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 Exchange Act of 1934, as amended(the (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission (“SEC”), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Integrated BioPharma, Inc. and its subsidiaries (collectively, the “Company”) or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, changes in general economic and business conditions; loss of market share through competition; introduction of competing products by other companies; the timing of regulatory approval and the introduction of new products by the Company; changes in industry capacity; pressure on prices from competition or from purchasers of the Company's products; regulatory changes in the pharmaceutical manufacturing industry and nutraceutical industry; regulatory obstacles to the introduction of new technologies or products that are important to the Company; availability of qualified personnel; the loss of any significant customers or suppliers; the impact of inflation and tightened labor markets; the impact of the war in Ukraine; the impact of the Israel-Hamas war 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, 2023 (“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 their businesses described in Item 1A of the Company’s Form 10-K and in other filings by the Company with the SEC. 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 its 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 ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

See accompanying notes to unaudited condensed consolidated financial statements.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY

FOR THE THREE MONTH PERIODSAND SIX MONTHS ENDED September 30,DECEMBER 31, 2023 andAND 2022

(in thousands, except share and per share amounts)

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except share and per share amounts)

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

Note 1. Nature of Operations, Principles of Consolidation andBasis of Presentation of Interim Financial Statements

Nature of Operations

Integrated BioPharma, Inc., a Delaware corporation (together with its subsidiaries, 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 and Luxembourg. The Company was originally incorporated in the state of Delaware on August 31, 1995 under the name Chem International, Inc., on On December 5, 2000, the Company changed its name to Integrated Health Technologies, Inc. and on January 29, 2003 changed its name to Integrated BioPharma, Inc.  The Company restated its certificate of incorporation in Delaware in June 2006.  The Company continues to do business as Chem International, Inc. with certain of its customers and certain vendors.

The Company’s business segments include: (a) Contract Manufacturing operated by Manhattan Drug Company, Inc. (“MDC”), which manufactures vitamins and nutritional supplements for sale to distributors, multilevel marketers and specialized health-care providers and (b) Other Nutraceutical Businesses which includes the operations of (i) AgroLabs, Inc. (“AgroLabs”), which distributed healthful nutritional products for sale through major mass market, grocery and drug and vitamin retailers under the following brands: Peaceful Sleep, and Wheatgrass and other products introduced into the market using the AgroLabs name (these are referred to as our branded products); (ii) The Vitamin Factory (the “Vitamin Factory”), which sells private label MDC products, as well as our AgroLabs products, through the Internet,  (iii) IHT Health Products, Inc. (“IHT”) a distributor of fine natural botanicals, including multi minerals produced under a license agreement, (iv) MDC Warehousing and Distribution, Inc. (“MDC Warehousing“), a service provider for warehousing and fulfilment services and (v) Chem International, Inc., ("Chem") a distributor of certain raw materials for DSM Nutritional Products LLC.  The Vitamin Factory had no products available for sale and AgroLabs had no sales of its branded products in the three and sixmonths ended September 30,December 31, 2023 and 2022.

Principles of Consolidation

The accompanying condensed consolidated financial statements for the interim periods are unaudited and include the accounts of Company.  Intercompany transactions and accounts have been eliminated in consolidation.

Basis of Presentation of Interim Financial Statements

The accompanying condensed consolidated financial statements for the interim periods are unaudited and include the accounts of Integrated BioPharma, Inc., a Delaware corporation (together with its subsidiaries, the “Company”). The interim condensed consolidated financial statements have been prepared in conformity with Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and therefore do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  However, all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented have been included. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (“Form 10-K”), as filed with the SEC. The June 30, 2023 balance sheet was derived from audited financial statements,

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

but does not include all disclosures required by GAAP. The preparation of the unaudited condensed financial statements in conformity with these accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period.  Ultimate results could differ from the estimates of management.  The results of operations for the three and sixmonths ended September 30,December 31, 2023 are not necessarily indicative of the results for the full fiscal year ending June 30, 20242023 or for any other period.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

Significant Accounting Policies

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

Income Taxes. The Company accounts for income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. Tax benefits are recognized when it is probable that the deduction will be sustained. A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will not be realized.

For the three months ended September 30,December 31, 2023 and 2022, the Company had federal deferred income tax expense of $6, and a deferred federal income tax benefit net of $38,$76 and $4, respectively and state income tax expense, net of approximately $7$6 and $61, in$14, respectively.  For the threesix months ended September 30,December 31, 2023 and 2022, the Company had a federal tax benefit of $70 and a deferred tax expense of $17, respectively and state income tax expense, net of approximately $13 and $44, respectively.

Leases. The 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 our 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.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, the 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.

StockThe following options in the amount of 4,423,183 and 4,081,583potentially dilutive shares for the three months ended September 30, 2023 and 2022, respectively,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 as a result of losses for the periods.

three and six months ended December 31, 2023 and 2022:

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 for the three months ended September 30, 2023 and 2022 was $77 and $88, respectively. In the three months ended September 30, 2023 and 2022, the Company disposed of fully depreciated property of $8 and $20.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

Note 3. Property and Equipment, net

Property and equipment, net consists of the following:

Depreciation and amortization expense recorded on property and equipment was $78 and $93 for the three months and $155 and $181 for six months ended December 31, 2023 and 2022, respectively.  Additionally, the Company disposed of property of $34 and $19 in the six months ended December 31, 2023 and 2022, respectively and in the three and six months ended December 31, 2023, recognized a loss on disposal of fixed assets of $2.

Note 4. Senior Credit Facility

As of September 30,December 31, 2023 and June 30, 2023, the Company had no amountsdebt outstanding under its Senior Credit Facility.

On 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.  Revolving Advances bear interest at PNC’s Base Rate (8.50% and 8.25% as of September 30,December 31, 2023 and June 30, 2023, respectively) or the Eurodollar Rate, at Borrowers’ option, plus 2.50%. 

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%).

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”).

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO 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) 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.

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 letters of credit, minus (iv) such reserves as PNC mayreasonably deem proper and necessary from time to time.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

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. ForIn the three months ended September 30,December 31, 2023 and 2022, approximately 91% 89% and 85%91%, respectively, of consolidated net sales respectively, were derived from two customers. These two customers are in the Company’s Contract Manufacturing Segment and represented approximately 76%70% and 19%23% and 61%70% and 30%25% in the three months ended September 30,December 31, 2023 and 2022, respectively.respectively of the Contract Manufacturing Segment net sales.  In the six months ended December 31, 2023  and 2022, approximately 90% and 88% of consolidated net sales, respectively, were derived from the same two customers and net sales to these two customers represented approximately 73% and 21% in the six months ended December 31, 2023 and 66% and 27% of net sales in the six months ended December 31, 2022, respectively of the Contract Manufacturing Segment net sales.  Accounts receivable from these two major customers represented approximately 79%78% and 84% of total net accounts receivable as of September 30December 31 and June 30, 2023, respectively. Two other customers in the other Nutraceutical Segment, while not significant customers of the Company’s consolidated net sales, represented approximately 41%40% and 35%22% and 55%81% and 26%, respectively,1% of net sales of the Other Nutraceutical Segment in the three months ended September 30,December 31, 2023 and 2022, and 41% and 28% and 66% and 15%, of net sales of the Other Nutraceutical Segment in the six months ended December 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 76% of the Company’s employees are covered by a union contract and are employed in its New Jersey facilities. The contract was renewed effective September 1, 20222023 and will expire on August 31, 2026.

The Company has seen a negative impact in its margins due to inflation and tightened labor markets.  The Company may not be able to timely 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 operations may also be affected by economic conditions, including inflationary pressures, that can impact consumer disposable income levels and spending habits, thereby reducing the orders it may receive from the Company’s significant customers.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

The Company 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 COVID-19 pandemic and other geo-political events. Currently, the drought in Panama is slowing down shipping container traffic, contributing to continued shipping delays in the receipt of certain raw materials used in the Company’s manufacturing process.

During the first quarter of calendar 2022, the war in Ukraine affected the 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 the Company’s customers is uncertain. 

Additionally, the current Israel-Hamas war in the Middle East could negatively impact the sales and margins of the Company.  Certain customers sell into Israel and the Company sources certain raw materials from Israel.  If the Israel-Hamas war carries on for a significant time frame, it could have a negative impact on the sales and margins of the Company if the Company is unable to replace these sales with other sales and/or obtain the same raw materials at substantially the same price as currently paid.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

Note 6. Leases and other Commitments and Contingencies

(a) Leases. The Company has operating and finance leases for its corporate and sales offices, warehousing and packaging facilities and certain machinery and equipment, including office equipment. The Company’s leases have remaining terms of less than 1 year to less than 5 years.

The components of lease expense for the three months ended September 30,December 31, 2023 and 2022, were as follows:

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 six months ended December 31, 2023 and 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 former 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 provided 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.  The Third Lease Amendment provides for minimum annual rental payments of $842, plus increases in real estate taxes and the building operating expenses allocation percentage and wasis effective as of July 1, 2022.

Rent expense and lease amortization costs for the three months ended September 30,December 31, 2023 and 2022 on these leases were $304$338 and $316$321 respectively, and for the six months ended December 31, 2023 and 2022 were $642 and $637, respectively, and are included in cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.  As of September 30,December 31, 2023 and June 30, 2023, the Company had no outstanding current obligations to Vitamin Realty.   TheAdditionally, the Company has operating lease obligations of $1,871$1,679 and $2,061 with Vitamin Realty as noted in the accompanying Condensed Consolidated Balance Sheet as of September 30,December 31, 2023 and June 30, 2023, respectively.

Other Operating Lease Liabilities.  The Company has entered into certain non-cancelable operating lease agreements expiring up through May, 2027, related to machinery and equipment and office equipment.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

As of September 30,December 31, 2023, the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases were as follows:

As of June 30, 2023, the Company’s ROU assets, lease obligations and remaining cash commitment on these leases were as follows:

As of September 30,December 31, 2023 and June 30, 2023, the Company’s weighted average discount rate for operating leases is approximately 4.92% and 4.41%, respectively, and the remaining term on operating lease liabilities iswere approximately 2.74.96% and 4.41% and 2.5 years and 2.9 years, respectively.

Financed Lease Obligation. 

As of each September 30,December 31, and June 30, 2023, the Company’s weighted average discount rate for the outstanding finance lease obligation is 0% and the remaining term on finance lease obligation is approximately 0.90.7 years and 1.2 years, respectively.  The related ROU asset and lease obligation are included in Property and Equipment, net and Finance Lease Obligation, respectively in the accompanying Condensed Consolidated Balance Sheet.

Supplemental cash flows information related to leases for the threesix months ended September 30,December 31, 2023, is as follows:

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

Supplemental cash flows information related to leases for the threesix months ended September 30,December 31, 2022, is as follows:

On August 4, 2023, the Company entered into a four year operating lease for transportation equipment with an annual commitment of $21.

Maturities of operating and finance lease liabilities as of September 30,December 31, 2023 were as follows:

(b) Legal Proceedings.

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

Note 7. Related Party Transactions

Information related to related party transactions are disclosed in Note 6(a). Leases for related party lease transactions.

Note 8. Equity Transactions and Stock-Based Compensation

In November 2023, the Board of Directors authorized the issuance of up to 597,500 stock options to Company officers and employees. The Company issued 582,500 stock options with an exercise price ranging from $0.24 to $0.26, vesting over three years, with expiration terms of ten years from the date of grant. 

Additionally, in July 2023, the Board of Directors authorized the issuance of 200,000 stock options (50,000 each) to the non-executive directors of (50,000 each) with an exercise price of $0.33, vesting over one year, 25% at the end of each quarter ending September 30, 2023, December 21, 2023, March 31, 2024 and June 30, 2024. 

For the three and threesix months ended September 30,December 31, 2023 and 2022, the Company incurred stock-based compensation expense of $71$61 and $81,$86, and $133 and $167, respectively.  The Company expects to record additional stock-based compensation of $257$328 over the remaining vesting periods of approximately one to three years for all non-vested stock options.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

The Company used the following assumptions to calculate the fair value of the stock option grants using the Black-Scholes option pricing model on the measurement date during the threesix months ended September 30,December 31, 2023:

The Company calculates expected volatility for a stock-based grant based on historic daily stock price observations of its common stock during the period immediately preceding the grant that is equal in length to the expected term of the grant. The expected term of the options is estimated based on the Company’s historical exercise rate and forfeiture rates are estimated based on employment termination experience. The risk free interest rate is based on U.S. Treasury yields for securities in effect at the time of grants with terms approximating the term of the grants. The assumptions used in the Black-Scholes option valuation model are highly subjective, and can materially affect the resulting valuations.

A summary of the Company’s stock option activity, and related information for the threesix months ended September 30,December 31, 2023 follows:

Note 9. Segment Information and Disaggregated Revenue

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

The Company has divided its operations into two reportable segments as follows: Contract Manufacturing, and Other Nutraceutical Businesses. The internationalInternational sales, concentrated primarily in Europe, for the three months ended September 30,December 31, 2023 and 2022 were $1,609$1,656 and $1,914, respectively and for the six months ended December 31, 2023 and 2022 were $3,265 and $2,473, respectively.

INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

Financial information relating to the three months ended September 30,December 31, 2023 and 2022 operations by business segment and disaggregated revenues was as follows:

Financial information relating to the six months ended December 31, 2023 and 2022 operations by business segment and disaggregated revenues was as follows:

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, 2023.

The Company is engaged primarily in the business of manufacturing, distributing, marketing and sales of vitamins, nutritional supplements and herbal products. The Company’s customers are located primarily in the United States and Luxembourg.

Business Outlook

Our future results of operations and the other forward-looking statements contained in this Quarterly Report on Form 10-Q, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operation”, involve a number of risks and uncertainties—in particular, the statements regarding our goals and strategies, new product introductions, plans to cultivate new businesses, future economic conditions, revenue, pricing, gross margin and costs, competition, the tax rate, and potential legal proceedings. We are focusing our efforts to improve operational efficiency and reduce spending that may have an impact on expense levels and gross margin. In addition to the various important factors discussed above, a number of other important factors could cause actual results to differ significantly from our expectations. See the risks described in “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023.

For the threesix months ended September 30,December 31, 2023, our net sales from operations increaseddecreased by $589$156 to approximately $12,915$24,424 from approximately $12,326$24,580 in the threesix months ended September 30, 2022.December 31, 2022, less than 1%.   Our net sales in the Contract Manufacturing Segment increased by $846,$247 or approximately 1.1%, offset by a decrease in our Other Nutraceuticals Segment of $287.$403.  Net sales increased in our Contract Manufacturing Segment primarily due to increased sales volumes to Life Extension of $1,959 offset by decreases in the amountamounts of $2,380 offset by decreased sales volumes to$1,482 and $ 230 from Herbalife and all other customers, of $1,092 and $412, respectively.  ForNet sales in the threesix months ended September 30,December 31, 2023 were lower by approximately $403 from the in the six months ended December 31, 2022 in our Other Nutraceuticals Segment by $403, primarily due to MDC Warehousing and 2022, a significant portion of our consolidatedCII with decreased net sales approximately 91%in the amounts of $238 and 85%, respectively,$171, respectively. The declines were concentrated amongfrom two major customers Life Extensionin this segment, which represented 41% and Herbalife,4% in our Contract Manufacturing Segment.  Life Extensionthe six months ended December 31, 2023 compared to 66% and Herbalife, represented approximately 76% and 19% and 69% and 29%, respectively, of our Contract Manufacturing Segment’s net sales15% in the three months ended September 30, 2023 and 2022, respectively.December 31, 2022.  The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations. Revenues in the three months ended September 30, 2023 were lower than the three months ended September 30, 2022 in our Other Nutraceuticals Segment by $287, primarily due to decreased sales in the Chem’s distributor business in the amount of $223.

For the threesix months ended September 30,December 31, 2023, we had an operating loss of approximately $54, a decrease$506, an increase of approximately $84$503 from the operating incomeloss of approximately $30$3 for the threesix months ended September 30,December 31, 2022. Our profit margins decreased from approximately 8.1%8.4% of net sales in the threesix months ended September 30,December 31, 2022 to approximately 6.4%5.5% of net sales in the threesix months ended September 30,December 31, 2023, primarily as a result of the increased cost of sales of $559. The increase of $559 in the cost of goods sold amount is from increased manufacturing costs $585 and $116 from increased cost of goods in our Contract Manufacturing Segment offset by a decrease of $142 in our Other Nutraceutical Segment of approximately $52 while revenues declined by $64.Nutraceuticals Segment.  Our consolidated selling and administrative expenses decreased by approximately $81$212 or approximately 8.4%10.2% in the threesix months ended September 30,December 31, 2023 compared to the threesix months ended September 30,December 31, 2022.  Our salaries and employee benefits decreased by $37approximately $100 as a result of decreased (i) bonuses of $43, (ii) base pay of $33 and (iii) payroll taxes and other employee benefits of $24.  Other selling and administrative expenses decreased by $112 primarily as a result of decreased stock compensation expense of $34 and all other generalselling and administrative expenses decreased by a net amount of $44, with no one expense increasing or decreasing by more than $11.$78.

Our revenue from our two significant customers in our Contract Manufacturing Segment is dependent on their demand within their respective distribution channels for the products we manufacture for them.  As in any competitive market, our ability to match or beat other contract manufacturers pricing for the same items may also alter our outlook and the ability to maintain or increase revenues.  We will continue to focus on our core businesses and push forward in maintaining our cost structure in line with our sales and expanding our customer base.  We believe that this focus will produce a reduction of the reliance on our two significant customers in our fiscal year ending June 30, 2025.

We have seen a negative impact onin our margins due to inflation and tightened labor markets.  We may not be able to timely increase our selling prices to our customers resulting from price increases from our suppliers due to various economic factors, including inflation, labor and shipping costs and our own increases in shipping, labor and other operating costs.  Our results of operations may also be affected by economic conditions, including inflationary pressures, that can impact consumer disposable income levels and spending habits, thereby reducing the orders we may receive from our significant customers.

We continue 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 COVID-19 pandemic and other geo-political events. Currently, the drought in Panama is slowing down shipping container traffic, contributing to continued shipping delays in the receipt of certain raw materials used in our manufacturing process.

During the first quarter of calendar 2022, the war in Ukraine affected our 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 our customers is uncertain. 

Additionally, the current Israel-Hamas war in the Middle East could negatively impact our sales and margins.  Certain of our customers sell into Israel and we source certain raw materials from Israel.  If the Israel-Hamas war carries on for a significant time frame, it could have a negative impact on our sales and margins if we are unable to replace these sales with other sales and/or obtain the same raw materials at substantially the same price as currently paid.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies in the three months ended September 30,December 31, 2023, 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, 2023 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: