UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2020

 

OR

 

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from to

Commission File Number 001-31668

 

INTEGRATED BIOPHARMA, INC.

(Exact name of registrant, as specified in its charter)

 

 

Delaware

22-2407475

 

(State or other jurisdiction of

(I.R.S. Employer

  incorporation or organization)   Identification No.)

        

 

225 Long Ave., Hillside, New Jersey

07205

(Address of principal executive offices) (Zip Code)

 

 

(888) 319-6962

(Registrant’s telephone number, including Area Code)

 

Not Applicable

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

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

None

None

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes __X__ No ____

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes __X__ No ____

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

   

 

Large accelerated filer 

 

Accelerated filer 

 

Non-accelerated filer  ☑

 

Emerging growth company 

 

Smaller reporting company ☑

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes         No __X__

 

As of May 13, 2020, there were 29,565,943 shares of common stock, $0.002 par value per share (“Common Stock”), of the registrant outstanding.

 

 

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

 

FORM 10-Q QUARTERLY REPORT

For the Three and Nine Months Ended March 31, 2020

INDEX

 

 

   

Page

 

Part I. Financial Information

 

Item 1.

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2020 and 2019 (unaudited)

2

 

Condensed Consolidated Balance Sheets as of March 31, 2020 and June 30, 2019 (unaudited)

3

 

Condensed Consolidated Statement of Stockholders’ Equity (Deficiency) for the Nine Months Ended March 31, 2020 and 2019 (unaudited)

4

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2020 and 2019 (unaudited)

5

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

6

     

Item 2.

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

17

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

26

     

Item 4.

Controls and Procedures

26

     
 

Part II. Other Information

 
     

Item 1.

Legal Proceedings

26

     

Item 1A.

Risk Factors

26

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

     

Item 3.

Defaults Upon Senior Securities

27

     

Item 4.

Mine Safety Disclosure

27

     

Item 5.

Other Information

27

     

Item 6.

Exhibits

28

 

 

Other

 

Signatures

 

29

     
     
     

 

 

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission (“SEC”), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Integrated BioPharma, Inc. and its subsidiaries (collectively, the “Company”) or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, changes in general economic and business conditions; loss of market share through competition; introduction of competing products by other companies; the timing of regulatory approval and the introduction of new products by the Company; changes in industry capacity; pressure on prices from competition or from purchasers of the Company's products; regulatory changes in the pharmaceutical manufacturing industry and nutraceutical industry; regulatory obstacles to the introduction of new technologies or products that are important to the Company; availability of qualified personnel; the loss of any significant customers or suppliers; and other factors both referenced and not referenced in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (“Form 10-K”), as filed with the SEC. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words, “plan”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “project”, “may”, “will”, “would”, “could”, “should”, “seeks”, or “scheduled to”, or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. The Company cautions investors that any forward-looking statements made by the Company are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements with respect to the Company, include, but are not limited to, the risks and uncertainties affecting its businesses described in Item 1 of the Company’s Form 10-K and in other securities filings by the Company. Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection or assumption in any of the forward-looking statements. The Company’s future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date hereof and the Company does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.

 

 
-1-

 

 

ITEM 1. FINANCIAL STATEMENTS

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

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

 

(Unaudited)

 
                                 
     

Three months ended

   

Nine months ended

 
   

March 31,

   

March 31,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Sales, net

  $ 13,631     $ 14,088     $ 39,234     $ 36,393  
                                 

Cost of sales

    11,779       11,995       33,957       31,750  
                                 

Gross profit

    1,852       2,093       5,277       4,643  
                                 

Selling and administrative expenses

    892       856       2,636       2,513  
                                 

Operating income

    960       1,237       2,641       2,130  
                                 

Other income (expense), net

                         

Interest expense

    (96 )     (196 )     (329 )     (586 )

Change in fair value of derivative liabilities

    -       -       -       9  

Realized gain on investment

    49       -       49       -  

Unrealized gain on investment

    90       -       35       -  

Other income, net

    -       25       27       32  

Other income (expense), net

    43       (171 )     (218 )     (545 )
                                 

Income before income taxes

    1,003       1,066       2,423       1,585  
                                 

Provision for income taxes

    67       143       216       257  
                                 

Net income

  $ 936     $ 923     $ 2,207     $ 1,328  
                                 

Basic earnings per common share

  $ 0.03     $ 0.03     $ 0.07     $ 0.05  
                                 

Diluted earnings per common share

  $ 0.03     $ 0.03     $ 0.07     $ 0.05  
                                 

Weighted average common shares outstanding - basic

    29,565,943       29,565,943       29,565,943       28,719,452  

Add: Equivalent shares outstanding

    1,319,380       542,782       1,113,309       582,525  

Weighted average common shares outstanding - diluted

    30,885,323       30,108,725       30,679,252       29,301,977  

 

 

See accompanying notes to condensed consolidated financial 

 

-2-

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

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

 

(Unaudited)

 
                 
   

March 31,

   

June 30,

 
   

2020

   

2019

 

Assets

               

Current Assets:

         

Cash

  $ 565     $ 475  

Accounts receivable, net

    4,272       4,439  

Inventories

    10,066       8,819  

Other current assets

    394       346  

Total current assets

    15,297       14,079  
                 

Property and equipment, net

    1,698       1,778  

Operating lease right-of-use assets (includes $2,901 and $3,236 with a related party)

    2,943       3,284  

Deferred tax assets, net

    596       534  

Security deposits and other assets

    111       115  

Total Assets

  $ 20,645     $ 19,790  
                 

Liabilities and Stockholders' Equity:

         

Current Liabilities:

         

Advances under revolving credit facility

  $ 3,425     $ 5,834  

Accounts payable (includes $3 and $67 due to related party)

    6,111       3,855  

Accrued expenses and other current liabilities

    1,219       1,147  

Current portion of long term debt, net

    1,149       1,047  

Current portion of operating lease liabilities (includes $463 and $450 with a related party)

    484       470  

Total current liabilities

    12,388       12,353  
                 

Operating lease liabilities (includes $2,445 and $2,793 with a related party)

    2,465       2,822  

Long term debt, net

    1,648       2,722  

Total liabilities

    16,501       17,897  
                 

Commitments and Contingencies

         
                 

Stockholders' Equity :

         

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

         

29,600,843 shares issued and 29,565,943 shares

         

outstanding, respectively

    59       59  

Additional paid-in capital

    50,241       50,197  

Accumulated deficit

    (46,057 )     (48,264 )

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

    (99 )     (99 )

Total Stockholders' Equity

    4,144       1,893  

Total Liabilities and Stockholders' Equity

  $ 20,645     $ 19,790  

 

 

See accompanying notes to condensed consolidated financial 

 

-3-

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

 

(in thousands, except shares)

 

(Unaudited)

 
                                                         
                                                         
                                                         

FOR THE NINE MONTHS ENDED MARCH 31, 2020:

                                     
                                                   

Total

 
   

Common Stock

   

Additional

   

Accumulated

   

Treasury Stock

   

Stockholders'

 
   

Shares

   

Par Value

   

Paid-in-Capital

   

Deficit

   

Shares

   

Cost

   

Equity

 
                                                         

Balance, June 30, 2019

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

Stock compensation expense for employee stock options

    -       -       15       -       -       -       15  

Net income

    -       -       -       312       -       -       312  

Balance, September 30, 2019

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

Stock compensation expense for employee stock options

    -       -       15       -       -       -       15  

Net income

    -       -       -       959       -       -       959  

Balance, December 31, 2019

    29,600,843       59       50,227       (46,993 )     34,900       (99 )     3,194  
                                                         

Stock compensation expense for employee stock options

    -       -       14       -       -       -       14  

Net income

    -       -       -       936       -       -       936  

Balance, March 31, 2020

    29,600,843     $ 59     $ 50,241     $ (46,057 )     34,900     $ (99 )   $ 4,144  

 

FOR THE NINE MONTHS ENDED MARCH 31, 2019:

                                                 
                                                   

Total Stockholders'

 
   

Common Stock

   

Additional

   

Accumulated

   

Treasury Stock

   

(Deficiency)

 
   

Shares

   

Par Value

   

Paid-in-Capital

   

Deficit

   

Shares

   

Cost

   

Equity

 
                                                         

Balance, June 30, 2018

    21,170,074     $ 42     $ 44,773     $ (49,952 )     34,900     $ (99 )   $ (5,236 )
                                                         

Shares issued upon conversion of

                                                       

CD Financial, LLC Convertible Note, net

    8,230,769       17       5,256       -       -       -       5,273  

Net income

    -       -       -       159       -       -       159  

Balance, September 30, 2018

    29,400,843       59       50,029       (49,793 )     34,900       (99 )     196  
                                                         

Shares issued upon exercise of  employee stock options

    200,000       -       24       -       -       -       24  

Net income

    -       -       -       246       -       -       246  

Balance, December 31, 2018

    29,600,843       59       50,053       (49,547 )     34,900       (99 )     466  
                                                         

Net income

    -       -       -       923       -       -       923  

Balance, March 31, 2019

    29,600,843     $ 59     $ 50,053     $ (48,624 )   $ 34,900     $ (99 )   $ 1,389  

 

 

See accompanying notes to condensed consolidated financial 

 

-4-

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands, except share and per share amounts)

 

(Unaudited)

 
                 
   

Nine months ended

 
   

March 31,

 
   

2020

   

2019

 

Cash flows provided by operating activities:

         

Net income

  $ 2,207     $ 1,328  

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

               

Depreciation and amortization

    239       234  

Amortization of operating lease right-of-use assets

    341       338  

Stock based compensation

    44       -  

Change in deferred tax assets

    (101 )     49  

Realized gain on sale of iBio, Inc. shares

    (49 )     -  

Unrealized (gain) loss on investment

    (35 )     -  

Other, net

    11       50  

Changes in operating assets and liabilities:

         

Decrease (increase) in:

               

Accounts receivable

    166       (1,161 )

Inventories

    (1,247 )     (2,807 )

Other current assets

    (7 )     (29 )

Security deposits and other assets

    (4 )     (3 )

(Decrease) increase in:

               

Accounts payable

    2,256       1,852  

Accrued expenses and other liabilities

    71       189  

Operating lease obligations

    (343 )     (339 )

Net cash provided by (used in) operating activities

    3,549       (299 )
                 

Cash flows from investing activities:

         

Purchase of property and equipment

    (158 )     (350 )
Proceeds from sale of investment     85       -  

Proceeds from sale of machinery and equipment

    3       -  

Cash contribution in AgroSport LLC

    -       (8 )

Net cash used in investing activities

    (70 )     (358 )
                 

Cash flows from financing activities:

         

Advances under revolving credit facility

    35,190       35,574  
Proceeds from sales/lease back of equipment     -       233  

Proceeds from exercise of employee stock options

    -       24  

Repayments of advances under revolving credit facility

    (37,599 )     (34,322 )

Repayments under term note payables

    (823 )     (475 )

Repayments under finance lease obligations

    (157 )     (174 )

Net cash (used in) provided by financing activities

    (3,389 )     860  
                 

Net increase in cash

    90       203  

Cash at beginning of period

    475       228  

Cash at end of period

  $ 565     $ 431  
                 

Supplemental disclosures of cash flow information:

         

Interest paid

  $ 323     $ 568  

Income taxes paid

  $ 303     $ 193  
                 

 

See accompanying notes to condensed consolidated financial 

-5-

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 1. Principles of Consolidation and Basis of Presentation

 

Basis of Presentation of Interim Financial Statements

 

The accompanying condensed consolidated financial statements for the interim periods are unaudited and include the accounts of Integrated BioPharma, Inc., a Delaware corporation (together with its subsidiaries, the “Company”). The interim condensed consolidated financial statements have been prepared in conformity with Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and therefore do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented have been included. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (“Form 10-K”), as filed with the SEC. The June 30, 2019 balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The preparation of the unaudited condensed financial statements in conformity with these accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period. Ultimate results could differ from the estimates of management. The results of operations for the three and nine months ended March 31, 2020 are not necessarily indicative of the results for the full fiscal year ending June 30, 2020 or for any other period.

 

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

 

Nature of Operations

 

The Company is engaged primarily in manufacturing, distributing, marketing and sales of vitamins, nutritional supplements and herbal products. The Company’s customers are located primarily in the United States, Luxembourg and Canada. The Company was previously known as Integrated Health Technologies, Inc. and, prior to that, as Chem International, Inc. The Company was reincorporated in its current form in Delaware in 1995. The Company continues to do business as Chem International, Inc. with certain of its customers and certain vendors.

 

The Company’s business segments include: (a) Contract Manufacturing operated by Manhattan Drug Company, Inc. (“MDC”), which manufactures vitamins and nutritional supplements for sale to distributors, multilevel marketers and specialized health-care providers; (b) Branded Proprietary Products operated by AgroLabs, Inc. (“AgroLabs”), which distributes healthful nutritional products for sale through major mass market, grocery and drug and vitamin retailers, under the following brands: Peaceful Sleep, Green Envy, Wheatgrass and other products which are being introduced into the market (these are referred to as our branded proprietary nutraceutical business and/or products); and (c) Other Nutraceutical Businesses which includes the operations of (i) The Vitamin Factory (the “Vitamin Factory”), which sells private label MDC products, as well as our AgroLabs products, through the Internet, (ii) IHT Health Products, Inc. (“IHT”) a distributor of fine botanicals, including multi minerals produced under a license agreement, (iii) MDC Warehousing and Distribution, Inc., a service provider for warehousing and fulfilment services and (iv) Chem International, Inc. (“Chem”), a distributor of certain raw materials for DSM Nutritional Products LLC.

 

 

 

-6-

 

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

Accounting Policies

 

Accounting Pronouncements Recently Adopted

 

In October, 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory,” which eliminates the requirement to defer recognition of income taxes on intra-entity transfers until the asset is sold to an outside party. The new guidance requires the recognition of current and deferred income taxes on intra-entity transfers of assets other than inventory, such as intellectual property and property, plant and equipment, when the transfer occurs. The guidance was effective for the Company on July 1, 2019. The standard requires a “modified retrospective” adoption, meaning the standard is applied through a cumulative adjustment in retained earnings as of the beginning of the period of adoption. This new guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

 

In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-11, "Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815)," which addresses the complexity of accounting for certain financial instruments with down round features. The amendments were effective for the Company on July 1, 2019 for the fiscal year ended June 30, 2020, and the interim periods within it. This new guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

 

Aside from the adoption of ASUs, as described above, there have been no material changes during fiscal year 2020 in the Company’s significant accounting policies to those previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

 

Significant Accounting Policies

 

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

 

 

identification of the promised goods or services in the contract;

 

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

 

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

 

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

 

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

 

Leases. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on our consolidated balance sheets. Finance leases are included in property and equipment, current portion of long term debt, and long-term debt obligation on our consolidated statement of financial condition.  

 

-7-

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

 

We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component.

 

Earnings Per Share. Basic earnings per common share amounts are based on weighted average number of common shares outstanding. Diluted earnings per share amounts are based on the weighted average number of common shares outstanding, plus the incremental shares that would have been outstanding upon the assumed exercise of all potentially dilutive stock options, warrants and convertible debt, subject to anti-dilution limitations using the treasury stock method and if converted method.

 

The following options were not included in the computation of weighted average diluted common shares outstanding as the effect of doing so would be anti-dilutive for the three and nine months ended March 31, 2020 and 2019:

 

   

Three Months Ended

   

Nine Months Ended

 
   

March 31,

   

March 31,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Anti-dilutive stock options

    -       150,000       -       150,000  

Total anti-dilutive shares

    -       150,000       -       150,000  

 

 

Note 2. Inventories

 

Inventories are stated at the lower of cost or net realizable value using the first-in, first-out method and consist of the following:

 

   

March 31,

   

June 30,

 
   

2020

   

2019

 
                 

Raw materials

  $ 7,185     $ 4,550  

Work-in-process

    1,555       2,325  

Finished goods

    1,326       1,944  

Total

  $ 10,066     $ 8,819  

 

 

 

 

 

 

 

 

-8-

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

 

Note 3. Property and Equipment, net

 

Property and equipment, net consists of the following:

   

March 31,

   

June 30,

 
   

2020

   

2019

 
                 

Land and building

  $ 1,250     $ 1,250  

Leasehold improvements

    1,287       1,282  

Machinery and equipment

    6,428       6,280  

Transportation equipment

    6       6  
      8,971       8,818  

Less: Accumulated depreciation and amortization

    (7,273 )     (7,040 )

Total

  $ 1,698     $ 1,778  

 

Depreciation and amortization expense recorded on property and equipment was $79 and $69 for the three months and $239 and $201 for nine months ended March 31, 2020 and 2019, respectively. Additionally, the Company disposed of fully depreciated property of $6 and $38 in the nine months ended March 31, 2020 and 2019, respectively and recognized a gain of $3 and $0 in the nine months ended March 31, 2020 and 2019, respectively.

 

 

Note 4. Senior Credit Facility and other Long Term Debt

 

As of March 31, 2020 and June 30, 2019, the Company had the following debt outstanding:

 

   

Principal Amount

   

Interest Rate

 

Maturity Date

   

As of March 31, 2020

   

As of June 30, 2019

           

Revolving advances under Senior Credit

                         

Facility with PNC Bank, National Association

  $ 3,425     $ 5,834       *  

5/15/2024

Installment Note with PNC Bank

    2,727       3,542       *  

5/15/2024

Installment Note with PNC Equipment Finance

    -       8       4.57 %

7/29/2019

Capitalized lease obligations

    113       269       4.01% - 9.38 %

4/25/2020 - 12/9/2020

Total outstanding debt

    6,265       9,653            

Less:   Revolving Advances

    (3,425 )     (5,834 )          

Prepaid financing costs

    (43 )     (50 )          

Current portion of long term debt, net

    (1,149 )     (1,047 )          

Long term debt, net

  $ 1,648     $ 2,722            

 

  *  See table below  

 

 

SENIOR CREDIT FACILITY

 

On May 15, 2019, the Company, MDC, AgroLabs, IHT, IHT Properties Corp. (“IHT Properties”) and Vitamin Factory (collectively, the “Borrowers”) amended the Revolving Credit, Term Loan and Security Agreement (the “Amended Loan Agreement”) with PNC Bank, National Association as agent and lender (“PNC”) and the other lenders party thereto entered into on June 27, 2012, as amended on February 19, 2016, and May 15, 2019.

 

-9-

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

 

The Amended Loan Agreement provides for a total of $11,585 in senior secured financing (the “Senior Credit Facility”) as follows: (i) discretionary advances (“Revolving Advances”) based on eligible accounts receivable and eligible inventory in the maximum amount of $8,000 (the “Revolving Credit Facility”), and (ii) a term loan in the amount of $3,585 (the “Term Loan”). The Senior Credit Facility is secured by all assets of the Borrowers, including, without limitation, machinery and equipment, real estate owned by IHT Properties, and common stock of iBio, Inc. (the "iBio Stock") owned by the Company. Revolving Advances bear interest at PNC’s Base Rate or the Eurodollar Rate, at Borrowers’ option, plus 2.50%. The Term Loan bears interest at PNC’s Base Rate or the Eurodollar Rate at Borrowers’ option, plus 3.00%.

 

As of March 31, 2020 and June 30, 2019, the Company had amounts outstanding utilizing the Eurodollar Rate of $0 and $4,250 under the Revolving Advances and $0 and $3,455 under the Term Note, respectively, with interest rates as of March 31, 2020 and June 30, 2019 as follows (based on the respective base rate plus 2.50% on Revolving Advances and 3.00% on the Term Note in effect as of the respective dates):

 

   

March 31,

 

June 30,

 
   

2020

     

2019

 

Revolving Credit Facility:

                 

Base Rate Interest

    3.25 %       5.50 %

Eurodollar Rate

    N/A         4.881 %

Term Loan:

                 

Base Rate Interest

    3.50 %       5.75 %

Eurodollar Rate

    N/A      

5.381% and 5.3838%

 

 

 

Upon and after the occurrence of any event of default under the Amended Loan Agreement, and during the continuation thereof, interest shall be payable at the interest rate then applicable plus 2%. The Senior Credit Facility matures on May 15, 2024 (the “Senior Maturity Date”).

 

The principal balance of the Revolving Advances is payable on the Senior Maturity Date, subject to acceleration, based upon a material adverse event clause, as defined, subjective accelerations for borrowing base reserves, as defined or upon the occurrence of any event of default under the Amended Loan Agreement or earlier termination of the Amended Loan Agreement pursuant to the terms thereof. The Term Loan shall be repaid in eighty-four (84) consecutive monthly installments of principal, the first eighty-three (83) of which shall be in the amount of $43, commencing on the first business day of June, 2019, and continuing on the first business day of each month thereafter, with a final payment of any unpaid balance of principal and interest payable on the Senior Maturity Date. The foregoing is subject to customary mandatory prepayment provisions and acceleration upon the occurrence of any event of default under the Amended Loan Agreement or earlier termination of the Amended Loan Agreement pursuant to the terms thereof.

 

The Revolving Advances are subject to the terms and conditions set forth in the Amended Loan Agreement and are made in aggregate amounts at any time equal to the lesser of (x) $8,000 or (y) an amount equal to the sum of: (i) up to 85%, subject to the provisions in the Amended Loan Agreement, of eligible accounts receivables (“Receivables Advance Rate”), plus (ii) up to the lesser of (A) 75%, subject to the provisions in the Amended Loan Agreement, of the value of the eligible inventory (“Inventory Advance Rate” and together with the Receivables Advance Rate, collectively, the “Advance Rates”), (B) 85% of the appraised net orderly liquidation value of eligible inventory (as evidenced by the most recent inventory appraisal reasonably satisfactory to PNC in its sole discretion exercised in good faith) and (C) the inventory sublimit in the aggregate at any one time (“Inventory Advance Rate” and together with the Receivables Advance Rate, collectively, the “Advance Rates”), minus (iii) the aggregate Maximum Undrawn Amount of all outstanding Letters of Credit, minus (iv) such reserves as PNC may reasonably deem proper and necessary from time to time.

 

-10-

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

The Amended Loan Agreement contains customary mandatory prepayment provisions, including, without limitation the requirement to use any sales proceeds from the sale of iBio Stock to repay the Term Loan and to prepay the outstanding amount of the Term Note in an amount equal to twenty-five percent (25%) of Excess Cash Flow for each fiscal year commencing with the fiscal year ended June 30, 2016, payable upon delivery of the financial statements to PNC referred to in and required by the Amended Loan Agreement for such fiscal year but in any event not later than one hundred twenty (120) days after the end of each such fiscal year, which amount shall be applied ratably to the outstanding principal installments of the Term Loan in the inverse order of the maturities thereof. The Amended Loan Agreement also contains customary representations and warranties, covenants and events of default, including, without limitation, (i) a fixed charge coverage ratio maintenance requirement and (ii) an event of default tied to any change of control as defined in the Amended Loan Agreement. In the nine months ended March 31, 2020, the Company repaid an additional $85 on the Term Note with the net proceeds from the sale of 40,000 shares of iBio Stock. As of March 31, 2020, the Company was in compliance with the fixed charge coverage ratio maintenance requirement and with the required annual payments of 25% of the Excess Cash Flow for each fiscal year commencing with the fiscal year ended June 30, 2016.

 

In connection with the Senior Credit Facility, the following loan documents were executed: (i) a Stock Pledge Agreement with PNC, pursuant to which the Company pledged to PNC the iBio Stock; (ii) a Mortgage and Security Agreement with PNC with IHT Properties; and (iii) an Environmental Indemnity Agreement with PNC.

 

OTHER LONG TERM DEBT

 

Paycheck Protection Program Term Note. On April 29, 2020, the Company entered into a Paycheck Protection Program Term Note (the “PPP Note”) with PNC 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 Bank to the Company pursuant to the Coronavirus, Aid, Relief, and Economic Security Act’s (the “CARES Act”) (P.L. 116-136) Paycheck Protection Program (the “Program”). Under the Program, all or a portion of the PPP Note may be forgiven in accordance with the Program requirements. 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.

 

Capitalized Lease Obligations. On February 25, 2020 and April 25, 2020, the separate capitalized lease obligations entered into by the Company on February 14, 2018 and April 17, 2018, with Marlin Equipment Finance in the amount of $38 and $15, respectively, which leases were secured by certain machinery and equipment, were satisfied with all payments being made under the capitalized lease obligations. The lease payments were approximately $2 and $1, respectively, and had imputed interest rates of 9.26% and 9.38%, respectively.

 

-11-

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

On November 1, 2019, the capitalized lease obligation entered into by the Company on December 22, 2017 with First American Equipment Finance in the amount of $143, which lease was secured by certain machinery and equipment, was satisfied with all payments being made under the capitalized lease obligation. The monthly lease payment was approximately $6 and had an imputed interest rate of 6.56%.

 

 

Note 5. Significant Risks and Uncertainties

 

(a) Major Customers. For the three months ended March 31, 2020 and 2019, approximately 91% and 92%, of consolidated net sales, respectively, were derived from two customers. These two customers are in the Company’s Contract Manufacturing Segment and represented approximately 64% and 26% and 72% and 22% in the three months ended March 31, 2020 and 2019, respectively. In each of the nine months ended March 31, 2020 and 2019, approximately 92% of consolidated net sales were derived from the same two customers and net sales to these two customers represented approximately 67% and 27% in the nine month periods ended March 31, 2020 and 71% and 24% of net sales in the nine months ended March 31, 2019, respectively. Accounts receivable from these two major customers represented approximately 82% and 88% of total net accounts receivable as of March 31, 2020 and June 30, 2019, respectively. The loss of any of these customers could have an adverse effect on the Company’s operations. Major customers are those customers who account for more than 10% of net sales.

 

(b) Other Business Risks. Approximately 71% of the Company’s employees are covered by a union contract and are employed in its New Jersey facilities. The contract was renewed on September 1, 2018 and will expire on August 31, 2021.

 

The Covid-19, or coronavirus, outbreak has the potential to cause a disruption in the Company's supply chain. Currently, some of the Company's 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 of these materials may be obtained by more than one supplier. However, due to port closures and other restrictions resulting from the coronavirus outbreak throughout the world, these suppliers, located both inside and outside of the United States, may have limited supply of the materials, which will cause the price of such materials to increase. These and other disruptions would likely impact the Company's sales and operating results. If we are unable to obtain the necessary materials to produce a supplement within the Company's standard lead times, it may delay the production and shipment of those supplements, thereby shifting the timing of recognizing the resulting sale to the Company's customers. In addition, the significant outbreak of this contagious disease in the human population has resulted in a widespread health crisis that could adversely affect the economies and financial markets of many countries, including the United States, resulting in an economic downturn that could affect demand for the Company's products and impact the Company's operating results.

 

 

 

Note 6. Leases and other Commitments and Contingencies

 

(a) Leases. The Company has operating and finance leases for its corporate and sales offices, warehousing and packaging facilities and certain machinery and equipment, including office equipment. The Company’s leases have remaining terms of less than 1 year to less than 6 years.

 

 

-12-

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

The components of lease expense for the three months ended March 31, 2020 and 2019, were as follows:

 

   

2020

   

2019

 
   

Related Party - Vitamin Realty

   

Other Leases

   

Totals

   

Related Party - Vitamin Realty

   

Other Leases

   

Totals

 
                                                 

Operating lease costs

  $ 142     $ 24     $ 166     $ 141     $ 23     $ 164  
                                                 

Finance Operating Lease Costs:

                                               

Amortization of right-of use assets

  $ -     $ 14     $ 14     $ -     $ 22     $ 22  

Interest on operating lease liabilities

    -       3       3       -       5       5  

Total finance lease cost

  $ -     $ 17     $ 17     $ -     $ 27     $ 27  

 

The components of lease expense for the nine months ended March 31, 2020 and 2019, were as follows:

 

   

2020

   

2019

 
   

Related Party - Vitamin Realty

   

Other Leases

   

Totals

   

Related Party - Vitamin Realty

   

Other Leases

   

Totals

 
                                                 

Operating lease costs

  $ 425     $ 80     $ 505     $ 423     $ 72     $ 495  
                                                 

Finance Operating Lease Costs:

                                               

Amortization of right-of use assets

  $ -     $ 43     $ 43     $ -     $ 55     $ 55  

Interest on operating lease liabilities

    -       11       11       -       12       12  

Total finance lease cost

  $ -     $ 54     $ 54     $ -     $ 67     $ 67  

 

Operating Lease Liabilities

 

Related Party Operating Lease Liabilities. Warehouse and office facilities are leased from Vitamin Realty Associates, LLC (“Vitamin Realty”), which is 100% owned by the Company’s chairman, and a major stockholder and certain of his family members, who are the Co-Chief Executive Officers and directors of the Company. On January 5, 2012, MDC entered into a second amendment of lease (the “Second Lease Amendment”) with Vitamin Realty for its office and warehouse space in New Jersey increasing its rentable square footage from an aggregate of 74,898 square feet to 76,161 square feet and extending the expiration date to January 31, 2026. This Second Lease Amendment provides for minimum annual rental payments of $533, plus increases in real estate taxes and building operating expenses. On May 19, 2014, AgroLabs entered into an amendment to the lease agreement entered into on January 5, 2012, with Vitamin Realty for an additional 2,700 square feet of warehouse space in New Jersey, the term of which was to expire on January 31, 2019 to extend the expiration date to June 1, 2024. This additional lease provides for minimum lease payments of $27 with annual increases plus the proportionate share of operating expenses.

 

Rent expense and lease amortization costs for the three months ended March 31, 2020 and 2019 on these leases were $216 and $203, respectively and $647 and $630 for the nine month periods ended March 31, 2020 and 2019, respectively and are included in cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. As of March 31, 2020 and June 30, 2019, the Company had outstanding current obligations to Vitamin Realty of $3 and $67, respectively, included in accounts payable in the accompanying Condensed Consolidated Balance Sheet. Additionally, the Company has operating lease obligations of $2,908 and $3,243 with Vitamin Realty as noted in the accompany Condensed Consolidated Balance Sheet as of March 31, 2020 and June 30, 2019, respectively.

 

 

 

-13-

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

Other Operating Lease Liabilities. The Company has entered into certain non-cancelable operating lease agreements expiring up through March, 2025, related to machinery and equipment and office equipment.

 

As of March 31, 2020, the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases were as follows:

 

   

Right-of-use Assets

   

Current Portion of Operating Lease Obligations

   

Operating Lease Obligations

   

Remaining Cash Commitment

 
                                 

Vitamin Realty Leases

  $ 2,901     $ 463     $ 2,445     $ 3,244  

Machinery and equipment leases

    18       11       7       19  

Office equipment leases

    24       10       13       25  
    $ 2,943     $ 484     $ 2,465     $ 3,288  

 

As of June 30, 2019, the Company’s ROU assets, lease obligations and remaining cash commitment on these leases were as follows:

 

   

Right-of-use Assets

   

Current Portion Operating Lease Obligations

   

Operating Lease Obligations

   

Remaining Cash Commitment

 
                                 

Vitamin Realty Leases

  $ 3,236     $ 450     $ 2,793     $ 3,668  

Machinery and equipment leases

    26       11       15       27  

Office equipment leases

    22       9       14       24  
    $ 3,284     $ 470     $ 2,822     $ 3,719  

 

As of March 31, 2020 and June 30, 2019, the Company’s weighted average discount rate and remaining term on lease liabilities were approximately 3.75% and 3.76% and 5.6 years and 6.4 years, respectively.

 

Supplemental cash flows information related to leases for the nine months ended March 31, 2020, was as follows:

   

Related Party - Vitamin Realty

   

Other Leases

   

Totals

 
                         

Cash paid for amounts included in the measurement of lease liabilities:

                       

Operating cash flows from operating leases

  $ 424     $ 75     $ 499  

Operating cash flows from finance leases

    -       11       11  

Financing cash flows from finance lease obligations

    -       157       157  

 

 

Supplemental cash flows information related to leases for the nine months ended March 31, 2019, was as follows:

   

Related Party - Vitamin Realty

   

Other Leases

   

Totals

 
                         

Cash paid for amounts included in the measurement of lease liabilities:

                       

Operating cash flows from operating leases

  $ 424     $ 72     $ 496  

Operating cash flows from finance leases

    -       12       12  

Financing cash flows from finance lease obligations

    -       174       174  

 

 

 

-14-

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

In the nine months ended March 31, 2020, the Company renewed, for one year, an operating lease for office space with an annual commitment of $25 and entered into a five-year lease agreement for the rental of office equipment with an annual commitment of $2.

 

Maturities of operating lease liabilities as of March 31, 2020 were as follows:

   

Operating

   

Related Party

   

Capitalized

         

Year ending

 

Lease

   

Operating Lease

   

Lease

         

June 30,

 

Commitment

   

Commitment

   

Obligations

   

Total

 
                                 

2020, remaining

  $ 5     $ 141     $ 39     $ 185  

2021

    23       565       77       605  

2022

    10       565       -       575  

2023

    2       565       -       567  

2024

    2       564       -       566  

2025

    1       533       -       534  

Thereafter

    -       311       -       311  

Total minimum lease payments

    43       3,244       116       3,403  

Imputed interest

    (2 )     (336 )     (3 )     (341 )

Total

  $ 41     $ 2,908     $ 113     $ 3,062  

 

Total rent expense, lease amortization costs and interest expense, including real estate taxes and maintenance charges, was approximately $257 and $249 and $783 and $756 for the three and nine months ended March 31, 2020 and 2019, respectively. Rent and lease amortization is included in cost of sales, selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

 

(b) Legal Proceedings.

 

The Company is subject, from time to time, to claims by third parties under various legal theories. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition and cash flows.

 

 

Note 7. Related Party Transactions

 

See Note 6(a). Leases for related party lease transactions.

 

 

Note 8. Segment Information and Disaggregated Revenue

 

The basis for presenting segment results generally is consistent with overall Company reporting. The Company reports information about its operating segments in accordance with GAAP which establishes standards for reporting information about a company’s operating segments.

 

The Company has divided its operations into three reportable segments as follows: Contract Manufacturing, Branded Proprietary Products and Other Nutraceutical Businesses. The international sales, concentrated primarily in Europe, for the three months ended March 31, 2020 and 2019 were $2,573 and $1,878, respectively and for the nine months ended March 31, 2020 and 2019 were $6,918 and $4,391, respectively.

 

-15-

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

Financial information relating to the three months ended March 31, 2020 and 2019 operations by business segment and disaggregated revenues was as follows:

 

     

Sales, Net

   

Segment

                 
     

U.S.

   

International

           

Gross

           

Capital

 
     

Customers

   

Customers

   

Total

   

Profit (loss)

   

Depreciation

   

Expenditures

 

Contract Manufacturing

2020

  $ 10,775     $ 2,558     $ 13,333     $ 1,772     $ 78     $ 49  
 

2019

    11,913       1,875       13,788       1,994       68       63  
                                                   

Branded Proprietary Products

2020

    1       2       3       (36 )     -       2  
 

2019

    14       3       17       7       -       -  
                                                   

Other Nutraceutical Businesses

2020

    282       13       295       116       1       6  
 

2019

    283       -       283       92       1       -  
                                                   

Total Company

2020

    11,058       2,573       13,631       1,852       79       57  
 

2019

    12,210       1,878       14,088       2,093       69       63  

 

 

Financial information relating to the nine months ended March 31, 2020 and 2019 operations by business segment and disaggregated revenues was as follows:

 

           

Sales, Net

   

Segment

                 
           

U.S.

   

International

           

Gross

           

Capital

 
           

Customers

   

Customers

   

Total

   

Profit (Loss)

   

Depreciation

   

Expenditures

 

Contract Manufacturing

 

2020

    $ 31,277     $ 6,844     $ 38,121     $ 4,949     $ 237     $ 150  
      2019       31,066       4,330       35,396       4,323       199       350  
                                                         

Branded Proprietary Products

 

2020

      5       12       17       (67 )     -       2  
   

2019

      133       22       155       49       -       -  
                                                         

Other Nutraceutical Businesses

 

2020

      1,034       62       1,096       395       2       6  
   

2019

      803       39       842       271       2       -  
                                                         

Total Company

 

2020

      32,316       6,918       39,234       5,277       239       158  
   

2019

      32,002       4,391       36,393       4,643       201       350  

 

   

Total Assets as of

 
   

March 31,

   

June 30,

 
   

2020

   

2019

 

Contract Manufacturing

  $ 18,416     $ 17,580  

Branded Proprietary Products

     357        427  

Other Nutraceutical Businesses

     1,872        1,783  

Total Company

  $ 20,645     $ 19,790  

 

 

-16-

 

 

 

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.

 

-17-

 

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.

 

-18-

 

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