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, 2019.
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, 2019.
For the three months ended September 30, 2019, our net sales from operations increased by $1,102 to approximately $11,406 from approximately $10,304 in the three months ended September 30, 2018. Substantially all of the increase in net sales was from the Contract Manufacturing Segment of $1,132, and, to a lesser extent, from our Other Nutraceuticals Segment of $36, offset by a decrease in the Branded Proprietary Products of $66. Net sales increased in our Contract Manufacturing Segment by $1,132 primarily due to increased sales volumes to Life Extension and Herbalife in the amount of $962 and $233, respectively, offset by decreases in our other customers of net $63. For the three months ended September 30, 2019, we had operating income of approximately $476, an increase of approximately $71 from operating income of approximately $405 for the three months ended September 30, 2018. Our profit margins increased from approximately 11.8% of net sales in the three months ended September 30, 2018 to approximately 12.3% of net sales in the three months ended September 30, 2019, primarily as a result of the increased sales in our Contract Manufacturing Segment of approximately $1,132. Our consolidated selling and administrative expenses increased by approximately $109 or approximately 13.5% in the three months ended September 30, 2019 compared to the three months ended September 30, 2018.
Our revenue from our two significant customers in our Contract Manufacturing Segment is dependent on the 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.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies in the three months ended September 30, 2019, except as disclosed in Note 1. Principles of Consolidation and Basis of Presentation of the Condensed Financial Statements of the Company contained in this Quarterly Report on Form 10-Q. Critical accounting policies and the significant estimates made in accordance with them are regularly discussed by management with our Audit Committee. Those policies are discussed under “Critical Accounting Policies” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of our Annual Report on Form 10-K for the year ended June 30, 2019 and in Note 1. Principles of Consolidation and Basis of Presentation of the Condensed Financial Statements of the Company contained in this Quarterly Report on Form 10-Q.
Results of Operations (in thousands, except share and per share amounts)
Our results from operations in the following table, sets forth the income statement data of our results as a percentage of net sales for the periods indicated:
|
|
For the three months
|
|
|
|
ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
87.7
|
%
|
|
|
88.2
|
%
|
Selling and administrative
|
|
|
8.1
|
%
|
|
|
7.9
|
%
|
|
|
|
95.8
|
%
|
|
|
96.1
|
%
|
Operating income
|
|
|
4.2
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1.1%
|
)
|
|
|
(1.9%
|
)
|
Unrealized loss in investment in iBio, Inc.
|
|
|
(0.2%
|
)
|
|
|
0.0
|
%
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
0.1
|
%
|
Other income, net
|
|
|
0.2
|
%
|
|
|
-
|
|
Other expense, net
|
|
|
(1.1%
|
)
|
|
|
(1.8%
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3.1
|
%
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
Income tax expense, net
|
|
|
0.3
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2.8
|
%
|
|
|
1.6
|
%
|
For the Three Months Ended September 30, 2019 compared to the Three Months Ended September 30, 2018
Sales, net. Sales, net, for the three months ended September 30, 2019 and 2018 were $11,406 and $10,304, respectively, an increase of 10.7%, and are comprised of the following:
|
|
Three months ended
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
September 30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2019
|
|
|
2018
|
|
|
2019 vs 2018
|
|
|
2019 vs 2018
|
|
|
|
(amounts in thousands)
|
|
|
|
|
|
Contract Manufacturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Customers
|
|
$
|
9,974
|
|
|
$
|
8,655
|
|
|
$
|
1,319
|
|
|
|
15.2
|
%
|
International Customers
|
|
|
1,010
|
|
|
|
1,197
|
|
|
|
(187
|
)
|
|
|
(15.6%
|
)
|
Net sales, Contract Manufacturing
|
|
|
10,984
|
|
|
|
9,852
|
|
|
|
1,132
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded Nutraceutical Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Customers
|
|
|
2
|
|
|
|
71
|
|
|
|
(69
|
)
|
|
|
(97.2%
|
)
|
International Customers
|
|
|
10
|
|
|
|
7
|
|
|
|
3
|
|
|
|
42.9
|
%
|
Net sales, Branded Nutraceutical Products
|
|
|
12
|
|
|
|
78
|
|
|
|
(66
|
)
|
|
|
(84.6%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Nutraceuticals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Customers
|
|
|
377
|
|
|
|
339
|
|
|
|
38
|
|
|
|
11.2
|
%
|
International Customers
|
|
|
33
|
|
|
|
35
|
|
|
|
(2
|
)
|
|
|
(5.7%
|
)
|
Net sales, Other Nutraceuticals
|
|
|
410
|
|
|
|
374
|
|
|
|
36
|
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
11,406
|
|
|
$
|
10,304
|
|
|
$
|
1,102
|
|
|
|
10.7
|
%
|
For the three months ended September 30, 2019 and 2018, a significant portion of our consolidated net sales, approximately 91% and 89%, respectively, were concentrated among two customers in our Contract Manufacturing Segment, Life Extension and Herbalife. Life Extension and Herbalife represented approximately 66% and 29% and 61% and 29%, respectively, of our Contract Manufacturing Segment’s net sales in the three months ended September 30, 2019 and 2018, respectively. Innophos and Nature’s Own Nutrition, a UK-based company, (customers of our Other Nutraceutical Businesses), while not significant customers of our consolidated net sales, represented approximately 12% and 5% and 28% and 11% respectively, of the Other Nutraceutical Businesses net sales in the three months ended September 30, 2019 and 2018, respectively. The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations.
The increase in net sales of approximately $1,102 was primarily the result of increased net sales in our Contract Manufacturing Segment by $1,132 primarily due to increased sales volumes to Life Extension and Herbalife in the amounts of $962 and $233, respectively, offset by a combined decrease to our other customers of net $63.
Cost of sales. Cost of sales increased by approximately $922 to $10,007 for the three months ended September 30, 2019, as compared to $9,085 for the three months ended September 30, 2018 or approximately 10%. Cost of sales decreased as a percentage of sales to 87.7% for the three months ended September 30, 2019 as compared to 88.2% for the three months ended September 30, 2018. The increase in the cost of goods sold amount is consistent with the increased net sales of approximately 11%. 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 an increase in selling and administrative expenses of $109, approximately 13% in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. As a percentage of sales, net, selling and administrative expenses were approximately 8% in each of the three months ended September 30, 2019 and 2018. The increase was primarily from increases in (i) salaries and employees benefits of approximately $78, as the result of increases in (a) the compensation of our newly appointed
Co-Chief Executive Officers in May 2019 of $26 in the three months ended September 30, 2019 compared to the three months ended September 30, 2018; (b) other staff salaries of $42 and (c) employee benefits due to increases in salary bases and medical insurance premium costs of $10; (ii) professional and consulting fees of approximately $52 primarily as the result of increased legal fees of approximately $46 from general legal counsel and $6 in other professional consulting services; and (iii) employee stock compensation expense of $15 as a result of issuing stock options in May 2019 with no such expense in the period ended September 30, 2018. These increases were partially offset by offset by a decrease of approximately $25 in amortization expense resulting from the full amortization of intangible assets on October 31, 2018.
Other income (expense), net. Other income (expense), net was approximately $127 for the three months ended September 30, 2019 compared to $191 for the three months ended September 30, 2018, and is composed of:
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Interest expense
|
|
$
|
(124
|
)
|
|
$
|
(200
|
)
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
9
|
|
Unrealized loss in investments
|
|
|
(24
|
)
|
|
|
-
|
|
Other income
|
|
|
21
|
|
|
|
-
|
|
Other income (expense), net
|
|
$
|
(127
|
)
|
|
$
|
(191
|
)
|
During the three month period ended September 30, 2018, the derivative liability was extinguished, resulting in the carrying value as of June 30, 2018 of $9, compared to a value of $0 as of September 30, 2018, due to the fact that the related derivative liability is no longer outstanding, resulting in a change of $9 for the three months ended September 30, 2018.
Our interest expense for the three months ended September 30, 2019 decreased by $76 from the three month period ended September 30, 2018, primarily as the result of CD Financial, LLC (“CD Financial”) exercising its conversion right to convert a promissory note issued by the Company to CD Financial in the principal amount of $5,350 to equity on July 24, 2018, an interest savings of $30 and the payoff of other related party debt on May 15, 2019 resulting in the reduction of interest expense of $33 in the three months ended September 30, 2019 with additional interest savings resulting from the decrease in the interest rates on our Senior Credit Facility resulting from rate cuts in the federal funds borrowing rates and a 0.25% rate reduction in the refinancing with PNC Bank on May 15, 2019. (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q).
Federal and state income tax expense, net. For the three months ended September 30, 2019 and 2018, we had state income tax expense, net of approximately $43 and $27, respectively and a federal income tax benefit of $6 in the three months ended September 30, 2019, compared to a federal tax expense of $28 in the three months ended September 30, 2018. 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.
Net income. Our net income for the three months ended September 30, 2019 and 2018 was approximately $312 and $159, respectively. The increase of approximately $153 was primarily the result of increased operating income of $71and decreased interest expense of $76.
Seasonality
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
1,685
|
|
|
$
|
593
|
|
Net cash used in investing activities
|
|
$
|
(58
|
)
|
|
$
|
(26
|
)
|
Net cash used in financing activities
|
|
$
|
(1,577
|
)
|
|
$
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
525
|
|
|
$
|
365
|
|
At September 30, 2019, our working capital was approximately $1,541, a decrease of $185 from our working capital of $1,726 at June 30, 2019. An increase in our current liabilities of $189, offset by the increase of $4 in our current assets, resulted in a net decrease in our working capital of $185 since June 30, 2019.
Operating Activities
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 $1,127 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.
Net cash provided by operating activities of $593 in the three months ended September 30, 2018 includes net income of approximately $159. 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 $401. Net cash provided in our operations in the three months ended September 30, 2018 from our working capital assets and liabilities in the amount of approximately $192 was primarily the result of cash provided from a decrease in our accounts receivable of $415 and an aggregate increase accounts payable, accrued expenses and other liabilities of $1,791, offset in part, by an increase in inventories of approximately $1,858.
Investing Activities
Cash used in investing activities in the three months ended September 30, 2019 and 2018, of approximately $58 and $26, respectively, was used primarily for the purchase of machinery and equipment of $58 and $18, respectively.
Financing Activities
Cash used in financing activities was approximately $1,577 for the three months ended September 30, 2019, and was 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.
Cash used in financing activities was approximately $430 for the three months ended September 30, 2018, and was from repayments of advances under our revolving credit facility of $10,400 and principal payments under our term notes in the amount of $184, offset by advances under our revolving credit facility of approximately $10,204.
As of September 30, 2019, we had cash of $525, funds available under our revolving credit facility of approximately $1,049 and working capital of approximately $1,541. Our working capital includes $4,799 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 $476 in the three months ended September 30, 2019. 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 13, 2020.
Our total annual commitments at September 30, 2019 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, 2019 and 2018 were approximately $58 and $18, respectively. The Company has budgeted approximately $450 for capital expenditures for fiscal year 2020. 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.
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, 2019, and, based upon this evaluation, the Chief Executive Officer 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, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
Item 1A. Risk Factors
Not Applicable
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 Chief Executive Officer.
|
31.2
|
Certification of pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
|
32.1
|
Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
|
32.2
|
Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
|
101
|
The following financial information from Integrated BioPharma, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three months ended September 30, 2019 and 2018, (ii) Condensed Consolidated Balance Sheets as of September 30, 2019 and June 30, 2019, (iii) Condensed Consolidated Statement of Changes in Stockholders’ (Deficit) Equity for the three months ended September 30, 2019, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2019 and 2018, and (iv) the Notes to Condensed Consolidated Financial Statements.
|
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 13, 2019
|
By: /s/ Christina Kay
|
|
Christina Kay,
|
|
Co-Chief Executive Officer
|
|
|
Date: November 13, 2019
|
By: /s/ Dina L. Masi
|
|
Dina L. Masi,
|
|
Chief Financial Officer & Senior Vice President
|