INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

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

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

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

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

The following options and potentially dilutive shares for stock options were not included in the computation of weighted average diluted common shares outstanding as the effect of doing so would be anti-dilutive for the three and nine months ended March 31, 20222023 and 2021:2022:

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

Note 2. Inventories

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

Note 3. Property and Equipment, net

Property and equipment, net consists of the following:

Depreciation and amortization expense recorded on property and equipment was $86 and $83 in each offor the three months ended March 31, 20222023 and 20212022 and $247$267 and $253$247 for nine months ended March 31, 20222023 and 2021,2022, respectively. Additionally, the Company disposed of fully depreciated property of $147$20 and $216$147 in the nine months ended March 31, 20222023 and 2021,2022, respectively and recognized net gain on disposals of $22 in the nine months ended March 31, 2022 2022.and a loss on disposal of $13 on property disposed of in the nine months ended March 31, 2021.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

Note 4. Senior Credit Facility and Financed Lease Obligation

As of March 31, 20222023 and June 30, 2021,2022, the Company had the following debt outstanding:

SENIOR CREDIT FACILITY

On May 15, 2019,March 16, 2023, the Company, MDC, AgroLabs, IHT, IHT Properties Corp. (“IHT Properties”) and Vitamin Factory (collectively, the “Borrowers”) amended the Revolving Credit, Term Loan and Security Agreement (the “Amended Loan Agreement”) with PNC Bank, National Association as agent and lender (“PNC”) and the other lenders party thereto entered into on June 27, 2012, as amended on February 19, 2016 and May 15, 2019.

The Amended Loan Agreement provides for a total of $11,585 in senior secured financing (the “Senior Credit Facility”) as follows: (i) discretionary advances (“Revolving Advances”) based on eligible accounts receivable and eligible inventory in the maximum amount of $8,000 (the “Revolving Credit Facility”), and (ii) a term loan in the amount of $3,585 (the “Term Loan”). The Senior Credit Facility is secured by all assets of the Borrowers, including, without limitation, machinery and equipment, real estate owned by IHT Properties, and common stock of iBio, Inc. (“iBio Stock”) owned by the Company.  As of March 31, 2023, the Company has sold all of its investment in iBio Stock, the proceeds of which were paid to PNC, as disclosed below.  Revolving Advances bear interest at PNC’s Base Rate (3.50%(8.00% and 3.25%4.75% as of March 31, 20222023 and June 30, 2021,2022, respectively) or the Eurodollar Rate, at Borrowers’ option, plus 2.50%. The Term Loan bore interest at PNC’s Base Rate (3.50%(5.0% as of June 30, 2021)2022) or the Eurodollar Rate at Borrowers’ option, plus 3.00%.  As of May 11, 2023, the Revolving Advance interest rate is 8.25%. 

As of March 16, 2023, the Amended Loan Agreement provides that any loans, advances and/or other extensions of credit denominated in U.S. Dollars prior to March 16, 2023 that bear interest or are permitted to bear interest, and have fees, commissions or other  amounts based on the London Interbank Offered Rate administered by the ICE Benchmark Administration (which may be referred to as the “Eurodollar Rate” ( “LIBOR”) shall thereafter bear interest based on the Term SOFR Rate plus the SOFR Adjustment . The Term SOFR Rate, for any day, shall be equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York (or a successor administrator of the secured overnight financing rate).  The SOFR Adjustment is defined as 10 basis points (0.10%).

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

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

The principal balance of the Revolving Advances is payable on the Senior Maturity Date, subject to acceleration, based upon a material adverse event clause, as defined, subjective accelerations for borrowing base reserves, as defined or upon the occurrence of any event of default under the Amended Loan Agreement or earlier termination of the Amended Loan Agreement pursuant to the terms thereof. The Term Loan shall be repaid in eighty-four (84) consecutive monthly installments of principal, the first eighty-three (83) of which shall be in the amount of $43, commencing on the first business day of June, 2019, and continuing on the first business day of each month thereafter, with a final payment of any unpaid balance of principal and interest payable on the Senior Maturity Date. The foregoing is subject to customary mandatory prepayment provisions and acceleration upon the occurrence of any event of default under the Amended Loan Agreement or earlier termination of the Amended Loan Agreement pursuant to the terms thereof.  The Company satisfied all the principal payments under the Term Note on January 3, 2022.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

The Revolving Advances are subject to the terms and conditions set forth in the Amended Loan Agreement and are made in aggregate amounts at any time equal to the lesser of (x) $8,000 or (y) an amount equal to the sum of: (i) up to 85%, subject to the provisions in the Amended Loan Agreement, of eligible accounts receivables (“Receivables Advance Rate”), plus (ii) up to the lesser of (A) 75%, subject to the provisions in the Amended Loan Agreement, of the value of the eligible inventory (“Inventory Advance Rate” and together with the Receivables Advance Rate, collectively, the “Advance Rates”), (B) 85% of the appraised net orderly liquidation value of eligible inventory (as evidenced by the most recent inventory appraisal reasonably satisfactory to PNC in its sole discretion exercised in good faith) and (C) the inventory sublimit in the aggregate at any one time (“Inventory Advance Rate” and together with the Receivables Advance Rate, collectively, the “Advance Rates”), minus (iii) the aggregate Maximum Undrawn Amount, as defined in the Amended Loan Agreement, of all outstanding Lettersletters of Credit,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 Term Note in an amount equal to twenty-five percent (25%) of Excess Cash Flow (as defined in the Amended Loan Agreement) for each fiscal year commencing with the fiscal year ended June 30, 2016, payable upon delivery of the financial statements to PNC referred to in and required by the Amended Loan Agreement for such fiscal year but in any event not later than one hundred twenty (120) days after the end of each such fiscal year, which amount shall be applied ratably to the outstanding principal installments of the Term Loan in the inverse order of the maturities thereof. The Amended Loan Agreement also contains customary representations and warranties, covenants and events of default, including, without limitation, (i) a fixed charge coverage ratio maintenance requirement and (ii) an event of default tied to any change of control as defined in the Amended Loan Agreement. As of March 31, 2022,2023, 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 and used the proceeds of $96 from the sale of iBio Stock in the nine monthsfiscal year ended March 31,June 30, 2021 to repay the Term Loan. Additionally, with the required annual payment of 25% of Excess Cash Flow for the fiscal year ended June 30, 2021, together with the required monthly installments of $43, the Company satisfied all the remaining principal payments required under the Term Note on January 3, 2022.

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

Note 5. Significant Risks and Uncertainties

(a) Major Customers. In each of the three months ended March 31, 20222023 and 2021,2022, approximately 88% and 92%, respectively, of consolidated net sales were derived from two customers. These two customers are in the Company’s Contract Manufacturing Segment and represented approximately 68% and 23% and 70% and 24% in each of the three months ended March 31, 20222023 and 2021,2022, respectively of the Contract Manufacturing Segment net sales.  In the nine months ended March 31, 20222023 and 2021,2022, approximately 91%88% and 92%91% of consolidated net sales, respectively, were derived from the same two customers and net sales to these two customers represented approximately 69%67% and 24%26% in the nine months ended March 31, 20222023 and 70%69% and 24% of net sales in the nine months ended March 31, 2021,2022, respectively of the Contract Manufacturing Segment net sales. Accounts receivable from these two major customers represented approximately 89%82% and 93%70% of total net accounts receivable as of March 31, 2023 and June 30, 2021,2022, respectively. One other customer and a different second customer in the other Nutraceutical Segment, while not significant customers of the Company’s consolidated net sales, represented approximately 47% and 27% and 45% and 11%, respectively, of net sales of the Other Nutraceutical Segment in the three months ended March 31, 2023 and 2022, and 61% and 11% and 42%, and 28%, of net sales of the Other Nutraceutical Segment in the nine months ended March 31, 2023 and 2022, respectively.

The loss of any of these customers could have an adverse effect on the Company’s operations. Major customers are those customers who account for more than 10% of net sales.

(b) Other Business Risks. Approximately 72%73% of the Company’s employees are covered by a union contract and are employed in its New Jersey facilities. The contract was renewed oneffective September 1, 20182022 and will expire on August 31, 2022.2026.

The continued supply chain issuesWhile the Company hasn’t, to date, seen a significant negative impact in its margins resulting from the globalcoronavirus outbreak, of COVID-19, or coronavirus, has caused minor disruptions in the Company's supply chain.  Most of the materials required in the Company's manufacturing process could be obtained from more than one supplier, which assisted in mitigating major disruptions in the Company's business.it is experiencing a negative impact on its margins due to inflation and tightened labor markets.  The Company continuesmay not be able to pursue qualificationtimely increase its selling prices to its customer resulting from price increases from its suppliers due to various economic factors, including inflation, labor and shipping costs and its own increases in shipping, labor and other operating costs.  The Company’s results of new suppliersoperations may also be affected by economic conditions, including inflationary pressures, that can impact consumer disposable income levels and new materials. These minor delays have and continue to delayspending habits, thereby reducing the Company's standard lead times, inorders it may receive from the production and shipment of the Company's customers' supplements, thereby shifting the timing of recognizing the resulting sale.  Transportation continues to be a factor in obtaining materials in a timely manner.  A shortage of containers is making it difficult for suppliers abroad to get materials to the United States. Company’s significant customers.

The Company also continues to experience minimal supply chain disruptions relating to fuel refinery and transportation issues as it pertains to shipping.  These issues first arose as result of the production of plastics.  This continues to impact the supplyCOVID-19 pandemic and demand of bottles and caps, key components in the Company's Contract Manufacturing Segment.   Transportation, in general, continues to be an issue in the delay of receiving materials and the Company's ability to meet promised delivery dates to the Company's customers in the Contract Manufacturing Segment. 

Additionally, theother geo-political events. The significant outbreak of this contagious disease in the human population has resulted in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for the Company’s products and impact the Company’s operating results.

While the Company hasn’t, to date, seen a significant negative impact in its margins resulting from the coronavirus outbreak, it is experiencing a slight negative impact on its margins due to inflation and tightened labor markets.

During the first quarter of calendar 2022, the war in Ukraine affected ourthe Company’s customer’s business operations in Ukraine and Russia, resulting in the cancelation of some future orders. The war resulted in the imposition of sanctions by the United States, the United Kingdom, and the European Union, that affect the cross-border operations of businesses operating in Russia. In addition, many multinational companies ceased or suspended their operations in Russia. Therefore, the ability to continue operations in Russia by ourthe Company’s customers is uncertain.  Also, there may be a shortage of Sunflower Oil products in the near future and this may cause delays in production of certain raw materials and may require reformulation of products.

Additionally, unrelated to the war, a recent export ban of palm oil products from Indonesia may play a role in reformulation of many products.  This may cause delays in finished products as these items will need to be reformulated and labels updated and printed with the changes, which may cause further delays.

Note 6. Leases and other Commitments and Contingencies

(a) Leases. The Company has operating and finance leases for its corporate and sales offices, warehousing and packaging facilities and certain machinery and equipment, including office equipment. The Company’s leases have remaining terms of approximately 2 to 45 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 March 31, 20222023 and 2021,2022, were as follows:

The components of lease expense for the nine months ended March 31, 20222023 and 2021,2022, were as follows:

Rent and lease amortization costs are included in cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

Operating Lease Liabilities

Related Party Operating Lease Liabilities.  Warehouse and office facilities are leased from Vitamin Realty Associates, LLC (“Vitamin Realty”), which is 100% owned by the estate of the Company’s executiveformer chairman, and a major stockholder and certain of his family members, who are the Co-Chief Executive Officers and directors of the Company. On January 5, 2012, MDC entered into a second amendment of lease (the “Second Lease Amendment”) with Vitamin Realty for its office and warehouse space in New Jersey increasing its rentable square footage from an aggregate of 74,898 square feet to 76,161 square feet and extending the expiration date to January 31, 2026. This Second Lease Amendment providesprovided for minimum annual rental payments of $533, plus increases in real estate taxes and building operating expenses.  On July 15, 2022, MDC entered into a third amendment of the lease (the “Third Lease Amendment”) with Vitamin Realty, increasing its rentable square footage to 116,175.  This Third Lease Amendment provided for minimum annual rental payments of $842, plus increases in real estate taxes and the building operating expenses allocation percentage and is effective as of July 1, 2022.

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, 20192020 to extend the expiration date to June 1, 2024. This additional lease providesprovided for minimum annual lease payments of $27 with annual increases plus the proportionate share of operating expenses.  The AgroLabs Lease was mutually terminated on July 15, 2022 with an effective date of July 1, 2022.

Rent expense and lease amortization costs for the three months ended March 31, 20222023 and 20212022 on these leases were $223$321 and $221,$223 respectively, and $667 and $664 for the nine-month periods months ended March 31, 20222023 and 2021,2022 were $958 and $667, respectively, and are included in cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. As of March 31, 20222023 and June 30, 2021,2022, the Company had outstanding current obligations to Vitamin Realty of $11$33 and $65,$72, respectively, included in accounts payable in the accompanying Condensed Consolidated Balance Sheet. Additionally, the Company has operating lease obligations of $1,965$2,249 and $2,327$1,839 with Vitamin Realty as noted in the accompanyaccompanying Condensed Consolidated Balance Sheet as of March 31, 20222023 and June 30, 2021,2022, respectively.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

Other Operating Lease Liabilities. The Company has entered into certain non-cancelable operating lease agreements expiring up through May, 2023, related to machinery and equipment and office equipment.

As of March 31, 2022, the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases were as follows:

As of June 30, 2021, the Company’s ROU assets, lease obligations and remaining cash commitment on these leases were as follows:

As of March 31, 2022 and June 30, 2021, the Company’s weighted average discount rate and remaining term on lease liabilities were approximately 3.86% and 3.75% and 3.7 years and 4.4 years, respectively.

Supplemental cash flows information related to leases for the nine months ended March 31, 2022, is as follows:

Supplemental cash flows information related to leases for the nine months ended March 31, 2021, is as follows: