Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands).
Certain statements set forth under this caption constitute “forward-looking statements.” See “Cautionary Statement Regarding Forward-Looking Statements” on page 3 of this Annual Report on Form 10-K for additional factors relating to such statements.
The Company is engaged primarily in the manufacturing, distributing, marketing and sale of vitamins, nutritional supplements and herbal products. The Company’s customers are located primarily throughout the United States, Luxembourg and Canada.
Our financial results are substantially dependent on net sales. Net sales are partly dependent on the mix of contract manufactured products, our branded proprietary liquid nutraceuticals and other nutraceutical sales, which are difficult to forecast. The varied sales pricing among our products and promotional support in the form of consumer coupons and other sales price allowances, along with the mix of products sold, affects the average selling price that we will realize and has a large impact on our revenue and gross margins in the operations of AgroLabs. Net sales in our operations of AgroLabs is also affected by: the timing of new product introductions and the demand for and market acceptance of our products; actions taken by our competitors, including new product offerings and introductions, marketing programs and pricing pressures, and our response to such actions; our ability to respond quickly to consumer tastes and needs; and the availability of sufficient raw materials and production lead-time from suppliers to meet demand.
Factors that could cause demand to be different from our expectations include: customer acceptance of our products and our competitors’ products; changes in customer order patterns, including order returns; changes in the level of inventory at customers; and changes in business and economic conditions, including conditions in the credit market that could affect consumer confidence and result in lower than expected demand for our products.
We believe that we have the product offerings, established and developing business relationships, facilities, personnel, and competitive and financial resources in place for business success; however, future revenue, costs, gross margins, and profits are all influenced by a number of factors, including those discussed above, all of which are inherently difficult to forecast.
In the fiscal year ended June 30, 2019, our net sales from operations increased by $6,267 to approximately $49,977 from approximately $43,710 in the fiscal year ended June 30, 2018. In the fiscal year ended June 30, 2019, our gross profit increased by approximately $1,234 to $6,222 from approximately $4,988 for the fiscal year ended June 30, 2018. Our profit margins increased by 1.0% in the fiscal year ended June 30, 2019, from 11.4% to 12.4% primarily as a result of the increased sales volume in the fiscal year ended June 30, 2019 compared to the fiscal year ended June 30, 2018 coupled with increased sales dollars used to offset the fixed manufacturing overhead costs. We had consolidated selling and administrative expenses of approximately $3,518 and $3,294 in the fiscal years ended June 30, 2019 and 2018, respectively. The increase in the consolidated selling and administrative expenses of $224 was primarily from higher salary and benefit costs for the year from a shift in our headcount and general increases in wages and employee benefits. In the fiscal years ended June 30, 2019 and 2018, we had operating income of approximately $2,704 and $1,694, respectively.
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.
Critical Accounting Policies and Estimates
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates include:
● sales returns and allowances;
● trade marketing and merchandising;
● allowance for doubtful accounts;
● inventory valuation;
● valuation and recoverability of long-lived and intangible assets;
● income taxes and valuation allowances on deferred income taxes; and
● accruals for, and the probability of, the outcome of current litigation, if any.
On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.
Allowances for Doubtful Accounts and Sales Returns
Our management makes judgments as to its ability to collect outstanding receivables and provides allowances for the portion of receivables for which collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding amounts. We continuously monitor payments from our customers and maintain allowances for estimated losses for doubtful accounts in the period they become known.
If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected. In recording any additional allowances, a respective charge against income is reflected in the general and administrative expenses, and would reduce the operating results in the period in which the increase is recorded.
Our return policy in our contract manufacturing business is to only accept returns for defective products. If defective products are returned, our agreement with our customers is to cure the defect and re-ship the product. Based on this policy, when the product is shipped we make an estimate of any potential returns or allowances. With respect to our branded proprietary nutraceutical products, our return policy is also to accept returns for defective products and re-ship replacement items for the damaged product. In most instances, the damaged goods are a small portion of the overall order and we instruct our customer to dispose of the damaged product and we issue them a credit for the dollar amount of the damaged goods plus any cost of disposal. We also estimate and make allowances at the time of shipment.
In the event we have an item that is discontinued in our customers retail stores, we work with our buyer and broker on the sell through and/or return such discontinued item. We make estimates of this event at both the time of shipment and at the time of the notice from our customer that our item has been discontinued, compare this to our recorded sales allowances and record any adjustments based upon the updated knowledge of a known return.
If the historical data we use to calculate the sales allowance for sales returns and other allowances does not reflect the amounts previously recorded, additional provisions for sales allowance may be needed and the future results of operations could be materially affected. In recording any additional sales allowances, a respective charge against income is reflected in net sales, and would reduce the profit margins and operating results in the period in which the increase is recorded.
Trade Marketing and Merchandising
In order to support the Company’s proprietary nutraceutical product lines, various promotional activities are conducted through the retail trade, distributors or directly with consumers, including in-store display and product placement programs, feature price discounts, coupons, and other similar activities. The Company regularly reviews and revises, when it deems necessary, estimates of costs to the Company for these promotional programs based on estimates of what will be redeemed by the retail trade, distributors, or consumers. These estimates are made using various techniques, including historical data on performance of similar promotional programs. Differences between estimated expense and actual performance are generally not material and are recognized as a change in management’s estimate in a subsequent period. Our total promotional expenditures, including amounts classified as a reduction of net sales, represent less than 1% of consolidated net sales in the financial statements contained in this Annual Report on Form 10-K, for each of the fiscal years ended June 30, 2019 and 2018.
Inventory Valuation
Inventories are stated at the lower of cost or net realizable value, which reflects management’s estimates of net realizable value. Cost is determined using the first-in, first-out method. As a result of our inventory being manufactured primarily on a purchase order basis, the quantity of both raw materials and finished goods inventory provides for minimal risk of potential overstock or obsolescence.
Mail and Internet order inventory is expiration date sensitive. Accordingly, we review this inventory, consider sales levels (by SKU), term to expiration date, potential for retesting to extend expiration date, and evaluate potential for obsolescence or overstock.
Long Lived Assets
Purchased intangibles consisting of patents and unpatented technological expertise, license fees and trade names purchased as part of business acquisitions are presented net of related accumulated amortization and are being amortized on a straight-line basis over the remaining useful lives of such intangibles.
We record impairment losses on other intangible assets when events and circumstances indicate that such assets might be impaired and the estimated fair value of any such asset is less than its recorded amount. The Company reviews the value of its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Conditions that would necessitate an impairment assessment include material adverse changes in operations, significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon certain acquired products, services, or marketplaces, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable. Tests for impairment or recoverability are performed at least annually and require significant management judgment and the use of estimates which the Company believes are reasonable and appropriate at the time of the impairment test. Future unanticipated events affecting cash flows and changes in market conditions could affect such estimates and result in the need for an impairment charge. The Company also re-evaluates the periods of amortization to determine whether circumstances warrant revised estimates of current useful lives. No impairment losses were identified in the fiscal years ended June 30, 2019 or 2018.
Income Taxes
The Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating losses and tax credit carry-forwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company reduces deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.
The Company uses a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
General Litigation
From time to time, the Company is a defendant or plaintiff in various legal actions which arise in the normal course of business. As such, the Company is required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of the provision required for these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. The provision may change in the future due to new developments or changes in circumstances. Changes in the provision could increase or decrease the Company’s earnings in the period the changes are made. In the opinion of management, after consultation with legal counsel, the ultimate resolution of these matters cannot be determined at this time as to the whether there could be material adverse effect on our financial condition or results of operations.
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.
|
Results of Operations (in thousands, except share and per share amounts)
The following table sets forth the income statement data of the Company as a percentage of net sales for the periods indicated:
|
|
For the Fiscal Year Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
87.6
|
%
|
|
|
88.6
|
%
|
Selling and administrative
|
|
|
7.0
|
%
|
|
|
7.5
|
%
|
Total costs and expenses
|
|
|
94.6
|
%
|
|
|
96.1
|
%
|
Income from operations
|
|
|
5.4
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
Other expense, net:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1.3%
|
)
|
|
|
(2.1%
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Change in fair value of derivative instruments
|
|
|
0.0
|
%
|
|
|
1.1
|
%
|
Unrealized loss on invesment in iBio, Inc.
|
|
|
(0.0%
|
)
|
|
|
-
|
|
Impairment charge on investment in iBio, Inc.
|
|
|
-
|
|
|
|
(0.8%
|
)
|
Other (expense) income, net
|
|
|
(0.0%
|
)
|
|
|
0.2
|
%
|
Total other income
|
|
|
(0.0%
|
)
|
|
|
0.5
|
%
|
Total other expense, net
|
|
|
(1.3%
|
)
|
|
|
(1.6%
|
)
|
Income before income taxes
|
|
|
4.1
|
%
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
Federal and state income tax expense, net
|
|
|
0.7
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3.4
|
%
|
|
|
1.6
|
%
|
Year ended June 30, 2019 Compared to the Year ended June 30, 2018
Sales, net. Net sales for the fiscal year ended June 30, 2019 and 2018 were $49,977 and $43,710, respectively, an increase of $6,267 or 14.3%. The increase is comprised of the following:
|
|
Fiscal Year Ended
|
|
|
Dollar Increase
|
|
|
Percentage
|
|
|
|
June 30,
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
2019
|
|
|
2018
|
|
|
2019 vs 2018
|
|
|
2019 vs 2018
|
|
|
|
(dollars in thousands)
|
|
Contract Manufacturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Customers
|
|
$
|
41,817
|
|
|
$
|
35,803
|
|
|
$
|
6,014
|
|
|
|
16.8
|
%
|
International Customers
|
|
|
6,625
|
|
|
|
6,279
|
|
|
|
346
|
|
|
|
5.5
|
%
|
Net sales, Contract Manufacturing
|
|
|
48,442
|
|
|
|
42,082
|
|
|
|
6,360
|
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded Nutraceutical Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Customers
|
|
|
137
|
|
|
|
204
|
|
|
|
(67
|
)
|
|
|
(32.8%
|
)
|
International Customers
|
|
|
22
|
|
|
|
48
|
|
|
|
(26
|
)
|
|
|
(54.2%
|
)
|
Net sales, Branded Nutraceutical Products
|
|
|
159
|
|
|
|
252
|
|
|
|
(93
|
)
|
|
|
(36.9%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Nutraceuticals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Customers
|
|
|
1,216
|
|
|
|
1,229
|
|
|
|
(13
|
)
|
|
|
(1.1%
|
)
|
International Customers
|
|
|
160
|
|
|
|
147
|
|
|
|
13
|
|
|
|
8.8
|
%
|
Net sales, Other Nutraceuticals
|
|
|
1,376
|
|
|
|
1,376
|
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
49,977
|
|
|
$
|
43,710
|
|
|
$
|
6,267
|
|
|
|
14.3
|
%
|
For each of the fiscal years ended June 30, 2019 and 2018, a significant portion of our consolidated net sales, approximately 91%, were concentrated among two customers, Life Extension and Herbalife, customers in our Contract Manufacturing Segment. Life Extension and Herbalife represented approximately 69% and 26% of our Contract Manufacturing Segment’s net sales in the each of the fiscal years ended June 30, 2019 and 2018. 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 15% and 10% and 12% and 5% respectively, of the Other Nutraceutical Businesses net sales in the fiscal years ended June 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 $6,267 was primarily the result of:
|
●
|
Net sales increased in our Contract Manufacturing Segment by approximately $6,360 which was primarily due to increased sales volumes to each of our major customers, Life Extension and Herbalife, in the amounts of $4,388 and $1,618, respectively, in the fiscal year ended June 30, 2019, compared to the comparable prior year.
|
|
●
|
Net sales in our Branded Nutraceutical Segment decreased by approximately $93 in the fiscal year ended June 30, 2019, compared to the fiscal year ended June 30, 2018. The decrease in the Branded Nutraceutical Segment was primarily the result of decreased sales to Costco Wholesale Corporation (“Costco”) in the amount of $85. The Costco decrease was the result of discontinuing sales of Green Envy products on Costco’s Canada website. This decision was made due to the strong U.S. Dollar compared to the Canadian Dollar and the decline in sales.
|
Cost of sales. Cost of sales increased by $5,033 to $43,755 for the fiscal year ended June 30, 2019, as compared to $38,722 for the fiscal year ended June 30, 2018, an increase of approximately 13%. Cost of sales as a percentage of sales was approximately 88% and 89% for the fiscal years ended June 30, 2019 and 2018, respectively. The increase in the cost of goods sold amount of approximately 13% is consistent with the increase in net sales of approximately 14%.
The decrease in the cost of goods sold as a percentage of net sales, was primarily the result of the increased net sales used to offset the fixed manufacturing overhead. There were no significant changes in the cost of goods sold in our other two segments other than the decreased sales.
Selling and Administrative Expenses. There was an increase in selling and administrative expenses of $224 or approximately 6.8% in the fiscal year ended June 30, 2019 as compared to the fiscal year ended June 30, 2018. As a percentage of sales, net, selling and administrative expenses were approximately 7.0% and 7.5% for the fiscal year ended June 30, 2019 and 2018, respectively. The increase was primarily from increases (i) in salaries and employees benefits of approximately $224, as the result of: (a) replacing our headcount with higher salaried employees, net of a pay structure change for the sales staff and to a lesser degree salary increases ($131) and (b) an increase in employee benefits due to the change in personnel and an increase in premiums ($94); (ii) an increase in employee stock compensation expense as a result of issuing stock options in May 2019 with immediate vesting for a portion of the option grant ($131); and (iii) in professional and consulting fees of approximately $37 primarily as the result of outsourcing our information technology function beginning in April 2018 and increased legal expenses for our SEC filings. These increases were offset by decreases in (i) advertising and marketing expenses of $24 as a result of decreased sales in the Branded Nutraceutical Segment, (ii) insurance costs of $20 as a result of a shift in allocation of insurance to cost of goods sold for increased percentage of sales in the Contract Manufacturing Segment and (iii) other components of our selling and administrative expenses in an aggregate of approximately $125, including decreases in depreciation and amortization expenses of approximately $69
Other expense, net. Other expense, net was approximately $662 for the fiscal year ended June 30, 2019 compared to $689 for the fiscal year ended June 30, 2018, and is composed of:
|
|
Fiscal Year Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Interest expense
|
|
$
|
(630
|
)
|
|
$
|
(926
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liability
|
|
|
9
|
|
|
|
494
|
|
Unrealized loss/Impairment charge on investment in iBio, Inc., respectively
|
|
|
(23
|
)
|
|
|
(358
|
)
|
Other income, net
|
|
|
(18
|
)
|
|
|
101
|
|
Total other income (expense), net
|
|
|
(32
|
)
|
|
|
237
|
|
Other expense, net
|
|
$
|
(662
|
)
|
|
$
|
(689
|
)
|
Our interest expense for the fiscal year ended June 30, 2019, was approximately $296 less than the fiscal year ended June 30, 2018. The decrease in interest expense for the fiscal year ended June 30, 2019 from June 30, 2018 was primarily as the result of CD Financial exercising its right to convert the $5,350 CD Convertible Note to equity on July 24, 2018, an interest savings of $315 offset, in part, by an increase of $83 in our Senior Debt as a result of higher average outstanding balances from the increase in operating expenses, including cost of sales (See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K).
In the fiscal year ended June 30, 2019, the derivative liability was extinguished, resulting in the carrying value of $0 as of June 30, 2019, as compared to the carrying value of $9 in the fiscal year ended June 30, 2018, as the related derivative liability is no longer outstanding, resulting in a change of $9 for the fiscal year ended June 30, 2019.
The variance in the change in fair value of derivative liability from the fiscal year ended June 30, 2017 to the fiscal year ended June 30, 2018 of $494 was mainly the result of the change in the volatility of the closing trading price of our common stock, as traded on the OTC Bulletin Board, from 98.11% as of June 30, 2017 to 51.30% as of June 30, 2018 and the decreased closing trading price of our common stock from $0.19 as of June 30, 2017 to $0.15 as of June 30, 2018. The volatility of the closing trading price of our common stock and the closing trading price are two of the variables used to calculate the estimated fair value of our derivative liabilities associated with the underlying derivative instrument.
In the fiscal year ended June 30, 2019, we recognized an unrealized loss of $23 in the investment in iBio, Inc. resulting from the change in the stock price as of June 30, 2018 to June 30, 2019. We did not sell any shares owned in the fiscal year ended June 30, 2019.
In the fiscal year ended June 30, 2018 we determined that there was an impairment on the carrying value of our investment in iBio, Inc. in the amount of approximately $358 resulting from the decline in the closing trading price of their common stock on the NYSE American Exchange from $3.90 per share as of June 30, 2017 (as adjusted for a 10 for 1 reverse stock split) to $0.90 per share as of June 30, 2018.
In the fiscal years ended June 30, 2019 and 2018, we had earned income of $79 and $8, respectively from providing back office and operational support for unrelated entities that sell consumer products through retail and internet based outlets. The balance of other income in the fiscal year ended June 30, 2018 was primarily from gains of (i) $88 from the investment in AgroSport LLC ("AGS") recognized on the exchange of certain assets relating to the contribution by AgroLabs of the AgroSport product line to AGS for a 33 1/3 percent interest in AGS and (ii) $5 from the disposal of fixed assets. In the fiscal year ended June 30, 2019, we recognized a loss of approximately $97 on this investment as AGS was not successful at implementing its business plan and currently has no products to sell or launch in the near future.
Federal and state income tax, net. For the fiscal years ended June 30, 2019 and 2018, we had a current state tax expense of approximately $287 and $170, respectively. In the fiscal year ended June 30, 2019, we had federal alternative minimum taxes of approximately $36 and a net deferred income tax expense of approximately $31, resulting in a net income tax expense of $354.
In the fiscal year ended June 30, 2018, we had federal alternative minimum taxes of approximately $4 and a net deferred income tax expense of approximately $152, resulting in a net income tax expense of $326. 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 the state tax expense from 2018 to 2019 was the result of increased taxable income for MDC, 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 fiscal year ended June 30, 2018 federal income tax expense includes a one-time charge for the change in the effective federal tax rate from 34% as of December 31, 2017 to 21% as of January 1, 2018 and other tax changes as a result of the Tax Cuts and Jobs Act enacted on December 22, 2017, which resulted in a net decrease to our deferred tax assets of $202.
Net income. Our net income for the fiscal year ended June 30, 2019 and 2018 was approximately $1,688 and $679, respectively. The increase of approximately $1,009 was primarily the result of increased operating income of $1,010.
Liquidity and Capital Resources
The following table sets forth, for the periods indicated, the Company’s net cash flows provided by or used in operating, investing and financing activities:
|
|
For the fiscal year ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Net cash provided by operating activities
|
|
$
|
328
|
|
|
$
|
1,168
|
|
Net cash used in investing activities
|
|
$
|
(422
|
)
|
|
$
|
(242
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
341
|
|
|
$
|
(830
|
)
|
Cash at end of year
|
|
$
|
475
|
|
|
$
|
228
|
|
At June 30, 2019, and 2018, the Company had working capital of $1,726 and a working capital deficit of approximately $4,026, respectively. Our current assets increased by $1,821 and current liabilities decreased by approximately $3,827 from June 30, 2018 to June 30, 2019. The decrease in the current liabilities was the result of $5,269 of the CD Convertible Note classified as current due to the receipt of a conversion notice in July 2018 and the subsequent conversion of the entire CD Convertible Note to common shares of the Company at $0.65 on July 31, 2018 (See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K), offset by the adoption of ASU 2016 2 Topic 842 for leases with an increase of $470 in current liabilities relating to future lease payments owed on operating leases now classified on the balance sheet and an increase in the amount outstanding under our revolving credit facility of $940.
Operating Activities
Net cash provided by operating activities of $328 in the fiscal year ended June 30, 2019 includes net income of approximately $1,688. After excluding the effects of non-cash expenses, including depreciation and amortization, compensation expense for employee stock options, accretion of financial instruments, release of accounts payable no longer owed and changes in the fair value of derivative liabilities and the impairment charge on our intangible assets, changes in deferred tax assets, the adjusted cash used in operations before the effect of the changes in working capital components was an increase of approximately $2,758. Cash in the amount of approximately $2,430 from our working capital assets and liabilities was used in our operating activities and was primarily the result of increases in inventories of approximately $1077, accounts receivable of $593, other assets of $73 and decreases in opearting lease obligations of $454 and accounts payable and accrued expenses and other liabilities of approximately $233.
Net cash provided by operating activities of $1,168 in the fiscal year ended June 30, 2018 includes net income of approximately $679. After excluding the effects of non-cash expenses, including depreciation and amortization, compensation expense for employee stock options, accretion of financial instruments, release of accounts payable no longer owed and changes in the fair value of derivative liabilities and the impairment charge on our intangible assets, changes in deferred tax assets, the adjusted cash used in operations before the effect of the changes in working capital components was an increase of approximately $1,215. Cash in the amount of approximately $57 from our working capital assets and liabilities was provided from our operating activities and was primarily the result of an increases in inventories of approximately $96 and current assets of $7 and decreases in accounts payable and accrued expenses and other liabilities of approximately $126, offset by a decrease in accounts receivable of $182.
Investing Activities
Cash used in investing activities was used for the purchase of machinery and equipment for approximately $414 and $247 in the fiscal years ended June 30, 2019 and 2018, respectively, offset in the fiscal year ended June 30, 2018 by proceeds received from the sale of fixed assets of $6, a net use of cash approximately $242. An additional use of cash in investing activities, in the fiscal years ending June 30, 2019 and 2018, was funding expenses for relating to our investment in AgroSport, LLC in the amounts of $8 and $1, respectively.
Financing Activities
Cash provided from financing activities was approximately $341 for the fiscal year ended June 30, 2019 and consists of; (i) $48,937 received from advances under our revolving credit facility; (ii) $2,400 received from amending our Term Note with PNC Bank; and (iii) $233 received from a sale leaseback transaction with First American Equipment Finance (See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K), offset in part by (i) repayments under our revolving credit facility of $47,997 (See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K), (ii) repayments of principal under our term notes in the amount of $3,023 (See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K) and (iii) repayments of $233 under our capitalized lease obligations
Cash used in financing activities was approximately $830 for the fiscal year ended June 30, 2018 and consists of; (i) repayments under our revolving credit facility of $40,945 (See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K), (ii) repayments of principal under our term notes in the amount of $959 (See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K) and (iii) repayments of $233 under our capitalized lease obligations, offset in part by $41,164 received from advances under our revolving credit facility and $143 received from a sale leaseback transaction with First American Equipment Finance (See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K).
As of June 30, 2019, we had cash of approximately $475, funds available under our revolving credit facility of approximately $1,530 and working capital of $1,726. Our working capital includes approximately $5,834 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 5 to the consolidated financial statements included in this Annual Report on Form 10-K). Furthermore, we had income from operations of approximately $2,704 in the fiscal year ended June 30, 2019 and net income of approximately $1,688. After taking into consideration our interim results and current projections, management believes that operations, together with the revolving credit facility and equipment financing will support our working capital requirements at least through the twelve month period ending August 29, 2020.
Our total annual commitments at June 30, 2019 for long term non-cancelable leases of approximately $604 consists of obligations under operating leases for facilities and operating lease agreements for the rental of warehouse equipment and office equipment.
Capital Expenditures
The Company's capital expenditures in the fiscal years ended June 30, 2019 and 2018 were approximately $414 and $300 ($53 funded with capitalized lease financing in the fiscal year ended June 30, 2018), respectively. The Company has budgeted approximately $450 for capital expenditures for the fiscal year ending June 30, 2020. The total amount is expected to be funded from cash provided from the Company’s operations and from lease financing.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Impact of Inflation
The Company does not believe that inflation has significantly affected its results of operations.