unforeseen
costs in development;
|
| |
·
|
legal
actions by brand competitors; and
|
| |
·
|
inability
to demonstrate bioequivalence in clinical studies as required by
the FDA.
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
These,
as well as other factors may lead to product approval delays or the abandonment
of products in development. The failure of a product to reach successful
commercialization could materially and adversely affect our business and
operating results.
Our
future success is dependent upon incurring significant levels of research and
development expenditures which will continue to have an adverse effect on our
profitability.
Our
current business and expansion plan is dependent upon incurring significant
levels of research and development expenditures, which continue to have an
adverse effect on our profitability. This may cause the market price of our
common stock to decline or fluctuate.
We
face intense competition which could significantly limit our expansion and
growth and materially adversely affect our business and financial results.
The
generic drug market and industry is highly competitive. Most of our competitors
have greater financial, research and development, marketing and other resources
than we do and therefore, can develop and commercialize more products and
develop and commercialize them faster and more efficiently than us. The markets
in which we compete and intend to compete are undergoing, and are expected
to
continue to undergo, rapid and significant changes. We expect competition to
intensify as technological advances are made.
We
also
face intense price competition in certain of our products and expect to face
intense competition in some of the products we intend to develop and market.
This price competition may lead to reductions in prices and gross margins which
can adversely affect our business and financial results, and can cause the
price
of our common stock to decline or fluctuate.
We
address competitive issues by seeking to develop and manufacture products where
competition is limited. However, there can be no assurance that this strategy
will be effective as there may be no barriers to additional competitors entering
the market for these products.
We
may not maintain adequate product liability insurance.
We
currently maintain $10,000 in product liability insurance. While we believe
this
amount to be adequate, there can be no assurance that any one or series of
claims may exceed our coverage or that coverage will not be denied with respect
to a claim or series of claims. A lack of sufficient coverage could materially
and adversely affect our business, financial results and the market value of
our
common stock.
We
enter into various agreements in the normal course of our business which have
indemnification provisions, the triggering of which could have a material
adverse impact on our business and financial results.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
In
the
normal course of our business, we enter into manufacturing, marketing and other
agreements whereby we agree to indemnify the other party or parties in the
event
of certain breaches of the agreement or with respect to product defects or
recalls. While we maintain insurance
coverage which we believe can effectively mitigate our obligations under these
indemnification provisions, there can be no assurance that such coverage will
be
adequate to do so. Should our obligations under an indemnification provision
exceed our coverage or should coverage be denied, our business, financial
results and the market value of our common stock could be materially and
adversely affected.
Our
operating results are affected by a number of factors and may fluctuate
significantly on a quarterly basis.
Our
operating results may vary substantially from quarter to quarter. Revenues
and
other operating results for any given period may be greater or less than those
in other periods. Factors that may cause quarterly results to vary include,
but
are not limited to, the following:
| |
·
|
the
amount of research and development
expenditures;
|
| |
·
|
competition
for new and existing products;
|
| |
·
|
changes
in pricing for raw materials and other inputs;
and
|
Fluctuations
in our operating results may cause a decline or fluctuation in the price of
our
common stock.
Reserves
for credits and pricing adjustments may be inadequate.
For
certain customers, we issue various price adjustments and credits based on
market prices or sales to certain customers. For instance, when we sell certain
products to prime vendors for the U.S. government, the sales to the prime vendor
are at one price, but if the products are resold to the government, the prime
vendor gets to chargeback a portion of the purchase price because sales to
the
government are at a discount.
Although
we establish a reserve for these credits and chargebacks at the time of sale
based on known contingencies, there can be no assurance that such reserves
will
be adequate. Increases in credits and chargebacks may exceed what was estimated
as a result of a variety of reasons, including unanticipated increased
competition or an unexpected change in one or more of its contractual
relationships. Any failure to establish adequate reserves with respect to
credits or chargebacks may result in a material adverse effect on our business,
financial results and may cause the price of our common stock to decline or
fluctuate.
We
are presently dependent on a limited number of products for most of our
revenues.
We
currently generate most of our revenues and gross margins from the sale of
a
limited number of products. For the fiscal year ended June 30, 2007, the
following products accounted for 95% of our total revenues: Ibuprofen, generic
Bactrim, Naproxen and our female hormone products.
Ibuprofen alone accounted for 41% of our revenues. Any material adverse
developments, including increased competition, with respect to the sale or
use
of these products, or our failure to successfully introduce new products, could
have a material adverse effect on our revenues and gross margins.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
We
are presently dependent on a small number of major customers.
For
the
fiscal year ended June 30, 2007, five customers, in the aggregate, accounted
for
62% of the company’s sales. While we have been able to diversify our customer
base over the past two fiscal years, the loss of any one or more of these
customers or the substantial reduction in orders from any one or more of such
customers could have a material adverse effect on our operating results and
financial condition and could cause a decline in the market price of our common
stock.
Our
loan agreement with Wells Fargo Business Credit imposes significant operating
and financial restrictions, which may prevent us from capitalizing on business
opportunities and taking certain actions.
Our
loan
agreement with Wells Fargo Business Credit, a copy of which is contained in
our
Current Report on Form 8-K filed with the SEC on February 15, 2006, imposes
significant operating and financial restrictions on us. These restrictions
limit
our ability to, among other things, incur additional indebtedness, make
investments, sell assets, incur certain liens, or merge or consolidate. There
can be no assurance that these restrictions will not adversely affect our
ability to finance our future operations or capital needs or to pursue available
business opportunities.
As
set
forth below under “Management’s Discussion and Analysis,” we were unable to meet
certain financial covenants with Wells Fargo Business Credit and were required
to raise additional monies through the sale of debt securities. On November
14,
2007, Wells Fargo Business Credit lifted certain of the restrictions on us
which
enabled us to raise additional monies, waived certain defaults and agreed to
amended covenants. There can be no assurance that Wells Fargo Business Credit
will act similarly in the future if we breach our credit agreement
again.
We
may be liable to pay substantial damages, including liquidated damages, or
be
obligated to redeem such stock for cash if we do not timely perform certain
obligations we have to holders of our Series B-1 and C-1 Preferred
Stock.
In
May 2006 we sold to one institutional investor for $10,000 shares of our Series
B-1 Convertible Preferred Stock. In September 2006 we sold to another
institutional investor shares of our Series C-1 Convertible Preferred Stock
for
$10,000. Under the transaction documents relating to these sales the holders
have the right to redeem such shares for cash upon the occurrence of certain
events, including our failure to pay dividends on such stock, our failure to
timely deliver certificates for shares of our common stock if the holders elect
to convert such shares, if we default on indebtedness owed to third parties
and
such persons accelerate the maturity of at least $3,000 of such indebtedness,
or
there is a change in control of our company. In addition, we are subject to
penalties, up to a maximum of 18% of the aggregate purchase price (which
penalties accrue on a daily basis so long as we continue to be in default of
our
obligations) (a) if, within 60 days after a request to do so is made by the
holders of such preferred stock, we do not timely file with the Securities
and
Exchange Commission (the “SEC”) a registration statement covering the resale of
shares of our 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 our common stock because of
a
failure to keep the registration statement effective or because of a suspension
or delisting of our common stock from the American Stock Exchange or other
principal exchange on which our common stock is traded. We are also subject
to
penalties if we fail 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 our business and financial condition
would likely be materially adversely affected and the market price of our common
stock would likely decline.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
We
have defaulted in certain of our agreements with the holders of the Series
B-1
and C-1 Preferred Stock which have been waived per the Consent and Waiver
Agreement dated November 7, 2007, as described in the “Managements Discussion
and Analysis” Section below and under the heading “Recent Developments” in Item
1. Those holders have provided a waiver of those defaults in exchange for a
decrease in the conversion and exercise prices of the preferred stock and
warrants held by them which has a dilutive effect on our common stock. There
can
be no assurance that any future defaults will be similarly waived.
We
are currently involved in legal disputes which could have a material adverse
effect on our financial condition.
As
reported in our Current Report on Form 8-K filed with the SEC on June 28, 2006,
on June 1, 2006, Ray Vuono commenced an action against us in the Supreme Court
of the State of New York, County of Suffolk (Index No. 13985/06). The complaint
against Interpharm alleges, among other things, that Vuono is entitled to
receive additional compensation as a “finder” under an agreement dated July 1,
2002 with respect to a reverse merger transaction consummated by us in May
2003.
Vuono also alleges that he is entitled to additional compensation under the
agreement in respect of a $41,500 credit facility from Wells Fargo Business
Credit, Inc. obtained by us in February 2006 and the sale for $10,000 of shares
of a new series of convertible preferred stock and warrants to purchase our
common stock consummated by the Company with Tullis-Dickerson Capital Focus
III,
L.P. in May 2006. The total amount of damages sought by Vuono in the action
was
approximately $10,000.
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.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
The
Court
deferred its decision on Vuono’s motion to disqualify counsel, and held 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.
In
May
2007, a former employee commenced an action against us with the New York
State Division of Human Rights. The complaint alleges claims of race
discrimination. The total sought by the former employee in the action is
unspecified. We believe that the claims are without merit and are
vigorously defending the action. Currently, we cannot predict with
certainty the outcome of this litigation.
While
we
believe that these claims are without merit and are vigorously defending the
action, should we be unsuccessful in our defense, our business and financial
condition will be materially adversely affected and the market price of our
common stock could decline.
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 subsequently withheld any
additional payments under the Settlement until they received 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.
We
rely on independent third parties for some of the research and development
and
testing required for the regulatory approval of our products. Any failure by
any
of these third parties to perform this research and development or testing
properly and in a timely manner may have an adverse effect upon our ability
to
obtain regulatory approvals.
Our
applications
for the regulatory approval of products incorporate the results of research
and
development and testing and other information that is conducted or gathered
by
independent third parties (including, for example, Tris Pharma, Inc. whose
agreements with us are described fully under “Business”), manufacturers of raw
materials, testing laboratories, contract research organizations or independent
research facilities. Our ability to obtain regulatory approval on the products
being developed and tested is dependent upon the quality of the work performed
by these third parties, the quality of the third parties’ facilities and the
accuracy of the information provided by third parties. In some instances, we
have little or no control over any of these factors. If this testing is not
performed properly, our ability to obtain regulatory approvals could be
restricted or delayed.
Our
future success depends on our ability to attract and retain key employees and
consultants.
Our
future success will depend, to a substantial degree, upon the continued service
of the key members of our management team. The loss of the services of key
members of our management team, or their inability to perform services on our
behalf, could have a material effect
on our business and financial condition and could result in a decline in the
market value of our common stock.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Our
success,
and the success of our expansion plan, also will depend, to a large extent,
upon
the contributions of our existing sales, marketing, operations, regulatory,
compliance scientific, quality control and quality assurance staff and our
ability to build their departments and hire additional qualified personnel.
We
compete for qualified personnel against other larger companies which may offer
more favorable employment opportunities. If we are not able to attract and
retain the necessary personnel to accomplish our business objectives, we could
experience constraints that would adversely affect our ability to sell and
market products, or to support internal research and development programs.
In
particular, product development programs depend on the ability to attract and
retain highly skilled scientists, biochemists, and sales and marketing efforts
depend on the ability to attract and retain skilled and experienced sales,
marketing and quality assurance representatives. Although we believe we have
been successful in attracting and retaining skilled personnel in all areas
of
our business, we cannot assure that we can continue to attract, train and retain
such personnel. Any failure in this regard could limit our growth and expansion
and new product development.
Our
ability to service our debt from Wells Fargo Business Credit and make dividend
payments to the holders of our Series B-1 and C-1 Preferred Stock and to meet
our cash requirements depends on numerous factors, some of which are beyond
our
control.
Our
ability to satisfy our obligations to Wells Fargo Business Credit, the holders
of our Series B-1 and C-1 Preferred Stock, and the holders of our Junior
Subordinated Secured 12% Promissory Note due 2010 and the holders of our Secured
12% Promissory Notes Due 2009 will depend on our future operating performance
and financial results, which will be subject, in part, to factors beyond our
control, including interest rates and general economic, financial and business
conditions. If we are unable to generate sufficient cash flow, we may be
required to: refinance all or a portion of our debt with Wells Fargo, obtain
additional financing in the future for working capital, capital expenditures
and
general corporate or other purposes; redirect a substantial portion of our
cash
flow to debt service, which as a result, might not be available for our
operations or other purposes; sell some of our assets or operations; reduce
or
delay capital expenditures; or revise or delay our operations or strategic
plans. If we are required to take any of these actions, it could have a material
adverse effect on our business and financial condition. In addition, there
can
be no assurance that we would be able to take any of these actions, that these
actions would enable us to continue to satisfy our capital requirements or
that
these actions would be permitted under the terms of our agreement with Wells
Fargo or under the terms of the Series B-1 and C-1 Preferred Stock.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Risks
Related to Our Industry
Litigation
is common in our industry and can cause significant expense and
delays.
Branded
pharmaceutical companies with patented products are increasingly suing companies
that produce generic forms of their patented brand name products for alleged
patent infringement or other violations of intellectual property rights, which
may delay or prevent the entry of such generic products into the market.
Generally, a generic drug may not be marketed until the applicable patent(s)
on
the brand name drug expires. When an ANDA is filed with the FDA for approval
of
a generic drug, the filing person may either certify that the patent listed
by
the FDA as covering the generic product is about to expire, in which case the
ANDA will not become effective until the expiration of such patent, or that
any
patent listed as covering the generic drug is invalid or will not be infringed
by the manufacture, sale or use of the new drug for which the ANDA is filed.
Under either circumstance, there is a risk that a branded pharmaceutical company
may sue the filing person for alleged patent infringement or other violations
of
intellectual property rights. Also, other companies that compete with us by
manufacturing, developing and/or selling the same generic pharmaceutical
products similarly may file lawsuits against us claiming patent infringement
or
invalidity. Because a portion of our current business involves the marketing
and
development soon to be off-patent products, the threat of litigation, the
outcome of which is inherently uncertain, is always present. Such litigation
is
often costly and time consuming, and could result in a substantial delay in,
or
prevent, the commercialization of our products, which could have a material
adverse effect on our business and financial condition and the market for our
common stock.
We
are susceptible to product liability claims that may not be covered by
insurance, which, if successful, could require us to pay substantial
damages.
We
face the risk of loss resulting from, and the adverse publicity associated
with,
product liability lawsuits, whether or not such claims are valid. In many
instances, there is no way that such claims can be avoided. Unanticipated side
effects or unfavorable publicity concerning any of our products would likely
have an adverse effect on our ability to achieve acceptance by prescribing
physicians, managed care providers, pharmacies and other retailers, customers
and patients. Even unsuccessful product liability claims could require us to
spend money on litigation, divert management’s time, damage our reputation and
impair the marketability of our products. In addition, while we believe our
current level of product liability insurance is sufficient, there can be no
assurance that it will be enough to cover any one or series of claims. There
can
also be no assurance that as we expand, that we will be able to maintain
adequate insurance coverage at acceptable costs. A successful product liability
claim that is excluded from coverage or exceeds policy limits could require
us
to pay substantial sums. In addition, insurance coverage for product liability
may become prohibitively expensive in the future.
We
are subject to extensive governmental regulation, the non-compliance with which
may result in fines and/or other sanctions, including product seizures, product
recalls, injunctive actions and criminal prosecutions.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
We
are subject to extensive regulation by the federal government, principally
the
FDA and the Drug Enforcement Administration and state governments. The FFDC
Act,
the Controlled Substances Act, the Generic Drug Enforcement Act of 1992 (the
“Generic Act”), and other federal statutes and regulations govern the testing,
manufacture, safety, labeling, storage, recordkeeping, approval, advertising
and
promotion of our products. The Generic Act, a result of legislative
hearings and investigations into the generic drug approval process, is
particularly relevant to our business. Under the Generic Act, the FDA is
authorized to impose debarment and other penalties on individuals and companies
that commit illegal acts relating to the generic drug approval process. In
some
situations, the Generic Act requires the FDA not to accept or review for a
period of time ANDAs from a company or an individual that has committed certain
violations and provides for temporary denial of approval of applications during
its investigation. Additionally, non-compliance with other applicable regulatory
requirements may result in fines, perhaps significant in amount, and other
sanctions imposed by courts and/or regulatory bodies, including the initiation
of product seizures, product recalls, injunctive actions and criminal
prosecutions. The FDA also has the authority to withdraw its approval of drugs
in accordance with statutory procedures.
In
addition to the new drug approval process, the FDA also regulates the facilities
and operational procedures that we use to manufacture our products. We must
register our facilities with the FDA. All products manufactured in those
facilities must be made in a manner consistent with current good manufacturing
practices (“cGMP”). Compliance with cGMP regulations requires substantial
expenditures of time, money and effort in such areas as production and quality
control to ensure full technical compliance. The FDA periodically inspects
our
manufacturing facilities for compliance. FDA approval to manufacture a drug
is
site-specific. Failure to comply with cGMP regulations at one of our
manufacturing facilities could result in an enforcement action brought by the
FDA which could include withholding the approval of ANDAs or other product
applications of that facility. If the FDA were to require one of our
manufacturing facilities to cease or limit production, our business could be
adversely affected. Delay and cost in obtaining FDA approval to manufacture
at a
different facility also could have a material adverse effect on our business,
financial position and results of operations and could cause the market value
of
our common stock to decline.
Because
of the chemical ingredients of pharmaceutical products and the nature of the
manufacturing process, we are subject to extensive environmental regulation
and
the risk of incurring liability for damages and/or the costs of remedying
environmental problems. In the future, we may be required to increase
expenditures in order to remedy environmental problems and/or comply with
applicable regulations. Additionally, if we fail to comply with environmental
regulations to use, discharge or dispose of hazardous materials appropriately
or
otherwise to comply with the provisions of our operating licenses, the licenses
could be revoked and we could be subject to criminal sanctions and/or
substantial civil liability or be required to suspend or modify our
manufacturing operations.
As
part
of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003,
companies are now required to file with the FTC and the Department of Justice
certain types of agreements entered into between
brand and generic pharmaceutical companies related to the manufacture, marketing
and sale of generic versions of brand drugs. This requirement could affect
the manner in which generic drug manufacturers resolve intellectual property
litigation and other disputes with brand pharmaceutical companies and could
result generally in an increase in private-party litigation against
pharmaceutical companies or additional investigations or proceedings by the
FTC
or other governmental authorities. The impact of this requirement, and the
potential private-party lawsuits associated with arrangements between brand
name
and generic drug manufacturers, is uncertain and could adversely affect the
Company’s business.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Our
distribution operations and our customers are subject to various regulatory
requirements, including from the DEA, FDA and State Boards of Pharmacy and
Health, among others. These include licensing, registration, recordkeeping,
security and reporting requirements. Failure by the Company to comply with
these
regulatory requirements could impact our ability to make and/or maintain sales
of our products resulting in a materially adverse impact on the Company’s
finances.
Our
raw materials are purchased primarily from foreign distributors of bulk
pharmaceutical chemicals. Any significant supply interruption could have a
material adverse effect on our business and financial condition and could cause
a decline in the market value of our common stock.
Our
raw
materials are purchased primarily from foreign companies. From time to time,
we
have experienced difficulty in obtaining certain raw materials and products,
there can be no assurance that supply interruptions or delays will not occur
again in the future or that we will not have to obtain substitute materials
or
products, which would require additional regulatory approvals. In addition,
changes in its raw material suppliers could result in delays in production,
higher raw material costs and loss of sales and customers because regulatory
authorities must generally approve raw material sources for pharmaceutical
products. Any significant supply interruption could
have a material adverse effect on our business and financial condition and
could
cause a decline in the market value of our common stock.
We
may not be able to utilize all of the deferred tax assets recorded on our
balance sheet.
In accordance with Statement of Financial Accounting Standard (SFAS) No. 109,
“Accounting for Income Taxes,” we are required to establish a valuation
allowance against our deferred tax assets if it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
valuation allowance should be sufficient to reduce the deferred tax asset to
the
amount that is more likely than not to be realized. At June 30, 2007, we had
a
total of $5,975 in net deferred tax assets, which we believe are realizable
based on the requirements of SFAS 109. However, because we have shown volatile
operating results in the past and because there is no guarantee that the amount
and timing of net profits, if any, will be sufficient to fully utilize our
deferred tax assets, there is a risk that we will have to record an additional
valuation allowance in the future. Moreover, there is a risk that unfavorable
audits of, for example, tax credit or NOL carryforwards by government agencies
or change of ownership limitations under Section 382 of the Internal Revenue
Code of 1986 may reduce the value of our deferred tax assets. If any of these
events were to occur, our financial results for one or more periods would be
adversely affected.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
RISKS
RELATING TO OUR COMMON STOCK
Our
research and development expenditures may not lead to the commercialization
of
successful products.
Our current business and expansion plan calls for, and is dependent upon,
research and development expenditures in order to add new products to our
product line, but also upon the projected success of new products. There
can be no assurance, however, that these research and development expenditures
will result in successful or profitable products as there are many factors
which
affect the success of pharmaceutical products in the market such as consumer
acceptance, continuing acceptance by the medical profession, litigation and
product liability and competition. In the event that our significant
research and development expenditures do not result
in
profitable products, our business and financial condition would be materially
and adversely affected and the market price of our common stock would
decline.
We
have never paid cash dividends on our common stock and are not likely to do
so
in the foreseeable future.
We
have
never declared or paid any cash dividends on our common stock. We currently
intend to retain any future earnings for use in the operation and expansion
of
our business. We do not expect to pay any cash dividends in the foreseeable
future but will review this policy as circumstances dictate.
Six
of our shareholders control us through their ownership and control of voting
stock.
Four
of
our shareholders, one of whom is an Executive Vice President and owns
approximately 27% of our common stock, along with two investors who share a
proxy from three of these shareholders, own and control in the aggregate
approximately 76% of our common stock. These stockholders can effectively
control us and their interests may materially differ from other
shareholders.
There
is only a limited trading market for our common stock.
Our
common stock is traded on the American Stock Exchange, but the public float
available for trading is currently relatively small. Therefore, the volume
and
price of trading in our common stock is subject to significant fluctuations.
The
Waivers obtained from the holders of our Series B-1 and C-1 Preferred Stock
will
be dilutive to our other shareholders.
Pursuant
to the terms of the purchase of our Series B-1 and C-1 Preferred Stock, we
cannot raise additional capital through the sale of securities until such time
as the common stock into which the Series B-1 and C-1 Preferred Stock is
convertible has been registered for re-sale, which has not yet occurred. On
November 8, 2007, in exchange for a waiver permitted us to sell additional
securities, we lowered the conversion price of the Series B-1 and C-1 Preferred
Stock from $1.5338 to $0.95 and lowered the exercise price of an aggregate
of
4,564 warrants held by them
from
$1.639 to $0.95. The decreased conversion and exercise prices could result
in
the issuance of an additional 8,013 shares by us without additional
consideration which could increase our net loss per share to common stockholders
and may have an adverse impact on the market price of our common
stock.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
The
trading of our common stock has been suspended for failure to comply with rules
and regulations of the American Stock Exchange relating to timely SEC
filings.
As
reported in our Current Reports on Form 8-K and Form 8-K/A filed with the SEC
on
October 12 and 15, 2007, respectively, we disclosed that as a result of
negotiations with Wells Fargo Bank, National Association, acting through our
Wells Fargo Business Credit operating division ("Wells Fargo"), the Company
would not be able to file its Form 10-K by its due date of October 15, 2007
and
that we anticipated filing upon the conclusion of negotiations with Wells Fargo.
We further disclosed that on October 12, 2007, we notified the American Stock
Exchange (“AMEX”) that we would not file its Form 10-K in a timely manner in
conformity with Section 610(b) of the AMEX Company Guide.
On
October 15, 2007, we received notice from the AMEX that trading in its common
stock would be halted pending compliance with AMEX rules through the filing
of
financial information and on October 16, 2007, trading in its common stock
was
halted.
We
anticipate that we will be unable to file its Quarterly Report on Form 10-Q
for
the three months ended September 30, 2007 by its due date. This late filing
is
likely to result in an additional or continued suspension of trading in the
Company’s common stock on the AMEX, and could result in the delisting of the
Company’s common stock from the AMEX. A continued or additional trading
suspension may adversely impact the market value of our common stock in the
event that trading again commences and a delisting of our common stock from
the
AMEX is likely to adversely impact the market value of our common stock if
it
can be traded over-the-counter and may result in a substantial loss of value
if
it cannot be so traded.
ITEM
1B.
Unresolved Staff Comments
None.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
ITEM
2. PROPERTIES
Description
of Property
We
lease
an entire building in Hauppauge, New York, pursuant to a non-cancellable lease
expiring in October, 2019, which houses our manufacturing, warehousing and
some
of our executive offices. The leased building is approximately 100 square feet
and is located in an industrial/office park. The lease between the landlord
and
Interpharm Inc, states that upon a change in ownership of Interpharm Inc, which
occurred on May 30, 2003, the landlord is entitled to increase the rents to
fair
market value and every three years thereafter. The current annual lease payments
to the landlord, Sutaria Family Realty, LLC, are $660. Sutaria Family Realty,
LLC is owned by Mona Rametra, Perry Sutaria and Raj Sutaria, who collectively
own and control 37,706 shares of our common stock and 4,855 shares of our Series
A-1 Preferred Stock and are the children of Dr. Maganlal K. Sutaria, the
Chairman of our Board of Directors, and the niece and nephews of Bhupatlal
K.
Sutaria, our past President. In addition, Raj Sutaria is an Executive Vice
President of Interpharm Holdings, Inc. There are no tenants in the building
other than us.
In
January 2007, we entered into a seven year lease for approximately 20 square
feet of office space. The lease provides us 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, we are required to pay for renovations to the facility,
currently estimated at approximately $300.
On
June
29, 2004, pursuant to a contract entered into on November 14, 2003, we purchased
a 92 square foot facility on thirty seven acres of land, located at 50
Horseblock Road in Brookhaven, New York. The purchase price for the building
and
land was approximately $9,400. The facility is located in Suffolk County, New
York's Brookhaven Empire Zone. As part of the planned modifications to the
facility, we constructed a 16 square foot research and development laboratory
within the facility, which is now operational. Through June 30, 2007 we have
spent an additional $8,685 in building renovations and equipment.
ITEM
3. LEGAL
PROCEEDINGS
As
reported in our Current Report on Form 8-K filed with the SEC on June 28, 2006,
on June 1, 2006, Ray Vuono (“Vuono”) commenced an action against us in the
Supreme Court of the State of New York, County of Suffolk (Index No. 13985/06).
Vuono’s complaint against us alleges, among other things, that Vuono is entitled
to receive additional compensation as a “finder” under an agreement dated July
1, 2002 between Vuono and the Company (then known as Atec Group, Inc.) with
respect to a reverse merger transaction consummated by us in May 2003. Vuono
also alleges that he is entitled to additional compensation under the agreement
in respect of a $41,500 credit facility from Wells Fargo Business Credit, Inc.
obtained by us in February 2006 and the sale for $10,000 of shares of a new
series of convertible preferred stock and warrants to purchase our common stock
consummated by us with Tullis-Dickerson Capital Focus
III, L.P. in May 2006. The total amount of damages sought by Vuono in the action
was $10,000.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
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 a decision on Vuono’s motion to disqualify
counsel pending a hearing and further proceedings.
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.
We
believe that Vuono’s claims are without merit and we are vigorously defending
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 us with the New York
State Division of Human Rights. The complaint alleges claims of race
discrimination. The total sought by the former employee in the action is
unspecified. We believe that the claims are without merit and are
vigorously defending the action. Currently, we 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 subsequently held any
additional payments under the Settlement until they received 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.
We
are
unaware of any other material pending or threatened legal action or proceeding
against us.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of our security holders during the fiscal
quarter ended June 30, 2007.
PART
II
| ITEM 5. |
|
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON
EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE
RANGE OF COMMON
STOCK
|
Our
common stock is traded on the American Stock Exchange under the symbol "IPA."
As
reported in our Current Reports on Form 8-K and Form 8-K/A filed with the SEC
on
October 12 and 15, 2007, respectively, we disclosed that as a result of
negotiations with Wells Fargo Bank, National Association, acting through its
Wells Fargo Business Credit operating division ("Wells Fargo"), the Company
would not be able to file its Form 10-K by its due date of October 15, 2007
and
that we anticipated filing upon the conclusion of negotiations with Wells Fargo.
We further disclosed that on October 12, 2007, we notified the American Stock
Exchange (“AMEX”) that we would not file its Form 10-K in a timely manner in
conformity with Section 610(b) of the AMEX Company Guide.
On
October 15, 2007, we received notice from the AMEX that trading in our common
stock would be halted pending compliance with AMEX rules through the filing
of
financial information and on October 16, 2007, trading in its common stock
was
halted.
The
following table sets forth the high and low sale prices for our common stock
for
the periods indicated as reported by the American Stock Exchange. Such prices
reflect inter-dealer prices without retail mark-up, markdown or commissions
and
may not necessarily represent actual transactions.
| |
|
High
|
|
Low
|
|
| |
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
Quarter
ended 3/31
|
|
|
2.58
|
|
|
1.50
|
|
|
Quarter
ended 6/30
|
|
|
1.65
|
|
|
1.23
|
|
|
Quarter
ended 9/30
|
|
|
1.82
|
|
|
1.07
|
|
|
Quarter
ended 12/31
|
|
|
1.49
|
|
|
1.21
|
|
| |
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
Quarter
ended 3/31
|
|
|
1.68
|
|
|
1.24
|
|
|
Quarter
ended 6/30
|
|
|
1.56
|
|
|
1.10
|
|
|
Quarter
ended 9/30
|
|
|
1.54
|
|
|
1.08
|
|
|
Quarter
ended 12/31
|
|
|
2.51
|
|
|
1.25
|
|
| |
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
Quarter
ended 3/31
|
|
|
2.09
|
|
|
1.60
|
|
|
Quarter
ended 6/30
|
|
|
1.80
|
|
|
1.28
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
As
of
November 12, 2007, there were approximately one hundred and sixty seven holders
of record of our common stock, two hundred and eighty eight holders of record
of
Series C preferred shares, and one holder of record each of our Series B-1
Convertible Preferred Stock and Series C-1 Convertible Preferred
Stock.
We
do not
currently pay dividends on our common stock. It is our present intention not
to
declare or pay dividends on our common stock, but to retain earnings for the
operation and expansion of our business.
The
holders of our Series A-1 preferred shares are entitled to cumulative annual
dividends of $0.0341 per share when and as declared by our Board of Directors.
We are required to pay quarterly dividends on our Series B-1 Preferred Stock
and
our Series C-1 Preferred Stock at an annual dividend rate of 8.25%, in either
cash or common stock. In an effort to retain cash, we intend to pay the Series
B-1 Preferred Stock and Series C-1 Preferred Stock with restricted common
stock.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER
EQUITY
COMPENSATION PLANS
The
following table gives information about our common stock that may be issued
upon
the exercise of options, warrants and rights under all of our equity
compensation plans as of June 30, 2007. The table includes the following
plans: 1997 Stock Option Plan and 2000 Flexible Stock Plan.
|
Plan
Category
|
|
Number
of Securities to be issued upon exercise of outstanding options,
warrants
and rights
|
|
Weighted-average
exercise price of outstanding options, warrant and rights
|
|
Number
of securities remaining available for future issuance under equity
compensation plans(excluding securities reflected in column
(a))
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans
approved
by security
holders:
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
1997
Stock Option Plan
|
|
|
1,317
|
|
$
|
1.85
|
|
|
-0-
|
|
|
2000
Flexible Stock Plan(1)
|
|
|
10,613
|
|
$
|
0.99
|
|
|
9,387
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,930
|
|
$
|
1.08
|
|
|
9,387
|
|
(1)
Securities available for future issue increase each year by 10% of our
outstanding common stock at the beginning of each year. The total amount of
common stock available under the plan cannot exceed 20,000 shares.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
RECENT
SALES OF UNREGISTERED SECURITIES
During
the fiscal quarter ended June 30, 2007, we have made the following issuances
of
restricted securities:
We
issued
122 shares of common stock in payment of Series B-1 dividends accrued as of
March 31, 2007.
We
issued
122 shares of common stock in payment of Series C-1 dividends accrued as of
March 31, 2007.
We
issued
72 shares of common stock as a result of an exercise of employee options to
acquire our common stock. The shares were issued in reliance upon Section 4(2)
of the Securities Act.
At
June
30, 2007, we had accrued $206 each of Series B-1 and Series C-1 dividends,
which
was paid in July 2007 through the issuance of 148 shares each of our
common stock.
In
July
2007, we issued 8 shares of common stock as a result of the exercise of employee
options to acquire our common stock, for which we received cash of approximately
$5. The shares were issued in reliance upon Section 4(2) of the Securities
Act.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
SERIES
A-1,
B-1 and C-1
PREFERRED STOCK
Series
A-1 Convertible Preferred Stock
The
following are the principal designations, preferences and rights of our Series
A-1 Convertible Preferred Stock which is held by two holders:
|
-
Title.
|
$.01
par value per share Series A-1 Convertible Cumulative Preferred
Stock.
|
| |
|
|
-
Voting.
|
No
voting rights.
|
| |
|
|
-
Liquidation Preference.
|
$0.682
per share.
|
| |
|
|
-
Dividend Rights.
|
$0.0341
per share, per year, when and as declared by our Board of
Directors.
|
| |
|
|
-
Redemption Provisions.
|
None.
|
| |
|
|
-
Amount Authorized.
|
5,000
|
| |
|
|
-
Amount Issued.
|
4,855
|
| |
|
|
-
Conversion.
|
Converts
on a 1:1 basis into common stock
upon:
|
| |
i. |
the Company reaching $150,000 in revenues;
|
| |
ii.
|
a
merger, consolidation, sale of assets or similar transaction;
or
|
| |
iii.
|
a
“Change in Control” which occurs if (a) any person, or any two or more
persons acting as a group, and all affiliates of such person or persons,
shall, acquire and own, beneficially, 50% or more of the common stock
outstanding, or (b) if following (i) a tender or exchange offer for
voting
securities of the Company, or (ii) a proxy contest for the election
of
directors of the Company, the persons who were directors of the Company
immediately before the initiation of such event cease to constitute
a
majority of the Board of Directors of the Company upon the completion
of
such tender or exchange offer or proxy contest or within one year
after
such completion.
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Series
B-1 Redeemable Convertible Preferred Stock
On
May
15, 2006, Tullis-Dickerson Capital Focus III, L.P. purchased 10 shares of our
newly designated Series B-1 Redeemable Convertible Preferred Stock as fully
described in our Current Report on Form 8-K filed with the SEC on June 2, 2006.
The following are the principal designations, preferences and rights of our
Series B-1 Redeemable Convertible Preferred Stock which is held by one
holder:
|
-
Title.
|
$.01
par value per share Series B-1 Convertible Preferred
Stock.
|
| |
|
|
-
Voting.
|
Each
votes with the common and has a number of votes equal to the number
of
shares of common into which it is convertible on the record date
for the
action to be voted upon. The current aggregate number of votes for
the
Series B-1 Stock is 6,520.
|
| |
|
|
-
Liquidation Preference.
|
Upon
certain liquidation events set forth in the Certificate of Designation,
the holder of each share is entitled to a payment of $1 plus accrued
but
unpaid dividends.
|
| |
|
|
-
Dividend Rights.
|
8.25%
per annum, payable quarterly in arrears in either cash or at our
option,
in restricted common stock.
|
| |
|
|
-
Redemption Provisions.
|
We
are required to redeem the Series B-1 Stock upon the occurrence of
specified events, including, but not limited to a change in control,
a
going private transaction, failure to pay dividends or a failure
to allow
conversion.
|
| |
|
|
-
Amount Authorized.
|
15
|
| |
|
|
-
Amount Issued.
|
10
|
| |
|
|
-
Conversion.
|
The
Series B-1 Stock, as well as any accrued dividends, may be converted
at
any time by the holder into a number of shares of our common stock
determined by dividing the dollar amount to be converted by $1.5338.
Pursuant to the subsequent debt issuance discussed below (“Liquidity and
Capital Resources”), the conversion was reduced to
$0.95.
|
| |
|
|
-
Registration Rights
|
The
holders of the Series B-1 Stock have demand registration rights pursuant
to which we must file a registration statement to cover common shares
into
which the Series B-1 Stock is convertible within 60 days of a request
to
do so.
|
| |
|
|
-
Right to Appoint a Director
|
For
so long as Tullis-Dickerson Capital Focus III, L.P. or any of its
affiliates holds at least 25% of the Series B-1 Stock, it shall have
the
right to appoint one member of our Board of
Directors.
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Series
C-1 Redeemable Convertible Preferred Stock
On
September 11, 2006, Aisling Capital II, LP purchased 10 shares of our newly
designated Series C-1 Redeemable Convertible Preferred Stock as fully described
in our Current Report on Form 8-K filed with the SEC on September 15, 2006.
The
following are the principal designations, preferences and rights of our Series
C-1 Redeemable Convertible Preferred Stock which is held by one
holder:
|
-
Title.
|
$.01
par value per share Series C-1 Convertible Preferred
Stock.
|
| |
|
|
-
Voting.
|
Each
votes with the common and has a number of votes equal to the number
of
shares of common into which it is convertible on the record date
for the
action to be voted upon. The current aggregate number of votes for
the
Series C-1 Stock is 6,520.
|
| |
|
|
-
Liquidation Preference.
|
Upon
certain liquidation events set forth in the Certificate of Designation,
the holder of each share is entitled to a payment of $1 plus accrued
but
unpaid dividends.
|
| |
|
|
-
Dividend Rights.
|
8.25%
per annum, payable quarterly in arrears in either cash or at our
option,
in restricted common stock.
|
| |
|
|
-
Redemption Provisions.
|
We
are required to redeem the Series C-1 Stock upon the occurrence of
specified events, including, but not limited to a change in control,
a
going private transaction, failure to pay dividends or a failure
to allow
conversion.
|
| |
|
|
-
Amount Authorized.
|
10
|
| |
|
|
-
Amount Issued.
|
10
|
| |
|
|
-
Conversion.
|
The
Series C-1 Stock, as well as any accrued dividends, may be converted
at
any time by the holder into a number of shares of our common stock
determined by dividing the dollar amount to be converted by $1.5338.
Pursuant to the subsequent debt issuance discussed below (“Liquidity and
Capital Resources”), the conversion was reduced to
$0.95.
|
| |
|
|
-
Registration Rights
|
The
holders of the Series C-1 Stock have demand registration rights pursuant
to which we must file a registration statement to cover common shares
into
which the Series C-1 Stock is convertible within 60 days of a request
to
do so.
|
| |
|
|
-
Right to Appoint a Director
|
For
so long as Aisling Capital II, LP or any of its affiliates holds
at least
25% of the Series C-1 Stock, it shall have Board observer
rights.
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
ITEM
6.
SELECTED
FINANCIAL DATA
The
following table presents summary financial data for the years ended June 30,
2007, 2006, 2005, 2004, and the six-months ended June 30, 2003. The following
summary financial data should be read in conjunction with the consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Report (in
thousands except per share data):
| |
|
Year
Ended June 30, 2007
|
|
Year
Ended June 30, 2006
|
|
Year
Ended June 30, 2005
|
|
Year
Ended June 30,
2004
|
|
Six
Months Ended June 30, 2003
|
|
|
Net
Sales
|
|
$
|
75,587
|
|
$
|
63,355
|
|
$
|
39,911
|
|
$
|
41,100
|
|
$
|
14,953
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
(14,058
|
)
|
|
(3,790
|
)
|
|
(149
|
)
|
|
3,123
|
|
|
724
|
|
|
(Loss)
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.26
|
)
|
|
(0.15
|
)
|
|
(0.01
|
)
|
|
0.16
|
|
|
0.08
|
|
|
Diluted
|
|
|
(0.26
|
)
|
|
(0.15
|
)
|
|
(0.01
|
)
|
|
0.04
|
|
|
0.02
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
74,374
|
|
|
62,867
|
|
|
46,390
|
|
|
35,168
|
|
|
20,339
|
|
|
Long-term
obligations
|
|
|
15,849
|
|
|
14,077
|
|
|
6,706
|
|
|
7,076
|
|
|
267
|
|
|
Cash
dividend per
common
share
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
(in
Thousands except per share data)
Results
of Operations
Overview
Interpharm
Holdings, Inc., (the "Company" or "Interpharm"), through its operating
wholly-owned subsidiary, Interpharm, Inc., ("Interpharm, Inc." and collectively
with Interpharm, "we" or "us") is engaged in the business of developing,
manufacturing and marketing generic prescription strength and over-the-counter
pharmaceutical products. As of June 30, 2007, we manufactured and marketed
36
generic pharmaceutical products, which represent various oral dosage strengths
for 11 unique products for twenty-five of these products.
As
more
fully described below, as a result of increased expenses and losses incurred
by
the Company during the fiscal year ended June 30, 2007, we defaulted on our
credit facility with WFBC and, in November 2007, had to raise an additional
$8,000 in debt financing. A complete description of the debt financing and
a
Forbearance Agreement with WFBC may be found below in “Liquidity and Capital
Resources.”
Net
sales
for the fiscal year ended June 30, 2007 were $75,587 compared to $63,355 for
fiscal year ended June 30, 2006, an increase of $12,232 or 19%. We successfully
increased sales of existing products as we continued to expand our distribution
with the top tier accounts in retail, wholesale, distributor, and managed care
trade classes. However, we had also anticipated launching three new generic
pharmaceutical products by June 2007, all of which were delayed. These new
products are currently on schedule to be launched in fiscal year ended June
2008.
Our
gross
margin was 28.7% for the fiscal year ended June 30, 2007, which was somewhat
improved over our 27.5% gross margin in the previous year. In the first half
of
fiscal 2007, we had experienced raw material supply issues, which created
backorders, which were fulfilled during the second half of the fiscal year.
At
the same time, we encountered difficulty in forecasting new customer demand
for
existing product positions. In an effort to maintain satisfactory customer
service levels while solving our raw material supply issues, we created an
oversupply and build up of inventory levels. In addition, we lost a large
purchaser of our OTC Ibuprofen product at March 31, 2007, due to the customer’s
FDA regulatory problems, and the customer is no longer purchasing product from
us. One result of the foregoing was a significant increase in inventory levels
by June 2007.
In
parallel, we continued to strengthen our employee infrastructure, particularly
in areas such as regulatory affairs and cGMP compliance, and we implemented
a
new enterprise resource planning IT system needed to accommodate future growth.
In addition, we continued spending on our generic pharmaceutical R&D
programs at original planned levels. As sales were lower than anticipated,
the
net result was a significant operating loss for fiscal 2007 which we expect
to
continue through the first quarter of fiscal 2008. Coupled with the increased
inventory levels, the operating losses led to a rapidly worsening cashflow
situation towards the end of fiscal 2007. Subsequent to June 2007, we proceeded
to identify sources of debt and equity financing which in
the
completion of $8,000 in subordinated debt financing transactions in November
2007 (see “Liquidity and Capital Resources” for detailed
discussion).
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
With
respect to our research and development programs, during fiscal 2007 we filed
ten ANDAs and two additional ANDAs owned by the Company but in the name of
Tris
Pharma.
In
addition during fiscal 2007, we obtained FDA approval for twelve ANDAs for
five
unique products which we plan to launch in FY 2008.
We are
now manufacturing and packaging commercial quantities of some of our current
products at our Yaphank facility. The specialized facilities for oral
contraceptives, soft gels and high potency products are now operational. We
are
commencing production of batches for use in conducting bioequivalence studies
and the submissions of ANDAs.
We
have
continued to develop products in areas that are characterized by having high
barriers to entry, i.e., related to formulation, technology, patents, analytical
and dedicated facilities. We have been aggressive in advancing these high
barrier product areas. While the development process has taken longer than
planned, we continue to make good progress in these areas.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Fiscal
Year Ended June 30, 2007 compared to Fiscal Year Ended June 30,
2006
| |
|
For
the Fiscal
Year
Ended
June
30, 2007
|
|
For
the Fiscal
Year
Ended
June
30, 2006
|
|
|
SALES,
Net
|
|
$
|
75,587
|
|
$
|
63,355
|
|
|
COST
OF SALES
|
|
|
53,920
|
|
|
45,927
|
|
| |
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
21,667
|
|
|
17,428
|
|
| |
|
|
|
|
|
|
|
|
Gross
Profit Percentage
|
|
|
28.67
|
%
|
|
27.51
|
%
|
| |
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
13,340
|
|
|
11,449
|
|
|
Related
party rent expense
|
|
|
103
|
|
|
72
|
|
|
Research
and development
|
|
|
18,962
|
|
|
10,674
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
32,405
|
|
|
22,195
|
|
| |
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(10,738
|
)
|
|
(4,767
|
)
|
| |
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
Contract
termination expense
|
|
|
(1,655
|
)
|
|
|
|
|
Asset
impairment charge
|
|
|
(101
|
)
|
|
---
|
|
|
Loss
on Sale of Fixed Asset
|
|
|
(99
|
)
|
|
(5
|
)
|
|
Interest
expense, net
|
|
|
(1,275
|
)
|
|
(718
|
)
|
| |
|
|
|
|
|
|
|
|
TOTAL
OTHER EXPENSES
|
|
|
(3,130
|
)
|
|
(723
|
)
|
| |
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(13,868
|
)
|
|
(5,490
|
)
|
| |
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE (BENEFIT)
|
|
|
190
|
|
|
(1,700
|
)
|
| |
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(14,058
|
)
|
$
|
(3,790
|
)
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Net
Sales
Net
sales
for the fiscal year ended June 30, 2007 were $75,587 compared to $63,355 for
fiscal year ended June 30, 2006, an increase of $12,232 or 19%. Significant
components contributing to our sales growth are set forth in the table below:
| |
|
Year
ended June
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
%
of
|
|
|
|
%
of
|
|
| |
|
Sales
|
|
Sales
|
|
Sales
|
|
Sales
|
|
|
Ibuprofen
|
|
$
|
31,149
|
|
|
41.2
|
|
$
|
33,836
|
|
|
53.4
|
|
|
Bactrim(R)
|
|
|
17,471
|
|
|
23.1
|
|
|
4,220
|
|
|
6.7
|
|
|
Naproxen
|
|
|
12,221
|
|
|
16.2
|
|
|
9,401
|
|
|
14.8
|
|
|
Female
hormone product
|
|
|
11,199
|
|
|
14.8
|
|
|
8,100
|
|
|
12.8
|
|
|
Hydrocodone/Ibuprofen
|
|
|
2,334
|
|
|
3.1
|
|
|
3,693
|
|
|
5.8
|
|
|
Hydrocodone/Acetaminophen
|
|
|
545
|
|
|
0.7
|
|
|
--
|
|
|
--
|
|
|
All
Other Products
|
|
|
668
|
|
|
0.9
|
|
|
4,105
|
|
|
6.5
|
|
|
Total
|
|
$
|
75,587
|
|
|
100
|
%
|
$
|
63,355
|
|
|
100
|
%
|
| |
§
|
Net
sales of Ibuprofen for the year ended June 30, 2007 decreased $2,687,
or
7.9%, as compared to sales for the year ended June 30, 2006. The
decrease
is partially due to supply chain issues incurred during our fiscal
year
ended June 30, 2007 and partially due to a decrease in demand for
a
specific strength of Ibuprofen. The decrease in demand is directly
related
to one of our customer’s voluntary suspension of sales of over-the-counter
pharmaceuticals as a result of the FDA inspection, which
was unrelated to our product. We have been working with our suppliers
to
obtain adequate supplies of Ibuprofen raw material. We are currently
attempting to qualify an additional source of Ibuprofen, and we are
making
efforts to ensure that our suppliers maintain adequate levels of
inventory
sufficient to enable us to increase our overall
production.
|
| |
§
|
For
year ended June 30, 2007 we significantly increased our market share
of
Sulfamethoxazole - Trimethoprim in two strengths 400mg / 80mg commonly
referred to as generic Bactrim(R) and 800mg / 160mg or commonly referred
to as Bactrim-DS(R) (both, “Bactrim”). Sales increased to $17,471 during
the year ended June 2007 from $4,220 for the year ended June 30,
2006,
primarily as a result of two significant factors: (i) our entering
into
sales and marketing arrangements with two major distributors which
include
net profit sharing arrangements; and (ii) favorable pricing conditions
in
the market.
|
| |
§
|
Naproxen
net sales for the year ended June 30, 2007 increased $2,820 or 30%,
as
compared to sales for the year ended June 2006. The increase is primarily
due to our success in increasing our customer
base.
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
| |
§
|
Net
sales of our female hormone products for the year ended June 30,
2007
increased $3,099 or 38.3% compared to sales for the year ended June
2006
due primarily to a higher volume of units shipped during the current
fiscal year. As previously reported, as a result of market conditions,
on
October 27, 2006, we amended our agreement with Pharmaceuticals,
Inc.
(“Centrix”). Commencing November 2006, Centrix agreed to purchase over a
twelve month period, 40% more bottles than the initial year of the
agreement at a discounted price with a provision for profit sharing.
Under the amended agreement, the parties shared net profits as defined
in
the agreement. The amendment has a one year term, after which time
the original Centrix agreement shall again be in full force and
effect.
|
| |
§
|
On
October 3, 2006, we entered into a termination and release agreement
(the
“Termination Agreement”) with Watson terminating the Manufacturing and
Supply Agreement dated as of October 14, 2003 pursuant to which we
manufactured and supplied and Watson distributed and sold generic
Vicoprofen(R) (7.5 mg hydrocodone bitartrate/200 mg ibuprofen) tablets.
As
a result of the Termination Agreement we obtained all rights to market
this product. Net sales of this product for the year ended June 2007,
decreased $1,360 or 36.8% to $2,334 as compared to $3,693 for the
year
ended June 2006. The decrease is partially due to a decrease in units
shipped as well as a decrease in market prices for this product during
the
year ended June 2007.
|
| |
§
|
As
a result of our decision to halt the manufacture and sale of Allopurinol
and Atenolol under a contract manufacturing agreement, our revenues
for
these products declined during the fiscal year ended June 30, 2007.
Both
Allopurinol and Atenolol were manufactured for and shipped to one
customer
based on quantities ordered by that customer. Revenue from sales
of Allopurinol
and Atenolol decreased by $2,287 from $2,289 for the year ended June
30,
2006 to $2 for the year ended June 30, 2007. Sales of these product
are
included in All Other Products in the table above. The manufacturing
capacity gained from the decrease in production of these two products
is
being used for other products. For fiscal 2008 and beyond we anticipate
little or no sales of these
products.
|
During
the fiscal year ended June 30, 2007, five customers, in the aggregate, accounted
for approximately 62% of total sales. For the fiscal year ended June 30, 2006
we
had four key customers which accounted for approximately 53%.
Cost
of sales / Gross Profits
During
year ended June 30, 2007, prices for raw materials remained relatively constant
when compared to the prior year.
While
no
assurance can be given, we
anticipate this trend to continue, at least for the near future. During the
fiscal year ended June 30, 2007, we have
incurred increased direct labor and supervisory salaries and related benefits
associated with increased production. As
part of our expansion plan, we have continued to increase our managerial and
production staff. We believe this increase is required and should
ultimately support our expansion plan. Additionally,
we incurred increased general overhead costs, such as product liability
insurance, workers compensation insurance, medical benefits and utilities.
We
believe these higher costs will likely continue for the near
future.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Gross
profit for the fiscal year ended June 30, 2007 significantly increased by
$4,239, or 24%, to $21,667, compared to $17,428 for the year ended June 30,
2006. In
addition, our gross profit percentage
remained relatively consistent, increasing 1.2 percentage points from 27.5%
for
the year ended
June 30, 2006 to 28.7% for the year ended June 30, 2007. While
direct labor and most overhead expenses have increased to accommodate higher
manufacturing throughput in fiscal 2007, the improvement in gross margin is
primarily a function of (i) the Company selling higher margin products during
the current fiscal year and (ii) greater throughput and relatively higher
inventory levels as of June 30, 2007 resulting in higher absorption of labor
and
overhead and thus, a positive impact on cost of goods sold.
Gross
margin percentage can fluctuate as a result of many factors, such as changes
in
our selling price or the cost of raw materials, as well as increases in cost
of
labor and general overhead. Fluctuations in our sales volume and product
mix affect gross margin dollars. As part of our plan, we are seeking to add
new
products with higher margins, however, there can be no assurance that sales
will
increase or cost of sales will not increase disproportionately.
Selling
and General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses include salaries and related
costs, commissions, travel, administrative facilities, communications costs
and
promotional expenses for our direct sales and marketing staff, administrative
and executive salaries and related benefits, legal, accounting and other
professional fees as well as general corporate overhead.
During
the fiscal year ended June 30, 2007, SG&A expenses increased $1,891, or
16.5% to $13,340, as compared to $11,449 during fiscal year end June 2006.
When
stated as a percentage of net sales, SG&A expenses decreased to 17.6% for
the year ended June 2007 as compared to 18.1% for the year ended June
2006.
Significant
factors contributing to the dollar increase in SG&A expenses include: an
increase of $887 in compensation and related taxes and benefits of sales and
administrative staff to support our growth; an increase in professional services
of $688, of which $289 relates to costs associated with the implementation
of
our new ERP system and of which the remainder can be associated with management
and IT consulting, an increase in depreciation of $545, primarily due to our
second facility becoming operational for general and administrative purposes
in
July 2006; an increase in rent of $50 and utilities of $196, much of which
is
associated with our second facility; an increase in computer-related expenses
of
$202 related to the increase in the number of employees; and an increase in
Board Compensation of $194 as a result of a new Board of Directors Compensation
Policy. Included in SG&A expense for the fiscal year ended June 2006, was a
$621 non-recurring expense related to investment banking services and a
non-recurring commission expense of $460 related to a specific contract
providing for commissions to one salesman during the first year of sales under
a
sales agreement with Centrix. The one time expenses incurred during the year
ended June 2006 offset the increases noted above in SG&A expenses in the
current year.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Research
and Development Expenses
Research
and development expenses for new products currently in development in our new
product pipeline consist primarily of wages, outside development organizations,
bioequivalence studies, materials, legal fees, and consulting fees. Research
and
development expenses increased by $8,288 or 77.6% during the fiscal year ended
June 30, 2007 to $18,962 as compared to $10,674 during the fiscal year ended
June 2006. This represents an increase in R&D as a percentage of net sales
to 25.1% for the fiscal year ended June 30, 2007 as compared to 16.8% for the
fiscal year ended June 2006.
The
increase was due to: higher compensation expenses of $2,324 primarily related
to
the expansion of analytical chemist and product formulation staff; an increase
of $1,561 for legal services primarily related to patent reviews for products
under development or pending launch; an increase in purchases of raw materials
of $1,276 necessary for the production of trial batches of new generic
pharmaceutical products; $1,128 of increased costs related to bioequivalence
studies for new generic pharmaceutical products currently in development; and
an
increase of $749 for consulting related to new product development.
Our
research and development efforts continue to focus in the areas of oral
contraceptives, soft gelatin capsules and modified release products, and we
are
planning to commence bioequivalence studies in each of these areas by December
2007. Work is progressing well in the product area of products coming off
patent. As we continue to focus in on these types of pharmaceutical products
and
as new products are released we anticipate a decline in our research and
development costs.
As
previously disclosed, during February 2005, we 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, we 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 us to challenge the patents
for the equivalent branded products. 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 us and 40% for Tris. Further, this agreement
provides us 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, we 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.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
During
October 2006, we 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”). We 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. We were required to pay Tris $1,000, whether or not regulatory approval
is obtained for any of the liquid products. We have 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.
We
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.
Interest
Expense
Our
net
interest expense increased approximately $557 to approximately $1,275 for the
fiscal year ended June 30, 2007 from $718 for the fiscal year ended June 30,
2006. In an effort to fund our plan, we increased our borrowings from our
credit facility with Wells Fargo Business Credit. The additional borrowings
were
required primarily to fund our research and development efforts, for renovation
and construction costs incurred for our second facility and new equipment.
In
addition to these borrowings being in place for the entire year ended June
30,
2007, we also began to draw down from our line of credit in Q4 2007 and taken
additional equipment loans. Our total outstanding debt with Wells Fargo was
$26,400 at June 30, 2007 compared to $15,567 at June 30, 2006.
In
addition, $87 was included in interest expense for the fiscal year ended June
30, 2007 related to the accreted interest on the Watson Laboratories, Inc.
(“Watson”) Termination Agreement (the “Termination Agreement”) discussed below.
In
order
to hedge against rising interest rates, we entered into two interest rate swap
arrangements. Fair value of the interest rate swaps at June 30, 2007 and 2006
was approximately $10 and $98 and is included in Other Assets. However, it
is
likely that, as a result of additional borrowings we will incur increases in
our
interest expense in the future.
Contract
Termination Expense
On
October 3, 2006, we entered into a Termination and Release Agreement with Watson
terminating the Manufacturing and Supply Agreement dated October 14, 2003 (the
“Supply Agreement”) pursuant to which we manufactured and supplied and Watson
distributed and sold generic Vicoprofen(R) (7.5 mg hydrocodone bitartrate/200
mg
ibuprofen) tablets, (the “Product”). As a result of entering into the
Termination Agreement, we recorded contract termination expense of $1,655 for
the year ended June 30, 2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Operating
Loss
Although
our sales and gross margins increased, as a result of our increase in research
and development efforts from which we believe we will see the benefits from
in
the future, along with increases in selling and general and administrative
costs, we incurred an operating loss of $10,738 for the year ended June 30,
2007
compared to an operating loss of $4,767 for the year ended June 30, 2006.
Income
Taxes
We
account 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
net deferred tax asset is adjusted by a valuation allowance, if, based on the
weight of available evidence, it is more likely than not that some portion
or
the entire net deferred tax asset will not be realized. We assess realization
of
our deferred tax assets based on all available evidence in order to conclude
whether it is more likely than not that the deferred tax assets will be
realized. Available evidence considered includes, but is not limited to, the
our
historic operation results, projected future operating earnings results,
reversing temporary differences and changing business circumstances. When there
is a change in circumstances that causes a change in judgment about the
realizability of the deferred tax assets, we may adjust all or a portion of
the
applicable valuation allowance in the period when such changes occur. For the
year ended June 30, 2007 increased our valuation allowance by $4,670 and we
recorded income tax expense of $190 as compared to the year ended June 30,
2006,
which had a benefit from income tax of $1,700.
Liquidity
and Capital Resources
At
June
30, 2007 we had an accumulated deficit of $18,831 and operating activities
used
$14,105 of cash for the year then ended. In order to address our operating
loss
position and our lack of liquidity, (i) we have completed a series of banking
and financing activities in October and November 2007, which are outlined below
in “Subsequent Events - Banking and Financing Transactions”, and (ii) we are
taking various actions to improve profitability and cash flows generated from
operations, including:
| |
·
|
Reducing
headcount and other operating expenses in different functional areas
where
possible while still carrying out our future growth
plan
|
| |
·
|
Increasing
revenue through the launch of new products, identifying new customers
and
expanding relationships with existing
customers
|
| |
·
|
Scaling
back our research and development activities to levels where we can
execute our overall business plan while managing the financial
implications
|
While
we believe that the initiatives described above will result in positive cash
flows and profitability, there can be no assurance that we will achieve our
cash
flow and profitability goals, or that we will be able, if necessary, to raise
additional capital sufficient to implement our plans. In such event, we may
have
to revise our plans and significantly reduce our operating expenses, which
could
have an adverse effect on revenue and operations in the short term.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Subsequent
Events - Banking and Financing Transactions
1.
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”).
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.
2.
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 November
7,
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 October 1, 2009 (the “STAR Notes”) in the following
amounts to the following parties:
|
Tullis-Dickerson
Capital Focus III, L.P. (“TD III”)
|
|
$
|
833
|
|
|
Aisling
Capital II, L.P. (“Aisling”)
|
|
$
|
833
|
|
|
Cameron
Reid (“Reid”)
|
|
$
|
833
|
|
|
Sutaria
Family Realty, LLC (“SFR”)
|
|
$
|
2,500
|
|
TD
III 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
(In
thousands, except per share data)
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 TD III 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.
3.
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 TD III 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 TD III 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 TD III and Aisling tag
along rights on certain sales of Company common stock.
Our
operations and capital expenditures have been financed through cash flows from
operations and the WFBC Credit Facility. For the fiscal year ended June 30,
2007, net cash used in operating activities was $14,105 as compared to cash
provided by operating activities of $801 during the fiscal year ended June
30,
2006. Significant factors comprising the net cash used in operating activities
for the fiscal year ended June 30, 2007 include: net loss of $14,058, increase
in inventory of $9,747, and a decrease in deferred revenue of $3,399, partially
offset by a decrease of $1,212 in accounts receivable and an increase in
accounts payable, accrued expenses and other liabilities of $5,416. Inventory
levels increased significantly due to several factors, as discussed below in
“Inventory”. The increase in accounts payable, accrued expenses and other
payables primarily relates to the increase in purchased inventory items and
the
overall increase in operating expenses, primarily related to higher research
and
development costs.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
We
also
recognized several non-cash charges: depreciation and amortization of $2,554,
contract termination expense of $1,655 (related to termination of the agreement
with Watson Pharmaceuticals), stock-based compensation expense (in accordance
with SFAS 123 (R)) amounting to $1,070, a lower of cost or market write down
of
inventory of $1,157 and deferred tax expense of $195.
During
the fiscal year ended June 30, 2007, we used funds in investing activities
of
$8,296 compared to $8,142 used in investing activities during the fiscal year
ended June 30, 2006. These amounts primarily related to capital expenditures
of
$8,003 in fiscal year ended June 30, 2007 for new machinery, equipment and
building renovations as compared to $6,833 of capital expenditures in the prior
year. We continue to invest in and develop our Yaphank, NY facility; $4,345
of
the total $8,003 in capital expenditures was invested there primarily for
purchases of machinery and equipment and building improvements. Most of our
research and development activity is conducted there and, as previously
reported, we commenced packaging and some manufacturing following an FDA
inspection in February 2007. As previously disclosed, we elected not to move
forward with the planned construction of a research and development facility
in
Ahmedabad, India, and on April 25, 2007, we completed the sale of our
subsidiary, Interpharm Development Private Limited (“IDPL”) located in
Ahmedabad, India to an entity partially owned by two officers of the Company
for
$161.
During
the fiscal year ended June 30, 2007, net cash of $21,035 was provided by
financing activities primarily related to (i) the sale of $10,000 of our Series
C-1 redeemable convertible preferred stock in September 2006, which generated
$9,993 of cash, and (ii) $9,866 in proceeds from drawdown of the WFBC revolving
credit facility.
At
June
30, 2007, we had $72 in cash and cash equivalents, compared to $1,438 at June
30, 2006.
Bank
Financing
On
February 9, 2006, we entered into a four-year financing arrangement with Wells
Fargo Business Credit (“the WFBC Credit Facility”). 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
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
The
funds
made available through this facility paid down, in its entirety, the $20,450
owed on the previous credit facility. The WFBC revolving credit facility
borrowing base is calculated as (i) 85% of our 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, our remaining availability under the revolving credit facility was $6,708.
The $12,000 loan for the real estate in Yaphank, NY is payable in equal monthly
installments of $67 plus interest through February 2010 at which time the
remaining principal balance is due. As of June 30, 2007, the real estate loan
balance outstanding was $10,933. 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. During the fiscal year ended June 30,
2007, we borrowed $2,780 under the second capital expenditure facility for
the
cost of new equipment, and such borrowings are being amortized over 60 months.
As of June 30, 2007, the aggregate balance outstanding for both M&E term
loans was $5,601, and there was approximately $150 available for additional
capital expenditure borrowings.
Under
the
terms of the WFBC agreement, three stockholders, all related to our 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. We were required to raise a minimum of $7,000 through
the sale of equity or subordinated debt by June 30, 2006. The
shareholder’s pledges of marketable securities would be reduced by WFBC either
upon our raising capital, net of expenses in excess of $5,000 or achieving
certain milestones. As a result of our sale of $10,000 of Series B-1 redeemable
convertible preferred stock in May 2006, the limited personal guarantees were
reduced by $3,670. Then, in September 2006, our sale of $10,000 Series C-1
redeemable convertible preferred stock 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 our 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, we put in place a lock-box arrangement and we 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 our assets.
In
addition, we are required to comply with certain financial covenants. As of
June
30, 2007, we were not in compliance with several covenants, as described above
in “Subsequent Events -
Banking
and Financing Transactions”, and we have received a waiver of these defaults
from WFBC.
With
respect to the real estate term loan and the $3,500 M&E loan, we entered
into interest rate swap contracts (the “swaps”), whereby we pay 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 was approximately $10 and is included in Other Assets.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
As
previously disclosed, we entered into agreements with Tris for the development
and delivery of over thirty new Technical Packages. The combined costs of these
two agreements will approximate $5,800, of which we have paid $5,425 as of
June
30, 2007. 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.
Future
cash flows could be aided by utilization of our available Federal net operating
loss carryforwards ("NOLs"). At June 30, 2007 we have remaining Federal NOLs
of
approximately $32,250 available through 2027. As of June 30, 2007, as a result
of changes in New York state law, the benefit of the future utilization of
State
NOLs has been eliminated. Pursuant to Section 382 of the Internal Revenue Code
regarding substantial changes in Company ownership, utilization of the Federal
NOLs is limited. As a result of losses incurred in fiscal years 2005, 2006
and
2007, which indicate uncertainty as to our 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 has been established decreasing the total accumulated net deferred tax
asset of $11,529 to $5,975.
In
addition, at June 30, 2007, we have approximately $986 of New York State
investment tax credit carryforwards, expiring in various years through 2022.
These carryforwards are available to reduce future New York State income tax
liabilities. However, we reserved 100% of the investment tax credit
carryforward, which we do not anticipate utilizing.
Watson
Termination Agreement
On
October 3, 2006, we 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 we manufactured and supplied and Watson
distributed and sold generic Vicoprofen(R) (7.5 mg hydrocodone bitartrate/200
mg
ibuprofen) tablets, (the “Product”). Watson
was required to return all rights and agreements to us thereby enabling us
to
market the Product. Further, Watson was required to turn over to us 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 then we in turn invoiced Watson $42 for repacking.
The net
affect was a reduction of $99 to our net sales during the year ended June 30,
2007. In
consideration of the termination of Watson’s rights under the Supply Agreement,
the we are 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, we 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.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Accounts
Receivable
Our
accounts receivable at June 30, 2007 was $12,945 as compared to $14,212 at
June
30, 2006. The average annual turnover ratio of accounts receivable to net sales
for the fiscal years ended June 30, 2007 and 2006 was 5.5 and 5.7 turns,
respectively. Our turns are calculated on an annual average. Our accounts
receivable continue to have minimal risk with respect to bad debts; however
this
trend cannot be assured.
Inventory
At
June
30, 2007, our inventory was $17,295 as compared to $8,706 at June 30, 2006.
Our
turnover of inventory for the years ended June 30, 2007 and 2006 was 4.15 and
5.20, respectively. Our inventory is current; there are no reserves for
obsolescence. Our inventory levels have risen in order to support our growth
and
overall customer demands.
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 net book value of inventory
on
hand by this amount during the year ended June 30, 2007.
Accounts
Payable
Our
accounts payable, accrued expenses and other current liabilities increased
by
approximately $5,892 to $18,542 at June 30, 2007 from $12,650 at June 30, 2006,
primarily as a result of a $3,791 increase in accounts payable and accrued
expenses related to raw material purchases, which is partially the result of
the
timing of the receipt of $920 in raw materials at year-end; and an increase
in
accounts payable and accrued expenses of $935 pertaining to research and
development costs, of which $580 of the increase related to legal fees in this
area. Additionally, the increase is partially attributable to liabilities
incurred in relation to fixed asset additions, specifically, the Company has
approximately $516 included in accounts payable and accrued expenses at June
30,
2007 related to the acquisition of our new ERP system.
Cash
During
the year ended June 30, 2007, cash decreased $1,366 from $1,438 at June 30,
2006
to $72 at June 30, 2007. For the year ended June 30, 2007 we funded our business
from bank debt, operations and sale of Series C-1 redeemable convertible
preferred stock.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Our
Obligations
As
of
June 30, 2007, our obligations and the periods in which they are scheduled
to
become due are set forth in the following table:
| |
|
|
|
Due
in less
|
|
Due
|
|
Due
|
|
Due
|
|
| |
|
|
|
than
1
|
|
in
1-3
|
|
in
3-5
|
|
after
5
|
|
|
Obligation
|
|
Total
|
|
Year
|
|
Years
|
|
Years
|
|
Years
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate and M&E Term Loans (a)
|
|
$
|
16,534
|
|
$
|
2,170
|
|
$
|
14,364
|
|
$
|
--
|
|
$
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease
|
|
|
145
|
|
|
21
|
|
|
77
|
|
|
47
|
|
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
of Credit
|
|
|
9,866
|
|
|
9,866
|
|
|
--
|
|
|
--
|
|
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease and
software
license
|
|
|
10,547
|
|
|
1,188
|
|
|
2,026
|
|
|
1,902
|
|
|
5,431
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities
reflected
on the
Registrants
Balance Sheet
under
GAAP
|
|
|
2,000
|
|
|
500
|
|
|
1,000
|
|
|
500
|
|
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash obligations
|
|
$
|
39,092
|
|
$
|
13,745
|
|
$
|
17,467
|
|
$
|
2,449
|
|
$
|
5,431
|
|
In
addition to the information presented in the table above, there is a balance
on
the Tris solids agreement, as amended, of $375 which could be paid by us if
certain milestones are reached.
(a)
The
Real Estate Term Loan of $12,000 is 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 M&E Term Loans are
payable in equal monthly installments of $114 plus interest through February
2010 at which time the remaining principal balance is due. With respect to
additional capital expenditures, we are 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
(In
thousands, except per share data)
Leases
We
lease
an entire building in Hauppauge, New York, pursuant to a non-cancellable lease
expiring in October, 2019, which houses our manufacturing, warehousing and
some
executive offices. The leased building is approximately 100 square feet and
is
located in an industrial/office park. The current annual lease payments to
the
landlord, Sutaria Family Realty, LLC, are $660. Sutaria Family Realty, LLC
is
owned by Mona Rametra, Perry Sutaria and Raj Sutaria. Upon a change in ownership
of the Company, and every three years thereafter, the annual base rent will
be
adjusted to fair market value, as determined by an independent appraisal. There
are no tenants in the building other than us.In January 2007 the Company entered
into a seven year lease for approximately 20 square feet of office space. The
lease provides us 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.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Fiscal
Year Ended June 30, 2006 compared to Fiscal Year Ended June 30,
2005
| |
|
For
the Fiscal
Year
Ended
June
30, 2006
|
|
For
the Fiscal
Year
Ended
June
30, 2005
|
|
|
SALES,
Net
|
|
$
|
63,355
|
|
$
|
39,911
|
|
|
COST
OF SALES
|
|
|
45,927
|
|
|
30,839
|
|
| |
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
17,428
|
|
|
9,072
|
|
| |
|
|
|
|
|
|
|
|
Gross
Profit Percentage
|
|
|
27.51
|
%
|
|
22.73
|
%
|
| |
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
11,449
|
|
|
5,092
|
|
|
Related
party rent expense
|
|
|
72
|
|
|
72
|
|
|
Research
and development
|
|
|
10,674
|
|
|
4,003
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
22,195
|
|
|
9,167
|
|
| |
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(4,767
|
)
|
|
(95
|
)
|
| |
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
Gain
on sale of marketable securities
|
|
|
---
|
|
|
9
|
|
|
Loss
on sale of fixed asset
|
|
|
(5
|
)
|
|
--
|
|
|
Interest
expense, net
|
|
|
(718
|
)
|
|
(136
|
)
|
| |
|
|
|
|
|
|
|
|
TOTAL
OTHER EXPENSES
|
|
|
(723
|
)
|
|
(127
|
)
|
| |
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME
TAXES
|
|
|
(5,490
|
)
|
|
(222
|
)
|
| |
|
|
|
|
|
|
|
|
BENEFIT
FROM
INCOME
TAXES
|
|
|
(1,700
|
)
|
|
(73
|
)
|
| |
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(3,790
|
)
|
$
|
(149
|
)
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Net
Sales
Net
sales
for the fiscal year ended June 30, 2006 were $63,355 compared to $39,911 for
fiscal year ended June 30, 2005, an increase of $23,444 or 58.7%. Significant
components contributing to our growth of existing products were those set forth
in the table below:
|
Product
|
|
Year
over year
increase
in net sales
|
|
|
Ibuprofen
|
|
$
|
5,866
|
|
|
Naproxen
|
|
|
7,721
|
|
|
Hydrocodone
/ Ibuprofen
|
|
|
1,166
|
|
|
Total
|
|
$
|
14,753
|
|
| |
§
|
The
increase in net sales of Ibuprofen was primarily the result of an
expanded
customer base and improvements in manufacturing and packaging which
enabled us to increase output and modest cost of materials reductions.
|
| |
§
|
An
expanded customer base, as well as obtaining a U.S. Government contract
to
supply Naproxen to various governmental agencies valued at approximately
$3,900 for the twelve month period beginning September 2005 were
key
factors contributing to the $7,721 increase in sales of Naproxen.
The
contract includes four one-year option periods.
|
| |
§
|
On
a fiscal year over year basis, we had an increase of more than $1,166
from
sales of Hydrocodone 7.5 mg/Ibuprofen 200 mg, our generic version
of
Vicoprofen(R), which was launched during the three month period ended
December 31, 2004, and Reprexain(R) (Hydrocodone 5.0 mg/Ibuprofen
200 mg).
The results for the periods reported include additional revenue derived
from a profit sharing arrangement for these
products.
|
During
the fiscal year ended June 30, 2006, we began to see the positive effects of
our
expansion plan which commenced in 2005. Two new products were launched which
contributed greatly to our revenue growth. As we continue our planned product
line expansion we anticipate that fiscal year 2007 should witness the launching
of new products as well; however there can be no assurance we will be successful
in achieving our plan. The two new products for fiscal 2006 were:
| |
§
|
As
reported in our Current Report on Form 8-K filed with the SEC on
July 18,
2005, we entered into an agreement with Centrix Pharmaceutical, Inc.
(“Centrix”) for the sale of a female hormone product, which is distributed
in two strengths. This product generates a higher gross margin compared
to
our other products. The agreement commenced upon the first shipment
of the
product to Centrix in August, 2005. Centrix was required to purchase
a
minimum $11,500 of the product during the first twelve month period
with
the option to purchase an additional $2,000 of product. For the twelve
month period ended June 30, 2006, we shipped approximately $8,100
of the
female hormone product to Centrix. We will ship approximately $5,400
of
product by September 30, 2006. We have renegotiated the agreement
with
Centrix for the up coming year and we anticipated sales during fiscal
2007
of the product to exceed fiscal year 2006 totals. In the event that
the
agreement is terminated at any time, or for any reason, we maintain
the
right to market the product alone or with a third
party.
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
| |
§
|
In
September, 2005, we launched Sulfamethoxazole and Trimethoprim (“SMT”)
single and double strength tablets, which are sold by the innovator
under
the brand-name Bactrim(R). SMT is a widely used antibiotic used to
treat
infections such as urinary tract infections, bronchitis, ear infections
(otitis), traveler's diarrhea, and Pneumocystis carinii pneumonia.
Sales
during fiscal 2006 of these products approximated
$4,200.
|
As
a
result of our decision to greatly reduce and ultimately halt the manufacture
and
sale of Allopurinol and Atenolol under a contract manufacturing agreement,
our
revenues for these products declined during the fiscal year ended June 30,
2006.
Both Allopurinol and Atenolol were manufactured for and shipped to one customer
based on quantities ordered by that customer. Revenue from sales of Allopurinol
and Atenolol decreased by approximately $4,700 from $7,100 for the year ended
June 30, 2005 to $2,400 for the year ended June 30, 2006. The manufacturing
capacity gained from the decrease in production of these two products is being
used for other products.
The
fluctuations in revenue by product were generally not attributable to any
changes in our pricing which, for our entire product line, remained relatively
stable.
During
the fiscal year ended June 30, 2006, four key customers, in the aggregate,
accounted for approximately 53% of total sales. For the fiscal year ended June
30, 2005 we had three key customers which accounted for approximately
56%
Cost
of sales / Gross Profits
During
the year ended June 30, 2006, prices for our raw materials remained relatively
constant. While
no
assurance could be given, we
anticipated this trend to continue, at least for the near future. During the
fiscal year ended June 30, 2006, prices for packaging components increased.
It
is uncertain as to whether or not these costs will continue to rise.
We
have
incurred increased direct labor and supervisory salaries and related benefits
associated with increased production. As
part of our expansion plan, we have increased managerial and production staff.
We believed this increase is required and should ultimately support our
expansion plan. Additionally,
incurred increased general overhead costs, such as product liability insurance,
workers compensation insurance, medical benefits and utilities.
Gross
profit for the fiscal year ended June 30, 2006 significantly increased $8,356,
or 92%, to $17,428, compared to $9,072 for the year ended June 30, 2005.
In
addition, our gross profit percentage increased 4.8 percentage points from
22.7%
for the year ended
June 30, 2005 to 27.5% for the year ended June 30, 2006. This increase is
primarily due to sales of our new products: Bactrim(R) and our female hormone
therapy products which both generate higher gross margins compared to our
remaining products. Gross margins for the remaining products were generally
consistent with the prior year.
Gross
margin percentage can fluctuate as a result of many factors, such as changes
in
our selling price or the cost of raw materials, as well as increases in cost
of
labor and general overhead. Fluctuations in our sales volume and product mix
affect gross margin dollars. As part of our plan, we are seeking to add new
products with higher margins, however, there can be no assurance that sales
will
increase or cost of sales will not increase disproportionately.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Selling
and General and Administrative Expenses
Selling,
general and administrative expenses include salaries and related costs,
commissions, travel, administrative facilities, communications costs and
promotional expenses for our direct sales and marketing staff, administrative
and executive salaries and related benefits, legal, accounting and other
professional fees as well as general corporate overhead.
During
the fiscal year ended June 30, 2006, selling, general and administrative
expenses increased approximately $6,357 to approximately $11,449, or 18.1%
of
net sales from approximately $5,092 or 12.8% of net sales, during fiscal year
end June 30, 2005.
Significant
factors contributing to this increase include: necessary increases in the
staffing of administrative and sales areas to support our growth of $1,954;
related payroll taxes and benefits of $496; increased commission expenses and
freight expenses of $314 and $234, respectively, both of which are attributable
to our higher sales; $600 for investment banking services; increased accounting
and legal costs of $284, primarily related to the refinancing of our bank debt
and sale of our Series B-1 preferred stock; an increase in general insurance
of
$229; increased rent, utilities and taxes of $200; an increase in depreciation
of non-manufacturing assets of $105; and the recognition of a non cash charge
of
$1,195` as a result of our adoption of the fair value recognition provisions
of
Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised
2004), “Share-Based Payment,” (“SFAS 123(R)”). Included in the $1,195 was a
non-cash charge related to the modification of an option grant as a result
the
death of an executive officer. Adoption of SFAS 123(R) requires us to report
a
non-cash expense for the ratable portion of the fair value of employee stock
option awards of unvested stock options over the remaining vesting period.
Previously we elected to follow the intrinsic value method in accounting for
our
stock-based employee compensation arrangements as defined by Accounting
Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations including Financial Accounting Standards
Board Interpretation No. 44, “Accounting for Certain Transactions Involving
Stock Compensation”.
Research
and Development Expenses
Research
and development expenses for new products currently in development in our new
product pipeline consist primarily of wages, outside development organizations,
bioequivalence studies, materials, legal fees, and consulting fees. During
the
fiscal year ended June 30, 2006 we incurred $10,674 in research and development
expenses, which is $6,671 greater than the prior year amount of $4,003. We
believe that research and development expenses, as a percentage of our net
sales, will be substantially higher in the future as we seek to expand our
product lines. While we believed increased spending for research and development
efforts will allow us to add obtain approvals for new products, there can be
no
assurance we will be successful in the commercialization.
A
significant component of our expansion plan includes two agreements with Tris
Pharma, Inc. (“Tris”). One of the agreements is for the development and
licensing of twenty-five liquid generic products (“Liquids Agreement”). In the
event that Tris delivers twenty-five successful technical packages, of which
there can be no assurance, we will be required to pay Tris $3,000.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
In
accordance with the terms of this agreement, we make payments as various
milestones are achieved. In addition, Tris is to receive a royalty of between
10% and 12% of net profits resulting from the sales of each product. We are
entitled to offset the royalty payable to Tris each year, at an agreed upon
rate, to recoup the development fees paid to Tris under the Liquids
Agreement.
The
second agreement, as amended, pertains to the solid dosage products (“solids”),
pursuant to which we are to 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
softgel products. Further, the terms of this amendment require us pay to Tris
$750 based upon various Tris milestone achievements. Some products included
in
this agreement, as amended, may require us to challenge the patents for the
equivalent branded products. This agreement, as amended, provides for payments
of an aggregate of $4,500 to Tris, whether or not regulatory approval is
obtained for any of the solids products. The agreement for solids also provides
for an equal sharing of net profits for each product, except for one product,
if
it 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 us 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 solids agreement was further amended. This second amendment requires
Tris to deliver a Technical Package for one additional solid dosage product.
Further, terms of this second amendment will requires us to pay to Tris an
additional $300 after it has paid the initial aggregate amounts associated
to
the original agreement.
For
the
fiscal year ended June 30, 2006, we recorded as a research and development
expense approximately $2,110 in connection with these agreements. Further,
since
inception, we have incurred approximately $3,510 of research and development
costs associated with the Tris agreements. The combined costs of these
agreements could aggregate up to $7,800. The balance on the liquid agreement
of
$2,750 could be paid within three years if all milestones are reached. The
balance on the solids agreement, as amended, of $1,675 could be paid within
two
years if all milestones are reached.
During
the fiscal year ended June 30, 2006, we filed seventeen ANDAs.
Interest
Expense
Our
interest expense, net increased approximately $583 to approximately $718 for
the
fiscal year ended June 30, 2006 from $136 for the fiscal year ended June 30,
2005. In an effort to fund our plan, in February, 2006, we increased our
borrowing capabilities through a new credit facility entered into with Wells
Fargo Business Credit. The additional borrowings were required primarily to
fund
our research and development efforts, for renovation and construction costs
incurred for our second facility and new equipment. In order to hedge against
rising interest rates, we entered into two interest rate swap arrangements.
As
of June 30, 2006, we have saved approximately $98 as a result of these swaps
agreements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Operating
Loss
Although
our sales and gross margins increased, as a result of our increase in research
and development efforts from which we believe we will see the benefits from
in
the future, along with increases in selling and general and administrative
costs, we incurred an operating loss of $5,490 for the year ended June 30,
2006
compared to an operating loss of $222 for the year ended June 30, 2005.
Income
Taxes
For
the
year ended June 30, 2006 we recorded an income tax benefit of $1,700, an
increase in the benefit of $1,627 compared to the year ended June 30, 2005
which
had a benefit from income tax of $73.
We
account 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
net deferred tax asset is adjusted by a valuation allowance, if, based on the
weight of available evidence, it is more likely than not that some portion
or
all of the net deferred tax asset will not be realized. Our net deferred tax
asset at June 30, 2006 was $6,170 and $4,413 at June 30, 2005.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Critical
Accounting Policies
Management's
discussion and analysis of financial condition and results of operations
discusses our financial statements, which have been prepared in accordance
with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires that we make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, we evaluate judgments and estimates
made,
including those related to revenue recognition, inventories, income taxes and
contingencies including litigation. We base our judgments and estimates on
historical experience and on various other factors that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are
not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We
consider the following accounting policies to be most critical in understanding
the more complex judgments that are involved in preparing its financial
statements and the uncertainties that could impact results of operations,
financial condition and cash flows.
Revenue
Recognition
We
recognize 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.
We
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. We can, and do, 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 we (i) have a risk of loss associated with the raw materials
purchased, (ii) convert the raw material into a finished product based upon
developed specifications, (iii) have other sources of supply of the raw
material, and (iv) have credit risk related to the sale of such product to
the
suppliers. For the year ended June 30, 2007, we 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, we 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”.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
In
addition, we are party to supply agreements with certain pharmaceutical
companies under which, in addition to the selling price of the product, we
receive payments based on sales or profits
associated with these products realized by its customer. We recognize revenue
related to the initial selling price upon shipment of the products as the
selling price is fixed and determinable and no right of return exists. The
additional revenue component of these agreement’s are recognized by us at the
time our customers record their sales and is based on pre-defined formulas
contained in the agreements. Receivables related to this revenue of $594 and
$620 and at June 30, 2007 and 2006, respectively, are included in “Accounts
receivable, net” in the accompanying Consolidated Balance Sheets.
Sales
Returns and Allowances
At
the
time of sale, we simultaneously record estimates for various costs, which reduce
product sales. These costs include estimates of chargebacks and other sales
allowances. In addition, we record an allowance 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 us. Actual experience associated with any of these
items
may be different than our estimates. We regularly review the factors that
influence our estimates and, if necessary, make adjustments when we believe
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, we have offered a sales incentive to one of
our
customers in the form of an incentive volume price adjustment. We account 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 our products during a specified
period of time. The incentive offered was based upon a fixed dollar amount
per
unit sold to the customer. We 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. We 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, we recorded the provision
for
this sales incentive when the related revenue is recognized. Our sales incentive
liability may prove to be inaccurate, in which case we may have understated
or
overstated the provision required for these arrangements. Therefore, although
we
make our best estimate of our sales incentive liability, many factors, including
significant unanticipated changes in the purchasing volume of our customer,
could have significant impact on the our liability for sales incentives and
our
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,
we recognized sales incentive revenue of $3,399 related to this
agreement.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Inventory
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.
Income
Taxes
We
account 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
net deferred tax asset is adjusted by a valuation allowance, if, based on the
weight of available evidence, it is more likely than not that some portion
or
all of the net deferred tax asset will not be realized. Our net deferred tax
asset at June 30, 2007 was $5,975 and $6,170 at June 30, 2006.
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.
Stock
Based Compensation
Effective
July 1, 2005, we adopted the fair value recognition provisions of SFAS
No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”), using
the modified-prospective-transition method. As a result, our net income before
taxes for the years ended June 30, 2007 and 2006 are $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”).
Accounts
Receivable / Chargebacks
Accounts
receivable are comprised of amounts owed to us through the sales of our 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.
We
sell some of our products indirectly to various government agencies referred
to
below as “indirect customers.” We enter into agreements with our 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. We 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 our 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. We
continually monitor the reserve for chargebacks and make adjustments to the
reserve as deemed necessary. Actual chargebacks may differ from estimated
reserves.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
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 our consolidated financial position,
results of operations or cash flows.
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 our consolidated
financial position, results of operations or cash flows.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
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. We are 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. We are currently assessing the impact that
the adoption of FIN 48 will have on its financial position and results of
operations.
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. We are currently evaluating the effect that
adopting this statement will have on our 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 our fiscal year beginning
July 2008. We are evaluating the impact of adopting SFAS 157 but does not expect
that it will have a material impact on our consolidated financial position,
results of operations or cash flows.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
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 our 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. We do not
expect the adoption of FSP EITF 00-19-2 to have a material impact on our
consolidated financial position, results of operations or cash
flows.
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. We do not expect the adoption of SFAS No. 159
to
have a material impact on our 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. We record these advance
payments in accordance with EITF 07-3 and therefore does not have any impact
on
our consolidated financial statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Issue
and Uncertainties
Risk
of Product Liability Claims
The
testing, manufacturing and marketing of pharmaceutical products subject us
to
the risk of product liability claims. We believe that we maintain 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 we will be able
to
maintain existing coverage or obtain additional coverage at reasonable
rates.
ITEM
7A.
QUANTITIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As
of
this filing, our principal financial instrument is a $41,500 credit facility,
consisting of a real property mortgage of $12,000, two machinery and equipment
lines aggregating $7,000 and a revolving credit line of a maximum of $22,500,
subject to a certain asset levels. Under the terms of the WFBC agreement, three
stockholders, all related to our Chairman of the Board of Directors, one of
whom
was, at the time, our Chief Operating Officer, 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. We were
required to raise a minimum of $7,000 through the sale of equity or subordinated
debt by June 30, 2006. The
shareholder’s pledges of marketable securities would be reduced by WFBC either
upon raising capital, net of expenses in excess of $5,000 or achieving certain
milestones. As a result of the sale of $10,000 of Series B-1 convertible
preferred stock in May 2006, the limited personal guarantees were reduced by
$3,670. In September, 2006 we consummated a $10,000 sale of a Series C-1
Convertible preferred stock, which eliminated the balance of the personal
pledges of marketable securities of $3,830.
At
June
30, 2007, total obligations to our bank pertaining to the credit facility
described above were: (i) $9,866 related to the WFBC line of credit; (ii)
approximately $10,933 real property term loan; and (ii) $5,601 owing on the
machinery and equipment lines.
With
respect to the real estate term loan and the $3,500 M&E loan, we entered
into interest rate swap contract (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 was approximately $10 and is included
in
Other Assets
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Our
consolidated financial statements, including the notes thereto, together with
the report from our independent registered public accounting firm are presented
beginning at page F-1.
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None
ITEM
9A.
CONTROLS
AND PROCEDURES
Evaluation
of Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure.
Management necessarily applied its judgment in assessing the costs and benefits
of such controls and procedures, which, by their nature, can provide only
reasonable assurance regarding management's control objectives.
At
the
conclusion of the period ended June 30, 2007, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of
the design and operation of our disclosure controls and procedures. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective in alerting
them in a timely manner to information relating to the Company, required to
be
disclosed in this report.
In
July
2007, the Company implemented an enterprise resource planning (“ERP”) system.
The implementation involves enhancements in business processes and significant
improvements to the Company’s internal controls over financial reporting. In
addition to expanding and improving access to information, we believe the new
ERP system will provide a standard scalable information platform to accommodate
our current business growth plan.
ITEM
9B. - OTHER
INFORMATION
None
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
PART
III
ITEM
10.
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The
following table sets forth as of October 27, 2007 the names and ages of all
directors of the Company along with their current positions, offices and term:
|
Name
of Nominee
|
Age
|
Position
with the Company
|
Director
Since
|
| |
|
|
|
|
Dr.
Maganlal K. Sutaria
|
71
|
Chairman
|
May
2003
|
|
|
|
|
|
|
David
Reback (1)(2)(3)(4)
|
65
|
Director
|
November
1997
|
| |
|
|
|
|
Stewart
Benjamin (1)(4)
|
42
|
Director
|
May
2001
|
| |
|
|
|
|
Kennith
Johnson (1)(2)(3)(4)
|
54
|
Director
|
November
2004
|
| |
|
|
|
|
Richard
J. Miller
|
48
|
Director
|
May
2006
|
| |
|
|
|
|
Joan
P. Neuscheler
|
48
|
Director
|
August
2006
|
(1) Member
of
the audit committee
(2) Member
of
the compensation committee
(3) Member
of
the nominating committee
(4)
Member of corporate governance committee
The
Board
of Directors has determined that David Reback, Stewart Benjamin, Kennith
Johnson, and Joan P. Neuscheler are independent (as independence is defined
in
Section 121A of the listing standards of the American Stock
Exchange).
The
following information with respect to the principal occupation or employment
of
the nominees, the name and principal business of the corporation or other
organization in which such occupation or employment is carried on and other
affiliations and business experience during the past five years has been
furnished to us by the respective nominees:
DR.
MAGANLAL K. SUTARIA is a cardiovascular surgeon who received his medical degree
from the Medical College, Ahmedabad, Gujarat University in 1961 and since 1991
served as the Chairman of Interpharm, Inc. Dr. Sutaria has been a Director
and
Chairman of our Board of Directors since May 29, 2003.
DAVID
C.
REBACK has served as a director since November 1997. Since 1969, Mr. Reback
has
been a partner with Reback & Potash, LLP, a law firm specializing in
litigation, appellate matters and real estate. Mr. Reback received a B.A. from
Syracuse University, and in 1965 he received a Juris Doctor's degree from
Syracuse University College of Law.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
STEWART
BENJAMIN has served as a Director since May 2001. Mr. Benjamin is a certified
public accountant in the State of New York. From January 1996 to the present,
Mr. Benjamin has been self-employed as a sole practitioner under the name of
Stewart H. Benjamin, CPA, P.C. From 1985 through December 1995, Mr. Benjamin
was
employed as a staff accountant in both private industry and local public
accounting firms. Mr. Benjamin received a Bachelor of Business Administration
degree from Pace University in 1985.
KENNITH
JOHNSON has served as a Director since November 18, 2004. He currently serves
as
the Chairman of our Audit and Compensation Committees. He is a CPA with more
than 30 years of financial/accounting experience and presently Vice President
of
Finance & Administration with the operations of Fairfax Financial Holdings
Ltd. a financial and insurance holding company. Prior to joining Fairfax, he
had
been a consultant and the Senior Vice President and Chief Financial Officer
for
the Movado Group, Inc., a manufacturer and distributor of Swiss watches and
jewelry. Prior thereto, he was Vice President, Chief Financial Officer for
Wenger-The Swiss Army Knife Company, a distributor and importer of Swiss made
products. He has held financial positions with C.R. Bard, Inc., Becton Dickinson
Company and Pfizer Corporation.
RICHARD
J. MILLER has served as a director since May 30, 2006. Mr. Miller is the
managing member of Shippan Point Advisors, LLC, a private equity advisory firm.
As part of his private equity work, Mr. Miller was a member of
Tullis-Dickerson Capital Focus III, LP’s general partner from April 2002 to June
2006, serving as the Chairman and CEO of SupplyPro, Inc. from January 2004
to
June 2006, as well as consulting with other private equity firms.
Previously he served as Senior Vice President of GE Equity, a division of
GE Capital, where he led successful strategic investments in healthcare and
technology companies and as a partner of RFE Investment Partners, a venture
capital firm.
JOAN
P.
NEUSCHELER has served as a director since August 23, 2006. Ms. Neuscheler has
17
years of experience in private equity investing as an officer of
Tullis-Dickerson & Co., Inc. (“TD”), a health care-focused venture
capital firm. Since July 1998, Ms. Neuscheler has been the President
of TD. Ms. Neuscheler’s previous experience includes three
years in public accounting with Arthur Andersen and five years experience
as a senior officer in a reinsurance firm. Ms. Neuscheler is a
Director of Adams Respiratory Therapeutics, Inc. (NasdaqGS: ARXT), a
specialty pharmaceutical company, and a number of privately held companies.
She
received her B.B.A. and her M.B.A. from Pace University.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Executive
Officers
The
following table sets forth as of October 27, 2007 the names and ages of all
of
our officers along with their positions. Officers are appointed to serve until
the meeting of the board of directors following the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
|
Name
|
Age
|
Position
|
|
Cameron
Reid
|
53
|
Chief
Executive Officer
|
| |
|
|
|
Peter
Giallorenzo
|
49
|
Chief
Operating Officer, Chief Financial Officer and Executive Vice
President
|
| |
|
|
|
Kenneth
Cappel
|
41
|
Executive
Vice President and General Counsel
|
| |
|
|
|
Raj
Sutaria
|
36
|
Executive
Vice President
|
| |
|
|
|
Jeffrey
Weiss
|
40
|
Executive
Vice President - Sales and Marketing
|
| |
|
|
|
Jonathan
Berlent
|
38
|
Senior
Vice President - Business
Development
|
CAMERON
REID has served as the CEO of the Company since January 24, 2005. From 1992
through March 2004, Mr. Reid was the President of Dr. Reddy’s Laboratories, Inc.
Prior to joining Dr. Reddy’s, Mr. Reid was an Executive Vice President of, and
headed Roussel Corp., a division of Roussel UCLAF, a pharmaceutical company
based in Montvale, New Jersey. Mr. Reid holds a Bachelor of Science degree
in
chemistry and geology from the University of Calgary. He is also a graduate
of
the executive management program at INSEAD in France.
PETER
GIALLORENZO became one of our Executive Vice Presidents in January 2007, our
Chief Financial Officer in February 2007 and our Chief Operating Officer in
July
2007. Mr. Giallorenzo is a Certified Public Accountant with over twenty-five
years of management and financial experience for both public and private
companies. Prior to joining us, Mr. Giallorenzo served for six years as Senior
Vice President Finance and CFO of Nice-Pak Products, Inc., a consumer and
healthcare products manufacturer. Mr. Giallorenzo also has experience in the
generic pharmaceutical business having served as CFO initially, and then Senior
Vice President and Chief Operating Officer of Taro Pharmaceutical Industries,
Ltd., a generic pharmaceutical product manufacturer. Mr. Giallorenzo earned
a
B.B.A. in Accounting from Iona College in 1980.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
KENNETH
CAPPEL joined us in February 2005 and became our General Counsel on March 30,
2006. Mr. Cappel brings to us over 15 years of experience in pharmacy,
pharmaceutical development and intellectual property law. After holding
positions as a pharmacist in retail and hospital pharmacies, Mr. Cappel worked
as a pharmaceutical scientist in the Schering-Plough Research Institute from
October 1992 to September 2000. He then worked from September 2000 to March
2003
as an associate in the law firm of Budd Larner where his practice focused on
ANDA litigation, patent opinions and Hatch-Waxman/FDA regulatory issues. Mr.
Cappel was next employed at Dr. Reddy’s Laboratories, Inc. where from March 2003
to February 2005 he advised several key business units. Mr. Cappel graduated
Rutgers College of Pharmacy in 1989 and Seton Hall School of Law in 2000. He
is
a registered pharmacist and a member of the New Jersey bar.
JEFFREY
WEISS became our Executive Vice President of Sales and Marketing in April 2005.
Mr. Weiss brings with him over 17 years of experience in the pharmaceutical
industry, having served in many senior level management positions in sales
and
marketing. Prior to joining us, Mr. Weiss served as CEO of Glenmark
Pharmaceuticals Inc. from 2003 until joining us in April, 2005. Prior, Mr.
Weiss
served as Vice President of Sales for Dr. Reddy’s Laboratories, Inc. from 2001
to 2003. Mr. Weiss holds a Bachelors degree from William Paterson College in
Business Management.
JONATHAN
BERLENT became our Vice President of Business Development in August 2004. He
was
promoted to Senior Vice President on July 1, 2006. Mr. Berlent brings with
him
over eleven years of experience from the capital markets division of FleetBoston
as a manager and equities trader where he ran FleetBoston's Long Island desk
from March 2000 to August 2001. Mr. Berlent earned a Masters of Business
Administration from New York University's Stern School of Business in May 2001
where he double-majored in Finance and Management and he graduated in May 1991
from the University of Michigan with a Bachelor of Arts in
Economics.
RAJ
SUTARIA has been an Executive Vice President of our company since July 2007.
From November 2004 to July 2007 he served as our Chief Operating Officer.
Between 1997 and 2004, Mr. Sutaria served as Production Manager, Director of
Manufacturing, Vice President and Chief Operating Officer of Interpharm, Inc.
Mr. Sutaria earned a B.B.A. in Marketing from the University of Colorado at
Boulder in 1997 and is the son of Maganlal K. Sutaria and the nephew of
Bhupatlal K. Sutaria.
Family
Relationships
The
following family relationships exist for directors and officers: Raj
Sutaria, an officer of Interpharm, Inc., is the son of Maganlal K. Sutaria
and
the nephew of Bhupatlal K. Sutaria, our former President. Maganlal K. Sutaria
and Bhupatlal K. Sutaria are brothers.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
To
our
knowledge, based solely on a review of such materials as are required by the
Securities and Exchange Commission, none of our officers, directors or
beneficial holders of more
than
ten percent of our issued and outstanding shares of Common Stock has failed
to
timely file with the Securities and Exchange Commission any form or report
required to be so filed pursuant to Section 16(a) of the Securities Exchange
Act
of 1934 during the fiscal year ended June 30, 2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Code
of Ethics
The
Board of Directors has adopted a Code of Ethics that applies to all of our
employees, officers and directors. The Code of Ethics is available at the
Company’s website, www.interpharminc.com.
Audit
Committee and Audit Committee Financial Experts
The
Board
of Directors created an audit committee in 1994. The audit committee is
comprised of three directors: Kennith Johnson, Stewart Benjamin and David
Reback. The audit committee is responsible for reviewing reports of financial
results, audits, internal controls, and adherence to its Business Conduct
Guidelines in compliance with federal procurement laws and regulations. The
committee also recommends to the Board of Directors the selection of our outside
auditors and reviews their procedures for ensuring their independence with
respect to the services performed for us.
We
believe that Kennith Johnson and Stewart Benjamin qualify as “audit committee
financial experts” as defined in Rule 407(d)(5)(ii) of Regulation
S-K.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
ITEM
11.
COMPENSATION
DISCUSSION AND ANALYSIS
Introduction
and Corporate Governance
Our
Compensation Committee (which is referred to herein as the “Committee” or as the
“Compensation Committee”) oversees and administers our executive compensation
programs. The Committee’s complete roles and responsibilities are set forth in
the written charter adopted by the Board of Directors, which can be found at
www.interpharminc.com
under “Corporate Governance.” The Board of Directors selected the following four
individuals to serve on the Committee in November, 2006: Richard J. Miller
(Chair), Kennith Johnson, David Reback and Joan Neuscheler. All of these
individuals, with the exception of Richard J. Miller, qualify as an independent
director under the rules of the American Stock Exchange.
The
Committee meets at regularly scheduled times during the year and on an ad hoc
basis as business needs necessitate. During the fiscal year ended June 30,
2007,
the Committee met for three regularly scheduled meetings and held two ad hoc
meeting. As part of his duties as the Committee Chair, Mr. Miller reports on
Committee actions and recommendations to the Board of Directors.
The
Committee has retained Frederic W. Cook and Associates (“FW Cook”) as outside
advisors to the Committee. FW Cook reports directly to the Committee and
provides guidance on matters including trends in executive and non-employee
director compensation, the development of specific executive compensation
programs and other matters as directed by the Committee. FW Cook does not
provide any other services to the Company.
Executive
Compensation Philosophy and Objectives
Our
compensation program for the individuals named in the Summary Compensation
Table
(the “named executive officers”) is designed and implemented based on our
pay-for-performance compensation philosophy. Our
compensation committee’s current intent is to perform an annual strategic review
of our executive officers’ compensation to determine whether they provide
adequate incentives and motivation and whether they adequately compensate our
executive officers relative to comparable officers in other companies with
which
we compete for executives.
We strive to adhere to this philosophy by significantly differentiating the
pay
and rewards of our executive officers based on their demonstrated performance
and potential to contribute to the long-term success of the Company. Competing
for talent in the rapidly changing and increasingly competitive pharmaceutical
industry is both challenging and critical to our success. The quality of the
Company’s talent is a key driver of long-term stockholder value. Establishing
and maintaining executives’ long-term commitment to us is critical to the
development of our product pipeline, as development of new products often takes
three years or more, and time to market is critical to our business success.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
We
have established a total rewards framework that supports our compensation
philosophy through the following objectives:
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•
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to
afford our executives a competitive total rewards opportunity relative
to
organizations with which we compete for executive talent,
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•
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to
allow us to attract and retain superior, experienced people who can
perform and succeed in our fast-paced, dynamic and challenging
environment,
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•
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to
support our meritocracy by ensuring that our top performers receive
rewards that are substantially greater than those received by average
performers at the same position level, and
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•
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to
deliver pay in a cost efficient manner that aligns employees’ rewards with
stockholders’ long-term interests.
|
What
is our compensation program designed to reward?
The
compensation program is designed to reward superior financial, strategic and
operational performance that is achieved in a manner consistent with the
Company’s values. Results and how the results are attained are both critically
important. Our executive officers are assessed on the basis of demonstrated
results relative to pre-established goals, ability to address market changes
in
a timely and efficient manner, as well as demonstrated competencies and
behavioral attributes.
Compensation
Program Elements and Pay Level Determination
What
factors are considered in determining the amounts of
compensation?
The
Committee has formalized a review process for the determination of base
salaries, annual incentive targets and payments, and long-term incentive targets
and awards for all executive officers. For the year ended June 30, 2007, there
were no changes in the base salary or any annual cash incentive and long-term
incentive award determinations for the Chief Executive Officer.
As
part of this review process, the CEO presents to the Committee individual
assessments of each executive officer’s performance over the prior year, as well
as recommended compensation actions for each executive officer. The performance
assessments for executive officers include performance relative to established
goals, overall leadership effectiveness, impact across the organization and
performance and impact relative to other executive officers.
Formal
goal setting is critical to ensuring that our compensation program rewards
each
executive based on his or her success relative to the specific objectives for
his or her role. All Company senior managers are subject to annual goal setting,
as well as annual performance reviews. The key metrics we use to measure
performance differ by individual, but can be grouped into the following
categories:
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
|
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•
|
Financial —
we evaluate measures of Company financial performance, including
revenue
growth, gross margins, operating margins and other measures such
as
expense management.
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•
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Strategic —
we monitor the success of our executive team in furthering the strategic
success of the Company, including the development of the Company’s product
pipeline.
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•
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Operational —
we include operational measures in our determination of success,
including
our production capacity and capability, the timeliness and effectiveness
of new product launches, the execution of important internal Company
initiatives and customer growth and retention.
|
The
Committee considers the totality of the information presented (including
external competitiveness, the performance review, Company performance, progress
towards strategic objectives and internal equity) and applies its knowledge
and
discretion to determine the compensation for each executive officer.
During
the fiscal year ended June 30, 2007, the Company targeted its compensation
at
the median of its market peers, which are defined in the next section. The
actual compensation level for each executive officer may be above or below
median depending on factors such as Company performance, individual performance,
skills/capabilities, overall impact/contribution, experience in position,
“premiums” initially required to attract the executive and internal equity.
What
external market peer group is used for comparison, and how is it
established?
The
Company’s peer group is comprised of: (1) a named set of companies for
which executive compensation data from public filings is compiled and analyzed;
and (2) a somewhat broader set of companies participating in benchmark
compensation surveys from which executive compensation data is compiled and
analyzed by our compensation advisor.
The
named peer group is reviewed annually by the Committee for appropriateness,
considering such factors as size (e.g., revenue and market capitalization),
complexity (e.g., multiple marketed products), geographic scope of operations
(e.g., domestic-only presence), etc. The named peer group for the fiscal year
ended June 30, 2007 includes:
|
Arqule
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Hi
Tech Phamacal
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Quigley
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Caraco
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Bentley
Pharmaceuticals
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Inspire
Pharmaceutical
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Saviant
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Theragenics
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Bradley
Pharmaceuticals
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Lannett
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Supergen
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The
compensation surveys used in analyzing our external competitiveness include
data
from a broader set of biotechnology and pharmaceutical companies. We believe
that this broader set of companies is representative of our competitive market
for executive officers. These compensation surveys provide reliable data to
complement the data collected from executive compensation disclosures of our
named peer group.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
What
is each element of compensation and why is it paid?
The
Company’s executive compensation program is designed with three elements
(discussed in detail below), each of which serves an important role in
supporting Interpharm’s pay-for-performance philosophy and in realizing our
compensation program objectives:
|
Element
|
|
Role
and Purpose
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Base
Salary
|
|
• Provide
a stable source of income that facilitates the attraction and recognition
of the acquired skills and contributions of executives in the day-to-day
management of our business.
|
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Long-term
Incentives
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• Align
executive interests with those of stockholders.
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• Promote
long-term retention and stock ownership, and hold executives accountable
for enhancing stockholder value.
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• Enable
the delivery of competitive compensation opportunities in a manner
that
balances cost efficiency with perceived value.
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Benefits &
Perquisites
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• Provide
programs that promote health, wellness and financial security.
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• Provide
executive benefits and perquisites at or below market competitive
levels.
|
While
the general mix of the elements is considered in the design of our total
compensation program, the Committee does not target a specific mix of pay in
either its program design or in its compensation determinations. By design,
our
executive officers have more variability than non-executives in their
compensation, to more closely tie their compensation to the Company’s overall
performance.
Base
Salary
We
pay our executive officers base salaries to provide a baseline level of
compensation that is both competitive with the external market and commensurate
with each employee’s past performance, experience, responsibilities and skills.
The Company generally targets base salaries around the median of our external
market peers. In making its base salary determinations, the Committee takes
into
account the internal and external factors described above. Base salary increases
from the fiscal year ended June 30, 2006 to the fiscal year ended June 30,
2007
for our named executive officers averaged 2% and ranged from 0% to 5%. The
Company’s CEO received a 0% increase in the fiscal year ended June 30, 2007.
Long-term
Incentives
A
long-term incentive (“LTI”) opportunity has been designed for managers to foster
a culture of ownership, align compensation with stockholder interests and
promote long-term retention and affiliation with the organization. The Committee
has determined the types of awards to be used for delivering long-term
incentives. In doing so, the Committee considered the ability of each type
of
award to achieve key compensation objectives (such as employee retention,
motivation and attraction), the needs of the business, competitive market
practices, dilution and expense constraints, as well as tax and accounting
implications.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
For
the fiscal year ended June 30, 2007, the Committee evaluated various program
designs and approved a program awarding stock options for our executive
officers. Stock options promote stockholder alignment and accountability and
are
qualified as performance-based pay under Internal Revenue Code
Section 162(m). Our 2007 stock option grants vest over four years.
Tax-deductibility
of Compensation
Section 162(m)
of the Internal Revenue Code of 1986, as amended, limits to $1 million the
amount a company may deduct for compensation paid to its CEO or any of its
other
four named executive officers. This limitation does not, however, apply to
compensation meeting the definition of “qualifying performance-based”
compensation.
Management
works with the Committee to assess alternatives to preserve the deductibility
under Section 162(m) of compensation payments to the extent reasonably
practicable, consistent with our compensation policies and as determined to
be
in the best interests of the Company and its stockholders. For the fiscal year
ended June 30, 2007, the Company believes that the Compensation payments will
meet the requirements of Section 162(m) of the Internal Revenue Code of 1986,
as
amended.
Perquisites
and Personal Benefits
In
addition to participating in the benefit programs provided to all other
employees (for example, medical, dental, vision, life and disability insurance,
employee stock purchase plan), we provide certain perquisites and additional
benefits to executives. These supplemental benefits and perquisites include:
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· Auto
Allowances The
Company provided annual car allowance benefits to executive officers
and
certain management personnel. Such reimbursement is considered taxable
income to the recipients.
· Mobile
Telephone Allowance:
The Company provided monthly mobile telephone allowance benefits
to
executive officers and certain management personnel. Such reimbursement
is
considered taxable income to the recipients.
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Retirement
Plans
We
maintain 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, including executive management, 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.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except per share data)
Summary
Compensation Table
The
following table shows the compensation paid to or earned by the named executive
officers during the fiscal year ended June 30, 2007.
|
Name
and 'Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards ($) (1)
|
|
Option
Awards ($) (2)
|
|
Non-Equity
Incentive Plan Compensation ($) (3)
|
|
Change
in Pension Value and Nonqualified Deferred Compensation Earnings
($)
(4)
|
|
All
Other Compensation ($) (5)
|
|
Total
($)
|
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(a)
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(b)
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(c)
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(d)
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(e)
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(f)
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(g)
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(h)
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(i)
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(j)
|
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|
Cameron
Reid
|
|
|
2007
|
|
$
|
300
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
13
|
|
$
|
313
|
|
|
Chief
Executive Officer
|
|
|
2006
|
|
$
|
297
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
297
|
|
|
|
|
|
2005
|
|
$
|
76
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
76
|
|
|
Bhupatlal
Sutaria
|
|
|
2007
|
|
$
|
275
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
13
|
|
$
|
288
|
|
|
President
|
|
|
2006
|
|
$
|
271
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
22
|
|
$
|
293
|
|
| |
|
|
2005
|
|
$
|
198
|
|
$
|
15
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
21
|
|
$
|
234
|
|
|
Peter
Giallarenzo
|
|
|
2007
|
|
$
|
110
|
|
$
|
-
|
|
$
|
-
|
|
$
|
117
|
|
$
|
-
|
|
$
|
-
|
|
$
|
|