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, 2017 (“Form 10-K”), as filed with the SEC. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words, “plan”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “project”, “may”, “will”, “would”, “could”, “should”, “seeks”, or “scheduled to”, or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. The Company cautions investors that any forward-looking statements made by the Company are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements with respect to the Company, include, but are not limited to, the risks and uncertainties affecting its businesses described in Item 1 of the Company’s Annual Report filed on Form 10-K for the year ended June 30, 2017 and in other securities filings by the Company. Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection or assumption in any of the forward-looking statements. The Company’s future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date hereof and the Company does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.

 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

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, 2017.

 

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, 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 six months ended December 31, 2017, our net sales from operations decreased by $4.5 million to approximately $20.6 million from approximately $25.1 million in the six months ended December 31, 2016. Substantially all the decrease in net sales was from the Contract Manufacturing Segment with a decrease of $4.2 million ($5.4 million from our significant customer Herbalife offset by increased sales to Life Extension of $1.2 million), while our other two segments, Branded Nutraceutical Segment and Other Nutraceuticals Segment, had decreased sales of $0.1 million and $0.2 million, respectively. The decline in sales in the six months ended December 31, 2017 from Herbalife, was primarily due to decreased orders received from Herbalife for items that we manufacture for Herbalife and secondarily from decreases of (i) approximately $0.6 million as a result of a scheduled shut down of Herbalife’s logistics software in August 2017, which caused Herbalife to request shipments originally scheduled for the three months ended September 30, 2017 to be shipped in June 2017 and (ii) approximately $0.5 million as a result of discontinued items by Herbalife which were manufactured by MDC.  For the six months ended December 31, 2017 we had operating income of approximately $0.4 million, a decrease of approximately $1.5 million from the six months ended December 31, 2016 of approximately $1.9 million. Our profit margins decreased from approximately 14% of net sales in the six months ended December 31, 2016 to 10% of net sales in the six months ended December 31, 2017, primarily as a result of the decreased sales in our Contract Manufacturing Segment of approximately $4.2 million. This decline in margins was the result of the decreased sales in the Contract Manufacturing Segment to Herbalife with increased sales to Life Extension (higher cost of goods), while our fixed manufacturing costs remained substantially the same in the year over year reporting period. We maintained our consolidated selling and administrative expenses at approximately $1.6 million in each of the six months ended December 31, 2017 and 2016.

 

 

Critical Accounting Policies and Estimates

 

There have been no changes to our critical accounting policies in the six months ended December 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, 2017.

 

 

 

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 six months
		ended December 31,								ended December 31,
		2017				2016				2017				2016
Sales, net			100.0	%			100.0	%			100.0	%			100.0	%
Costs and expenses:
Cost of sales			90.3	%			88.1	%			90.0	%			85.5	%
Selling and administrative			7.9	%			7.3	%			8.0	%			6.8	%
			98.2	%			95.4	%			98.0	%			92.3	%
Income from operations			1.8	%			4.6	%			2.0	%			7.7	%
Other income (expense), net
Interest expense			(2.1%	)			(1.8%	)			(2.2%	)			(1.8%	)
Change in fair value of derivative liabilities			1.7	%			(2.9%	)			0.3	%			(2.9%	)
Impairment charge on investment in iBio, Inc.			(1.5%	)			-				(1.2%	)			-
Other income, net			0.0	%			0.1	%			0.0	%			0.1	%
Other income (expense), net			(1.9%	)			(4.6%	)			(3.1%	)			(4.6%	)
(Loss) income before income taxes			(0.1%	)			(0.0%	)			(1.1%	)			3.1	%
Federal and state income taxes, net			3.1	%			0.6	%			1.5	%			0.8	%
Net (loss) income			(3.2%	)			(0.6%	)			(2.6%	)			2.3	%

 

 

 

 

For the Six Months Ended December 31, 2017 compared to the Six Months Ended December 31, 2016

 

Sales, net. Sales, net, for the six months ended December 31, 2017 and 2016 were $20.6 million and $25.1 million, respectively, a decrease of 17.9%, and are comprised of the following:

 

		Six months ended								Dollar				Percentage
		December 31,								Change				Change
		2017				2016				2017 vs 2016				2017 vs 2016
		(amounts in thousands)
Contract Manufacturing:
US Customers		$	16,981			$	19,528			$	(2,547	)			(13.0%	)
International Customers			2,782				4,398				(1,616	)			(36.7%	)
Net sales, Contract Manufacturing			19,763				23,926				(4,163	)			(17.4%	)
Branded Nutraceutical Products:
US Customers			181				90				91				101.1	%
International Customers			21				196				(175	)			(89.3%	)
Net sales, Branded Nutraceutical Products			202				286				(84	)			(29.4%	)
Other Nutraceuticals:
US Customers			502				762				(260	)			(34.1%	)
International Customers			103				79				24				30.4%
Net sales, Other Nutraceuticals			605				841				(236	)			(28.1%	)
Total net sales		$	20,570			$	25,053			$	(4,483	)			(17.9%	)

 

 

 

 

 

 

For the six months ended December 31, 2017 and 2016 a significant portion of our consolidated net sales, approximately 91% and 92%, respectively, were concentrated among two customers, Life Extension and Herbalife, customers in our Contract Manufacturing Segment. Life Extension and Herbalife represented approximately 71% and 23% and 54% and 42%, respectively, of our Contract Manufacturing Segment’s net sales in the six months ended December 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”) and BJ's Wholesale Club ("BJ's") (customers of our Branded Nutraceutical Products Segment), while not significant customers of our consolidated net sales represented approximately 30% and 29% and 57% and none respectively, of the Branded Nutraceutical Products Segment net sales in the six months ended December 31, 2017 and 2016, respectively.

 

The decrease in net sales of approximately $4.2 million was primarily the result of:

 

●

Net sales decreased in our Contract Manufacturing Segment by $4.2 million primarily due to decreased sales volumes to Herbalife of approximately $5.4 million in the six months ended December 31, 2017 compared to the six months ended December 31, 2016. The decline in sales in the six months ended December 31, 2017 from Herbalife, was primarily due to decreased orders received from Herbalife for items that we manufacture for Herbalife and secondarily from decreases of (i) approximately $0.6 million as a result of a scheduled shut down of Herbalife’s logistics software in August 2017, which caused Herbalife to request shipments originally scheduled for the three months ended September 30, 2017 to be shipped in June 2017 and (ii) approximately $0.5 million as a result of discontinued items by Herbalife which were manufactured by MDC.  Offsetting the decline of net sales to Herbalife was an increase of sales volume to Life Extension of approximately $1.2 million in the six months ended December 31, 2017 compared to the six months ended December 31, 2016.

●

Net sales in our Branded Nutraceutical Products Segment decreased by approximately $84,000 in the six months ended December 31, 2017, primarily as the result of decreased sales of $173,000 to Costco resulting from pricing pressures from the strong US Dollar versus the Canadian Dollar, offset, in part, by an initial sale to BJ’s in the amount of $59,000.

●

Net sales in our Other Nutraceuticals segment decreased by $0.2 million primarily as a result of the timing of shipments to our regular customers. We expect $0.1 million of these sales to occur in the next three months ending March 31, 2018.

 

Cost of sales. Cost of sales decreased by $2.9 million to $18.5 million for the six months ended December 31, 2017, as compared to $21.4 million, a decrease of 14%, for the six months ended December 31, 2016. Cost of sales increased as a percentage of sales to 90% for the six months ended December 31, 2017 as compared to 85.5% for the six months ended December 31, 2016. The decrease in the cost of goods sold amount is consistent with the decreased net sales of approximately 18%. The increase in the cost of goods sold as a percentage of net sales, was primarily the result of the increased sales to Life Extension as a percentage of total sales in our Contract Manufacturing Segment. The cost of the raw materials for the Life Extension finished goods, on average, cost more per bottle than goods produced for our other customers in the Contract Manufacturing Segment as they tend to use raw materials with trademarked characteristics which limits the ability to negotiate pricing. Secondarily, the cost of sales increased as a percentage of sales, net as a result of the fixed manufacturing costs in our Contract Manufacturing Segment decreasing by approximately 11% from the comparable period a year ago, while our sales decreased by approximately 18%. There were no significant changes in the cost of goods sold in our other two segments other than the decreased sales in each of the other two segments.

 

Selling and Administrative Expenses. There was a slight decrease in selling and administrative expenses of $49,000 or approximately 2.9% in the six months ended December 31, 2017 as compared to the six months ended December 31, 2016. As a percentage of sales, net, selling and administrative expenses were approximately 8% and 7% for the six months ended December 31, 2017 and 2016, respectively. The decrease was primarily due to a decrease in salaries and employees benefits of approximately $80,000, as the result of decreasing our sales support by two people and a decrease in our vacation pay liability offset by an increase in professional and consulting fees of approximately $31,000 for work performed on new products labels and trademark registrations in our Branded Nutraceutical Segment as well as legal fees incurred in our Other Nutraceutical Segment for the trademark and patent protection of the Multi Minerals sold under a license agreement.

 

 

Other income (expense), net. Other income (expense), net was approximately $0.6 million for the six months ended December 31, 2017 compared to $1.2 million for the six months ended December 31, 2016, and is composed of:

 

	Six months ended
	December 31,
	2017			2016
	(dollars in thousands)
Interest expense	$	(462	)	$	(459	)
Change in fair value of derivative instruments		67			(731	)
Impairment charge on investment in iBio, Inc.		(251	)		-
Other income		4			31
Other income (expense), net	$	(642	)	$	(1,159	)

 

 

The variance in the change in fair value of derivative liabilities between the six months ended December 31, 2016 and the six months ended December 31, 2017 was mainly the result of the decreased closing trading price of our common stock from $0.19 as of June 30, 2017 to $0.18 as of December 31, 2017 and the change in the volatility of the closing trading price of our common stock from 98.11% as of June 30, 2017 to 106.00% as of December 31, 2017. The closing trading price and the volatility of the closing trading price of our common stock are 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 six months ended December 31, 2017, was slightly more, approximately $3,000 more than for the six months ended December 31, 2016. The increase in interest expense was the result of an increase in interest rates of 0.75% from the six month period ended December 31, 2016 to the six month period ended December 31, 2017 on our Senior Credit Facility (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q), offset by, a decrease in our outstanding debt in the amount of $0.5 million from June 30, 2017 to December 31, 2017.

 

In the six months ended December 31, 2017 we determined that there was an impairment on the carrying value of our investment in iBio, Inc. in the amount of approximately $0.3 million resulting from the decline in the closing trading price of their common stock on the NYSE American Exchange for the six month period ended December 31, 2017 from $0.39 per share as of June 30, 2017 to $0.18 per share as of December 31, 2017.

 

Other income decreased by approximately $27,000 as the result of earning less income from providing back office support, logistics and operational support for a start-up company which sells over the counter pharmaceutical and nutraceutical products through retail and internet based outlets.

 

Federal and state income tax, net. For the six months ended December 31, 2017 and 2016, we had state income tax, net expense of approximately $44,000 and $197,000, respectively, and a federal deferred income tax expense of $250,000 and none, respectively. We continue to maintain a reserve on a portion of our deferred tax assets as it has been determined that based upon past losses, the Company’s past liquidity concerns and the current economic environment, that it is “more likely than not” the Company’s deferred tax assets may not be fully realized. The state tax expense is the result of MDC using all of its state net operating losses in the fiscal year ended 2013 tax period. All of our other subsidiaries still have adequate net operating losses for state income tax purposes to absorb any taxable income for state tax purposes.

 

The decrease in state income tax expense of $153,000 is the result of the decreased net income for MDC.  The increase in the federal income tax expense of $250,000 is the result of the one-time charge for the change in the effective federal tax rate from 34% as of December 31, 2017 to 21% as of January 1, 2018 which resulted in a decrease to our deferred tax assets of $263,000 offset by a current federal tax benefit of approximately $13,000.

 

 

Net (loss) income. Our net loss for the six months ended December 31, 2017 was $0.5 million compared to net income of $0.6 million in the six months ended December 31, 2016, a decrease of $1.1 million. The decrease was primarily the result of our decreased operating income of $1.5 million, the impairment charge on our investment in iBio, Inc. of $0.3 million and increased income tax expense, net of $0.1 million, offset by the change in fair value of derivative instruments of approximately $0.8 million.

 

For the Three Months Ended December 31, 2017 compared to the Three Months Ended December 31, 2016

 

Sales, net. Sales, net, for the three months ended December 31, 2017 and 2016 were $10.8 million and $12.4 million, respectively, a decrease of 12.7%, and are comprised of the following:

 

		Three months ended								Dollar				Percentage
		December 31,								Change				Change
		2017				2016				2017 vs 2016				2017 vs 2016
		(amounts in thousands)
Contract Manufacturing:
US Customers		$	9,159			$	10,207			$	(1,048	)			(10.3%	)
International Customers			1,199				1,687				(488	)			(28.9%	)
Net sales, Contract Manufacturing			10,358				11,894				(1,536	)			(12.9%	)
Branded Nutraceutical Products:
US Customers			162				61				101				165.6%
International Customers			10				101				(91	)			(90.1%	)
Net sales, Branded Nutraceutical Products			172				162				10				6.2%
Other Nutraceuticals:
US Customers			231				307				(76	)			(24.8%	)
International Customers			39				9				30				333%
Net sales, Other Nutraceuticals			270				316				(46	)			(14.6%	)
Total net sales		$	10,800			$	12,372			$	(1,572	)			(12.7%	)

 

For the three months ended December 31, 2017 and 2016 a significant portion of our consolidated net sales, approximately 91% and 92%, respectively, were concentrated among two customers in our Contract Manufacturing Segment, Life Extension and Herbalife.  Life Extension and Herbalife represented approximately 79% and 16% and 60% and 35%, respectively, of our Contract Manufacturing Segment’s net sales in the three months ended December 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”) and BJ's Wholesale Club ("BJ's") (customers of our Branded Nutraceutical Products Segment), while not significant customers of our consolidated net sales, each represented approximately 34% of net sales in the three months ended December 31, 2017, and Costco represented approximately 53% of net sales in the three months ended December 31, 2016, of the Branded Nutraceutical Products Segment.

 

The decrease in net sales of approximately $1.6 million was primarily the result of net sales decreasing in our Contract Manufacturing Segment of $1.5 million primarily due to decreased sales volumes to one of our major customers, Herbalife of approximately $2.6 million, in the three months ended December 31, 2017, compared to the comparable prior period, offset by an increase of approximately $1.0 million from our other major customer, Life Extension.

 

Cost of sales. Cost of sales decreased by $1.1 million, approximately 10%, to $9.8 million for the three months ended December 31, 2017, as compared to $10.9 million for the three months ended December 31, 2016. Cost of sales increased as a percentage of sales to 90.3% for the three months ended December 31, 2017 as compared to 88.1% for the three months ended December 31, 2016. The decrease in the cost of goods sold of 10% is consistent with the decreased net sales of approximately 13%. The increase in the cost of goods sold as a percentage of net sales, was primarily the result of the increased sales to Life Extension as a percentage of total sales in our Contract Manufacturing Segment.

 

 

The cost of the raw materials for the Life Extension finished goods, on average, cost more per bottle than goods produced for our other customers in the Contract Manufacturing Segment as they tend to use raw materials with trademarked characteristics which limits the ability to negotiate pricing. Secondarily, the cost of sales increased as a percentage of sales, net as a result of the fixed manufacturing costs in our Contract Manufacturing Segment decreasing by approximately 9% from the comparable period a year ago, while our sales decreased by approximately 13%. There were no significant changes in the cost of goods sold in our other two segments other than the decreased sales in each of the other two segments.

 

Selling and Administrative Expenses. There was a decrease in selling and administrative expenses of $50,000 in the three months ended December 31, 2017 as compared to the three months ended December 31, 2016 or approximately 5.5%. As a percentage of sales, net, selling and administrative expenses were approximately 8% and 7% for the three months ended December 31, 2017 and 2016, respectively. The decrease was primarily due to a decrease in salaries and employees benefits of approximately $57,000, as the result of decreasing our sales support by two people and a decrease in our vacation pay liability, and a decrease in stock option compensation expense of $18,000 since no new stock options were granted in the three month period ended December 31, 2017; offset by an increase in professional and consulting fees of approximately $18,000 for work performed on new products labels and trademark registrations in our Branded Nutraceutical Segment and other business consulting services. No other expense within our selling and administrative expenses changed by more than $10.

 

Other income (expense), net. Other income (expense), net was approximately $0.2 million and $0.6 million for the three months ended December 31, 2017 and 2016, respectively, and is composed of:

 

		Three months ended
		December 31,
		2017				2016
		(dollars in thousands)
Interest expense		$	(229	)		$	(227	)
Change in fair value of derivative instruments			185				(364	)
Impairment charge on investment in iBio, Inc.			(168	)			-
Other income			4				15
Other income (expense), net		$	(208	)		$	(576	)

 

The variance in the change in fair value of derivative liabilities between the three months ended December 31, 2016 and the three months ended December 31, 2017 was mainly the result of the increased closing trading price of our common stock from $0.15 as of September 30, 2016 to $0.23 as of December 31, 2016 and a subsequent decrease in the closing trading price of our common stock in the three month period ended December 31, 2017 from $0.22 as of September 30, 2017 to $0.18 as of December 31, 2017. The volatility of the closing trading price of our stock is one of the variables used to calculate the estimated fair value of our derivative liabilities associated with the underlying derivative instrument.

 

Our interest expense in the three months ended December 31, 2017, increased by approximately $2,000 from the three months ended December 31, 2016, primarily as the result of the increase in interest rates of 0.75% from the three month period ended December 31, 2016 to the three month period ended December 31, 2017 on our Senior Credit Facility (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). Other income decreased by approximately $11,000 as the result of earning less income from providing back office support, logistics and operational support for a start-up company which sells over the counter pharmaceutical and nutraceutical products through retail and internet based outlets.

 

In the three months ended December 31, 2017 we determined that there was an impairment on the carrying value of our investment in iBio, Inc. in the amount of approximately $0.2 million resulting from the decline in the closing trading price of their common stock on the NYSE American Exchange for the three month period ended December 31, 2017 from $0.32 per share as of September 30, 2017 to $0.18 per share as of December 31, 2017.

 

 

Federal and state income tax, net. For the three months ended December 31, 2017 and 2016, we had state income tax expense of approximately $34,000 and $71,000, respectively, and federal income tax expense of $304,000 and none, respectively. We continue to maintain a reserve on a portion our deferred tax assets as it has been determined that based upon past losses, the Company’s past liquidity concerns and the current economic environment, that it is “more likely than not” the Company’s deferred tax assets may not be fully realized. The state tax expense is the result of MDC using all of its state net operating losses in the fiscal year ended 2013 tax period. All of our other subsidiaries still have adequate net operating losses for state income tax purposes to absorb any taxable income for state tax purposes.

 

The decrease in state income tax expense of $27,000 is the result of the decreased net income for MDC. The increase in the federal income tax expense of $304,000 is the result of the one-time charge for the change in the effective federal tax rate from 34% as of December 31, 2017 to 21% as of January 1, 2018, which resulted in a decrease to our deferred tax assets of $263,000 and a current federal tax expense of approximately $41,000.

 

Net loss. Our net loss for the three months ended December 31, 2017 and 2016 was approximately $348,000 and $77,000, respectively. The increase of approximately $271,000 was primarily the result of decreased operating income of $373,000 and an increase in federal and state income taxes, net of $267,000, offset by the decreases in other expenses of 369,000.

 

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 six months ended
		December 31,
		2017				2016
		(dollars in thousands)
Net cash provided by operating activities		$	640			$	547
Net cash used in investing activities		$	(206	)		$	(83	)
Net cash used in financing activities		$	(512	)		$	(793	)
Cash at end of period		$	54			$	66

 

At December 31, 2017 and June 30, 2017, our working capital was approximately $0.7 million and $1.4 million, respectively. Our current assets increased by $0.7 million and current liabilities increased by approximately $1.4 million, resulting in a net decrease in our working capital of $0.7 million.

 

 

Net cash provided by operating activities of $0.6 million in the six months ended December 31, 2017, includes a net loss of approximately $0.5 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 $0.1 million. Cash was provided by operations from our working capital assets and liabilities in the amount of approximately $0.5 million and was primarily the result of a net increase in accounts payable and accrued expenses and other liabilities of approximately $1.5 million offset, in part, by increases in accounts receivable of $0.6 million and inventories of $0.4 million.

 

Net cash provided by operating activities of $0.5 million in the six months ended December 31, 2016, includes net income of approximately $0.6 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 $1.6 million. Cash was used in operations from our working capital assets and liabilities in the amount of approximately $1.0 million and was primarily the result of increases in accounts receivable of $1.3 million offset, in part, by a net increase in accounts payable and accrued expenses and other liabilities of approximately $1.5 million.

 

Cash used in investing activities of $206,000 and $83,000 in the six months ended December 31, 2017 and 2016, respectively, was used for the purchase of property and equipment primarily in our Contract Manufacturing Segment.

 

Cash used in financing activities was approximately $0.5 million for the six months ended December 31, 2017, $19.7 million from advances under our revolving credit facility and $0.1 million in proceeds received in a sales-lease back financing for machinery and equipment in our Contract Manufacturing Segment, offset in part, by repayments of advances under our revolving credit facility of $19.6 million and repayments of principal under our term notes in the amount of $0.7 million.

 

Cash used in financing activities was approximately $0.8 million for the six months ended December 31, 2016, $23.0 million from advances under our revolving credit facility offset, in part, by repayments of advances under our revolving credit facility of $23.2 million and repayments of principal under our term notes in the amount of $0.5 million.

 

As of December 31, 2017, we had cash of $54,000, funds available under our revolving credit facility of approximately $1.8 million and working capital of approximately $0.7 million. Our working capital includes $4.8 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 $0.2 million in the six months ended December 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 at least through the period ending February 9, 2019.

 

Our total annual commitments at December 31, 2017 for long term non-cancelable leases of approximately $594,000 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 February 9, 2018, we have not received any further communication from Cedarburg with respect to its demand for indemnification as set forth in the Demand Letter. We intend to vigorously contest Cedarburg's demand as set forth in the Demand Letter.

 

Capital Expenditures

 

The Company's capital expenditures for the six months ended December 31, 2017 and 2016 were approximately $216,000 and $83,000, respectively. The Company has budgeted approximately $0.3 million for capital expenditures for fiscal year 2018. 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 December 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 six months ended December 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, 2017, could materially and adversely affect our business, financial condition and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. There have been no material changes to our risk factors from those disclosed in our Form 10-K for the year ended June 30, 2017.

 

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, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2017 and 2016, (ii) Condensed Consolidated Balance Sheets as of December 31, 2017 and June 30, 2017, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended December 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:    February 9, 2018	By: /s/ E. Gerald Kay
	E. Gerald Kay,
	President and Chief Executive Officer

 

 

Date:    February 9, 2018	By: /s/ Dina L. Masi
	Dina L. Masi
	Chief Financial Officer and Senior Vice President