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IG > SEC Filings for IG > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for IGI LABORATORIES, INC

Form 10-Q for IGI LABORATORIES, INC


14-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This " Management ' s Discussion and Analysis of Financial Condition and Results of Operations " section and other sections of this Quarterly Report on Form 10- Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates and on management's beliefs and assumptions. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on current expectations of management and are not guarantees of future performance, and involve certain risks, uncertainties and assumptions, which are difficult to predict. These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, the general economic conditions in the markets in which the Company operates, levels of industry research and development spending, the Company's ability to continue to attract and retain qualified personnel, the fixed price nature of product development agreements or the loss of customers and other factors described in the Company' s filings with the Securities and Exchange Commission, including the "Risk Factors" section as set forth below in this Quarterly Report on Form 10-Q. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise .

Company Overview

Strategic Overview

IGI is engaged in the formulation, development, manufacture and packaging of topical semi-solid and liquid products for pharmaceutical, cosmeceutical and cosmetic customers. The Company's strategic plan is to build upon this foundation by expanding into the generic prescription pharmaceutical arena. This strategy is based upon three initiatives: increasing the current contract manufacturing and contract formulation services business, developing a generic portfolio of formulations in topical dosage forms, and creating unique opportunities around the Company's licensed NovasomeŽ technology and novel dosage forms.

The Company has structured its management team to implement this plan. The team brings a wealth of experience in the generic pharmaceutical industry to IGI. IGI's facilities and manufacturing equipment have been designed to produce topical and liquid products and support the Company's target prescription dosage forms.

Contract manufacturing services will continue to be crucial to IGI's success. The customer base for these services is pharmaceutical companies as well as cosmetic, cosmeceutical, and OTC product marketers who require product development/manufacturing support. This is a highly-competitive market with a number of larger, greater-resourced companies offering similar services. IGI looks to create niche opportunities for itself by providing high quality, customer-oriented service.

IGI plans to build a prescription pharmaceutical portfolio in the specialty areas of topical dosage forms. This will be accomplished through in-house formulation and development, and submission of ANDAs to the FDA. The entire approval process can take 3-5 years before a product is approved, of which the FDA approval portion is approximately 18 - 36 months, with an average review time currently of 32 months. The Company's target is to submit 4-6 ANDAs each year. To date, IGI has submitted eight ANDAs. We filed one application in September 2010, January 2011 and December 2011, two applications in November 2011, one application in May 2012 and two applications in June of 2012. All of the submissions are for generic topical prescription drugs.

IGI has exclusive rights for the use of NovasomeŽ technology in topical formulations and intends to pursue collaboration opportunities with established pharmaceutical companies seeking to develop topical products with unique properties. In addition, the Company will explore line extension opportunities through innovative packaging or alternate dosage forms of existing pharmaceutical molecules.

Recent Events

On August 31, 2012, the Company entered into a Loan and Security Agreement with Square 1 Bank pursuant to which Square 1 Bank agreed to extend credit facilities to the Company. The Company drew down $1,000,000 in principal amount on August 31, 2012.

On November 5, 2012, the Company announced it gained authorization to launch its first IGI label topical prescription products. The Company plans to launch its first prescription products later this year.

Results of Operations

Three months ended September 30, 2012 compared to September 30, 2011

The Company had a net loss of $1,422,000, or $0.04 per share, for the three months ended September 30, 2012, compared to $487,000, or $0.01 per share, in the comparable period for 2011, which resulted from the following:

Revenues (in thousands):


                                      Three Months Ended
                                        September 30,       Increase/(Decrease)
    Components of Revenue:             2012       2011           $          %
    Product sales                   $    1,464 $     1,945    $    (481)   (25)%
    Research and development income        496         119          377     317%
    Licensing, royalty, and other
     income                                 26          49          (23)   (47)%
       Total Revenues               $    1,986 $     2,113     $   (127)      6%

The decrease in product sales for the three months ended September 30, 2012 as compared to the same period in 2011 was primarily due to decreased product sales to two of the Company's major customers. The increase in research and development income during the three months ended September 30, 2012 as compared to the same period in 2011 is attributable to new customer relationships established in the first quarter of 2012 and their desire to have the Company develop, manufacture and package their new products or line extensions and the continued strong relationships with our current customer base. Licensing, royalty and other income decreased due to the decrease in sales of Novasome based products marketed by our licensees. The Company believes the loss of certain royalties is related to the normal life cycle of the products and that certain royalties of the Company may continue to decline.

Costs and expenses (in thousands):

                                       Three Months Ended
                                          September 30,     Increase/(Decrease)
                                         2012      2011          $          %
   Cost of sales                       $   1,222 $   1,479    $    (257)   (17)%
   Selling, general and administrative       980       609          371      61%
   Product development and research          620       442          178      40%
      Totals costs and expenditures    $   2,822 $   2,530    $     292      12%

Cost of sales as a percentage of revenue was 62% for the three month period ended September 30, 2012 as compared to 70% for the comparable period in 2011. Cost of sales as a percentage of product sales can vary depending on product
mix. Cost of sales percentage improved due to the product mix, which includes more pharmaceutical product sales, in 2012 as compared to 2011 and increased product sales and research and development income for the nine months ended September 30, 2012, which allowed the Company to absorb more of its overhead costs. The improvement in the product mix sold in 2012 as compared to 2011, was primarily attributable to the increase in the sale of pharmaceutical products, which typically are higher margin products.

Selling, general and administrative expenses for the three month period ended September 30, 2012 increased by $371,000 as compared to the same period in 2011 as a result of the severance agreement with our former President and CEO of $150,000, an increase of $28,000 in salaries and related expenses, an increase of $48,000 in employees' compensation payable in stock, an increase of $17,000 in the expense from the issuance of stock options, an increase of $86,000 in recruiting fees, an increase of $53,000 in professional fees, and an increase of $20,000 in expenses related to shareholder meetings and reports offset by a decrease of $32,000 in the allocation of overhead costs due to the changes in headcount in the departments as compared to the prior year.

Product development and research expenses for the three months ended September 30, 2012 decreased by $178,000 as compared to the same period for 2011 as follows. Clinical studies, pilot batch expense and outside testing increased by $156,000, an increase of $23,000 in salaries and related expenses, an increase of $14,000 in professional fees, an increase of $11,000 in repairs and maintenance, an increase of $4,000 in overhead costs related to repairs and maintenance and a change in the allocation of overhead costs due to the changes in headcount in the departments as compared to the prior year. These increases were partially offset by a decrease of $29,000 in lab supplies and samples.

Interest (Income) Expense (in thousands):

Three Months Ended

                          September 30,      Increase/(Decrease)
                         2012       2011         $          %
Interest Income        $       - $      (2)    $     (2)   (100)%
Interest Expense       $     584 $      73     $    511      700%
Other (Income) Expense $       2 $      (1)    $     (3)   (300)%

Interest expense increased for the three months ended September 30, 2012 as compared to the same period in 2011 due to the inclusion in 2012 of approximately $545,000 of amortization of debt issuance costs related to the Note Payable - Related Party that was paid in full and terminated on August 31, 2012.

Net loss (in thousands, except per share numbers):

Three Months Ended
September 30, Increase/(Decrease) 2012 2011 $ % Net loss $ (1,422) $ (487) $ 935 192% Net loss per share $ (0.04) $ (0.01) $ 0.03 300%

The increase in net loss for the three months ended September 30, 2012 as compared to the same period in 2011 is due to the decrease in revenues noted above and the increase in costs and expenses and interest expenses also noted above, which included amortization of debt issuance costs of approximately $0.5 million, and costs related to the change in the executive management team of approximately $0.4 million.

Nine months ended September 30, 2012 compared to September 30, 2011

The Company had a net loss of $2,745,000, or $0.07 per share, for the nine months ended September 30, 2012, compared to $2,468,000, or $0.06 per share, in the comparable period for 2011, which resulted from the following:

Revenues (in thousands):


                                      Nine Months Ended
                                        September 30,      Increase/(Decrease)
Components of Revenue:                 2012       2011          $          %
Product sales                       $    4,835 $    5,030     $   (195)    (4)%
Research and development income          1,368        539          829     154%
Licensing, royalty and other income         52        142          (90)   (63)%
   Total Revenues                   $    6,255 $    5,711     $    544      10%

Total revenues increased $274,000 for the nine months ended September 30, 2012 as compared to 2011 due to increased revenue from product development projects, primarily with our pharmaceutical partners. The decrease in product sales for the nine months ended September 30, 2012 as compared to the same period in 2011 was primarily due to decreased product sales to three of the Company's customers, partially offset by increased product sales to two of the Company's customers. The increase in research and development income during the nine months ended September 30, 2012 as compared to the same period in 2011 is attributable to new customer relationships established in the first quarter of 2012 and their desire to have the Company develop, manufacture and package their new products or line extensions and the continued strong relationships with our current customer base. Licensing, royalty and other income decreased due to the decrease in sales of Novasome based products marketed by our licensees. The Company believes the loss of certain royalties is related to the normal life cycle of the products and that certain royalties of the Company may continue to decline.

Costs and expenses (in thousands):

                                     Nine Months Ended
                                       September 30,     Increase/(Decrease)
                                      2012      2011          $          %
Cost of sales                       $   4,271 $   4,113     $     158      4%
Selling, general and administrative     2,254     2,300           (46)   (2)%
Product development and research        1,735     1,573           162     10%
   Totals costs and expenditures    $   8,260 $   7,986      $    274      3%

Cost of sales as a percentage of revenue was 68% for the nine month period ended September 30, 2012 as compared to 72% for the comparable period in 2011. Cost of sales as a percentage of product sales can vary depending on product mix. Cost of sales percentage improved due to the product mix, which includes more pharmaceutical product sales, in both periods and increased product sales and research and development income for the three months ended September 30, 2012, which allowed the Company to absorb more of its overhead costs. The improvement in the product mix sold in 2012 as compared to 2011, was primarily attributable to the increase in the sale of pharmaceutical products, which typically are higher margin products.

Selling, general and administrative expenses for the nine month period ended September 30, 2012 decreased as compared to the same period in 2011 due to a decrease of $96,000 in professional fees, a decrease of $89,000 in the allocation of overhead costs due to the changes in headcount in the departments as compared to prior year, a decrease of $76,000 in consulting fees and a decrease of $19,000 in listing fees, partially offset by an increase in salaries and related expenses of $140,000 due to the severance agreement with our former President and CEO of $150,000 in 2012 and an increase of $105,000 in recruiting fees.

Product development and research expenses for the nine months ended September 30, 2012 increased as compared to the same period for 2011 due to an increase of $186,000 in pilot batch expense, an increase of $72,000 in salaries and related expenses, an increase of $33,000 in consulting fees, an increase of $19,000 in professional fees and an increase of $57,000 in overhead due to repairs and maintenance and an increase in the allocation of overhead costs due to the changes in headcount in the departments from prior year, partially offset by a decrease of $181,000 in clinical studies and a decrease of $23,000 in outside testing and supplies.

Interest (Income) Expense and Other Income (in thousands):

Nine Months Ended

                         September 30,     Increase/(Decrease)
                         2012     2011         $          %
Interest Income        $      - $    (13)    $   (13)    (100)%
Interest Expense       $    728 $    208     $   520       250%
Other (Income) Expense $     12 $     (2)    $   (14)      700%

Interest income decreased for the nine months ended September 30, 2012 as compared to the same period in 2011 due to lower cash balances in 2012. Interest expense increased for the nine months ended September 30, 2012 as compared to the same period in 2011 due to the inclusion in 2012 of approximately $545,000 of amortization of debt issuance costs related to the Note Payable - Related Party that was paid in full and terminated on August 31, 2012.

Net loss (in thousands, except per share numbers):

Nine Months Ended

                        September 30,       Increase/(Decrease)
                      2012        2011           $          %
Net loss           $   (2,745) $   (2,468)       $    277    11%
Net loss per share $    (0.07) $    (0.06)       $   0.01    17%

The increase in net loss for the three months ended September 30, 2012 as compared to the same period in 2011 is due to the increase in costs and expenses and interest expenses noted above, partially offset by the increase in revenues, also noted above. Net loss in 2012 included amortization of debt issuance costs of approximately $0.5 million, and costs related to the change in the executive management team of approximately $0.4 million.

Liquidity and Capital Resources

The Company's operating activities used $1.2 million of cash during the nine months ended September 30, 2012 compared to $2.5 million used in the comparable period of 2011. The use of cash for both the nine months ended September 30, 2012 and 2011 was a result of the net loss for the period, partially offset by the non-cash expense items and 2011 was substantially a result of the net loss for the period, which included costs related to product development and research of $1.7 million and $1.6 million for the nine months ended September 30, 2012 and 2011, respectively.

The Company's investing activities used $0.3 million of cash in the nine months ended September 30, 2012 compared to $0.2 million of cash used in investing activities in the first nine months of 2011. The funds used for the periods ended September 30, 2012 and 2011 were for additional equipment and improvements for the compounding area, packaging and filling lines and additional equipment and related services for the analytical area.

The Company's financing activities provided $0.4 million of cash in the nine months ended September 30, 2012 compared to $0.6 million provided in the nine months ended September 30, 2011. The cash provided for the nine month period ended September 30, 2012 was the net proceeds the new credit facility less repayment of the Note Payable - Related Party as more fully described in Note 8 to the Company's Consolidated Financial Statements. The cash provided for the nine month period ended September 30, 2011 was mainly the proceeds from the drawdown of the Note Payable - Related Party as more fully described in Note 9 to the Company's Consolidated Financial Statements.

The Company's principal sources of liquidity are cash and cash equivalents of approximately $1.8 million at September 30, 2012, the $2 million available on the $3 million credit facility detailed in Note 8 to the Company's Consolidated Financial Statements and cash from operations. Prior to the execution of the credit facility detaled in Note 8, the Company utilized the $3 million credit facility detailed in Note 9, which was terminated in August of 2012. The Company sustained a net loss of $2.8 million for the nine months ended September 30, 2012, and had working capital of $3 million at September 30, 2012.

The Company may require additional funding and this funding will depend, in part, on the timing and structure of potential business arrangements. If necessary, the Company may continue to seek to raise additional capital through the sale of its equity or through a strategic alliance with a third party. There may also be additional acquisition and growth opportunities that may require external financing. There can be no assurance that such financing will be available on terms acceptable to the Company, or at all. We believe that our existing capital resources including the remaining $2 million availability under the loan detailed in Note 8 will be sufficient to support our current business plan beyond November 2013.

Off Balance Sheet Arrangements

The Company does not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies and Estimates

IGI's condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates.

Please refer to the Company's Form 10-K for the year ended December 31, 2011 for a complete list of all Critical Accounting Policies and Estimates. See also Note 3 to the Company's Consolidated Financial Statements.

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