10-Q 1 inbp20200930_10q.htm FORM 10-Q inbp20200930_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 September 30, 2020

 

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)

 

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 __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 __X__ 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__

 

As of November 12, 2020, there were 29,645,943 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 Months Ended September 30, 2020

INDEX

 

 

   

Page
 

Part I. Financial Information

  

Item 1.

Condensed Consolidated Statements of Income for the Three Months Ended September 30, 2020 and 2019 (unaudited)

2
 

Condensed Consolidated Balance Sheets as of September 30, 2020 and June 30, 2020 (unaudited)

3
 

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended September 30, 2020 and 2019 (unaudited)

4
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2020 and 2019 (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

16
     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22
     

Item 4.

Controls and Procedures

22
     
 

Part II. Other Information

  
     

Item 1.

Legal Proceedings

22
     

Item 1A.

Risk Factors

22
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23
     

Item 3.

Defaults Upon Senior Securities

23
     

Item 4.

Mine Safety Disclosure

23
     

Item 5.

Other Information

23
     

Item 6.

Exhibits

23
 

 

Other

  

Signatures

  

24
     
     
     

 

 
 

 

 

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; the outbreak and continued spread of COVID-19; 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, 2020 (“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 1A 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 INCOME

  

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

  

(Unaudited)

  
                 
   

Three months ended

  
   

September 30,

  
   

2020

    

2019

  
                 

Sales, net

   $ 15,172     $ 11,406  
                 

Cost of sales

     12,799       10,007  
                 

Gross profit

     2,373       1,399  
                 

Selling and administrative expenses

     864       923  
                 

Operating income

     1,509       476  
                 

Other income (expense), net:

          

Interest expense

     (76 )     (124 )

Realized gain on sale of investment in iBio Stock

     56       -  

Unrealized loss on investment in iBio Stock

     (29 )     (20 )

Other income, net

     8       17  

Total other expense, net

     (41 )     (127 )
                 

Income before income taxes

     1,468       349  
                 

Income tax expense, net

     427       37  
                 

Net income

   $ 1,041     $ 312  
                 

Basic net income per common share

   $ 0.04     $ 0.01  
                 

Diluted net income per common share

   $ 0.03     $ 0.01  
                 

Weighted average common shares outstanding - basic

     29,645,943       29,565,943  

Add: Equivalent shares outstanding - Stock Options

     2,147,133       1,158,690  

Weighted average common shares outstanding - diluted

     31,793,076       30,724,633  

 

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)

  
                 
   

September 30,

    

June 30,

  
   

2020

    

2020

  

Assets

                

Current Assets:

          

Cash

   $ 369     $ 402  

Accounts receivable, net

     4,855       5,507  

Inventories

     12,756       10,101  

Other current assets

     594       451  

Total current assets

     18,574       16,461  
                 

Property and equipment, net

     1,670       1,696  

Operating lease right-of-use assets (includes $2,673 and $2,788 with a related party)

     2,704       2,824  

Deferred tax assets, net

     1,606       1,883  

Security deposits and other assets

     76       80  

Total Assets

   $ 24,630     $ 22,944  
                 

Liabilities and Stockholders' Equity:

          

Current Liabilities:

          

Advances under revolving credit facility

   $ 2,823     $ 4,046  

Accounts payable (includes $72 and $62 due to related party)

     7,058       4,358  

Accrued expenses and other current liabilities

     1,433       1,384  

Current portion of long term debt, net

     2,836       2,823  

Current portion of operating lease liabilities (includes $472 and $467 with a related party)

     494       488  

Total current liabilities

     14,644       13,099  
                 

Long term debt, net

     654       1,436  

Operating lease liabilities (includes $2,207 and $2,327 with a related party)

     2,216       2,342  

Total liabilities

     17,514       16,877  
                 

Commitments and Contingencies

          
                 

Stockholders' Equity :

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

 29,680,843 shares issued and 29,645,943 shares outstanding, respectively

     59       59  

Additional paid-in capital

     50,271       50,263  

Accumulated deficit

     (43,115 )     (44,156 )

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

     (99 )     (99 )

Total Stockholders' Equity

     7,116       6,067  

Total Liabilities and Stockholders' Equity

   $ 24,630     $ 22,944  

 

See accompanying notes to condensed consolidated financial statements.

 

 

-3-
 
 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

  

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

  

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

  

(in thousands, except shares)

  

(Unaudited)

  
                                                       
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020:  
                                                       
                                                 

Total

  
 

Common Stock

    

Additional

    

Accumulated

    

Treasury Stock

    

Stockholders'

  
 

Shares

    

Par Value

    

Paid-in-Capital

    

Deficit

    

Shares

    

Cost

    

Equity

  
                                                       

Balance, July 1, 2020

   29,680,843     $ 59     $ 50,263     $ (44,156 )     34,900     $ (99 )   $ 6,067  
                                                       

Stock compensation expense employee stock options

   -       -       8       -       -       -       8  

Net income

   -       -       -       1,041       -       -       1,041  

Balance, September 30, 2020

   29,680,843     $ 59     $ 50,271     $ (43,115 )     34,900     $ (99 )   $ 7,116  

 

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019:
                                                         
   

Common Stock

    

Additional

    

Accumulated

    

Treasury Stock

    

Total Stockholders'

  
   

Shares

    

Par Value

    

Paid-in-Capital

    

Deficit

    

Shares

    

Cost

    

Equity

  
                                                         

Balance, July 1, 2019

     29,600,843     $ 59     $ 50,197     $ (48,264 )     34,900     $ (99 )   $ 1,893  
                                                         

Stock compensation expense for employee stock options

     -       -       15       -       -       -       15  

Net income

     -       -       -       312       -       -       312  

Balance, September 30, 2019

     29,600,843     $ 59     $ 50,212     $ (47,952 )     34,900     $ (99 )   $ 2,220  

 

 

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)

  
                 
   

Three months ended

  
   

September 30,

  
   

2020

    

2019

  

Cash flows provided by operating activities:

          

Net income

   $ 1,041     $ 312  

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

                

Depreciation and amortization

     83       91  

Amortization of operating lease right-of-use assets

     120       116  

Stock based compensation

     8       15  

Change in deferred tax assets

     277       (5 )

Realized gain on sale of investment in iBio Stock

     (56 )     -  

Unrealized loss on investment in iBio Stock

     29       20  

Other, Net

     5       9  

Changes in operating assets and liabilities:

          

Decrease (increase) in:

                

Accounts receivable

     652       1,084  

Inventories

     (2,655 )     (1,073 )

Other current assets

     (185 )     -  

Security deposits and other assets

     (26 )     18  

(Decrease) increase in:

                

Accounts payable

     2,696       1,251  

Accrued expenses and other liabilities

     49       (37 )

Operating lease obligations

     (120 )     (116 )

Net cash provided by operating activities

     1,918       1,685  
                 

Cash flows from investing activities:

          

Purchase of property and equipment

     (53 )     (58 )

Proceeds from sale of iBio Stock

     96       -  

Net cash provided by (used in) investing activities

     43       (58 )
                 

Cash flows from financing activities:

          

Advances under revolving credit facility

     13,921       11,040  

Repayments of advances under revolving credit facility

     (15,144 )     (12,075 )

Repayments under term note payables

     (734 )     (482 )

Repayments under finance lease obligations

     (37 )     (60 )

Net cash used in financing activities

     (1,994 )     (1,577 )
                 

Net (decrease) increase in cash

     (33 )     50  

Cash at beginning of period

     402       475  

Cash at end of period

   $ 369     $ 525  
                 

Supplemental disclosures of cash flow information:

          

Interest paid

   $ 57     $ 123  

Income taxes paid

   $ -     $ -  
                 

Supplemental disclosures of non-cash flow transactions:

          

Amount owed on purchase of property and equipment

   $ 20     $ -  

 

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, 2020 (“Form 10-K”), as filed with the SEC. The June 30, 2020 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 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 months ended September 30, 2020 are not necessarily indicative of the results for the full fiscal year ending June 30, 2021 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 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 distributes healthful nutritional products for sale through major mass market, grocery and drug and vitamin retailers, under the following brands: Peaceful Sleep, Wheatgrass and other products which are being introduced into the market (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., a service provider for warehousing and fulfillment services and (v) Chem International, Inc. (“Chem”), a distributor of certain raw materials for DSM Nutritional Products LLC.

 

Accounting Policies

 

Reclassifications. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

 

 

 

-6-
 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

 

Accounting Pronouncements Recently Adopted

 

On August 28, 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which changes the fair value measurement disclosure requirements of ASC 820. This ASU removes certain disclosure requirements regarding the amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of transfers between the levels. This ASU also adds disclosure requirements regarding unrealized gains and losses included in Other Comprehensive Income for recurring Level 3 fair value measurements and the range and weighted average of unobservable inputs used in Level 3 fair value measurements. ASU 2018-13 is effective for the fiscal year beginning July 1, 2020, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU 2018-13. This new guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

 

Aside from the adoption of ASUs, as described above, there have been no material changes during fiscal year 2020 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, 2020.

 

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.

 

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.

 

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.

 

 

-7-
 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

 

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 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 months ended September 30, 2020 and 2019:

 

 

 

   

Three Months Ended

  
   

September 30,

  
   

2020

    

2019

  
                 

Anti-dilutive stock options

     -       50,000  

Total anti-dilutive shares

     -       50,000  

 

 

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:

 

   

September 30,

    

June 30,

  
   

2020

    

2020

  
                 

Raw materials

   $ 9,957     $ 6,610  

Work-in-process

     1,972       2,612  

Finished goods

     827       879  

Total

   $ 12,756     $ 10,101  

 

-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:

 

   

September 30,

    

June 30,

  
   

2020

    

2020

  
                 

Land and building

   $ 1,250     $ 1,250  

Leasehold improvements

     1,327       1,287  

Machinery and equipment

     6,470       6,465  

Transportation equipment

     6       6  
      9,053       9,008  

Less: Accumulated depreciation and amortization

     (7,383 )     (7,312 )

Total

   $ 1,670     $ 1,696  

 

Depreciation and amortization expense recorded on property and equipment for the three months ended September 30, 2020 and 2019 was $83 and $91, respectively. In the three months ended September 30, 2020, the Company disposed of fully depreciated property of $12.

 

 

 

Note 4. Senior Credit Facility and other Long Term Debt

 

As of September 30, 2020 and June 30, 2020, the Company had the following debt outstanding:

 

 

   

Principal Amount

    

Interest Rate

  

Maturity Date
   

As of September 30, 2020

    

As of June 30, 2020

            

Revolving advances under Senior Credit

                          

Facility with PNC Bank, National Association

   $ 2,823     $ 4,046       3.25 %

5/15/2024

Installment Note with PNC Bank

     1,850       2,584       3.50 %

5/15/2024

Payroll Protection Program Loan with PNC Bank

     1,639       1,639       1.00 %

4/30/2022

Capitalized lease obligations

     38       75       4.01% -9.38  %  12/1/2020

Total outstanding debt

     6,350       8,344            

Less: Revolving Advances

     (2,823 )     (4,046 )          

Prepaid financing costs

     (37 )     (39 )          

Current portion of long term debt, net

     (2,836 )     (2,823 )          

Long term debt, net

   $ 654     $ 1,436            

 

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, and May 15, 2019.

 

 

 

-9-
 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

 

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, Inc. ("iBio Stock") owned by the Company. Revolving Advances bear interest at PNC’s Base Rate (3.25% as of September 30, 2020 and June 30, 2020) or the Eurodollar Rate, at Borrowers’ option, plus 2.50%. The Term Loan bears interest at PNC’s Base Rate (3.50% as of September 30, 2020 and June 30, 2020) or the Eurodollar Rate at Borrowers’ option, plus 3.00%.

 

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) $8,000 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 (as defined in the Amended Loan Agreement) 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 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 September 30, 2020, 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 and used the proceeds of $96 from the sale of iBio Stock in the three months ended September 30, 2020 to repay the Term Loan.

 

 

 

 

-10-
 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

 

 

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.

 

OTHER LONG TERM DEBT

 

Paycheck Protection Program Term Note. On April 29, 2020, the Company entered into a Paycheck Protection Program Term Note (the “PPP Note”) with PNC Bank in the amount of $1,639. The PPP Note has an interest rate of 1% and a maturity date of April 30, 2022. The PPP Note was issued by PNC Bank to the Company pursuant to the Coronavirus, Aid, Relief, and Economic Security Act’s (the “CARES Act”) (P.L. 116-136) Paycheck Protection Program (the “Program”). Under the Program, all or a portion of the PPP Note may be forgiven in accordance with the Program requirements. On August 20, 2020, the PPP Note was amended to conform to the provisions under the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), which was signed into law on June 5, 2020. The Flexibility Act significantly modified the loan forgiveness process and provided other benefits to the PPP loan recipient. The amount of the forgiveness shall be calculated (and may be reduced) in accordance with the requirements of the Program, including the provisions of Section 1106 of the Cares Act and the Flexibility Act. No more than 40% of the amount forgiven can be attributable to non-payroll costs, as defined in the Program.

 

There are no payments of interest or principal amortization due under the PPP Note while the PPP Note is in the Deferral Period, which is the period beginning on the date of the PPP Note, April 29, 2020, and ending on the Deferral Expiration Date. The Deferral Expiration Date is the date any forgiven amount is remitted to PNC Bank or the date that a final determination is made that no portion of the PPP Note will be forgiven. If the Company fails to apply for loan forgiveness, the Deferral Expiration Date will be August 15, 2021. Any amounts not forgiven under the Program will be payable in equal installments of principal plus any interest owed on the payment date from the Deferral Expiration Date through the Maturity Date. Additionally, any accrued interest that is not forgiven under the Program will be due on the First Payment Date, which is the 15th of the month following the month in which the Deferral Expiration Date occurs.

 

If the Company fails to make timely payments under the PPP Note, the Company, PNC Bank will charge a late payment fee equal to the lesser of 5% of the amount of such payment or $100. In the event of Default, as defined in the PPP Note, the default rate of interest will 5% in excess of the interest rate in effect from time to time under the PPP Note.

 

 

Note 5. Significant Risks and Uncertainties

 

(a) Major Customers. For the three months ended September 30, 2020 and 2019, 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 represented approximately 69% and 25% and 66% and 29% in the three months ended September 30, 2020 and 2019, respectively. Accounts receivable from these two major customers represented approximately 89% and 92% of total net accounts receivable as of September 30 and June 30, 2020, 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 69% 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.

 

The COVID-19, or coronavirus, outbreak has the potential to cause a disruption in the Company’s supply chain.  Currently, some of our suppliers of certain materials used in the production of our supplements are located in China and other impacted countries or other states within the United States.  Most of these materials may

 

 

-11-
 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

 

be obtained from more than one supplier.  However, due to port closures and other restrictions resulting from the coronavirus outbreak throughout the world, these suppliers, located both inside and outside of the United States, may have limited supply of the materials, which has caused prices of some materials to increase. These and other disruptions would likely impact the Company’s sales and operating results.  If the Company is unable to obtain the necessary materials to produce a supplement within the Company’s standard lead times, it may delay the production and shipment of those supplements, thereby shifting the timing of recognizing the resulting sale to the Company’s customers.  In addition, the significant outbreak of this contagious disease in the human population has resulted in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for the Company’s products and impact the Company’s operating results.

 

The Company does not currently anticipate any negative impact to its margins resulting from the coronavirus outbreak, however; if the Company is unable to obtain the necessary materials to produce a supplement within its standard lead times or the necessary safety and cleaning supplies it may delay the production and shipment of those supplements to its customers, thereby shifting the timing of recognizing the resulting sale to its customers. 

 

 

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 September 30, 2020 and 2019, were as follows:

 

   

2020

    

2019

  
   

Related Party - Vitamin Realty

    

Other Leases

    

Totals

    

Related Party - Vitamin Realty

    

Other Leases

    

Totals

  
                                                 

Operating lease costs

   $ 141     $ 24     $ 165     $ 135     $ 39     $ 174  
                                                 

Finance Operating Lease Costs:

                                                

Amortization of right-of use assets

   $ -     $ 12     $ 12     $ -     $ 27     $ 27  

Interest on operating lease liabilities

     -       1       1       -       5       5  

Total finance lease cost

   $ -     $ 13     $ 13     $ -     $ 32     $ 32  

 

 

 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 Company’s 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 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.

 

 

-12-
 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (in thousands, except share and per share amounts)

(Unaudited)

 

Rent expense, lease amortization costs and interest expense for the three months ended September 30, 2020 and 2019 on these leases were $222 and $213 respectively, and are included in cost of sales, selling and administrative expenses and interest expense in the accompanying Condensed Consolidated Statements of Income. As of September 30, 2020 and June 30, 2020, the Company had outstanding current obligations to Vitamin Realty of $72 and $62, respectively, included in accounts payable in the accompanying Condensed Consolidated Balance Sheet. Additionally, the Company has operating lease obligations of $2,679 and $2,794 with Vitamin Realty as noted in the accompany Condensed Consolidated Balance Sheet as of September 30, 2020 and June 30, 2020, respectively.

 

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 September 30, 2020, 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 Leases

   $ 2,673     $ 472     $ 2,207     $ 2,962  

Machinery and equipment leases

     13       11       2       13  

Office equipment leases

     18       11       7       19  
    $ 2,704     $ 494     $ 2,216     $ 2,994  

 

 

As of June 30, 2020, 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 Leases

   $ 2,788     $ 467     $ 2,327     $ 3,103  

Machinery and equipment leases

     28       20       8       29  

Office equipment leases

     8       1       7       9  
    $ 2,824     $ 488     $ 2,342     $ 3,141  

 

 

As of September 30, 2020 and June 30, 2020, the Company’s weighted average discount rate and remaining term on lease liabilities were approximately 3.75% and 3.75% and 5.1 years and 5.4 years, respectively.

 

-13-
 

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 three months ended September 30, 2020, 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

   $ 141     $ 24     $ 165  

Operating cash flows from finance leases

     -       1       1  

Financing cash flows from finance lease obligations

     -       37       37  

 

 

Supplemental cash flows information related to leases for the three months ended September 30, 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

   $ 141     $ 24     $ 165  

Operating cash flows from finance leases

     -       5       5  

Financing cash flows from finance lease obligations

     -       60       60  

 

The Company did not enter into any lease commitments in the three months ended September 30, 2020.

 

Maturities of operating lease liabilities as of September 30, 2020 were as follows:

 

 

   

 

    

Related Party

    

 

          

 

  

Operating Lease

    

Operating Lease

    

Financed Lease

          

Year ending June 30,

  

Commitment

    

Commitment

    

Obligations

    

Total

  
                                 

2021, remaining

   $ 16     $ 424     $ 39     $ 479  

2022

     11       565       -       576  

2023

     2       565       -       567  

2024

     2       565       -       567  

2025

     1       563       -       564  

2026

     -       280       -       280  

Total minimum lease payments

     32       2,962       39       3,033  

Imputed interest

     (1 )     (283 )     (1 )     (285 )

Total

   $ 31     $ 2,679     $ 38     $ 2,748  

 

Total rent expense, lease amortization costs and interest expense, including real estate taxes and maintenance charges, was approximately $265 and $263 for the three months ended September 30, 2020 and 2019, respectively. Rent and lease amortization and interest expense is included in cost of sales, selling and administrative expenses and interest expense in the accompanying Condensed Consolidated Statements of Income.

 

 

-14-
 

 

 

(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 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 two reportable segments as follows: Contract Manufacturing, and Other Nutraceutical Businesses. The international sales, concentrated primarily in Europe and Canada, for the three months ended September 30, 2020 and 2019 were $1,467 and $2,026, respectively.

 

Financial information relating to the three months ended September 30, 2020 and 2019 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

2020

   $ 13,324     $ 1,462     $ 14,786     $ 2,255     $ 82     $ 50  
 

2019

     9,001       1,983       10,984       1,250       90       58  
                                                   

Other Nutraceutical Businesses

2020

     381       5       386       118       1       3  
 

2019

     379       43       422       149       1       -  
                                                   

Total Company

2020

     13,705       1,467       15,172       2,373       83       53  
 

2019

     9,380       2,026       11,406       1,399       91       58  

 

   

Total Assets as of

  
   

September 30,

    

June 30,

  
   

2020

    

2020

  

Contract Manufacturing

   $ 21,429     $ 19,581  

Other Nutraceutical Businesses

      3,201        3,363  

Total Company

   $ 24,630     $ 22,944  

 

 

 

 

-15-
 

 

 

 

Item 2. MANAGEMENT’S 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, 2020.

 

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

 

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, 2020.

 

For the three months ended September 30, 2020, our net sales from operations increased by $3,766 to approximately $15,172 from approximately $11,406 in the three months ended September 30, 2019. Our net sales in the Contract Manufacturing Segment increased by $3,802, offset by a decrease in our Other Nutraceuticals Segment of $36. Net sales increased in our Contract Manufacturing Segment primarily due to increased sales volumes to Life Extension and Herbalife in the amount of $2,994 and $529, respectively. For the three months ended September 30, 2020, we had operating income of approximately $1,509, an increase of approximately $1,033 from operating income of approximately $476 for the three months ended September 30, 2019. Our profit margins increased from approximately 12.3% of net sales in the three months ended September 30, 2019 to approximately 15.5% of net sales in the three months ended September 30, 2020, primarily as a result of the increased sales in our Contract Manufacturing Segment of approximately $3,802. Our consolidated selling and administrative expenses decreased by approximately $59 or approximately 6.4 % in the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Professional fees decreased by $71 primarily from decreased legal fees of approximately $61, along with a decrease in travel and entertainment of $15, offset in part, by an increase in expected losses on customer receivables of $30, each as a result of the COVID-19, or coronavirus outbreak.

 

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.

 

The COVID-19, or coronavirus outbreak, has the potential to cause a disruption in our supply chain. Currently, some of our suppliers of certain materials used in the production of our supplements are located in China and other impacted countries or other states within the United States. Most materials may be obtained from more than one supplier. However, due to port closures and other restrictions resulting from the coronavirus outbreak throughout the world, these suppliers, located both inside and outside of the United States, may have limited supply of such materials,  which has caused prices of some materials to increase.

 

 

 

-16-
 

 

 

As of November 12, 2020, we have had delays, however; have not experienced a significant disruption in the supply chain for our raw materials. We have taken measures to secure some surplus stock and have informed our customers who may be affected of the potential price increase. In addition, the significant outbreak of this contagious disease in the human population has resulted in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and impact our operating results.

 

While, as of November 12, 2020, we haven’t experienced a major disruption in the supply chain for our manufactured products, we have, however, seen a disruption in the supply chain for personal protection equipment (“PPE”) and cleaning supplies used in our manufacturing facilities in accordance with our standard operating procedures and the updated guidelines issued by the Centers for Disease Control and Prevention (the “CDC”) for personal safety. The U.S. Department of Labor Occupational Safety and Health Administration has adopted the CDC guidelines and as such we are required to provide the PPE for our employees to wear while working. When we have obtained the out of stock items, such as face masks, gloves and other protective personal items, the cost of such items were substantially higher than the historical costs. This may impact our future gross margins. Additionally, if we are unable to obtain cleaning supplies, we may have to temporarily close areas of production until the needed supplies are obtained.

 

We do not currently anticipate any negative impact to our margins resulting from the coronavirus outbreak, however; if we are unable to obtain the necessary materials to produce a supplement within our standard lead times or the necessary PPE and cleaning supplies, it may delay the production and shipment of those supplements, thereby shifting the timing of recognizing the resulting sale to our customers.

 

While our facilities remained open during the State of New Jersey lockdown as an essential business, there can be no assurances that we will continue to operate if the Governor of New Jersey should modify or issue new executive orders prohibiting our facilities to remain open.

 

Critical Accounting Policies and Estimates

 

There have been no changes to our critical accounting policies in the three months ended September 30, 2020, 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, 2020 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

  
   

ended September 30,

  
   

2020

    

2019

  
                 

Sales, net

     100.0 %     100.0 %
                 

Costs and expenses:

                

Cost of sales

     84.4 %     87.7 %

Selling and administrative

     5.7 %     8.1 %
      90.1 %     95.8 %

Operating income

     9.9 %     4.2 %
                 

Other expense, net

                

Interest expense

     (0.5 %)     (1.1 %)

Realized gain on sale of investment in iBio Stock

     0.4 %     -  

Unrealized loss in investment in iBio, Stock

     (0.2 %)     (0.2 %)

Other income, net

     0.1 %     0.2 %

Other expense, net

     (0.2 %)     (1.1 %)
                 
                 

Income before income taxes

     9.7 %     3.1 %
                 

Income tax expense, net

     2.8 %     0.3 %
                 

Net income

     6.9 %     2.8 %

 

 

 

For the Three Months Ended September 30, 2020 compared to the Three Months Ended September 30, 2019

 

Sales, net. Sales, net, for the three months ended September 30, 2020 and 2019 were $15,172 and $11,406, respectively, an increase of 33.0%, and are comprised of the following:

 

   

Three months ended

    

Dollar

    

Percentage

  
   

September 30,

    

Change

    

Change

  
   

2020

    

2019

    

2020 vs 2019

    

2020 vs 2019

  
   

(amounts in thousands)

          

Contract Manufacturing:

                                

US Customers

   $ 13,324     $ 9,001     $ 4,323       48.0 %

International Customers

     1,462       1,983       (521 )     (26.3 %)

Net sales, Contract Manufacturing

     14,786       10,984       3,802       34.6 %
                                 

Other Nutraceuticals:

                                

US Customers

     381       379       2       0.5 %

International Customers

     5       43       (38 )     (88.4 %)

Net sales, Other Nutraceuticals

     386       422       (36 )     (8.5 %)
                                 

Total net sales

   $ 15,172     $ 11,406     $ 3,766       33.0 %

 

 

For the three months ended September 30, 2020 and 2019, a significant portion of our consolidated net sales, approximately 92% and 91%, respectively, were concentrated among two customers, Life Extension and Herbalife, in our Contract Manufacturing Segment.  Life Extension and Herbalife represented approximately 69% and 25% and 66% and 29%, respectively, of our Contract Manufacturing Segment’s net sales in the three months ended September 30, 2020 and 2019, respectively.  Innophos, while not significant customer of our consolidated net sales, represented approximately 0% and 26%, of the Other Nutraceutical Businesses net sales in the three months ended September 30, 2020 and 2019, respectively. The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations.

 

 

 

-18-
 

 

The increase in net sales of approximately $3,766 was primarily the result of increased net sales in our Contract Manufacturing Segment by $3,802 primarily due to increased sales volumes to Life Extension and Herbalife in the amounts of $2,994 and $529, respectively.

 

Cost of sales. Cost of sales increased by approximately $2,792 to $12,799 for the three months ended September 30, 2020, as compared to $10,007 for the three months ended September 30, 2019 or approximately 28%. Cost of sales decreased as a percentage of sales to 84.4% for the three months ended September 30, 2020 as compared to 87.7% for the three months ended September 30, 2019. The 28% 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 variances in sales.

 

Selling and Administrative Expenses. There was a decrease in selling and administrative expenses of $59, approximately 6% in the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. As a percentage of sales, net, selling and administrative expenses were approximately 6% and 8% in the three months ended September 30, 2020 and 2019, respectively. The decrease was primarily from decreases in (i) professional fees of approximately $71, as the result of decreased legal fees; and (ii) travel and entertainment of approximately $15. These decreases were partially offset by offset by an increase of approximately $30 in expected losses on collections of customer receivables resulting from the financial impact of COVID-19.

 

Other income (expense), net. Other income (expense), net was approximately $41 for the three months ended September 30, 2020 compared to $127 for the three months ended September 30, 2019, and is composed of:

 

   

Three months ended

  
   

September 30,

  
   

2020

    

2019

  
   

(dollars in thousands)

  

Interest expense

   $ (76 )   $ (124 )

Realized gain on sale of investment in iBio Stock

     56       -  

Unrealized loss on investment in iBio Stock

     (29 )     (20 )

Other income, net

     8       17  

Other expense, net

   $ (41 )   $ (127 )

 

 

Our interest expense for the three months ended September 30, 2020 decreased by $48 from the three month period ended September 30, 2019, primarily as the result of lower average daily balances outstanding under the Senior Credit Facility with PNC Bank and a decrease in the interest rates of approximately 1.5% in the three month period ended September 30, 2020 from the three month period ended September 30, 2019 (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q).

 

In the three months ended September 30, 2020, we sold 16,000 shares of iBio Stock for a gain of $56 with no such sales in the three months ended September 30, 2019.  Also, in the three months ended September 30, 2020, and 2019, we had an unrealized loss on the remaining iBio Stock of approximately $29 and $20, respectively.

 

Federal and state income tax expense, net. For the three months ended September 30, 2020, we had a federal deferred income tax expense of $273 compared to a $6 federal income tax benefit in the three months ended September 30, 2019 and state income tax expense, net of approximately $154 and $43, in the three months ended September 30, 2020 and 2019, 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, it is “more likely than not” that the Company’s deferred tax assets may not be fully realized.

 

-19-
 

 

Net income. Our net income for the three months ended September 30, 2020 and 2019 was approximately $1,041 and $312, respectively. The increase of approximately $729 was primarily the result of increased operating income of $1,033 offset by increased income taxes of $390.

 

Seasonality

 

The nutraceutical business can be seasonal. Due to our current customer base in our contract manufacturing segment, our fiscal quarter ending December 31st each year tends to be more than our average quarterly volume for the other three fiscal quarters in the fiscal year.  This increase is based on their forecast of their customer base.

 

The Company believes that there are non-seasonal factors that 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 three months ended

  
   

September 30,

  
   

2020

    

2019

  
   

(dollars in thousands)

  
                 

Net cash provided by operating activities

   $ 1,918     $ 1,685  

Net cash provided by (used in) investing activities

   $ 43     $ (58 )

Net cash used in financing activities

   $ (1,994 )   $ (1,577 )
                 

Cash at end of period

   $ 369     $ 525  

 

 

At September 30, 2020, our working capital was approximately $3,930, an increase of $568 from our working capital of $3,362 at June 30, 2020. Our current assets increased by $2,113 offset by an increase in our current liabilities of $1,545. The increase in the current assets is primarily from increases in inventories in the amount of $2,655 offset by a decrease in accounts receivable, net of $652.

 

Operating Activities

 

Net cash provided by operating activities of $1,918 in the three months ended September 30, 2020 includes net income of approximately $1,041. After excluding the effects of non-cash expenses, including depreciation and amortization, and changes in deferred tax assets, the adjusted cash provided from operations before the effect of the changes in working capital components was $1,507. Net cash provided by our operations in the three months ended September 30, 2020 from our working capital assets and liabilities in the amount of approximately $411 was primarily the result of cash provided from a decrease in our accounts receivable of $652 and an aggregate increase in accounts payable, accrued expenses and other liabilities of $2,745, offset in part, by increases in inventories of approximately $2,655 and prepaid and other assets of $211.

 

 

 

-20-
 

 

 

Net cash provided by operating activities of $1,685 in the three months ended September 30, 2019 includes net income of approximately $312. 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 $558. Net cash provided in our operations in the three months ended September 30, 2019 from our working capital assets and liabilities in the amount of approximately $1,126 was primarily the result of cash provided from a decrease in our accounts receivable of $1,084 and an aggregate increase accounts payable, accrued expenses and other liabilities of $1,214, offset in part, by an increase in inventories of approximately $1,073.

 

Investing Activities

 

Cash provided by investing activities in the three months ended September 30, 2020 of approximately $43 was from proceeds of $96 from the sale of iBio Stock offset by the purchase of machinery and equipment of $53. Cash used in investing activities in the three months ended September 30, 2019 of approximately $58 was used primarily for the purchase of machinery and equipment.

 

Financing Activities

 

Cash used in financing activities was approximately $1,994 for the three months ended September 30, 2020, and was primarily from repayments of advances under our revolving credit facility of $15,144 and principal payments under our term notes in the amount of $734, offset by advances under our revolving credit facility of approximately $13,921.

 

Cash used in financing activities was approximately $1,577 for the three months ended September 30, 2019, and was primarily from repayments of advances under our revolving credit facility of $12,075 and principal payments under our term notes in the amount of $482, offset by advances under our revolving credit facility of approximately $11,040.

 

As of September 30, 2020, we had cash of $369, funds available under our revolving credit facility of approximately $3,495 and working capital of approximately $3,930. Our working capital includes $2,823 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 $1,509 in the three months ended September 30, 2020. 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 November 12, 2021.

 

Our total annual commitments at September 30, 2020 for long term non-cancelable leases of approximately $565 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 three months ended September 30, 2020 and 2019 were approximately $53 and $58, respectively. The Company has budgeted approximately $475 for capital expenditures for fiscal year 2021. 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.

 

Recent Accounting Pronouncements

 

None.

 

Impact of Inflation

 

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

 

-21-
 

 

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 September 30, 2020, 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 September 30, 2020 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

 

 

-22-
 

 

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

 

None

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

Item 4. MINE SAFETY DISCLOSURE

 

Not Applicable.

 

Item 5. OTHER INFORMATION

 

None.

 

Item 6. EXHIBITS

 

(a)     Exhibits

 

Exhibit

Number

31.1

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

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 Co-Chief Executive Officers.

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 financial information from Integrated BioPharma, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income for the three months ended September 30, 2020 and 2019, (ii) Condensed Consolidated Balance Sheets as of September 30, 2020 and June 30, 2020, (iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended September 30, 2020 and 2019, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2020 and 2019, and (iv) the Notes to Condensed Consolidated Financial Statements.
-23-
 

 

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:     November 12, 2020  By: /s/ Christina Kay                                
  Christina Kay,
  Co-Chief Executive Officer
   
Date:     November 12, 2020  By: /s/ Riva Sheppard                                
         Riva Sheppard,
  Co-Chief Executive Officer
   
Date:     November 12, 2020  By: /s/ Dina L. Masi
         Dina L. Masi,
         Chief Financial Officer & Senior Vice President

 

 

 

    

      

       

 

 

      

      

 

 

-24-
 

 

 

-25-