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 December 31, 2017September 30, 2018
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) |
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 and post such files).
Yes X No ____
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer |
| Accelerated filer |
| Non-accelerated filer |
| Emerging growth company | Smaller reporting company ☑ |
If an emerging growth company, indicate by check mark is 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__
Applicable only to Corporate Issuers:
The numberAs of November 9, 2018, there were 29,365,943 shares outstanding of each of the issuer’s class of common stock, as$0.002 par value per share (“Common Stock”), of the latest practicable date:registrant outstanding.
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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
For the SixThree Months Ended December 31, 2017September 30, 2018
INDEX
Page | ||
Part I. Financial Information | ||
Item 1. | Condensed Consolidated Statements of Operations for the Three | 2 |
Condensed Consolidated Balance Sheets as of | 3 | |
Condensed Consolidated Statement of Stockholders’ (Deficiency) Equity for the three months ended September 30, 2018 (unaudited) | 4 | |
Condensed Consolidated Statements of Cash Flows for the |
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Notes to the Condensed Consolidated Financial Statements (unaudited) |
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Item 2. |
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
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Item 4. | Controls and Procedures |
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Part II. Other Information | ||
Item 1. | Legal Proceedings |
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Item 1A. | Risk Factors |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. | Defaults Upon Senior Securities |
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Item 4. | Mine Safety Disclosure |
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Item 5. | Other Information |
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Item 6. | Exhibits |
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Other | ||
Signatures |
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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 (the(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 including,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, 20172018 (“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 Annual Report filed on Form 10-K for the year ended June 30, 2017 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.
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES | INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES | INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES | ||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||||||||
(in thousands, except for share and per share amounts) | (in thousands, except for share and per share amounts) | (in thousands, except for share and per share amounts) | ||||||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||
Three months ended | Six months ended | Three months ended | ||||||||||||||||||||||
December 31, | December 31, | September 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||
Sales, net | $ | 10,800 | $ | 12,372 | $ | 20,570 | $ | 25,053 | $ | 10,304 | $ | 9,770 | ||||||||||||
Cost of sales | 9,752 | 10,902 | 18,517 | 21,432 | 9,085 | 8,765 | ||||||||||||||||||
Gross profit | 1,048 | 1,470 | 2,053 | 3,621 | 1,219 | 1,005 | ||||||||||||||||||
Selling and administrative expenses | 850 | 900 | 1,644 | 1,693 | 814 | 794 | ||||||||||||||||||
Operating income | 198 | 570 | 409 | 1,928 | 405 | 211 | ||||||||||||||||||
Other income (expense), net | ||||||||||||||||||||||||
Other income (expense), net: | Other income (expense), net: | |||||||||||||||||||||||
Interest expense | (229 | ) | (227 | ) | (462 | ) | (459 | ) | (200 | ) | (233 | ) | ||||||||||||
Change in fair value of derivative liabilities | 185 | (364 | ) | 67 | (731 | ) | 9 | (118 | ) | |||||||||||||||
Impairment on investment in iBio, Inc. | (168 | ) | - | (251 | ) | - | - | (83 | ) | |||||||||||||||
Other income, net | 4 | 15 | 4 | 31 | ||||||||||||||||||||
Other income (expense), net | (208 | ) | (576 | ) | (642 | ) | (1,159 | ) | ||||||||||||||||
Total other expense, net | (191 | ) | (434 | ) | ||||||||||||||||||||
(Loss) income before income taxes | (10 | ) | (6 | ) | (233 | ) | 769 | |||||||||||||||||
Income (loss) before income taxes | 214 | (223 | ) | |||||||||||||||||||||
Income tax expense, net | 338 | 71 | 294 | 197 | ||||||||||||||||||||
Income tax expense (benefit), net | 55 | (44 | ) | |||||||||||||||||||||
Net (loss) income | $ | (348 | ) | $ | (77 | ) | $ | (527 | ) | $ | 572 | |||||||||||||
Net income (loss) | $ | 159 | $ | (179 | ) | |||||||||||||||||||
Basic net (loss) income per common share | $ | (0.02 | ) | $ | (0.00 | ) | $ | (0.02 | ) | $ | 0.03 | |||||||||||||
Basic net income (loss) per common share | $ | 0.01 | $ | (0.01 | ) | |||||||||||||||||||
Diluted net (loss) income per common share | $ | (0.02 | ) | $ | (0.00 | ) | $ | (0.02 | ) | $ | 0.03 | |||||||||||||
Diluted net income (loss) per common share | $ | 0.01 | $ | (0.01 | ) | |||||||||||||||||||
Weighted average common shares outstanding - basic | 21,135,174 | 21,106,098 | 21,135,174 | 21,105,636 | 27,218,786 | 21,135,174 | ||||||||||||||||||
Add: Equivalent shares outstanding | - | - | - | 567,964 | ||||||||||||||||||||
Add: Equivalent shares outstanding - Stock Options | 744,818 | - | ||||||||||||||||||||||
Shares issuable upon conversion of Convertible Debt - CD Financial, LLC | - | - | - | - | - | - | ||||||||||||||||||
Weighted average common shares outstanding - diluted | 21,135,174 | 21,106,098 | 21,135,174 | 21,673,600 | 27,963,604 | 21,135,174 |
See accompanying notes to condensed consolidated financial statements.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES | INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES | INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES | ||||||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | CONDENSED CONSOLIDATED BALANCE SHEETS | CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||||||||
(in thousands, except for share and per share amounts) | (in thousands, except for share and per share amounts) | (in thousands, except for share and per share amounts) | ||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||
December 31, | June 30, | September 30, | June 30, | |||||||||||||
2017 | 2017 | 2018 | 2018 | |||||||||||||
Assets | ||||||||||||||||
Current Assets: | Current Assets: | Current Assets: | ||||||||||||||
Cash | $ | 54 | $ | 132 | $ | 365 | $ | 228 | ||||||||
Accounts receivable, net | 4,595 | 4,020 | 3,381 | 3,796 | ||||||||||||
Inventories | 8,058 | 7,645 | 9,600 | 7,741 | ||||||||||||
Other current assets | 505 | 754 | 387 | 389 | ||||||||||||
Total current assets | 13,212 | 12,551 | 13,733 | 12,154 | ||||||||||||
Property and equipment, net | 1,684 | 1,601 | 1,604 | 1,651 | ||||||||||||
Operating lease right-of-use assets | 65 | - | ||||||||||||||
Operating lease right-of-use assets - Vitamin Realty, LLC | 3,561 | - | ||||||||||||||
Deferred tax assets, net | 576 | 823 | 640 | 671 | ||||||||||||
Security deposits and other assets | 176 | 221 | 121 | 92 | ||||||||||||
Total Assets | $ | 15,648 | $ | 15,196 | $ | 19,724 | $ | 14,568 | ||||||||
Liabilities and Stockholders' Deficiency: | ||||||||||||||||
Liabilities and Stockholders' Equity (Deficiency): | Liabilities and Stockholders' Equity (Deficiency): | |||||||||||||||
Current Liabilities: | Current Liabilities: | Current Liabilities: | ||||||||||||||
Advances under revolving credit facility | $ | 4,790 | $ | 4,676 | $ | 4,699 | $ | 4,894 | ||||||||
Accounts payable (includes $77 due to related party) | 5,559 | 4,177 | ||||||||||||||
Accounts payable (includes $77 and $141 due to related party) | 6,044 | 4,184 | ||||||||||||||
Accrued expenses and other current liabilities | 1,313 | 1,184 | 982 | 1,060 | ||||||||||||
Current portion of long term debt, net | 869 | 1,118 | 851 | 773 | ||||||||||||
Current portion - Subordinated convertible note, net - CD Financial, LLC | - | 5,269 | ||||||||||||||
Total current liabilities | 12,531 | 11,155 | 12,576 | 16,180 | ||||||||||||
Operating lease liabilities | 65 | - | ||||||||||||||
Operating lease liabilities - Vitamin Realty, LLC | 3,569 | - | ||||||||||||||
Long term debt, net | 3,883 | 4,246 | 3,319 | 3,624 | ||||||||||||
Subordinated convertible note, net - CD Financial, LLC | 5,245 | 5,221 | ||||||||||||||
Derivative liabilities | 436 | 503 | ||||||||||||||
Total liabilities | 22,095 | 21,125 | 19,529 | 19,804 | ||||||||||||
Commitments and Contingencies | Commitments and Contingencies | Commitments and Contingencies | ||||||||||||||
Stockholders' Deficiency: | ||||||||||||||||
Stockholders' Equity (Deficiency): | Stockholders' Equity (Deficiency): | |||||||||||||||
Common Stock, $0.002 par value; 50,000,000 shares authorized; | Common Stock, $0.002 par value; 50,000,000 shares authorized; | Common Stock, $0.002 par value; 50,000,000 shares authorized; | ||||||||||||||
21,170,074 and 21,135,174 shares issued and outstanding, respectively | 42 | 42 | ||||||||||||||
29,400,843 and 21,170,074 shares issued, respectively | 29,400,843 and 21,170,074 shares issued, respectively | |||||||||||||||
29,365,943 and 21,135,174 shares outstanding, respectively | 59 | 42 | ||||||||||||||
Additional paid-in capital | 44,768 | 44,759 | 50,028 | 44,773 | ||||||||||||
Accumulated deficit | (51,158 | ) | (50,631 | ) | (49,793 | ) | (49,952 | ) | ||||||||
Less: Treasury stock, at cost, 34,900 shares | (99 | ) | (99 | ) | (99 | ) | (99 | ) | ||||||||
Total Stockholders' Deficiency | (6,447 | ) | (5,929 | ) | ||||||||||||
Total Liabilities and Stockholders' Deficiency | $ | 15,648 | $ | 15,196 | ||||||||||||
Total Stockholders' Equity (Deficiency) | 195 | (5,236 | ) | |||||||||||||
Total Liabilities and Stockholders' Equity (Deficiency) | $ | 19,724 | $ | 14,568 |
See accompanying notes to condensed consolidated financial statements.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
(in thousands, except share and per share amounts) | ||||||||
(Unaudited) | ||||||||
Six months ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (527 | ) | $ | 572 | |||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Depreciation and amortization | 182 | 202 | ||||||
Accretion of financing instruments and other non-cash interest | 52 | 52 | ||||||
Impairment charge on investment in iBio, Inc. | 251 | - | ||||||
Change in deferred tax assets, net | 247 | - | ||||||
Stock based compensation | 8 | 26 | ||||||
Change in fair value of derivative liabilities | (67 | ) | 731 | |||||
Gain on sale of fixed assets | (3 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Decrease (increase) in: | ||||||||
Accounts receivable | (575 | ) | (1,285 | ) | ||||
Inventories | (413 | ) | (70 | ) | ||||
Other current assets | (1 | ) | 33 | |||||
Security deposits and other assets | (19 | ) | (71 | ) | ||||
(Decrease) increase in: | ||||||||
Accounts payable | 1,379 | 166 | ||||||
Accrued expenses and other liabilities | 126 | 191 | ||||||
Net cash provided by operating activities | 640 | 547 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (210 | ) | (83 | ) | ||||
Cash proceeds from sale of equipment | 4 | - | ||||||
Net cash used in investing activities | (206 | ) | (83 | ) | ||||
Cash flows from financing activities: | ||||||||
Advances under revolving credit facility | 19,673 | 23,040 | ||||||
Proceeds from sales/lease back of equipment | 143 | - | ||||||
Repayments of advances under revolving credit facility | (19,559 | ) | (23,246 | ) | ||||
Repayments under term note payables | (669 | ) | (515 | ) | ||||
Repayments under capitalized lease obligations | (100 | ) | (72 | ) | ||||
Net cash used in financing activities | (512 | ) | (793 | ) | ||||
Net decrease in cash | (78 | ) | (329 | ) | ||||
Cash at beginning of period | 132 | 395 | ||||||
Cash at end of period | $ | 54 | $ | 66 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the periods for: | ||||||||
Interest | $ | 394 | $ | 472 | ||||
Income taxes | $ | 109 | $ | 227 |
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES | ||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY | ||||||||||||||||||||||||||||
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2018 | ||||||||||||||||||||||||||||
(in thousands, except shares) | ||||||||||||||||||||||||||||
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 | 5,255 | - | - | - | 5,272 | |||||||||||||||||||||
Net income | - | - | - | 159 | - | - | 159 | |||||||||||||||||||||
Balance, September 30, 2018 | 29,400,843 | $ | 59 | $ | 50,028 | $ | (49,793 | ) | 34,900 | $ | (99 | ) | $ | 195 |
See accompanying notes to condensed consolidated financial statements.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
(in thousands, except share and per share amounts) | ||||||||
(Unaudited) | ||||||||
Three months ended | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
Cash flows provided by operating activities: | ||||||||
Net income (loss) | $ | 159 | $ | (179 | ) | |||
from operating activities: | ||||||||
Depreciation and amortization | 91 | 100 | ||||||
Accretion of financing instruments and other non cash interest | 17 | 26 | ||||||
Stock based compensation | - | 4 | ||||||
Change in deferred tax assets | 31 | (54 | ) | |||||
Impairment on investment in iBio, Inc. | - | 83 | ||||||
Change in fair value of derivative liabilities | (9 | ) | 118 | |||||
Changes in operating assets and liabilities: | ||||||||
Decrease (increase) in: | ||||||||
Accounts receivable | 415 | 1,347 | ||||||
Inventories | (1,858 | ) | 603 | |||||
Other current assets | 8 | 35 | ||||||
Operating lease right of use assets | 112 | - | ||||||
Security deposits and other assets | (52 | ) | (48 | ) | ||||
(Decrease) increase in: | ||||||||
Accounts payable | 1,861 | (455 | ) | |||||
Accrued expenses and other liabilities | (70 | ) | 24 | |||||
Operating lease liabilities | (112 | ) | - | |||||
Net cash provided by operating activities | 593 | 1,604 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (18 | ) | (107 | ) | ||||
Cash contribution in AgroSport LLC | (8 | ) | - | |||||
Net cash used in investing activities | (26 | ) | (107 | ) | ||||
Cash flows from financing activities: | ||||||||
Advances under revolving credit facility | 10,204 | 9,997 | ||||||
Repayments of advances under revolving credit facility | (10,400 | ) | (10,768 | ) | ||||
Repayments under term note payables | (184 | ) | (544 | ) | ||||
Repayments under capitalized lease obligations | (50 | ) | (30 | ) | ||||
Net cash used in financing activities | (430 | ) | (1,345 | ) | ||||
Net increase in cash | 137 | 152 | ||||||
Cash at beginning of period | 228 | 132 | ||||||
Cash at end of period | $ | 365 | $ | 284 |
Supplemental disclosures of cash flow information: | |||||||||
Interest paid | $ | 201 | $ | 198 | |||||
Income taxes paid | $ | 2 | $ | - |
See accompanying notes to condensed consolidated financial statements.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in (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 8-038-03 of Regulation S-XS-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-K10-K for the fiscal year ended June 30, 2017 (“2018 (“Form 10-K”10-K”), as filed with the SEC. The June 30, 2017 2018 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 results of operations for the three and six months ended December 31, 2017 September 30, 2018 are not necessarily indicative of the results for the full fiscal year ending June 30, 2018 2019 or for any other period.
Nature of Operations
The Company is engaged primarily in manufacturing, distributing, marketing and sales of vitamins, nutritional supplements and herbal products. The Company’s customers are located primarily in the United States, Luxembourg and Canada. The Company was previously known as Integrated Health Technologies, Inc. and, prior to that, as Chem International, Inc. The Company was reincorporated in its current form in Delaware in 1995. The Company continues to do business as Chem International, Inc. with certain of its customers and certain vendors.
The Company’sCompany’s business segments include: (a) Contract Manufacturing operated by InB: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: Naturally Noni, Peaceful Sleep, Green Envy, FiberCal, 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 natural 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.
Significant Accounting Policies
Accounting Pronouncements Recently Adopted
In July 2015, May 2014, the Financial Accounting Standards BoardFASB issued ASU No.2015-11, Simplifying2014-09, “Revenue from Contracts with Customers”, Topic 606. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the Measurementtransfer of Inventory (Topic 330),nonfinancial assets, unless those contracts are within the scope of other standards. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
The core principle of the guidance is that an entity should recognize revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with customers. During 2016, the FASB issued several accounting standard that requires inventory be measured atupdates (ASU No. 2016-08, 2016-10 and 2016-12) to clarify implementation guidance and correct unintended application of the lower of cost and net realizable value and options that currently exist for market value be eliminated.guidance. The standard defines net realizable value as estimated selling pricesallows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.financial statements. This new guidance was effective for the Company beginning on July 1, 2017. There was no2018, and Note 8 provides the related disaggregated revenue disclosures. The adoption of this standard using the modified retrospective approach did not have a material impact on the Company’s condensed consolidatedrevenue recognition accounting policy or its Condensed Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall, (Subtopic 825-10) “Recognition and Measurement of Financial Assets and Financial Liabilities”, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial statements asinstruments. Under this guidance, companies have to measure equity investments, except those accounted for under the result of theequity method, at fair value and recognize changes in fair value in net income. The adoption of this ASU.standard on July 1, 2018, by Company did not have a material effect on its Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.
The standard will be effective for us beginning July 1, 2019, with early adoption permitted. We elected to early adopt the standard effective July 1, 2018. We elected the available practical expedients on adoption. In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information. The standard had a material impact on our consolidated balance sheets, but did not have a material impact on our consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for capital leases remained substantially unchanged.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in (in thousands, except share and per share amounts)
(Unaudited)
Adoption of this standard resulted in the recognition of additional ROU assets and lease liabilities for operating leases and had the following impact to the reported results as of June 30, 2018 on our condensed consolidated financial statements:
Consolidated Statement of Financial Condition | As Reported | New Lease Standard Adjustment | As Adjusted | |||||||||
Operating lease right-of-use assets | $ | - | $ | 69 | $ | 69 | ||||||
Operating lease right-of-use assets - Vitamin Realty, LLC | - | 3,668 | 3,668 | |||||||||
Operating lease liabilities | - | 69 | 69 | |||||||||
Operating lease liabilities - Vitamin Realty, LLC | - | 3,677 | 3,677 | |||||||||
Current portion of long term debt, net | 773 | - | 773 | |||||||||
Long term debt, net | 3,624 | - | 3,624 | |||||||||
Current portion - Subordinated convertible | ||||||||||||
note, net - CD Financial, LLC | 5,269 | - | 5,269 |
In August, 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which clarifies how certain cash receipts and payments are to be presented in the statement of cash flows. The guidance was effective for the Company on July 1, 2018 and did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Aside from the adoption of ASU No.2015-11,ASUs, as described above and the Leases policy described below, there have been no material changes during fiscal year 20182019 in the Company’sCompany’s significant accounting policies to those previously disclosed in the Company’s Annual Report on Form 10-K10-K for the fiscal year ended June 30, 2017.2018.
Significant Accounting Policies
Sales. The Company recognizes sales revenue, net of estimated sales returns and allowances, at the time it sells its products to the customer. The timing of a sale is determined when the product’s title and risk of loss transfers to the customer. The Company’s sales policy requires the customer to provide the Company with purchase orders with agreed upon selling prices and shipping terms.
Investment in iBio, Inc.Other Income. The Company accounts for its investment in iBio, Inc. (“iBio”) common stock on the cost basis as it retained approximately 6% of its interest in iBio (1,266,706 common shares) (the “iBio Stock”)recognizes revenue from service transactions at the time the service is performed and collection from the counter party is expected. Generally, revenue from services is classified as a component of other income (expense), net in the spin-offCompany's Condensed Consolidated Statements of this subsidiaryOperations when it relates to professional services and in August 2008. The Company reviews its investmentsales, net when it relates to warehousing and distribution services.
Leases. We determine if an arrangement is a lease at inception. Operating leases are included in iBio for impairmentoperating lease right-of-use (“ROU”) assets, other current liabilities, and records a loss when there is deemed to be a permanent impairmentoperating lease liabilities on our consolidated balance sheets. Finance leases are included in property and equipment, current portion of long term debt, and long-term debt obligation on our consolidated statement of financial condition.
Operating lease ROU assets and operating lease liabilities are recognized based on the investment. To date, there were cumulative impairment charges of approximately $2,454. The marketpresent value of the iBio Stock asfuture minimum lease payments over the lease term at commencement date. As most of December 31, 2017 was approximately $215our leases do not provide an implicit rate, we use our incremental borrowing rate based on the trade priceinformation available at commencement date in determining the closepresent value of tradingfuture 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 December 31, 2017. The investment in iBio, Inc. is included in other current assets ina straight-line basis over the accompanying Condensed Consolidated Balance Sheet.lease term.
Pursuant toWe 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 Company’s Loan Agreement with PNC Bank, National Association (“PNC”),lease and non-lease components as amended on February 19, 2016, all the net proceeds from the sale of any of the iBio Stock is to be used to prepay the outstanding principal of the term loan outstanding under the Amended Loan Agreement. (See Note 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt).a single lease component.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Earnings Per ShareShare. . Basic earnings per common share amounts are based on weighted average number of common shares outstanding. Diluted earnings per share amounts are based on the weighted average number of common shares outstanding, plus the incremental shares that would have been outstanding upon the assumed exercise of all potentially dilutive stock options, warrants and convertible debt, subject to anti-dilution limitations using the treasury stock method and if converted method.
The following options and potentially dilutive shares for convertible notesnote payable (see(See Note 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt) 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 six months ended December 31, 2017 September 30, 2018 and 2016:2017:
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Anti-dilutive stock options | 2,496,750 | 2,935,116 | 2,496,750 | 391,033 | ||||||||||||
Anti-dilutive shares for convertible note payable | 8,230,769 | 8,230,769 | 8,230,769 | 8,230,769 | ||||||||||||
Anti-dilutive shares | 10,727,519 | 11,165,885 | 10,727,519 | 8,621,802 |
Three Months Ended | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
Anti-dilutive stock options | 150,000 | 2,692,017 | ||||||
Anti-dilutive shares for convertible notes payable | - | 8,230,769 | ||||||
Total anti-dilutive shares | 150,000 | 10,922,786 | ||||||
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Additionally, in thousands, except sharethe three months ended September 30, 2018, the 8,230,769 common shares underlying the convertible note were potentially dilutive and therefore included in the diluted earnings per share amounts)
(Unaudited)calculation on a proportionate basis prior to the conversion into common shares of the Company as of July 24, 2018 and the results were antidilutive. (See Note 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt).
NoteNote 22. Inventories
Inventories are stated at the lower of cost or net realizable value using the first-in, first-outfirst-in, first-out method and consist of the following:
December 31, | June 30, | September 30, | June 30, | |||||||||||||
2017 | 2017 | 2018 | 2018 | |||||||||||||
Raw materials | $ | 4,749 | $ | 3,847 | $ | 6,409 | $ | 4,179 | ||||||||
Work-in-process | 1,946 | 1,963 | 2,131 | 2,207 | ||||||||||||
Finished goods | 1,363 | 1,835 | 1,060 | 1,355 | ||||||||||||
Total | $ | 8,058 | $ | 7,645 | $ | 9,600 | $ | 7,741 | ||||||||
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Note 33. Property and Equipment, net
Property and equipment, net consists of the following:
December 31, | June 30, | |||||||
2017 | 2017 | |||||||
Land and building | $ | 1,250 | $ | 1,250 | ||||
Leasehold improvements | 1,268 | 1,268 | ||||||
Machinery and equipment | 5,954 | 5,777 | ||||||
Transportation equipment | 7 | 11 | ||||||
8,479 | 8,306 | |||||||
Less: Accumulated depreciation and amortization | (6,795 | ) | (6,705 | ) | ||||
Total | $ | 1,684 | $ | 1,601 |
September 30, | June 30, | |||||||
2018 | 2018 | |||||||
Land and building | $ | 1,250 | $ | 1,250 | ||||
Leasehold improvements | 1,268 | 1,268 | ||||||
Machinery and equipment | 5,931 | 5,917 | ||||||
Transportation equipment | 6 | 6 | ||||||
8,455 | 8,441 | |||||||
Less: Accumulated depreciation | ||||||||
and amortization | (6,851 | ) | (6,790 | ) | ||||
Total | $ | 1,604 | $ | 1,651 |
Depreciation and amortization expense recorded on property and equipment was $57 and $80for the three months ended December 31,September 30, 2018 and 2017 was $66 and 2016, respectively, and $132 and $152 for the six months ended December 31, 2017 and 2016,$75, respectively. Additionally, the Company disposed of fully depreciated property of $38 and $10 in the six months ended December 31, 2017 and 2016, respectively, and sold transportation equipment for a gain of $3.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Note N4ote 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt
As of December 31, 2017 September 30, 2018 and June 30, 2017, 2018, the Company had the following debt outstanding:
Principal Amount | Interest Rate | Maturity Date | |||||||||||
As of September 30, 2018 | As of June 30, 2018 | ||||||||||||
Revolving advances under Senior Credit | |||||||||||||
Facility with PNC Bank, National Association | $ | 4,699 | $ | 4,894 | 5.25 | % | 2/19/2020 | ||||||
Installment Note with PNC Bank | 1,511 | 1,672 | 5.75 | % | 2/19/2020 | ||||||||
Installment Note with PNC Equipment Finance | 78 | 101 | 4.57 | % | 7/29/2019 | ||||||||
Promissory Note with CD Financial, LLC | 1,714 | 1,714 | 6.00 | % | 2/29/2020 | ||||||||
Promissory Note with Vitamin Realty, LLC | 686 | 686 | 4.00 | % | 2/29/2020 | ||||||||
Capitalized lease obligations | 220 | 269 | 3.86% -9.26% | 3/17/2019-12/8/2020 | |||||||||
Total outstanding debt | 8,908 | 9,336 | |||||||||||
Less: Revolving Advances | (4,699 | ) | (4,894 | ) | |||||||||
Prepaid financing costs | (39 | ) | (45 | ) | |||||||||
Current portion of long term debt, net | (851 | ) | (773 | ) | |||||||||
Long term debt, net | $ | 3,319 | $ | 3,624 | |||||||||
Convertible Note payable - CD Financial, LLC | $ | - | $ | 5,350 | 6.00 | % | 7/24/2018 | ||||||
Less: Discount for embedded derivative | - | (66 | ) | ||||||||||
Prepaid financing costs | - | (15 | ) | ||||||||||
Convertible Note payable, net - CD Financial, LLC | $ | - | $ | 5,269 |
Principal Amount | Interest Rate | Maturity Date | |||||||||||||||
As of | As of | ||||||||||||||||
December 31, 2017 | June 30, 2017 | ||||||||||||||||
Revolving advances under Senior Credit | |||||||||||||||||
Facility with PNC Bank, National Association | $ | 4,790 | $ | 4,676 | 4.50% | 2/19/2020 | |||||||||||
Installment Note with PNC Bank | 1,917 | 2,542 | 5.00% | 2/19/2020 | |||||||||||||
Installment Note with PNC Equipment Finance | 146 | 190 | 4.57% | 7/29/2019 | |||||||||||||
Promissory Note with CD Financial, LLC | 1,714 | 1,714 | 6.00% | 2/29/2020 | |||||||||||||
Promissory Note with Vitamin Realty, LLC | 686 | 686 | 4.00% | 2/29/2020 | |||||||||||||
Capitalized lease obligations | 349 | 307 | 3.86% | - | 11.43% | 3/6/2018 | - | 12/8/2020 | |||||||||
Total outstanding debt, net | 9,602 | 10,115 | |||||||||||||||
Less: Revolving Advances | (4,790 | ) | (4,676 | ) | |||||||||||||
Prepaid financing costs | (60 | ) | (75 | ) | |||||||||||||
Current portion of long term debt, net | (869 | ) | (1,118 | ) | |||||||||||||
Long term debt, net | $ | 3,883 | $ | 4,246 | |||||||||||||
Convertible Note payable - CD Financial, LLC | $ | 5,350 | $ | 5,350 | 6.00% | 2/29/2020 | |||||||||||
Less: Discount for embedded derivative | (85 | ) | (105 | ) | |||||||||||||
Prepaid financing costs | (20 | ) | (24 | ) | |||||||||||||
Convertible Note payable, net - CD Financial, LLC | $ | 5,245 | $ | 5,221 |
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
SENIOR CREDIT FACILITY
On February 19,19, 2016, 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.
The Amended Loan Agreement provides for a total of $11,422$11,422 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$8,000 (the “Revolving Credit Facility”) and (ii) a term loan in the amount of $3,422$3,422 (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 owned by the Company. Revolving Advances bear interest at PNC’s Base Rate or the Eurodollar Rate, at Borrowers’ option, plus 2.75% (4.50% (5.25% and 4.25%5.00% as of December 31, 2017 September 30 and June 30, 2017, 2018, respectively). The Term Loan bears interest at PNC’s Base Rate or the Eurodollar Rate, at Borrowers’ option, plus 3.25% (5.00% (5.75% and 4.75%5.50% as of December 31, 2017 September 30 and June 30, 2017, 2018, respectively). 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 February 19, 2020 (the(the “Senior Maturity Date”).
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
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) (84) consecutive monthly installments of principal, the firsteighty-three (83) (83) of which shall be in the amount of $41,$41, commencing on the first business day of March, 2016, 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) $8.0(x) $8.0 million or (y) an amount equal to the sum of: (i) up to 85%, subject to the provisions in the Amended Loan Agreement, of eligible accounts receivables (“Receivables Advance Rate”), plus (ii) up to the lesser of (A) 75%, subject to the provisions in the Amended Loan Agreement, of the value of the eligible inventory (“Inventory Advance Rate” and together with the Receivables Advance Rate, collectively, the “Advance Rates”), (B) 85% of the appraised net orderly liquidation value of eligible inventory (as evidenced by the most recent inventory appraisal reasonably satisfactory to PNC in its sole discretion exercised in good faith) and (C) the inventory sublimit in the aggregate at any one time (“Inventory Advance Rate” and together with the Receivables Advance Rate, collectively, the “Advance Rates”), minus (iii) the aggregate Maximum Undrawn Amount of all outstanding Letters of Credit, minus (iv) such reserves as PNC may reasonably deem proper and necessary from time to time.
The Amended Loan Agreement contains customary mandatory prepayment provisions, including, without limitation the requirement to use any sales proceeds from the sale of iBio Stock to repay the Term Loan and to prepay the outstanding amount of the Revolving AdvancesTerm Note in an amount equal to twenty-five percent (25%(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) (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.
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 also contains customary representations and warranties, covenants and events of default, including, without limitation, (i) a fixed charge coverage ratio maintenance requirement and (ii) an event of default tied to any change of control as defined in the Amended Loan Agreement. As of December 31, 2017, September 30, 2018, 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.
InIn connection with the Senior Credit Facility, PNC and CD Financial entered into the Intercreditor and Subordination Agreement (the “Intercreditor Agreement”), which was acknowledged by the Borrowers, pursuant to which, among other things, (a) the lien of CD Financial on assets of the Borrowers is subordinated to the lien of PNC on such assets during the effectiveness of the Senior Credit Facility, and (b) priorities for payment of the debt for the Company and its subsidiaries (as described in this Note 4)4) are established.
In addition, in connection with the Senior Credit Facility, the following loanloan 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.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
CD FINANCIAL, LLC
On June 27, 2012, the Company also entered into an Amended and Restated Securities Purchase Agreement (the “CD SPA”) with CD Financial, which amended and restated the Securities Purchase Agreement, dated as of February 21, 2008, between the Company and CD Financial, pursuant to which the Company issued to CD Financial a 9.5% Convertible Senior Secured Note in the original principal amount of $4,500$4,500 (the “Original CD Note”). Pursuant to the CD SPA, the Company issued to CD Financial (i) the Amended and Restated Convertible Promissory Note in the principal amount of $5,350$5,350 (the “CD Convertible Note”) and (ii) the Promissory Note in the principal amount of $1,714$1,714 (the “Liquidity Note”, and collectively with the CD Convertible Note, the “CD Notes”). The CD Notes originally matured on had an original maturity date of July 7, 2017, however, on February 19, 2016, the CD Notes were amended to extend the maturity date thereof to February 29,2020.
The CD Notes are secured by all assets of the Borrowers, including, without limitation, machinery and equipment, real estate owned by IHT Properties, and iBio Stock owned by the Company. The CD Notes bear interest at an annual rate of 6% and have a default rate of 10%.
The CD Convertible Note is convertible at the option of CD Financial into common stock of the Company at a conversion price of $0.65$0.65 per share, subject to customary adjustments including conversion price protection provisions.
Pursuant to the terms of the Amended Loan Agreement and the Intercreditor Agreement, during the effectiveness of the Senior Credit Facility, (i) the principal of the CD Convertible Note may not be repaid, (ii) the principal of the Liquidity Note may only be repaid if certain conditions under the Amended Loan Agreement are satisfied, and (iii) interest in respect of the CD Notes may only be paid if certain conditions under the Intercreditor Agreement are satisfied.
The CD SPA contains customary representations and warranties, covenants and events of default, including, without limitation, an event of default tied to any change of control as defined in the CD SPA.
In connection with the CD SPA, the Borrowers entered into an Amended and Restated Security Agreement and Amended and Restated Subsidiary Guaranty.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
On July 31, 2018, the Company authorized the issuance of 8,230,769 shares of the Company’s common stock (“Common Shares”) to CD Financial. The Common Shares were issued upon the exercise by CD Financial of its conversion right pursuant to the CD SPA and in accordance with Section 3 (b) of the CD Convertible Note. The CD Convertible Note was convertible at the option of CD Financial into Common Shares at a conversion price of $0.65 per share, subject to customary adjustments. CD Financial exercised its conversion right with respect to the entire principal amount due under the CD Convertible Note. The Common Shares issued to CD Financial were issued at a conversion price of $0.65 per Common Share.
As of December 31, 2017 and June 30, 2017, 2018, the related embedded derivative liability with respect to conversion price protection provisions on the CD Convertible Note hashad an estimated fair value of $436$9 and $503, respectively.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(as of September 30, 2018 had been extinguished in thousands, except share and per share amounts)
(Unaudited)connection with the above described conversion exercise by CD Financial on July 24, 2018.
The Company usedLiquidity Note issued under the following assumptions to calculate the fair value of the derivative liability using the Black-Scholes option pricing model:
December 31, | June 30, | |||||||
2017 | 2017 | |||||||
Risk Free Interest Rate | 1.91 | % | 1.49 | % | ||||
Volatility | 106.00 | % | 98.11 | % | ||||
Term | 2 years 2 months | 2 years 8 months | ||||||
Dividend Rate | 0.00 | % | 0.00 | % | ||||
Closing Price of Common Stock | $ | 0.18 | $ | 0.19 |
CD SPA remains outstanding.
OTHER LONG TERM DEBT
Related Party DebtDebt. . On June 27, 2012, MDC and the Company entered into a promissory note with Vitamin Realty Associates, LLC (“Vitamin Realty”) in the principal amount of approximately $686$686 (the “Vitamin Note”). The principal amount of the Vitamin Note represents the aggregate amount of unpaid, past due rent owedowing by MDC under the Lease Agreement, dated as of January 10, 1997, between MDC, as lessor, and Vitamin Realty, as landlord, pertaining to the real property located at 225 Long Avenue, Hillside, New Jersey. (See Note 6. Commitments and Contingencies (a) Leases – Related Parties Leases). The Vitamin Note matures on February 29,2020, as amended on February 19, 2016. The Vitamin Note accrues interest at an annual rate of 4% per annum. Interest in respect of the Vitamin Note is payable on the first business day of each calendar month. Pursuant to the terms of the Amended Loan Agreement, during the effectiveness of the Senior Credit Facility, the Vitamin Note may only be repaid or prepaid if certain conditions set forth in the Amended Loan Agreement are satisfied.
Capitalized Lease Obligations.On December 22, 2017, the Company entered into a capitalized lease obligation with First American Equipment Finance (“First American”) in the amount of $143, which lease is secured by certain machinery and equipment and matures on December 1, 2019. The Company sold certain machinery, purchased from equipment suppliers other than First American in the aggregate amount of $143, to First American for $143 and leased the sold equipment back from First American for monthly payments in the amount of approximately $6 with an imputed interest rate of 6.56%.
Note 5. Significant Risks and Uncertainties
(a)(a) Major Customers. For the three months ended December 31,September 30, 2018 and 2017, approximately 89% and 2016, approximately 91% and 92%, respectively, of consolidated net sales, respectively, were derived from two customers. These two customers are in the Company’s Contract Manufacturing Segment and represent approximately 79%61% and 16%29% and 60%63% and 35% of this Segment’s net sales32% in the three months ended December 31,September 30, 2018 and 2017, and 2016,respectively. Two other customers in the Branded Nutraceutical Segment, while not significant customers of the Company’s consolidated net sales, each represented approximately 34% of net sales in the three months ended December 31,2017, and one customer represented approximatley 53% of net sales in the three months ended December 31, 2016, of the Branded Nutraceutical Segment.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
For the six months ended December 31, 2017 and 2016, approximately 91% and 92%, respectively, of consolidated net sales, were derived from two customers. These two customers are in the Company’s Contract Manufacturing Segment and represent approximately 71% and 23% and 54% and 42% of this Segment’s net sales in the six months ended December 31, 2017 and 2016, respectively. Accounts receivable from thesetwo major customers represented approximately 90%89% and 61%87% of total net accounts receivable as of December 31 September 30 and June 30, 2017, respectively. Two other customers in the Branded Nutraceutical Segment, while not significant customers of the Company’s consolidated net sales, represented approximately 30% and 29% and 57% and none of net sales of the Branded Nutraceutical Segment in the six months ended December 31, 2017 and 2016,2018, respectively. The loss of any of these customers could have an adverse affecteffect on the Company’s operations. Major customers are those customers who account for more than 10% of net sales.
(b)(b) Other Business Risks. Approximately 66%67% 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, 2015 2018 and will expire on August 31, 2018.2021.
Note 6.Leases and other Commitments and Contingencies
(a) LeasesLeases. The Company has operating and finance leases for its corporate and sales offices, warehousing and packaging facilities and certain machinery and equipment, including office equipment. The Company’s leases have remaining terms of less than 1 year to less than 8 years.
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 September 30, 2018 were as follows:
Related Party - Vitamin Realty | Other Leases | Totals | ||||||||||
Operating lease costs | $ | - | $ | 19 | $ | 19 | ||||||
Finance Operating Lease Costs: | ||||||||||||
Amortization of right-of use assets | $ | 107 | $ | 5 | $ | 112 | ||||||
Interest on operating lease liabilities | 35 | 1 | 36 | |||||||||
Total finance lease cost | $ | 142 | $ | 6 | $ | 148 |
Operating Lease Liabilities
Related Party Leases.Operating Lease Liabilities. Warehouse and office facilities are leased from Vitamin Realty, which is 100% owned by the Company’s chairman, Chief Executive Officer and major stockholder and certain of his family members, who are also 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,$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 January 1, 2024. This additional lease provides for minimum lease payments of $27$27 with annual increases plus the proportionate share of operating expenses.
Rent expense, lease amortization costs and interest expense for each of the three months ended December 31,September 30, 2018 and 2017and 2016 on these leases was $214were $202 and for the six months ended December 31, 2017 and 2016, was $415 and $411,$201 respectively, and are included in both cost of sales, and selling and administrative expenses and interest expense in the accompanying Condensed Consolidated Statements of Operations. As of December 31, 2017 September 30, 2018 and June 30, 2017, 2018, the Company had an outstanding obligationcurrent obligations to Vitamin Realty of $763,$763 and $827, respectively, included in accounts payable, accrued expenses and other liabilities and long term debt in the accompanying Condensed Consolidated Balance Sheet. Additionally, the Company has operating lease obligations of $3,569 with Vitamin Realty as noted in the accompany Condensed Consolidated Balance Sheet.
Other Operating Lease Commitments.Liabilities. The Company has entered into certain non-cancelable operating lease agreements expiring up through January 31, 2026, May, 2023, related to officemachinery and warehouse space, equipment and vehicles (inclusive of the related party lease with Vitamin Realty).office equipment.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in (in thousands, except share and per share amounts)
(Unaudited)
The minimum rental commitments for long-term non-cancelableAs of September 30, 2018, the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases areis as follows:
Operating | Related Party | |||||||||||
| Lease | Lease | ||||||||||
Year Ending June 30, | Commitment | Commitment | Total | |||||||||
2018, remaining | $ | 27 | $ | 281 | $ | 308 | ||||||
2019 | 31 | 563 | 594 | |||||||||
2020 | 22 | 563 | 585 | |||||||||
2021 | 21 | 563 | 584 | |||||||||
2022 | 8 | 563 | 571 | |||||||||
2023 | - | 563 | 563 | |||||||||
Thereafter | - | 1,392 | 1,392 | |||||||||
Total | $ | 109 | $ | 4,488 | $ | 4,597 |
Right-of-use Assets | Operating Lease Obligations | Remaining Cash Commitment | ||||||||||
Vitamin Realty Leases | $ | 3,561 | $ | 3,569 | $ | 4,092 | ||||||
Machinery and equipment leases | 34 | 34 | 36 | |||||||||
Office equipment leases | 31 | 31 | 33 | |||||||||
$ | 3,626 | $ | 3,634 | $ | 4,161 |
The Company’s weighted average discount rate and remaining term on lease liabilities is approximately 3.76% and 7.1years, respectively.
Supplemental cash flows information related to leases for the three months ended September 30, 2018 is as follows:
Related Party - Vitamin Realty | Other Leases | Totals | ||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||
Operating cash flows from operating leases | $ | - | $ | 19 | $ | 19 | ||||||
Operating cash flows from finance leases | 94 | 5 | 99 | |||||||||
Financing cash flows from capital lease obligations | - | 50 | 50 |
The Company did not enter into any lease commitments in the three months ended September 30, 2018.
Maturities of operating lease liabilities as of September 30, 2018 were as follows:
| Related Party | |||||||||||
Year ending | Operating Lease | Operating Lease | ||||||||||
June 30, | Commitment | Commitment | Total | |||||||||
2019, remaining | $ | 18 | $ | 424 | $ | 442 | ||||||
2020 | 22 | 565 | 587 | |||||||||
2021 | 21 | 565 | 586 | |||||||||
2022 | 8 | 565 | 573 | |||||||||
2023 | - | 565 | 565 | |||||||||
2024 | - | 564 | 564 | |||||||||
Thereafter | - | 844 | 844 | |||||||||
Total minimum lease payments | 69 | 4,092 | 4,161 | |||||||||
Imputed interest | (4 | ) | (523 | ) | (527 | ) | ||||||
Total | $ | 65 | $ | 3,569 | $ | 3,634 |
Total rent expense, lease amortization costs and interest expense, including real estate taxes and maintenance charges, was approximately $254$239 and $255 and $496 and $492$242 for the three and six months ended December 31,September 30, 2018 and 2017, and 2016,respectively. Rent and lease amortization and interest expense is included in cost of sales, and selling and administrative expenses and interest expense in the accompanying Condensed Consolidated Statements of Operations.
(b)
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
(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’sCompany’s liquidity, financial condition and cash flows.
(c) Other Claims.
On May 15, 2012, Cedarburg Pharmaceuticals, Inc. ("Cedarburg") sent the Company a letter (the "Demand Letter") setting forth a demand for indemnification under the Stock Purchase Agreement, dated March 17, 2009 (the(the "Cedarburg SPA"), by and among Cedarburg, InB: Hauser Pharmaceutical Services, Inc., InB: Paxis Pharmaceuticals, Inc. and the Company. In the Demand Letter, Cedarburg demanded payment by the Company of $0.6 million$600 in respect of the Company's indemnification obligations under the Cedarburg SPA. In addition, in the Demand Letter, Cedarburg informed the Company that there are also environmental issues pending which may lead to additional costs to Cedarburg which will likely be in excess of $0.3 million.$300.
On May 30, 2012, the Company sent a letter responding to the Demand Letter and setting forth the Company’s position that it has no obligation to indemnify Cedarburg as demanded. On June 18, 2012, Cedarburg responded to the Company’s letter and, on July 27, 2012, the Company sent another letter to Cedarburg reiterating its position that the Company has no obligation to indemnify Cedarburg as demanded. On December 18, 2012, Cedarburg responded to the Company’s letter and, on January 15, 2013, the Company sent another letter to Cedarburg reiterating its position that the Company has no obligation to indemnify Cedarburg as demanded. As of FebruaryNovember 9, 2018, the Company has not received any further communication from Cedarburg with respect to its demand for indemnification as set forth in the Demand Letter. The Company intends to vigorously contest Cedarburg's demand as set forth in the Demand Letter.
Note 7. Related Party Transactions
See Note 4.4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt for related party securities and debt transactions.
See Note 6(a)6(a). Leases for related party lease transactions.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Note 8. Income Taxes
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018. During the three month and six month period ended December 31, 2017, the Company recognized a provision for income taxes of $338 and $294, respectively, of which $250 was considered a provisional estimate under the U.S. Securities and Exchange Commission Staff Accounting Bulletin No.118. The Company’s provisional estimate of $250 included $263 related to the impact of re-measuring the Company’s deferred tax balances to reflect the new tax rate.
The Company re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse. In addition, the Company elected to record certain deferred tax assets and liabilities related to the alternative minimum tax carry forward credits now allowed to be utilized in future taxable years. The provisional estimate of $263 incorporates assumptions made based upon the best available interpretation of the Act and may change as the Company receives additional clarification and implementation guidance.
Note 9.8. 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’scompany’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 and Canada, for the three months ended December 31,September 30, 2018 and 2017 were $1,239 and 2016 were $1,248$1,658, respectively.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and $1,797, respectively, and for the six months ended December 31, 2017 and 2016 were $2,906 and $4,673, respectively.per share amounts)
(Unaudited)
Financial information relating to the three months ended December 31,September 30, 2018 and 2017and 2016 operations by business segment and disaggregated revenues are as follows:
Sales, Net | Segment | |||||||||||||||||||||||||||||||||||||||||||||||||
U.S. | International | Gross | Capital | Sales, Net | Segment | |||||||||||||||||||||||||||||||||||||||||||||
Customers | Customers | Total | Profit (Loss) | Depreciation | Expenditures | U.S. | International | Gross | Capital | |||||||||||||||||||||||||||||||||||||||||
Customers | Customers | Total | Profit | Depreciation | Expenditures | |||||||||||||||||||||||||||||||||||||||||||||
Contract | 2017 | $ | 9,159 | $ | 1,199 | $ | 10,358 | $ | 896 | $ | 55 | $ | 109 | 2018 | $ | 8,655 | $ | 1,197 | $ | 9,852 | $ | 1,083 | $ | 65 | $ | 18 | ||||||||||||||||||||||||
Manufacturing | 2016 | 10,207 | 1,687 | 11,894 | 1,344 | 80 | 42 | 2017 | 7,822 | 1,583 | 9,405 | 835 | 74 | 93 | ||||||||||||||||||||||||||||||||||||
Branded Proprietary | 2017 | 162 | 10 | 172 | 65 | 1 | - | 2018 | 71 | 7 | 78 | 21 | - | - | ||||||||||||||||||||||||||||||||||||
Products | 2016 | 61 | 101 | 162 | 17 | - | - | 2017 | 19 | 11 | 30 | 32 | 1 | 13 | ||||||||||||||||||||||||||||||||||||
Other Nutraceutical | 2017 | 231 | 39 | 270 | 87 | 1 | - | 2018 | 339 | 35 | 374 | 115 | 1 | - | ||||||||||||||||||||||||||||||||||||
Businesses | 2016 | 307 | 9 | 316 | 109 | - | - | 2017 | 271 | 64 | 335 | 138 | - | 1 | ||||||||||||||||||||||||||||||||||||
Total | 2017 | 9,552 | 1,248 | 10,800 | 1,048 | 57 | 109 | 2018 | 9,065 | 1,239 | 10,304 | 1,219 | 66 | 18 | ||||||||||||||||||||||||||||||||||||
Company | 2016 | 10,575 | 1,797 | 12,372 | 1,470 | 80 | 42 | 2017 | 8,112 | 1,658 | 9,770 | 1,005 | 75 | 107 |
Total Assets as of | ||||||||
September 30, | June 30, | |||||||
2018 | 2018 | |||||||
Contract Manufacturing | $ | 17,339 | $ | 12,200 | ||||
Branded Proprietary Products | 665 | 543 | ||||||
Other Nutraceutical Businesses | 1,715 | 1,825 | ||||||
Total Company | $ | 19,724 | $ | 14,568 |
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Financial information relating to the six months ended December 31, 2017 and 2016 operations by business segment are as follows:
Sales, Net | Segment | ||||||||||||||||||||||||
U.S. | International | Gross | Capital | ||||||||||||||||||||||
Customers | Customers | Total | Profit (Loss) | Depreciation | Expenditures | ||||||||||||||||||||
Contract | 2017 | $ | 16,981 | $ | 2,782 | $ | 19,763 | $ | 1,731 | $ | 129 | $ | 202 | ||||||||||||
Manufacturing | 2016 | 19,528 | 4,398 | 23,926 | 3,240 | 151 | 83 | ||||||||||||||||||
Branded Proprietary | 2017 | 181 | 21 | 202 | 97 | 2 | 13 | ||||||||||||||||||
Products | 2016 | 90 | 196 | 286 | 51 | - | - | ||||||||||||||||||
Other Nutraceutical | 2017 | 502 | 103 | 605 | 225 | 1 | 1 | ||||||||||||||||||
Businesses | 2016 | 762 | 79 | 841 | 330 | 1 | 1 | ||||||||||||||||||
Total | 2017 | 17,664 | 2,906 | 20,570 | 2,053 | 132 | 216 | ||||||||||||||||||
Company | 2016 | 20,380 | 4,673 | 25,053 | 3,621 | 152 | 84 |
Total Assets as of | ||||||||
December 31, | June 30, | |||||||
2017 | 2017 | |||||||
Contract Manufacturing | $ | 13,154 | $ | 12,134 | ||||
Branded Proprietary Products | 710 | 784 | ||||||
Other Nutraceutical Businesses | 1,784 | 2,278 | ||||||
Total Company | $ | 15,648 | $ | 15,196 |
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, 2017.2018.
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 MD&A, involve a number of risks and uncertainties—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 Part II, Item 1A of this Quarterlythe Company's Annual Report on Form 10-Q.10-K for the fiscal year ended Jun 30, 2018.
For the sixthree months ended December 31, 2017,September 30, 2018, our net sales from operations decreasedincreased by $4.5 million$534 to approximately $20.6 million$10,304 from approximately $25.1 million$9,770 in the sixthree months ended December 31, 2016.September 30, 2017. Substantially all the decreaseincrease in net sales was from the Contract Manufacturing Segment with a decrease of $4.2 million ($5.4 million from our significant customer Herbalife offset by increased sales to Life Extension of $1.2 million),$447, while our other two segments, Branded NutraceuticalProprietary Products Segment and Other Nutraceuticals Segment, had decreasedincreased sales of $0.1 million$48 and $0.2 million,$39, respectively. The declineNet sales increased in sales in the six months ended December 31, 2017 from Herbalife, wasour Contract Manufacturing Segment by $447 primarily due to decreased orders receivedincreased sales volumes to Life Extension in the amount of $368 and to our other customers of net $88. For the three months ended September 30, 2018, we had operating income of approximately $405, an increase of approximately $194 from Herbalifeoperating income of approximately $211 for items that we manufacture for Herbalife and secondarilythe three months ended September 30, 2017. Our profit margins increased from decreasesapproximately 10% of (i) approximately $0.6 million as a result of a scheduled shut down of Herbalife’s logistics softwarenet sales in August 2017, which caused Herbalife to request shipments originally scheduled for the three months ended September 30, 2017 to be shipped in June 2017 and (ii) approximately $0.5 million as a result of discontinued items by Herbalife which were manufactured by MDC. For the six months ended December 31, 2017 we had operating income of approximately $0.4 million, a decrease of approximately $1.5 million from the six months ended December 31, 2016 of approximately $1.9 million. Our profit margins decreased from approximately 14%12% of net sales in the sixthree months ended December 31, 2016 to 10% of net sales in the six months ended December 31, 2017,September 30, 2018, primarily as a result of the decreasedincreased sales in our Contract Manufacturing Segment of approximately $4.2 million. This decline in margins was the result of the decreased sales in the Contract Manufacturing Segment to Herbalife with increased sales to Life Extension (higher cost of goods), while our fixed manufacturing costs remained substantially the same in the year over year reporting period. We maintained our$447. Our consolidated selling and administrative expenses at increased approximately $1.6 million$20 or approximately 3% in eachthe three months ended September 30, 2018 compared to the three months ended September 30, 2017.
During the three months ended September 30, 2018, CD Financial, LLC (“CD Financial”), exercised its conversion right pursuant to the CD SPA and in accordance with Section 3 (b) of the sixCD Convertible Note in the principal amount of approximately $5,350. The CD Convertible Note was convertible at the option of CD Financial into Common Shares at a conversion price of $0.65 per share, subject to customary adjustments. CD Financial exercised its conversion right with respect to the entire principal amount due under the CD Convertible Note. The Common Shares were issued to CD Financial at a conversion price of $0.65 per Common Share, resulting in the Company issuing 8,230,769 Common Shares to CD Financial. As a result of this conversion, the Company’s total stockholders’ deficiency of $5,236 as of June 30, 2018 was offset by the converted value of the CD Convertible Note of $5,272 in the three months ended December 31, 2017September 30, 2018, resulting in total stockholders’ equity of $36 without taking into account any other changes to the Company’s stockholders’ accounts or transactions. Additionally, the conversion results in annual cost savings of approximately $321 relating to the interest component of the CD Convertible Note. The remaining debt discount and 2016.issuance costs of $78 and the extinguished underlying derivative liability associated with the CD Convertible Note was charged to additional paid in capital due to the significant ownership by CD Financial in the Company.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies in the sixthree months ended December 31, 2017.September 30, 2018, 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, 2017.2018 and in Note 1. Principles of Consolidation and Basis of Presentation of the Condensed Financial Statements of the Company contained in this Quarterly Report on Form 10-Q.
Results of Operations(in thousands, except share and per share amounts)
Our results from operations in the following table, sets forth the income statement data of our results as a percentage of net sales for the periods indicated:
For the three months | For the six months | For the three months | ||||||||||||||||||||||
ended December 31, | ended December 31, | ended September 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||
Sales, net | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Costs and expenses: | ||||||||||||||||||||||||
Cost of sales | 90.3 | % | 88.1 | % | 90.0 | % | 85.5 | % | 88.2 | % | 89.7 | % | ||||||||||||
Selling and administrative | 7.9 | % | 7.3 | % | 8.0 | % | 6.8 | % | 7.9 | % | 8.1 | % | ||||||||||||
98.2 | % | 95.4 | % | 98.0 | % | 92.3 | % | 96.1 | % | 97.8 | % | |||||||||||||
Income from operations | 1.8 | % | 4.6 | % | 2.0 | % | 7.7 | % | ||||||||||||||||
Operating income | 3.9 | % | 2.2 | % | ||||||||||||||||||||
Other income (expense), net | ||||||||||||||||||||||||
Other expense, net | ||||||||||||||||||||||||
Interest expense | (2.1% | ) | (1.8% | ) | (2.2% | ) | (1.8% | ) | (1.9% | ) | (2.4% | ) | ||||||||||||
Impairment charge on investment in iBio, Inc. | 0.0 | % | (0.8% | ) | ||||||||||||||||||||
Change in fair value of derivative liabilities | 1.7 | % | (2.9% | ) | 0.3 | % | (2.9% | ) | 0.1 | % | (1.2% | ) | ||||||||||||
Impairment charge on investment in iBio, Inc. | (1.5% | ) | - | (1.2% | ) | - | ||||||||||||||||||
Other income, net | 0.0 | % | 0.1 | % | 0.0 | % | 0.1 | % | ||||||||||||||||
Other income (expense), net | (1.9% | ) | (4.6% | ) | (3.1% | ) | (4.6% | ) | ||||||||||||||||
Other expense, net | (1.8% | ) | (4.4% | ) | ||||||||||||||||||||
Income before income taxes | 2.1 | % | (2.2% | ) | ||||||||||||||||||||
(Loss) income before income taxes | (0.1% | ) | (0.0% | ) | (1.1% | ) | 3.1 | % | ||||||||||||||||
Income tax (benefit) expense, net | 0.5 | % | (0.4% | ) | ||||||||||||||||||||
Federal and state income taxes, net | 3.1 | % | 0.6 | % | 1.5 | % | 0.8 | % | ||||||||||||||||
Net (loss) income | (3.2% | ) | (0.6% | ) | (2.6% | ) | 2.3 | % | ||||||||||||||||
Net income | 1.6 | % | (1.8% | ) |
For the Six Months EndedDecember 31, 2017 compared to the Six Months EndedDecember 31, 2016
Sales, net.Sales, net, for the six months ended December 31, 2017 and 2016 were $20.6 million and $25.1 million, respectively, a decrease of 17.9%, and are comprised of the following:
Six months ended | Dollar | Percentage | ||||||||||||||
December 31, | Change | Change | ||||||||||||||
2017 | 2016 | 2017 vs 2016 | 2017 vs 2016 | |||||||||||||
(amounts in thousands) | ||||||||||||||||
Contract Manufacturing: | ||||||||||||||||
US Customers | $ | 16,981 | $ | 19,528 | $ | (2,547 | ) | (13.0% | ) | |||||||
International Customers | 2,782 | 4,398 | (1,616 | ) | (36.7% | ) | ||||||||||
Net sales, Contract Manufacturing | 19,763 | 23,926 | (4,163 | ) | (17.4% | ) | ||||||||||
Branded Nutraceutical Products: | ||||||||||||||||
US Customers | 181 | 90 | 91 | 101.1 | % | |||||||||||
International Customers | 21 | 196 | (175 | ) | (89.3% | ) | ||||||||||
Net sales, Branded Nutraceutical Products | 202 | 286 | (84 | ) | (29.4% | ) | ||||||||||
Other Nutraceuticals: | ||||||||||||||||
US Customers | 502 | 762 | (260 | ) | (34.1% | ) | ||||||||||
International Customers | 103 | 79 | 24 | 30.4% | ||||||||||||
Net sales, Other Nutraceuticals | 605 | 841 | (236 | ) | (28.1% | ) | ||||||||||
Total net sales | $ | 20,570 | $ | 25,053 | $ | (4,483 | ) | (17.9% | ) | |||||||
For the sixThree Months EndedSeptember 30, 2018 compared to the Three Months EndedSeptember 30, 2017
Sales, net.Sales, net, for the three months ended December 31,September 30, 2018 and 2017 were $10.3 million and 2016$9.8 million, respectively, an increase of 5.5%, and are comprised of the following:
Three months ended | Dollar | Percentage | ||||||||||||||
September 30, | Change | Change | ||||||||||||||
2018 | 2017 | 2018 vs 2017 | 2018 vs 2017 | |||||||||||||
(amounts in thousands) | ||||||||||||||||
Contract Manufacturing: | ||||||||||||||||
US Customers | $ | 8,655 | $ | 7,822 | $ | 833 | 10.6 | % | ||||||||
International Customers | 1,197 | 1,583 | (386 | ) | (24.4% | ) | ||||||||||
Net sales, Contract Manufacturing | 9,852 | 9,405 | 447 | 4.8 | % | |||||||||||
Branded Nutraceutical Products: | ||||||||||||||||
US Customers | 71 | 19 | 52 | 273.7 | % | |||||||||||
International Customers | 7 | 11 | (4 | ) | (36.4% | ) | ||||||||||
Net sales, Branded Nutraceutical Products | 78 | 30 | 48 | 160.0 | % | |||||||||||
Other Nutraceuticals: | ||||||||||||||||
US Customers | 339 | 271 | 68 | 25.1 | % | |||||||||||
International Customers | 35 | 64 | (29 | ) | (45.3% | ) | ||||||||||
Net sales, Other Nutraceuticals | 374 | 335 | 39 | 11.6 | % | |||||||||||
Total net sales | $ | 10,304 | $ | 9,770 | $ | 534 | 5.5 | % |
For the three months ended September 30, 2018 and 2017, a significant portion of our consolidated net sales, approximately 91%89% and 92%91%, respectively, were concentrated among two customers Life Extension and Herbalife, customers in our Contract Manufacturing Segment.Segment, Life Extension and Herbalife. Life Extension and Herbalife represented approximately 71%61% and 23%29% and 54%63% and 42%32%, respectively, of our Contract Manufacturing Segment’s net sales in the sixthree months ended December 31,September 30, 2018 and 2017, and 2016, respectively. The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations. Costco Wholesale Corporation (“Costco”) and BJ's Wholesale Club ("BJ's") (customers of our Branded Nutraceutical Products Segment), while not significant customers of our consolidated net sales represented approximately 30% and 29% and 57% and none respectively, of the Branded Nutraceutical Products Segment net sales in the six months ended December 31, 2017 and 2016, respectively.
The decreaseincrease in net sales of approximately $4.2 million$534 was primarily the result of:
● | Net sales |
● | Net sales in our Branded Nutraceutical |
|
|
Cost of sales. Cost of sales decreasedincreased by $2.9 millionapproximately $320 to $18.5 million$9,085 for the sixthree months ended December 31, 2017,September 30, 2018, as compared to $21.4 million, a decrease of 14%,$8,765 for the sixthree months ended December 31, 2016.September 30, 2017 or approximately 4%. Cost of sales increaseddecreased as a percentage of sales to 90%88.2% for the sixthree months ended December 31, 2017September 30, 2018 as compared to 85.5%89.7% for the sixthree months ended December 31, 2016.September 30, 2017. The decreaseincrease in the cost of goods sold amount is consistent with the decreasedincreased net sales of approximately 18%6%. The increase in the cost of goods sold as a percentage of net sales, was primarily the result of the increased sales to Life Extension as a percentage of total sales in our Contract Manufacturing Segment. The cost of the raw materials for the Life Extension finished goods, on average, cost more per bottle than goods produced for our other customers in the Contract Manufacturing Segment as they tend to use raw materials with trademarked characteristics which limits the ability to negotiate pricing. Secondarily, the cost of sales increased as a percentage of sales, net as a result of the fixed manufacturing costs in our Contract Manufacturing Segment decreasing by approximately 11% from the comparable period a year ago, while our sales decreased by approximately 18%. There were no significant changes in the cost of goods sold in our other two segments other than the decreased sales in each of the other two segments.
Selling and Administrative Expenses. There was a slight decreasean increase in selling and administrative expenses of $49,000 or$20, approximately 2.9%3% in the sixthree months ended December 31, 2017September 30, 2018 as compared to the sixthree months ended December 31, 2016.September 30, 2017. As a percentage of sales, net, selling and administrative expenses werewas approximately 8% and 7% forin each of the sixthree months ended December 31, 2017September 30, 2018 and 2016, respectively.2017. The decreaseincrease was primarily due to a decreasefrom increases (i) in salaries and employees benefits of approximately $80,000,$29, as the result of decreasingof: (a) replacing our sales support by two peopleheadcount with higher salaried employees ($5); (b) an increase in employee benefits due to the change in personnel and a decreasean increase in premiums ($6) and; (c) an increase in our vacation pay liability offset by an increase($14); and (ii) in professional and consulting fees of approximately $31,000 for work performed on new products labels$14 primarily as the result of outsourcing our information technology function beginning in April 2018. These increases were partially offset by an aggregate decrease of approximately $24 in other components (excluding consulting and trademark registrations inprofessional fees and salaries and employee benefits) of our Branded Nutraceutical Segment as well as legal fees incurred in our Other Nutraceutical Segment for the trademarkselling and patent protection of the Multi Minerals sold under a license agreement.administrative expenses.
Other income (expense), net. Other income (expense), net was approximately $0.6 million$191 for the sixthree months ended December 31, 2017September 30, 2018 compared to $1.2 million$434 for the sixthree months ended December 31, 2016,September 30, 2017, and is composed of:
Six months ended | ||||||
December 31, | ||||||
2017 | 2016 | |||||
(dollars in thousands) | ||||||
Interest expense | $ | (462 | ) | $ | (459 | ) |
Change in fair value of derivative instruments | 67 | (731 | ) | |||
Impairment charge on investment in iBio, Inc. | (251 | ) | - | |||
Other income | 4 | 31 | ||||
Other income (expense), net | $ | (642 | ) | $ | (1,159 | ) |
Three months ended | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
(dollars in thousands) | ||||||||
Interest expense | $ | (200 | ) | $ | (233 | ) | ||
Change in fair value of derivative liabilities | 9 | (118 | ) | |||||
Impairment on investment in iBio, Inc. | - | (83 | ) | |||||
Other income (expense), net | $ | (191 | ) | $ | (434 | ) |
The variance in the change in fair value of derivative liabilities betweenin the sixthree months ended December 31, 2016 and the six months ended December 31,September 30, 2017 was mainlyattributable to the result ofchange in the decreased closing trading price of our commonthe Company's stock, as traded on the OTC Bulletin Board, from $0.19 as of June 30, 2017 to $0.18$0.22 as of December 31, 2017 and the change in the volatility of the closing trading price of our common stock from 98.11% as of JuneSeptember 30, 2017 to 106.00% as of December 31, 2017. The closing trading price and the volatility of the closing trading price of our common stock are twois one of the variables used to calculate the estimated fair value of our derivative liabilities associated with the underlying derivative instrument.
Our interest expense for During the six months ended December 31, 2017, was slightly more, approximately $3,000 more than for the six months ended December 31, 2016. The increase in interest expense was the result of an increase in interest rates of 0.75% from the sixthree month period ended December 31, 2016 toSeptember 30, 2018, the six month period ended December 31, 2017 on our Senior Credit Facility (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q), offset by, a decrease in our outstanding debtderivative liability was extinguished, resulting in the amountcarrying value as of $0.5 million from June 30, 20172018 of $9 to December 31, 2017.be compared to a value of $0 as of September 30, 2018, as the related derivative liability is no longer outstanding, resulting in a change of $9 for the three months ended September 30, 2018.
In the sixthree months ended December 31,September 30, 2017 we determined that there was an impairment on the carrying value of our investment in iBio, Inc. in the amount of approximately $0.3 million$83 resulting from the decline in the closing trading price of their common stock on the NYSE American Exchange for the sixthree month period ended December 31, 2017 from $0.39 per share as of JuneSeptember 30, 2017 to $0.18 per share as of Decemberand continuing into the month ended October 31, 2017.
Other incomeOur interest expense for the three months ended September 30, 2018 decreased by approximately $27,000$33 from the three month period ended September 30, 2017 primarily as the result of earning less income from providing back office support, logistics and operational support forCD Financial exercising its conversion right to convert the $5,350 CD Convertible Note to equity on July 24, 2018, an interest savings of $61, offset in part, by the adoption of ASU 2016-02 on July 1, 2018, which classifies a start-up company which sells overportion of the counter pharmaceutical and nutraceutical products through retail and internet based outlets.operating lease payments as interest. Accordingly, in the three month period ended September 30, 2018, we incurred an interest cost of $35 on our operating lease liabilities.
Federal and state income tax (benefit) expense, net. For the sixthree months ended December 31,September 30, 2018 and 2017, and 2016, we had state income tax expense, net expense of approximately $44,000$27 and $197,000,$10, respectively and a federal deferred income tax expense of $250,000$73 in the three months ended September 30, 2018 and none, respectively.a federal income tax benefit of $28 in the three months ended September 30, 2017. We continue to maintain a reserve on a portion of our deferred tax assets as it has been determined that based upon past losses, the Company’s past liquidity concerns and the current economic environment, that it is “more likely than not” the that Company’s deferred tax assets may not be fully realized. The state tax expense is the result of MDC using all of its state net operating losses in the fiscal year ended 2013 tax period. 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 decrease in state income tax expense of $153,000 is the result of the decreased net income for MDC. The increase in the federal income tax expense of $250,000 is the result of the 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 which resulted in a decrease to our deferred tax assets of $263,000 offset by a current federal tax benefit of approximately $13,000.
Netincome (loss)income. Our net loss for the six months ended December 31, 2017 was $0.5 million compared to net income of $0.6 million in the six months ended December 31, 2016, a decrease of $1.1 million. The decrease was primarily the result of our decreased operating income of $1.5 million, the impairment charge on our investment in iBio, Inc. of $0.3 million and increased income tax expense, net of $0.1 million, offset by the change in fair value of derivative instruments of approximately $0.8 million.
For the Three Months Ended December 31, 2017 compared tothe Three Months Ended December 31, 2016
Sales, net.Sales, net, for the three months ended December 31, 2017 and 2016 were $10.8 million and $12.4 million, respectively,September 30, 2018 was $159 compared to a decreasenet loss of 12.7%, and are comprised of the following:
Three months ended | Dollar | Percentage | ||||||||||||||
December 31, | Change | Change | ||||||||||||||
2017 | 2016 | 2017 vs 2016 | 2017 vs 2016 | |||||||||||||
(amounts in thousands) | ||||||||||||||||
Contract Manufacturing: | ||||||||||||||||
US Customers | $ | 9,159 | $ | 10,207 | $ | (1,048 | ) | (10.3% | ) | |||||||
International Customers | 1,199 | 1,687 | (488 | ) | (28.9% | ) | ||||||||||
Net sales, Contract Manufacturing | 10,358 | 11,894 | (1,536 | ) | (12.9% | ) | ||||||||||
Branded Nutraceutical Products: | ||||||||||||||||
US Customers | 162 | 61 | 101 | 165.6% | ||||||||||||
International Customers | 10 | 101 | (91 | ) | (90.1% | ) | ||||||||||
Net sales, Branded Nutraceutical Products | 172 | 162 | 10 | 6.2% | ||||||||||||
Other Nutraceuticals: | ||||||||||||||||
US Customers | 231 | 307 | (76 | ) | (24.8% | ) | ||||||||||
International Customers | 39 | 9 | 30 | 333% | ||||||||||||
Net sales, Other Nutraceuticals | 270 | 316 | (46 | ) | (14.6% | ) | ||||||||||
Total net sales | $ | 10,800 | $ | 12,372 | $ | (1,572 | ) | (12.7% | ) | |||||||
For the three months ended December 31, 2017 and 2016 a significant portion of our consolidated net sales, approximately 91% and 92%, respectively, were concentrated among two customers in our Contract Manufacturing Segment, Life Extension and Herbalife. Life Extension and Herbalife represented approximately 79% and 16% and 60% and 35%, respectively, of our Contract Manufacturing Segment’s net sales$179 in the three months ended December 31,September 30, 2017, and 2016, respectively.a change of $293. The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations. Costco Wholesale Corporation (“Costco”) and BJ's Wholesale Club ("BJ's") (customers of our Branded Nutraceutical Products Segment), while not significant customers of our consolidated net sales, each represented approximately 34% of net sales in the three months ended December 31, 2017, and Costco represented approximately 53% of net sales in the three months ended December 31, 2016, of the Branded Nutraceutical Products Segment.
The decreasechange in net sales of approximately $1.6 millionincome was the primarily the result of net sales decreasing in our Contract Manufacturing Segment of $1.5 million primarily due to decreased sales volumes to one of our major customers, Herbalife of approximately $2.6 million, in the three months ended December 31, 2017, compared to the comparable prior period, offset by an increase of approximately $1.0 million from our other major customer, Life Extension.
Cost of sales. Cost of sales decreased by $1.1 million, approximately 10%, to $9.8 million for the three months ended December 31, 2017, as compared to $10.9 million for the three months ended December 31, 2016. Cost of sales increased as a percentage of sales to 90.3% for the three months ended December 31, 2017 as compared to 88.1% for the three months ended December 31, 2016. The decrease in the cost of goods sold of 10% is consistent with the decreased net sales of approximately 13%. The increase in the cost of goods sold as a percentage of net sales, was primarily the result of the increased sales to Life Extension as a percentage of total sales in our Contract Manufacturing Segment.
The cost of the raw materials for the Life Extension finished goods, on average, cost more per bottle than goods produced for our other customers in the Contract Manufacturing Segment as they tend to use raw materials with trademarked characteristics which limits the ability to negotiate pricing. Secondarily, the cost of sales increased as a percentage of sales, net as a result of the fixed manufacturing costs in our Contract Manufacturing Segment decreasing by approximately 9% from the comparable period a year ago, while our sales decreased by approximately 13%. There were no significant changes in the cost of goods sold in our other two segments other than the decreased sales in each of the other two segments.
Selling and Administrative Expenses. There was a decrease in selling and administrative expenses of $50,000 in the three months ended December 31, 2017 as compared to the three months ended December 31, 2016 or approximately 5.5%. As a percentage of sales, net, selling and administrative expenses were approximately 8% and 7% for the three months ended December 31, 2017 and 2016, respectively. The decrease was primarily due to a decrease in salaries and employees benefits of approximately $57,000, as the result of decreasing our sales support by two people and a decrease in our vacation pay liability, and a decrease in stock option compensation expense of $18,000 since no new stock options were granted in the three month period ended December 31, 2017; offset by an increase in professional and consulting fees of approximately $18,000 for work performed on new products labels and trademark registrations in our Branded Nutraceutical Segment and other business consulting services. No other expense within our selling and administrative expenses changed by more than $10.
Other income (expense), net. Other income (expense), net was approximately $0.2 million and $0.6 million for the three months ended December 31, 2017 and 2016, respectively, and is composed of:
Three months ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Interest expense | $ | (229 | ) | $ | (227 | ) | ||
Change in fair value of derivative instruments | 185 | (364 | ) | |||||
Impairment charge on investment in iBio, Inc. | (168 | ) | - | |||||
Other income | 4 | 15 | ||||||
Other income (expense), net | $ | (208 | ) | $ | (576 | ) | ||
The variance in the change in fair value of derivative liabilities between the three months ended December 31, 2016 and the three months ended December 31, 2017 was mainly the result of the increased closing trading price of our common stock from $0.15 as of September 30, 2016 to $0.23 as of December 31, 2016 and a subsequent decrease in the closing trading price of our common stock in the three month period ended December 31, 2017 from $0.22 as of September 30, 2017 to $0.18 as of December 31, 2017. The volatility of the closing trading price of our stock is one of the variables used to calculate the estimated fair value of our derivative liabilities associated with the underlying derivative instrument.
Our interest expense in the three months ended December 31, 2017, increased by approximately $2,000 from the three months ended December 31, 2016, primarily as the result of the increase in interest rates of 0.75% from the three month period ended December 31, 2016 to the three month period ended December 31, 2017 on our Senior Credit Facility (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). Other income decreased by approximately $11,000 as the result of earning less income from providing back office support, logistics and operational support for a start-up company which sells over the counter pharmaceutical and nutraceutical products through retail and internet based outlets.
In the three months ended December 31, 2017 we determined that there was an impairment on the carrying value of our investment in iBio, Inc. in the amount of approximately $0.2 million resulting from the decline in the closing trading price of their common stock on the NYSE American Exchange for the three month period ended December 31, 2017 from $0.32 per share as of September 30, 2017 to $0.18 per share as of December 31, 2017.
Federal and state income tax, net. For the three months ended December 31, 2017 and 2016, we had state income tax expense of approximately $34,000 and $71,000, respectively, and federal income tax expense of $304,000 and none, respectively. We continue to maintain a reserve on a portion our deferred tax assets as it has been determined that based upon past losses, the Company’s past liquidity concerns and the current economic environment, that it is “more likely than not” the Company’s deferred tax assets may not be fully realized. The state tax expense is the result of MDC using all of its state net operating losses in the fiscal year ended 2013 tax period. 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 decrease in state income tax expense of $27,000 is the result of the decreased net income for MDC. The increase in the federal income tax expense of $304,000 is the result of the 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, which resulted in a decrease to our deferred tax assets of $263,000 and a current federal tax expense of approximately $41,000.
Net loss. Our net loss for the three months ended December 31, 2017 and 2016 was approximately $348,000 and $77,000, respectively. The increase of approximately $271,000 was primarily the result of decreased operating income of $373,000$194 and decreases in other expenses of $243, offset by an increase in federal and state income taxes net of $267,000, offset by the decreases in other expenses of 369,000.$99.
Seasonality
The nutraceutical business tends to be seasonal. We have found that in our first fiscal quarter ending on September 30th of each year, orders for our branded proprietary nutraceutical products usually slow (absent the addition of new customers or a new product launch with a significant first time order), as buyers in various markets may have purchased sufficient inventory to carry them through the summer months. Conversely, in our second fiscal quarter, ending on December 31st of each year, orders for our products increase as the demand for our branded nutraceutical products, as well as sales orders from our customers in our contract manufacturing segment, seem to increase in late December to early January as consumers become health conscious as they enter the new year.
The Company believes that there are other non-seasonal factors that also may influence the variability of quarterly results including, but not limited to, general economic and industry conditions that affect consumer spending, changing consumer demands and current news on nutritional supplements. Accordingly, a comparison of the Company’s results of operations from consecutive periods is not necessarily meaningful, and the Company’s results of operations for any period are not necessarily indicative of future periods.
Liquidity and Capital Resources
The following table sets forth, for the periods indicated, the Company’sCompany’s net cash flows used in operating, investing and financing activities, its period end cash and cash equivalents and other operating measures:
For the six months ended | For the three months ended | |||||||||||||||
December 31, | September 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||
Net cash provided by operating activities | $ | 640 | $ | 547 | $ | 593 | $ | 1,604 | ||||||||
Net cash used in investing activities | $ | (206 | ) | $ | (83 | ) | $ | (26 | ) | $ | (107 | ) | ||||
Net cash used in financing activities | $ | (512 | ) | $ | (793 | ) | $ | (430 | ) | $ | (1,345 | ) | ||||
Cash at end of period | $ | 54 | $ | 66 | $ | 365 | $ | 284 |
At December 31, 2017 and JuneSeptember 30, 2017,2018 our working capital was approximately $0.7 million$1,157 and $1.4 million, respectively. Ourat June 30, 2018, we had a working capital deficit of $4,026. The increase of $1,579 in our current assets increased by $0.7 million and a decrease in our current liabilities increased by approximately $1.4 million, resultingof $3,604, resulted in a net decreaseincrease in our working capital of $0.7 million.$5,183 since June 30, 2018.
Operating Activities
Net cash provided by operating activities of $0.6 million$593 in the sixthree months ended December 31, 2017,September 30, 2018, includes a net lossincome of approximately $0.5 million.$159. After excluding the effects of non-cash expenses, including depreciation and amortization, and changes in the fair value of derivative liabilities and deferred tax assets, the adjusted cash provided from operations before the effect of the changes in working capital components was $0.1 million. Cash was$289. Net cash provided byin our operations in the three months ended September 30, 2018 from our working capital assets and liabilities in the amount of approximately $0.5 million and$304 was primarily the result of cash provided from a netdecrease in our accounts receivable of $415 and an aggregate increase in accounts payable, and accrued expenses and other liabilities of approximately $1.5 million$1,791, offset in part, by increasesan increase in accounts receivable of $0.6 million and inventories of $0.4 million.approximately $1,858.
Net cash provided by operating activities of $0.5 million$1,604 in the sixthree months ended December 31, 2016,September 30, 2017, includes a net incomeloss of approximately $0.6 million.$179. After excluding the effects of non-cash expenses, including depreciation and amortization, and changes in the fair value of derivative liabilities, deferred tax assets and impairment charge on our investment in iBio, Inc., the adjusted cash provided from operations before the effect of the changes in working capital components was $1.6 million. Cash was used$98. Net cash provided in our operations in the three months ended September 30, 2017 from our working capital assets and liabilities in the amount of approximately $1.0 million and$1,506 was primarily the result of increasesdecreases in accounts receivable and inventories of $1.3 million$1,347 and $603, respectively, offset in part, by a net increase in accounts payable and accrued expenses and other liabilities of approximately $1.5 million.$431.
Investing Activities
Cash used in investing activities of $206,000 and $83,000 in the sixthree months ended December 31,September 30, 2018 and 2017, of approximately $26 and 2016,$107, respectively, was used primarily for the purchase of propertymachinery and equipment primarily in our Contract Manufacturing Segment.of $18 and $107, respectively.
Financing Activities
Cash used in financing activities was approximately $0.5 million$430 for the sixthree months ended December 31, 2017, $19.7 millionSeptember 30, 2018, and was from advances under our revolving credit facility and $0.1 million in proceeds received in a sales-lease back financing for machinery and equipment in our Contract Manufacturing Segment, offset in part, by repayments of advances under our revolving credit facility of $19.6 million$10,400 and repayments of principal payments under our term notes in the amount of $0.7 million.
Cash used in financing activities was approximately $0.8 million for the six months ended December 31, 2016, $23.0 million from$184, offset by advances under our revolving credit facility offset of approximately $10,204.
Cash used in part, byfinancing activities was approximately $1,345 for the three months ended September 30, 2017, and was from repayments of advances under our revolving credit facility of $23.2 million$10,768 and repayments of principal payments under our term notes in the amount of $0.5 million.$544 offset by advances under our revolving credit facility offset of approximately $9,997.
As of December 31, 2017,September 30, 2018, we had cash of $54,000,$365, funds available under our revolving credit facility of approximately $1.8 million$1,577 and working capital of approximately $0.7 million.$1,157. Our working capital includes $4.8 million$4,699 outstanding under our revolving line of credit which is not due until February 2020 but classified as current due to a subjective acceleration clause that could cause the advances to become currently due. (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). Furthermore,Additionally, we had income from operations of approximately $0.2 million$405 in the sixthree months ended December 31, 2017.September 30, 2018 and going forward we will have an annual interest cost savings of approximately $321 as a result of the conversion of the CD Convertible Note into equity at the election of CD Financial in July 2018. After taking into consideration our interim results and current projections, management believes that operations, together with the revolving credit facility will support our working capital requirements at least through the period ending FebruaryNovember 9, 2019.
Our total annual commitments at December 31, 2017September 30, 2018 for long term non-cancelable leases of approximately $594,000$565 consists of obligations under operating leases for facilities and operating lease agreements for the rental of warehouse equipment, office equipment and automobiles.
On May 15, 2012, Cedarburg Pharmaceuticals, Inc. ("Cedarburg") sent us a letter (the "Demand Letter") setting forth a demand for indemnification under the Stock Purchase Agreement, dated March 17, 2009 (the "Cedarburg SPA"), by and among Cedarburg, InB: Hauser Pharmaceutical Services, Inc., InB: Paxis Pharmaceuticals, Inc. and the Company. In the Demand Letter, CedarburgCedarburg demanded payment by us of $0.6 million$600 in respect of the Company's indemnification obligations under the Cedarburg SPA. In addition, in the Demand Letter, Cedarburg informed us that there are also environmental issues pending which may lead to additional costs to Cedarburg which will likely be in excess of $0.3 million.$300.
On May 30, 2012, we sent a letter responding to the Demand Letter and setting forth our position that we have no obligation to indemnify Cedarburg as demanded. On June 18, 2012, Cedarburg responded to our letter and, on July 27, 2012, we sent another letter to Cedarburg reiterating our position that we have no obligation to indemnify Cedarburg as demanded. On December 18, 2012, Cedarburg responded to our letter and, on January 15, 2013, we sent another letter to Cedarburg reiterating our position that we have no obligation to indemnify Cedarburg as demanded. As of FebruaryNovember 9, 2018, we have not received any further communication from Cedarburg with respect to its demand for indemnification as set forth in the Demand Letter. We intend to vigorously contest Cedarburg's demand as set forth in the Demand Letter.
Capital Expenditures
The Company's capital expenditures for the sixthree months ended December 31,September 30, 2018 and 2017 and 2016 were approximately $216,000$18 and $83,000,$107, respectively. The Company has budgeted approximately $0.3 million$500 for capital expenditures for fiscal year 2018.2019. The total amount is expected to be funded from lease financing and cash provided from the Company’s operations.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting PronouncementsPronouncements
None.None.
Impact of Inflation
The Company does not believe that inflation has significantly affected its results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified by the Commission’sSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2017,September 30, 2018, and, based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective in providing reasonable assurance of compliance.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the sixthree months ended December 31, 2017September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
Item 1A. Risk Factors
The risks described in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended June 30, 2017, could materially and adversely affect our business, financial condition and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. There have been no material changes to our risk factors from those disclosed in our Form 10-K for the year ended June 30, 2017.Not Applicable.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.Recent Sales of Unregistered Securities
On July 31, 2018, the Company issued 8,230,769 Common Shares to CD Financial, LLC (“CD Financial”). The Common Shares were issued upon the exercise by CD Financial of its conversion right pursuant to the CD SPA and in accordance with Section 3 (b) of the CD Convertible Note in the principal amount of approximately $5,350. The CD Convertible Note was convertible at the option of CD Financial into Common Shares at a conversion price of $0.65 per share, subject to customary adjustments. CD Financial exercised its conversion right with respect to the entire principal amount due under the CD Convertible Note. The Common Shares issued to CD Financial were issued at a conversion price of $0.65 per Common Share.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the quarter ended September 30, 2018, neither we nor any “affiliated purchaser,” as that term is defined in Rule 10b-18(a)(3) under the Exchange Act, purchased any of our registered equity securities.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURE
Not Applicable.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
(a) Exhibits
Exhibit
Number
31.1 | Certification of pursuant to Section 302 of Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. |
31.2 | Certification of pursuant to Section 302 of Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. |
32.1 | Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. |
32.2 | Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. |
| The following financial information from Integrated BioPharma, Inc.’s Quarterly Report on Form 10-Q for the quarter ended |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTEGRATED BIOPHARMA, INC.
Date: November 9, 2018 By: /s/ E Gerald Kay
E, Gerald Kay,
President and Chief Executive Officer
Date: November 9, 2018 By: /s/ Dina L. Masi
Dina L. Masi,
Chief Financial Officer & Senior Vice President