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 nine months ended March 31, 2020, our net sales increased by $2,841 to approximately $39,234 from approximately $36,393 in the nine months ended March 31, 2019. Substantially all of the increase in net sales was from the Contract Manufacturing Segment of $2,725, and, to a lesser extent, from our Other Nutraceuticals Segment of $254, offset by a decrease in the Branded Proprietary Products of $138. Net sales increased in our Contract Manufacturing Segment by $2,725 primarily due to increased sales volumes to Herbalife and Life Extension in the amounts of $2,010 and $688, respectively. For the nine months ended March 31, 2020, we had operating income of approximately $2,641, an increase of approximately $511 from operating income of approximately $2,130 for the nine months ended March 31, 2019. Our profit margins increased from approximately 12.8% of net sales in the nine months ended March 31, 2019 to approximately 13.5% of net sales in the nine months ended March 31, 2020, primarily as a result of the increased sales in our Contract Manufacturing Segment of approximately $2,725. Our consolidated selling and administrative expenses increased by approximately $123 or approximately 4.9% in the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019.
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.
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, other impacted countries or 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 will cause the price of such materials to increase. As of May 13, 2020, we have 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 diseases 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 May 13, 2020, we have not 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 obtain items for which there is a shortage, such as face masks, gloves and other PPE, the cost of such items is 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 it may delay the production and shipment of those supplements or the necessary PPE and cleaning supplies, thereby shifting the timing of recognizing the resulting sale to our customer.
While our facilities have 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 nine months ended March 31, 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, 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
|
|
|
For the nine months
|
|
|
|
ended March 31,
|
|
|
ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
86.4
|
%
|
|
|
85.1
|
%
|
|
|
86.6
|
%
|
|
|
87.2
|
%
|
Selling and administrative
|
|
|
6.5
|
%
|
|
|
6.1
|
%
|
|
|
6.7
|
%
|
|
|
6.9
|
%
|
|
|
|
92.9
|
%
|
|
|
91.2
|
%
|
|
|
93.2
|
%
|
|
|
94.1
|
%
|
Income from operations
|
|
|
7.1
|
%
|
|
|
8.8
|
%
|
|
|
6.8
|
%
|
|
|
5.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(0.7%
|
)
|
|
|
(1.4%
|
)
|
|
|
(0.8%
|
)
|
|
|
(1.6%
|
)
|
Realized gain on investment
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
0.1
|
%
|
|
|
-
|
|
Unrealized gain on investment
|
|
|
0.7
|
%
|
|
|
-
|
|
|
|
0.1
|
%
|
|
|
-
|
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0
|
%
|
Other income, net
|
|
|
-
|
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Other income (expense), net
|
|
|
0.3
|
%
|
|
|
(1.2%
|
)
|
|
|
(0.5%
|
)
|
|
|
(1.5%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7.4
|
%
|
|
|
7.6
|
%
|
|
|
6.2
|
%
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
0.5
|
%
|
|
|
1.0
|
%
|
|
|
0.6
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6.9
|
%
|
|
|
6.6
|
%
|
|
|
5.6
|
%
|
|
|
3.7
|
%
|
For the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019
Sales, net. Sales, net, for the nine months ended March 31, 2020 and 2019 were $39,234 and $36,393, respectively, an increase of 7.8%, and were comprised of the following:
|
|
Nine Months Ended
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
March 31,
|
|
|
Change
|
|
|
Change
|
|
|
|
2020
|
|
|
2019
|
|
|
2020 vs 2019
|
|
|
2020 vs 2019
|
|
|
|
(amounts in thousands)
|
|
|
|
|
|
Contract Manufacturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Customers
|
|
$
|
31,277
|
|
|
$
|
31,066
|
|
|
$
|
211
|
|
|
|
0.7
|
%
|
International Customers
|
|
|
6,844
|
|
|
|
4,330
|
|
|
|
2,514
|
|
|
|
58.1
|
%
|
Net sales, Contract Manufacturing
|
|
|
38,121
|
|
|
|
35,396
|
|
|
|
2,725
|
|
|
|
7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded Nutraceutical Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Customers
|
|
|
5
|
|
|
|
133
|
|
|
|
(128
|
)
|
|
|
(96.2%
|
)
|
International Customers
|
|
|
12
|
|
|
|
22
|
|
|
|
(10
|
)
|
|
|
(45.5%
|
)
|
Net sales, Branded Nutraceutical Products
|
|
|
17
|
|
|
|
155
|
|
|
|
(138
|
)
|
|
|
(89.0%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Nutraceuticals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Customers
|
|
|
1,034
|
|
|
|
803
|
|
|
|
231
|
|
|
|
28.8
|
%
|
International Customers
|
|
|
62
|
|
|
|
39
|
|
|
|
23
|
|
|
|
59.0
|
%
|
Net sales, Other Nutraceuticals
|
|
|
1,096
|
|
|
|
842
|
|
|
|
254
|
|
|
|
30.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
39,234
|
|
|
$
|
36,393
|
|
|
$
|
2,841
|
|
|
|
7.8
|
%
|
For the nine months ended March 31, 2020 and 2019, a significant portion of our consolidated net sales, approximately 91% and 92%, respectively, were concentrated among two customers in our Contract Manufacturing Segment, Life Extension and Herbalife. Life Extension and Herbalife represented approximately 67% and 27% and 71% and 24%, respectively, of our Contract Manufacturing Segment’s net sales in the nine months ended March 31, 2020 and 2019, respectively. Innophos (a customer of our Other Nutraceutical Businesses), while not a significant customer of our consolidated net sales, represented approximately 13% and 15% of the Other Nutraceutical Businesses net sales in the nine months ended March 31, 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.
The increase in net sales of approximately $2,841 was primarily the result of increased net sales in our Contract Manufacturing Segment by $2,725 primarily due to increased sales volumes to Herbalife and Life Extension in the amounts of $2,010 and $688, respectively.
Cost of sales. Cost of sales increased by approximately $2,207 to $33,957 for the nine months ended March 31, 2020, as compared to $31,750 for the nine months ended March 31, 2019 or approximately 7%. Cost of sales decreased as a percentage of sales to 86.5% for the nine months ended March 31, 2020 as compared to 87.2% for the nine months ended March 31, 2019. The increase in the cost of goods sold amount is consistent with the increased net sales of approximately 7.8%. 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 $123, approximately 5% in the nine months ended March 31, 2020 as compared to the nine months ended March 31, 2019. As a percentage of sales, net, selling and administrative expenses was approximately 7% for each of the nine month periods ended March 31, 2020 and 2019. The increase of $123 was primarily from increases in (i) salaries and employees benefits of approximately $103, as the result of increases in (a) the compensation of our newly appointed Co-Chief Executive Officers in May 2019 of $61 in the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019; (b) other staff salaries of $34 and (c) employee benefits due to increases in salary bases and medical insurance premium costs of $8; (ii) professional and consulting fees of approximately $54 primarily as the result of increased legal fees of approximately $28 from general legal counsel and an increase of $26 in other professional consulting services; and (iii) employee stock compensation expense of $44 as a result of issuing stock options in May 2019 with no such expense in the period ended March 31, 2019. These increases were partially offset by a decrease of approximately $34 in amortization expense resulting from the full amortization of intangible assets on October 31, 2018 and other expenses of $46 with no one expense component decreasing by more than approximately $12.
Other income (expense), net. Other income (expense), net was approximately $218 for the nine months ended March 31, 2020 compared to $545 for the nine months ended March 31, 2019, and was composed of:
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
Interest expense
|
|
$
|
(329
|
)
|
|
$
|
(586
|
)
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
9
|
|
Realized gain on investment
|
|
|
49
|
|
|
|
-
|
|
Unrealized gain on investment
|
|
|
35
|
|
|
|
-
|
|
Other income
|
|
|
27
|
|
|
|
32
|
|
Other income (expense), net
|
|
$
|
(218
|
)
|
|
$
|
(545
|
)
|
Our interest expense for the nine months ended March 31, 2020 decreased by $257 from the nine month period ended March 31, 2019, primarily resulting from the decrease in the interest rates on our Senior Credit Facility resulting from rate cuts in the federal funds borrowing rates of 2.00% and a 0.25% rate reduction in the refinancing with PNC on May 15, 2019 (total savings of approximately $156) and from the payoff of the related party debt, also on May 15, 2019, in the aggregate amount of $2,400 resulting in reduce interest costs in the nine months ended March 31, 2020 of approximately $98.
During the nine month period ended March 31, 2019, the derivative liability was extinguished, resulting in the carrying value as of June 30, 2018 of $9, compared to a value of $0 as of March 31, 2019, resulting in a change of $9 for the nine months ended March 31, 2019.
In the nine months ended March 31, 2020, we sold 40,000 shares of iBio Stock for a gain of $49 with no such sales in the nine months ended March 31, 2019. Also, in the nine months ended March 31, 2020, we had an unrealized gain on the remaining iBio Stock of approximately $35 compared to no unrealized gains on investments in the nine months ended March 31, 2019.
Provision for income taxes. For the nine months ended March 31, 2020 and 2019, we had a state income tax provision of approximately $318 and $216, respectively and a federal income tax benefit of $102 in the nine months ended March 31, 2020, compared to a federal tax expense of $41 in the nine months ended March 31, 2019. 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.
The increase in state tax expense of approximately $102 includes the recognition of an increased amount owed from the tax provision for the fiscal year ended June 30, 2019 to the tax return filed in March 2020 in the amount of $40. The balance of the increase is from a change in the effective rate for the State of New Jersey on the taxable income of MDC to include a 2.5% surcharge for the fiscal year ending June 30, 2020 and the increased taxable income in the nine months ended March 31, 2020 as compared to the nine months ended March 31, 2019 in the approximate amount of $315. All of our other subsidiaries still have adequate net operating losses for state income tax purposes to absorb any taxable income for state tax purposes.
The federal tax benefit of $102 in the nine-month period ended March 31, 2020 includes the recognition of the change from the tax provision for the fiscal year ended June 30, 2019 to the tax return filed in March 2020 in the amount of $40 relating to our alternative minimum tax carryover due from payments made in prior years.
Net income. Our net income for the nine months ended March 31, 2020 and 2019 was approximately $2,207 and $1,328, respectively. The increase of approximately $879 was primarily the result of increased operating income of $511 and decreased interest expense of $257, offset by an increase in selling and administrative expenses of $123.
For the Three Months Ended March 31, 2020 compared to the Three Months Ended March 31, 2019
Sales, net. Sales, net, for the three months ended March 31, 2020 and 2019 were $13,631 and $14,088, respectively, a decrease of 3.2%, and were comprised of the following:
|
|
Three months ended
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
March 31,
|
|
|
Change
|
|
|
Change
|
|
|
|
2020
|
|
|
2019
|
|
|
2020 vs 2019
|
|
|
2020 vs 2019
|
|
|
|
(amounts in thousands)
|
|
|
|
|
|
Contract Manufacturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Customers
|
|
$
|
10,775
|
|
|
$
|
11,913
|
|
|
$
|
(1,138
|
)
|
|
|
(9.6%
|
)
|
International Customers
|
|
|
2,558
|
|
|
|
1,875
|
|
|
|
683
|
|
|
|
36.4
|
%
|
Net sales, Contract Manufacturing
|
|
|
13,333
|
|
|
|
13,788
|
|
|
|
(455
|
)
|
|
|
(3.3%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded Nutraceutical Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Customers
|
|
|
1
|
|
|
|
14
|
|
|
|
(13
|
)
|
|
|
(92.9%
|
)
|
International Customers
|
|
|
2
|
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
(33.3%
|
)
|
Net sales, Branded Nutraceutical Products
|
|
|
3
|
|
|
|
17
|
|
|
|
(14
|
)
|
|
|
(82.4%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Nutraceuticals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Customers
|
|
|
282
|
|
|
|
283
|
|
|
|
(1
|
)
|
|
|
(0.4%
|
)
|
International Customers
|
|
|
13
|
|
|
|
-
|
|
|
|
13
|
|
|
|
100.0
|
%
|
Net sales, Other Nutraceuticals
|
|
|
295
|
|
|
|
283
|
|
|
|
12
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
13,631
|
|
|
$
|
14,088
|
|
|
$
|
(457
|
)
|
|
|
(3.2%
|
)
|
In the three months ended March 31, 2020 and 2019, a significant portion of our consolidated net sales, approximately 91% and 92%, respectively, were concentrated among two customers, Life Extension and Herbalife, customers in our Contract Manufacturing Segment. Life Extension and Herbalife represented approximately 64% and 26% in the three months ended March 31, 2020 and 72% and 22% in the three months ended March 31, 2019, respectively, of our Contract Manufacturing Segment’s net sales. The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations.
The decrease in net sales of approximately $457 was primarily the result of net sales decreasing in our Contract Manufacturing Segment of $455, primarily due to decreased sales volumes to one of our major customer, Life Extension of approximately $1,006, offset by an increase in sales volumes with Herbalife of approximately $491, and other customers of approximately $60 in the three months ended March 31, 2020, compared to the comparable prior period.
Cost of sales. Cost of sales decreased by $216, approximately 2%, to $11,779 for the three months ended March 31, 2020, as compared to $11,995 for the three months ended March 31, 2019. Cost of sales as a percentage of sales was approximately 85% in the three months ended March 31, 2020 compared to approximately 86% for the three months ended March 31, 2019. The decrease in the cost of goods sold amount is consistent with the decreased net sales of approximately 3% as well as the increase in the cost of goods sold as a percentage, as the fixed overhead expenses did not change from period to period.
Selling and Administrative Expenses. There was a slight increase in selling and administrative expenses of $36 in the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, approximately 4.2%. As a percentage of sales, net, selling and administrative expenses were approximately 7% for each of the three month periods ended March 31, 2020 and 2019. The decrease was primarily due to an increase in professional and consulting fees of approximately $38 ($7 in general legal and $31 in other professional consulting fees), as the result of timing of the performance of such services throughout the year. No other expense within our selling and administrative expenses changed by more than $16.
Other income (expense), net. Other income (expense), net was approximately $43 and ($171) for the three months ended March 31, 2020 and 2019, respectively, and was composed of:
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
Interest expense
|
|
$
|
(96
|
)
|
|
$
|
(196
|
)
|
Realized gain on investment
|
|
|
49
|
|
|
|
-
|
|
Unrealized gain on investment
|
|
|
90
|
|
|
|
-
|
|
Other income
|
|
|
-
|
|
|
|
25
|
|
Other income (expense), net
|
|
$
|
43
|
|
|
$
|
(171
|
)
|
Our interest expense for the three months ended March 31, 2020 decreased by $100 from the three month period ended March 31, 2019, primarily resulting from the decrease in the interest rates on our Senior Credit Facility resulting from rate cuts in the federal funds borrowing rates of 1.50% in the three month period ended March 31, 2020 and offset by approximately 0.25% rate savings with electing Eurodollar Rate option available in the Senior Credit Facility in the three months ended March 31, 2019. Additionally, the Company had approximately $581 of less average total senior debt outstanding in the three month period ended March 31, 2020, resulting in combined savings of approximately $33 and from the payoff of the related party debt, on May 15, 2019, in the aggregate amount of $2,400 resulting in reduce interest costs in the three months ended March 31, 2020 of approximately $33.
In the three months ended March 31, 2020, we sold 40,000 shares of iBio Stock for a gain of $49 with no such sales in the three months ended March 31, 2019. Also, in the three months ended March 31, 2020, we had an unrealized gain on the remaining iBio Stock of approximately $90 compared to no unrealized gain or loss on investment in the three months ended March 31, 2019.
Provision for income taxes. For the three months ended March 31, 2020 and 2019, we had a state income tax provision of approximately $160 and $115, respectively. For the three months ended March 31, 2020, we had a federal income tax benefit of $93 and a federal tax expense of $29 for the three months ended March 31, 2019. We continue to maintain a reserve on a portion of our deferred tax assets as it has been determined that based upon past losses, the Company’s past liquidity concerns and the current economic environment, that it is “more likely than not” the Company’s deferred tax assets may not be fully realized.
The increase in state tax expense of approximately $45 was primarily the result the recognition of an increased amount owed from the tax provision for the fiscal year ended June 30, 2019 to the tax return filed in March 2020 in the amount of $40. The balance of the increase is from a change in the effective rate for the State of New Jersey on the taxable income of MDC to include a 2.5% surcharge for the fiscal year ending June 30, 2020. All of our other subsidiaries still have adequate net operating losses for state income tax purposes to absorb any taxable income for state tax purposes.
The federal tax benefit of $93 in the three-month period ended March 31, 2020 includes the recognition of the change from the tax provision for the fiscal year ended June 30, 2019 to the tax return filed in March 2020 in the amount of $40 relating to our alternative minimum tax carryover due from payments made in prior years.
Net income. We had net income for the three months ended March 31, 2020 and 2019 of $936 and $923, respectively. The increase in net income of approximately $13 was primarily the result of decreased other income (expense), net of $214, decreased provision of income taxes of $76, offset by a decrease in operating income of $277.
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 nine months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
3,549
|
|
|
$
|
(299
|
)
|
Net cash used in investing activities
|
|
$
|
(70
|
)
|
|
$
|
(358
|
)
|
Net cash (used in) provided by financing activities
|
|
$
|
(3,389
|
)
|
|
$
|
860
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
565
|
|
|
$
|
431
|
|
At March 31, 2020, our working capital was approximately $2,909, an increase of $1,183 from our working capital of $1,726 at June 30, 2019. An increase in our current assets of $1,218 offset by an increase of $35 in our current liabilities resulted in the increase in our working capital of $1,183 since June 30, 2019.
Operating Activities
Net cash provided by operating activities of $3,549 in the nine months ended March 31, 2020 includes net income of approximately $2,207. 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 $2,657. Net cash provided by our operations in the nine months ended March 31, 2020 from our working capital assets and liabilities in the amount of approximately $892 was primarily the result of cash provided by a decrease in accounts receivable of $166 and an aggregate increase in accounts payable, accrued expenses and other liabilities of $2,327, offset, in part, by decreases in inventories of $1,247 and obligations under operating leases of $343.
Net cash used in operating activities of $299 in the nine months ended March 31, 2019, includes net income of approximately $1,328. After excluding the effects of non-cash expenses, including depreciation and amortization, and changes in the fair value of derivative liabilities and deferred tax assets, the adjusted cash provided from operations before the effect of the changes in working capital components was $2,009. Net cash used in our operations in the nine months ended March 31, 2019 from our working capital assets and liabilities in the amount of approximately $2,297 was primarily the result of cash used in our accounts receivable of $1,161 and inventories of $2,807 and a decrease in obligations under operating leases of $339 offset, in part, with an aggregate increase in accounts payable, accrued expenses and other liabilities of $2,041.
Investing Activities
Cash used in investing activities in the nine months ended March 31, 2020 and 2019, of approximately $70 and $358, respectively, was used primarily for the purchase of machinery and equipment of $158 and $350, respectively. In the nine months ended March 31, 2020, cash used in investing activities was offset, in part, with proceeds in the amount of $85 from the sale of 40,000 shares of iBio Stock.
Financing Activities
Cash used in financing activities was approximately $3,389 for the nine months ended March 31, 2020, and was from repayments of advances under our revolving credit facility of $37,599 and principal payments under our term notes and under capitalized lease obligations in the amount of $823 and $157, respectively, offset by advances under our revolving credit facility of approximately $35,190.
Cash provided by financing activities was approximately $860 for the nine months ended March 31, 2019, and was from advances under our revolving credit facility of $35,574 and proceeds from a sales/lease back arrangement in the amount of $233, offset in part, by repayments of advances under our revolving credit facility of $34,322, principal payments under our term notes in the amount of $475 and payments under capitalized lease obligations of $174.
As of March 31, 2020, we had cash of $565, funds available under our revolving credit facility of approximately $2,671 and working capital of approximately $2,909. Our working capital includes $3,425 outstanding under our revolving line of credit which is not due until May 2024 but classified as current due to a subjective acceleration clause that could cause the advances to become currently due. (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). Additionally, we had income from operations of approximately $2,641 in the nine months ended March 31, 2020. On April 30, 2020, we received proceeds $1,639 under the CARES Act from PNC in connection with our PPP Loan (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). After taking into consideration our interim results and current projections, management believes that operations, together with the revolving credit facility and proceeds from the PPP Note, will support our working capital requirements at least through the period ending May 13, 2021.
Our total annual commitments at March 31, 2020 for long term non-cancelable leases of approximately $565 consisted of obligations under operating leases for facilities and operating lease agreements for the rental of warehouse equipment, office equipment and automobiles.
Capital Expenditures
The Company's capital expenditures for the nine months ended March 31, 2020 and 2019 were approximately $158 and $350, respectively. The Company has budgeted approximately $200 for capital expenditures for the remaining three months in the fiscal year ending June 30, 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 March 31, 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 March 31, 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
There have been no material changes made to the risk factors listed in “Item 1A - Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, except as follows:
The coronavirus outbreak has the potential to cause a disruption in our supply chain and business operations.
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, other impacted countries or 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 will cause the price of such materials to increase.
If we are unable to obtain the necessary materials to produce a supplement within our standard lead times, it may delay the production and shipment of those supplements, thereby shifting the timing of recognizing the resulting sale to our customer. 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.
Additionally, a disruption in the supply chain for personal protection equipment (“PPE”) and cleaning supplies used in our manufacturing facilities could have an adverse effect on our operations. 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, adopted by The U.S. Department of Labor Occupational Safety and Health Administration, we are required to provide the PPE for our employees to wear while working. The inability to obtain affordable PPE and cleaning supplies in a timely matter may result in temporary closures of impacted production area until the needed supplies are obtained.
Furthermore, if the State of New Jersey lockdown were to include essential businesses or if the Governor of New Jersey should modify or issue new executive orders prohibiting our facilities to remain open, there can be no assurances that we will continue to operate.
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
On April 29, 2020, the Company entered into a Paycheck Protection Program Term Note (the “PPP Note”) with PNC in the amount of $1,639. The PPP Note has an interest rate of 1% and a maturity date of April 29, 2022. The PPP Note was issued by PNC 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. 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. No more than 25% 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 until November 15, 2020. Any amounts not forgiven under the Program will be payable in 18 equal installments of principal plus any interest owed on the payment date.
If the Company fails to make timely payments under the PPP Note, PNC will charge the Company 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 be 5% in excess of the interest rate then in effect under the PPP Note.
The foregoing is a summary of the PPP Note and is qualified in its entirety by reference to the complete text of the PPP Note, which is filed by the Company as Exhibit 10 to this Quarterly Report on Form 10-Q.
Item 6. EXHIBITS
(a) Exhibits
Exhibit
Number
10.1
|
Paycheck Protection Program Term Note, dated as of April 29, 2020, by and among Integrated BioPharma, Inc. and PNC Bank, National Association, in the original principal amount of $1,639,300.
|
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 March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the nine months ended March 31, 2020 and 2019, (ii) Condensed Consolidated Balance Sheets as of March 31, 2020 and June 30, 2019, (iii) Condensed Consolidated Statement of Changes in Stockholders’ (Deficit) Equity for the three and nine months ended March 31, 2020 and 2019, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2020 and 2019, and (v) 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: May 13, 2020
|
By: /s/ Christina Kay
|
|
Christina Kay,
|
|
Co-Chief Executive Officer
|
|
|
Date: May 13, 2020
|
By: /s/ Dina L. Masi
|
|
Dina L. Masi,
|
|
Chief Financial Officer & Senior Vice President
|