NOTE
2 -
Management’s Liquidity Plans and Going Concern
The
accompanying condensed consolidated financial statements have been prepared
on a
going concern basis, which contemplates continuity of operations, realization
of
assets, and liquidity of liabilities in the ordinary course of business.
Realization of the Company’s assets is dependent on the continued operations of
the Company and the future success of such operations.
The
Company has incurred a net loss for the six months ended December 31, 2007
of
$17,794 and has incurred net losses for each of the last three fiscal years.
At
December 31, 2007, the Company had a working capital deficiency of $16,635,
an
accumulated deficit of $39,970 and cash flows used in operating activities
of
$9,835.
In
addition, as disclosed in Note 8 - Debt, on January 10, 2008, the Company
received notice that it had defaulted under its Forbearance Agreement with
Wells
Fargo Business Credit, with respect to: (i) financial covenants relating to
required Income Before Tax for the months ending October 31, 2007 and November
30, 2007, (ii) financial covenants relating to required Net Cash Flow for the
months ending October 31, 2007 and November 30, 2007 and (iii) an obligation
to
have a designated financial advisor provide an opinion as to the Company's
ability to meet their fiscal year 2008 projections. Subsequently, on January
28,
2008, Wells Fargo informed the Company that it would consider providing the
Company with credit availability on the condition that the Company (i) develops
and implements a new operating plan focused on increasing the amount of eligible
collateral and reducing costs and (ii) develop an alternative financing
arrangement. Further, on February 5, 2008, the Company and Wells Fargo entered
into the Forbearance Agreement whereby Wells Fargo agreed to, among other
things, (i) forbear from exercising its remedies arising from the Company’s
default under the Credit Agreement until June 30, 2008 provided no further
default occurs; (ii) provide a moratorium on certain principal payment; (iii)
and advance the Company up to $3,000 under a newly granted real estate line
of
credit mortgage on the Company’s real estate, which amounts will be due on June
30, 2008. The total amount outstanding with Wells Fargo at December 31, 2007
was
$30,590.
Under
the
Forbearance Agreement the Company agreed to (i) submit to Wells Fargo,
on a weekly basis, a “rolling” 13-week budget; (ii) engage a chief restructuring
officer to review and oversee the budget and, in conjunction with the
Company’s management, certain financial matters; (iii) grant Wells Fargo an
equity line of credit mortgage to secure its new equity line of credit and
a
collateral mortgage to secure certain obligations under the $7,000 portion
of
revolving line of credit that has been converted to a term loan and (iv) pay
Wells Fargo a success fee of up to $500 in the event the balance of the
indebtedness owed to Wells Fargo is repaid from the sale of the Company’s
stock or substantially all of its assets prior to June 30,
2008
In
connection with its negotiation of the Forbearance Agreement, the Company
completed a restructuring of its operations on January 25, 2008 and submitted
a
new operating plan to Wells Fargo, which the Company believes will result in
positive cash flow and net profits, and includes the following:
|
|
·
|
Identifying
alternative financing sources for the Company’s real estate, machinery and
equipment, and working capital finance.
|
|
|
·
|
Reducing
payroll and headcount by approximately
20%
|
|
|
·
|
Increasing
revenue through the launch of new products, identifying new customers,
and
expanding relationships with existing
customers
|
|
|
·
|
Substantially
reducing research and development activities
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
2 -
Management’s Liquidity Plans and Going Concern,
continued
There
can
be no assurances that the Company will be able to reverse its operating losses,
cash flow deficiencies, or meet the requirements set forth in the Forbearance
Agreement entered into on February 5, 2008. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. The financial
statements do not include any adjustments to the measurement and classification
of recorded asset amounts and classification of liabilities that might be
necessary should we be unable to continue as a going concern.
Among
other initiatives, the Company is currently holding discussions with its key
vendors in an effort ensure that there is a continuous supply of raw
materials. In addition, the Company is seeking alternative financing
arrangements to secure additional working capital. If the Company is not
able to procure sufficient levels of raw materials, or if the Company is not
able to secure additional working capital in a timely manner, then the Company
will not be able to continue as a going concern. The Company would then be
forced to conduct a sale of the Company or a liquidation of assets in
bankruptcy.
NOTE
3 -
Summary
of Significant Accounting Policies
Revenue
Recognition
The
Company recognizes product sales revenue when title and risk of loss have
transferred to the customer, when estimated provisions for chargebacks and
other
sales allowances including discounts, rebates, etc., are reasonably
determinable, and when collectibility is reasonably assured. Accruals for these
provisions are presented in the condensed consolidated financial statements
as
reductions to revenues. Accounts receivable are presented net of allowances
relating to the above provisions of $4,694 and $4,865 at December 31, 2007
and
June 30, 2007, respectively.
In
addition, the Company is party to manufacturing and supply agreements with
certain pharmaceutical companies under which, in addition to the selling price
of the product, the Company receives payments based on sales or profits
associated with these products realized by its customer. The Company recognizes
revenue related to the initial selling price upon shipment of the products
as
the selling price is fixed and determinable and no right of return exists.
The
additional revenue component of these agreements is recognized by the Company
at
the time its customers record their sales and is based on pre-defined formulas
contained in the agreements. Receivables related to this revenue of $40 and
$594
at December 31, 2007 and June 30, 2007, respectively, are included in “Accounts
receivable, net” in the accompanying Condensed Consolidated Balance Sheets.
Earnings
(Loss) Per Share
Basic
earnings (loss) per share (“EPS”) of common stock is computed by dividing net
income (loss) attributable to common stockholders by the weighted average number
of shares of common stock outstanding during the period. Diluted EPS reflects
the amount of net income (loss) for the period available to each share of common
stock outstanding during the reporting period, giving effect to all potentially
dilutive shares of common stock from the potential exercise of stock options
and
warrants and conversions of convertible preferred stocks.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
3 -
Summary
of Significant Accounting Policies, continued
Use
of
Estimates in the Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. These estimates are often based on judgements,
probabilities, and assumptions that management believe are reasonable, but
that
are not inherently uncertain and unpredictable. As a result, actual results
could differ from those estimates. Management periodically evaluates estimates
used in the preparation of the consolidated financial statements for continued
reasonableness. Appropriate adjustments, if any, to the estimates used are
made
prospectively based on such periodic evaluations.
Stock
Based Compensation
The
Company accounts for stock based compensation arrangements using the fair value
recognition provisions of Statement of Financial Accounting Standards (“SFAS”)
No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”). The
Company estimates fair value of employee stock options using the Black-Scholes
Model. Key assumptions in the Black-Scholes model include stock price, expected
volatility, risk free interest rate, expected life, and expected forfeiture
rates. The compensation cost of these arrangements is recognized over the
requisite service period, which in the case of employees is often the vesting
period. As a result, the Company’s net loss before taxes for the three months
ended December 31, 2007 and 2006 included a non cash stock based compensation
expense of $233 and $375, respectively, and $575 and $586 for the six months
ended December 31, 2007 and 2006, respectively.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
fully recoverable. To determine if impairment exists, the Company compares
the
estimated future undiscounted cash flows from the related long-lived assets
to
the net carrying amount of such assets. Once it has been determined that
impairment exists, the carrying value of the asset is adjusted to fair value.
Factors considered in the determination of fair value include current operating
results, trends and the present value of estimated expected future cash
flows.
Reclassifications
Certain
reclassifications have been made to the condensed consolidated financial
statements for the prior period to conform to the current period’s
classifications. These reclassifications have no effect on previously reported
net income.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
3 -
Summary
of Significant Accounting Policies
,
continued
New
Accounting Pronouncements
On
July
1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”)
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 Statement of Financial Accounting Standards
(“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No.109”). This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No.
109. FIN 48 prescribes a recognition threshold and measurement attribute for
the
financial statement recognition and measurement of an income tax position taken
or expected to be taken in an income tax return. Adoption of the provisions
of
FIN 48 did not have a material impact on the Company’s condensed consolidated
financial position, results of operations, or its cash flows for the six months
ended December 31, 2007 (see Note 9).
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. This guidance was
effective for the Company as of July 1, 2007. Adoption of the provisions
of SFAS 156 had no impact on the Company’s condensed consolidated financial
position, results of operations, or its cash flows for the six months ended
December 31, 2007.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures
about
fair value measurements. It codifies the definitions of fair value included
in
other authoritative literature; clarifies and, in some cases, expands on the
guidance for implementing fair value measurements; and increases the level
of
disclosure required for fair value measurements. Although SFAS 157 applies
to
(and amends) the provisions of existing authoritative literature, it does not,
of itself, require any new fair value measurements, nor does it establish
valuation standards. SFAS 157 is effective for financial statements issued
for
fiscal years beginning after November 15, 2007, and interim periods within
those
fiscal years. This statement will be effective for the Company's fiscal year
beginning July 2008. The Company will evaluate the impact of adopting SFAS
157
but does not expect that it will have a material impact on the Company's
consolidated financial position, results of operations or cash
flows.
In
December 2006, the FASB issued FASB Staff Position (“FSP”) EITF 00-19-2
“Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”). FSP
00-19-2 provides guidance related to the accounting for registration payment
arrangements and specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration arrangement,
whether issued as a separate arrangement or included as a provision of a
financial instrument or arrangement, should be separately recognized and
measured in accordance with SFAS No. 5, “Accounting for
Contingencies.” FSP 00-19-2 requires that if the transfer of
consideration under a registration payment arrangement is probable and can
be
reasonably estimated at inception, the contingent liability under such
arrangement shall be included in the allocation of proceeds from the related
financing transaction using the measurement guidance in
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
3 -
Summary
of Significant Accounting Policies
,
continued
Statement
No. 5. FSP 00-19-2 applies immediately to any registration payment arrangements
entered into subsequent to the issuance of FSP 00-19-2. This guidance was
effective for the Company as of July 1, 2007. Adoption of the provisions of
FSP
00-19-2 had no impact on the Company’s condensed consolidated financial
position, results of operations, or its cash flows for the three and six months
ended December 31, 2007.
In
February 2007, the FASB issued Statement (“SFAS”) No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities - including an amendment
of FASB Statement No. 115
”
(“SFAS
159”). This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The fair value option established by this Statement permits all
entities to choose to measure eligible items at fair value at specified election
dates. A business entity shall report unrealized gains and losses on items
for
which the fair value option has been elected in earnings (or another performance
indicator if the business entity does not report earnings) at each subsequent
reporting date. Most of the provisions of this Statement apply only to entities
that elect the fair value option. However, the amendment to FASB Statement
No.
115, Accounting for Certain Investments in Debt and Equity Securities, applies
to all entities with available-for-sale and trading securities. Some
requirements apply differently to entities that do not report net income. This
Statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. The Company does not expect the adoption of
SFAS
No. 159 to have a material impact on its consolidated financial
statements.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141R, “Business
Combinations” (“SFAS 141R”), which replaces SFAS No. 141, “Business
Combinations.” SFAS 141R establishes principles and requirements for determining
how an enterprise recognizes and measures the fair value of certain assets
and
liabilities acquired in a business combination, including noncontrolling
interests, contingent consideration, and certain acquired contingencies. SFAS
141R also requires acquisition-related transaction expenses and restructuring
costs be expensed as incurred rather than capitalized as a component of the
business combination. SFAS 141R will be applicable prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15, 2008. SFAS
141R
would have an impact on accounting for any businesses acquired after the
effective date of this pronouncement. The Company does not expect the adoption
of SFAS No. 141R to have a material impact on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS
160”). SFAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary (previously referred to as minority
interests). SFAS 160 also requires that a retained noncontrolling interest
upon
the deconsolidation of a subsidiary be initially measured at its fair value.
Upon adoption of SFAS 160, the Company would be required to report any
noncontrolling interests as a separate component of stockholders’ equity. The
Company would also be required to present any net income allocable to
noncontrolling interests and net income attributable to the stockholders of
the
Company separately in its consolidated statements of income. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
3 -
Summary
of Significant Accounting Policies, continued
December
15, 2008. SFAS 160 requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other requirements
of SFAS 160 shall be applied prospectively. SFAS 160 would have an impact on
the
presentation and disclosure of the noncontrolling interests of any non
wholly-owned businesses acquired in the future. The Company does not expect
the
adoption of SFAS No. 160 to have a material impact on its consolidated financial
statements.
NOTE
4 -
Accounts
Receivable
Accounts
receivable are comprised of amounts owed to the Company through the sales of
its
products throughout the United States. These accounts receivable are presented
net of allowances for doubtful accounts, sales returns, discounts, rebates
and
customer chargebacks. Allowances for doubtful accounts were approximately $30
at
December 31, 2007 and June 30, 2007. 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 $4,694 and $4,865 at December
31, 2007 and June 30, 2007, respectively. The
Company
sells some of its products indirectly to various government agencies referred
to
below as “indirect customers.” The Company enters into agreements with its
indirect customers to establish pricing for certain products. The indirect
customers then independently select a wholesaler from which to actually purchase
the products at these agreed-upon prices. The Company will provide credit (known
as a “chargeback”) 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. The provision for chargebacks is based on expected sell-through
levels by the Company’s wholesale customers to the indirect customers, and
estimated wholesaler inventory levels. As sales to the large wholesale customers
increase, the reserve for chargebacks will also generally increase. However,
the
size of the increase depends on the product mix.
The
Company continually monitors the reserve for chargebacks and makes adjustments
to the reserve as deemed necessary. Actual chargebacks may differ from estimated
reserves.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
4 -
Accounts
Receivable
The
changes in the allowance for customer chargebacks, discounts and other credits
that reduced gross revenue for the six months ended December 31, 2007 and 2006
was as follows:
|
|
|
Six
Months Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Reserve
balance - beginning
|
|
$
|
4,865
|
|
$
|
2,315
|
|
|
|
|
|
|
|
|
|
|
|
Actual
chargebacks, discounts and other
|
|
|
|
|
|
|
|
|
credits
taken in the current period (a)
|
|
|
(11,381
|
)
|
|
(5,014
|
)
|
|
|
|
|
|
|
|
|
|
|
Current
provision related to current period sales
|
|
|
11,210
|
|
|
5,267
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
balance - ending
|
|
$
|
4,694
|
|
$
|
2,568
|
|
|
|
(a)
|
Actual
chargebacks, discounts and other credits are determined based upon
the
customer’s application of amounts taken against the accounts receivable
balance.
|
NOTE
5 -
Inventories
Inventories
consist of the following:
|
|
|
December
31,
|
|
June
30,
|
|
|
|
|
2007
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Finished
goods
|
|
$
|
3,074
|
|
$
|
3,085
|
|
|
Work
in process
|
|
|
4,715
|
|
|
7,260
|
|
|
Raw
materials
|
|
|
3,896
|
|
|
6,286
|
|
|
Packaging
materials
|
|
|
776
|
|
|
664
|
|
|
Total
|
|
$
|
12,461
|
|
$
|
17,295
|
|
|
Less:
Reserve for obsolescence
|
|
|
(205
|
)
|
|
--
|
|
|
Total
|
|
$
|
12,256
|
|
$
|
17,295
|
|
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
December 31, 2007 and June 30, 2007 that were determined to have a carrying
value in excess of market were $1,000 and $1,157, respectively. As a result,
the
Company reduced the carrying value of inventory on hand to its market value
by
these amounts as of December 31, 2007 and June 30, 2007,
respectively.
The
Company performs a quarterly review of inventory items to determine if an
obsolescence reserve adjustment is necessary. The allowance not only considers
specific items and expiration dates, but also takes into consideration the
overall value of the inventory as of the balance sheet date. The inventory
obsolescence reserve value at December 31, 2007 was $205.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
6 -
Land,
Building and Equipment
Land,
building and equipment consist of the following:
|
|
|
December
31,
|
|
June
30,
|
|
|
|
|
2007
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Land
|
|
$
|
4,924
|
|
$
|
4,924
|
|
|
Building
|
|
|
12,460
|
|
|
12,460
|
|
|
Machinery
and equipment
|
|
|
18,021
|
|
|
16,881
|
|
|
Computer
equipment
|
|
|
2,700
|
|
|
2,065
|
|
|
Construction
in Progress
|
|
|
36
|
|
|
186
|
|
|
Furniture
and fixtures
|
|
|
1,003
|
|
|
953
|
|
|
Leasehold
improvements
|
|
|
5,130
|
|
|
4,386
|
|
|
|
|
|
44,274
|
|
|
41,855
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
9,175
|
|
|
7,357
|
|
|
|
|
|
|
|
|
|
|
|
Land,
Building and Equipment, net
|
|
$
|
35,099
|
|
$
|
34,498
|
|
Depreciation
and amortization expense for the three and six months ended December 31, 2007
was approximately $913 and $1,818, respectively, and was approximately $541
and
$1,029 for the three and six months ended December 31, 2006.
NOTE
7 -
Accounts
Payable, Accrued Expenses and Other Current
Liabilities
Accounts
payable, accrued expenses and other current liabilities consist of the
following:
|
|
|
December
31,
|
|
June
30,
|
|
|
|
|
2007
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
purchases
|
|
$
|
5,730
|
|
$
|
9,525
|
|
|
Research
and development expenses
|
|
|
1,657
|
|
|
3,003
|
|
|
Contract
termination liability
|
|
|
902
|
|
|
386
|
|
|
Other
|
|
|
5,041
|
|
|
5,628
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,330
|
|
$
|
18,542
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
8 -
Debt
Long-term
Debt
A
summary
of the outstanding long-term debt is as follows:
|
|
|
December
31,
|
|
June
30,
|
|
|
|
|
2007
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
credit facility
|
|
$
|
15,143
|
|
$
|
9,866
|
|
|
Real
estate term loan
|
|
|
10,533
|
|
|
10,933
|
|
|
Machinery
and equipment term loans
|
|
|
4,914
|
|
|
5,601
|
|
|
STAR
Note Payable
|
|
|
4,552
|
|
|
-
|
|
|
Sutaria
Note Payable
|
|
|
3,000
|
|
|
-
|
|
|
Capital
leases
|
|
|
386
|
|
|
183
|
|
|
|
|
|
38,528
|
|
|
26,583
|
|
|
Less:
amount representing interest on capital leases
|
|
|
58
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
|
38,470
|
|
|
26,545
|
|
|
|
|
|
|
|
|
|
|
|
Less:
current maturities
|
|
|
30,680
|
|
|
12,057
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
$
|
7,790
|
|
$
|
14,488
|
|
In
February, 2006, the Company entered into a four-year financing arrangement
with
Wells Fargo Business Credit (“WFBC”). This financing agreement provided an
original maximum credit facility of $41,500 comprised of:
·
$22,500
revolving credit facility (the “facility”)
·
$12,000
real estate term loan
·
$
3,500
machinery and equipment (“M&E”) term loan
·
$
3,500
additional / future capital expenditure facility
The
funds
made available through this facility paid down, in its entirety, the $20,445
owed on the previous credit facility. The revolving credit facility borrowing
base is calculated as (i) 85% of the Company’s eligible accounts receivable plus
the lesser of 50% of cost or 85% of the net orderly liquidation value of its
eligible inventory. The advances pertaining to inventory were initially capped
at the lesser of 100% of the advance from accounts receivable or $9,000. 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 of approximately $8,800 is due. The $3,500 M&E
loan is payable in equal monthly installments of $58 plus interest through
February 2010 at which time the remaining principal balance is due. With respect
to additional capital expenditures, the Company is permitted to borrow 90%
of
the cost of new equipment purchased to a maximum of $3,500 in borrowings
amortized over 60 months.
In
connection with WFBC credit facility, the Company incurred deferred financing
costs of $482, which are being amortized over the term of the WFBC credit
facility and are included in Other Assets. Of this amount, $30 and $60 has
been
amortized for the three and six months ended December 31, 2007 and 2006,
respectively.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
8 -
Debt,
continued
The
WFBC
credit facility is collateralized by substantially all of the assets of the
Company. In addition, the Company is required to comply with certain financial
covenants. On October 26, 2007, the Company and Wells Fargo Business Credit
finalized a Forbearance Agreement, which was subsequently amended on November
12, 2007, that terminated on December 31, 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 “Defaults”). In
accordance with the Forbearance Agreement, WFBC waived the Defaults based upon
the Borrower’s consummation and receipt of $8,000 related to the issuance of
subordinated debt described below.
On
November 7, 2007 and November 14, 2007, as required by the Forbearance
Agreement, the Company received a total of $8,000 in gross proceeds from the
issuance and sale of subordinated debt.
On
November 7, 2007, Dr. Maganlal K. Sutaria, the Chairman of the Company’s Board
of Directors, and Vimla M. Sutaria, his wife, loaned $3,000 to the Company
pursuant to a Junior Subordinated Secured 12% Promissory Note due 2010 (the
“Sutaria Note”). Interest of 12% per annum on the Sutaria Note is payable
quarterly in arrears, and for the first 12 months of the note’s term, may be
paid in cash, or additional notes (“PIK Notes”), at the option of the Company.
Thereafter, the Company is required to pay at least 8% interest in cash, and
the
balance, at its option, in cash or PIK Notes.
Repayment
of the Sutaria Notes is secured by liens on substantially all of the Company’s
property and real estate. Pursuant to intercreditor agreements, the Sutaria
Notes are subordinated to the liens held by WFBC and the holders of the STAR
Notes described below.
On
November 14, 2007, the Company issued and sold an aggregate of $5,000 of Secured
12% Promissory Notes Due 2009 (the “STAR Notes”) in the following amounts to the
following parties:
|
Tullis-Dickerson
Capital Focus III, L.P. (“Tullis”)
|
|
$
|
833
|
|
|
Aisling
Capital II, L.P. (“Aisling”)
|
|
$
|
833
|
|
|
Cameron
Reid (“Reid”)
|
|
$
|
833
|
|
|
Sutaria
Family Realty, LLC (“SFR”)
|
|
$
|
2,500
|
|
Tullis
is
an investor in the Company and the holder of its Series B-1 Convertible
Preferred Stock. Aisling is also an investor in the Company and the holder
of
its Series C-1 Convertible Preferred Stock. Reid is the Company’s Chief
Executive Officer and SFR is owned by Company shareholders who control
approximately 53% 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 for share data)
NOTE
8 -
Debt, continued
Interest
of 12% per annum on the STAR Notes is payable quarterly in arrears, and may
be
paid, at the option of the Company, in cash or PIK Notes. Upon the Company
obtaining stockholder approval and ratification of the issuance of the STAR
Note
financing and making the necessary filings with the SEC in connection therewith
(the “Stockholder Approval”), which was 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, which was filed on January 15, 2008, 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.
In
accordance with EITF 00-27,
Application
of Issue No. 98-5 to Certain Convertible Instruments (“EITF
00-27”)
,
a
commitment date occurs for purposes of determining the fair value
of the
issuer's common stock to be used to measure the intrinsic value of
an
embedded conversion option when the following two characteristics
have
been met: i) the agreement specifies all significant terms, including
the
quantity to be exchanged, the fixed price, and the timing of the
transaction, and ii) the agreement includes a disincentive for
nonperformance that is sufficiently large to make performance probable.
The above characteristics were met on November 14, 2007 as all significant
terms were agreed to and performance was probable as the funds had
been
received and the majority shareholders had delivered a proxy approving
the
transaction. Accordingly,
the Company recorded a discount to the debt of $480, which is being
accreted over the life of the STAR Notes. Non-cash interest of $32
was
recognized during the six months ended December 31, 2007.
|
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 Notes (and, eventually, Convertible Notes) is
secured by a second priority lien on substantially all of the Company’s property
and real estate. Pursuant to intercreditor agreements, the STAR Note financing
liens are subordinate to those of WFBC, but ahead, in priority, of the Sutaria
Notes.
Also,
upon the Company obtaining the Stockholder Approval, the Series B-1 and Series
C-1 Convertible Preferred Stock held by Tullis and Aisling shall be exchangeable
for shares of a new Series D-1 Convertible Preferred Stock, which shall be
substantially similar to the B-1 and C-1 Convertible Preferred Stock other
than
the Conversion price which is to be $0.95 per share instead of $1.5338 per
share.
In
accordance with EITF 00-27,
as
all
significant terms were agreed to and performance was probable as the funds
had
been received and the majority shareholders had delivered a proxy approving
the
transaction
,
the
Company recorded a deemed dividend of approximately $3,030 related to this
pending exchange during the quarter ended December 31, 2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
8 -
Debt,
continued
Pursuant
to the terms of the Securities Purchase Agreements for the Company’s Series B-1
and C-1 Convertible Preferred Stock, the consent of Tullis and Aisling was
required for the issuance of the Sutaria Notes and for the STAR Note financing.
In consideration for that consent, the Company has agreed to exchange 2,282
warrants to purchase Company Common Stock held by each of Tullis and Aisling
with an exercise price of $1.639 per share for new warrants with an exercise
price of $0.95 per share. In addition, the Major Shareholders have agreed to
give Tullis and Aisling tag along rights on certain sales of Company common
stock. As a result, the Company recorded a deemed dividend of approximately
$315, which represented the difference in the fair value immediately before
and
after the reduction of the exercise price on November 14, 2007.
In
connection with the Sutaria Notes and STAR Note Financing, the Company incurred
deferred financing costs of $283, which are being amortized over the term of
Notes and is included in Other Assets. Of this amount, $19 has been amortized
for the three and six months ended December 31, 2007.
On
January 10, 2008, the Company received notice from Wells Fargo that they had
defaulted under the Forbearance Agreement, with respect to: (i) financial
covenants relating to required Income Before Tax for the months ending October
31, 2007 and November 30, 2007, (ii) financial covenants relating to required
Net Cash Flow for the months ending October 31, 2007 and November 30, 2007
and
(iii) an obligation to have a designated financial advisor provide an opinion
as
to the Company's ability to meet their fiscal year 2008 projections. The Notice
states that Wells Fargo is not demanding repayment of the Outstanding Amount
at
this time, but that Wells Fargo reserves the right to do so. In addition, Wells
Fargo had informed the Company that it was in the process of assessing the
Company’s eligible collateral under the Wells Fargo Credit Agreement and was
providing limited credit availability for ongoing operations pending the outcome
of that review. On January 28, 2008, Wells Fargo informed the Company that
it
would consider providing the Company with credit availability on the condition
that the Company (i) develops and implements a new operating plan focused on
increasing the amount of eligible collateral and reducing costs and (ii) develop
an alternative financing arrangement.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
8 -
Debt,
continued
On
February 5, 2008, the Company and Wells Fargo entered into the Forbearance
Agreement whereby Wells Fargo agreed to, among other things, (i) forbear from
exercising its remedies arising from the Company’s default under the Credit
Agreement until June 30, 2008 provided no further default occurs; (ii) provide
a
moratorium on certain principal payment; (iii) and advance the Company up to
$3,000 under a newly granted real estate line of credit mortgage on the
Company’s real estate, which amounts will be due on June 30, 2008.
Under
the
Forbearance Agreement the Company agreed to (i) submit to Wells Fargo, on a
weekly basis, a “rolling” 13-week budget; (ii) engage a chief restructuring
officer to review and oversee the budget and, in conjunction with Company
management, certain financial matters; (iii) grant Wells Fargo an equity line
of
credit mortgage to secure its new equity line of credit and a collateral
mortgage to secure certain obligations under that portion of revolving line
of
credit that has been converted to a term loan and (iv) pay Wells Fargo a success
fee of up to $500 in the event the balance of the indebtedness owed to Wells
Fargo is repaid from the sale of the Company’s stock or substantially all of its
assets prior to June 30, 2008.
The
Forbearance Agreement also limits the Company’s borrowing base on which certain
advances are made and provides for a number of events of default, including
(i)
a material adverse change (ii) failure of the Company to meet certain budget
items by more that 10%; (iii) failure to receive a letter of intent for the
sale
of the assets of the Company for an amount in excess of the Wells Fargo
indebtedness by March 31, 2008; (iv) failure by the Company to receive a
commitment for the sale of the assets of the Company for an amount in excess
of
the Wells Fargo indebtedness by April 30, 2008; (v) failure of the Company
to
close a transaction for the sale of the assets of the Company for an amount
in
excess of the Wells Fargo indebtedness by June 30, 2008; and (vi) Wells Fargo
indebtedness remains outstanding on June 30, 2008. Pursuant to the operating
plan approved by Wells Fargo in connection with the Forbearance Agreement,
the
Company was given access to up to an additional $3,000 of capital to meet its
ongoing working capital and operating requirements.
The
revolving credit facility and term loans bear interest at a rate of the prime
rate less 0.5% or, at the Company’s option, LIBOR plus 250 basis points.
However, as a results of the default discussed above, the Company was charged
interest at the default rate of prime plus 2.5% from September 30, 2007 through
the forbearance period. At December 31, 2007, the interest rate on this debt
was
9.75%. Pursuant to the requirements of the WFBC agreement, the Company has
put
in place a lock-box arrangement. The Company will incur a fee of 25 basis points
per annum on any unused amounts of this credit facility.
With
respect to the real estate term loan and the $3,500 M&E loan, the Company
entered into interest rate swap contracts (the “swaps”), whereby the Company
pays a fixed rate of 7.56% and 8.00% per annum, respectively. However, as a
result of the default discussed above, the Company was charged interest at
the
default rates of 10.56% and 11.00%, respectively. The swaps 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
December 31, 2007 and June 30, 2007 was approximately ($380) and $10 and is
included in Other Liabilities and Other Assets, respectively.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
8 -
Debt,
continued
Capital
Leases
The
Company has acquired equipment under a capital lease with annual interest at
8.89% that expires September 2012. The asset and liability under the capital
lease is recorded at the fair value of the asset and is depreciated over its
estimated useful life. The remaining cost of the asset included in machinery
and
equipment is $133 as of December 31, 2007.
On
September 14, 2007, the Company acquired equipment under a capital lease with
annual interest at 9.23% that expires August 2010. The asset and liability
under
the capital lease is recorded at the fair value of the asset and is depreciated
over its estimated useful life. The remaining cost of the asset included in
computer equipment is $195 as of December 31, 2007.
NOTE
9-
Income
Taxes
At
December 31, 2007, the Company has remaining Federal net operating losses
(“NOLs”) of $44,053 available through 2027. 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, 2007, and the Company’s current financial position (see
Note 2 - Management’s Liquidity Plans and Going Concern), which indicate
uncertainty as to the Company’s ability to generate future taxable income, the
“more-likely-than-not” standard has not been met and therefore the Company’s
deferred tax asset may not be realized. As such, the company carried a full
valuation allowance against its deferred tax assets as of December 31, 2007.
In
calculating its tax provision for the six month periods ended December 31,
2007
and 2006, the Company applied aggregate effective tax rates of approximately
51%
and 27%, respectively, thereby creating income tax expense of $5,976 and an
income tax benefit of $922, respectively. The increase in effective tax rates
is
the result of the Company increasing the valuation allowance against its
deferred tax assets during the six months ended December 31, 2007.
The
Company has adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes
- an
interpretation of FASB Statement No. 109"("FIN 48"), on January 1, 2007.
FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an
enterprise's financial statements in accordance with SFAS No. 109, "Accounting
for Income Taxes," and prescribes a recognition threshold and measurement
process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in
interim period, disclosure and transition.
Based
on
the company's evaluation, it has been concluded that there are no significant
uncertain tax positions requiring recognition in the Company's financial
statements. The Company's evaluation was performed for its significant
jurisdictions, United States Federal and New York State Corporate income tax
returns for tax years ended June 30, 2004 through June 30, 2007, the only
periods subject to examination. The Company believes that its income tax
positions and deductions would be sustained on audit and does not anticipate
any
adjustments that would result in a material change to its financial
position. In addition, the company did not record a cumulative effect
adjustment related to the adoption of FIN 48.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
9-
Income
Taxes, continued
The
Company's policy for recording interest and penalties associated with audits
is
to record such items as a component of income taxes. There were no amounts
accrued for penalties or interest as of or during the six months ended December
31, 2007. The Company does not expect its unrecognized tax benefit
position to change during the next twelve months. Management is currently
unaware of any issues under review that could result in significant payments,
accruals or material deviations from its position.
NOTE
10-
Earnings
(Loss) Per Share
The
calculations of basic and diluted EPS are as follows:
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(10,897
|
)
|
$
|
(4,124
|
)
|
$
|
(17,794
|
)
|
$
|
(2,494
|
)
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1 Preferred stock dividends
|
|
|
(41
|
)
|
|
(41
|
)
|
|
(82
|
)
|
|
(82
|
)
|
|
Series B-1 Preferred stock dividends
|
|
|
--
|
|
|
(206
|
)
|
|
--
|
|
|
(413
|
)
|
|
Series C-1 Preferred stock dividends
|
|
|
--
|
|
|
(206
|
)
|
|
--
|
|
|
(247
|
)
|
|
Deemed dividend from Series B-1
warrants exercise price modification
|
|
|
(158
|
)
|
|
--
|
|
|
(158
|
)
|
|
--
|
|
|
Deemed dividend from Series C-1
warrants exercise price modification
|
|
|
(157
|
)
|
|
--
|
|
|
(157
|
)
|
|
--
|
|
|
Deemed dividend on Series B-1
exchange for Series D-1
|
|
|
(1,515
|
)
|
|
--
|
|
|
(1,515
|
)
|
|
--
|
|
|
Deemed dividend on Series C-1
exchange for Series D-1
|
|
|
(1,515
|
)
|
|
--
|
|
|
(1,515
|
)
|
|
(1,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
(14,283
|
)
|
$
|
(4,577
|
)
|
$
|
(21,221
|
)
|
$
|
(4,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted EPS
weighted
average shares outstanding
|
|
|
66,738
|
|
|
65,063
|
|
|
66,467
|
|
|
64,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted EPS:
|
|
$
|
(0.21
|
)
|
$
|
(0.07
|
)
|
$
|
(0.32
|
)
|
$
|
(0.07
|
)
|
Stock
options, warrants and convertible preferred stock, equivalent to 37,989 and
29,330 shares of the Company’s common stock, were not included in the
computation of diluted earnings per share for the six months ended December
31,
2007 and 2006, respectively, as their inclusion would be
antidilutive.
As
of
December 31, 2007, the total number of common shares outstanding and the number
of common shares potentially issuable upon exercise of all outstanding stock
options and conversion of preferred stocks (including contingent conversions)
is
as follows:
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
10-
Earnings
(Loss) Per Share, continued
|
Common
stock outstanding
|
|
|
66,738
|
|
|
Stock
options outstanding
|
|
|
10,525
|
|
|
Warrants
outstanding
|
|
|
6,406
|
|
|
Common
stock issuable upon converstion of preferred stocks:
|
|
|
|
|
|
Series C
|
|
|
6
|
|
|
Series A-1 (maximum contingent conversion) (a)
|
|
|
4,855
|
|
|
Series B-1 (c)
|
|
|
10,526
|
|
|
Series C-1 (c)
|
|
|
10,526
|
|
|
|
|
|
|
|
|
Total (b)
|
|
|
109,582
|
|
|
|
(a)
|
The
Series A-1 shares are convertible only if the Company reaches $150
million
in annual sales or upon a merger, consolidation, sale of assets or
similar
transaction.
|
|
|
(b)
|
Assuming
no further issuance of equity instruments, or changes to the equity
structure of the Company, this total represents the maximum number
of
shares of common stock that could be outstanding through July 24,
2017
(the end of the current vesting and conversion
periods).
|
|
|
(c)
|
Upon
the Company obtaining Stockholder Approval, which is reasonably assured
as
the major shareholders have provided a proxy approving the transactions,
the Series B-1 and Series C-1 Convertible Preferred Stock held by
Tullis
and Aisling shall be exchangeable for shares of a new Series D-1
Convertible Preferred Stock, which shall be substantially similar
to the
B-1 and C-1 Convertible Preferred Stock other than the Conversion
price
which is to be $0.95 per share instead of $1.5338 per
share.
|
NOTE
11 -
Series
B-1 Redeemable Convertible Preferred Stock
In
May
2006, the Company entered into a Securities Purchase Agreement (the “Agreement”)
with Tullis-Dickerson Capital Focus III, L.P. (“Tullis”). Under the Agreement,
the Company agreed to issue and sell to Tullis, and Tullis agreed to purchase
from the Company, for a purchase price of $10,000 (net proceeds of $9,858)
an
aggregate of 10 shares of a newly designated series of the Company’s preferred
stock (“B-1”), together with 2,282 warrants to purchase shares of common stock
of the Company with an initial exercise price of $1.639 per share. The warrants
have a five year term. The Series B-1 Stock and warrants sold to Tullis were
initially convertible and/or exercisable into a total of 8,802 shares of common
stock. The B-1 shares were initially convertible into common shares at a
conversion price of $1.5338, and have an annual dividend rate of 8.25%, payable
quarterly, which can be paid, at the Company’s option, in cash or the Company’s
common stock. In addition, the B-1 shareholders have the right to require the
Company to redeem all or a portion of the B-1 shares upon the occurrence of
certain triggering events, at a price per preferred share to be calculated
on
the day immediately preceding the date of a triggering event. A triggering
event
shall be deemed to have occurred at such time as any of the following events:
(i) failure to cure a conversion failure by delivery of the required number
of
shares of common stock within ten trading days; (ii) failure to pay any
dividends, redemption price, change of control redemption price, or any other
amounts when due; (iii) any event of default with respect to any indebtedness,
including borrowings under the WFBC Credit and Security Agreement, under which
the oblige of such indebtedness are entitled to and do accelerate the maturity
of at least an aggregate of $3,000 in outstanding indebtedness; and (iv) breach
of any representation, warranty, covenant or other term or condition in the
Series B-1 Transaction Document.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
11 -
Series
B-1 Redeemable Convertible Preferred Stock,
continued
For
the
six months ended December 31, 2007, the Company issued 148 shares of common
stock as payment of $206 of previously accrued dividends. In connection with
the
Consent and Waiver Agreement (discussed in Note 8 - Debt), Tullis waived their
rights to receive dividends for the quarters ended September 30, 2007 and
December 31, 2007.
With
respect to the Company’s accounting for the preferred stock, EITF Topic D-98,
paragraph 4, states that Rule 5-02.28 of Regulation S-X requires securities
with redemption features that are not solely within the control of the issuer
to
be recorded outside of permanent equity. As described above, the terms of the
Preferred Stock include certain redemption features that may be triggered
by events that are not solely within the control of the Company, such as a
potential default with respect to any indebtedness, including borrowings under
the WFBC financing arrangement. Accordingly, the Company has classified the
B-1
shares as temporary equity and the value ascribed to the B-1 shares upon initial
issuance in May 2006 was the amount received in the transaction less the
relative fair value ascribed to the warrants and direct costs associated with
the transaction. The Company allocated $1,704 of the gross proceeds of the
sale
of B-1 shares to the warrants based on estimated fair value. In accordance
with
EITF Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain Convertible
Instruments," ("EITF 00-27") the Company recorded a non-cash charge of $1,418
to
accumulated deficit during the quarter ended June 30, 2006. The non-cash charge
measures the difference between the relative fair value of the B-1 shares and
the fair market value of the Company's common stock issuable pursuant to the
conversion terms on the date of issuance. On January 10, 2008, the Company
received notice from WFBC that the Company was in default under its Senior
Credit Agreement and Initial Forbearance Agreement dated October 26, 2007.
On
February 5, 2008, the Company entered into a Forbearance Agreement with Wells
Fargo, which provides the Company with additional credit and provides for a
forbearance by Wells Fargo from exercising its remedies based on previous
defaults with respect to the Company’s credit agreement with Wells Fargo. As a
result of the January 10, 2008 default notice and the terms of the February
5,
2008 Forbearance Agreement, in February 2008, the Company could no longer
conclude that it is not probable that the Series B-1 preferred stock will become
redeemable. Therefore, the Company will adjust the preferred stock to its
$10,000 redemption value in the Company’s fiscal quarter ended March 31, 2008.
In
addition, in May 2006, in connection with the sale of the B-1 shares the Company
entered into a Registration Rights Agreement, as amended, with Tullis. Under
the
terms of this Registration Rights Agreement the Company is subject to penalties
(a) if, within 60 days after a request to do so is made by the holders of such
preferred stock, the Company does not timely file with the
Securities
and Exchange Commission a registration statement covering the resale of shares
of its common stock issuable to such holders upon conversion of the preferred
stock, (b) if a registration statement is filed, such registration statement
is
not declared effective within 180 days after the request is made or (c) if
after
such a registration is declared effective, after certain grace periods the
holders are unable to make sales of its common stock because of a failure to
keep the registration statement effective or because of a suspension or
delisting of its common stock from the American Stock Exchange or other
principal exchange on which its common stock is traded. The penalties will
accrue on a daily basis so long as the Company is in default of the Registration
Rights Agreement. The maximum amount of a registration delay penalty as defined
in the Registration Rights Agreement is 18% of the aggregate purchase price
of
Tullis’ registrable securities included in the related registration statement.
Unpaid registration delay penalties shall accrue interest at the rate of 1.5%
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
11 -
Series
B-1 Redeemable Convertible Preferred Stock, continued
per
month until paid in full. If the Company fails to get a registration statement
effective penalties shall accrue at an amount equal to 1.67% per month of the
aggregate purchase price of Tullis’ registrable securities included in the
related registration statement. If the effectiveness failure continues for
more
than
180
days the penalty rate shall increase to 3.33%. In addition, if the Company
fails
to maintain the effectiveness of a registration statement, penalties shall
accrue at a rate of 3.33% per month of the aggregate purchase price of the
registrable securities included in the related registration. The Company is
also
subject to penalties if there is a failure to timely deliver to a holder (or
credit the holder’s balance with Depository Trust Company if the common stock is
to be held in street name) a certificate for shares of our common stock if
the
holder elects to convert its preferred stock into common stock. Therefore,
upon
the occurrence of one or more of the foregoing events the Company’s business and
financial condition could be materially adversely affected and the market price
of its common stock would likely decline.
The
Company’s Series B-1 redeemable convertible preferred stock is summarized as
follows at
December
31, 2007:
|
|
|
Shares
Issued
|
|
|
|
|
|
|
Shares
|
|
And
|
|
Par
Value
|
|
Liquidation
|
|
|
Authorized
|
|
Outstanding
|
|
Per
Share
|
|
Preference
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
10
|
|
$
|
100
|
|
$
|
10,000
|
|
Upon
the
Company obtaining Stockholder Approval, the Series B-1 Convertible Preferred
Stock held by Tullis shall be exchangeable for shares of a new Series D-1
Convertible Preferred Stock, which shall be substantially similar to the B-1
Convertible Preferred Stock other than the Conversion price which is to be
$0.95
per share instead of $1.5338 per share.
The
change in conversion price effectively changed the number of shares of common
stock into which the Series B-1 preferred shares may be converted from 6,520
to
10,526 for the Series D-1 preferred shares.
In
accordance with EITF 00-27, as all significant terms were agreed to and
performance was probable as the funds had been received and the majority
shareholders had delivered a proxy approving the transaction, the Company
recorded a deemed dividend of approximately $1,515 during the quarter ended
December 31, 2007.
Pursuant
to the terms of the Securities Purchase Agreements for the Company’s Series B-1
Convertible Preferred Stock, the consent of Tullis 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 Tullis with an exercise price of $1.639 per share for
new
warrants with an exercise price of $0.95 per share. In addition, the Major
Shareholders have agreed to give Tullis tag along rights on certain sales of
Company common stock. In accordance with EITF 00-27, as all significant terms
were agreed to and performance was probable as the funds had been received
and
the majority shareholders had delivered a proxy approving the
transaction
,
the
Company recorded a deemed dividend of approximately $158.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
12 -
Series
C-1 Redeemable Convertible Preferred Stock
On
September 11, 2006, the Company entered into a Securities Purchase Agreement
(the “C-1 Agreement”) with Aisling Capital, L.P. (the “Buyer”). Under the C-1
Agreement, the Company agreed to issue and sell to the Buyer, and the Buyer
agreed to purchase from the Company, for a purchase price of $10,000 (net
proceeds of $9,993) an aggregate of 10 shares of a newly designated series
of
the Company’s preferred stock (“C-1”), together with 2,282 warrants to purchase
shares of common stock of the Company with an initial exercise price of $1.639
per share. The warrants have a five year term. The Series C-1 Stock and warrants
sold to the Buyer were initially convertible and/or exercisable into a total
of
8,802 shares of common stock. The C-1 shares were initially convertible into
common shares at a conversion price of $1.5338, and have an annual dividend
rate
of 8.25%, payable quarterly, which can be paid, at the Company’s option, in cash
or the Company’s common stock. In addition, the C-1 shareholders have the right
to require the Company to redeem all or a portion of the C-1 shares upon the
occurrence of certain triggering events, as defined, at a price per preferred
share to be calculated on the day immediately preceding the date of a triggering
event. A triggering event shall be deemed to have occurred at such time as
any
of the following events: (i) failure to cure a conversion failure by delivery
of
the required number of shares of common stock within ten trading days; (ii)
failure to pay any dividends, redemption price, change of control redemption
price, or any other amounts when due; (iii) any event of default with respect
to
any indebtedness, including borrowings under the WFBC Credit and Security
Agreement, under which the oblige of such indebtedness are entitled to and
do
accelerate the maturity of at least an aggregate of $3,000 in outstanding
indebtedness; and (iv) breach of any representation, warranty, covenant or
other
term or condition in the Series C-1 Transaction Document.
For
the
six months ended December 31, 2007, the Company issued 148 shares of common
stock as payment of $206 of previously accrued dividends. In connection with
the
Consent and Waiver Agreement (discussed in Note 8 - Debt and Note 18 -
Subsequent Events), Aisling waived their rights to receive dividends for the
quarters ended September 30, 2007 and December 31, 2007.
With
respect to the Company’s accounting for the preferred stock, EITF Topic D-98,
paragraph 4, states that Rule 5-02.28 of Regulation S-X requires securities
with redemption features that are not solely within the control of the issuer
to
be recorded outside of permanent equity. As described above, the terms of the
Preferred Stock include certain redemption features that may be triggered
by events that are not solely within the control of the Company, such as a
potential default with respect to any indebtedness, including borrowings under
the WFBC financing arrangement. Accordingly, the Company has classified the
C-1
shares as temporary equity and the value ascribed to the C-1 shares upon initial
issuance in September 2006 was the amount received in the transaction less
the
relative fair value ascribed to the warrants and direct costs associated with
the transaction. The Company allocated $1,641of the gross proceeds of the sale
of C-1 shares to the warrants based on estimated fair value. In accordance
with
EITF Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain Convertible
Instruments," ("EITF 00-27") the Company recorded a non-cash charge of $1,094
to
Accumulated deficit during the quarter ended September 30, 2006. The non-cash
charge measures the difference between the relative fair value of the C-1 shares
and the fair market value of the Company's common stock issuable pursuant to
the
conversion terms on the date of issuance. On January 10, 2008, the Company
received notice from WFBC that the Company was in default under its Senior
Credit Agreement and Initial Forbearance Agreement dated October 26, 2007.
On
February 5, 2008, the Company entered into a Forbearance Agreement with Wells
Fargo, which provides the Company with additional credit and provides for a
forbearance by Wells Fargo from exercising its remedies based on previous
defaults with respect to the Company’s credit agreement with Wells Fargo. As a
result of the January 10, 2008 default
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
12 -
Series
C-1 Redeemable Convertible Preferred Stock
notice
and the terms of the February 5, 2008 Forbearance Agreement, in February 2008,
the Company could no longer conclude that it is not probable that the Series
B-1
preferred stock will become redeemable. Therefore, the Company will adjust
the
preferred stock to its $10,000 redemption value in the Company’s fiscal quarter
ended March 31, 2008.
In
addition, on September 11, 2006, in connection with the sale of the C-1 shares
the Company entered into a Registration Rights Agreement, as amended, with
the
Buyer. Under the terms of this Registration Rights Agreement the Company is
subject to penalties (a) if, within 60 days after a request to do so is made
by
the holders of such preferred stock, the Company does not timely file with
the
Securities and Exchange Commission a registration statement covering the resale
of shares of its common stock issuable to such holders upon conversion of the
preferred stock, (b) if a registration statement is filed, such registration
statement is not declared effective within 180 days after the request is made
or
(c) if after such a registration is declared effective, after certain grace
periods the holders are unable to make sales of its common stock because of
a
failure to keep the registration statement effective or because of a suspension
or delisting of its common stock from the American Stock Exchange or other
principal exchange on which its common stock is traded. The penalties will
accrue on a daily basis so long as the Company is in default of the Registration
Rights Agreement. The maximum amount of a registration delay penalty as defined
in the Registration Rights Agreement is 18% of the aggregate purchase price
of
the Buyers registrable securities included in the related registration
statement. Unpaid registration delay penalties shall accrue interest at the
rate
of 1.5% per month until paid in full. If the Company fails to get a registration
statement effective penalties shall accrue at an amount equal to 1.67% per
month
of the aggregate purchase price of the Buyers registrable securities included
in
the related registration statement. If the effectiveness failure continues
for
more than 180 days the penalty rate shall increase to 3.33%. In addition, if
the
Company fails to maintain the effectiveness of a registration statement,
penalties shall accrue at a rate of 3.33% per month of the aggregate purchase
price of the registrable securities included in the related registration. The
Company is also subject to penalties if there is a failure to timely deliver
to
a holder (or credit the holder’s balance with Depository Trust Company if the
common stock is to be held in street name) a certificate for shares of our
common stock if the holder elects to convert its preferred stock into common
stock. Therefore, upon the occurrence of one or more of the foregoing events
the
Company’s business and financial condition could be materially adversely
affected and the market price of its common stock would likely
decline.
The
Company’s Series C-1 redeemable convertible preferred stock is summarized as
follows at December 31, 2007:
|
|
|
Shares
Issued
|
|
|
|
|
|
|
Shares
|
|
And
|
|
Par
Value
|
|
Liquidation
|
|
|
Authorized
|
|
Outstanding
|
|
Per
Share
|
|
Preference
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
10
|
|
$
|
100
|
|
$
|
10,000
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
12 -
Series
C-1 Redeemable Convertible Preferred Stock, continued
Upon
the
Company obtaining Stockholder Approval, the Series C-1 Convertible Preferred
Stock held by Aisling shall be exchangeable for shares of a new Series D-1
Convertible Preferred Stock, which shall be substantially similar to the C-1
Convertible Preferred Stock other than the Conversion price which is to be
$0.95
per share instead of $1.5338 per share. The change in conversion price
effectively changed the number of shares of common stock into which the Series
C-1 preferred shares may be converted from 6,520 to 10,526 for the Series D-1
preferred shares. In accordance with EITF 00-27, as all significant terms were
agreed to and performance was probable as the funds had been received and the
majority shareholders had delivered a proxy approving the transaction, the
Company recorded a deemed dividend of approximately $1,515 during the quarter
ended December 31, 2007 .
Pursuant
to the terms of the Securities Purchase Agreements for the Company’s Series C-1
Convertible Preferred Stock, the consent of 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 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 Aisling tag along rights on certain
sales
of Company common stock. In accordance with EITF 00-27, as all significant
terms
were agreed to and performance was probable as the funds had been received
and
the majority shareholders had delivered a proxy approving the
transaction
,
the
Company recorded a deemed dividend of approximately $157.
NOTE
13 -
Equity
Securities
Preferred
Stocks
During
the six months ended December 31, 2007, the Company issued 148 shares of the
Company’s common stock to each of the Series B-1 and C-1 stockholders,
respectively, for dividends earned for the quarter ended June 30, 2007 of $206
for each of the Series B-1 and Series C-1 stockholders,
respectively.
Common
Stock
During
the six months ended December 31, 2007, 148 shares of the Company’s common stock
were issued to Series B-1 and C-1 preferred stock shareholders, respectively,
in
settlement of dividends for the quarter ended June 30, 2007.
Stock
Options and Appreciation Rights
During
the six months ended December 31, 2007:
·
the
Company recognized approximately $39 as income in connection with 100 previously
issued stock appreciation rights (“SARs”). The SARs must be exercised between
July 1, 2008 and December 31, 2008. The SARs are recorded at fair value and
are
marked to market at each reporting period. As of December 31, 2007, the total
liability related to the SARs is $7;
·
total
unrecognized compensation cost related to stock options granted was $1,281.
The
unrecognized stock option compensation cost is expected to be recognized over
a
weighted-average period of approximately 2.90 years;
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
13 -
Equity
Securities, continued
·
total
options outstanding and total options exercisable to purchase the Company’s
common stock as of September 30, 2007, amounted to 10,525
and
9,195, respectively; These options had a weighted average exercise price of
$1.14 and $1.09, respectively. At December 31, 2007 these options had no
intrinsic value.
·
80
options to purchase the Company’s common stock were issued to certain employees
at the market price on the date of the grant and had vesting periods ranging
from 2.44 to 4.93 years from the date of issuance, and having a weighted average
exercise price of $0.98 on the date of grant. There was no intrinsic value
in
these options at December 31, 2007.
·
in
connection with separation agreements involving three employees, the Company
accelerated the vesting of 388 options, which were exercisable until December
10, 2007. As a result of these transactions, the Company recognized $0 and
$246
expense during the three and six months ended December 31, 2007.
·
the
Company issued 556 shares (548 resulting from a cashless exercise of 1,100
options), resulting in $5 proceeds in connection with exercises of options
to
purchase the Company’s stock.
NOTE
14 -
401k
Plan
In
2006,
the Company initiated a pre-tax savings plan covering substantially all
employees, which qualifies under Section 401(k) of the Internal Revenue
Code. Under the plan, eligible employees may contribute a portion of their
pre-tax salary, subject to certain limitations. The Company contributes and
matches 100% of the employee pre-tax contributions, up to 3% of the employee’s
compensation plus 50% of pre-tax contributions that exceed 3% of compensation,
but not to exceed 5% of compensation. The Company may also make profit-sharing
contributions in its discretion which would be allocated among all eligible
employees, whether or not they make contributions. Company contributions were
approximately $103 and $195 for the three and six month period ended December
31, 2007, respectively.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
15 -
Economic
Dependency
Major
Customers
The
Company had the following customer concentrations for the three and six month
periods ended December 31, 2007 and 2006:
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Customer
"A"
|
|
|
13
|
%
|
|
12
|
%
|
|
13
|
%
|
|
10
|
%
|
|
Customer
"B"
|
|
|
*
|
|
|
16
|
%
|
|
*
|
|
|
15
|
%
|
|
Customer
"C"
|
|
|
*
|
|
|
13
|
%
|
|
*
|
|
|
14
|
%
|
|
Customer
"D"
|
|
|
*
|
|
|
10
|
%
|
|
*
|
|
|
17
|
%
|
|
Customer
"E"
|
|
|
*
|
|
|
*
|
|
|
11
|
%
|
|
*
|
|
|
Customer
"F"
|
|
|
*
|
|
|
18
|
%
|
|
*
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Sales to customer were less than 10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
Customer
"A"
|
|
$
|
7,736
|
|
|
Customer
"B"
|
|
|
68
|
|
|
Customer
"C"
|
|
|
525
|
|
|
Customer
"D"
|
|
|
564
|
|
|
Customer
"E"
|
|
|
617
|
|
|
Customer
"F"
|
|
|
103
|
|
The
Company has supply agreements to sell various strengths of Ibuprofen, and
commencing October 2005, various strengths of Naproxen, to the Department of
Veteran Affairs through two intermediary wholesale prime vendors whose data
are
combined and reflected in Customer “A” above.
Major
Suppliers
For
the
three and six months ended December 31, 2007, the Company purchased materials
from three suppliers totaling approximately 74% and 68%, respectively. For
the
three and six months ended December 31, 2006, the Company purchased materials
from four suppliers totaling approximately 67% and 65% of purchases,
respectively. At December 31, 2007 and 2006, aggregate amounts due to these
suppliers included in accounts payable, were approximately $3,944 and $5,357,
respectively.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
16 -
Related
Party Transactions
Rents
The
Company leases one of its business premises located in Hauppauge, New York,
(“Premises”) from an entity owned by three stockholders (“Landlord”), under a
noncancelable lease expiring in October 2019.
Under
the
terms of the lease for the Premises, upon a transfer of a majority of the issued
and outstanding voting stock of Interpharm, Inc., which occurred on May 30,
2003, and every three years thereafter, the annual rent may be adjusted to
fair
market value, as determined by an independent appraiser. Effective May 1, 2006,
the Company is paying the Landlord a base rent of $660 annually. For the three
and six months ended December 31, 2007, the rents paid in accordance with this
lease were $165 and $330, respectively. For the three and six months ended
December 31, 2006, the rents paid in accordance with this lease were $165 and
$285, respectively.
Investment
in APR, LLC.
In
February and April 2005, the Company purchased 5 Class A membership interests
(“Interests”) from each of Cameron Reid (“Reid”), the Company’s Chief Executive
Officer, and John Lomans (“Lomans”), who has no affiliation with the Company,
for an aggregate purchase price of $1,023 (including costs of $23) of APR,
LLC,
a Delaware limited liability company primarily engaged in the development of
complex bulk pharmaceutical products (“APR”). The purchases were made pursuant
to separate Class A Membership Interest Purchase Agreements dated February
16,
2005 between the Company and Reid and Lomans (the “Purchase Agreements”). At the
time of the purchases, Reid and Lomans owned all of the outstanding Class A
membership interests of APR, which had, outstanding, 100 Class A membership
interests and 100 Class B membership interests. As a result, the Company owns
10
of the 100 Class A membership interests outstanding. The two classes of
membership interests have different economic and voting rights, and the Class
A
members have the right to make most operational decisions. The Class B interests
are held by one of the Company’s major customers and suppliers.
In
accordance with the terms of the Purchase Agreements, the Company has granted
to
Reid and Lomans each a proxy to vote 5 of the Interests owned by the Company
on
all matters on which the holders of Interests may vote.
The
Board
of Directors approved the purchases of Interests at a meeting held on February
15, 2005, based on an analysis and advice from an independent investment banking
firm. Reid did not participate during the Company’s deliberations on this
matter. The Company is accounting for its investment in APR pursuant to the
cost
method of accounting.
Purchase
from APR, LLC
In
the
prior year, the Company placed an order valued at $160 for a certain raw
material from APR. The Company currently purchases the same raw material from
an
overseas supplier at a price 37% greater than the price APR is currently willing
to offer. The Company believes sourcing the raw material from APR would not
only
resolve intermittent delays in obtaining this material from overseas but would
also improve gross margins on products using the raw material. Supply of this
raw material is being coordinated with the Company’s requirement projections for
the fiscal year ended June 30, 2008. As of December 31, 2007, the Company has
advanced $80 to APR in connection with this order.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
16 -
Related
Party Transactions, continued
Separation
Agreements
As
of
September 10, 2007, the Company entered into separation agreements in connection
with the termination of employment of Bhupatlal K. Sutaria, the brother of
the
Chairman of the Company’s Board of Directors and the Company’s former President,
Vimla Sutaria, the wife of the Chairman of the Company’s Board of Directors, and
Jyoti Sutaria, the wife of Bhupatlal K. Sutaria. In connection with his
separation agreement, Bhupatlal K. Sutaria received six months of salary
aggregating $138, accelerated vesting of 200 stock options and a “cashless” or
“net” exercise feature with respect to all of his 700 vested options.
Accordingly, on September 21, 2007, Mr. Sutaria exercised all of his available
options under this agreement.
In
connection with her separation agreement, Jyoti Sutaria received accelerated
vesting of 100 stock options and a “cashless” exercise feature with respect to
all of her 400 vested options. Accordingly, on September 21, 2007, Mrs. Sutaria
exercised all of her available options under this agreement.
In
connection with her separation agreement, Vimla Sutaria received accelerated
vesting of 88 stock options and a “cashless” exercise feature with respect to
all of her 350 vested options which expired on December 10, 2007.
NOTE
17 -
Commitments
and Contingencies
Litigation
An
action
was commenced on June 1, 2006, by Ray Vuono (“Vuono” of “plaintiff”) in the
Supreme Court of the State of New York, County of Suffolk (Index No.
13985/06). The action alleged that plaintiff was owed an amount exceeding
$10 million in unpaid “finder’s fees” under an advisory agreement between
plaintiff and Atec Group, Inc.
By
motion
dated July 26, 2006, the Company moved to dismiss Vuono’s complaint in its
entirety. Vuono cross-moved to disqualify the Company's counsel due to an
alleged conflict of interest. By 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
million of the total of $10 million claimed by Vuono. The Court deferred
its decision on Vuono’s motion to disqualify counsel, and held a hearing on the
matter on September 24, 2007. By decision and order dated December 17,
2007, the Court denied Vuono’s motion to disqualify counsel.
Vuono
has
filed notices of appeal in connection with both the partial dismissal of his
claims and the motion to disqualify. The Company’s time to file and serve
answering briefs has been extended to April 1, 2008. It is also anticipated
that the trial court will shortly order the parties to engage in expedited
discovery, including the exchange of documents and depositions of Vuono, the
Company, and third-parties. The Company will continue to vigorously defend
the
action and cannot predict with certainty the outcome of this
litigation.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
17 -
Commitments
and Contingencies, continued
In
May
2007, a former employee commenced an action against the Company with the
New York State Division of Human Rights. The complaint against the Company
alleges claims of race discrimination. The total sought by the former employee
in the action is unspecified. A hearing has been scheduled for late March
2008. The Company believes that the claims are without merit and the Company
is
vigorously defending the action.
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 $477 for the amount it owed
the Company. On October 12, 2007, the Company notified Leiner that one lot
of
this product was subject to a voluntary recall. Leiner has subsequently
threatened to hold any additional payments under the Settlement until they
receive reasonable assurances from the Company that the additional lots in
their
possession would not be subject to the recall as well. If all lots were
recalled, Leiner would be entitled to a reimbursement by the Company of
approximately $256. However, the Company does not believe any further lots
will
be recalled.
On
November 8, 2007, Leiner failed to make its initial principal payment under
the
Promissory Note, and indicated that it did not intend to make future payments
under the Note. In response, the Company declared Leiner in default under
the Promissory Note and accelerated the unpaid principal obligations. On
November 26, 2007, the Company commenced litigation, via a motion for summary
judgment in lieu of complaint, in New York Supreme Court, Suffolk County
entitled
Interpharm
Holdings, Inc. v. Leiner Health Products LLC.
,
36642/2007, seeking to recover the full principal amount of the promissory
note
plus costs and interest. Leiner has opposed the Company’s motion, the
company expects a decision by early spring. In addition, Leiner has commenced
an
action against the Company in California state court for a declaratory judgment
that it is entitled to a set-off against the Promissory Note based on the
recall.
Leiner
Health Products LLC v. Interpharm Holdings, Inc.
,
Superior Court of California, Los Angeles, No. BC381396. The Company’s response
to Leiner’s California complaint is due in mid-February. The Company will
continue to vigorously defend the action.
On
November 2, 2007, the Company commenced an action against Watson in the U.S.
District Court, Eastern District of New York (Index No. 02-4600). The Company
is
seeking rescission and a declaratory judgment relieving the Company of its
obligations under the Termination Agreement. Watson’s answer in this action
contains counterclaims seeking damages in the amount of $500 (representing
the
initial installment due from the Company under the Termination Agreement),
a
declaratory judgment that the Company must pay the balance due under the
Termination Agreement, and damages for breach of the underlying Supply
Agreement. Discovery in this action is expected to commence in mid-February
2008.
On
November 16, 2007, Crane Partners LLC (“Crane”) commenced an action against the
Company in the Superior Court of NJ-Law Div., Bergen County (Index No.
L8474-07). Crane alleges the Company breached certain obligations under a Term
Sheet that Crane and the Company entered into on October 22, 2007. Crane is
seeking $60 plus interest and costs. A scheduling conference is set for February
20, 2008. The Company will continue to vigorously defend the action.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
On
December 17, 2007, Generic Pharmaceutical Services Inc. (“GPSI”) commenced an
action against the Company in the NY Supreme Court-Suffolk County (Index No.
07-39101). GPSI claims breach of contract and breach of implied warranty of
merchantability in connection with product supplied to it by the Company. GPSI
alleges damages of not less than $1,500. The Company believes that the claims
are without merit and the Company is vigorously defending the action.
On
January 25, 2008, Forest Laboratories, Inc. et al. (“Forest”) commenced an
action against the Company in the U.S. District Court, District of Delaware
(Index No. 08-52) in connection with the Company’s filing of its memantine
tablets ANDA containing a paragraph IV certification challenging Forest’s patent
on the branded product known as Namenda
®
.
Forest’s complaint alleges infringement of U.S. Patent No. 5,061,703. Forest is
seeking, inter alia, a judgment that the company has infringed U.S. Patent
No.
5,061,703; that the Company’s ANDA shall not be approved prior to the expiration
date of U.S. Patent No. 5,061,703 and an award of attorney fees, costs and
expenses.
The
testing, manufacturing and marketing of pharmaceutical products subject the
Company to the risk of product liability claims. The Company believes that
it
maintains an adequate amount of product liability insurance, but no assurance
can be given that such insurance will cover all existing and future claims
or
that it will be able to maintain existing coverage or obtain additional coverage
at reasonable rates.
From
time
to time, the Company is a party to litigation arising in the normal course
of
its business operations. In the opinion of management, it is not anticipated
that the settlement or resolution of any such matters will have a material
adverse impact on the Company’s financial condition, liquidity or results of
operations.
Operating
Leases
Property
Lease
In
January 2007 the Company entered into a seven year lease for approximately
20
square feet of office space. The lease provides the Company an option to extend
the lease for a period of three years. According to the terms of the lease
the
base annual rental for the first year will be $261 and will increase by 3%
annually thereafter. Further, the Company is required to pay for renovations
to
the facility, currently estimated at approximately $300.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
17 -
Commitments
and Contingencies, continued
Significant
Contracts
Tris
Pharmaceuticals, Inc.
During
February 2005, the Company entered into an agreement (“Solids Agreement”), for
solid dosage products (“solids”) with Tris. In July 2005, the Solids Agreement
was amended. According to the terms of the Solids Agreement, as amended, the
Company will collaborate with Tris on the development, manufacture and marketing
of eight solid oral dosage generic products. The amendment to this agreement
requires Tris to deliver Technical Packages for two soft-gel products and one
additional solid dosage product. Some of the products included in this
agreement, as amended, may require the Company to challenge the patents for
the
equivalent branded products. This agreement, as amended, provides for payments
of an aggregate of $4,800 to Tris, whether or not regulatory approval is
obtained for any of the solids products. The Solids Agreement also provides
for
an equal sharing of net profits for each product, except for one product, that
is successfully sold and marketed, after the deduction and reimbursement of
all
litigation-related and certain other costs. The excluded product provides for
a
profit split of 60% for the Company and 40% for Tris. Further, this agreement
provides the Company with a perpetual royalty-free license to use all technology
necessary for the solid products in the United States, its territories and
possessions.
In
April
2006, the Company and Tris further amended the Solids Agreement. This second
amendment required Tris to deliver a Technical Package for one additional solid
dosage product.
Further,
terms of this second amendment required the Company to pay to Tris an additional
$300 associated with the original agreement.
During
October 2006, the Company entered into a new agreement (“New Liquids Agreement”)
with Tris Pharma, Inc. (“Tris”), which terminated the agreement entered into in
February 2005, which was for the development and licensing of up to twenty-five
liquid generic products (“Liquids Agreement”). According to the terms of the New
Liquids Agreement, Tris will, among other things, be required to develop and
deliver the properties, specifications and formulations (“Product Details”) for
fourteen generic liquid pharmaceutical products (“Liquid Products”). The Company
will then utilize this information to obtain all necessary approvals. Further,
under the terms of the New Liquids Agreement Tris will manufacture, package
and
label each product for a fee. The Company was required to pay Tris $1,000,
whether or not regulatory approval is obtained for any of the liquid products.
The Company has paid in full the $1,000; $250 having been paid during the term
of the initial Liquids Agreement; $500 paid upon the execution of the New
Liquids Agreement, and the balance of $250 paid December 15, 2006. In addition,
Tris is to receive 40% of the net profits, as defined, in accordance with the
terms in the New Liquids Agreement.
The
Company further amended the Solids Agreement in October 2006, modifying the
manner in which certain costs will be shared as well as clarifying the parties’
respective audit rights.
Since
inception, we have incurred approximately $5,425 of research and development
costs associated with the Tris agreements of which the Company has paid the
full
amount due as of December 31, 2007. The combined costs of these agreements
could
aggregate up to $5,800. The balance on the solids agreement, as amended, of
$375
could be paid within two years if all milestones are reached. There is no
outstanding balance to be paid related to the liquid agreement as of December
31, 2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
17 -
Commitments
and Contingencies, continued
Watson
Pharmaceuticals, Inc
.
On
October 3, 2006, the Company entered into a termination and release agreement
(the “Termination Agreement”) with Watson Laboratories, Inc. (“Watson”)
terminating the Manufacturing and Supply Agreement dated October 14, 2003 (the
“Supply Agreement”) pursuant to which the Company manufactured and supplied and
Watson distributed and sold generic Vicoprofen® (7.5 mg hydrocodone
bitartrate/200 mg ibuprofen) tablets, (the “Product”).
Watson
was required to return all rights and agreements to the Company thereby enabling
it to market the Product. Further, Watson was required to turn over to the
Company its current customer list for this Product and agreed that, for a period
of six months from closing, neither Watson nor any of its affiliates is to
solicit sales for this product from its twenty largest customers.
In
accordance with the Termination Agreement, Watson returned approximately $141
of
the Product and the Company in turn invoiced Watson $42 for
repacking.
The
net
affect was a reduction of $99 to the Company’s net sales during the six months
ended December 31, 2007.
In
consideration of the termination of Watson’s rights under the Supply Agreement,
the Company is to pay Watson $2,000 payable at the rate of $500 per year over
four years from the first anniversary of the effective date of the termination
agreement. The Company determined the net present value of the obligation and
accordingly increased Accounts payable, accrued expenses and other liabilities
and Contract termination liability by $367 and $1,288, respectively. At December
31, 2007, contract termination liability of $902 and $903 are included in
Accounts payable, accrued expenses and other liabilities and Contract
termination liability, respectively. The imputed interest of $345 will be
amortized over the remaining life of the obligation using the effective interest
rate method. Non-cash interest of $28 and $62 was recognized during the three
and six months ended December 31, 2007.
On
November 2, 2007, the Company commenced an action against Watson in the U.S.
District Court, Eastern District of New York (Index No. 02-4600). The Company
is
seeking rescission of the Termination Agreement based on Watson’s fraud in the
inducement and a declaratory judgment relieving the Company of its obligations
under the Termination Agreement. Watson’s answer in this action contains
counterclaims seeking damages in the amount of $500 (representing the initial
installment due from the Company under the Termination Agreement, which the
Company withheld due to Watson’s fraud), a declaratory judgment that the Company
must pay the balance due under the Termination Agreement, and damages for breach
of the underlying Supply Agreement. Discovery in this action is expected to
commence in mid-February 2008.
In
February 2007 the Company entered into a termination and release agreement
with
Watson terminating the Manufacturing and Supply Agreement dated as of July
1, 2003 pursuant to which the Company manufactured and supplied and Watson
distributed and sold Reprexain® (5.0 mg hydrocodone bitartrate/200 mg ibuprofen)
tablets. Further, in February 2007 the Company entered into an intellectual
property purchase agreement with Watson whereby the Company acquired the
registered trademark, domain name, and website content relating to the
pharmaceutical product Reprexain® (5.0 mg hydrocodone bitartrate/200 mg
ibuprofen) tablets as described in the agreement. As consideration
the Company shall pay Watson, on a quarterly basis, 1.5% of net sales derived
from sales of 5.0 mg hydrocodone bitartrate/200 mg ibuprofen tablets
sold under the Reprexain® trademark.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
NOTE
17 -
Commitments
and Contingencies, continued
Centrix
Pharmaceutical, Inc.
On
October 27, 2006, the Company amended its agreement with Centrix
Pharmaceuticals, Inc., (“Centrix”) wherein Centrix has agreed to purchase over a
twelve month period, 40% more bottles of the Company’s female hormone therapy
products than the initial year of the agreement, commencing November 2006.
The parties will share net profits, as defined in the agreement, with the
Company’s share being paid within 45 days of the end of each calendar month.
The amendment has a one year term, after which time the original Centrix
agreement shall again be in full force and effect. On February 13, 2008, the
Company notified Centrix that it is in material breach of their original
agreement and the October 27, 2006 amendment. As a result, the Company has
terminated the agreement.
Applied
Pharma, LLC
In
October 2006 the Company entered into a consulting agreement with Applied
Pharma, LLC in which the consultant agreed to provide the Company with, among
other things, analytical method development services relating to the Company’s
oral contraceptive products. The Agreement is for thirty six months and may
be
terminated by either party with 90 days written notice. The agreement calls
for
monthly payments of $25, which aggregate to a maximum of $900 along with a
$75
payment which was issued upon the execution of the agreement. The principal
of
Applied Pharma, LLC holds a minority interest in APR, LLC.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
ITEM
2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISK
Certain
statements in this document may constitute “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995, including
those concerning Management’s expectations with respect to future financial
performance, trends and future events, particularly relating to sales of current
products and the introduction of new products. Such statements involve known
and
unknown risks, uncertainties and contingencies, many of which are beyond the
control of the Company, which could cause actual results and outcomes to differ
materially from those expressed herein. These statements are often, but not
always, made typically by use of words or phrases such as “estimate,” “plans,”
“projects,” “anticipates,” “continuing,” “ongoing,” “expects,” “intends,”
“believes,” or similar words and phrases. Factors that might affect such
forward-looking statements set forth in this document include (i) increased
competition from new and existing competitors, and pricing practices from such
competitors, (ii) pricing pressures, (iii) the amount of funds available for
research and development, (iv) research and development project delays or delays
and unanticipated costs in obtaining regulatory approvals, (v) the continued
ability of distributed product suppliers to meet future demand, (vi) the costs,
delays involved in and outcome of any threatened or pending litigations, (vii)
and general industry and economic conditions. Any forward-looking statements
included in this document are made as of the date hereof only, based on
information available to us as of the date hereof, and, subject to applicable
law to the contrary, we assume no obligation to update any forward-looking
statements.
Investing
in our securities involves substantial risks and uncertainties. Therefore,
we
encourage you to review the “Risk Factors” contained in Item 1A of our Form 10-K
filed with the SEC on November 15, 2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
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
previously reported, as a result of increased expenses and losses we incurred
during the fiscal year ended June 30, 2007, we defaulted on our credit facility
with Wells Fargo Business Credit (“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 under the
heading “Liquidity and Capital Resources.”
On
January 10, 2008, we received notice from WFBC that we had defaulted under
the
Forbearance Agreement. On February 5, 2008, we entered into a new Forbearance
Agreement with WFBC. In conjunction with these activities, we have restructured
our business in an effort to achieve positive cash flow and profitability.
On January 29, 2008, we reduced payroll by approximately 20% on an annualized
basis, and the Company’s research and development programs have been
substantially curtailed.
Net
sales
for the three and six months ended December 31, 2007 were $16,214 and $33,929,
respectively, which represented a 7.2% and 15.8% decrease from sales of $17,479
and $40,305 for the three and six months ended December 31, 2006. Lower
sales in the three months ended December 31, 2007 was due to our inability
to
obtain adequate levels of raw materials, which was the result of raw material
supply being interrupted by the Company’s liquidity difficulties during the
quarter ended December 31, 2007. The Company’s inefficient production and
planning processes also contributed to not being able to completely satisfy
open
sales orders. As a result, we had backorders of approximately $3,000 at
December 31, 2007.
Subsequent
to December 31, 2007, we have taken steps to improve the production planning
process which should improve our sales performance going forward. We are
currently holding discussions with the Company’s key vendors in an effort ensure
that there is a continuous supply of raw materials. In addition, we are
seeking alternative financing arrangements to secure additional working
capital. If we are not able to procure sufficient levels of raw materials,
or if we are not able to secure additional working capital in a timely manner,
then the Company will not be able to continue as a going concern. We would
then be forced to conduct a sale of the Company or a liquidation of assets
in
bankruptcy.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
Results
of Operations --
Summary
As
indicated in the tables below, our net sales decreased $1,265, or 7.2%, when
comparing the three month periods ended December 31, 2007 and 2006. In addition,
our net sales decreased $6,376 or 15.8% when comparing the six month periods
ended December 31, 2007 and 2006.
|
|
|
Three
Month Periods Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
%
of
|
|
|
|
%
of
|
|
|
|
|
Sales
|
|
Sales
|
|
Sales
|
|
Sales
|
|
|
Ibuprofen
|
|
$
|
6,615
|
|
|
41
|
%
|
$
|
8,551
|
|
|
49
|
%
|
|
Bactrim®
|
|
|
3,562
|
|
|
22
|
|
|
4,556
|
|
|
26
|
|
|
Naproxen
|
|
|
2,893
|
|
|
18
|
|
|
2,422
|
|
|
14
|
|
|
Hydrocodone/Acetaminophen
|
|
|
1,040
|
|
|
6
|
|
|
--
|
|
|
0
|
|
|
Isometheptene/Dichloral
|
|
|
1,492
|
|
|
9
|
|
|
--
|
|
|
0
|
|
|
Hydrocodone/Ibuprofen
|
|
|
541
|
|
|
3
|
|
|
104
|
|
|
1
|
|
|
Female
hormone product
|
|
|
--
|
|
|
0
|
|
|
1,766
|
|
|
10
|
|
|
All
Other Products
|
|
|
71
|
|
|
1
|
|
|
80
|
|
|
0
|
|
|
Total
|
|
$
|
16,214
|
|
|
100
|
%
|
$
|
17,479
|
|
|
100
|
%
|
|
|
|
Six
Month Periods Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
%
of
|
|
|
|
%
of
|
|
|
|
|
Sales
|
|
Sales
|
|
Sales
|
|
Sales
|
|
|
Ibuprofen
|
|
$
|
15,981
|
|
|
47
|
%
|
$
|
17,173
|
|
|
43
|
%
|
|
Bactrim®
|
|
|
7,022
|
|
|
20
|
|
|
9,304
|
|
|
23
|
|
|
Naproxen
|
|
|
5,008
|
|
|
15
|
|
|
5,520
|
|
|
14
|
|
|
Hydrocodone/Acetaminophen
|
|
|
1,715
|
|
|
5
|
|
|
--
|
|
|
0
|
|
|
Isometheptene/Dichloral
|
|
|
1,492
|
|
|
4
|
|
|
447
|
|
|
1
|
|
|
Female
hormone product
|
|
|
1,275
|
|
|
4
|
|
|
6,791
|
|
|
17
|
|
|
Hydrocodone/Ibuprofen
|
|
|
1,213
|
|
|
4
|
|
|
1,030
|
|
|
2
|
|
|
All
Other Products
|
|
|
223
|
|
|
1
|
|
|
40
|
|
|
0
|
|
|
Total
|
|
$
|
33,929
|
|
|
100
|
%
|
$
|
40,305
|
|
|
100
|
%
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
|
|
·
|
Net sales of Ibuprofen for the three and six month
periods ended December 31, 2007 decreased by $1,936, or 22.6% and
$1,192
or 6.9%, as compared to sales for the three and six months ended
December
31, 2006, respectively. The sales decreases resulted primarily from
our
inability to obtain sufficient quantities of raw materials in the
three
months ended December 31, 2007, which blocked us from producing sufficient
quantities of finished product to satisfy open
orders.
|
|
|
·
|
Net
sales of our Bactrim products for the three and six months ended
December
31, 2007 decreased $994, or 21.8% and $2,282 or 24.5%, as compared
to
sales for the three and six month periods ended December 31, 2006,
respectively. (We market our Sulfamethoxazole - Trimethoprim products
in
two strengths: 400mg / 80mg, commonly referred to as generic Bactrim®, and
800mg / 160mg, commonly referred to as Bactrim-DS® (both, “Bactrim”)). The
sales decrease resulted from our inability to obtain sufficient quantities
of raw materials in the three months ended December 31, 2007, which
blocked us from producing sufficient quantities of finished product
to
satisfy open orders. In addition, the decrease in sales primarily
relates
to lower selling prices in the December 2007 quarter as compared
to the
prior year.
|
|
|
·
|
Net
sales of our Naproxen products for the three month period ended December
31, 2007 increased $471, or 19.4%, as compared to sales for the three
month period ended December 31, 2006. However, sales for the six
month
period ended December 31, 2007 decreased $512, or 9.3%, as compared
to
sales for the six month period ended December 31, 2006 due to increased
competitive pressure and due to losing private label distributor
business
to a large wholesaler and retailer in July
2007.
|
|
|
·
|
Net
sales of our female hormone products for the three months ended December
31, 2007 were zero, and sales for the six month period ended December
31,
2007 decreased $5,516, or 81.2%, as compared to sales for the six
month
period ended December 31, 2006. During the past six months, two additional
competitors entered the market for these products, resulting in decreased
selling prices, lower volume sold and lower margins. On February
13, 2008
we terminated the agreement with Centrix under which we marketed
this
product. See Note 17 to the condensed consolidated financial statements
contained herein for additional
discussion.
|
|
|
·
|
We
re-entered the market with distribution of our
Isometheptene/Dichloral/Acetominophen capsules product in October
2007
(equivalent to branded product Midrin®). Our sales of this product through
major wholesaler and retailer channels of distribution have steadily
increased as we increase our sources of raw material
supply.
|
|
|
·
|
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® (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 three and six month
periods ended December 31, 2007 increased by $437 or 420.2% and $183
or
17.8%, respectively as compared to sales for the six month period
ended
December 31, 2006.
|
|
|
·
|
During
the six months ended December 31, 2007, we re-launched seven strengths
of
our hydrocodone bitartrate/acetaminophen tablet products though retail
and
wholesale channels of distribution.
|
For
the
three and six months ended December 31, 2007, we purchased materials from three
suppliers totaling approximately 74% and 68%, respectively. For the three and
six months ended December 31, 2006, we purchased materials from four suppliers
totaling approximately 67% and 65% of purchases, respectively. At December
31,
2007 aggregate amounts due to these suppliers included in accounts payable,
were
approximately $3,944.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
Cost
of sales / Gross Margins
Our
gross
profit percentage for the three and six month periods ended December 31, 2007
was 14.0% and 9.9%, respectively, a decrease of 9.1
and
22.4
percentage points as compared to 23.1% and 32.3% for the three and six months
ended December 31, 2006, respectively. Due to the liquidity issues that
have confronted us in the past several months, we were not able to maintain
a
continuous source of supply for many of major raw materials. This created
inefficiencies in the manufacturing and planning processes and resulted in
not
being able to produce sufficient finished products to satisfy open orders in
a
timely manner. Subsequent to the November 2007 financing transactions,
while we were able to begin to obtain increased materials, inventory levels
at
December 31, 2007 were lower than required and we were behind in terms of the
rate at which raw materials had been converted to finished goods.
During
the six months ended December 31, 2007, inventory levels were reduced as
discussed above. In addition, we recognized adjustments of $1,000 to
reduce the carrying value of certain inventory items on hand at December 31,
2007 to their market value and a reserve for obsolescence of $205. The
combination of the significant decrease in inventory from June 30, 2007 to
December 31, 2007, the $1,205 in inventory adjustments, and the relatively
low
level of net sales resulted in higher cost of sales as a percentage of sales
being reflected in the three and six months ended December 31,
2007.
Selling
and General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses increased $147 or 4.7% to
$3,303 for the three months ended December 31, 2007, as compared to $3,156
for
the three months ended December 31, 2006. When stated as a percentage of
net sales, SG&A expenses increased to 20.4% for the three months ended
December 31, 2007 as compared to 18.1% for the three months ended December
31,
2006.
The
increase in SG&A expenses during the three months ended December 31, 2007 as
compared to the three months ended December 31, 2006 is primarily attributable
to a $225 increase in freight expense. This increase is due to a higher
proportion of distribution through major retail channels as opposed to warehouse
and distribution centers, combined with an increase in the number of shipments
between our two production facilities as we are now using warehouse space in
the
Yaphank facility for storage of our raw materials and as we have started
production out of the Yaphank facility for products which can only be shipped
from our Hauppauge location due to FDA restrictions. In addition, there was
an
increase of $88 in bank fees resulting from waiver fees following defaults
under
our Forbearance Agreement with WFBC, an increase of $77 for professional and
consulting fees as a result of an increase in management advisory services,
and
an increase of $62 in compensation and related taxes and benefits for sales
and
administrative staff.
There
were significant offsets to the increases in SG&A described above. We
currently have outstanding SARs, which are recorded at fair value and are marked
to market each reporting period with changes in fair value being recorded to
SG&A. The adjustments in the fair value resulted in a decline of $94 in
SG&A expense during the three months ended December 31, 2007 as compared to
the three months ended December 31, 2006. Board of Directors fees declined
by
$139 as a result of a nonrecurring cost incurred during the quarter ended
December 31, 2006 resulting from the finalization of a new board compensation
package. In addition, legal and accounting costs declined by $79 which was
primarily attributable to the settlement of a legal matter during the quarter
ended December 31, 2006 in the amount of $66.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
SG&A
expenses increased $1,281 or 22.1% to $7,075 for the six months ended December
31, 2007, as compared to $5,794 for the six months ended December 31,
2006. When stated as a percentage of net sales, SG&A expenses
increased to 20.9% for the six months ended December 31, 2007 as compared to
14.4% for the same period in the prior year.
The
increase in SG&A expense for the six months ended December 31, 2007 as
compared to the six months ended December 31, 2006 is primarily attributable
to
an increase of $316 in compensation and related taxes and benefits for sales
and
administrative staff, an increase in freight expense of $297 consistent with
the
discussion above, an increase of $262 in professional services and consulting
fees consisting of non-capitalizable costs associated with the ERP system
implementation and additional management advisory services, an increase of
$89
in bank fees resulting from waiver fees following defaults under our Forbearance
Agreement with WFBC, and an increase of $71 in rent expense. These expenses
were
partially offset by a decrease in the fair value of our outstanding SARs of
$105.
SFAS
123®
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. We reported non-cash expenses of $233 and $375
during the three month periods ended December 31, 2007 and December 31, 2006,
respectively. We reported non-cash expenses of $575 and $586 during the
six month periods ended December 31, 2007 and December 31, 2006,
respectively.
Research
and Development Expenses
We
incurred Research and Development (“R&D”) expenses of $2,903 during the
three month period ended December 31, 2007, which represented a decrease of
$1,968, or 40.4 %, below $4,871 incurred in the three month period ended
December 31, 2006.
The
decline in R&D expenses is primarily the result of a $1,082 decrease in
costs associated with our agreements with Tris Pharma, Inc. (“Tris”) as
described below, a $357 decline in legal and consultation costs, a $280 decline
in materials used in the bio-study and product development processes, a $413
reduction in costs associated with bioequivalence studies for new generic
pharmaceutical products currently in development, and a $244 decrease in outside
service costs. These decreases were offset by an increase of $319 in overhead
costs such as rent, depreciation and utilities, due to growth in the amount
of
space allocated for R&D work as compared to the comparative period in the
prior year.
R&D
costs for the six month period ended December 31, 2007 decreased $1,928, or
23.3% to $6,361 from $8,289 for the six month period ended December 31, 2006.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
The
decline in R&D expenses is primarily the result of a $1,447 decrease in
costs associated with our agreements with Tris as described below, and a $1,219
reduction in costs associated with bioequivalence studies for new generic
pharmaceutical products currently in development. In addition, there was also
a
$446 decrease in legal and consultation costs, and a $164 decrease in outside
service costs. These decreases were offset by an increase of $623 in
compensation and related taxes and benefits for R&D employees, and an
increase of $584 in overhead costs such as rent, depreciation and utilities,
due
to growth in the amount of space allocated for R&D work as compared to the
comparative period in the prior year.
As
previously reported, during October 2006, we entered into a new agreement (“New
Liquids Agreement”) with Tris Pharma, Inc. (“Tris”), which terminated the
agreement entered into February 2005, which in turn 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. Tris will manufacture, package and label each product
for a fee. In conjunction with this new liquids agreement we were required
to
pay Tris $1,000, whether or not regulatory approval is obtained for any of
the
liquid products. As of December 31, 2007, all payments associated to this
agreement were made. In addition, Tris is to receive forty percent of the net
profits, as defined, in accordance with the terms in the New Liquids
Agreement.
During
February 2005, we entered into a second 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 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 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 $4,500 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 requires
Tris to deliver a Technical Package for one additional solid dosage
product. Further, terms of this second amendment will require us to pay to
Tris an additional $300 after we have paid the initial aggregate amounts
associated with the original agreement.
We
further amended the Solids Agreement in October 2006, modifying the manner
in
which certain costs will be shared as well as clarifying respective audit
rights.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
Interest
Expense, net
Our
net
interest expense increased approximately $744 and $1,200 when comparing the
three and six months ended December 31, 2007 with the three and six month period
ended December 31, 2006. The increases are primarily a result of an increase
in
borrowings from our line of credit and the default rate of interest being
charged as a result of the defaults discussed below in Liquidity and Capital
Resources. As of December 31, 2006, we had not drawn from our line of credit
as
compared to $15,143 outstanding against the line of credit as of December 31,
2007. In addition to these borrowings being in place, we also borrowed
additional funds for new equipment.
In
order
to hedge against rising interest rates, we entered into two interest rate swap
arrangements. Fair value of the interest rate swaps at December 31, 2007 and
2006 was approximately ($380) and $83 and is included in Other Liabilities
and
Other Assets, respectively. However, it is likely that, as a result of
additional borrowings we will incur increases in our interest expense in the
future.
Income
Taxes
At
December 31, 2007, we have remaining Federal net operating losses (“NOLs”) of
$44,053 available through 2027. Pursuant to Section 382 of the Internal Revenue
Code regarding substantial changes in our ownership, utilization of the Federal
NOLs is limited. As a result of losses incurred in fiscal years 2005, 2006,
2007, and the our current financial position (see Note 2 - Management’s
Liquidity Plans and Going Concern of the accompanying condensed consolidated
financial statements), which indicate uncertainty as to our ability to generate
future taxable income, the “more-likely-than-not” standard has not been met and
therefore our deferred tax asset may not be realized. As such, we carried a
full
valuation allowance against our deferred tax assets as of December 31, 2007.
In
calculating its tax provision for the six month periods ended December 31,
2007
and 2006, we applied aggregate effective tax rates of approximately 51% and
27%,
respectively, thereby creating income tax expense of $5,976 and a benefit of
$922, respectively. The increase in effective tax rates is the result of
increasing our valuation allowance against its deferred tax assets during the
three months ended December 31, 2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
Liquidity
and Capital Resources
As
previously reported, on October 26, 2007, we finalized a Forbearance Agreement
with WFBC that terminated on December 31, 2007, which was subsequently amended
on November 12, 2007. As of June 30, 2007, we 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 “Defaults”). WFBC waived the Defaults based upon our
consummation and receipt of $8,000 related to the issuance of subordinated
debt
described below.
On
January 10, 2008, we received notice (the “Notice”) from Wells Fargo that we had
defaulted under the Forbearance Agreement with respect to: (i) financial
covenants relating to required Income Before Tax for the months ending October
31, 2007 and November 30, 2007, (ii) financial covenants relating to required
Net Cash Flow for the months ending October 31, 2007 and November 30, 2007
and
(iii) an obligation to have a designated financial advisor provide an opinion
as
our ability to meet their fiscal year 2008 projections. The Notice stated that
Wells Fargo is not demanding repayment of the Outstanding Amount at this time,
but that Wells Fargo reserves the right to do so.
On
February 5, 2008, we entered into a Forbearance Agreement with Wells Fargo
Bank,
National Association (“Wells Fargo”) which, as more fully set forth below,
provides us with additional credit and provides for a forbearance by Wells
Fargo
from exercising its remedies based on previous defaults with respect to
ourcredit agreement with Wells Fargo.
In
connection with our negotiation of the Forbearance Agreement, we completed
a
restructuring of its operations on January 25, 2008 and submitted a new
operating plan to Wells Fargo which we believe will result in positive cash
flow
and net profits. Pursuant to the new operating plan, we have substantially
reduced research and development activities, reduced payroll by approximately
20% and began a process to identify alternative financing sources for our real
estate, machinery and equipment, and working capital finance.
As
reported in Holdings’ Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 29, 2008, on January 28, 2008, Wells Fargo
informed us that it would consider providing us with credit availability on
the
condition that we (i) develop and implement a new operating plan focused on
increasing the amount of eligible collateral and reducing costs and (ii) develop
an alternative financing arrangement.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
On
February 5, 2008, we entered into the Forbearance Agreement with Wells Fargo
whereby Wells Fargo agreed to, among other things, (i) forbear from exercising
its remedies arising from our default under the Wells Fargo Credit Agreement
until June 30, 2008 provided no further default occurs; (ii) provide a
moratorium on certain principal payment; (iii) and advance us up to $3,000
under
a newly granted real estate line of credit mortgage on our real estate, which
amounts will be due on June 30, 2008.
Under
the
Forbearance Agreement we agreed to (i) submit to Wells Fargo, on a weekly basis,
a “rolling” 13-week budget; (ii) engage a chief restructuring officer to review
and oversee the budget and, in conjunction with our management, certain
financial matters; (iii) grant Wells Fargo an equity line of credit mortgage
to
secure its new equity line of credit and a collateral mortgage to secure certain
obligations under the $7,000 portion of revolving line of credit that has been
converted to a term loan and (iv) pay Wells Fargo a success fee of up to $500
in
the event the balance of the indebtedness owed to Wells Fargo is repaid from
the
sale of our stock or substantially all of our assets prior to June 30, 2008.
The
Forbearance Agreement also limits our borrowing base on which certain advances
are made and provides for a number of events of default, including (i) a
material adverse change (ii) failure by us to meet certain budget items by
more
that 10%; (iii) failure to receive a letter of intent for the sale of the assets
of the Company for an amount in excess of the Wells Fargo indebtedness by March
31, 2008; (iv) failure by the Company to receive a commitment for the sale
of
the assets of the Company for an amount in excess of the Wells Fargo
indebtedness by April 30, 2008; (v) failure of the Company to close a
transaction for the sale of the assets of the Company for an amount in excess
of
the Wells Fargo indebtedness by June 30, 2008; and (vi) Wells Fargo indebtedness
remains outstanding on June 30, 2008.
Pursuant
to the operating plan approved by Wells Fargo in connection with the Forbearance
Agreement, the Company will have access to up to an additional $3,000 of capital
to meet its ongoing working capital and operating requirements.
At
December 31, 2007, we had a working capital deficiency of $16,635, an
accumulated deficit of $39,970 and cash flows used in operating activities
of
$9,835. In order to address our operating loss position and our lack of
liquidity, we have taken various actions to improve profitability and cash
flows
generated from operations, including:
|
|
o
|
Headcount
was reduced on January 29, 2008 resulting in a 20% decrease in
compensation costs on an annualized
basis.
|
|
|
o
|
Research
& development (R&D) initiatives have been suspended, resulting in
a substantial reduction in R&D expense commencing February 1, 2008.
|
As
previously reported, we completed a series of banking and financing activities
in October and November 2007, which are outlined below.
On
November 7, 2007 and November 14, 2007, as required by the Forbearance
Agreement, we received a total of $8,000 in gross proceeds from the issuance
and
sale of subordinated debt.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
On
November 7, 2007, Dr. Maganlal K. Sutaria, the Chairman of the Company’s Board
of Directors, and Vimla M. Sutaria, his wife, loaned $3,000 to the Company
pursuant to a Junior Subordinated Secured 12% Promissory Note due 2010 (the
“Sutaria Note”). Interest of 12% per annum on the Sutaria Note is payable
quarterly in arrears, and for the first 12 months of the note’s term, may be
paid in cash, or additional notes (“PIK Notes”), at the option of the Company.
Thereafter, we are 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 our 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, we issued and sold an aggregate of $5,000 of Secured 12%
Promissory Notes Due 2009 (the “STAR Notes”) in the following amounts to the
following parties:
|
Tullis-Dickerson
Capital Focus III, L.P. (“Tullis”)
|
|
$
|
833
|
|
|
Aisling
Capital II, L.P. (“Aisling”)
|
|
$
|
833
|
|
|
Cameron
Reid (“Reid”)
|
|
$
|
833
|
|
|
Sutaria
Family Realty, LLC (“SFR”)
|
|
$
|
2,500
|
|
Tullis
is
an investor in the Company and the holder of its Series B-1 Convertible
Preferred Stock. Aisling is also an investor in the Company and the holder
of
its Series C-1 Convertible Preferred Stock. Reid is the Company’s Chief
Executive Officer and SFR is owned by Company shareholders who control
approximately 53% of the Company’s voting stock (the “Major Shareholders”),
including Raj Sutaria, who is a Company Executive Vice President.
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, which was filed on January 15, 2008, 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;
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
|
|
·
|
Warrants
to acquire an aggregate of 1,842 shares of Common Stock (the “Warrants”)
with an exercise price of $0.95 per share.
|
Each
of
the Convertible Notes and Warrants are to have anti-dilution protection with
respect to issuances of Common Stock, or common stock equivalents at less than
$0.95 per share such that their conversion or exercise price shall be reset
to a
price equal to 90% of the price at which shares of Common Stock or equivalents
are deemed to have been issued.
The
repayment of the STAR and Convertible Notes is secured by a second priority
lien
on substantially all of the Company’s property and real estate. Pursuant to
intercreditor agreements, the STAR Note financing liens are subordinate to
those
of WFBC, but ahead, in priority, of the Sutaria Notes.
Also,
upon the Company obtaining the Stockholder Approval, the Series B-1 and Series
C-1 Convertible Preferred Stock held by Tullis and Aisling shall be exchangeable
for shares of a new Series D-1 Convertible Preferred Stock, which shall be
substantially similar to the B-1 and C-1 Convertible Preferred Stock other
than
the Conversion price which is to be $0.95 per share instead of $1.5338 per
share.
Pursuant
to the terms of the Securities Purchase Agreements for the Company’s Series B-1
and C-1 Convertible Preferred Stock, the consent of Tullis and Aisling was
required for the issuance of the Sutaria Notes and for the STAR Note financing.
In consideration for that consent, the Company has agreed to exchange 2,282
warrants to purchase Company Common Stock held by each of Tullis and Aisling
with an exercise price of $1.639 per share for new warrants with an exercise
price of $0.95 per share. In addition, the Major Shareholders have agreed to
give Tullis and Aisling tag along rights on certain sales of Company common
stock.
Our
operations and capital expenditures have been financed through the WFBC Credit
Facility. For the six months ended December 31, 2007, net cash used in operating
activities was $9,835 as compared to cash used in operating activities of $2,195
for the six months ended December 31, 2006. Significant factors comprising
the
net cash used in operating activities for the six months ended December 31,
2007
include: net loss of $17,794, increase in inventory and prepaid expenses and
other current assets of $3,834 and $433, respectively, partially offset by
a
decrease in accounts payable, accrued expenses and other liabilities of $5,282.
Accounts payable, accrued expenses and other payables decreased primarily due
to
the receipt of $8,000 in conjunction with the completion of the banking and
financing activities discussed below. We also recognized several non-cash
charges: depreciation and amortization of $1,818, stock-based compensation
expense (in accordance with SFAS 123 ®) amounting to $575, a lower of cost or
market write down of inventory of $1,000 and an inventory obsolescence reserve
of $205.
For
the
six months ended December 31, 2007, we used funds in investing activities of
$2,080 compared to $2,320 used in investing activities during the six months
ended December 31, 2006. These amounts primarily related to capital expenditures
for new machinery, equipment and building renovations.
Our
financing activities provided cash of $11,884 for the six months ended December
31, 2007 compared to $9,956 of cash provided by financing activities for the
same period in the prior year. For the six months ended December 31, 2007,
we
increased borrowings by $5,277 under the WFBC revolving credit facility. For
the
quarter ended December 31, 2006, net cash of $9,993 was provided by the sale
of
$10,000 of our Series C-1 redeemable convertible preferred stock, which
generated $9,993 of cash. For the quarter ended December 31, 2007, net cash
of
$8,000 was provided by the issuance of subordinated debt.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
At
December 31, 2007, we had $41 in cash and cash equivalents, compared to $72
at
June 30, 2007.
Realization
of our assets is dependent on the continued operations of the Company and the
future success of such operations. There can be no assurances that we will
be
able to reverse our operating losses, cash flow deficiencies, or meet the
requirements set forth in the Forbearance Agreement entered into on February
5,
2008. These factors raise substantial doubt about our ability to continue as
a
going concern. Among other initiatives, we are currently holding discussions
with its key vendors in an effort ensure that there is a continuous supply
of
raw materials. In addition, we are seeking alternative financing
arrangements to secure additional working capital. If we are not able to
procure sufficient levels of raw materials, or if we are not able to secure
additional working capital in a timely manner, then we will not be able to
continue as a going concern. We would then be forced to conduct a sale of
the Company or a liquidation of assets in bankruptcy.
Bank
Financing
During
February, 2006, we entered into a four-year financing arrangement with Wells
Fargo Business Credit (“WFBC”). This financing agreement provided an original
maximum credit facility of $41,500 comprised of:
·
$22,500
revolving credit facility (the “facility”)
·
$12,000
real estate term loan
·
$
3,500
machinery and equipment (“M&E”) term loan
·
$
3,500
additional / future capital expenditure facility
Complete
details regarding the WFBC credit facility may be found in Note 8 of the
accompanying condensed consolidated financial statements for the quarter ended
December 31, 2007 and in our Form 10-K filed with the SEC on November 15,
2007.
Watson
Termination Agreement
On
October 3, 2006, we entered into a termination and release agreement (the
“Termination 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®
(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 ourselves. Further, Watson was required to turn over to
us
its then 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
we
in turn invoiced Watson $42 for repacking. The net effect was a reduction of
$99
to our net sales during the three month ended December 2006. In consideration
of
the termination of Watson’s rights under the Supply Agreement, 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 agreement. We determined the
net
present value of the obligation and accordingly included in Accounts payable,
accrued expenses and other liabilities and Contract termination liability $367
and $1,288, respectively. The imputed interest of $324 will be amortized over
the four year life of the obligation using the effective interest rate method.
At December 31, 2007, contract termination liability of $902 and $903 are
included in Accounts payable, accrued expenses and other liabilities and
Contract termination liability, respectively. The imputed interest of $345
will
be amortized over the remaining life of the obligation using the effective
interest rate method. Non-cash interest of $28 and $62 was recognized during
the
three and six months ended December 31, 2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
Accounts
Receivable
Our
accounts receivable at December 31, 2007 was $13,718 as compared to $12,945
at
June 30, 2007. The average annual turnover ratio of accounts receivable to
net
sales for the six months ended December 31, 2007 was 5.09. 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.
Inventories
At
December 31, 2007, our inventory was $12,256 as compared to $17,295 at June
30,
2007. Our turnover of inventory for the six months ended December 31, 2007
was
4.14.
We
reduce
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 December 31,
2007 that were determined to have a carrying value in excess of market was
$1,000.
In
addition, we perform a quarterly review of inventory items to determine if
an
obsolescence reserve adjustment is necessary. The allowance not only considers
specific items and expiration dates, but also takes into consideration the
overall value of the inventory as of the balance sheet date. The inventory
obsolescence reserve value at December 31, 2007 was $205.
Accounts
Payable, Accrued Expenses and Other Liabilities
Accounts
payable, accrued expenses and other current liabilities decreased $5,214 from
June 30, 2007 to December 31, 2007 primarily due to the receipt and use of
$8,000 in conjunction with the completion of the banking and financing
activities outlined above.
Cash
Cash
decreased approximately $31 to $41 at December 31, 2007 from $72 at June 30,
2007 as more fully described in Liquidity and Capital Resources
above.
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 on-going 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 our financial
statements and the uncertainties that could impact results of operations,
financial condition and cash flows.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
Revenue
Recognition
We
recognize product sales revenue upon the shipment of product, when estimated
provisions for chargebacks and other sales allowances are reasonably
determinable, and when collectibility is reasonably assured. Accruals for these
provisions are presented in the consolidated financial statements as reductions
to revenues. Accounts receivable are presented net of allowances relating to
the
above provisions.
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 our 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. We recognize the additional revenue
component of these agreements at the time our customers record their sales
and
are based on pre-defined formulas contained in the agreements.
We
purchase raw materials from two suppliers, which are manufactured into finished
goods and sold back to such suppliers 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,” we recorded sales to, and purchases from, these suppliers 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 our 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. These factors among others, qualify
us as
the principal under the indicators set forth in EITF 99-19, “Reporting Revenue
Gross as a Principal vs. Net as an Agent.” If the terms and substance of the
arrangement change, such that we no longer qualify to report these transactions
on a gross reporting basis, our net income and cash flows would not be affected.
However, our sales and cost of sales would both be reduced by a similar amount.
These purchase and sales transactions are recorded at fair value in accordance
with EITF Issue 04-13 “Accounting for Purchase and Sales of Inventory with the
Same Counterparty”.
Inventories
Our
inventories are valued at the lower of cost or market determined on a first-in,
first-out basis, and includes the cost of raw materials, labor and manufacturing
overhead. We continually evaluate the carrying value of our inventories and
when
factors such as expiration dates and spoilage indicate that impairment has
occurred, either a reserve is established against the inventories' carrying
value or the inventories are disposed of and completely written off in the
period incurred.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
Research
and Development
Pursuant
to SFAS No. 2 “Accounting for Research and Development Costs,” research and
development costs are expensed as incurred or at the date payment of
non-refundable amounts become due, whichever occurs first. Research and
development costs, which consist of salaries and related costs of research
and
development personnel, fees paid to consultants and outside service providers,
raw materials used specifically in the development of its new products and
bioequivalence studies. Pre-approved milestone payments due under contract
research and development arrangements are expensed when the milestone is
achieved.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands, except for share data)
Issues
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.