UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

____________

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2017

 

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 transistion 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 number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date:

 

	Class	Outstanding at May 10, 2017
	Common Stock, $0.002 par value	21,130,174 Shares

  

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

 

FORM 10-Q QUARTERLY REPORT

For the Nine months ended March 31, 2017

INDEX

 

 

		Page
	Part I. Financial Information
Item 1.	Condensed Consolidated Statements of Operations for the Three and Nine months ended March 31, 2017 and 2016 (unaudited)	2
	Condensed Consolidated Balance Sheets as of March 31, 2017 and June 30, 2016 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine months ended March 31, 2017 and 2016 (unaudited)	4
	Notes to the Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24
	Part II. Other Information
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosure	24
Item 5.	Other Information	25
Item 6.	Exhibits	25
	Other
Signatures		26

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 “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, 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, 2016 (“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, 2016 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
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share and per share amounts)
(Unaudited)
		Three months ended						Nine months ended
		March 31,						March 31,
		2017			2016			2017			2016
Sales, net		$ 10,654			$ 10,971			$ 35,707			$ 30,830
Cost of sales		9,315			9,647			30,747			27,216
Gross profit		1,339			1,324			4,960			3,614
Selling and administrative expenses		910			874			2,603			2,511
Operating income		429			450			2,357			1,103
Other income (expense), net
Interest expense		(225	)		(248	)		(684	)		(728	)
Change in fair value of derivative liabilities		92			(130	)		(639	)		(127	)
Other income, net		10			15			41			65
Other income (expense), net		(123	)		(363	)		(1,282	)		(790	)
Income before income taxes		306			87			1,075			313
Income tax expense, net		68			54			265			102
Net income		238			33			810			211
Change in fair value of derivative liability		(92	)		-			-			-
Interest expense on Convertible debt-CD Financial, LLC		80			-			-			-
Accretion of Convertible debt - CD Financial, LLC		10			-			-			-
Diluted net income		$ 236			$ 33			$ 810			$ 211
Basic net income per common share		$ 0.01			$ 0.00			$ 0.04			$ 0.01
Diluted net income per common share		$ 0.01			$ 0.00			$ 0.04			$ 0.01
Weighted average common shares outstanding - basic		21,125,952			21,105,174			21,113,696			21,105,174
Add: Equivalent shares oustanding - stock options		1,434,853			176,754			856,927			92,527
Shares issuable upon conversion of  Convertible Debt - CD Financial, LLC		8,230,769			-			-			-
Weighted average common shares outstanding - diluted		30,791,574			21,281,928			21,970,623			21,197,701
See accompanying notes to condensed consolidated financial statements.

 

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share amounts)
(Unaudited)
		March 31,			June 30,
		2017			2016
Assets
Current Assets:
Cash		$       196			$         395
Accounts receivable, net		2,706			3,135
Inventories		7,880			7,756
Investment in iBio, Inc.		501			501
Other current assets		353			283
Total current assets		11,636			12,070
Property and equipment, net		1,654			1,567
Security deposits and other assets		324			448
Total Assets		$ 13,614			$ 14,085
Liabilities and Stockholders' Deficiency:
Current Liabilities:
Advances under revolving credit facility		$   3,706			$  4,210
Accounts payable (includes $64 and $331 due to related party)		4,677			5,469
Accrued expenses and other current liabilities		1,120			1,211
Current portion of long term debt		1,033			934
Total current liabilities		10,536			11,824
Long term debt		4,605			5,306
Subordinated convertible note, net - CD Financial, LLC		5,235			5,206
Derivative liabilities		715			76
Total liabilities		21,091			22,412
Commitments and Contingencies
Stockholders' Deficiency:
Common Stock, $0.002 par value; 50,000,000 shares authorized;
21,165,074 and 21,140,074 shares issued, 21,130,174 and 21,105,174 shares outstanding		42			42
Additional paid-in capital		44,747			44,707
Accumulated deficit		(52,167	)		(52,977	)
Less: Treasury stock, at cost, 34,900 shares		(99	)		(99	)
Total Stockholders' Deficiency		(7,477	)		(8,327	)
Total Liabilities and Stockholders' Deficiency		$ 13,614			$ 14,085
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)
		Nine months ended
		March 31,
		2017			2016
Cash flows from operating activities:
Net income		$   810			$   211
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		298			260
Accretion of financing instruments and other non-cash interest		78			165
Stock based compensation		37			24
Change in fair value of derivative liabilities		639			127
Gain on sale of fixed assets		-			(3	)
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable		429			(995	)
Inventories		(124	)		(1,053	)
Other current assets		(69	)		19
Security deposits and other assets		-			(153	)
(Decrease) increase in:
Accounts payable		(792	)		908
Accrued expenses and other liabilities		(91	)		(327	)
Net cash provided by (used in) operating activities		1,215			(817	)
Cash flows from investing activities:
Purchase of property and equipment		(310	)		(40	)
Cash proceeds from sale of equipment		-			2
Net cash used in investing activities		(310	)		(38	)
Cash flows from financing activities:
Advances under revolving credit facility		34,454			29,623
Repayments of advances under revolving credit facility		(34,958	)		(29,869	)
Proceeds from sale/lease back		158			-
Proceeds from exercises of stock options		2			-
Proceeds from term note payable		-			1,975
Proceeds from Line of Credit Note		-			43
Repayments under term note payables		(659	)		(450	)
Repayments under capitalized lease obligations		(101	)		(88	)
Net cash (used in) provided by financing activities		(1,104	)		1,234
Net (decrease) increase in cash		(199	)		379
Cash at beginning of period		395			71
Cash at end of period		$ 196			$ 450
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest		$ 676			$ 535
Income taxes		$ 294			$   72
Supplemental disclosures of non-cash transactions:
Accretion on embedded derivative feature of convertible note payable		$   29			$   76
Amortization of prepaid financing costs		$   49			$   89
Financing on capitalized lease obligations		$      -			$ 252
See accompanying notes to condensed consolidated financial statements.

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 1. Principles of Consolidation and Basis of Presentation

 

Basis of Presentation of Interim Financial Statements

 

The accompanying condensed consolidated financial statements for the interim periods are unaudited and include the accounts of Integrated BioPharma, Inc., a Delaware corporation (together with its subsidiaries, the “Company”). The interim condensed consolidated financial statements have been prepared in conformity with Rule 8-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and therefore do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented have been included. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (“Form 10-K”), as filed with the SEC. The June 30, 2016 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 nine months ended March 31, 2017 are not necessarily indicative of the results for the full fiscal year ending June 30, 2017 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’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, drug and vitamin retailers, under the following brands: Naturally Noni, Coconut Water, Aloe Pure, Peaceful Sleep, Green Envy, ACAI Extra, ACAI Cleanse, 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 and (iii) Chem International, Inc. (“Chem”), a distributor of certain raw materials for DSM Nutritional Products LLC.

 

Significant Accounting Policies

 

There have been no material changes during fiscal year 2017 in the Company’s significant accounting policies to those previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016.

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

Investment in iBio, Inc. 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”) at the time of the spin-off of this subsidiary in August 2008.  The Company reviews its investment in iBio for impairment and records a loss when there is deemed to be a permanent impairment of the investment. To date, there were cumulative impairment charges of approximately $2,168. The market value of the iBio Stock as of March 31, 2017 was approximately $513 based on the trade price at the close of trading on March 31, 2017.

Pursuant to the Company’s Loan Agreement with PNC Bank, National Association (“PNC”), the Company was required to sell the iBio Stock when the trading price of the iBio Stock is less than $0.88 per share for a period of fifteen (15) consecutive trading days on the applicable exchange and utilize all proceeds from such sale to prepay the outstanding principal of the term loan outstanding under the Loan Agreement at such time. During certain historic periods, the trading price of the iBio Stock was less than $0.88 for a period of fifteen (15) consecutive trading days. Although PNC did not require the Company to sell shares of iBio Stock, the Company sold 73,191 shares of iBio Stock in the quarter ended June 30, 2015.

 

On February 19, 2016, the Loan Agreement with PNC was amended whereby the requirement to sell the iBio Stock based on the selling price of $0.88 per share was removed; however, the requirement to use all the net proceeds from the sale of any of the iBio Stock to prepay the outstanding principal of the term loan outstanding under the Amended Loan Agreement remains. (See Note 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt).

 

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

 

The following options and potentially dilutive shares for convertible notes payable (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 nine months ended March 31, 2017 and 2016:

 

		Three Months Ended						Nine Months Ended
		March 31,						March 31,
		2017			2016			2017			2016
Anti-dilutive stock options		213,100			694,950			313,100			694,950
Anti-dilutive shares for
convertible notes payable		-			8,230,769			8,230,769			8,230,769
Anti-dilutive shares		213,100			8,925,719			8,543,869			8,925,719

 

 

 

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

NOTES TO THE 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 market using the first-in, first-out method and consist of the following:

 

		March 31,			June 30,
		2017			2016
Raw materials		$ 4,857			$ 4,040
Work-in-process		1,120			2,212
Finished goods		1,903			1,504
Total		$ 7,880			$ 7,756

 

 

Note 3. Property and Equipment, net

 

Property and equipment, net consists of the following:

 

		March 31,			June 30,
		2017			2016
Land and building		$ 1,250			$ 1,250
Leasehold improvements		1,264			1,210
Machinery and equipment		5,782			5,536
Transportation equipment		11			11
		8,307			8,007
Less: Accumulated depreciation and amortization		(6,653	)		(6,440	)
Total		$ 1,654			$ 1,567

 

 

Depreciation and amortization expense recorded on property and equipment was $71 and $65 for the three months ended March 31, 2017 and 2016, respectively and $223 and $180 for the nine months ended March 31, 2017 and 2016, respectively. Additionally, the Company disposed of fully depreciated property of $10 and $163 in the nine months ended March 31, 2017 and 2016, respectively.

 

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt

 

As of March 31, 2017 and June 30, 2016, the Company had the following debt outstanding:

 

		Principal Amount						Interest Rate		Maturity Date
		As of March 31, 2017			As of June 30, 2016
Revolving advances under Senior Credit
Facility with PNC Bank, National Association		$ 3,706			$ 4,210			4.00	%	2/19/2020
Installment Note with PNC Bank		2,664			3,259			4.50	%	2/19/2020
Installment Note with PNC Equipment Finance		212			275			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		362			306			3.86% -		3/6/2018-
								11.43	%	12/8/2020
Total outstanding debt		9,344			10,450
Less: Revolving Advances		(3,706	)		(4,210	)
Current portion of long term debt		(1,033	)		(934	)
Long term debt		$ 4,605			$ 5,306
Convertible Note payable - CD Financial, LLC		$ 5,350			$ 5,350			6.00	%	2/29/2020
Discount for embedded derivative		(115	)		(144	)
Convertible Note payable, net - CD Financial, LLC		$ 5,235			$ 5,206

 

SENIOR CREDIT FACILITY

 

On February 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 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 $3,422 (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% (4.00% and 3.50% as of March 31, 2017 and June 30, 2016, respectively). The Term Loan bears interest at PNC’s Base Rate or the Eurodollar Rate, at Borrowers’ option, plus 3.25% (4.50% and 4.00% as of March 31, 2017 and June 30, 2016, 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 “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) consecutive monthly installments of principal, the first eighty-three (83) of which shall be in the amount of $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) $8,000 or (y) an amount equal to the sum of: (i) up to 85%, subject to the provisions in the Amended Loan Agreement, of eligible accounts receivables (“Receivables Advance Rate”), plus (ii) up to the lesser of (A) 75%, subject to the provisions in the Amended Loan Agreement, of the value of the eligible inventory (“Inventory Advance Rate” and together with the Receivables Advance Rate, collectively, the “Advance Rates”), (B) 85% of the appraised net orderly liquidation value of eligible inventory (as evidenced by the most recent inventory appraisal reasonably satisfactory to PNC in its sole discretion exercised in good faith) and (C) the inventory sublimit in the aggregate at any one time (“Inventory Advance Rate” and together with the Receivables Advance Rate, collectively, the “Advance Rates”), minus (iii) the aggregate Maximum Undrawn Amount of all outstanding Letters of Credit, minus (iv) such reserves as PNC may reasonably deem proper and necessary from time to time.

 

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 Advances in an amount equal to twenty-five percent (25%) of Excess Cash Flow for each fiscal year commencing with the fiscal year ending 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, 2017, the Company was in compliance with the fixed charge coverage ratio maintenance requirement.

 

The Loan Agreement (prior to giving effect to the February 19, 2016 amendment described above) required the Company to sell iBio Stock if the per share price fell below $0.88. This requirement is not in the Amended Loan Agreement, however, the requirement to use all the net proceeds from the sale of any of the iBio Stock to prepay the outstanding principal of the term loan outstanding under the Amended Loan Agreement remains a requirement under the Amended Loan Agreement. During certain historic periods, the trading price of the iBio Stock was less than $0.88 for a period of fifteen (15) consecutive trading days; however, PNC temporarily waived the requirement to sell the iBio Stock due to certain trading rules and restrictions under Rule 144 under the Securities Act of 1933, as amended. Although not required to sell the iBio Stock by PNC, in the quarter ended June 30, 2015, the Company sold 73,191 shares of iBio Stock.

 

In 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) are established.

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

 

In addition, 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.

 

CD FINANCIAL, LLC

 

On June 27, 2012, the Company 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 (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 (the “CD Convertible Note”) and (ii) the Promissory Note in the principal amount of $1,714 (the “Liquidity Note”, and collectively with the CD Convertible Note, the “CD Notes”). The CD Notes originally matured on July 7, 2017, however, on February 19, 2016, the CD Notes were amended to extend the maturity date 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 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.

 

As of March 31, 2017 and June 30, 2016, the related embedded derivative liability with respect to conversion price protection provisions on the CD Convertible Note has an estimated fair value of $715 and $76, respectively.

 

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

NOTES TO THE 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 derivative liability using the Black-Scholes option pricing model:

 

		March 31,			June 30,
		2017			2016
Risk Free Interest Rate		1.48	%		0.81	%
Volatility		104.50	%		63.20	%
Term		2 years 11 months			3 years 8 months
Dividend Rate		0.00	%		0.00	%
Closing Price of Common Stock		$ 0.21			$ 0.11

 

 

OTHER LONG TERM DEBT

 

Related Party Debt. On June 27, 2012, MDC and the Company entered into separate promissory notes with (i) Vitamin Realty Associates, LLC (“Vitamin Realty”), and E. Gerald Kay, the Company’s Chief Executive Officer, Chairman of the Board, President and a major shareholder, in the principal amounts of approximately $686 (the “Vitamin Note”) and $27 (the “Kay Note”), respectively (collectively the “Related Party Notes”). The principal amount of the Vitamin Note represents the aggregate amount of unpaid, past due rent owing 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 Party Leases). The Kay Note represented amounts owed to Mr. Kay for unreimbursed business expenses incurred by Mr. Kay in the fiscal year ended June 30, 2008. (See Note 7. Related Party Transactions). On May 27, 2016, the Kay Note in the amount of $27 was paid in full, prior to its maturity date of July 7, 2017, after satisfying the conditions set forth in the Amended Loan Agreement and cancelled accordingly. The Vitamin Realty Note matures on February 29, 2020, as amended on February 19, 2016. The Vitamin Realty Note accrues interest at an annual rate of 4% per annum. Interest in respect of the Vitamin Realty Note is payable on the first business day of each calendar month. Pursuant to the terms of the Loan Agreement, during the effectiveness of the Senior Credit Facility, the Related Party Notes may only be repaid or prepaid if certain conditions set forth in the Amended Loan Agreement are satisfied.

 

Capitalized Lease Obligations. On November 20, 2016, the capitalized lease obligation the Company entered into on December 5, 2013, De Lage Landen Financial Services in the amount of $72, which lease was secured by certain machinery and equipment, was satisfied with all payments being made under the capitalized lease obligation. The monthly lease payment was approximately $2 and had an imputed interest rate of 5.3%.

 

On March 17, 2017, the Company entered into a capitalized lease obligation with First American Equipment Finance (“First American”) in the amount of $158, which lease is secured by certain machinery and equipment and matures on March 17, 2019. The Company sold certain machinery, purchased from an equipment supplier other than First American in the amount of $158,  to First American for $158 and leased it back for monthly payments in the amount of approximately $7 with an imputed interest rate of 3.86%.

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

Note 5. Significant Risks and Uncertainties

(a) Major Customers. For the three months ended March 31, 2017 and 2016, approximately 87% and 90%, respectively of consolidated net sales, were derived from two customers. These two customers are in the Company’s Contract Manufacturing Segment and represent approximately 65% and 64% and 24% and 32% of this Segment’s net sales in the three months ended March 31, 2017 and 2016, respectively. A third customer in the Branded Nutraceutical Segment, while not a significant customer of the Company’s consolidated net sales, represented approximately 5% and 23% of net sales in the three months ended March 31, 2017 and 2016, respectively, of the Branded Nutraceutical Segment.

 

For each of the nine months ended March 31, 2017 and 2016, approximately 90% of consolidated net sales, were derived from two customers. These two customers are in the Company’s Contract Manufacturing Segment and represent approximately 58% and 59% and 37% and 36% of this Segment’s net sales in the nine months ended March 31, 2017 and 2016, respectively. A third customer in the Branded Nutraceutical Segment, while not a significant customer of the Company’s consolidated net sales, represented approximately 73% and 42% of net sales in the nine months ended March 31, 2017 and 2016, respectively, of the Branded Nutraceutical Segment. Accounts receivable from these two major customers represented approximately 91% and 87% of total net accounts receivable as of March 31, 2017 and June 30, 2016, respectively. The loss of any of these customers could have an adverse affect on the Company’s operations. Major customers are those customers who account for more than 10% of net sales.

 

(b) Other Business Risks. Approximately 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 and will expire on August 31, 2018.

 

Note 6. Commitments and Contingencies

(a) Leases

 

Related Party Leases. 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, a wholly-owned subsidiary of the Company, entered into a second amendment of lease (the “Second Lease Amendment”) with Vitamin Realty for its office and warehouse space in New Jersey increasing its rentable square footage from an aggregate of 74,898 square feet to 76,161 square feet and extending the expiration date to January 31, 2026. This Second Lease Amendment provides for minimum annual rental payments of $533, plus increases in real estate taxes and building operating expenses. On May 19, 2014, AgroLabs entered into an Amendment to the lease agreement entered into on January 5, 2012, with Vitamin Realty for an additional 2,700 square feet of warehouse space in New Jersey, the term of which was to expire on January 31, 2019 to extend the expiration date to January 1, 2024. This additional lease provides for minimum lease payments of $27 with annual increases plus the proportionate share of operating expenses.

 

Rent expense for the three and nine months ended March 31, 2017 and 2016 on these leases were $195 and $199 and $606 and $602, respectively, and are included in both cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. As of March 31, 2017 and June 30, 2016, the Company had an outstanding obligation to Vitamin Realty of $761 and $1,102, respectively, included in accounts payable, accrued expenses and other current liabilities and long term debt in the accompanying Condensed Consolidated Balance Sheet.

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

 

Other Lease Commitments. The Company has entered into certain non-cancelable operating lease agreements expiring up through January 31, 2026, related to office and warehouse space, equipment and vehicles (inclusive of the related party lease with Vitamin Realty).

 

The minimum rental commitments for long-term non-cancelable leases are as follows:

 

		Operating			Related Party
Year ending		Lease			Lease
June 30,		Commitment			Commitment			Total
2017, remaining		$ 16			$ 141			$ 157
2018		40			563			603
2019		27			563			590
2020		22			563			585
2021		21			563			584
2022		8			563			571
Thereafter		-			1,955			1,955
Total		$ 134			$ 4,911			$ 5,045

 

Total rent expense, including real estate taxes and maintenance charges, was approximately $226 and $239 and $718 and $724 for the three and nine months ended March 31, 2017 and 2016, respectively. Rent expense is included in cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

 

(b) Legal Proceedings.

 

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

 

(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 "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 $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 $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 May 10, 2017, 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.

 

 

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 7. Related Party Transactions

 

See Note 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt for related party securities transactions.

 

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

 

Note 8. Segment Information

 

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

 

The Company has divided its operations into three reportable segments as follows: Contract Manufacturing, Branded Proprietary Products and Other Nutraceutical Businesses. The international sales, concentrated primarily in Europe and Canada, for the three months ended March 31, 2017 and 2016 were $2,005 and $1,557, respectively and for the nine months ended March 31, 2017 and 2016 were $6,678 and $5,405, respectively.

 

Financial information relating to the three months ended March 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 Manufacturing	2017		$ 8,358			$ 1,983			$ 10,341			$ 1,243			$ 70			$ 219
	2016		8,979			1,476			10,455			1,187			65			63
Branded Proprietary Products	2017		31			4			35			(20	)		-			-
	2016		42			41			83			(33	)		-			-
Other Nutraceutical Businesses	2017		260			18			278			116			1			7
	2016		393			40			433			170			-			-
Total Company	2017		8,649			2,005			10,654			1,339			71			226
	2016		9,414			1,557			10,971			1,324			65			63

 

 

 

 

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 nine months ended March 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 Manufacturing	2017		$ 27,885			$ 6,381			$ 34,266			$ 4,483			$ 222			$ 302
	2016		23,986			5,105			29,091			3,070			179			292
Branded Proprietary Products	2017		123			199			322			30			-			-
	2016		259			230			489			76			-			-
Other Nutraceutical Businesses	2017		1,021			98			1,119			447			1			7
	2016		1,180			70			1,250			468			1			1
Total Company	2017		29,029			6,678			35,707			4,960			223			309
	2016		25,425			5,405			30,830			3,614			180			293

 

 

 

		Total Assets as of
		March 31,			June 30,
		2017			2016
Contract Manufacturing		$ 11,326			$ 11,853
Branded Proprietary Products		681			676
Other Nutraceutical Businesses		1,607			1,556
Total Company		$ 13,614			$ 14,085

 

 

 

 

 

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND RESULTS OF OPERATION

 

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, 2016.

 

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—in particular, the statements regarding our goals and strategies, new product introductions, plans to cultivate new businesses, pending divestitures, future economic conditions, revenue, pricing, gross margin and costs, 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 Quarterly Report on Form 10-Q.

 

For the nine months ended March 31, 2017, our net sales from operations increased by $4.9 million to approximately $35.7 million from approximately $30.8 million in the nine months ended March 31, 2016. Substantially all the increase in net sales was from the Contract Manufacturing Segment ($2.5 million and $2.0 million from our significant customers, Life Extension and Herbalife, respectively), our other two segments had net decreases in net sales of approximately $0.3 million. The increase in sales from our major customers was the result of producing new items resulting in increased volumes. We also increased selling prices on certain items due to increased costs of the raw materials used in those items. For the nine months ended March 31, 2017 we had operating income of approximately $2.4 million, an increase of approximately $1.3 million from the nine months ended March 31, 2016 of approximately $1.1 million. Our profit margins increased from approximately 11.7% of net sales in the nine months ended March 31, 2016 to approximately 13.9% of net sales in the nine months ended March 31, 2017, primarily as a result of increased weighted gross margins in our Contract Manufacturing Segment of approximately 3%. This improvement was the direct result of the increased sales volume while our fixed manufacturing costs remained substantially the same in the year over year reporting period. Our consolidated selling and administrative expenses increased approximately 4% or approximately $0.1 million from approximately $2.5 million for the nine months ended March 31, 2016 to approximately $2.6 million in the nine months ended March 31, 2017.

 

 

 

Critical Accounting Policies and Estimates

 

There have been no changes to our critical accounting policies in the nine months ended March 31, 2017. 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, 2016.

 

 

Results of Operations

 

Our results from operations in the following table, sets forth the income statement data of our results as a percentage of net sales for the periods indicated:

		For the three months						For the nine months
		ended March 31,						ended March 31,
		2017			2016			2017			2016
Sales, net		100.0	%		100.0	%		100.0	%		100.0	%
Costs and expenses:
Cost of sales		87.5	%		87.9	%		86.1	%		88.3	%
Selling and administrative		8.5	%		8.0	%		7.3	%		8.1	%
		96.0	%		95.9	%		93.4	%		96.4	%
Income from operations		4.0	%		4.1	%		6.6	%		3.6	%
Other income (expense), net
Interest expense		(2.1%	)		(2.3%	)		(1.9%	)		(2.4%	)
Change in fair value of derivative liabilities		0.9	%		(1.2%	)		(1.8%	)		(0.4%	)
Other income, net		0.1	%		0.1	%		0.1	%		0.2	%
Other income (expense), net		(1.1%	)		(3.3%	)		(3.6%	)		(2.6%	)
Income before income taxes		2.9	%		0.8	%		3.0	%		1.0	%
Federal and state income taxes, net		0.7	%		0.5	%		0.7	%		0.3	%
Net income		2.2	%		0.3	%		2.3	%		0.7	%

 

 

 

For the Nine months ended March 31, 2017 compared to the Nine months ended March 31, 2016

 

Sales, net. Sales, net, for the nine months ended March 31, 2017 and 2016 were $35.7 million and $30.8 million, respectively, an increase of 15.8%, and are comprised of the following:

 

		Nine months ended						Dollar			Percentage
		March 31,						Change			Change
		2017			2016			2017 vs 2016			2017 vs 2016
		(amounts in thousands)
Contract Manufacturing:
US Customers		$ 27,885			$ 23,986			$ 3,899			16.3	%
International Customers		6,381			5,105			1,276			25.0	%
Net sales, Contract Manufacturing		34,266			29,091			5,175			17.8	%
Branded Nutraceutical Products:
US Customers		123			259			(136	)		(52.5%	)
International Customers		199			230			(31	)		(13.5%	)
Net sales, Branded Nutraceutical Products		322			489			(167	)		(34.2%	)
Other Nutraceuticals:
US Customers		1,021			1,180			(159	)		(13.5%	)
International Customers		98			70			28			40.0	%
Net sales, Other Nutraceuticals		1,119			1,250			(131	)		(10.5%	)
Total net sales		$ 35,707			$ 30,830			$ 4,877			15.8	%

 

 

 

For each of the nine months ended March 31, 2017 and 2016 a significant portion of our consolidated net sales, approximately 90%, were concentrated among two customers, Life Extension and Herbalife, customers in our Contract Manufacturing Segment. Life Extension and Herbalife represented approximately 58% and 59% and 37% and 36%, respectively, of our Contract Manufacturing Segment’s net sales in the nine months ended March 31, 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”) (a customer of our Branded Proprietary Products Segment), while not a significant customer of our consolidated net sales represented approximately 73% and 42% of net sales in the nine months ended March 31, 2017 and 2016, respectively of the Branded Propriety Products Segment.

 

The increase in net sales of approximately $4.9 million was primarily the result of:

●

Net sales increase in our Contract Manufacturing Segment by $5.2 million primarily due to increased sales volumes to our major customers, Herbalife and Life Extension, in the nine months ended March 31, 2017, of approximately $2.5 million and $2.0 million, respectively compared to the comparable prior period.

●

Net sales in our Branded Nutraceutical Segment decreased by approximately $0.2 million in the nine months ended March 31, 2017, compared to the nine months ended March 31, 2016. The decrease in the Branded Nutraceutical Segment is the primarily the result of a $0.1 million release of an estimated sales allowance for a customer the Company has not done business with in the past five years, with no such release in the nine months ended March 31, 2017. The remaining decrease of approximately $0.1 million is the result of the timing of shipments in our domestic sales base from the first nine months of our fiscal year ending June 30, 2017 into the three months ending June 30, 2017.

●

Net sales in the Other Nutraceutical Segment decreased by approximately $0.1 million, primarily due to a decline in overall sales in Chem International Inc. in the nine month period ended March 31, 2017 compared to the nine month period ended March 31, 2016.

  

Cost of sales. Cost of sales increased by $3.5 million to $30.7 million for the nine months ended March 31, 2017, as compared to $27.2 million for the nine months ended March 31, 2016, an increase of 13%.  As a percentage of sales, cost of sales was 86.1% for the nine months ended March 31, 2017 as compared to 88.3% for the nine months ended March 31, 2016. The increase in the cost of goods sold amount is consistent with the increased net sales of approximately 16%. The decrease in the cost of goods sold as a percentage of net sales, was primarily the result of the increased sales of $5.2 million in the Contract Manufacturing Segment resulting in the absorption of the fixed manufacturing overhead costs of this segment. There were no significant changes in the cost of goods sold in our other two segments.

 

Selling and Administrative Expenses. There was a slight increase in selling and administrative expenses of $92 or approximately 3.7% in the nine months ended March 31, 2017 as compared to the nine months ended March 31, 2016. As a percentage of sales, net, selling and administrative expenses were approximately 7% and 8% for the nine months ended March 31, 2017 and 2016, respectively. The increase in selling and administrative expenses was primarily the result of increased salaries and employee benefits of approximately $0.1 million, offset in part by a decrease in marketing and advertising expenses in the Branded Nutraceutical Segment of approximately $35. Salaries and employee benefits increased as the result of salary increases, primarily for the executive officers of the Company (these increases were effective October 1, 2016 and were the first increases for the executive officers in approximately 10 years). No other expense within our selling and administrative expenses changed by more than $25.

 

 

 

 Other income (expense), net. Other income (expense), net was approximately $1.3 million expense for the nine months ended March 31, 2017 compared to $0.8 million expense for the nine months ended March 31, 2016, and is composed of:

		Nine months ended
		March 31,
		2017			2016
		(dollars in thousands)
Interest expense		$ (684	)		$ (728	)
Change in fair value of derivative liabilities		(639	)		(127	)
Other income		41			65
Other income (expense), net		$ (1,282	)		$ (790	)

 

 

The variance in the change in fair value of derivative liabilities from the nine months ended March 31, 2016 to the nine months ended March 31, 2017 was mainly the result of the increased closing trading price of our common stock from $0.11 as of June 30, 2016 to $0.21 as of March 31, 2017 and the change in the volatility of the closing trading price of our common stock from 63.2% as of June 30, 2016 to 104.5% as of March 31, 2017. The closing trading price and the volatility of the closing trading price of our common stock are two of the variables used to calculate the estimated fair value of our derivative liabilities associated with the underlying derivative instrument. Our interest expense for the nine months ended March 31, 2017 was slightly less the for the nine months ended March 31, 2016 primarily as the result of decreased non cash interest charges from the accretion for the embedded derivative in our Convertible Note Payable – CD Financial, LLC (See Note 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt in this Quarterly Report on Form 10-Q) and the amortization of prepaid financing charges of approximately $87, offset by increased interest expense of approximately $43 on our outstanding debt. The other component of other income (expense) is not significant and did not vary significantly from the nine months ended March 31, 2016.

 

Federal and state income tax, net. For the nine months ended March 31, 2017 and 2016, we had federal and state tax expense of approximately $0.3 million and $0.1 million, respectively. We continue to maintain a full reserve on 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 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.

 

Net income. Our net income for the nine months ended March 31, 2017 and 2016 was approximately $0.8 million and $0.2 million, respectively. The increase of approximately $0.6 million was primarily the result of our increased operating income of $1.3 million offset by the change in fair value of derivative instruments of approximately $0.5 million and increased income tax expense of approximately $0.2 million.

 

 

 

 

For the Three months ended March 31, 2017 compared to the Three months ended March 31, 2016

 

Sales, net. Sales, net, for the three months ended March 31, 2017 and 2016 were $10.7 million and $11.0 million, respectively, a decrease of 2.9%, and are comprised of the following:

 

		Three months ended						Dollar			Percentage
		March 31,						Change			Change
		2017			2016			2017 vs 2016			2017 vs 2016
		(amounts in thousands)
Contract Manufacturing:
US Customers		$ 8,358			$ 8,979			$ (621	)		(6.9%	)
International Customers		1,983			1,476			507			34.3	%
Net sales, Contract Manufacturing		10,341			10,455			(114	)		(1.1%	)
Branded Nutraceutical Products:
US Customers		31			42			(11	)		(26.2%	)
International Customers		4			41			(37	)		(90.2%	)
Net sales, Branded Nutraceutical Products		35			83			(48	)		(57.8%	)
Other Nutraceuticals:
US Customers		260			393			(133	)		(33.8%	)
International Customers		18			40			(22	)		(55.0%	)
Net sales, Other Nutraceuticals		278			433			(155	)		(35.8%	)
Total net sales		$ 10,654			$ 10,971			$ (317	)		(2.9%	)

 

For the three months ended March 31, 2017 and 2016 a significant portion of our consolidated net sales, approximately 87% and 91%, respectively, were concentrated among two customers, Life Extension and Herbalife, customers in our Contract Manufacturing Segment. Life Extension and Herbalife represented approximately 65% and 64% and 24% and 32%, respectively of our Contract Manufacturing Segment’s net sales in the three months ended March 31, 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.

 

The decrease in net sales of approximately $0.3 million in the three months ended March 31, 2017 from the three months ended March 31, 2016 was the result of net sales decreasing in our Contract Manufacturing Segment and Other Nutraceuticals Segment by $0.1 million and $0.2 million, respectively. Each of these decreases was the result of decreased sales volume.

 

Cost of sales. Cost of sales decreased by $0.3 million to $9.3 million for the three months ended March 31, 2017, as compared to $9.6 million for the three months ended March 31, 2016 or approximately 3.4%. Cost of sales decreased as a percentage of sales to 87.5% for the three months ended March 31, 2017 as compared to 87.9% for the three months ended March 31, 2016. The decrease in the cost of goods sold amount is consistent with the decreased net sales of approximately 3%. The decrease in the cost of goods sold as a percentage of net sales, was primarily the result of the change in the product mix sold in our Contract Manufacturing Segment resulting in a lower cost of raw materials in the products sold. There were no significant changes in the cost of goods sold in our other two segments.

 

Selling and Administrative Expenses. There was an increase in selling and administrative expenses of $36 in the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 or approximately 4%. As a percentage of sales, net, selling and administrative expenses were approximately 8.5% and 8% for the three months ended March 31, 2017 and 2016, respectively. The increase in selling and administrative expenses was primarily the result of increased salaries and employee benefits of approximately $47 in the three months ended March 31, 2017 compared to the comparable prior three month period. Salaries and employee benefits increased as the result of salary increases, primarily for the executive officers of the Company (these increases were effective October 1, 2016 and were the first increases for the executive officers in approximately 10 years). No other expense within our selling and administrative expenses changed by more than $15.

 

 

Other income (expense), net. Other income (expense), net was approximately $0.1 million and $0.4 million expense for the three months ended March 31, 2017 and 2016, respectively, and is composed of:

		Three months ended
		March 31,
		2017			2016
		(dollars in thousands)
Interest expense		$ (225	)		$ (248	)
Change in fair value of derivative liabilities		92			(130	)
Other income		10			15
Other income (expense), net		$ (123	)		$ (363	)

 

The variance in the change in fair value of derivative liabilities from the three months ended March 31, 2016 to the March 31, 2016 was mainly the result of the decreased closing trading price of our common stock from $0.23 as of December 31, 2016 to $0.21 as of March 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 March 31, 2017 decreased by approximately $23 from the three months ended March 31, 2016, as the result of decreased non cash interest charges from the accretion for the embedded derivative in our Convertible Note Payable – CD Financial, LLC (See Note 4. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt in this Quarterly Report on Form 10-Q) and the amortization of prepaid financing charges of approximately $18 and decreased interest expense of approximately $5 on our outstanding debt. Other income decreased by approximately $5 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.

 

Federal and state income tax, net. For the three months ended March 31, 2017 and 2016, we had federal and state tax expense of approximately $68 and $54, respectively. We continue to maintain a full reserve on 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 realized. The state income 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.

 

Net income. Our net income for the three months ended March 31, 2017 and 2016 was approximately $0.2 million and $33, respectively. The increase of approximately $0.2 million was primarily the result of the change in the fair value of derivative instruments of approximately $0.2 million.

 

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’s net cash flows used in operating, investing and financing activities, its period end cash and cash equivalents and other operating measures:

		For the nine months ended
		March 31,
		2017			2016
		(dollars in thousands)
Net cash provided by (used in) operating activities		$ 1,215			$ (817	)
Net cash used in investing activities		$ (310	)		$ (38	)
Net cash (used in) provided by financing activities		$ (1,104	)		$ 1,234
Cash at end of period		$ 196			$ 450

 

 

At March 31, 2017 and June 30, 2016, our working capital was approximately $1.1 million and $0.2 million, respectively. Our current assets decreased by $0.4 million and current liabilities decreased by approximately $1.3 million, resulting in a net increase in our working capital of $0.9 million.

 

Net cash provided by operating activities of $1.2 million in the nine months ended March 31, 2017, includes net income of approximately $0.8 million. After excluding the effects of non-cash expenses, including depreciation and amortization, and changes in the fair value of derivative liabilities, the adjusted cash provided from operations before the effect of the changes in working capital components was $1.9 million. Cash was used in operations from our working capital assets and liabilities in the amount of approximately $0.7 million and was primarily the result of a net decrease in accounts payable and accrued expenses and other liabilities of approximately $0.9 million and an increase in inventories of $0.1 million offset, in part, by a decrease in accounts receivable of $0.4 million.

 

Net cash used in operating activities of $0.8 million in the nine months ended March 31, 2016, includes net income of approximately $0.2 million. After excluding the effects of non-cash expenses, including depreciation and amortization, and changes in the fair value of derivative liabilities, the adjusted cash provided from operations before the effect of the changes in working capital components was $0.8 million. Cash was used in operations from our working capital assets and liabilities in the amount of approximately $1.6 million and was primarily the result of increases in accounts receivable and inventories of $1.0 million each, prepaid expenses and other assets of $0.2 million offset, in part, by a net increase in accounts payable and accrued expenses and other liabilities of approximately $0.6 million.

 

Cash used in investing activities of $0.3 million and $38 in the nine months ended March 31, 2017 and 2016, respectively, was for the purchase of property and equipment primarily in our Contract Manufacturing Segment.

 

Cash used in financing activities was approximately $1.1 million for the nine months ended March 31, 2017, primarily a result of repayments of advances under our revolving credit facility of $35.0 million and principal payments made under our term notes in the amount of $0.7 million, offset, in part, with $34.5 million received from advances under our revolving credit facility.

 

Net cash provided by financing activities was approximately $1.2 million for the nine months ended March 31, 2016, $29.6 million from advances under our revolving credit facility and $2.0 million from proceeds under our refinanced Term Note with PNC Bank, offset by repayments of advances under our revolving credit facility of $29.9 million, principal under our term notes in the amount of $0.4 million and payments under our capitalized lease obligations of $0.1 million.

 

 

As of March 31, 2017, we had cash of $0.2 million, funds available under our revolving credit facility of approximately $1.7 million and working capital of approximately $1.2 million. Our working capital includes $3.7 million 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, we had income from operations of approximately $2.4 million in the nine months ended March 31, 2017. 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 through the next twelve months.

 

Our total annual commitments at March 31, 2017 for long term non-cancelable leases of approximately $0.6 million 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, Cedarburg demanded payment by us of $0.6 million 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.

 

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 May 10, 2017, 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 each of the nine months ended March 31, 2017 and 2016 were approximately $0.3 million ($38 funded with proceeds under our convertible line of credit for equipment financing and $0.3 million funded with capitalized lease financing in the nine months ended March 31, 2016). The Company has budgeted approximately $0.3 million for capital expenditures for fiscal year 2017. 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 Pronouncements

 

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’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 March 31, 2017, 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 nine months ended March 31, 2017 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.

 

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, 2016, 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, 2016.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

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.
101	The following financial information from Integrated BioPharma, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2017 and 2016, (ii) Condensed Consolidated Balance Sheets as of March 31, 2017 and June 30, 2016, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2017 and 2016, and (iv) the Notes to Condensed Consolidated Statements.

 

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:     May 10, 2017	By: /s/ E Gerald Kay
	E. Gerald Kay,
	President and Chief Executive Officer

  

      

Date:     May 10, 2017	By: /s/ Dina L. Masi
	Dina L. Masi,
	Chief Financial Officer & Senior Vice President