10-Q 1 inbp20190331_10q.htm FORM 10-Q inbp20190331_10q.htm
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

____________

 

FORM 10-Q

 

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2019

 

OR

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from to

 Commission File Number 001-31668

 

INTEGRATED BIOPHARMA, INC.

(Exact name of registrant, as specified in its charter)

 

Delaware 22-2407475
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)

 

225 Long Ave., Hillside, New Jersey

07205

(Address of principal executive offices) (Zip Code)

 

(888) 319-6962

(Registrant’s telephone number, including Area Code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  X    No ____

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  No ____

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

   

 

Large accelerated filer ☐

 

Accelerated filer ☐

 

Non-accelerated filer    ☑

 

Emerging growth company ☐  

 

Smaller reporting company ☑

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes       No __X__

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
None None None

 

As of May 15, 2019, there were 29,565,943 shares of common stock, $0.002 par value per share (“Common Stock”), of the registrant outstanding.

 

 

 

 

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

 

FORM 10-Q QUARTERLY REPORT

For the three and nine months ended March 31, 2019

INDEX

 

 

   

Page

 

Part I. Financial Information

 

Item 1.

Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2019 and 2018 (unaudited)

2

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and June 30, 2018 (unaudited)

3

 

Condensed Consolidated Statements of Stockholders’ (Deficiency) Equity for the nine months ended March 31, 2019 and 2018 (unaudited)

4

 

Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2019 and 2018 (unaudited)

5

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

6

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

27

     

Item 4.

Controls and Procedures

27

     
 

Part II. Other Information

 
     

Item 1.

Legal Proceedings

27

     

Item 1A.

Risk Factors

27

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

     

Item 3.

Defaults Upon Senior Securities

28

     

Item 4.

Mine Safety Disclosure

28

     

Item 5.

Other Information

28

     

Item 6.

Exhibits

28

 

 

Other

 

Signatures

 

29

     
     
     

 

 

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

 

Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission (“SEC”), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Integrated BioPharma, Inc. and its subsidiaries (collectively, the “Company”) or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, changes in general economic and business conditions; loss of market share through competition; introduction of competing products by other companies; the timing of regulatory approval and the introduction of new products by the Company; changes in industry capacity; pressure on prices from competition or from purchasers of the Company's products; regulatory changes in the pharmaceutical manufacturing industry and nutraceutical industry; regulatory obstacles to the introduction of new technologies or products that are important to the Company; availability of qualified personnel; the loss of any significant customers or suppliers; and other factors both referenced and not referenced in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (“Form 10-K”), as filed with the SEC. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words, “plan”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “project”, “may”, “will”, “would”, “could”, “should”, “seeks”, or “scheduled to”, or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. The Company cautions investors that any forward-looking statements made by the Company are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements with respect to the Company, include, but are not limited to, the risks and uncertainties affecting its businesses described in Item 1 of the Company’s Form 10-K and in other securities filings by the Company. Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection or assumption in any of the forward-looking statements. The Company’s future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date hereof and the Company does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.

 

-1-

 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(in thousands, except for share and per share amounts)

 

(Unaudited)

 
                                 
   

Three months ended

   

Nine months ended

 
   

March 31,

   

March 31,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Sales, net

  $ 14,088     $ 10,575     $ 36,393     $ 31,145  
                                 

Cost of sales

    11,995       9,106       31,750       27,623  

Gross profit

    2,093       1,469       4,643       3,522  
                                 

Selling and administrative expenses

    856       809       2,513       2,453  

Operating income

    1,237       660       2,130       1,069  
                                 

Other income (expense), net:

                         

Interest expense

    (196 )     (232 )     (586 )     (694 )

Change in fair value of derivative liabilities

    -       54       9       121  

Impairment on investment in iBio, Inc.

    -       -       -       (251 )

Other income, net

    25       9       32       13  

Other expense, net

    (171 )     (169 )     (545 )     (811 )
                                 

Income before income taxes

    1,066       491       1,585       258  

Income tax expense, net

    143       103       257       397  
                                 

Net income (loss)

    923       388       1,328       (139 )

Change in fair value of derivative liability

    -       (54 )     -       -  

Interest expense on Convertible debt - CD Financial, LLC

    -       55       -       -  

Accretion of Convertible debt - CD Financial, LLC

    -       9       -       -  

Diluted net income (loss)

  $ 923     $ 398     $ 1,328     $ (139 )
                                 

Basic net income (loss) per common share

  $ 0.03     $ 0.02     $ 0.05     $ (0.01 )
                                 

Diluted net income (loss) per common share

  $ 0.03     $ 0.01     $ 0.05     $ (0.01 )

 

Weighted average common shares outstanding - basic

    29,565,943       21,135,174       28,719,452       21,135,174  

Add:   Equivalent shares outstanding

    542,782       836,428       582,525       -  

Shares issuable upon conversion of

                               

Convertible Debt - CD Financial, LLC

    -       8,230,769       -       -  

Weighted average common shares outstanding - diluted

    30,108,725       30,202,371       29,301,977       21,135,174  

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

-2-

 

 

 

 

 

 

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except for share and per share amounts)

 

(Unaudited)

 
                 
   

March 31,

   

June 30,

 
   

2019

   

2018

 

Assets

               

Current Assets:

         

Cash

  $ 431     $ 228  

Accounts receivable, net

    4,957       3,796  

Inventories

    10,549       7,741  

Other current assets

    413       389  

Total current assets

    16,350       12,154  
                 

Property and equipment, net

    1,802       1,651  

Operating lease right-of-use assets

    54       -  

Operating lease right-of-use assets - Vitamin Realty, LLC

    3,345       -  

Deferred tax assets, net

    622       671  

Security deposits and other assets

    48       92  

Total Assets

  $ 22,221     $ 14,568  
                 

Liabilities and Stockholders' Equity (Deficiency):

         

Current Liabilities:

         

Advances under revolving credit facility

  $ 6,147     $ 4,894  

Accounts payable (includes $68 and $141 due to related party)

    6,036       4,184  

Accrued expenses and other current liabilities

    1,240       1,060  

Current portion of long term debt, net

    1,014       773  

Current portion - Subordinated convertible note, net - CD Financial, LLC

    -       5,269  

Total current liabilities

    14,437       16,180  
                 

Operating lease liabilities

    54       -  

Operating lease liabilities - Vitamin Realty, LLC

    3,353       -  

Long term debt, net

    2,988       3,624  

Total liabilities

    20,832       19,804  
                 

Commitments and Contingencies

         
                 

Stockholders' Equity (Deficiency):

         

Common Stock, $0.002 par value; 50,000,000 shares authorized;

         

29,600,843 and 21,170,074 shares issued, respectively

         

29,565,943 and 21,135,174 shares outstanding, respectively

    59       42  

Additional paid-in capital

    50,053       44,773  

Accumulated deficit

    (48,624 )     (49,952 )

Less: Treasury stock, at cost, 34,900 shares

    (99 )     (99 )

Total Stockholders' Equity (Deficiency)

    1,389       (5,236 )

Total Liabilities and Stockholders' Equity (Deficiency)

  $ 22,221     $ 14,568  

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

-3-

 
 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY

 

FOR THE NINE MONTHS ENDED MARCH 31,

 

(in thousands, except shares)

 

 

 

FOR THE NINE MONTHS ENDED MARCH 31, 2019:

                                                      Total  
                      Additional                               Stockholders'  
   

Common Stock

   

Paid-in

   

Accumulated

   

Treasury Stock

   

(Deficiency)

 
 
 
 
   

Shares

   

Par Value

   

Capital

   

Deficit

   

Shares

   

Cost

   

Equity

 
                                                         

Balance, June 30, 2018

    21,170,074     $ 42     $ 44,773     $ (49,952 )     34,900     $ (99 )   $ (5,236 )

Shares issued upon conversion of

                                                       

CD Financial, LLC Convertible Note, net

    8,230,769       17       5,256       -       -       -       5,273  

Net income

    -       -       -       159       -       -       159  
Balance, September 30, 2018     29,400,843       59       50,029       (49,793 )     34,900       (99 )     196  
Shares issued upon exercise of employee stock options     200,000       -       24       -       -       -       24  

Net income

    -       -       -       246       -       -       246  
Balance, December 31, 2018     29,600,843       59       50,053       (49,547 )     34,900       (99 )     466  

Net income

    -       -       -       923       -       -       923  

Balance, March 31, 2019

    29,600,843     $ 59     $ 50,053     $ (48,624 )     34,900     $ (99 )   $ 1,389  

 

FOR THE NINE MONTHS ENDED MARCH 31, 2018:

                                                      Total  
                      Additional                               Stockholders'  
   

Common Stock

   

Paid-in

   

Accumulated

   

Treasury Stock

   

(Deficiency)

 
 
 
 
   

Shares

   

Par Value

   

Capital

   

Deficit

   

Shares

   

Cost

   

Equity

 
                                                         

Balance, June 30, 2017

    21,170,074     $ 42     $ 44,759     $ (50,631 )     34,900     $ (99 )   $ (5,929 )

Compensation expense for employee stock options

    -       -       4       -       -       -       4  

Net loss

    -       -       -       (179 )     -       -       (179 )
Balance, September 30, 2017     29,170,074       42       44,763       (50,810 )     34,900       (99 )     (6,104 )
Compensation expense for employee stock options     -       -       5       -       -       -       5  

Net loss

    -       -       -       (348 )     -       -       (348 )
Balance, December 31, 2017     29,170,074       42       44,768       (51,158 )     34,900       (99 )     (6,447 )
Compensation expense for employee stock options     -       -       3       -       -       -       3  

Net income

    -       -       -       388       -       -       388  

Balance, March 31, 2018

    29,170,074     $ 42     $ 44,771     $ (50,770 )     34,900     $ (99 )   $ (6,056 )

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

-4-

 

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands, except share and per share amounts)

 

(Unaudited)

 
                 
   

Nine months ended

 
   

March 31,

 
   

2019

   

2018

 

Cash flows provided by operating activities:

         

Net income (loss)

  $ 1,328     $ (139 )

Adjustments to reconcile net income (loss) to net cash

         

from operating activities:

               

Depreciation and amortization

    234       264  

Accretion of financing instruments and other non cash interest

    46       79  

Stock based compensation

    -       12  

Change in deferred tax assets

    49       290  

Equity loss in investment in AgroSport, LLC

    12       -  

Impairment on investment in iBio, Inc.

    -       251  

Change in fair value of derivative liabilities

    (9 )     (121 )

Gain on sale of fixed assets

    -       (5 )

Changes in operating assets and liabilities:

         

Decrease (increase) in:

               

Accounts receivable

    (1,161 )     822  

Inventories

    (2,807 )     (910 )

Other current assets

    (29 )     24  

Security deposits and other assets

    (3 )     -  

(Decrease) increase in:

               

Accounts payable

    1,852       697  

Accrued expenses and other liabilities

    189       79  

Net cash (used in) provided by operating activities

    (299 )     1,343  
                 

Cash flows from investing activities:

         

Purchase of property and equipment

    (350 )     (216 )

Cash proceeds from sale of equipment

    -       6  

Cash contribution in AgroSport LLC

    (8 )     -  

Net cash used in investing activities

    (358 )     (210 )
                 

Cash flows from financing activities:

         

Advances under revolving credit facility

    35,574       30,123  

Proceeds from sales/lease back of equipment

    233       143  

Proceeds from exercise of employee stock options

    24       -  

Repayments of advances under revolving credit facility

    (34,322 )     (30,480 )

Repayments under term note payables

    (475 )     (814 )

Repayments under capitalized lease obligations

    (174 )     (175 )

Net cash provided by (used in) financing activities

    860       (1,203 )
                 

Net increase (decrease) in cash

    203       (70 )

Cash at beginning of period

    228       132  

Cash at end of period

  $ 431     $ 62  

Supplemental disclosures of cash flow information:

               

Interest paid

  $ 568     $ 596  

Income taxes paid

  $ 193     $ 130  

Supplemental disclosures of non-cash flow information:

         

Financing on capitalized lease obligations

  $ -     $ 38  

 

See accompanying notes to condensed consolidated financial statements.

 

-5-

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

 

 

Note 1. Principles of Consolidation and Basis of Presentation

Basis of Presentation of Interim Financial Statements

 

The accompanying condensed consolidated financial statements for the interim periods are unaudited and include the accounts of Integrated BioPharma, Inc., a Delaware corporation (together with its subsidiaries, the “Company”). The interim condensed consolidated financial statements have been prepared in conformity with Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and therefore do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented have been included. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (“Form 10-K”), as filed with the SEC. The June 30, 2018 balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the nine months ended March 31, 2019 are not necessarily indicative of the results for the full fiscal year ending June 30, 2019 or for any other period.

 

Nature of Operations

 

The Company is engaged primarily in manufacturing, distributing, marketing and sales of vitamins, nutritional supplements and herbal products. The Company’s customers are located primarily in the United States, Luxembourg and Canada. The Company was previously known as Integrated Health Technologies, Inc. and, prior to that, as Chem International, Inc. The Company was reincorporated in its current form in Delaware in 1995. The Company continues to do business as Chem International, Inc. with certain of its customers and certain vendors.

 

The Company’s business segments include: (a) Contract Manufacturing operated by InB:Manhattan Drug Company, Inc. (“MDC”), which manufactures vitamins and nutritional supplements for sale to distributors, multilevel marketers and specialized health-care providers; (b) Branded Proprietary Products operated by AgroLabs, Inc. (“AgroLabs”), which distributes healthful nutritional products for sale through major mass market, grocery and drug and vitamin retailers, under the following brands: Naturally Noni, Peaceful Sleep, Green Envy, FiberCal, Wheatgrass and other products which are being introduced into the market (these are referred to as our branded proprietary nutraceutical business and/or products); and (c) Other Nutraceutical Businesses which includes the operations of (i) The Vitamin Factory (the “Vitamin Factory”), which sells private label MDC products, as well as our AgroLabs products, through the Internet, (ii) IHT Health Products, Inc. (“IHT”) a distributor of fine natural botanicals, including multi minerals produced under a license agreement, (iii) MDC Warehousing and Distribution, Inc., a service provider for warehousing and fulfilment services and (iv) Chem International, Inc. (“Chem”), a distributor of certain raw materials for DSM Nutritional Products LLC.

 

Accounting Policies

 

Accounting Pronouncements Recently Adopted

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, Topic 606. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to

 

 

-6-

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

                                                                       

be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with customers. During 2016, the FASB issued several accounting updates (ASU No. 2016-08, 2016-10 and 2016-12) to clarify implementation guidance and correct unintended application of the guidance. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. This new guidance was effective for the Company beginning on July 1, 2018, and Note 8 provides the related disaggregated revenue disclosures. The adoption of this standard using the modified retrospective approach did not have a material impact on the Company’s revenue recognition accounting policy or its Condensed Consolidated Financial Statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall, (Subtopic 825-10) “Recognition and Measurement of Financial Assets and Financial Liabilities”, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Under this guidance, companies have to measure equity investments, except those accounted for under the equity method, at fair value and recognize changes in fair value in net income. The adoption of this standard on July 1, 2018, by Company did not have a material effect on its Condensed Consolidated Financial Statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.

 

The standard will be effective for us beginning July 1, 2019, with early adoption permitted. We elected to early adopt the standard effective July 1, 2018. We elected the available practical expedients on adoption. In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information. The standard had a material impact on our consolidated balance sheets, but did not have a material impact on our consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for capital leases remained substantially unchanged.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-7-

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

                                                                       

Adoption of this standard resulted in the recognition of additional ROU assets and lease liabilities for operating leases and had the following impact to the reported results as of June 30, 2018 on our condensed consolidated financial statements:

 

 

 

Consolidated Statement of Financial Condition

 

As Reported

 

New Lease Standard Adjustment

 

As Adjusted

 
                             

Operating lease right-of-use assets

  $ -       $ 69       $ 69  

Operating lease right-of-use assets - Vitamin Realty, LLC

    -         3,668         3,668  

Operating lease liabilities

    -         69         69  

Operating lease liabilities - Vitamin Realty, LLC

    -         3,677         3,677  

Current portion of long term debt, net

    773         -         773  

Long term debt, net

    3,624         -         3,624  

Current portion - Subordinated convertible note, net - CD Financial, LLC

    5,269         -         5,269  

 

In August, 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which clarifies how certain cash receipts and payments are to be presented in the statement of cash flows. The guidance was effective for the Company on July 1, 2018 and did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

 

Aside from the adoption of ASU's, as described above and the Leases policy described below, there have been no material changes during fiscal year 2019 in the Company’s significant accounting policies to those previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

 

Significant Accounting Policies

 

Sales. The Company recognizes sales revenue, net of estimated sales returns and allowances, at the time it sells its products to the customer. The timing of a sale is determined when the product’s title and risk of loss transfers to the customer. The Company’s sales policy requires the customer to provide the Company with purchase orders with agreed upon selling prices and shipping terms.

 

Other Income. The Company recognizes revenue from service transactions at the time the service is performed and collection from the counter party is expected. Generally, revenue from services is classified as a component of other income (expense), net in the Company's Condensed Consolidated Statements of Operations when it relates to professional services and in sales, net when it relates to warehousing and distribution services.

 

Leases. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on our consolidated balance sheets. Finance leases are included in property and equipment, current portion of long term debt, and long-term debt obligation on our consolidated statement of financial condition.  

 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

 

 

-8-

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

                                                                 

We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component.

 

Earnings Per Share. Basic earnings per common share amounts are based on weighted average number of common shares outstanding. Diluted earnings per share amounts are based on the weighted average number of common shares outstanding, plus the incremental shares that would have been outstanding upon the assumed exercise of all potentially dilutive stock options, warrants and convertible debt, subject to anti-dilution limitations using the treasury stock method and if converted method.

 

The following options and potentially dilutive shares for convertible notes payable (See Note 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt) were not included in the computation of weighted average diluted common shares outstanding as the effect of doing so would be anti-dilutive for the three and nine months ended March 31, 2019 and 2018:

 

   

Three Months Ended

   

Nine Months Ended

 
   

March 31,

   

March 31,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Anti-dilutive stock options

    150,000       150,000       150,000       2,487,584  

Anti-dilutive shares for convertible note payable

    -       -       -       8,230,769  

Anti-dilutive shares

    150,000       150,000       150,000       10,718,353  

 

 

Additionally, in the nine months ended March 31, 2019, the 8,230,769 common shares underlying the convertible note were potentially dilutive and therefore included in the diluted earnings per share calculation on a proportionate basis prior to the conversion into common shares of the Company as of July 24, 2018 and the results were antidilutive. (See Note 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt).

 

 

Note 2. Inventories

 

Inventories are stated at the lower of cost or net realizable value using the first-in, first-out method and consist of the following:

 

   

March 31,

   

June 30,

 
   

2019

   

2018

 
                 

Raw materials

  $ 6,881     $ 4,179  

Work-in-process

    2,218       2,207  

Finished goods

    1,450       1,355  

Total

  $ 10,549     $ 7,741  

 

 

 

 

 

 

 

-9-

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

                                                          

 

 Note 3. Property and Equipment, net

 

Property and equipment, net consists of the following:

 

   

March 31,

   

June 30,

 
   

2019

   

2018

 
                 

Land and building

  $ 1,250     $ 1,250  

Leasehold improvements

    1,268       1,268  

Machinery and equipment

    6,231       5,917  

Transportation equipment

    6       6  
      8,755       8,441  

Less: Accumulated depreciation and amortization

    (6,953 )     (6,790 )

Total

  $ 1,802     $ 1,651  

 

Depreciation and amortization expense recorded on property and equipment was $69 and $57 for the three months ended March 31, 2019 and 2018, respectively, and $201 and $189 for the nine months ended March 31, 2019 and 2018, respectively. Additionally, the Company disposed of fully depreciated property of $38 in the nine months ended March 31, 2019 and $146 and another $4 in transportation equipment with a remaining basis of $1 at the time of sale in the nine months ended March 31, 2018. The Company sold the transportation equipment for a gain of $3 and sold fully depreciation machinery and equipment for a gain of $2 in the nine months ended March 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-10-

 

 

 INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

                                                          

 

 

 Note 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt

 

As of March 31, 2019 and June 30, 2018, the Company had the following debt outstanding:

 

   

Principal Amount

   

Interest Rate

 

Maturity Date

   

As of March 31, 2019

   

As of June 30, 2018

           

Revolving advances under Senior Credit

                         

Facility with PNC Bank, National Association

  $ 6,147     $ 4,894       5.50 %

5/15/2024

Installment Note with PNC Bank

    1,267       1,672       6.00 %

5/15/2024

Installment Note with PNC Equipment Finance

    32       101       4.57 %

7/29/2019

Promissory Note with CD Financial, LLC

    1,714       1,714       6.00 %

5/15/2019

Promissory Note with Vitamin Realty, LLC

    686       686       4.00 %

5/15/2019

Capitalized lease obligations

 
 
 
 
328   
 
 
 
 
 
269   
 
 
 
 
 
4.01% -
9.38
 
%

12/1/2019-

2/1/2021

Total outstanding debt

    10,174       9,336            

Less: Revolving Advances

    (6,147 )     (4,894 )          

Prepaid financing costs

    (25 )     (45 )          

Current portion of long term debt, net

    (1,014 )     (773 )          

Long term debt, net

  $ 2,988     $ 3,624            

 

Convertible Note payable - CD Financial, LLC

  $ -     $ 5,350       6.00 %

7/24/2018

Less: Discount for embedded derivative

    -       (66 )          

Prepaid financing costs

    -       (15 )          

Convertible Note payable, net - CD Financial, LLC

  $ -     $ 5,269            

 

SENIOR CREDIT FACILITY

 

On May 15, 2019, the Company, MDC, AgroLabs, IHT, IHT Properties Corp. (“IHT Properties”) and Vitamin Factory (collectively, the “Borrowers”) amended the Revolving Credit, Term Loan and Security Agreement (the “Amended Loan Agreement”) with PNC Bank, National Association as agent and lender (“PNC”) and the other lenders party thereto entered into on June 27, 2012, as amended on February 19, 2016,

 

The Amended Loan Agreement provides for a total of $11,585 in senior secured financing (the “Senior Credit Facility”) as follows: (i) discretionary advances (“Revolving Advances”) based on eligible accounts receivable and eligible inventory in the maximum amount of $8,000 (the “Revolving Credit Facility”), and (ii) a term loan in the amount of $3,585 (the “Term Loan”).  The Senior Credit Facility is secured by all assets of the Borrowers, including, without limitation, machinery and equipment, real estate owned by IHT Properties, and common stock of iBio owned by the Company.  Revolving Advances bear interest at PNC’s Base Rate or the Eurodollar Rate, at Borrowers’ option, plus 2.50%. The Term Loan bears interest at PNC’s Base Rate or the Eurodollar Rate at Borrowers’ option, plus 3.00%.

 

 

-11-

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

                                                        

 

As of March 31, 2019, the Company had amounts outstanding utilizing the Eurodollar Rate of $4,500 and $1,200 under the Revolving Advances and Term Note, respectively, with interest rates as of March 31, 2019 and June 30, 2018 as follows (based on the respective base rate plus 2.75% on Revolving Advances and 3.25% on the Term Note in effect as of the respective dates):

 

   

March 31,

   

June 30,

 
   

2019

   

2018

 

Revolving Credit Facility:

         

Base Rate Interest

    5.50 %     5.00 %

Eurodollar Rate

    5.24063 %     n/a  

Term Loan:

               

Base Rate Interest

    6.00 %     5.50 %

Eurodollar Rate

    5.74063 %     n/a  

 

Upon and after the occurrence of any event of default under the Amended Loan Agreement, and during the continuation thereof, interest shall be payable at the interest rate then applicable plus 2%. The Senior Credit Facility matures on May 15, 2024 (the “Senior Maturity Date”).

 

The principal balance of the Revolving Advances is payable on the Senior Maturity Date, subject to acceleration, based upon a material adverse event clause, as defined, subjective accelerations for borrowing base reserves, as defined or upon the occurrence of any event of default under the Amended Loan Agreement or earlier termination of the Amended Loan Agreement pursuant to the terms thereof. The Term Loan shall be repaid in eighty-four (84) consecutive monthly installments of principal, the first eighty-three (83) of which shall be in the amount of $43, commencing on the first business day of June, 2019, and continuing on the first business day of each month thereafter, with a final payment of any unpaid balance of principal and interest payable on the Senior Maturity Date. The foregoing is subject to customary mandatory prepayment provisions and acceleration upon the occurrence of any event of default under the Amended Loan Agreement or earlier termination of the Amended Loan Agreement pursuant to the terms thereof.

 

The Revolving Advances are subject to the terms and conditions set forth in the Amended Loan Agreement and are made in aggregate amounts at any time equal to the lesser of (x) $8.0 million or (y) an amount equal to the sum of: (i) up to 85%, subject to the provisions in the Amended Loan Agreement, of eligible accounts receivables (“Receivables Advance Rate”), plus (ii) up to the lesser of (A) 75%, subject to the provisions in the Amended Loan Agreement, of the value of the eligible inventory (“Inventory Advance Rate” and together with the Receivables Advance Rate, collectively, the “Advance Rates”), (B) 85% of the appraised net orderly liquidation value of eligible inventory (as evidenced by the most recent inventory appraisal reasonably satisfactory to PNC in its sole discretion exercised in good faith) and (C) the inventory sublimit in the aggregate at any one time (“Inventory Advance Rate” and together with the Receivables Advance Rate, collectively, the “Advance Rates”), minus (iii) the aggregate Maximum Undrawn Amount of all outstanding Letters of Credit, minus (iv) such reserves as PNC may reasonably deem proper and necessary from time to time.

 

The Amended Loan Agreement contains customary mandatory prepayment provisions, including, without limitation the requirement to use any sales proceeds from the sale of iBio Stock to repay the Term Loan and to prepay the outstanding amount of the Term Note in an amount equal to twenty-five percent (25%) of Excess Cash Flow for each fiscal year commencing with the fiscal year ended June 30, 2016, payable upon delivery of the financial statements to PNC referred to in and required by the Amended Loan Agreement for such fiscal year but in any event not later than one hundred twenty (120) days after the end of each such fiscal year, which amount shall be applied ratably to the outstanding principal installments of the Term Loan in the inverse order of the

 

 

-12-

 

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

                                                        

 

maturities thereof. The Amended Loan Agreement also contains customary representations and warranties, covenants and events of default, including, without limitation, (i) a fixed charge coverage ratio maintenance requirement and (ii) an event of default tied to any change of control as defined in the Amended Loan Agreement. As of March 31, 2019, the Company was in compliance with the fixed charge coverage ratio maintenance requirement and with the required annual payments of 25% of the Excess Cash Flow for each fiscal year commencing with the fiscal year ended June 30, 2016.

 

In connection with the Senior Credit Facility, PNC and CD Financial entered into the Intercreditor and Subordination Agreement (the “Intercreditor Agreement”), which was acknowledged by the Borrowers, pursuant to which, among other things, (a) the lien of CD Financial on assets of the Borrowers is subordinated to the lien of PNC on such assets during the effectiveness of the Senior Credit Facility, and (b) priorities for payment of the debt for the Company and its subsidiaries (as described in this Note 4) are established.

 

In addition, in connection with the Senior Credit Facility, the following loan documents were executed: (i) a Stock Pledge Agreement with PNC, pursuant to which the Company pledged to PNC the iBio Stock; (ii) a Mortgage and Security Agreement with PNC with IHT Properties; and (iii) an Environmental Indemnity Agreement with PNC.

 

CD FINANCIAL, LLC

 

On June 27, 2012, the Company also entered into an Amended and Restated Securities Purchase Agreement (the “CD SPA”) with CD Financial, which amended and restated the Securities Purchase Agreement, dated as of February 21, 2008, between the Company and CD Financial, pursuant to which the Company issued to CD Financial a 9.5% Convertible Senior Secured Note in the original principal amount of $4,500 (the “Original CD Note”). Pursuant to the CD SPA, the Company issued to CD Financial (i) the Amended and Restated Convertible Promissory Note in the principal amount of $5,350 (the “CD Convertible Note”) and (ii) the Promissory Note in the principal amount of $1,714 (the “Liquidity Note”, and collectively with the CD Convertible Note, the “CD Notes”). The CD Notes had an original maturity date of July 7, 2017, however, on February 19, 2016, the CD Notes were amended to extend the maturity date thereof to February 29, 2020.

 

The CD Notes are secured by all assets of the Borrowers, including, without limitation, machinery and equipment, real estate owned by IHT Properties, and iBio Stock owned by the Company. The CD Notes bear interest at an annual rate of 6% and have a default rate of 10%.

 

The CD Convertible Note is convertible at the option of CD Financial into common stock of the Company at a conversion price of $0.65 per share, subject to customary adjustments including conversion price protection provisions.

Pursuant to the terms of the Amended Loan Agreement and the Intercreditor Agreement, during the effectiveness of the Senior Credit Facility, (i) the principal of the CD Convertible Note may not be repaid, (ii) the principal of the Liquidity Note may only be repaid if certain conditions under the Amended Loan Agreement are satisfied, and (iii) interest in respect of the CD Notes may only be paid if certain conditions under the Intercreditor Agreement are satisfied.

 

The CD SPA contains customary representations and warranties, covenants and events of default, including, without limitation, an event of default tied to any change of control as defined in the CD SPA.

 

In connection with the CD SPA, the Borrowers entered into an Amended and Restated Security Agreement and Amended and Restated Subsidiary Guaranty.

 

 

-13-

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

                                                        

 

On May 15, 2019, the Liquidity Note was satisfied in full with the repayment of principal and interest in the amount of $1,718.  The Liquidity Note was permitted to be paid in full in the Amended Loan Agreement with PNC Bank.

 

On July 31, 2018, the Company authorized the issuance of 8,230,769 shares of the Company’s common stock (“Common Shares”) to CD Financial. The Common Shares were issued upon the exercise by CD Financial of its conversion right pursuant to the CD SPA and in accordance with Section 3 (b) of the CD Convertible Note. The CD Convertible Note was convertible at the option of CD Financial into Common Shares at a conversion price of $0.65 per share, subject to customary adjustments. CD Financial exercised its conversion right with respect to the entire principal amount due under the CD Convertible Note. The Common Shares issued to CD Financial were issued at a conversion price of $0.65 per Common Share.

 

As of June 30, 2018, the related embedded derivative liability with respect to conversion price protection provisions on the CD Convertible Note had an estimated fair value of $9 and as of March 31, 2019 had been extinguished in connection with the above described conversion exercise by CD Financial on July 24, 2018.

 

OTHER LONG TERM DEBT

 

Related Party Debt. On June 27, 2012, MDC and the Company entered into a promissory note with Vitamin Realty Associates, LLC (“Vitamin Realty”) in the principal amount of approximately $686 (the “Vitamin Note”). The principal amount of the Vitamin Note represents the aggregate amount of unpaid, past due rent owing by MDC under the Lease Agreement, dated as of January 10, 1997, between MDC, as lessor, and Vitamin Realty, as landlord, pertaining to the real property located at 225 Long Avenue, Hillside, New Jersey. (See Note 6. Commitments and Contingencies (a) Leases – Related Parties Leases). The Vitamin Note matures on February 29, 2020, as amended on February 19, 2016. The Vitamin Note accrues interest at an annual rate of 4% per annum. Interest in respect of the Vitamin Note is payable on the first business day of each calendar month. Pursuant to the terms of the Amended Loan Agreement, during the effectiveness of the Senior Credit Facility, the Vitamin Note may only be repaid or prepaid if certain conditions set forth in the Amended Loan Agreement are satisfied.

 

On May 15, 2019, the Vitamin Note was satisfied in full with the repayment of principal and interest in the amount of $689.  The Vitamin Note was permitted to be paid in full in the Amended Loan Agreement with PNC Bank.

 

Capitalized Lease Obligations. On February 1, 2019, the Company entered into a capitalized lease obligation with First American Equipment Finance (“First American”) in the amount of $233, which lease is secured by certain machinery and equipment and matures on February 1, 2021. The Company sold certain machinery, purchased from equipment suppliers other than First American in the aggregate amount of $233, to First American for $233 and leased the sold equipment back from First American for monthly payments in the amount of approximately $10 with an imputed interest rate of 7.28%.

 

On February 1, 2019, the capitalized lease obligation entered into by the Company on March 17, 2017 with First American in the amount of $158, which lease was secured by certain machinery and equipment, was satisfied with all payments being made under the capitalized lease obligation. The monthly lease payment was approximately $7 and had an imputed interest rate of 3.86%.

 

-14-

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

                                                        

 

Note 5. Significant Risks and Uncertainties

 

(a) Major Customers. For the three and nine months ended March 31, 2019 and 2018, approximately 92% and 91% of consolidated net sales, respectively, were derived from two customers. These two customers are in the Company’s Contract Manufacturing Segment and net sales to these two customers represented approximately 72% and 22% in the three months ended March 31, 2019 and 74% and 21% of net sales in the three months ended March 31, 2018, respectively and approximately 71% and 24% in the nine months ended March 31, 2019 and 72% and 22% of net sales in the nine months ended March 31, 2018, respectively. Accounts receivable from these two major customers represented approximately 92% and 87% of total net accounts receivable as of March 31, 2019 and June 30, 2018, respectively. The loss of any of these customers could have an adverse effect on the Company’s operations. Major customers are those customers who account for more than 10% of net sales.

 

(b) Other Business Risks. Approximately 72% of the Company’s employees are covered by a union contract and are employed in its New Jersey facilities. The contract was renewed on September 1, 2018 and will expire on August 31, 2021.

 

 

Note 6. Leases and other Commitments and Contingencies

 

(a) Leases. The Company has operating and finance leases for its corporate and sales offices, warehousing and packaging facilities and certain machinery and equipment, including office equipment. The Company’s leases have remaining terms of less than 1 year to less than 8 years.

 

The components of lease expense for the three months ended March 31, 2019 were as follows:

 

   

Related Party - Vitamin Realty

   

Other Leases

   

Totals

 
                         

Operating Lease Costs

  $ 141     $ 23     $ 164  
                         

Finance Lease Costs:

                       

Amortization of right-of use assets

  $ -     $ 22     $ 22  

Interest on operating lease liabilities

    -       5       5  

Total Finance Lease Costs

  $ -     $ 27     $ 27  

 

 

The components of lease expense for the nine months ended March 31, 2019 were as follows:

 

   

Related Party - Vitamin Realty

   

Other Leases

   

Totals

 
                         

Operating Lease Costs

  $ 423     $ 72     $ 495  
                         

Finance Lease Costs:

                       

Amortization of right-of use assets

  $ -     $ 55     $ 22  

Interest on operating lease liabilities

    -       12       12  

Total Finance Lease Costs

  $ -     $ 67     $ 67  

 

 

-15-

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

                                                  

 Operating Lease Liabilities

 

Related Party Operating Lease Liabilities. Warehouse and office facilities are leased from Vitamin Realty, which is 100% owned by the Company’s chairman, and a major stockholder and certain of his family members, who are also the Co-Chief Executive Officers and directors of the Company. On January 5, 2012, MDC entered into a second amendment of lease (the “Second Lease Amendment”) with Vitamin Realty for its office and warehouse space in New Jersey increasing its rentable square footage from an aggregate of 74,898 square feet to 76,161 square feet and extending the expiration date to January 31, 2026. This Second Lease Amendment provides for minimum annual rental payments of $533, plus increases in real estate taxes and building operating expenses. On May 19, 2014, AgroLabs entered into an amendment to the lease agreement entered into on January 5, 2012, with Vitamin Realty for an additional 2,700 square feet of warehouse space in New Jersey, the term of which was to expire on January 31, 2019 to extend the expiration date to June 1, 2024. This additional lease provides for minimum lease payments of $27 with annual increases plus the proportionate share of operating expenses.

 

Rent expense, lease amortization costs and interest expense on these related party leases were $203 and $204 for the three months ended March 31, 2019 and 2018, and $630 and $619 for the nine months ended March 31, 2019 and 2018, respectively, and are included in cost of sales, selling and administrative expenses and interest expense in the accompanying Condensed Consolidated Statements of Operations. As of March 31, 2019 and June 30, 2018, the Company had outstanding current obligations to Vitamin Realty of $761 and $827, respectively, included in accounts payable, accrued expenses and other liabilities and long term debt in the accompanying Condensed Consolidated Balance Sheet. Additionally, the Company has operating lease obligations of $3,353 with Vitamin Realty as noted in the accompany Condensed Consolidated Balance Sheet.

 

Other Operating Lease Liabilities. The Company has entered into certain non-cancelable operating lease agreements expiring up through May, 2023, related to machinery and equipment and office equipment.

 

As of March 31, 2019, the Company’s ROU assets, lease obligations and remaining cash commitment on these leases is as follows:

 

   

Right-of-use Assets

   

Operating Lease Obligations

   

Remaining Cash Commitment

 
                         

Vitamin Realty Leases

  $ 3,345     $ 3,353     $ 3,810  

Machinery and equipment leases

    29       29       30  

Office equipment leases

    25       25       26  
    $ 3,399     $ 3,407     $ 3,866  

 

 

The Company’s weighted average discount rate and remaining term on lease liabilities is approximately 3.76% and 6.6 years, respectively.

 

Supplemental cash flows information related to leases for the nine months ended March 31, 2019 is as follows:

 

   

Related Party - Vitamin Realty

   

Other Leases

   

Totals

 
                         

Cash paid for amounts included in the measurement of

                       
lease liabilities:                        

Operating cash flows from operating leases

  $ 424     $ 72     $ 496  

Operating cash flows from capital finance lease obligations

    -       12       12  

Financing cash flows from capital lease obligations

    -       174       174  

 

 

 

-16-

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

                                          

The Company entered into a sales/lease back commitment in the nine months ended March 31, 2019 in the amount of $233, see Note 4 - Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt.

 

Maturities of operating lease liabilities as of March 31, 2019 were as follows:

 

Year ending June 30,

 

Operating Lease Commitment

   

Related Party Operating Lease Commitment

      Capitalized Lease Obligations    

Total

 
                                 

2019, remaining

  $ 12     $ 142     $ 65     $ 219  

2020

    39       565       206       810  

2021

    22       565       77       664  

2022

    9       565       -       574  

2023

    -       565       -       565  

2024

    -       563       -       563  

Thereafter

    -       845       -       845  

Total minimum lease payments

    82       3,810       348       4,240  

Imputed interest

    (3 )     (457)       (20 )     (480 )

Total

  $ 79     $ 3,353     $ 328     $ 3,760  

 

Total rent expense, including real estate taxes and maintenance charges, was approximately $249 and $245 and $756 and $741 for the three months and nine months ended March 31, 2019 and 2018, respectively. Rent and lease amortization and interest expense are included in cost of sales, selling and administrative expenses and interest expense in the accompanying Condensed Consolidated Statements of Operations.

 

(b) Legal Proceedings.

 

The Company is subject, from time to time, to claims by third parties under various legal theories. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition and cash flows.

 

 

Note 7. Related Party Transactions

 

See Note 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt for related party securities and debt transactions.

 

See Note 6(a). Leases for related party lease transactions.

 

 

Note 8. Segment Information and Disaggregated Revenue

 

The basis for presenting segment results generally is consistent with overall Company reporting. The Company reports information about its operating segments in accordance with GAAP which establishes standards for reporting information about a company’s operating segments.

 

The Company has divided its operations into three reportable segments as follows: Contract Manufacturing, Branded Proprietary Products and Other Nutraceutical Businesses. The international sales, concentrated primarily in Europe and Canada, for the three months ended March 31, 2019 and 2018 were $1,878 and $891, respectively, and for the nine months ended March 31, 2019 and 2018 were $4,391 and $3,797, respectively.

 

-17-

 

 

Financial information relating to the three months ended March 31, 2019 and 2018 operations by business segment and disaggregated revenues are as follows:

 

      Sales, Net     Segment            
      U.S.     International           Gross           Capital
      Customers     Customers     Total     Profit (Loss)     Depreciation     Expenditures
Contract Manufacturing 2019   $ 11,913     $ 1,875     $ 13,788     $ 1,995     $ 68     $ 63  
  2018     9,333       879       10,212       1,363       55       42  
Branded Proprietary Products 2019     14       3       17       7       -       -  
  2018     -       9       9       (2 )     1       -  
Other Nutraceutical Businesses 2019     283       -       283       92       1       -  
  2018     351       3       354       108       1       -  
Total Company 2019     12,210       1,878       14,088       2,093       69       63  
  2018     9,684       891       10,575       1,469       57       42  

 

 

Financial information relating to the nine months ended March 31, 2019 and 2018 operations by business segment are as follows:

 

     

Sales, Net

   

Segment

                   
     

U.S.

   

International

           

Gross

           

Capital

     

Customers

   

Customers

   

Total

   

Profit

   

Depreciation

   

Expenditures

Contract Manufacturing

2019

  $ 31,066     $ 4,330     $ 35,396     $ 4,323     $ 199     $ 350    
 

2018

    26,314       3,661       29,975       3,094       184       244    

Branded Proprietary Products

2019

    133       22       155       49       -       -    
 

2018

    181       30       211       95

 

    3       13    

Other Nutraceutical Businesses

2019

    803       39       842       271       2       -    
 

2018

    853       106       959       333       2       1    

Total Company

2019

    32,002       4,391      

36,393

      4,643       201       350    
 

2018

    27,348       3,797       31,145       3,522       189       258    

 

 

   

Total Assets as of

 
   

March 31,

   

June 30,

 
   

2019

   

2018

 

Contract Manufacturing

  $ 19,756     $ 12,200  
                 
 Branded Proprietary Products     585       543  
                 
 Other Nutraceutical Businesses     1,880       1,825  

Total Company

  $ 22,221     $ 14,568  

 

 

-18-

 

 

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (dollars in thousands)

 

Certain statements set forth under this caption constitute “forward-looking statements.” See “Disclosure Regarding Forward-Looking Statements” on page 1 of this Quarterly Report on Form 10-Q for additional factors relating to such statements. The following discussion should also be read in conjunction with the condensed consolidated financial statements of the Company and Notes thereto included herein and the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

 

The Company is engaged primarily in the manufacturing, distributing, marketing and sales of vitamins, nutritional supplements and herbal products. The Company’s customers are located primarily in the United States, Luxembourg and Canada.

 

Business Outlook (amounts in thousands)

 

Our future results of operations and the other forward-looking statements contained in this Quarterly Report on Form 10-Q, including this "Management's Discussion and Analysis of Financial Condition and Results of Operations", involve a number of risks and uncertainties—in particular, the statements regarding our goals and strategies, new product introductions, plans to cultivate new businesses, future economic conditions, revenue, pricing, gross margin and costs, competition, the tax rate, and potential legal proceedings. We are focusing our efforts to improve operational efficiency and reduce spending that may have an impact on expense levels and gross margin. In addition to the various important factors discussed above, a number of other important factors could cause actual results to differ significantly from our expectations. See the risks described in “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

 

For the nine months ended March 31, 2019, our net sales from operations increased by $5,248 to approximately $36,393 from approximately $31,145 in the nine months ended March 31, 2018. The increase in net sales was from the Contract Manufacturing Segment with increased net sales of $5,421, offset with decreases in our other two segments, Branded Proprietary Products and Other Nutraceuticals Segment, of $56 and $117, respectively. Net sales increased in our Contract Manufacturing Segment by $5,421 primarily due to increased sales volumes with our two major customers, Life Extension in the amount of $3,392 and Herbalife in the amount of $1,668. For the nine months ended March 31, 2019, we had operating income of approximately $2,130, an increase of approximately $1,061 from operating income of approximately $1,069 for the nine months ended March 31, 2018. Our profit margins increased from approximately 11% of net sales in the nine months ended March 31, 2018 to approximately 13% of net sales in the nine months ended March 31, 2019, primarily as a result of the increased sales in our Contract Manufacturing Segment of approximately $5,421. Our consolidated selling and administrative expenses increased by approximately $60 or approximately 2.4% in the nine months ended March 31, 2019 compared to the nine months ended March 31, 2018.

 

During the nine months ended March 31, 2019, CD Financial, LLC (“CD Financial”), exercised its conversion right pursuant to the CD SPA and in accordance with Section 3 (b) of the CD Convertible Note in the principal amount of approximately $5,350. The CD Convertible Note was convertible at the option of CD Financial into Common Shares at a conversion price of $0.65 per share, subject to customary adjustments. CD Financial exercised its conversion right with respect to the entire principal amount due under the CD Convertible Note. The Common Shares were issued to CD Financial at a conversion price of $0.65 per Common Share, resulting in the Company issuing 8,230,769 Common Shares to CD Financial. As a result of this conversion, the Company’s total stockholders’ deficiency of $5,236 as of June 30, 2018 was offset by the converted value of the CD Convertible Note of $5,272 in the nine months ended March 31, 2019, resulting in total stockholders’ equity of $36 without taking into account any other changes to the Company’s stockholders’ accounts or transactions. Additionally, the conversion results in annual cost savings of approximately $321 relating to the interest component of the CD Convertible Note. The remaining debt discount and issuance costs of $78 and the extinguished underlying derivative liability associated with the CD Convertible Note was charged to additional paid in capital due to the significant ownership by CD Financial in the Company.

 

-19-

 

 

On May 15, 2019, we amended the maturity date of our Senior Credit Facility from February 19, 2020 to May 15, 2024 and paid off in full Related Party Debt that was set to mature on February 29, 2020 in the aggregate amount of $2,400 using proceeds from the Amended Loan Agreement with PNC Bank.  Certain other terms were amended under our Senior Credit Facility, see Note 4 to the condensed financial statements included in this Quarterly Report on Form 10-Q.  These amendments, will continue to provide the working capital and liquidity required to support our operating businesses.

 

Critical Accounting Policies and Estimates

 

There have been no changes to our critical accounting policies in the nine months ended March 31, 2019, except as disclosed in Note 1. Principles of Consolidation and Basis of Presentation of the Condensed Financial Statements of the Company contained in this Quarterly Report on Form 10-Q. Critical accounting policies and the significant estimates made in accordance with them are regularly discussed by management with our Audit Committee. Those policies are discussed under “Critical Accounting Policies” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of our Annual Report on Form 10-K for the year ended June 30, 2018 and in Note 1. Principles of Consolidation and Basis of Presentation of the Condensed Financial Statements of the Company contained in this Quarterly Report on Form 10-Q.

 

Results of Operations (in thousands, except share and per share amounts)

 

Our results from operations in the following table, sets forth the income statement data of our results as a percentage of net sales for the periods indicated:

 

 

   

For the three months

   

For the nine months

 
   

ended March 31,

   

ended March 31,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Sales, net

    100.0 %     100.0 %     100.0 %     100.0 %
                                 

Costs and expenses:

                               

Cost of sales

    85.1 %     86.1 %     87.2 %     88.7 %

Selling and administrative

    6.1 %     7.7 %     6.9 %     7.9 %
      91.2 %     93.8 %     94.1 %     96.6 %

Income from operations

    8.8 %     6.2 %     5.9 %     3.4 %
                                 

Other income (expense), net:

                               

Interest expense

    (1.4% )     (2.2% )     (1.6% )     (2.2% )

Change in fair value of derivative liabilities

    -       0.5 %     0.0 %     0.4 %

Impairment charge on investment in iBio, Inc.

    -       -       -       (0.8% )

Other income, net

    0.2 %     0.1 %     0.1 %     0.0 %

Other expense, net

    (1.2% )     (1.6% )     (1.5% )     (2.6% )
                                 

Income before income taxes

    7.6 %     4.6 %     4.4 %     0.8 %
                                 

Federal and state income taxes, net

    1.0 %     1.0 %     0.7 %     1.3 %
                                 

Net income (loss)

    6.6 %     3.6 %     3.7 %     (0.5% )

 

 

  

 

-20-

 

 

 

 For the Nine Months Ended March 31, 2019 compared to Nine Months Ended March 31, 2018

 

Sales, net. Sales, net, for the nine months ended March 31, 2019 and 2018 were $36,393 and $31,145, respectively, an increase of 16.9%, and are comprised of the following:

 

   

Nine months ended

   

Dollar

   

Percentage

 
   

March 31,

   

Change

   

Change

 
   

2019

   

2018

   

2019 vs 2018

   

2019 vs 2018

 
   

(amounts in thousands)

         

Contract Manufacturing:

                               

US Customers

  $ 31,066     $ 26,314     $ 4,752       18.1 %

International Customers

    4,330       3,661       669       18.3 %

Net sales, Contract Manufacturing

    35,396       29,975       5,421       18.1 %
                                 

Branded Nutraceutical Products:

                               

US Customers

    133       181       (48 )     (26.5% )

International Customers

    22       30       (8 )     (26.7% )

Net sales, Branded Nutraceutical Products

    155       211       (56 )     (26.5% )
                                 

Other Nutraceuticals:

                               

US Customers

    803       853       (50 )     (5.9% )

International Customers

    39       106       (67 )     (63.2% )

Net sales, Other Nutraceuticals

    842       959       (117 )     (12.2% )
                                 

Total net sales

  $ 36,393     $ 31,145     $ 5,248       16.9 %

 

 

In the nine months ended March 31, 2019 and 2018, a significant portion of our consolidated net sales, approximately 92% and 91%, respectively, were concentrated among two customers in our Contract Manufacturing Segment, Life Extension and Herbalife. Life Extension and Herbalife represented approximately 71% and 24% in the nine months ended March 31, 2019 and 72% and 22% in the nine months ended March 31, 2018, respectively, of our Contract Manufacturing Segment’s net sales, respectively. The loss of either of these customers could have a significant adverse impact on our financial condition and results of operations.

 

The increase in net sales was from the Contract Manufacturing Segment with increased net sales of $5,421, offset with decreases in our other two segments, Branded Proprietary Products and Other Nutraceuticals Segment, of $56 and $117, respectively. Net sales increased in our Contract Manufacturing Segment by $5,421 primarily due to increased sales volumes with our two major customers, Life Extension in the amount of $3,392 and Herbalife in the amount of $1,668.

 

Cost of sales. Cost of sales increased by approximately $4,127 to $31,750 for the nine months ended March 31, 2019, as compared to $27,623 for the nine months ended March 31, 2018 or approximately 15%. Cost of sales decreased as a percentage of sales to 87.2% for the nine months ended March 31, 2019 as compared to 88.7% for the nine months ended March 31, 2018. The increase in the cost of goods sold amount is consistent with the increased net sales of approximately 17%. The decrease in the cost of goods sold as a percentage of net sales, was primarily the result of the increased net sales used to offset the fixed manufacturing overhead. There were no significant changes in the cost of goods sold in our other two segments other than the decreased sales in each of the other two segments.

 

Selling and Administrative Expenses. There was an increase in selling and administrative expenses of $60, approximately 2.4% in the nine months ended March 31, 2019 as compared to the nine months ended March 31, 2018. As a percentage of sales, net, selling and administrative expenses was approximately 7% and 8% in the nine months ended March 31, 2019 and 2018, respectively. The increase was primarily from increases (i) in salaries and employees benefits of approximately $149, as the result of: (a) replacing our headcount with higher salaried employees, net of a pay structure change for the sales staff ($35); (b) an increase in employee benefits due to the change in personnel and an increase in premiums ($83) and; (c) an increase in our vacation pay liability ($31); and (ii) in professional and consulting fees of approximately $27 primarily as the result of outsourcing our information technology function beginning in April 2018 and increased legal expenses for our SEC filings. These increases were offset by decreases in (i) advertising and marketing of $34 as a result of decreased sales in the Branded Nutraceutical Segment, (ii) commissions and license fees of $18, also as a result of decreased sales relating to these payments and (iii) an aggregate of approximately $99 in other components of our selling and administrative expenses including decreases in depreciation and amortization expenses of approximately $47.

 

-21-

 

 

Other income (expense), net. Other income (expense), net was approximately $545 for the nine months ended March 31, 2019 compared to $811 for the nine months ended March 31, 2018, and is composed of:

 

   

Nine months ended

 
   

March 31,

 
   

2019

   

2018

 
   

(dollars in thousands)

 

Interest expense

  $ (586 )   $ (694 )

Change in fair value of derivative liabilities

    9       121  

Impairment on investment in iBio, Inc.

    -       (251 )

Other income, net

    32       13  

Other income (expense), net

  $ (545 )   $ (811 )

 

 

During the nine month period ended March 31, 2019, the derivative liability was extinguished, resulting in the carrying value as of June 30, 2018 of $9 to be compared to a value of $0 as of March 31, 2019, as the related derivative liability is no longer outstanding, resulting in a change of $9 for the nine months ended March 31, 2019.

 

The change in fair value of derivative liabilities in the nine months ended March 31, 2018 was mainly the result of the decreased closing trading price of the Company's stock, as traded on the OTC Bulletin Board, from $0.19 as of June 30, 2017 to $0.17 as of March 31, 2018 and the change in the volatility of the closing trading price of our common stock from 98.11% as of June 30, 2017 to 110.80% as of March 31, 2018. The closing trading price and the volatility of the closing trading price of our common stock are two of the variables used to calculate the estimated fair value of our derivative liabilities associated with the underlying derivative instrument. 

 

In the nine months ended March 31, 2018 we determined that there was an impairment on the carrying value of our investment in iBio, Inc. in the amount of approximately $251 resulting from the decline in the closing trading price of their common stock on the NYSE American Exchange for the nine month period ended March 31, 2018 from $0.39 per share as of June 30, 2017 to $0.18 per share as of December 31, 2017.  There was no such impairment in the three month period ended March 31, 2018.

 

Our interest expense for the nine months ended March 31, 2019 decreased by $108 from the nine month period ended March 31, 2018, primarily as the result of CD Financial exercising its conversion right to convert the $5,350 CD Convertible Note to equity on July 24, 2018, an interest savings of $223, offset in part, by the adoption of ASU 2016-02 on July 1, 2018, which classifies a portion of the operating lease payments as interest. Accordingly, in the nine month period ended March 31, 2019, we incurred an interest cost of $103 on our operating lease liabilities.

 

Federal and state income tax (benefit) expense, net. For the nine months ended March 31, 2019 and 2018, we had state income tax expense, net of approximately $216 and $111, respectively and deferred federal income tax expense of $41 and $286 in the nine months ended March 31, 2019 and 2018, respectively.

 

The increase in state income tax expense of $105 is the result of the increased net income for MDC and the decrease in the federal income tax expense of $245 is the result of the one-time charge for the change in the effective federal tax rate from 34% as of December 31, 2017 to 21% as of January 1, 2018 which resulted in a decrease to our deferred tax assets of $263 offset by a current federal tax benefit of approximately $24 in the nine month period ended March 31, 2018 with no such rate change in the nine month period ended March 31, 2019.

 

-22-

 

 

We continue to maintain a reserve on our deferred tax assets as it has been determined that based upon past losses, the Company’s past liquidity concerns and the current economic environment, it is “more likely than not” that the Company’s deferred tax assets may not be fully realized.

 

Net income (loss). Our net income for the nine months ended March 31, 2019 was $1,328 compared to a net loss of $139 in the nine months ended March 31, 2018, a change of $1,467. The change in net income was primarily the result of increased operating income of $1,121 and decreases in other expenses of $266 and in federal and state income taxes of $140.

 

For the Three Months Ended March 31, 2019 compared to the Three Months Ended March 31, 2018

 

Sales, net. Sales, net, for the three months ended March 31, 2019 and 2018 were $14,088 and $10,575, respectively, an increase of 33.2%, and are comprised of the following:

   

Three months ended

   

Dollar

   

Percentage

 
   

March 31,

   

Change

   

Change

 
   

2019

   

2018

   

2019 vs 2018

   

2019 vs 2018

 
   

(amounts in thousands)

         

Contract Manufacturing:

                               

US Customers

  $ 11,913     $ 9,333     $ 2,580       27.6 %

International Customers

    1,875       879       996       113.3 %

Net sales, Contract Manufacturing

    13,788       10,212       3,576       35.0 %
                                 

Branded Nutraceutical Products:

                               

US Customers

    14       -       15       100.0 %

International Customers

    3       9       (7 )     (66.7% )

Net sales, Branded Nutraceutical Products

    17       9       8       88.9 %
                                 

Other Nutraceuticals:

                               

US Customers

    283       351       (68 )     (19.4% )

International Customers

    -       3       (3 )     (100.0% )

Net sales, Other Nutraceuticals

    283       354       (71 )     (20.1% )
                                 

Total net sales

  $ 14,088     $ 10,575     $ 3,513       33.2 %

 

 

For the three months ended March 31, 2019 and 2018 a significant portion of our consolidated net sales, approximately 92% and 91%, respectively, were concentrated among two customers, Life Extension and Herbalife, customers in our Contract Manufacturing Segment. Life Extension and Herbalife represented approximately 72% and 22% in the three months ended March 31, 2019 and 74% and 21% in the three months ended March 31, 2018, respectively, of our Contract Manufacturing Segment’s net sales. The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations.

 

The increase in net sales of approximately $3,513 was primarily the result of net sales increasing in our Contract Manufacturing Segment of $3,577 primarily due to increased sales volumes to our major customers, Life Extension of approximately $2,341 and Herbalife of approximately $993, in the three months ended March 31, 2019, compared to the comparable prior period.

 

Cost of sales. Cost of sales increased by $2,889, approximately 32%, to $11,995 for the three months ended March 31, 2019, as compared to $9,106 for the three months ended March 31, 2018. Cost of sales decreased as a percentage of sales to 85.1% for the three months ended March 31, 2019 as compared to 86.1% for the three months ended March 31, 2018. The increase in the cost of goods sold amount is consistent with the increased net sales of approximately 33%. The decrease in the cost of goods sold as a percentage of net sales, was primarily the result of the increased net sales used to offset the fixed manufacturing overhead. There were no significant changes in the cost of goods sold in our other two segments other than the decreased sales in each of the other two segments.

 

-23-

 

 

Selling and Administrative Expenses. There was an increase in selling and administrative expenses of $47 in the three months ended March 31, 2019 as compared to the three months ended March 31, 2018, approximately 6%. As a percentage of sales, net, selling and administrative expenses were approximately 6% and 8% for the three months ended March 31, 2019 and 2018, respectively. The increase was primarily due to an increase in salaries and employees benefits of approximately $86, as the result of replacing an administrative staff with a higher paid individual; offset, in part, by decreases of approximately $24 in amortization as the result of intangible assets being fully amortized in October 2018 and $23 in advertising and marketing expenses as a result of lower sales in the Branded Nutraceutical Segment. No other expense within our selling and administrative expenses changed by more than $10.

 

Other income (expense), net. Other income (expense), net was approximately $171 and $169 for the three months ended March 31, 2019 and 2018, respectively, and is composed of:

 

   

Three months ended

 
   

March 31,

 
   

2019

   

2018

 
   

(dollars in thousands)

 

Interest expense

  $ (196 )   $ (232 )

Change in fair value of derivative instruments

    -       54  

Other income, net

    25       9  

Other income (expense), net

  $ (171 )   $ (169 )

 

 

The variance in the change in fair value of derivative liabilities from the three months ended March 31, 2018 to the three months ended March 31, 2019 was the result of the extinguishment of the derivative instrument upon the conversion of the related debt to common stock in July 2018 (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q).

 

Our interest expense for the three months ended March 31, 2019 decreased by $36 from the three month period ended March 31, 2018, primarily as the result of CD Financial exercising its conversion right to convert the $5,350 CD Convertible Note to equity on July 24, 2018 (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q), an interest savings of $80. This decrease was offset in part, by increased amounts outstanding under our revolving credit facility along with increased interest rates on the senior debt of 1.0% from March 31, 2018 to March 31, 2019 coupled with the adoption of ASU 2016-02 on July 1, 2018, which classifies a portion of the operating lease payments as interest. Accordingly, in the three month period ended March 31, 2019, we incurred additional interest cost on our senior debt of $11 and an interest cost of $33 on our operating lease liabilities.

 

Federal and state income tax, net. For the three months ended March 31, 2019 and 2018, we had state income tax expense of approximately $115 and $67, respectively, and federal income tax expense of $29 and $36, respectively. We continue to maintain a reserve on a portion of our deferred tax assets as it has been determined that based upon past losses, the Company’s past liquidity concerns and the current economic environment, that it is “more likely than not” the Company’s deferred tax assets may not be fully realized. The state tax expense is the result of MDC using all of its state net operating losses in the fiscal year ended 2013 tax period. All of our other subsidiaries still have adequate net operating losses for state income tax purposes to absorb any taxable income for state tax purposes.

 

The increase in state income tax expense of $48 is the result of the increased net income for MDC and the decrease in the federal income tax expense of $7 is the result of the release of valuation allowances on the deferred tax asset relating to the net operating losses available for use on our consolidated federal tax return.

 

Net income. We had net income for the three months ended March 31, 2019 and 2018 of approximately $923 and $388, respectively. The increase in net income of approximately $535, is primarily the result of increased operating income of $576 and federal and state income taxes, net of $40 and a decrease in other expenses of $2.

 

-24-

 

 

 Seasonality

 

The nutraceutical business tends to be seasonal. We have found that in our first fiscal quarter ending on September 30th of each year, orders for our branded proprietary nutraceutical products usually slow (absent the addition of new customers or a new product launch with a significant first time order), as buyers in various markets may have purchased sufficient inventory to carry them through the summer months. Conversely, in our second fiscal quarter, ending on December 31st of each year, orders for our products increase as the demand for our branded nutraceutical products, as well as sales orders from our customers in our contract manufacturing segment, seem to increase in late December to early January as consumers become health conscious as they enter the new year.

 

The Company believes that there are other non-seasonal factors that also may influence the variability of quarterly results including, but not limited to, general economic and industry conditions that affect consumer spending, changing consumer demands and current news on nutritional supplements. Accordingly, a comparison of the Company’s results of operations from consecutive periods is not necessarily meaningful, and the Company’s results of operations for any period are not necessarily indicative of future periods.

 

Liquidity and Capital Resources

 

The following table sets forth, for the periods indicated, the Company’s net cash flows used in operating, investing and financing activities, its period end cash and cash equivalents and other operating measures:

 

   

For the nine months ended

 
   

March 31,

 
   

2019

   

2018

 
   

(dollars in thousands)

 
                 

Net cash (used in) provided by operating activities

  $ (299 )   $ 1,343  

Net cash used in investing activities

  $ (358 )   $ (210 )

Net cash provided by (used in) financing activities

  $ 860     $ (1,203 )
                 

Cash at end of period

  $ 431     $ 62  

 

 

At March 31, 2019, our working capital was approximately $1,913 and at June 30, 2018, we had a working capital deficit of $4,026. The increase of $4,196 in our current assets and a decrease in our current liabilities of $1,743, resulted in a net increase in our working capital of $5,939 since June 30, 2018. The decrease in the current liabilities was primarily the result of $5,269 of the CD Convertible Note, classified as current due to the receipt of a conversion notice in July 2018, and the subsequent conversion of the entire CD Convertible Note to common shares of the Company at $0.65 per share on July 31, 2018.

 

Operating Activities

 

Net cash used in operating activities of $299 in the nine months ended March 31, 2019, includes net income of approximately $1,328. After excluding the effects of non-cash expenses, including depreciation and amortization, and changes in the fair value of derivative liabilities and deferred tax assets, the adjusted cash provided from operations before the effect of the changes in working capital components was $1,660. Net cash used in our operations in the nine months ended March 31, 2019 from our working capital assets and liabilities in the amount of approximately $1,959 was primarily the result of cash used in our accounts receivable of $1,160 and inventories of $2,807 offset, in part, with an aggregate increase in accounts payable, accrued expenses and other liabilities of $2,041.

 

 

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Net cash provided by operating activities of $1,343 in the nine months ended March 31, 2018, includes a net loss of approximately $139. After excluding the effects of non-cash expenses, including depreciation and amortization, and changes in the fair value of derivative liabilities, the adjusted cash provided from operations before the effect of the changes in working capital components was $631. Cash was provided by operations from our working capital assets and liabilities in the amount of approximately $712 and was primarily the result of a net increase in accounts payable and accrued expenses and other liabilities of approximately $776 adn a decrease in accounts receivable of $822, offset, in part, by an increase in inventories of $910.

 

Investing Activities

 

Cash used in investing activities in the nine months ended March 31, 2019 and 2018, of approximately $358 and $210, respectively, was used primarily for the purchase of machinery and equipment of $350 and $216, respectively.

 

Financing Activities

 

Cash provided by financing activities was approximately $860 for the nine months ended March 31, 2019, and was from advances under our revolving credit facility of $35,574 and proceeds from a sales/lease back arrangement in the amount of $233, offset in part, by repayments of advances under our revolving credit facility of $34,322, principal payments under our term notes in the amount of $475 and payments under capitalized lease obligations of $174.

 

Cash used in financing activities was approximately $1,203 for the nine months ended March 31, 2018, and was from $30,123of advances under our revolving credit facility and $143 in proceeds received in a sales-lease back financing for machinery and equipment in our Contract Manufacturing Segment, offset in part, by repayments of advances under our revolving credit facility of $30,480 and repayments of principal under our term notes in the amount of $814.

 

As of March 31, 2019, we had cash of $431, funds available under our revolving credit facility of approximately $1,787 and working capital of approximately $1,913. Our working capital includes $6,147 outstanding under our revolving line of credit which is not due until May 2024 but classified as current due to a subjective acceleration clause that could cause the advances to become currently due. (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). Additionally, we had income from operations of approximately $2,130 in the nine months ended March 31, 2019 and going forward we will have an annual interest cost savings of approximately $321 as a result of the conversion of the CD Convertible Note into equity at the election of CD Financial in July 2018. After taking into consideration our interim results and current projections, management believes that operations, together with the revolving credit facility will support our working capital requirements at least through the period ending May 15, 2020.

 

Our total annual commitments at March 31, 2019 for long term non-cancelable leases of approximately $604 consists of obligations under operating leases for facilities and operating lease agreements for the rental of warehouse equipment, office equipment and automobiles.

 

Capital Expenditures

 

The Company's capital expenditures for the nine months ended March 31, 2019 and 2018 were approximately $351 and $258 ($38 financed with capitalized lease obligations), respectively.  The Company has budgeted approximately $500 for capital expenditures for fiscal year 2019. The total amount is expected to be funded from lease financing and cash provided from the Company’s operations.

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements.

 

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Recent Accounting Pronouncements

 

None.

 

Impact of Inflation

 

The Company does not believe that inflation has significantly affected its results of operations.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

Item 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Under the supervision and with the participation of management, including the Co-Chief Executive Officers and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2019, and, based upon this evaluation, the Co-Chief Executive Officers and Chief Financial Officer have concluded that these controls and procedures are effective in providing reasonable assurance of compliance.

 

Changes in Internal Control over Financial Reporting

 

No change in our internal control over financial reporting occurred during the three months ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

Item 1A. Risk Factors

 

Not Applicable

 

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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales of Unregistered Securities

 

None.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

During the quarter ended March 31, 2019, neither we nor any “affiliated purchaser,” as that term is defined in Rule 10b-18(a)(3) under the Exchange Act, purchased any of our registered equity securities.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

Item 4. MINE SAFETY DISCLOSURE

 

Not Applicable.

 

Item 5. OTHER INFORMATION

 

On May 15, 2019, we amended the maturity date of our Senior Credit Facility from February 19, 2020 to May 15, 2024 and paid off in full Related Party Debt that was set to mature on February 29, 2020 in the aggregate amount of $2,400 using proceeds from the Amended Loan Agreement with PNC Bank.  See Note 4 to the condensed financial statements included in this Quarterly Report on Form 10-Q. 

 

Item 6. EXHIBITS

 

(a)     Exhibits

 

Exhibit

Number

10.1 Second Amendment to Revolving Credit, Tem Loan and Security Agreement dated as of May 15, 2019 by and among Integrated BioPharma, Inc., InB: Manhattan Drug Company, Inc., AgroLabs, Inc., IHT Health Products, Inc., IHT Properties, Inc. and Vitamin Factory, Inc. and PNC Bank, National Association.
10.2 Second Amended and Restated Term Note dated as of May 15, 2019 by and among Integrated BioPharma, Inc., InB: Manhattan Drug Company, Inc., AgroLabs, Inc., IHT Health Products, Inc., IHT Properties, Inc. and Vitamin Factory, Inc. and PNC Bank, National Association.

31.1

Certification of pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.

31.2

Certification of pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.

32.1

Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.

32.2

Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.

101

The following unaudited financial information from Integrated BioPharma, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2019 and 2018, (ii) Condensed Consolidated Balance Sheets as of March 31, 2019 and June 30, 2018, (iii) Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity for the nine months ended March 31, 2019 and 2018, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2019 and 2018, and (iv) the Notes to Condensed Consolidated Financial Statements.

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SIGNATURES

 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

INTEGRATED BIOPHARMA, INC.

 

Date:     May 15, 2019   By: /s/ Christina Kay               
  Christina Kay,  
  Co-Chief Executive Officer  
     
Date:     May 15, 2019  By: /s/ Dina L. Masi                                
  Dina L. Masi,  
  Chief Financial Officer & Senior Vice President

   

          

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