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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, 2024

 

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

(Registrants telephone number, including Area Code)

 

Not Applicable

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

 

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

 

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 ☑ 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.

 

      

Smaller reporting company

Large accelerated filer ☐  

 

Accelerated filer ☐  

 

Non-accelerated filer  ☑

 

Emerging growth 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 ☑

 

As of May 10, 2024, there were 30,099,610 shares of common stock, $0.002 par value per share, of the registrant outstanding.

 

 

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

 

FORM 10-Q QUARTERLY REPORT

For the Three and Nine Months Ended March 31, 2024

INDEX

 

 

   

Page

 

Part I. Financial Information

 

Item 1.

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2024 and 2023 (unaudited)

2

 

Condensed Consolidated Balance Sheets as of March 31, 2024 and June 30, 2023 (unaudited)

3

 

Condensed Consolidated Statement of Stockholders’ Equity for the Three and Nine Months Ended March 31, 2024 and 2023 (unaudited)

4

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2024 and 2023 (unaudited)

5

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

     

Item 2.

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

16

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

23

     

Item 4.

Controls and Procedures

23

     
 

Part II. Other Information

 
     

Item 1.

Legal Proceedings

23

     

Item 1A.

Risk Factors

24

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

     

Item 3.

Defaults Upon Senior Securities

24

     

Item 4.

Mine Safety Disclosure

24

     

Item 5.

Other Information

24

     

Item 6.

Exhibits

25

 

Other

 

Signatures

 

26

     
     
     

 

 

 

 

 

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 Exchange 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; inflation and tightened labor markets; the impact of the war in Ukraine; the impact of the Israel-Hamas war 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, 2023 (“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 their businesses described in Item 1A of the Company’s Form 10-K and in other filings by the Company with the SEC.  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 its 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 ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(Unaudited)

 

 

   

Three months ended

   

Nine months ended

 
   

March 31,

   

March 31,

 
   

2024

    2023     2024     2023  
                                 

Sales, net

  $ 13,147     $ 13,098     $ 37,571     $ 37,678  

Cost of sales

    11,899       12,090       34,971       34,603  
                                 

Gross profit

    1,248       1,008       2,600       3,075  

Selling and administrative expenses

    893       964       2,751       3,034  
                                 

Operating income (loss)

    355       44       (151 )     41  
                                 

Other income (expense), net

                               

Interest income (expense), net

    (4 )     2       6       (16 )

Other income, net

    1       -       (1 )     (8 )

Other income (expense), net

    (3 )     2       5       (24 )
                                 

Income (loss) before income taxes

    352       46       (146)       17  
                                 

Income tax expense, net

    (67 )     (30 )     (10 )     (91 )
                                 

Net income (loss)

  $ 285     $ 16     $ (156 )   $ (74 )
                                 

Basic net income (loss) per common share

  $ 0.01     $ 0.00     $ (0.01 )   $ (0.00 )
                                 

Diluted net income (loss) per common share

  $ 0.01     $ 0.00     $ (0.01 )   $ (0.00)  
                                 

Weighted average common shares outstanding - basic

    30,099,610       29,949,610       30,054,883       29,929,610  

Add: Equivalent shares outstanding - Stock Options

    664,612       1,513,699       -       -  

Weighted average common shares outstanding - diluted

    30,764,222       31,463,309       30,054,883       29,949,610  

 

                     See accompanying notes to unaudited condensed consolidated financial statements.

 

 

2

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share and per share amounts)

(Unaudited)

 

 

  

March 31,

  

June 30,

 
  

2024

  2023 

Assets

        

Current Assets:

        

Cash

 $2,020  $1,316 

Accounts receivable, net

  4,719   4,511 

Inventories

  11,169   10,261 

Other current assets

  353   284 

Total current assets

  18,261   16,372 
         

Property and equipment, net

  1,891   1,653 

Operating lease right-of-use assets (includes $1,485 and $2,061 with a related party)

  2,020   2,623 

Deferred tax assets, net

  4,713   4,726 

Security deposits and other assets

  57   57 

Total Assets

 $26,942  $25,431 
         

Liabilities and Stockholders' Equity:

        

Current Liabilities:

        

Accounts payable 

 $3,673  $2,266 

Accrued expenses and other current liabilities

  2,319   1,632 

Current portion of long term debt, net

  18   42 

Current portion of operating lease liabilities (includes $796 and $772 with a related party)

  935   888 

Total current liabilities

  6,945   4,828 
         
Long term debt  -   7 

Operating lease liabilities (includes $689 and $1,289 with a related party)

  1,086   1,735 

Total liabilities

  8,031   6,570 
         

Commitments and Contingencies (Note 6)

          
         

Stockholders' Equity :

        

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

        
30,134,510 and 29,984,510 shares issued, respectively, and        

30,099,610 and 29,949,610 shares issued and outstanding, respectively

  60   60 

Additional paid-in capital

  51,445   51,239 

Accumulated deficit

  (32,495)  (32,339)

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

  (99)  (99)

Total Stockholders' Equity

  18,911   18,861 

Total Liabilities and Stockholders' Equity

 $26,942  $25,431 

 

  See accompanying notes to unaudited condensed consolidated financial statements.

 

3

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2024 AND 2023

(in thousands, except share and per share amounts)

(Unaudited)

FOR THE THREE AND NINE MONTHS ENDED MARCH 31,  2024:

 

                                                   

Total

 
   

Common Stock

   

Additional

   

Accumulated

   

Treasury Stock

   

Stockholders'

 
   

Shares

   

Par Value

   

Paid-in-Capital

   

Deficit

   

Shares

   

Cost

   

Equity

 
                                                         

Balance, July 1, 2023

    29,984,510     $ 60     $ 51,239     $ (32,339 )     34,900     $ (99 )   $ 18,861  

Stock compensation expense for employee stock options

    -       -       71       -       -       -       71  
Shares issued upon exercise of stock options     150,000       -       13       -       -       -       13  

Net loss

    -       -       -       (59 )     -       -       (59 )

Balance, September 30, 2023

    30,134,510       60       51,323       (32,398 )     34,900       (99 )     18,886  

Stock compensation expense for employee stock options

    -       -       62       -       -       -       62  

Net loss

    -       -       -       (382 )     -       -       (382 )

Balance, December 31, 2023

    30,134,510       60       51,385       (32,780 )     34,900       (99 )     18,566  

Stock compensation for employee stock options

    -       -       60       -       -       -       60  

Net income

    -       -       -       285       -       -       285  

Balance, March 31, 2024

    30,134,510     $ 60     $ 51,445     $ (32,495 )     34,900     $ (99 )   $ 18,911  

 

FOR THE THREE AND NINE MONTHS ENDED MARCH 31,  2023:

 

   

Common Stock

   

Additional

   

Accumulated

   

Treasury Stock

   

Total Stockholders'

 
   

Shares

   

Par Value

   

Paid-in-Capital

   

Deficit

   

Shares

   

Cost

   

Equity

 
                                                         

Balance, July 1, 2022

    29,984,510     $ 60     $ 50,919     $ (32,305 )     34,900     $ (99 )   $ 18,575  

Stock compensation expense for employee stock options

    -       -       81       -       -       -       81  

Net loss

    -       -       -       (35 )     -       -       (35 )

Balance, September 30, 2022

    29,984,510       60       51,000       (32,340 )     34,900       (99 )     18,621  

Stock compensation expense for employee stock options

    -       -       86       -       -       -       86  

Net loss

    -       -       -       (55 )     -       -       (55 )

Balance, December 31, 2022

    29,984,510       60       51,086       (32,395 )     34,900       (99 )     18,652  

Stock compensation expense for employee stock options

    -       -       73       -       -       -       73  

Net income

    -       -       -       16       -       -       16  

Balance, March 31, 2023

    29,984,510     $ 60     $ 51,159     $ (32,379 )     34,900     $ (99 )   $ 18,741  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except share and per share amounts)

(Unaudited)

 

  

Nine months ended

 
  

March 31,

 
  

2024

  

2023

 

Cash flows provided by operating activities:

        

Net (loss) income

 $(156) $(74)

Adjustments to reconcile net income to net cash from operating activities:

        

Depreciation and amortization

  232   267 

Amortization of operating lease right-of-use assets

  672   588 

Stock based compensation

  193   240 

Change in deferred tax assets

  12   42 

Other, net

  10   17 

Changes in operating assets and liabilities:

        

Decrease (increase) in:

        

Accounts receivable, net

  (206)  205 

Inventories

  (908)  1,118 

Other assets

  (77)  (20)
Security deposits and other assets  -   (19)

(Decrease) increase in:

        

Accounts payable

  1,342   346 

Accrued expenses and other liabilities

  687   296 

Operating lease obligations

  (672)  (588)

Net cash provided by operating activities

  1,129   2,418 
         

Cash flows from investing activities:

        

Purchase of property and equipment

  (407)  (98)

Proceeds from sale of iBio Stock

  -   4 

Net cash used in investing activities

  (407)  (94)
         

Cash flows from financing activities:

        

Proceeds from exercise of employee stock options

  13   - 

Repayments (advances) under revolving credit facility

  -   (101)

Repayments under finance lease obligations

  (31)  (25)

Net cash used in financing activities

  (18)  (126)
         

Net increase in cash

  704   2,198 

Cash at beginning of period

  1,316   331 

Cash at end of period

 $2,020  $2,529 

 

Supplemental disclosures of cash flow information:

               

Interest paid

  $ 31     $ 31  

Income taxes paid

  $ 37     $ -  
                 

Supplemental disclosures of non-cash flow transactions:

               
Acquisition of right-of-use assets, net   $ 1,560     $ 1,560  

Amount owed on purchase of property and equipment

  $ 65     $ -  

 

   See accompanying notes to unaudited 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. Nature of Operations, Principles of Consolidation and Basis of Presentation of Interim Financial Statements

 

Nature of Operations

 

Integrated BioPharma, Inc., a Delaware corporation (together with its subsidiaries, 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 and Luxembourg. The Company was originally incorporated in the state of Delaware on August 31, 1995 under the name Chem International, Inc.  On December 5, 2000, the Company changed its name to Integrated Health Technologies, Inc. and on January 29, 2003 changed its name to Integrated BioPharma, Inc.  The Company restated its certificate of incorporation in Delaware in June 2006.  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 Manhattan Drug Company, Inc. (“MDC”), which manufactures vitamins and nutritional supplements for sale to distributors, multilevel marketers and specialized health-care providers and (b) Other Nutraceutical Businesses which includes the operations of (i) AgroLabs, Inc. (“AgroLabs”), which distributed healthful nutritional products for sale through major mass market, grocery and drug and vitamin retailers under the following brands: Peaceful Sleep, and Wheatgrass and other products introduced into the market using the AgroLabs name (these are referred to as our branded products); (ii) The Vitamin Factory (the “Vitamin Factory”), which sells private label MDC products, as well as our AgroLabs products, through the Internet,  (iii) IHT Health Products, Inc. (“IHT”) a distributor of fine natural botanicals, including multi minerals produced under a license agreement, (iv) MDC Warehousing and Distribution, Inc. (“MDC Warehousing”), a service provider for warehousing and fulfilment services and (v) Chem International, Inc., a distributor of certain raw materials for DSM Nutritional Products LLC.  The Vitamin Factory had no products available for sale and AgroLabs had no sales of its branded products in the three and nine months ended March 31, 2024 and 2023.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements for the interim periods are unaudited and include the accounts of Company.  Intercompany transactions and accounts have been eliminated in consolidation.

 

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 (“GAAP”).  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, 2023 (“Form 10-K”), as filed with the SEC. The June 30, 2023 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. The preparation of the unaudited condensed financial statements in conformity with these accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period.  Ultimate results could differ from the estimates of management.  The results of operations for the three and nine months ended March 31, 2024 are not necessarily indicative of the results for the full fiscal year ending June 30, 2024 or for any other period.

 

6

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

Significant Accounting Policies

 

Revenue Recognition. The Company recognizes product sales revenue, the prices of which are fixed and determinable, when title and risk of loss have transferred to the customer, when estimated provisions for product returns, rebates, charge-backs and other sales allowances are reasonably determinable, and when collectability is reasonably assured. Accruals for these items are presented in the consolidated financial statements as reductions to sales. The Company’s net sales represent gross sales invoiced to customers, less certain related charges for discounts, returns, rebates, charge-backs and other allowances. Cost of sales includes the cost of raw materials and all labor and overhead associated with the manufacturing and packaging of the products. Gross margins are affected by, among other things, changes in the relative sales mix among our products and valuation and/or charge off of slow moving, expired or obsolete inventories. To perform revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps:

 

 

identification of the promised goods or services in the contract;

 

determination of whether the promised goods or serves are performance obligations including whether they are distinct in the context of the contract;

 

measurement of the transaction price, including the constraint on variable consideration;

 

allocation of the transaction price to the performance obligations based on estimated selling prices; and

 

recognition of revenue when (or as) the Company satisfies each performance obligation. A performance obligation is a promise to transfer a distinct good or service to the customer and is the unit of account in ASC 606.

 

Income Taxes. The Company accounts for income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. Tax benefits are recognized when it is probable that the deduction will be sustained. A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will not be realized.

 

For the three months ended March 31, 2024 and 2023, the Company had federal income tax expense of $81 and $9, respectively and state income tax (benefit) expense, net of approximately $(14) and $21, respectively.  For the nine months ended March 31, 2024 and 2023, the Company had a federal tax expense, net of $11 and $26, respectively and state income tax (benefit) expense, net of approximately $(1) and $65, respectively.

 

 

7

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

 

Leases. The Company determines 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 its consolidated balance sheets. Finance leases are included in property and equipment, current portion of long term debt, and long-term debt obligation on the condensed 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.

 

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, the Company accounts 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, subject to anti-dilution limitations using the treasury stock method.

 

The following options and potentially dilutive shares for stock options 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, 2024 and 2023:

 

 

  

Three Months Ended

  

Nine Months Ended

 
  

March 31,

  

March 31,

 
  

2024

  

2023

  

2024

  

2023

 
                 

Anti-dilutive stock options

  2,393,183   427,000   4,758,183   1,286,983 

Total anti-dilutive shares

  2,439,183   427,000   4,758,183   1,286,983 

 

 

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,

 
  

2024

  

2023

 
         

Raw materials

 $8,510  $6,859 

Work-in-process

  1,824   2,148 

Finished goods

  835   1,254 

Total

 $11,169  $10,261 

 

 

8

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,

 
  

2024

  

2023

 
         

Land and building

 $1,250  $1,250 
Leasehold improvements  1,341   1,371 
Machinery and equipment  7,219   6,801 
   9,810   9,422 
Less: Accumulated depreciation and amortization  (7,919)  (7,769)

Total

 $1,891  $1,653 

 

Depreciation and amortization expense recorded on property and equipment was $77 and $86 for the three months and $232 and $267 for nine months ended March 31, 2024 and 2023, respectively.  Additionally, the Company disposed of property of $85 and $20 in the nine months ended March 31, 2024 and 2023, respectively and in the three and nine months ended March 31, 2024 recognized a gain on disposal of fixed assets of $1 and a net loss of $1, respectively.

 

 

Note 4. Senior Credit Facility

 

As of March 31, 2024 and June 30, 2023, the Company had no debt outstanding under its Senior Credit Facility.

 

On May 9, 2024, 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, May 15, 2019, June 28, 2019 and March 16, 2023.

 

The Amended Loan Agreement provides for a total of $5,000 ($8,000 as of March 31, 2024 and June 30, 2023) 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 $5,000 ($8,000 as of March 31, 2024 and June 30, 2023) (the “Revolving Credit Facility”). The Senior Credit Facility is secured by all assets of the Borrowers, including, without limitation, machinery and equipment, and real estate owned by IHT Properties.  Revolving Advances bear interest at PNC’s Base Rate (8.50% and 8.25% as of March 31, 2024 and June 30, 2023, respectively) or the Term SOFR Rate plus the SOFR Adjustment. The Term SOFR Rate, for any day, shall be equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York (or a successor administrator of the secured overnight financing rate). The SOFR Adjustment is defined as 10 basis points (0.10%).

 

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, 2026 (the “Senior Maturity Date”) ( May 15, 2024 as of March 31, 2024 and June 30, 2023).  

 

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. 

 

 

 

9

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

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) $5,000 ($8,000 as of March 31, 2024 and June 30, 2023) 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, as defined in the Amended Loan Agreement, of all outstanding letters of credit, minus (iv) such reserves as PNC may reasonably deem proper and necessary from time to time.

 

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.

 

 

Note 5. Significant Risks and Uncertainties

 

(a) Major Customers.  In the three months ended March 31, 2024 and 2023, approximately 90% and 88%, respectively, of consolidated net sales were derived from two customers. These two customers are in the Company’s Contract Manufacturing Segment and represented approximately 72% and 20% and 68% and 23% in the three months ended March 31, 2024 and 2023, respectively of the Contract Manufacturing Segment net sales.  In the nine months ended March 31, 2024 and 2023, approximately 90% and 88% of consolidated net sales, respectively, were derived from the same two customers and net sales to these two customers represented approximately 73% and 21% in the nine months ended March 31, 2024 and 67% and 26% of net sales in the nine months ended March 31, 2023, respectively of the Contract Manufacturing Segment net sales.  Accounts receivable from these two major customers represented approximately 86% and 84% of total net accounts receivable as of March 31 2024 and June 30, 2023, respectively.  Two other customers in the other Nutraceutical Segment, while not significant customers of the Company’s consolidated net sales, represented approximately 40% and 23% and 47% and 27% of net sales of the Other Nutraceutical Segment in the three months ended March 31, 2024 and 2023, and 40% and 18% and 61% and 11%, of net sales of the Other Nutraceutical Segment in the nine months ended March 31, 2024 and 2023, 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 77% of the Company’s employees are covered by a union contract and are employed in its New Jersey facilities. The contract was renewed effective September 1, 2022 and will expire on August 31, 2026.

 

The Company has seen a negative impact in its margins due to inflation and tightened labor markets.  The Company may not be able to timely increase its selling prices to its customer resulting from price increases from its suppliers due to various economic factors, including inflation, labor and shipping costs and its own increases in shipping, labor and other operating costs.  The Company’s results of operations may also be affected by economic conditions, including inflationary pressures, that can impact consumer disposable income levels and spending habits, thereby reducing the orders it may receive from the Company’s significant customers.

 

The Company continues to experience minimal supply chain disruptions relating to fuel refinery and transportation issues as it pertains to shipping.  These issues first arose as result of the COVID-19 pandemic and other geo-political events. Currently, the drought in Panama is slowing down shipping container traffic, contributing to continued shipping delays in the receipt of certain raw materials used in the Company’s manufacturing process.

 

10

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

During the first quarter of calendar 2022, the war in Ukraine affected the Company’s customer’s business operations in Ukraine and Russia, resulting in the cancelation of some future orders. The war resulted in the imposition of sanctions by the United States, the United Kingdom, and the European Union, that affect the cross-border operations of businesses operating in Russia. In addition, many multinational companies ceased or suspended their operations in Russia. Therefore, the ability to continue operations in Russia by the Company’s customers is uncertain. 

 

Additionally, the current Israel-Hamas war in the Middle East could negatively impact the sales and margins of the Company.  Certain customers sell into Israel and the Company sources certain raw materials from Israel.  If the Israel-Hamas war carries on for a significant time frame, it could have a negative impact on the sales and margins of the Company if the Company is unable to replace these sales with other sales and/or obtain the same raw materials at substantially the same price as currently paid.

 

 

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 5 years.

 

The components of lease expense for the three months ended March 31, 2024 and 2023, were as follows:

   

 

  

Three months ended March 31,

 
  

2024

  

2023

 
  

Related Party - Vitamin Realty

  

Other Leases

  

Totals

  

Related Party - Vitamin Realty

  

Other Leases

  

Totals

 
                         

Operating lease costs

 $211  $42  $253  $211  $53  $264 
                         

Finance Lease Costs:

                        

Amortization of right-of use assets

 $-  $3  $3  $-  $3  $3 

Total finance lease cost

 $-  $3  $3  $-  $3  $3 

 

 

The components of lease expense for the nine months ended March 31, 2024 and 2023, were as follows:

 

  

Nine months ended March 31,

 
  

2024

  

2023

 
  

Related Party - Vitamin Realty

  

Other Leases

  

Totals

  

Related Party - Vitamin Realty

  

Other Leases

  

Totals

 
                         

Operating lease costs

 $

632

  $123  $755  $632  $99  $731 
                         

Finance Operating Lease Costs:

                        

Amortization of right-of use assets

 $-  $9  $9  $-  $9  $9 

Total finance lease cost

 $-  $9  $9  $-  $9  $9 

 

Rent and lease amortization costs are included in cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

 

Operating Lease Liabilities

 

Related Party Operating Lease Liabilities.  Warehouse and office facilities are leased from Vitamin Realty Associates, LLC (“Vitamin Realty”), which is 100% owned by the estate of the Company’s former chairman, and a major stockholder and certain of his family members, who are 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 provided for minimum annual rental payments of $533, plus increases in real estate taxes and building operating expenses.  On July 15, 2022, MDC entered into a third amendment of the lease (the “Third Lease Amendment”) with Vitamin Realty, increasing its rentable square footage to 116,175.  The Third Lease Amendment provides for minimum annual rental payments of $842, plus increases in real estate taxes and the building operating expenses allocation percentage and is effective as of July 1, 2022.

 

11

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

Rent expense and lease amortization costs for the three months ended March 31, 2024 and 2023 on these leases were $332 and $321 respectively, and for the nine months ended March 31, 2024 and 2023 were $974 and $958, respectively, and are included in cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. As of March 31, 2024 and June 30, 2023, the Company had no current obligations to Vitamin Realty.  Additionally, the Company has operating lease obligations of $1,485 and $2,061 with Vitamin Realty as noted in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2024 and June 30, 2023, respectively.

 

Other Operating Lease Liabilities. The Company has entered into certain non-cancelable operating lease agreements expiring up through May, 2027, related to office equipment.

 

As of March 31, 2024, the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases were as follows:

 

  

Right-of-use Assets

  

Current Portion of Operating Lease Obligations

  

Operating Lease Obligations

  

Remaining Cash Commitment

 
                 

Vitamin Realty lease

 $1,485  $796  $689  $1,544 
Warehouse lease  461   114   347   529 
Transportation lease  59   16   43   68 

Office equipment leases

  15   9   7   16 
  $2,020  $935  $1,086  $2,157 

 

As of June 30, 2023, the Company’s ROU assets, lease obligations and remaining cash commitment on these leases were as follows:

 

  

Right-of-use Assets

  

Current Portion Operating Lease Obligations

  

Operating Lease Obligations

  

Remaining Cash Commitment

 
                 

Vitamin Realty lease

 $2,061  $772  $1,289  $2,176 
Warehouse lease  541   108   433   631 

Office equipment leases

  21   8   13   23 
  $2,623  $888  $1,735  $2,830 

 

 

As of March 31, 2024 and June 30, 2023, the Company’s weighted average discount rate and remaining term on operating lease liabilities were approximately 4.98% and 4.41% and 2.2 years and 2.9 years, respectively. 

 

Financed Lease Obligation. 

 

As of each March 31, 2024 and June 30, 2023, the Company’s weighted average discount rate for the outstanding finance lease obligation of $18 and $49, respectively is 0% and the remaining term on finance lease obligation is approximately 0.4 years and 1.2 years, respectively.  The related ROU asset and lease obligation are included in Property and Equipment, net and Finance Lease Obligation, respectively, in the accompanying Condensed Consolidated Balance Sheet.

 

 

12

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

Supplemental cash flows information related to leases for the nine months ended March 31, 2024, 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

 $632  $166  $798 

Operating cash flows from finance leases

  -   -   - 

Financing cash flows from finance lease obligations

  -   31   31 

 

 

Supplemental cash flows information related to leases for the nine months ended March 31, 2023, 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

 $632  $99  $731 

Operating cash flows from finance leases

  -   -   - 

Financing cash flows from finance lease obligations

  -   25   25 

 

Maturities of operating lease liabilities as of March 31, 2024 were as follows:

 

 

  

Operating

  

Related Party

  

Finance

     

Year ending

 

Lease

  

Operating Lease

  

Lease

     

June 30,

 

Commitments

  

Commitment

  

Obligation

  

Total

 
                 

2024, remaining

 $42  $210  $11  $263 

2025

  169   842   7   1,030 

2026

  169   492   -   998 

2027

  169   -   -   641 

2028

  64   -   -   62 

Total minimum lease payments

  613   1,544   18   2,175 

Imputed interest

  (77)  (59)  -   (136)

Total

 $536  $1,485  $18  $2,039 

(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

 

Information related to related party transactions are disclosed in Note 6(a). Leases for related party lease transactions.

 

13

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 8. Equity Transactions and Stock-Based Compensation

 

In November 2023, the Board of Directors authorized the issuance of up to 597,500 stock options to Company officers and employees. The Company issued 582,500 stock options with an exercise price ranging from $0.24 to $0.26, vesting over three years, with expiration terms of ten years from the date of grant. 

 

Additionally, in July 2023, the Board of Directors authorized the issuance of 200,000 stock options (50,000 each) to the non-executive directors of the Company with an exercise price of $0.33, vesting over one year, 25% at the end of each quarter ending September 30, 2023, December 31, 2023, March 31, 2024 and June 30, 2024.

 

For the three and nine months ended March 31, 2024 and 2023, the Company incurred stock-based compensation expense of $61 and $73, and $193 and $240, respectively.  The Company expects to record additional stock-based compensation of $267 over the remaining vesting periods of approximately one to three years for all non-vested stock options.

 

The Company used the following assumptions to calculate the fair value of the stock option grants using the Black-Scholes option pricing model on the measurement date during the nine months ended March 31, 2024:

 

Risk Free Interest Rate

  3.91% to 4.36%

Volatility

  116.9% to 131.7%

Term

 

7.5 to 10 years

 

Dividend Rate

  0.00%

Closing Price of Common Stock

 $0.24 
Closing Price of Common Stock $0.26 
Closing Price of Common Stock $0.33 

 

The Company calculates expected volatility for a stock-based grant based on historic daily stock price observations of its common stock during the period immediately preceding the grant that is equal in length to the expected term of the grant. The expected term of the options is estimated based on the Company’s historical exercise rate and forfeiture rates are estimated based on employment termination experience. The risk free interest rate is based on U.S. Treasury yields for securities in effect at the time of grants with terms approximating the term of the grants. The assumptions used in the Black-Scholes option valuation model are highly subjective, and can materially affect the resulting valuations.

 

A summary of the Company’s stock option activity, and related information for the nine months ended March 31, 2024 follows:

 

      

Weighted

 
      

Average

 
      

Exercise

 
  

Options

  

Price

 
         

Outstanding as of June 30, 2023

  4,3760,284  $0.35 

Granted

  782,500   0.27 

Exercised

  (150,000)  0.09 
Terminated  (9,167)  0.58 

Expired

  (241,434)  0.44 

Outstanding as of March 31, 2024

  4,758,183  $0.41 

Exercisable at March 31, 2024

  3,754,317  $0.34 

 

 

 

14

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 9. 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 two reportable segments as follows: Contract Manufacturing, and Other Nutraceutical Businesses. International sales, concentrated primarily in Europe, for the three months ended March 31, 2024 and 2023 were $1,980 and $2,188, respectively and for the nine months ended March 31, 2024 and 2023 were $5,245 and $6,576, respectively.

 

Financial information relating to the three months ended March 31, 2024 and 2023 operations by business segment and disaggregated revenues was as follows:

 

   Sales, Net  Segment        
   

U.S.

  

International

      

Gross

      

Capital

 
   

Customers

  

Customers

  

Total

  

Profit (loss)

  

Depreciation

  

Expenditures

 

Contract Manufacturing

2024

 $10,770  $2,980  $12,750  $1,250  $77  $345 
 

2023

  10,417   2,180   12,597   978   86   16 
                          

Other Nutraceutical Businesses

2024

  397   -   397   (2)  -   - 
 

2023

  493   8   501   30   -   - 
                          

Total Company

2024

  11,167   1,980   13,147   1,248   77   345 
 

2023

  10,910   2,188   13,098   1,008   86   16 

 

Financial information relating to the nine months ended March 31, 2024 and 2023 operations by business segment and disaggregated revenues was as follows:

 

 

   

Sales, Net

  

Segment

         
   

U.S.

  

International

      

Gross

      

Capital

 
   

Customers

  

Customers

  

Total

  

Profit

  

Depreciation

  

Expenditures

 

Contract Manufacturing

2024

 $31,022  $5,218  $36,240  $2,563  $231  $404 
 

2023

  29,272   6,568   35,840   2,745   265   98 
                          

Other Nutraceutical Businesses

2024

  1,304   27   1,331   37   1   3 
 

2023

  1,830   8   1,838   330   2   - 
                          

Total Company

2024

  32,326   5,245   37,571   2,600   232   407 
 

2023

  31,102   6,576   37,678   3,075   267   98 

 

 

  

Total Assets as of

 
  

March 31,

  

June 30,

 
  

2024

  

2023

 
         

Contract Manufacturing

 $21,097  $19,507 
Other Nutraceutical Businesses  5,845   5,924 

Total Company

 $26,942  $25,431 

 

 

15

 
 

Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANICAL 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, 2023.

 

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 and Luxembourg.

 

Business Outlook

 

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 Operation”, 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, 2023.

 

For the nine months ended March 31, 2024, our net sales from operations decreased by $107 to approximately $37,571 from approximately $37,678 in the nine months ended March 31, 2023, less than 1%.   Our net sales in the Contract Manufacturing Segment increased by $400 or approximately 1.1%, offset by a decrease in our Other Nutraceuticals Segment of $507.  Net sales increased in our Contract Manufacturing Segment primarily due to increased sales volumes to Life Extension of $2,618 offset by decreases in the amounts of $1,776 and $ 442 from Herbalife and all other customers, respectively.  Net sales in the nine months ended March 31, 2024 were lower by approximately $507 from the nine months ended March 31, 2023 in our Other Nutraceuticals Segment primarily due to MDC Warehousing and CII with decreased net sales in the amounts of $422 and $90, respectively.  The declines were from two major customers in this segment, which represented 40% and 18% in the nine months ended March 31, 2024 compared to 61% and 8% in the three months ended March 31, 2023.  The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations. 

 

For the nine months ended March 31, 2024, we had an operating loss of approximately $151, a decrease of approximately $192 from the operating income of approximately $41 for the nine months ended March 31, 2023.  Our profit margins decreased from approximately 8.2% of net sales in the nine months ended March 31, 2023 to approximately 6.9% of net sales in the nine months ended March 31, 2024, primarily as a result of the increased cost of sales of $368. The increase of $368 in the cost of goods sold amount is from increased manufacturing costs $572 in our Contract Manufacturing Segment offset, in part. by a decrease of $214 in our Other Nutraceuticals Segment from the decline in sales.  Our consolidated selling and administrative expenses decreased by approximately $282 or approximately 9.3% in the nine months ended March 31, 2024 compared to the nine months ended March 31, 2023.  Our salaries and employee benefits decreased by approximately $130 as a result of decreased (i) bonuses of $43, (ii) base pay of $61 and (iii) payroll taxes and other employee benefits of $26.  Other selling and administrative expenses decreased by $152 primarily as a result of decreased stock compensation expense of $47 and all other selling and administrative expenses of $105.

 

Our revenue from our two significant customers in our Contract Manufacturing Segment is dependent on their demand within their respective distribution channels for the products we manufacture for them.  As in any competitive market, our ability to match or beat other contract manufacturers pricing for the same items may also alter our outlook and the ability to maintain or increase revenues.  We will continue to focus on our core businesses and push forward in maintaining our cost structure in line with our sales and expanding our customer base.  We believe that this focus will produce a reduction of the reliance on our two significant customers in our fiscal year ending June 30, 2025.

 

16

 

We have seen a negative impact in our margins due to inflation and tightened labor markets.  We may not be able to timely increase our selling prices to our customers resulting from price increases from our suppliers due to various economic factors, including inflation, labor and shipping costs and our own increases in shipping, labor and other operating costs.  Our results of operations may also be affected by economic conditions, including inflationary pressures, that can impact consumer disposable income levels and spending habits, thereby reducing the orders we may receive from our significant customers.

 

We continue to experience minimal supply chain disruptions relating to fuel refinery and transportation issues as it pertains to shipping.  These issues first arose as result of the COVID-19 pandemic and other geo-political events. Currently, the drought in Panama is slowing down shipping container traffic, contributing to continued shipping delays in the receipt of certain raw materials used in our manufacturing process.

 

During the first quarter of calendar 2022, the war in Ukraine affected our customer’s business operations in Ukraine and Russia, resulting in the cancelation of some future orders. The war resulted in the imposition of sanctions by the United States, the United Kingdom, and the European Union, that affect the cross-border operations of businesses operating in Russia. In addition, many multinational companies ceased or suspended their operations in Russia. Therefore, the ability to continue operations in Russia by our customers is uncertain. 

 

Additionally, the current Israel-Hamas war in the Middle East could negatively impact our sales and margins.  Certain of our customers sell into Israel and we source certain raw materials from Israel.  If the Israel-Hamas war carries on for a significant time frame, it could have a negative impact on our sales and margins if we are unable to replace these sales with other sales and/or obtain the same raw materials at substantially the same price as currently paid.

 

Critical Accounting Policies and Estimates

 

There have been no changes to our critical accounting policies in the three months ended March 31, 2024, 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, 2023 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.

 

 

 

 

17

 

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,

 
   

2024

   

2023

   

2024

   

2023

 
                                 

Sales, net

    100.0 %     100.0 %     100.0 %     100.0 %
                                 

Costs and expenses:

                               

Cost of sales

    90.5 %     92.3 %     93.1 %     91.8 %

Selling and administrative

    6.8 %     7.4 %     7.3 %     8.1 %
      97.3 %     99.7 %     100.4 %     99.9 %

Income (loss) from operations

    2.7 %     0.3 %     (0.4% )     0.1 %
                                 

Other income (expense), net

                               

Interest income (expense)

    (0.0% )     (0.1% )     0.0 %     (0.1% )

Other income (expense), net

    0.0 %     0.1 %     (0.1% )     (0.1% )

Other income (expense), net

    0.0 %     0.0 %     (0.0% )     (0.2% )
                                 
                                 

Income (loss) before income taxes

    2.7 %     0.3 %     (0.4% )     (0.1% )
                                 

Income tax expense, net

    (0.4% )     (0.2% )     (0.0% )     (0.1% )
                                 

Net income (loss)

    2.2 %     0.1 %     (0.4% )     (0.2% )

 

For the Nine Months Ended March 31, 2024 compared to the Nine Months Ended March 31, 2023

 

Sales, net. Sales, net, for the nine months ended March 31, 2024 and 2023 were $37,571 and $37,678, respectively, a decrease of 0.3%, and were comprised of the following:

 

 

   

Nine months ended

   

Dollar

   

Percentage

 
   

March 31,

   

Change

   

Change

 
   

2024

   

2023

   

2024 vs 2023

   

2024 vs 2023

 
   

(amounts in thousands)

         

Contract Manufacturing:

                               

US Customers

  $ 31,022     $ 29,272     $ 1,750       6.0 %

International Customers

    5,218       6,568       (1,350 )     (20.6% )

Net sales, Contract Manufacturing

    36,240       35,840       400       1.1 %
                                 

Other Nutraceuticals:

                               

US Customers

    1,304       1,830       (526 )     (28.7% )

International Customers

    27       8       19       237.5 %

Net sales, Other Nutraceuticals

    1,331       1,838       (507 )     (27.6% )
                                 

Total net sales

  $ 37,571     $ 37,678     $ (107 )     (0.3% )

 

In the nine months ended March 31, 2024 and 2023, a significant portion of our consolidated net sales, approximately 90% and 82%, were concentrated among two customers in our Contract Manufacturing Segment, Life Extension and Herbalife.  Life Extension and Herbalife represented approximately 73% and 21% and 67% and 26%, respectively, of our Contract Manufacturing Segment’s net sales in the nine months ended March 31, 2024 and 2023, respectively. 

 

 

19

 

The decrease in net sales of approximately $107 in the nine months ended March 31, 2024 was primarily the result of decreased sales in the Other Nutraceutical Segment of approximately $507, offset by the increase in the Contract Manufacturing Segment of $400, from the nine months ended March 31, 2023.  The decrease in our Other Nutraceuticals Segment by $507, was primarily due to decreased net sales by MDC Warehousing and CII in the amounts of $422 and $89, respectively.  The declines were from two major customers in this segment, which represented 40% and 18% in the nine months ended March 31, 2024 compared to 61% and 8% in the nine months ended March 31, 2023.  The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations.

 

Cost of sales.  Cost of sales increased by approximately $368 to $34,971 for the nine months ended March 31, 2024, as compared to $34,603 for the nine months ended March 31, 2023 or approximately 1.1%.  Cost of sales increased as a percentage of sales to 93.1% for the nine months ended March 31, 2024 as compared to 91.8% for the nine months ended March 31, 2023. The increase of $368 in the cost of goods sold amount is from increased manufacturing costs of $572 in our Contract Manufacturing Segment offset by a decrease of $214 in our Other Nutraceuticals Segment.  The increase in the cost of goods sold as a percentage of net sales, was primarily the result of substantially the same sales in the Contract Manufacturing net sales used to offset the increased manufacturing overhead costs.

 

Selling and Administrative Expenses.  There was a decrease in selling and administrative expenses of approximately $282 or approximately 9.3% in the nine months ended March 31, 2024 compared to the nine months ended March 31, 2023.  As a percentage of sales, net, selling and administrative expenses were approximately 7.3% and 8.1% in the nine months ended March 31, 2024 and 2023, respectively.  Our salaries and employee benefits decreased by approximately $130 as a result of decreased (i) bonuses of $43, (ii) base pay of $61 and (iii) payroll taxes and other employee benefits of $26.  Other selling and administrative expenses decreased by $152 primarily as a result of decreased stock compensation expense of $47 and all other selling and administrative expenses of $105.  

 

Other income (expense), net. Other income (expense), net was approximately $5 for the nine months ended March 31, 2024 compared to $(24) for the nine months ended March 31, 2023, and was composed of:

 

   

Nine months ended

 
   

March 31,

 
   

2024

   

2023

 
   

(dollars in thousands)

 

Interest income (expense), net

  $ 6     $ (16 )

Other expense, net

    (1 )     (8 )

Other income (expense), net

  $ 5     $ (24 )

 

In the nine months ended March 31, 2023, we sold our remaining iBio Stock, for a loss of $35 offset with an unrealized gain on the remaining iBio Stock of approximately $27, resulting in net other expense of $8

 

Income tax benefit (expense), net. For the nine months ended March 31, 2024 and 2023, we had a state income tax (benefit) provision of approximately ($1) and $65, respectively and federal income tax expense of $11 and $26, in the nine months ended March 31, 2024 and 2023, respectively.  The income state tax benefit in the nine months ended March 31, 2024 includes a lower than expected state tax liability in the fiscal year ended June 30, 2023 of $19, offset by the current estimated tax provision of $18 for the nine months ended March 31, 2024.

 

Net loss. We had a net loss for the nine months ended March 31, 2024 and 2023 of approximately $156 and $74, respectively. The increase of approximately $82 in net losses was primarily the result of the increased operating loss of $192 offset, in part, by the change in the provision for income taxes of $81.

 

18

 

 

For the Three Months Ended March 31, 2024 compared to the Three Months Ended March 31, 2023

 

Sales, net. Sales, net, for the three months ended March 31, 2024 and 2023 were $13,147 and $13,098, respectively, an increase of 0.4%, and are comprised of the following:

 

 

   

Three months ended

   

Dollar

   

Percentage

 
   

March 31,

   

Change

   

Change

 
   

2024

   

2023

   

2024 vs 2023

   

2024 vs 2023

 
   

(amounts in thousands)

         

Contract Manufacturing:

                               

US Customers

  $ 10,770     $ 10,417     $ 353       3.4 %

International Customers

    1,980       2,180       (200 )     (9.2% )

Net sales, Contract Manufacturing

    12,750       12,597       153       1.2 %
                                 

Other Nutraceuticals:

                               

US Customers

    397       493       (96 )     (19.5% )

International Customers

    -       8       (8 )     (100.0% )

Net sales, Other Nutraceuticals

    397       501       (104 )     (20.8% )
                                 

Total net sales

  $ 13,147     $ 13,098     $ 49       0.4 %

 

For the three months ended March 31, 2024 and 2023, a significant portion of our consolidated net sales, approximately 90% and 88%, respectively, were concentrated among two customers, Life Extension and Herbalife, in our Contract Manufacturing Segment.  Life Extension and Herbalife, represented approximately 72% and 21% and 68% and 23%, respectively, of our Contract Manufacturing Segment’s net sales in the three months ended March 31, 2024 and 2023, respectively. 

 

Revenues in the three months ended March 31, 2024 were lower than the three months ended March 31, 2023 in our Other Nutraceuticals Segment by $104, primarily due to a decrease of $184 from MDC Warehousing offset, in part, by an increase in sales from CII of $81.  One customer that represented 27% of revenues in our Other Nutraceutical Segment in the three months ended March 31, 2023, declined by $153 in sales and represented 0% of sales in this segment for the three months ended March 31, 2024.  This was offset by another customer in our Other Nutraceuticals Segment customer with increased sales of $82, increasing from representing 2% of sales in this segment in the three months ended March 31, 2023 to 23% in the three months ended March 31, 2024.

 

The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations. 

 

Cost of sales.  Cost of sales decreased by approximately $191 to $11,899 for the three months ended March 31, 2024, as compared to $12,090 for the three months ended March 31, 2023 or approximately 2%.  Cost of sales decreased as a percentage of sales to 90.5% for the three months ended March 31, 2024 as compared to 92.3% for the three months ended March 31, 2023. The decrease in the cost of goods sold as a percentage of net sales, was primarily the result of the increased net sales in the Contract Manufacturing Segment used to offset the fixed manufacturing overhead. 

 

Selling and Administrative Expenses.  There was a decrease in selling and administrative expenses of $71, approximately 7% in the three months ended March 31, 2024 as compared to the three months ended March 31, 2023.  As a percentage of sales, net, selling and administrative expenses were approximately 6.8% and 7.4% in the three months ended March 31, 2024 and 2023, respectively. The decrease of $71 was primarily from decreases in  (i) salaries and employee benefit costs of $63 ($46 in lower salaries and $17 in lower employee benefits), (ii) stock compensation expense of $25 and (iii) all other selling and administrative expenses of $3.

 

 

20

 

 

Other income (expense), net. Other income (expense), net was approximately $(3) for the three months ended March 31, 2024 compared to $2 for the three months ended March 31, 2023, and is composed of: