Corporate Greed at it’s Worst
Stocklemon does not cover many AMEX companies, but we could not help ourselves with this one. This has all the elements of the corporate greed that has become so loathefull in the post Enron/Worldcom economy. It is the opinion of Stocklemon that Interpharm represents everything that is bad about the public marketplace. The last non OTC stock covered by Stocklemon was E-Universe, back in 2002. Since, they have been halted by the SEC for the frauds that were discovered by Stocklemon a year earlier.
Interpharm, a generic pharmaceutical company, whose main product, ibuprofen tablets made from powder they buy in bulk from a related party (more on that below), is a stock designed to make insiders rich, while misleading the public. This is the third time insiders used this Company to line their pockets while picking those of the unsuspecting public. This is the second reverse merger for this public company that has been through 2 class actions and 2 reverse splits, which resulted in a 50 for 1 reverse-split to the public.
History of Fraud and Class Action Lawsuits:
Hillside Bedding traded under the symbol “BEDS” and was considered a classic pump and dump of the 90’s. Hillside was known for its bagmen who delivered cash to boiler rooms and or rogue brokers who helped sell it stock to the unsuspecting public. Hillside suffered a class action lawsuit for defrauding investors and then became Atec. Atec came along in 1994, and tried to ride the wave with the Y2k mania. After issuing large amounts of S8 and preferred stock, this too ended with a class action lawsuit.
This follows a pattern that we saw with its predecessor Hillside Bedding and Atec Group. Let’s play a game of fill in the box.
|Hillside Bedding||Preferred Stock||Insider Sales||Massive S8||Class Action Lawsuit|
|Atec Group||Preferred Stock||Insider Sales||Massive S8||Class Action Lawsuit|
|Interpharm||Preferred Stock||Insider Sales||Massive S8||(Fill in This Box)|
Massive Insider Dumping !!!!!!
Interpharm merged into ATEC 3 months ago. In the past 3 months,
over 1 million shares of stock have been sold by insiders. http://www.nasdaq.com/asp/Holdings.asp?symbol=IPA&selected=IPA&page=holdingssummary This includes the close to 350,000 options that the insiders exercised at 45 cents. Considering this company has not even been public for 4 months, the amount of insider selling is inexcusable to long term investors.
This Could Be Devastating.Big Lawsuit No Insurance
Interpharm is currently being sued as a result of an individual who ingested guaifenesin/phenylpropanolamine of which the company was the designer, constructor, manufacturer, producer, marketer, seller and distributor. The Plaintiffs have alleged 9 causes of action of product liability, tort liability, negligence, breach of implied and express warranties and violation of the Washington Consumer Protection Act. But wait it gets worse….Interpharm had NO INSURANCE. If the company loses this case, it could suck all the cash and more out of Interpharm. Interpharm attempted to renew their policy 11 months after they received a claim.
Stocklemon suggests that this lawsuit could have been the reason the company was brought public. Facing a potential multi-million dollar judgment could have been a financial nightmare for the Sutaria family. This seems to have been a way to pass this major liability on to the investing public.
Interpharm has less than $300,000 in the bank when it went public. This lawsuit could have bankrupted the company.
THE BIG QUESTION..How many shares are outstanding on IPA?
When one looks at the shares outstanding it “appears” to be 8mm shares (at least on yahoo) so it APPEARS to be trading inline with a fair valuation. Some sites say 13mm. But is that accurate? NO!
So what is the REAL amount of shares outstanding?
Stocklemon put together a chart so the capital structure can be better understood. All of these numbers do not include the massive S-8 (read below) that the company will face in the coming years
|Interpharm, Inc.||Atec Group, Inc.||Pro Forma Adjustments||Pro Forma|
|Weighted average shares outstanding||5,783,533||13,809,661|
|Effect of dilutive securities:|
|Series A convertible preferred stock||—||1,526||1,526|
|Series B convertible preferred stock||—||292||292|
|Series C convertible preferred stock||—||5,620||5,620|
|Series J convertible preferred stock||—||105,000||105,000|
|Series K convertible preferred stock||26,770,731||—||1,492,300||28,263,031|
|Options – treasury stock method||—||373,075||—||373,075|
|Total common stock equivalents||26,770,731||485,513||1,492,300||28,748,544|
|Denominator for pro forma diluted EPS||32,554,264||8,511,641||1,492,300||42,558,205|
|ATEC options which may have been exercised prior to consummation of deal||4,084,480||5,668,258||9,752,738|
|Series K additional if all ATEC options convert||18,588,552||18,588,552|
|Adjustment to Pro Forma if ATEC options convert||(1,865,375)||(1,865,375)|
GREED In the S-8 Registration
An S-8 filed on 8-11-03 for registering 1,978,300 shares 50,000 for previous attorney (nice severance for the former attorney since the stock was/is $7.00) and it describes the following anti dilution option plan “The Plan provides for the issuance of stock options for the purchase of 10,000,000 shares of Interpharm Holdings Inc.’s Common Stock plus an annual increase, effective on the first day of each calendar year, equal to 10% of the number of outstanding shares of Common Stock as of the first day of each calendar year, but in no event more than 20,000,000 shares in the aggregate.
The reason why they register 1.9 million shares According to Munish Ramtera from IPA, the reason the company filed the S8 is because the options for the shareholders of ATEC were expiring in 90 days and they made a deal to register them under the S8. When he says shareholders of Atec, he is referring to his father, uncle, and other relatives.
The most amazing part of this S-8 is that it calls for up to 10% dilution per year of outstanding shares going to insiders. This is massive and shows no regard for the shareholders. This type of plan has no place in any company that has even one inch of respect for its shareholders.
The Company’s Fundamentals
Interpharm Holdings, Inc. is in the business of developing, manufacturing and distributing generic pharmaceutical products in the United States, currently marketing 20 products. Sounds like a nice little company right? (by the way, ATEC sounded really nice too until you read deeper into there filings and discovered all the self-dealing, the self enriching employment agreements giving to top management). What would you think the market cap should be on a company that has revenues of even $28 million and $1.6 million in earnings? Now don’t answer too quickly. The company has shown signs of growth. Before you answer, it is only fair to tell you that the generic drug that counts for most of their revenues is Ibuprofen. Yes, Motrin or Advil knockoffs. It is a commodity business but hey, it a living. What would one expect to pay for such a company? Well let’s look at what multiple one leader in the generic drug market trade at called Teva Pharmaceutical Industries Ltd. (http://biz.yahoo.com/p/t/teva.html) trade at multiple of 27. And their growth is much higher than Interpharm (Teva latest quarter showed revenues of $1.52 billion were up 36% for the quarter and earnings of $348.1 million were up 96%. Although Teva is considered a generic drug company, they have an incredible pipeline of proprietary drugs. And, Interpharm? How is their pipeline of proprietary drugs? There are none.
Not surprising since they only spent $211k in R&D for last year.
What is the True Value of IPA?
But let’s say that 27 multiple is a fair number for Interpharm. Let’s say 30 times earnings. That would translate into $42 million or a market capitalization of around 50 cents a share? The fairness opinion that ATEC and IPA paid for said the value was between $49.7 and $55.7 million. Let’s use their high number. $55.7 million. That would give us a total market cap (not earnings) of .55 cents a share.
Attention Changewave Readers You Must Read This!!!!
Stocklemon believes that much of the recent turn up in the stock has been from the recommendation of Tobin Smith in his Changwave report. Stocklemon believes that this report is fundamentally flawed. We have tried to contact Tobin Smith 5 times about the report; we have yet to receive a response from Mr. Smith. Below is a list of the major mistakes made by Tobin Smith in his report.
Mistake #1- Smith says, “Very soon the company will hire a real investment banker and clear up the preferred stock”
Truth- What does this mean? How can one “clean up” preferred? What type of non-sense jargon talk is this? Also, is Tobin violating Reg FD? NOWHERE in their filings or in press releases does it say the company is talking to an investment banker.
Mistake #2- Smith states that the outstanding shares are 7 million with 40 million preferred.
Truth- The outstanding shares are over 70 million with the preferred and the recent S-8. Since when does preferred stock not count as stock? If one were to buy the company, they would have to buy the preferred stock.
Mistake #3- Changewave states that IPA will do $1 per share in pre tax cash flow.
Truth- We do not know where Smith pulls these numbers from but it has less truth in it than a Dr. Seuss book. Where does he get these numbers? These are pulled out of the thin air and have no relation to the true value of Interpharm.
Changewave recommends a buy and states about IPA, “With good news coming and so little bad news out there..” How does he know? We spoke with Munish Rametra at Interpharm and he stated that he does not remember ever having a conversation with Tobin Smith. Can somebody please ask Mr. Smith where he purchased his crystal ball, because we would like one. How would he know if there is good news or no bad news?
Does Tobin Smith Read? Do not trust Stocklemon, Do not trust Tobin Smith. Look for yourself at the 8k filed on 5/2/2003 and in the proxy statement the company states the capital structure and shows how it is way north of any number that Tobin Smith reported. It is the opinion of Stocklemon that Mr. Smith is doing a disservice to his readers on Interpharm. His analysis is foolish and does not factor in the true nature of the business or more importantly the capital structure.
Related Party Transactions
From the beginning and even prior to the merger of Atek into Hillside, the Rametra brothers engaged in related party transactions. In the early financial statements filed by Atek, if we look closely, we discover hundreds of thousands of dollars in intercompany revenues. When we read the prospectus filed on July 24, 1996 wherein the Company filed to resell 15.4 million shares as well as 2.9 million warrants, we are told that Atek was seeking acquisitions. What did they decide to acquire? A business called Innovative Business Micros, Inc., a company owned by, Ashok Rametra, Surinder Rametra, Atek’s principal executive officer principal financial officer and their brother Rajnish Rametra. The brothers also decided that they deserved hefty employment contracts that gave them not only salaries but also bonuses on both revenues and pre-tax profits, mandatory stock bonuses for 5% of the stock outstanding plus discretionary bonuses. The brothers also issued themselves preferred shares. While these activities are not necessarily illegal, they were and are a warning signs of how the Company’s management treats themselves versus its shareholders.
When the Rametra brothers decided to purchase “their” business for a NOTE to shareholders, they also wanted to merge a company into what would be a shell with a note receivable from them. The Atek insiders would still control millions of shares of the public company so they needed a decent company that would go along with them. The answer for them was Interpharm. It fit the bill perfectly for them. Interpharm showed small profits and the despite the fact that they really are in a commodity type of business, buying bulk ibuprofen powder and making tablets, the industry sounded hot and sexy, generic pharmaceuticals. And the best part? The owners are related through marriage!
Proxy dated 5/02/03
“Mona Rametra, the owner of 20% of Interpharm’s capital stock, is the daughter-in-law of Surinder Rametra, our chairman and a member of Atec’s Board. She is also the daughter of Dr. Maganlal K. Sutaria, the Chairman of the Board and chief executive officer of Interpharm. Mrs. Rametra will receive 20% of all of the consideration to be issued to the Interpharm shareholders for their Interpharm stock. Although Dr. Sutaria does not own any Interpharm stock, his other two children (i.e. Mrs. Rametra’s brothers) collectively own 55% of Interpharm stock and his nephew, Ravi Sutaria, owns the remaining 25%. Ravi Sutaria is the son of Bhupatlal K. Sutaria, the President of Interpharm. In addition, Munish K. Rametra, who is Mrs. Rametra’s husband and Surinder Rametra’s son, will share a finder’s fee of $100,000 with three other individuals relating to the acquisition of Interpharm.”
Preferred Stock Game
Tobin Smith will have you believe that all of the preferred stock is restricted for 7 years. He evidently did not read the Series K Registration. There is a provision which allows for the continued registration of shares if the ownership of management (the Series K holders) drops beneath 51% of the outstanding. So, the way it would work would be that they would register 1/7 in year 1, sell, register 1/7 in year 2, sell, register some in year 3, sell…and then they are under 51%. At that point they can register ALL their stock and sell. If there are any events which
dilute them in the intervening years (and where they waive their strong
anti-dilutive provisions), they can register and sell immediately. For
instance, if they decide to merge with another generic manufacturer, say 1/3
of their size, they can register everything and sell tomorrow.
Related Real Estate Transactions
To be consistent, the management of Interpharm, like their relatives at Atek, the predecessor, owns the facilities that the Company rents. ATEK and IPA believe in management or insiders owning the real estate used and rented by the company, and whose mortgages are guaranteed by, the Company. Why not have it be a Company asset? The shareholders are paying for it! In addition, the shareholders should know that their Company has guaranteed the loans for r the real estate. And how does this benefit the shareholders? Unless you are related, It DOESN’T!!!!
Interpharm had a 50% owned subsidiary called Saturn Chemical. Saturn acted solely as a purchasing agent for Interpharm by purchasing Ibuprofen powder and supplying it to Interpharm.
Interpharm has in the past sold finished goods to the other 50% owner of Saturn. Since then, the other owner has turned over their 50% to Interpharm with no consideration in return. Who was this other owner? We called Interpharm, and they refused to answer who the other owner might be. Why did the company need a purchasing agent that is 50% wholly owned? How did this affect the numbers of last year?
Stocklemon believes that StockDiagnostics.com is one of the best stock advisory sites on the web. It judges companies based on a proprietary OPS rating and covers both long and short positions. On September 16, 2003 Stock Diagnostics came out with this report on IPA.
OPS Kindling of the Week
Interpharm Holdings, Inc. (AMEX: IPA, $6.95) is our OPS Kindling of the Week. Interpharm has had negative OPS in the two most recent quarters. This Commack, NY-based company’s OPS Rating is StockDiagnostics.com’s third worst OPS Rating of 6. Trailing twelve-month OPS was ($0.04). Trailing twelve-month revenues are down more than 12%. The fifty-two week price range is between the low of $0.26 (09/26/2002) and the high of $9.31 (07/14/2003). Interpharm carries the Price to Operational cashflow (P/O) multiple of (191.1x) with the Price to Tangible Book multiple of 13.6x. Interpharm, formerly known as ATEC Group, develops and manufactures both prescription-strength and over-the-counter (OTC) generic drugs for wholesale distribution. As with our other OPS Kindling, we expect Interpharm’s shares may be trading below $1 within the next twelve months.
Stocklemon challenges Interpharm and Tobin Smith to a conference call where they can explain themselves to shareholders. Stocklemon will pay for the call. If a representative from either Changewave or Interpharm emails us, we will do the rest. If do not hear from them, we will arrange our own conference call to better explain the business of Interpharm Holdings.
Stocklemon believes that the Interpharm story will end in a class action lawsuit. The company uses a public company as their own private pocketbook and it shows no respect for shareholders. The greed that is exercised by management is second to none. Our target on this stock is less than $1 within the next six months. Furthermore, we encourage Mr. Tobin Smith to correct the statements made in his many reports. If he does not, Stocklemon believes that he is nothing more than an accomplice in this deception that is being played on the public.