UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q |
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2020
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 |
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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)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
None |
None |
None |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes __X__ No ____
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes __X__ No ____
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer ☑ |
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Emerging growth company |
Smaller reporting company ☑ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No __X__
As of May 13, 2020, there were 29,565,943 shares of common stock, $0.002 par value per share (“Common Stock”), of the registrant outstanding.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
For the Three and Nine Months Ended March 31, 2020
INDEX
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 (collectively, the “Company”) or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, changes in general economic and business conditions; loss of market share through competition; introduction of competing products by other companies; the timing of regulatory approval and the introduction of new products by the Company; changes in industry capacity; pressure on prices from competition or from purchasers of the Company's products; regulatory changes in the pharmaceutical manufacturing industry and nutraceutical industry; regulatory obstacles to the introduction of new technologies or products that are important to the Company; availability of qualified personnel; the loss of any significant customers or suppliers; 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, 2019 (“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 Form 10-K 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 |
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
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(in thousands, except for share and per share amounts) |
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(Unaudited) |
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Three months ended |
Nine months ended |
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March 31, |
March 31, |
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2020 |
2019 |
2020 |
2019 |
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Sales, net |
$ | 13,631 | $ | 14,088 | $ | 39,234 | $ | 36,393 | |||||||||
Cost of sales |
11,779 | 11,995 | 33,957 | 31,750 | |||||||||||||
Gross profit |
1,852 | 2,093 | 5,277 | 4,643 | |||||||||||||
Selling and administrative expenses |
892 | 856 | 2,636 | 2,513 | |||||||||||||
Operating income |
960 | 1,237 | 2,641 | 2,130 | |||||||||||||
Other income (expense), net |
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Interest expense |
(96 | ) | (196 | ) | (329 | ) | (586 | ) | |||||||||
Change in fair value of derivative liabilities |
- | - | - | 9 | |||||||||||||
Realized gain on investment |
49 | - | 49 | - | |||||||||||||
Unrealized gain on investment |
90 | - | 35 | - | |||||||||||||
Other income, net |
- | 25 | 27 | 32 | |||||||||||||
Other income (expense), net |
43 | (171 | ) | (218 | ) | (545 | ) | ||||||||||
Income before income taxes |
1,003 | 1,066 | 2,423 | 1,585 | |||||||||||||
Provision for income taxes |
67 | 143 | 216 | 257 | |||||||||||||
Net income |
$ | 936 | $ | 923 | $ | 2,207 | $ | 1,328 | |||||||||
Basic earnings per common share |
$ | 0.03 | $ | 0.03 | $ | 0.07 | $ | 0.05 | |||||||||
Diluted earnings per common share |
$ | 0.03 | $ | 0.03 | $ | 0.07 | $ | 0.05 |
Weighted average common shares outstanding - basic |
29,565,943 | 29,565,943 | 29,565,943 | 28,719,452 | ||||||||||||
Add: Equivalent shares outstanding |
1,319,380 | 542,782 | 1,113,309 | 582,525 | ||||||||||||
Weighted average common shares outstanding - diluted |
30,885,323 | 30,108,725 | 30,679,252 | 29,301,977 |
See accompanying notes to condensed consolidated financial
See accompanying notes to condensed consolidated financial
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) |
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(in thousands, except shares) |
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(Unaudited) |
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FOR THE NINE MONTHS ENDED MARCH 31, 2020: |
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Total |
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Common Stock |
Additional |
Accumulated |
Treasury Stock |
Stockholders' |
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Shares |
Par Value |
Paid-in-Capital |
Deficit |
Shares |
Cost |
Equity |
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Balance, June 30, 2019 |
29,600,843 | $ | 59 | $ | 50,197 | $ | (48,264 | ) | 34,900 | $ | (99 | ) | $ | 1,893 | ||||||||||||||
Stock compensation expense for employee stock options |
- | - | 15 | - | - | - | 15 | |||||||||||||||||||||
Net income |
- | - | - | 312 | - | - | 312 | |||||||||||||||||||||
Balance, September 30, 2019 |
29,600,843 | 59 | 50,212 | (47,952 | ) | 34,900 | (99 | ) | 2,220 | |||||||||||||||||||
Stock compensation expense for employee stock options |
- | - | 15 | - | - | - | 15 | |||||||||||||||||||||
Net income |
- | - | - | 959 | - | - | 959 | |||||||||||||||||||||
Balance, December 31, 2019 |
29,600,843 | 59 | 50,227 | (46,993 | ) | 34,900 | (99 | ) | 3,194 | |||||||||||||||||||
Stock compensation expense for employee stock options |
- | - | 14 | - | - | - | 14 | |||||||||||||||||||||
Net income |
- | - | - | 936 | - | - | 936 | |||||||||||||||||||||
Balance, March 31, 2020 |
29,600,843 | $ | 59 | $ | 50,241 | $ | (46,057 | ) | 34,900 | $ | (99 | ) | $ | 4,144 |
See accompanying notes to condensed consolidated financial
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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(in thousands, except share and per share amounts) |
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(Unaudited) |
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Nine months ended |
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March 31, |
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2020 |
2019 |
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Cash flows provided by operating activities: |
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Net income |
$ | 2,207 | $ | 1,328 | |||||
Adjustments to reconcile net income to net cash from operating activities: |
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Depreciation and amortization |
239 | 234 | |||||||
Amortization of operating lease right-of-use assets |
341 | 338 | |||||||
Stock based compensation |
44 | - | |||||||
Change in deferred tax assets |
(101 | ) | 49 | ||||||
Realized gain on sale of iBio, Inc. shares |
(49 | ) | - | ||||||
Unrealized (gain) loss on investment |
(35 | ) | - | ||||||
Other, net |
11 | 50 | |||||||
Changes in operating assets and liabilities: |
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Decrease (increase) in: |
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Accounts receivable |
166 | (1,161 | ) | ||||||
Inventories |
(1,247 | ) | (2,807 | ) | |||||
Other current assets |
(7 | ) | (29 | ) | |||||
Security deposits and other assets |
(4 | ) | (3 | ) | |||||
(Decrease) increase in: |
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Accounts payable |
2,256 | 1,852 | |||||||
Accrued expenses and other liabilities |
71 | 189 | |||||||
Operating lease obligations |
(343 | ) | (339 | ) | |||||
Net cash provided by (used in) operating activities |
3,549 | (299 | ) | ||||||
Cash flows from investing activities: |
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Purchase of property and equipment |
(158 | ) | (350 | ) | |||||
Proceeds from sale of investment | 85 | - | |||||||
Proceeds from sale of machinery and equipment |
3 | - | |||||||
Cash contribution in AgroSport LLC |
- | (8 | ) | ||||||
Net cash used in investing activities |
(70 | ) | (358 | ) | |||||
Cash flows from financing activities: |
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Advances under revolving credit facility |
35,190 | 35,574 | |||||||
Proceeds from sales/lease back of equipment | - | 233 | |||||||
Proceeds from exercise of employee stock options |
- | 24 | |||||||
Repayments of advances under revolving credit facility |
(37,599 | ) | (34,322 | ) | |||||
Repayments under term note payables |
(823 | ) | (475 | ) | |||||
Repayments under finance lease obligations |
(157 | ) | (174 | ) | |||||
Net cash (used in) provided by financing activities |
(3,389 | ) | 860 | ||||||
Net increase in cash |
90 | 203 | |||||||
Cash at beginning of period |
475 | 228 | |||||||
Cash at end of period |
$ | 565 | $ | 431 | |||||
Supplemental disclosures of cash flow information: |
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Interest paid |
$ | 323 | $ | 568 | |||||
Income taxes paid |
$ | 303 | $ | 193 | |||||
See accompanying notes to condensed consolidated financial
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO 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 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and therefore do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. 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, 2019 (“Form 10-K”), as filed with the SEC. The June 30, 2019 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 preparation of the unaudited condensed financial statements in conformity with these accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period. Ultimate results could differ from the estimates of management. The results of operations for the three and nine months ended March 31, 2020 are not necessarily indicative of the results for the full fiscal year ending June 30, 2020 or for any other period.
Reclassifications. Certain prior year amounts have been reclassified to conform to the current period presentation.
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 Manhattan Drug Company, Inc. (“MDC”), which manufactures vitamins and nutritional supplements for sale to distributors, multilevel marketers and specialized health-care providers; (b) Branded Proprietary Products operated by AgroLabs, Inc. (“AgroLabs”), which distributes healthful nutritional products for sale through major mass market, grocery and drug and vitamin retailers, under the following brands: Peaceful Sleep, Green Envy, 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 botanicals, including multi minerals produced under a license agreement, (iii) MDC Warehousing and Distribution, Inc., a service provider for warehousing and fulfilment services and (iv) Chem International, Inc. (“Chem”), a distributor of certain raw materials for DSM Nutritional Products LLC.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Accounting Policies
Accounting Pronouncements Recently Adopted
In October, 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory,” which eliminates the requirement to defer recognition of income taxes on intra-entity transfers until the asset is sold to an outside party. The new guidance requires the recognition of current and deferred income taxes on intra-entity transfers of assets other than inventory, such as intellectual property and property, plant and equipment, when the transfer occurs. The guidance was effective for the Company on July 1, 2019. The standard requires a “modified retrospective” adoption, meaning the standard is applied through a cumulative adjustment in retained earnings as of the beginning of the period of adoption. This new guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-11, "Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815)," which addresses the complexity of accounting for certain financial instruments with down round features. The amendments were effective for the Company on July 1, 2019 for the fiscal year ended June 30, 2020, and the interim periods within it. This new guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Aside from the adoption of ASUs, as described above, there have been no material changes during fiscal year 2020 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, 2019.
Significant Accounting Policies
Revenue Recognition. The Company recognizes product sales revenue, the prices of which are fixed and determinable, when title and risk of loss have transferred to the customer, when estimated provisions for product returns, rebates, charge-backs and other sales allowances are reasonably determinable, and when collectability is reasonably assured. Accruals for these items are presented in the consolidated financial statements as reductions to sales. The Company’s net sales represent gross sales invoiced to customers, less certain related charges for discounts, returns, rebates, charge-backs and other allowances. Cost of sales includes the cost of raw materials and all labor and overhead associated with the manufacturing and packaging of the products. Gross margins are affected by, among other things, changes in the relative sales mix among our products and valuation and/or charge off of slow moving, expired or obsolete inventories. To perform revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps:
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identification of the promised goods or services in the contract; |
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determination of whether the promised goods or serves are performance obligations including whether they are distinct in the context of the contract; |
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measurement of the transaction price, including the constraint on variable consideration; |
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allocation of the transaction price to the performance obligations based on estimated selling prices; and |
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recognition of revenue when (or as) the Company satisfies each performance obligation. A performance obligation is a promise to transfer a distinct good or service to the customer and is the unit of account in ASC 606. |
Leases. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on our consolidated balance sheets. Finance leases are included in property and equipment, current portion of long term debt, and long-term debt obligation on our consolidated statement of financial condition.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component.
Earnings Per Share. Basic earnings per common share amounts are based on weighted average number of common shares outstanding. Diluted earnings per share amounts are based on the weighted average number of common shares outstanding, plus the incremental shares that would have been outstanding upon the assumed exercise of all potentially dilutive stock options, warrants and convertible debt, subject to anti-dilution limitations using the treasury stock method and if converted method.
The following options were not included in the computation of weighted average diluted common shares outstanding as the effect of doing so would be anti-dilutive for the three and nine months ended March 31, 2020 and 2019:
Three Months Ended |
Nine Months Ended |
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March 31, |
March 31, |
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2020 |
2019 |
2020 |
2019 |
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Anti-dilutive stock options |
- | 150,000 | - | 150,000 | ||||||||||||
Total anti-dilutive shares |
- | 150,000 | - | 150,000 |
Note 2. Inventories
Inventories are stated at the lower of cost or net realizable value using the first-in, first-out method and consist of the following:
March 31, |
June 30, |
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2020 |
2019 |
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Raw materials |
$ | 7,185 | $ | 4,550 | ||||
Work-in-process |
1,555 | 2,325 | ||||||
Finished goods |
1,326 | 1,944 | ||||||
Total |
$ | 10,066 | $ | 8,819 |
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Note 3. Property and Equipment, net
Property and equipment, net consists of the following:
March 31, |
June 30, |
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2020 |
2019 |
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Land and building |
$ | 1,250 | $ | 1,250 | ||||
Leasehold improvements |
1,287 | 1,282 | ||||||
Machinery and equipment |
6,428 | 6,280 | ||||||
Transportation equipment |
6 | 6 | ||||||
8,971 | 8,818 | |||||||
Less: Accumulated depreciation and amortization |
(7,273 | ) | (7,040 | ) | ||||
Total |
$ | 1,698 | $ | 1,778 |
Depreciation and amortization expense recorded on property and equipment was $79 and $69 for the three months and $239 and $201 for nine months ended March 31, 2020 and 2019, respectively. Additionally, the Company disposed of fully depreciated property of $6 and $38 in the nine months ended March 31, 2020 and 2019, respectively and recognized a gain of $3 and $0 in the nine months ended March 31, 2020 and 2019, respectively.
Note 4. Senior Credit Facility and other Long Term Debt
As of March 31, 2020 and June 30, 2019, the Company had the following debt outstanding:
Principal Amount |
Interest Rate |
Maturity Date |
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As of March 31, 2020 |
As of June 30, 2019 |
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Revolving advances under Senior Credit |
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Facility with PNC Bank, National Association |
$ | 3,425 | $ | 5,834 | * |
5/15/2024 |
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Installment Note with PNC Bank |
2,727 | 3,542 | * |
5/15/2024 |
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Installment Note with PNC Equipment Finance |
- | 8 | 4.57 | % |
7/29/2019 |
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Capitalized lease obligations |
113 | 269 | 4.01% - 9.38 | % |
4/25/2020 - 12/9/2020 |
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Total outstanding debt |
6,265 | 9,653 | |||||||||||
Less: Revolving Advances |
(3,425 | ) | (5,834 | ) | |||||||||
Prepaid financing costs |
(43 | ) | (50 | ) | |||||||||
Current portion of long term debt, net |
(1,149 | ) | (1,047 | ) | |||||||||
Long term debt, net |
$ | 1,648 | $ | 2,722 |
* See table below |
SENIOR CREDIT FACILITY
On May 15, 2019, the Company, MDC, AgroLabs, IHT, IHT Properties Corp. (“IHT Properties”) and Vitamin Factory (collectively, the “Borrowers”) amended the Revolving Credit, Term Loan and Security Agreement (the “Amended Loan Agreement”) with PNC Bank, National Association as agent and lender (“PNC”) and the other lenders party thereto entered into on June 27, 2012, as amended on February 19, 2016, and May 15, 2019.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
The Amended Loan Agreement provides for a total of $11,585 in senior secured financing (the “Senior Credit Facility”) as follows: (i) discretionary advances (“Revolving Advances”) based on eligible accounts receivable and eligible inventory in the maximum amount of $8,000 (the “Revolving Credit Facility”), and (ii) a term loan in the amount of $3,585 (the “Term Loan”). The Senior Credit Facility is secured by all assets of the Borrowers, including, without limitation, machinery and equipment, real estate owned by IHT Properties, and common stock of iBio, Inc. (the "iBio Stock") owned by the Company. Revolving Advances bear interest at PNC’s Base Rate or the Eurodollar Rate, at Borrowers’ option, plus 2.50%. The Term Loan bears interest at PNC’s Base Rate or the Eurodollar Rate at Borrowers’ option, plus 3.00%.
As of March 31, 2020 and June 30, 2019, the Company had amounts outstanding utilizing the Eurodollar Rate of $0 and $4,250 under the Revolving Advances and $0 and $3,455 under the Term Note, respectively, with interest rates as of March 31, 2020 and June 30, 2019 as follows (based on the respective base rate plus 2.50% on Revolving Advances and 3.00% on the Term Note in effect as of the respective dates):
March 31, |
June 30, |
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2020 |
2019 |
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Revolving Credit Facility: |
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Base Rate Interest |
3.25 | % | 5.50 | % | |||||
Eurodollar Rate |
N/A | 4.881 | % | ||||||
Term Loan: |
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Base Rate Interest |
3.50 | % | 5.75 | % | |||||
Eurodollar Rate |
N/A |
5.381% and 5.3838% |
Upon and after the occurrence of any event of default under the Amended Loan Agreement, and during the continuation thereof, interest shall be payable at the interest rate then applicable plus 2%. The Senior Credit Facility matures on May 15, 2024 (the “Senior Maturity Date”).
The principal balance of the Revolving Advances is payable on the Senior Maturity Date, subject to acceleration, based upon a material adverse event clause, as defined, subjective accelerations for borrowing base reserves, as defined or upon the occurrence of any event of default under the Amended Loan Agreement or earlier termination of the Amended Loan Agreement pursuant to the terms thereof. The Term Loan shall be repaid in eighty-four (84) consecutive monthly installments of principal, the first eighty-three (83) of which shall be in the amount of $43, commencing on the first business day of June, 2019, and continuing on the first business day of each month thereafter, with a final payment of any unpaid balance of principal and interest payable on the Senior Maturity Date. The foregoing is subject to customary mandatory prepayment provisions and acceleration upon the occurrence of any event of default under the Amended Loan Agreement or earlier termination of the Amended Loan Agreement pursuant to the terms thereof.
The 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.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
The Amended Loan Agreement contains customary mandatory prepayment provisions, including, without limitation the requirement to use any sales proceeds from the sale of iBio Stock to repay the Term Loan and to prepay the outstanding amount of the Term Note in an amount equal to twenty-five percent (25%) of Excess Cash Flow for each fiscal year commencing with the fiscal year ended June 30, 2016, payable upon delivery of the financial statements to PNC referred to in and required by the Amended Loan Agreement for such fiscal year but in any event not later than one hundred twenty (120) days after the end of each such fiscal year, which amount shall be applied ratably to the outstanding principal installments of the Term Loan in the inverse order of the maturities thereof. The Amended Loan Agreement also contains customary representations and warranties, covenants and events of default, including, without limitation, (i) a fixed charge coverage ratio maintenance requirement and (ii) an event of default tied to any change of control as defined in the Amended Loan Agreement. In the nine months ended March 31, 2020, the Company repaid an additional $85 on the Term Note with the net proceeds from the sale of 40,000 shares of iBio Stock. As of March 31, 2020, the Company was in compliance with the fixed charge coverage ratio maintenance requirement and with the required annual payments of 25% of the Excess Cash Flow for each fiscal year commencing with the fiscal year ended June 30, 2016.
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.
OTHER LONG TERM DEBT
Paycheck Protection Program Term Note. On April 29, 2020, the Company entered into a Paycheck Protection Program Term Note (the “PPP Note”) with PNC in the amount of $1,639. The PPP Note has an interest rate of 1% and a maturity date of April 29, 2022. The PPP Note was issued by PNC Bank to the Company pursuant to the Coronavirus, Aid, Relief, and Economic Security Act’s (the “CARES Act”) (P.L. 116-136) Paycheck Protection Program (the “Program”). Under the Program, all or a portion of the PPP Note may be forgiven in accordance with the Program requirements. The amount of the forgiveness shall be calculated (and may be reduced) in accordance with the requirements of the Program, including the provisions of Section 1106 of the CARES Act. No more than 25% of the amount forgiven can be attributable to non-payroll costs, as defined in the Program. There are no payments of interest or principal amortization due under the PPP Note until November 15, 2020. Any amounts not forgiven under the Program will be payable in 18 equal installments of principal plus any interest owed on the payment date.
If the Company fails to make timely payments under the PPP Note, PNC will charge the Company a late payment fee equal to the lesser of 5% of the amount of such payment or $100. In the event of Default, as defined in the PPP Note, the default rate of interest will be 5% in excess of the interest rate then in effect under the PPP Note.
Capitalized Lease Obligations. On February 25, 2020 and April 25, 2020, the separate capitalized lease obligations entered into by the Company on February 14, 2018 and April 17, 2018, with Marlin Equipment Finance in the amount of $38 and $15, respectively, which leases were secured by certain machinery and equipment, were satisfied with all payments being made under the capitalized lease obligations. The lease payments were approximately $2 and $1, respectively, and had imputed interest rates of 9.26% and 9.38%, respectively.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
On November 1, 2019, the capitalized lease obligation entered into by the Company on December 22, 2017 with First American Equipment Finance in the amount of $143, 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 $6 and had an imputed interest rate of 6.56%.
Note 5. Significant Risks and Uncertainties
(a) Major Customers. For the three months ended March 31, 2020 and 2019, approximately 91% and 92%, of consolidated net sales, respectively, were derived from two customers. These two customers are in the Company’s Contract Manufacturing Segment and represented approximately 64% and 26% and 72% and 22% in the three months ended March 31, 2020 and 2019, respectively. In each of the nine months ended March 31, 2020 and 2019, approximately 92% of consolidated net sales were derived from the same two customers and net sales to these two customers represented approximately 67% and 27% in the nine month periods ended March 31, 2020 and 71% and 24% of net sales in the nine months ended March 31, 2019, respectively. Accounts receivable from these two major customers represented approximately 82% and 88% of total net accounts receivable as of March 31, 2020 and June 30, 2019, respectively. The loss of any of these customers could have an adverse effect on the Company’s operations. Major customers are those customers who account for more than 10% of net sales.
(b) Other Business Risks. Approximately 71% 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, 2018 and will expire on August 31, 2021.
The Covid-19, or coronavirus, outbreak has the potential to cause a disruption in the Company's supply chain. Currently, some of the Company's suppliers of certain materials used in the production of our supplements are located in China, other impacted countries or states within the United States. Most of these materials may be obtained by more than one supplier. However, due to port closures and other restrictions resulting from the coronavirus outbreak throughout the world, these suppliers, located both inside and outside of the United States, may have limited supply of the materials, which will cause the price of such materials to increase. These and other disruptions would likely impact the Company's sales and operating results. If we are unable to obtain the necessary materials to produce a supplement within the Company's standard lead times, it may delay the production and shipment of those supplements, thereby shifting the timing of recognizing the resulting sale to the Company's customers. In addition, the significant outbreak of this contagious disease in the human population has resulted in a widespread health crisis that could adversely affect the economies and financial markets of many countries, including the United States, resulting in an economic downturn that could affect demand for the Company's products and impact the Company's operating results.
Note 6. Leases and other Commitments and Contingencies
(a) Leases. The Company has operating and finance leases for its corporate and sales offices, warehousing and packaging facilities and certain machinery and equipment, including office equipment. The Company’s leases have remaining terms of less than 1 year to less than 6 years.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
The components of lease expense for the three months ended March 31, 2020 and 2019, were as follows:
2020 |
2019 |
|||||||||||||||||||||||
Related Party - Vitamin Realty |
Other Leases |
Totals |
Related Party - Vitamin Realty |
Other Leases |
Totals |
|||||||||||||||||||
Operating lease costs |
$ | 142 | $ | 24 | $ | 166 | $ | 141 | $ | 23 | $ | 164 | ||||||||||||
Finance Operating Lease Costs: |
||||||||||||||||||||||||
Amortization of right-of use assets |
$ | - | $ | 14 | $ | 14 | $ | - | $ | 22 | $ | 22 | ||||||||||||
Interest on operating lease liabilities |
- | 3 | 3 | - | 5 | 5 | ||||||||||||||||||
Total finance lease cost |
$ | - | $ | 17 | $ | 17 | $ | - | $ | 27 | $ | 27 |
The components of lease expense for the nine months ended March 31, 2020 and 2019, were as follows:
2020 |
2019 |
|||||||||||||||||||||||
Related Party - Vitamin Realty |
Other Leases |
Totals |
Related Party - Vitamin Realty |
Other Leases |
Totals |
|||||||||||||||||||
Operating lease costs |
$ | 425 | $ | 80 | $ | 505 | $ | 423 | $ | 72 | $ | 495 | ||||||||||||
Finance Operating Lease Costs: |
||||||||||||||||||||||||
Amortization of right-of use assets |
$ | - | $ | 43 | $ | 43 | $ | - | $ | 55 | $ | 55 | ||||||||||||
Interest on operating lease liabilities |
- | 11 | 11 | - | 12 | 12 | ||||||||||||||||||
Total finance lease cost |
$ | - | $ | 54 | $ | 54 | $ | - | $ | 67 | $ | 67 |
Operating Lease Liabilities
Related Party Operating Lease Liabilities. Warehouse and office facilities are leased from Vitamin Realty Associates, LLC (“Vitamin Realty”), which is 100% owned by the Company’s chairman, and a major stockholder and certain of his family members, who are the Co-Chief Executive Officers and directors of the Company. On January 5, 2012, MDC entered into a second amendment of lease (the “Second Lease Amendment”) with Vitamin Realty for its office and warehouse space in New Jersey increasing its rentable square footage from an aggregate of 74,898 square feet to 76,161 square feet and extending the expiration date to January 31, 2026. This Second Lease Amendment 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 June 1, 2024. This additional lease provides for minimum lease payments of $27 with annual increases plus the proportionate share of operating expenses.
Rent expense and lease amortization costs for the three months ended March 31, 2020 and 2019 on these leases were $216 and $203, respectively and $647 and $630 for the nine month periods ended March 31, 2020 and 2019, respectively and are included in cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. As of March 31, 2020 and June 30, 2019, the Company had outstanding current obligations to Vitamin Realty of $3 and $67, respectively, included in accounts payable in the accompanying Condensed Consolidated Balance Sheet. Additionally, the Company has operating lease obligations of $2,908 and $3,243 with Vitamin Realty as noted in the accompany Condensed Consolidated Balance Sheet as of March 31, 2020 and June 30, 2019, respectively.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Other Operating Lease Liabilities. The Company has entered into certain non-cancelable operating lease agreements expiring up through March, 2025, related to machinery and equipment and office equipment.
As of March 31, 2020, the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases were as follows:
Right-of-use Assets |
Current Portion of Operating Lease Obligations |
Operating Lease Obligations |
Remaining Cash Commitment |
|||||||||||||
Vitamin Realty Leases |
$ | 2,901 | $ | 463 | $ | 2,445 | $ | 3,244 | ||||||||
Machinery and equipment leases |
18 | 11 | 7 | 19 | ||||||||||||
Office equipment leases |
24 | 10 | 13 | 25 | ||||||||||||
$ | 2,943 | $ | 484 | $ | 2,465 | $ | 3,288 |
As of June 30, 2019, the Company’s ROU assets, lease obligations and remaining cash commitment on these leases were as follows:
Right-of-use Assets |
Current Portion Operating Lease Obligations |
Operating Lease Obligations |
Remaining Cash Commitment |
|||||||||||||
Vitamin Realty Leases |
$ | 3,236 | $ | 450 | $ | 2,793 | $ | 3,668 | ||||||||
Machinery and equipment leases |
26 | 11 | 15 | 27 | ||||||||||||
Office equipment leases |
22 | 9 | 14 | 24 | ||||||||||||
$ | 3,284 | $ | 470 | $ | 2,822 | $ | 3,719 |
As of March 31, 2020 and June 30, 2019, the Company’s weighted average discount rate and remaining term on lease liabilities were approximately 3.75% and 3.76% and 5.6 years and 6.4 years, respectively.
Supplemental cash flows information related to leases for the nine months ended March 31, 2020, was as follows:
Related Party - Vitamin Realty |
Other Leases |
Totals |
||||||||||
Cash paid for amounts included in the measurement of lease liabilities: |
||||||||||||
Operating cash flows from operating leases |
$ | 424 | $ | 75 | $ | 499 | ||||||
Operating cash flows from finance leases |
- | 11 | 11 | |||||||||
Financing cash flows from finance lease obligations |
- | 157 | 157 |
Supplemental cash flows information related to leases for the nine months ended March 31, 2019, was as follows:
Related Party - Vitamin Realty |
Other Leases |
Totals |
||||||||||
Cash paid for amounts included in the measurement of lease liabilities: |
||||||||||||
Operating cash flows from operating leases |
$ | 424 | $ | 72 | $ | 496 | ||||||
Operating cash flows from finance leases |
- | 12 | 12 | |||||||||
Financing cash flows from finance lease obligations |
- | 174 | 174 |
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
In the nine months ended March 31, 2020, the Company renewed, for one year, an operating lease for office space with an annual commitment of $25 and entered into a five-year lease agreement for the rental of office equipment with an annual commitment of $2.
Maturities of operating lease liabilities as of March 31, 2020 were as follows:
Operating |
Related Party |
Capitalized |
||||||||||||||
Year ending |
Lease |
Operating Lease |
Lease |
|||||||||||||
June 30, |
Commitment |
Commitment |
Obligations |
Total |
||||||||||||
2020, remaining |
$ | 5 | $ | 141 | $ | 39 | $ | 185 | ||||||||
2021 |
23 | 565 | 77 | 605 | ||||||||||||
2022 |
10 | 565 | - | 575 | ||||||||||||
2023 |
2 | 565 | - | 567 | ||||||||||||
2024 |
2 | 564 | - | 566 | ||||||||||||
2025 |
1 | 533 | - | 534 | ||||||||||||
Thereafter |
- | 311 | - | 311 | ||||||||||||
Total minimum lease payments |
43 | 3,244 | 116 | 3,403 | ||||||||||||
Imputed interest |
(2 | ) | (336 | ) | (3 | ) | (341 | ) | ||||||||
Total |
$ | 41 | $ | 2,908 | $ | 113 | $ | 3,062 |
Total rent expense, lease amortization costs and interest expense, including real estate taxes and maintenance charges, was approximately $257 and $249 and $783 and $756 for the three and nine months ended March 31, 2020 and 2019, respectively. Rent and lease amortization is included in cost of sales, 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.
Note 7. Related Party Transactions
See Note 6(a). Leases for related party lease transactions.
Note 8. Segment Information and Disaggregated Revenue
The basis for presenting segment results generally is consistent with overall Company reporting. The Company reports information about its operating segments in accordance with GAAP which establishes standards for reporting information about a company’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, for the three months ended March 31, 2020 and 2019 were $2,573 and $1,878, respectively and for the nine months ended March 31, 2020 and 2019 were $6,918 and $4,391, respectively.
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Financial information relating to the three months ended March 31, 2020 and 2019 operations by business segment and disaggregated revenues was as follows:
Sales, Net |
Segment |
||||||||||||||||||||||||
U.S. |
International |
Gross |
Capital |
||||||||||||||||||||||
Customers |
Customers |
Total |
Profit (loss) |
Depreciation |
Expenditures |
||||||||||||||||||||
Contract Manufacturing |
2020 |
$ | 10,775 | $ | 2,558 | $ | 13,333 | $ | 1,772 | $ | 78 | $ | 49 | ||||||||||||
2019 |
11,913 | 1,875 | 13,788 | 1,994 | 68 | 63 | |||||||||||||||||||
Branded Proprietary Products |
2020 |
1 | 2 | 3 | (36 | ) | - | 2 | |||||||||||||||||
2019 |
14 | 3 | 17 | 7 | - | - | |||||||||||||||||||
Other Nutraceutical Businesses |
2020 |
282 | 13 | 295 | 116 | 1 | 6 | ||||||||||||||||||
2019 |
283 | - | 283 | 92 | 1 | - | |||||||||||||||||||
Total Company |
2020 |
11,058 | 2,573 | 13,631 | 1,852 | 79 | 57 | ||||||||||||||||||
2019 |
12,210 | 1,878 | 14,088 | 2,093 | 69 | 63 |
Financial information relating to the nine months ended March 31, 2020 and 2019 operations by business segment and disaggregated revenues was as follows:
Sales, Net |
Segment |
|||||||||||||||||||||||||||
U.S. |
International |
Gross |
Capital |
|||||||||||||||||||||||||
Customers |
Customers |
Total |
Profit (Loss) |
Depreciation |
Expenditures |
|||||||||||||||||||||||
Contract Manufacturing |
2020 |
$ | 31,277 | $ | 6,844 | $ | 38,121 | $ | 4,949 | $ | 237 | $ | 150 | |||||||||||||||
2019 | 31,066 | 4,330 | 35,396 | 4,323 | 199 | 350 | ||||||||||||||||||||||
Branded Proprietary Products |
2020 |
5 | 12 | 17 | (67 | ) | - | 2 | ||||||||||||||||||||
2019 |
133 | 22 | 155 | 49 | - | - | ||||||||||||||||||||||
Other Nutraceutical Businesses |
2020 |
1,034 | 62 | 1,096 | 395 | 2 | 6 | |||||||||||||||||||||
2019 |
803 | 39 | 842 | 271 | 2 | - | ||||||||||||||||||||||
Total Company |
2020 |
32,316 | 6,918 | 39,234 | 5,277 | 239 | 158 | |||||||||||||||||||||
2019 |
32,002 | 4,391 | 36,393 | 4,643 | 201 | 350 |
Total Assets as of |
||||||||
March 31, |
June 30, |
|||||||
2020 |
2019 |
|||||||
Contract Manufacturing |
$ | 18,416 | $ | 17,580 | ||||
Branded Proprietary Products |
357 | 427 | ||||||
Other Nutraceutical Businesses |
1,872 | 1,783 | ||||||
Total Company |
$ | 20,645 | $ | 19,790 |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND RESULTS OF OPERATION (dollars in thousands)
Certain statements set forth under this caption constitute “forward-looking statements.” See “Disclosure Regarding Forward-Looking Statements” on page 1 of this Quarterly Report on Form 10-Q for additional factors relating to such statements. The following discussion should also be read in conjunction with the condensed consolidated financial statements of the Company and Notes thereto included herein and the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
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 “Management’s Discussion and Analysis of Financial Condition and Results of Operation”, involve a number of risks and uncertainties—in particular, the statements regarding our goals and strategies, new product introductions, plans to cultivate new businesses, future economic conditions, revenue, pricing, gross margin and costs, competition, the tax rate, and potential legal proceedings. We are focusing our efforts to improve operational efficiency and reduce spending that may have an impact on expense levels and gross margin. In addition to the various important factors discussed above, a number of other important factors could cause actual results to differ significantly from our expectations. See the risks described in “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
For the nine months ended March 31, 2020, our net sales increased by $2,841 to approximately $39,234 from approximately $36,393 in the nine months ended March 31, 2019. Substantially all of the increase in net sales was from the Contract Manufacturing Segment of $2,725, and, to a lesser extent, from our Other Nutraceuticals Segment of $254, offset by a decrease in the Branded Proprietary Products of $138. Net sales increased in our Contract Manufacturing Segment by $2,725 primarily due to increased sales volumes to Herbalife and Life Extension in the amounts of $2,010 and $688, respectively. For the nine months ended March 31, 2020, we had operating income of approximately $2,641, an increase of approximately $511 from operating income of approximately $2,130 for the nine months ended March 31, 2019. Our profit margins increased from approximately 12.8% of net sales in the nine months ended March 31, 2019 to approximately 13.5% of net sales in the nine months ended March 31, 2020, primarily as a result of the increased sales in our Contract Manufacturing Segment of approximately $2,725. Our consolidated selling and administrative expenses increased by approximately $123 or approximately 4.9% in the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019.
Our revenue from our two significant customers in our Contract Manufacturing Segment is dependent on the demand within their respective distribution channels for the products we manufacture for them. As in any competitive market, our ability to match or beat other contract manufacturers pricing for the same items may also alter our outlook and the ability to maintain or increase revenues. We will continue to focus on our core businesses and push forward in maintaining our cost structure in line with our sales and expanding our customer base.
The Covid-19, or coronavirus outbreak, has the potential to cause a disruption in our supply chain. Currently, some of our suppliers of certain materials used in the production of our supplements are located in China, other impacted countries or states within the United States. Most materials may be obtained from more than one supplier. However, due to port closures and other restrictions resulting from the coronavirus outbreak throughout the world, these suppliers, located both inside and outside of the United States, may have limited supply of such materials, which will cause the price of such materials to increase. As of May 13, 2020, we have delays, however; have not experienced a significant disruption in the supply chain for our raw materials. We have taken measures to secure some surplus stock and have informed our customers who may be affected of the potential price increase. In addition, the significant outbreak of this contagious diseases in the human population has resulted in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and impact our operating results.
While, as of May 13, 2020, we have not experienced a major disruption in the supply chain for our manufactured products, we have, however, seen a disruption in the supply chain for personal protection equipment (“PPE”) and cleaning supplies used in our manufacturing facilities in accordance with our standard operating procedures and the updated guidelines issued by the Centers for Disease Control and Prevention (the “CDC”) for personal safety. The U.S. Department of Labor Occupational Safety and Health Administration has adopted the CDC guidelines and as such we are required to provide the PPE for our employees to wear while working. When we obtain items for which there is a shortage, such as face masks, gloves and other PPE, the cost of such items is substantially higher than the historical costs. This may impact our future gross margins. Additionally, if we are unable to obtain cleaning supplies, we may have to temporarily close areas of production until the needed supplies are obtained.
We do not currently anticipate any negative impact to our margins resulting from the coronavirus outbreak, however; if we are unable to obtain the necessary materials to produce a supplement within our standard lead times it may delay the production and shipment of those supplements or the necessary PPE and cleaning supplies, thereby shifting the timing of recognizing the resulting sale to our customer.
While our facilities have remained open during the State of New Jersey lockdown as an essential business, there can be no assurances that we will continue to operate if the Governor of New Jersey should modify or issue new executive orders prohibiting our facilities to remain open.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies in the nine months ended March 31, 2020, except as disclosed in Note 1. Principles of Consolidation and Basis of Presentation of the Condensed Financial Statements of the Company contained in this Quarterly Report on Form 10-Q. Critical accounting policies and the significant estimates made in accordance with them are regularly discussed by management with our Audit Committee. Those policies are discussed under “Critical Accounting Policies” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of our Annual Report on Form 10-K for the year ended June 30, 2019 and in Note 1. Principles of Consolidation and Basis of Presentation of the Condensed Financial Statements of the Company contained in this Quarterly Report on Form 10-Q.
Results of Operations (in thousands, except share and per share amounts)
Our results from operations in the following table, sets forth the income statement data of our results as a percentage of net sales for the periods indicated:
For the three months |
For the nine months |
|||||||||||||||
ended March 31, |
ended March 31, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Sales, net |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales |
86.4 | % | 85.1 | % | 86.6 | % | 87.2 | % | ||||||||
Selling and administrative |
6.5 | % | 6.1 | % | 6.7 | % | 6.9 | % | ||||||||
92.9 | % | 91.2 | % | 93.2 | % | 94.1 | % | |||||||||
Income from operations |
7.1 | % | 8.8 | % | 6.8 | % | 5.9 | % | ||||||||
Other income (expense), net |
||||||||||||||||
Interest expense |
(0.7% | ) | (1.4% | ) | (0.8% | ) | (1.6% | ) | ||||||||
Realized gain on investment |
0.3 | % | - | 0.1 | % | - | ||||||||||
Unrealized gain on investment |
0.7 | % | - | 0.1 | % | - | ||||||||||
Change in fair value of derivative liabilities |
- | - | - | 0.0 | % | |||||||||||
Other income, net |
- | 0.2 | % | 0.1 | % | 0.1 | % | |||||||||
Other income (expense), net |
0.3 | % | (1.2% | ) | (0.5% | ) | (1.5% | ) | ||||||||
Income before income taxes |
7.4 | % | 7.6 | % | 6.2 | % | 4.4 | % | ||||||||
Provision for income taxes |
0.5 | % | 1.0 | % | 0.6 | % | 0.7 | % | ||||||||
Net income |
6.9 | % | 6.6 | % | 5.6 | % | 3.7 | % |
For the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019
Sales, net. Sales, net, for the nine months ended March 31, 2020 and 2019 were $39,234 and $36,393, respectively, an increase of 7.8%, and were comprised of the following:
Nine Months Ended |
Dollar |
Percentage |
||||||||||||||
March 31, |
Change |
Change |
||||||||||||||
2020 |
2019 |
2020 vs 2019 |
2020 vs 2019 |
|||||||||||||
(amounts in thousands) |
||||||||||||||||
Contract Manufacturing: |
||||||||||||||||
US Customers |
$ | 31,277 | $ | 31,066 | $ | 211 | 0.7 | % | ||||||||
International Customers |
6,844 | 4,330 | 2,514 | 58.1 | % | |||||||||||
Net sales, Contract Manufacturing |
38,121 | 35,396 | 2,725 | 7.7 | % | |||||||||||
Branded Nutraceutical Products: |
||||||||||||||||
US Customers |
5 | 133 | (128 | ) | (96.2% | ) | ||||||||||
International Customers |
12 | 22 | (10 | ) | (45.5% | ) | ||||||||||
Net sales, Branded Nutraceutical Products |
17 | 155 | (138 | ) | (89.0% | ) | ||||||||||
Other Nutraceuticals: |
||||||||||||||||
US Customers |
1,034 | 803 | 231 | 28.8 | % | |||||||||||
International Customers |
62 | 39 | 23 | 59.0 | % | |||||||||||
Net sales, Other Nutraceuticals |
1,096 | 842 | 254 | 30.2 | % | |||||||||||
Total net sales |
$ | 39,234 | $ | 36,393 | $ | 2,841 | 7.8 | % |
For the nine months ended March 31, 2020 and 2019, 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 67% and 27% and 71% and 24%, respectively, of our Contract Manufacturing Segment’s net sales in the nine months ended March 31, 2020 and 2019, respectively. Innophos (a customer of our Other Nutraceutical Businesses), while not a significant customer of our consolidated net sales, represented approximately 13% and 15% of the Other Nutraceutical Businesses net sales in the nine months ended March 31, 2020 and 2019, respectively. The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations.
The increase in net sales of approximately $2,841 was primarily the result of increased net sales in our Contract Manufacturing Segment by $2,725 primarily due to increased sales volumes to Herbalife and Life Extension in the amounts of $2,010 and $688, respectively.
Cost of sales. Cost of sales increased by approximately $2,207 to $33,957 for the nine months ended March 31, 2020, as compared to $31,750 for the nine months ended March 31, 2019 or approximately 7%. Cost of sales decreased as a percentage of sales to 86.5% for the nine months ended March 31, 2020 as compared to 87.2% for the nine months ended March 31, 2019. The increase in the cost of goods sold amount is consistent with the increased net sales of approximately 7.8%. The decrease in the cost of goods sold as a percentage of net sales, was primarily the result of the increased net sales used to offset the fixed manufacturing overhead. There were no significant changes in the cost of goods sold in our other two segments other than the variances in sales.
Selling and Administrative Expenses. There was an increase in selling and administrative expenses of $123, approximately 5% in the nine months ended March 31, 2020 as compared to the nine months ended March 31, 2019. As a percentage of sales, net, selling and administrative expenses was approximately 7% for each of the nine month periods ended March 31, 2020 and 2019. The increase of $123 was primarily from increases in (i) salaries and employees benefits of approximately $103, as the result of increases in (a) the compensation of our newly appointed Co-Chief Executive Officers in May 2019 of $61 in the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019; (b) other staff salaries of $34 and (c) employee benefits due to increases in salary bases and medical insurance premium costs of $8; (ii) professional and consulting fees of approximately $54 primarily as the result of increased legal fees of approximately $28 from general legal counsel and an increase of $26 in other professional consulting services; and (iii) employee stock compensation expense of $44 as a result of issuing stock options in May 2019 with no such expense in the period ended March 31, 2019. These increases were partially offset by a decrease of approximately $34 in amortization expense resulting from the full amortization of intangible assets on October 31, 2018 and other expenses of $46 with no one expense component decreasing by more than approximately $12.
Other income (expense), net. Other income (expense), net was approximately $218 for the nine months ended March 31, 2020 compared to $545 for the nine months ended March 31, 2019, and was composed of:
Nine months ended |
||||||||
March 31, |
||||||||
2020 |
2019 |
|||||||
(dollars in thousands) |
||||||||
Interest expense |
$ | (329 | ) | $ | (586 | ) | ||
Change in fair value of derivative liabilities |
- | 9 | ||||||
Realized gain on investment |
49 | - | ||||||
Unrealized gain on investment |
35 | - | ||||||
Other income |
27 | 32 | ||||||
Other income (expense), net |
$ | (218 | ) | $ | (545 | ) |
Our interest expense for the nine months ended March 31, 2020 decreased by $257 from the nine month period ended March 31, 2019, primarily resulting from the decrease in the interest rates on our Senior Credit Facility resulting from rate cuts in the federal funds borrowing rates of 2.00% and a 0.25% rate reduction in the refinancing with PNC on May 15, 2019 (total savings of approximately $156) and from the payoff of the related party debt, also on May 15, 2019, in the aggregate amount of $2,400 resulting in reduce interest costs in the nine months ended March 31, 2020 of approximately $98.
During the nine month period ended March 31, 2019, the derivative liability was extinguished, resulting in the carrying value as of June 30, 2018 of $9, compared to a value of $0 as of March 31, 2019, resulting in a change of $9 for the nine months ended March 31, 2019.
In the nine months ended March 31, 2020, we sold 40,000 shares of iBio Stock for a gain of $49 with no such sales in the nine months ended March 31, 2019. Also, in the nine months ended March 31, 2020, we had an unrealized gain on the remaining iBio Stock of approximately $35 compared to no unrealized gains on investments in the nine months ended March 31, 2019.
Provision for income taxes. For the nine months ended March 31, 2020 and 2019, we had a state income tax provision of approximately $318 and $216, respectively and a federal income tax benefit of $102 in the nine months ended March 31, 2020, compared to a federal tax expense of $41 in the nine months ended March 31, 2019. 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, it is “more likely than not” that the Company’s deferred tax assets may not be fully realized.
The increase in state tax expense of approximately $102 includes the recognition of an increased amount owed from the tax provision for the fiscal year ended June 30, 2019 to the tax return filed in March 2020 in the amount of $40. The balance of the increase is from a change in the effective rate for the State of New Jersey on the taxable income of MDC to include a 2.5% surcharge for the fiscal year ending June 30, 2020 and the increased taxable income in the nine months ended March 31, 2020 as compared to the nine months ended March 31, 2019 in the approximate amount of $315. 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 federal tax benefit of $102 in the nine-month period ended March 31, 2020 includes the recognition of the change from the tax provision for the fiscal year ended June 30, 2019 to the tax return filed in March 2020 in the amount of $40 relating to our alternative minimum tax carryover due from payments made in prior years.
Net income. Our net income for the nine months ended March 31, 2020 and 2019 was approximately $2,207 and $1,328, respectively. The increase of approximately $879 was primarily the result of increased operating income of $511 and decreased interest expense of $257, offset by an increase in selling and administrative expenses of $123.
For the Three Months Ended March 31, 2020 compared to the Three Months Ended March 31, 2019
Sales, net. Sales, net, for the three months ended March 31, 2020 and 2019 were $13,631 and $14,088, respectively, a decrease of 3.2%, and were comprised of the following:
Three months ended |
Dollar |
Percentage |
||||||||||||||
March 31, |
Change |
Change |
||||||||||||||
2020 |
2019 |
2020 vs 2019 |
2020 vs 2019 |
|||||||||||||
(amounts in thousands) |
||||||||||||||||
Contract Manufacturing: |
||||||||||||||||
US Customers |
$ | 10,775 | $ | 11,913 | $ | (1,138 | ) | (9.6% | ) | |||||||
International Customers |
2,558 | 1,875 | 683 | 36.4 | % | |||||||||||
Net sales, Contract Manufacturing |
13,333 | 13,788 | (455 | ) | (3.3% | ) | ||||||||||
Branded Nutraceutical Products: |
||||||||||||||||
US Customers |
1 | 14 | (13 | ) | (92.9% | ) | ||||||||||
International Customers |
2 | 3 | (1 | ) | (33.3% | ) | ||||||||||
Net sales, Branded Nutraceutical Products |
3 | 17 | (14 | ) | (82.4% | ) | ||||||||||
Other Nutraceuticals: |
||||||||||||||||
US Customers |
282 | 283 | (1 | ) | (0.4% | ) | ||||||||||
International Customers |
13 | - | 13 | 100.0 | % | |||||||||||
Net sales, Other Nutraceuticals |
295 | 283 | 12 | 4.2 | % | |||||||||||
Total net sales |
$ | 13,631 | $ | 14,088 | $ | (457 | ) | (3.2% | ) |
In the three months ended March 31, 2020 and 2019, 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 64% and 26% in the three months ended March 31, 2020 and 72% and 22% in the three months ended March 31, 2019, respectively, of our Contract Manufacturing Segment’s net sales. 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 $457 was primarily the result of net sales decreasing in our Contract Manufacturing Segment of $455, primarily due to decreased sales volumes to one of our major customer, Life Extension of approximately $1,006, offset by an increase in sales volumes with Herbalife of approximately $491, and other customers of approximately $60 in the three months ended March 31, 2020, compared to the comparable prior period.
Cost of sales. Cost of sales decreased by $216, approximately 2%, to $11,779 for the three months ended March 31, 2020, as compared to $11,995 for the three months ended March 31, 2019. Cost of sales as a percentage of sales was approximately 85% in the three months ended March 31, 2020 compared to approximately 86% for the three months ended March 31, 2019. The decrease in the cost of goods sold amount is consistent with the decreased net sales of approximately 3% as well as the increase in the cost of goods sold as a percentage, as the fixed overhead expenses did not change from period to period.
Selling and Administrative Expenses. There was a slight increase in selling and administrative expenses of $36 in the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, approximately 4.2%. As a percentage of sales, net, selling and administrative expenses were approximately 7% for each of the three month periods ended March 31, 2020 and 2019. The decrease was primarily due to an increase in professional and consulting fees of approximately $38 ($7 in general legal and $31 in other professional consulting fees), as the result of timing of the performance of such services throughout the year. No other expense within our selling and administrative expenses changed by more than $16.
Other income (expense), net. Other income (expense), net was approximately $43 and ($171) for the three months ended March 31, 2020 and 2019, respectively, and was composed of:
Three months ended |
||||||||
March 31, |
||||||||
2020 |
2019 |
|||||||
(dollars in thousands) |
||||||||
Interest expense |
$ | (96 | ) | $ | (196 | ) | ||
Realized gain on investment |
49 | - | ||||||
Unrealized gain on investment |
90 | - | ||||||
Other income |
- | 25 | ||||||
Other income (expense), net |
$ | 43 | $ | (171 | ) |
Our interest expense for the three months ended March 31, 2020 decreased by $100 from the three month period ended March 31, 2019, primarily resulting from the decrease in the interest rates on our Senior Credit Facility resulting from rate cuts in the federal funds borrowing rates of 1.50% in the three month period ended March 31, 2020 and offset by approximately 0.25% rate savings with electing Eurodollar Rate option available in the Senior Credit Facility in the three months ended March 31, 2019. Additionally, the Company had approximately $581 of less average total senior debt outstanding in the three month period ended March 31, 2020, resulting in combined savings of approximately $33 and from the payoff of the related party debt, on May 15, 2019, in the aggregate amount of $2,400 resulting in reduce interest costs in the three months ended March 31, 2020 of approximately $33.
In the three months ended March 31, 2020, we sold 40,000 shares of iBio Stock for a gain of $49 with no such sales in the three months ended March 31, 2019. Also, in the three months ended March 31, 2020, we had an unrealized gain on the remaining iBio Stock of approximately $90 compared to no unrealized gain or loss on investment in the three months ended March 31, 2019.
Provision for income taxes. For the three months ended March 31, 2020 and 2019, we had a state income tax provision of approximately $160 and $115, respectively. For the three months ended March 31, 2020, we had a federal income tax benefit of $93 and a federal tax expense of $29 for the three months ended March 31, 2019. 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 increase in state tax expense of approximately $45 was primarily the result the recognition of an increased amount owed from the tax provision for the fiscal year ended June 30, 2019 to the tax return filed in March 2020 in the amount of $40. The balance of the increase is from a change in the effective rate for the State of New Jersey on the taxable income of MDC to include a 2.5% surcharge for the fiscal year ending June 30, 2020. 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 federal tax benefit of $93 in the three-month period ended March 31, 2020 includes the recognition of the change from the tax provision for the fiscal year ended June 30, 2019 to the tax return filed in March 2020 in the amount of $40 relating to our alternative minimum tax carryover due from payments made in prior years.
Net income. We had net income for the three months ended March 31, 2020 and 2019 of $936 and $923, respectively. The increase in net income of approximately $13 was primarily the result of decreased other income (expense), net of $214, decreased provision of income taxes of $76, offset by a decrease in operating income of $277.
Seasonality
The nutraceutical business can be seasonal. Due to our current customer base in our contract manufacturing segment, our fiscal quarter ending December 31st each year tends to be more than our average quarterly volume for the other three fiscal quarters in the fiscal year. This increase is based on their forecast of their customer base.
The Company believes that there are non-seasonal factors that 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, |
||||||||
2020 |
2019 |
|||||||
(dollars in thousands) |
||||||||
Net cash provided by (used in) operating activities |
$ | 3,549 | $ | (299 | ) | |||
Net cash used in investing activities |
$ | (70 | ) | $ | (358 | ) | ||
Net cash (used in) provided by financing activities |
$ | (3,389 | ) | $ | 860 | |||
Cash at end of period |
$ | 565 | $ | 431 |
At March 31, 2020, our working capital was approximately $2,909, an increase of $1,183 from our working capital of $1,726 at June 30, 2019. An increase in our current assets of $1,218 offset by an increase of $35 in our current liabilities resulted in the increase in our working capital of $1,183 since June 30, 2019.
Operating Activities
Net cash provided by operating activities of $3,549 in the nine months ended March 31, 2020 includes net income of approximately $2,207. After excluding the effects of non-cash expenses, including depreciation and amortization, and changes in the fair value of derivative liabilities and deferred tax assets, the adjusted cash provided from operations before the effect of the changes in working capital components was $2,657. Net cash provided by our operations in the nine months ended March 31, 2020 from our working capital assets and liabilities in the amount of approximately $892 was primarily the result of cash provided by a decrease in accounts receivable of $166 and an aggregate increase in accounts payable, accrued expenses and other liabilities of $2,327, offset, in part, by decreases in inventories of $1,247 and obligations under operating leases of $343.
Net cash used in operating activities of $299 in the nine months ended March 31, 2019, includes net income of approximately $1,328. After excluding the effects of non-cash expenses, including depreciation and amortization, and changes in the fair value of derivative liabilities and deferred tax assets, the adjusted cash provided from operations before the effect of the changes in working capital components was $2,009. Net cash used in our operations in the nine months ended March 31, 2019 from our working capital assets and liabilities in the amount of approximately $2,297 was primarily the result of cash used in our accounts receivable of $1,161 and inventories of $2,807 and a decrease in obligations under operating leases of $339 offset, in part, with an aggregate increase in accounts payable, accrued expenses and other liabilities of $2,041.
Investing Activities
Cash used in investing activities in the nine months ended March 31, 2020 and 2019, of approximately $70 and $358, respectively, was used primarily for the purchase of machinery and equipment of $158 and $350, respectively. In the nine months ended March 31, 2020, cash used in investing activities was offset, in part, with proceeds in the amount of $85 from the sale of 40,000 shares of iBio Stock.
Financing Activities
Cash used in financing activities was approximately $3,389 for the nine months ended March 31, 2020, and was from repayments of advances under our revolving credit facility of $37,599 and principal payments under our term notes and under capitalized lease obligations in the amount of $823 and $157, respectively, offset by advances under our revolving credit facility of approximately $35,190.
Cash provided by financing activities was approximately $860 for the nine months ended March 31, 2019, and was from advances under our revolving credit facility of $35,574 and proceeds from a sales/lease back arrangement in the amount of $233, offset in part, by repayments of advances under our revolving credit facility of $34,322, principal payments under our term notes in the amount of $475 and payments under capitalized lease obligations of $174.
As of March 31, 2020, we had cash of $565, funds available under our revolving credit facility of approximately $2,671 and working capital of approximately $2,909. Our working capital includes $3,425 outstanding under our revolving line of credit which is not due until May 2024 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). Additionally, we had income from operations of approximately $2,641 in the nine months ended March 31, 2020. On April 30, 2020, we received proceeds $1,639 under the CARES Act from PNC in connection with our PPP Loan (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). After taking into consideration our interim results and current projections, management believes that operations, together with the revolving credit facility and proceeds from the PPP Note, will support our working capital requirements at least through the period ending May 13, 2021.
Our total annual commitments at March 31, 2020 for long term non-cancelable leases of approximately $565 consisted of obligations under operating leases for facilities and operating lease agreements for the rental of warehouse equipment, office equipment and automobiles.
Capital Expenditures
The Company's capital expenditures for the nine months ended March 31, 2020 and 2019 were approximately $158 and $350, respectively. The Company has budgeted approximately $200 for capital expenditures for the remaining three months in the fiscal year ending June 30, 2020. 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 SEC’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 Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of management, including the Co-Chief Executive Officers 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, 2020, and, based upon this evaluation, the Co-Chief Executive Officers 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 three months ended March 31, 2020 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
From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
Item 1A. Risk Factors
There have been no material changes made to the risk factors listed in “Item 1A - Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, except as follows:
The coronavirus outbreak has the potential to cause a disruption in our supply chain and business operations.
The Covid-19, or coronavirus, outbreak has the potential to cause a disruption in our supply chain. Currently, some of our suppliers of certain materials used in the production of our supplements are located in China, other impacted countries or states within the United States. Most materials may be obtained from more than one supplier. However, due to port closures and other restrictions resulting from the coronavirus outbreak throughout the world, these suppliers, located both inside and outside of the United States, may have limited supply of such materials, which will cause the price of such materials to increase.
If we are unable to obtain the necessary materials to produce a supplement within our standard lead times, it may delay the production and shipment of those supplements, thereby shifting the timing of recognizing the resulting sale to our customer. In addition, the significant outbreak of this contagious disease in the human population has resulted in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and impact our operating results.
Additionally, a disruption in the supply chain for personal protection equipment (“PPE”) and cleaning supplies used in our manufacturing facilities could have an adverse effect on our operations. In accordance with our standard operating procedures and the updated guidelines issued by the Centers for Disease Control and Prevention (the “CDC”) for personal safety, adopted by The U.S. Department of Labor Occupational Safety and Health Administration, we are required to provide the PPE for our employees to wear while working. The inability to obtain affordable PPE and cleaning supplies in a timely matter may result in temporary closures of impacted production area until the needed supplies are obtained.
Furthermore, if the State of New Jersey lockdown were to include essential businesses or if the Governor of New Jersey should modify or issue new executive orders prohibiting our facilities to remain open, there can be no assurances that we will continue to operate.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURE
Not Applicable.
Item 5. OTHER INFORMATION
On April 29, 2020, the Company entered into a Paycheck Protection Program Term Note (the “PPP Note”) with PNC in the amount of $1,639. The PPP Note has an interest rate of 1% and a maturity date of April 29, 2022. The PPP Note was issued by PNC to the Company pursuant to the Coronavirus, Aid, Relief, and Economic Security Act’s (the “CARES Act”) (P.L. 116-136) Paycheck Protection Program (the “Program”). Under the Program, all or a portion of the PPP Note may be forgiven in accordance with the Program requirements. The amount of the forgiveness shall be calculated (and may be reduced) in accordance with the requirements of the Program, including the provisions of Section 1106 of the CARES Act. No more than 25% of the amount forgiven can be attributable to non-payroll costs, as defined in the Program. There are no payments of interest or principal amortization due under the PPP Note until November 15, 2020. Any amounts not forgiven under the Program will be payable in 18 equal installments of principal plus any interest owed on the payment date.
If the Company fails to make timely payments under the PPP Note, PNC will charge the Company a late payment fee equal to the lesser of 5% of the amount of such payment or $100. In the event of Default, as defined in the PPP Note, the default rate of interest will be 5% in excess of the interest rate then in effect under the PPP Note.
The foregoing is a summary of the PPP Note and is qualified in its entirety by reference to the complete text of the PPP Note, which is filed by the Company as Exhibit 10 to this Quarterly Report on Form 10-Q.
Item 6. EXHIBITS
(a) Exhibits
Exhibit
Number
10.1 |
|
31.1 |
|
31.2 |
|
32.1 |
|
32.2 |
|
101 |
The following financial information from Integrated BioPharma, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the nine months ended March 31, 2020 and 2019, (ii) Condensed Consolidated Balance Sheets as of March 31, 2020 and June 30, 2019, (iii) Condensed Consolidated Statement of Changes in Stockholders’ (Deficit) Equity for the three and nine months ended March 31, 2020 and 2019, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2020 and 2019, and (v) the Notes to Condensed Consolidated Financial 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 13, 2020 | By: /s/ Christina Kay |
Christina Kay, | |
Co-Chief Executive Officer | |
Date: May 13, 2020 | By: /s/ Dina L. Masi |
Dina L. Masi, | |
Chief Financial Officer & Senior Vice President |
Paycheck Protection Program Term Note
$1,639,300.00 April 29, 2020
FOR VALUE RECEIVED, INTEGRATED BIOPHARMA INC (the “Borrower”), with an address at 225 LONG AVENUE, BUILDING 15, HILLSIDE, NEW JERSEY 07205, promises to pay to the order of PNC BANK, NATIONAL ASSOCIATION (the “Bank”), in lawful money of the United States of America in immediately available funds at its offices located at 222 Delaware Avenue, Wilmington, Delaware 19801, Attn: Business Banking, or at such other location as the Bank may designate from time to time, the principal sum of $1,639,300.00 (the “Facility”), together with interest accruing on the outstanding principal balance from the date hereof, all as provided below. This Note is being issued pursuant to the Coronavirus Aid, Relief, and Economic Security Act’s (the “CARES Act”) (P.L. 116-136) Paycheck Protection Program (the “Program”).
1. Rate of Interest. Amounts outstanding under this Note will bear interest at a rate per annum (“Fixed Rate”) which is at all times equal to 1.00%. Interest will be calculated based on the actual number of days that principal is outstanding over a year of 360 days. In no event will the rate of interest hereunder exceed the maximum rate allowed by law.
2. Structure; Payment Terms. During the period (the “Deferral Period”) beginning on the date of this Note and ending on the 6 month anniversary of the date of this Note (the “Deferral Expiration Date”), interest on the outstanding principal balance will accrue at the Fixed Rate, but neither principal nor interest shall be due and payable during the Deferral Period. On the Deferral Expiration Date, the outstanding principal of the Facility that is not forgiven under the Program (the “Conversion Balance”) shall convert to an amortizing term loan payable as set forth below.
On the 15th day of the 7th month following the date of this Note (the “First Payment Date”), all accrued interest that is not forgiven under the Program shall be due and payable. Additionally, on the First Payment Date, and continuing on the 15th day of each month thereafter until the 2nd anniversary of the date of this Note (the “Maturity Date”), equal installments of principal shall be due and payable, each in an amount determined by dividing the Conversion Balance by 18 (the “Monthly Principal Amount”). Interest shall be payable at the same times as the Monthly Principal Amount. Any outstanding principal and accrued interest shall be due and payable in full on the Maturity Date.
If any payment under this Note shall become due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing interest in connection with such payment. “Business Day” shall mean any day other than a Saturday or Sunday or a legal holiday on which commercial banks are authorized or required by law to be closed for business in the State of Delaware. The Borrower hereby authorizes the Bank to charge the Borrower’s deposit account at the Bank for any payment when due. Payments received will be applied to charges, fees and expenses (including attorneys’ fees), accrued interest and principal in any order the Bank may choose, in its sole discretion.
3. Forgiveness of the Facility. All or a portion of this Facility may be forgiven in accordance with the Program requirements. The amount of forgiveness shall be calculated (and may be reduced) in accordance with the requirements of the Program, including the provisions of Section 1106 of the CARES Act. Not more than 25% of the amount forgiven can be attributable to non-payroll costs.
4. Late Payments; Default Rate. If the Borrower fails to make any payment of principal, interest or other amount coming due pursuant to the provisions of this Note within fifteen (15) calendar days of the date due and payable, the Borrower also shall pay to the Bank a late charge equal to the lesser of five percent (5%) of the amount of such payment or $100.00 (the “Late Charge”). Such fifteen (15) day period shall not be construed in
any way to extend the due date of any such payment. Upon maturity, whether by acceleration, demand or otherwise, and at the Bank’s option upon the occurrence of any Event of Default (as hereinafter defined) and during the continuance thereof, each advance outstanding under this Note shall bear interest at a rate per annum (based on the actual number of days that principal is outstanding over a year of 360 days) which shall be five percentage points (5.00%) in excess of the interest rate in effect from time to time under this Note but not more than the maximum rate allowed by law (the “Default Rate”). The Default Rate shall continue to apply whether or not judgment shall be entered on this Note. Both the Late Charge and the Default Rate are imposed as liquidated damages for the purpose of defraying the Bank’s expenses incident to the handling of delinquent payments, but are in addition to, and not in lieu of, the Bank’s exercise of any rights and remedies hereunder, under the other Loan Documents (as defined below) or under applicable law, and any fees and expenses of any agents or attorneys which the Bank may employ. In addition, the Default Rate reflects the increased credit risk to the Bank of carrying a loan that is in default. The Borrower agrees that the Late Charge and Default Rate are reasonable forecasts of just compensation for anticipated and actual harm incurred by the Bank, and that the actual harm incurred by the Bank cannot be estimated with certainty and without difficulty. As used in this Note, “Loan Documents” means, individually and collectively, this Note, together with all other agreements and documents executed and/or delivered in connection with this Note or referred to in this Note, as amended, modified or renewed from time to time.
5. Prepayment. The Borrower shall have the right to prepay any amounts outstanding under this Note at any time and from time to time, in whole or in part, without penalty.
6. Increased Costs; Yield Protection. On written demand, together with written evidence of the justification therefor, the Borrower agrees to pay the Bank all direct costs incurred, any losses suffered or payments made by the Bank as a result of any Change in Law (hereinafter defined), imposing any reserve, deposit, allocation of capital or similar requirement (including without limitation, Regulation D of the Board of Governors of the Federal Reserve System) on the Bank, its holding company or any of their respective assets relative to the Facility. “Change in Law” means the occurrence, after the date of this Note, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any governmental authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any governmental authority; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law”, regardless of the date enacted, adopted or issued.
7. Representations, Warranties and Covenants.
(a) |
The Borrower hereby represents and warrants that, if not a natural person, the Borrower is duly organized, validly existing and in good standing under the laws of the state of its incorporation or organization and has the power and authority to own and operate its assets and to conduct its business as now or proposed to be carried on, and is duly qualified, licensed and in good standing to do business in all jurisdictions where its ownership of property or the nature of its business requires such qualification or licensing. |
(b) |
The Borrower certifies, acknowledges and agrees that the certifications contained in the Paycheck Protection Program Certification and the Program application delivered to the Bank are true and correct, which certifications are hereby incorporated herein by this reference as if set forth herein. |
(c) |
The Borrower covenants and agrees that the Borrower will do all things necessary to (i) if not a natural person, (A) maintain, renew and keep in full force and effect its organizational existence and all rights, permits and franchises necessary to enable it to continue its business as currently conducted; and (B) continue in operation in substantially the same manner as at present, to the extent permitted by applicable law (including without limitation any statute, ordinance, rule or regulation relating to employment practices, pension benefits or environmental, occupational and health standards and controls); and (ii) comply with all laws applicable to the Borrower and to the operation of its business (including without limitation any statute, ordinance, rule or regulation relating to employment practices, pension benefits or environmental, occupational and health standards and controls). |
(d) |
The Borrower represents and warrants that (i) the Borrower has full power, authority and capacity to enter into the transactions provided for in this Note and the other Loan Documents; (ii) if not a natural person, all necessary action to authorize the execution and delivery of this Note and the other Loan Documents has been properly taken; (iii) this Note and the other Loan Documents, when executed and delivered by the Borrower, will constitute the legal, valid and binding obligations of the Borrower enforceable in accordance with their terms; (iv) if not a natural person, the Borrower is and will continue to be duly authorized to perform all of the terms and provisions of this Note and the other Loan Documents; (v) there does not exist, either before or after giving effect to the terms of this Note, any default or violation by the Borrower of or under any of the terms, conditions or obligations of any of its governing documents; and (vi) the Borrower does not require the consent of any party with respect to this Note, the other Loan Documents or the Facility except for such consents that have been obtained. |
(e) |
The Borrower covenants and agrees to take all such additional actions and promptly provide to the Bank all additional documents, statements and information as the Bank may require from time to time, in its discretion, in connection with the SBA’s requirements or requests under or in respect of the Program or the general standard operating procedures of the SBA. |
(f) |
The Borrower authorizes and directs the Bank to disburse the proceeds of the Facility and to direct payments due under the Facility in accordance with the Disbursement and Payment Authorization Instructions attached to this Note as Exhibit A. |
8. Other Loan Documents. Notwithstanding any provision to the contrary in any Loan Document or any other collateral security documents that may have been or may in the future be executed and delivered to the Bank, or an agent acting on behalf of the Bank, to secure any obligations of the Borrower to the Bank, this Note is not intended to be secured by real property, and the applicability of any lien on such real property to secure this Note is expressly disclaimed by the Bank.
9. Events of Default. The occurrence of any of the following events will be deemed to be an “Event of Default” under this Note: (i) the nonpayment of any principal, interest or other indebtedness under this Note when due; (ii) the occurrence of any event of default or any default and the lapse of any notice or cure period, or the Borrower’s failure to observe or perform any covenant or other agreement, under or contained in any Loan Document; (iii) the filing by or against the Borrower of any proceeding in bankruptcy, receivership, insolvency, reorganization, liquidation, conservatorship or similar proceeding (and, in the case of any such proceeding instituted against the Borrower, such proceeding is not dismissed or stayed within 30 days of the commencement thereof, provided that the Bank shall not be obligated to advance additional funds hereunder during such period); (iv) any assignment by the Borrower for the benefit of creditors, or any levy, garnishment, attachment or similar proceeding is instituted against any property of the Borrower held by or deposited with the Bank; (v) the commencement of any foreclosure or forfeiture proceeding, execution or attachment against any collateral securing the obligations of the Borrower to the Bank; (vi) the entry of a final judgment against the Borrower and the failure of the Borrower to discharge the judgment within ten (10) days of the entry thereof; (vii) any change in the Borrower’s equity ownership (if not a public company), or any merger, consolidation, division or other reorganization of, with or by the Borrower, or the sale or other transfer of all or any substantial part of the Borrower’s property or assets, except as otherwise permitted by the Bank; (viii) any change in the Borrower’s business, assets, operations, financial condition or results of operations that has or could reasonably be expected to have any material adverse effect on the Borrower; (ix) the Borrower ceases doing business as a going concern; (x) any representation or warranty made by the Borrower to the Bank in any Loan Document or any other documents now or in the future evidencing or securing the obligations of the Borrower to the Bank, is false, erroneous or misleading in any material respect; (xi) the death, incarceration, indictment or legal incompetency of any individual Borrower or, if the Borrower is a partnership or limited liability company, the death, incarceration, indictment or legal incompetency of any individual general partner or member; or (xii) failure of the Borrower to notify the Bank within ten (10) days of any change of the Borrower’s address.
Upon the occurrence of an Event of Default: (a) the Bank shall be under no further obligation to make advances hereunder; (b) if an Event of Default specified in clause (iii) or (iv) above shall occur, the outstanding principal balance and accrued interest hereunder together with any additional amounts payable hereunder shall be immediately due and payable without demand or notice of any kind; (c) if any other Event of Default shall occur, the outstanding principal balance and accrued interest hereunder together with any additional amounts payable hereunder, at the Bank’s option and without demand or notice of any kind, may be accelerated and become immediately due and payable; (d) at the Bank’s option, this Note will bear interest at the Default Rate from the date of the occurrence of the Event of Default; and (e) the Bank may exercise from time to time any of the rights and remedies available under the Loan Documents or under applicable law. The Borrower acknowledges that upon the occurrence of an Event of Default, SBA, as defined below, may be required to pay the Lender under the SBA guarantee, and SBA may then seek recovery on the Facility (to the extent any balance remains after loan forgiveness).
10. Right of Setoff. In addition to all rights of setoff against the Borrower’s money, securities or other property given to the Bank by law, the Bank shall have, with respect to the Borrower’s obligations to the Bank under this Note and to the extent permitted by law, a contractual right of setoff against all of the Borrower’s deposits, moneys, securities and other property now or hereafter in the possession of or on deposit with, or in transit to, the Bank or any other direct or indirect subsidiary of The PNC Financial Services Group, Inc., whether held in a general or special account or deposit, whether held jointly with someone else, or whether held for safekeeping or otherwise, excluding, however, all IRA, Keogh, and trust accounts. Every such right of setoff may be exercised without demand upon or notice to the Borrower upon the occurrence of an Event of Default. Every such right of setoff shall be deemed to have been exercised immediately upon the occurrence of an Event of Default hereunder without any action of the Bank, although the Bank may enter such setoff on its books and records at a later time.
11. Financial and Other Information. Within forty five (45) days after the Bank’s request, the Borrower agrees to deliver any financial and other business and ownership information concerning the Borrower that the Bank may request from time to time, such as annual and interim financial statements (all of which shall be prepared in accordance with generally accepted accounting principles), federal income tax returns. The Borrower also agrees to deliver to the Bank, promptly upon the Bank’s request, certification(s) of beneficial owners in the form requested by the Bank (as executed and delivered to the Bank on or prior to the date of this Note and updated from time to time, the “Certification of Beneficial Owners”). If the Borrower was required to execute and deliver to the Bank a Certification of Beneficial Owners, (a) the Borrower represents and warrants, as of the date of this Note and as of the date each updated Certification of Beneficial Owners is provided to the Bank, that the information in the Certification of Beneficial Owners is true, complete and correct, and (b) the Borrower agrees to provide confirmation of the accuracy of the information set forth in the Certification of Beneficial Owners, or deliver a new Certification of Beneficial Owners in form and substance acceptable to the Bank, as and when requested by the Bank and/or when any individual identified on the most recent Certification of Beneficial Owners provided to the Bank as a controlling party and/or a direct or indirect individual owner has changed. The Borrower further agrees to provide such other information and documentation as may reasonably be requested by the Bank from time to time for purposes of compliance by the Bank with applicable laws (including without limitation the USA PATRIOT Act and other “know your customer” and anti-money laundering rules and regulations), and any policy or procedure implemented by the Bank to comply therewith. Additionally, the Borrower will keep books and records in a manner satisfactory to the Bank and allow the Bank and SBA to inspect and audit books, records and papers relating to the Borrower’s financial or business condition.
12. Anti-Money Laundering/International Trade Law Compliance. The Borrower represents and warrants to the Bank, as of the date of this Note, the date of each advance of proceeds under the Facility, the date of any renewal, extension or modification of the Facility, and at all times until the Facility has been terminated and all amounts thereunder have been indefeasibly paid in full, that: (a) no Covered Entity (i) is a Sanctioned Person; (ii) has any of its assets in a Sanctioned Country or in the possession, custody or control of a Sanctioned Person; or (iii) does business in or with, or derives any of its operating income from investments in or transactions with, any Sanctioned Country or Sanctioned Person in violation of any law, regulation, order or directive enforced by any Compliance Authority; (b) the proceeds of the Facility will not be used to fund any operations in, finance any investments or activities in, or, make any payments to, a Sanctioned Country or Sanctioned Person in violation of any law, regulation, order or directive enforced by any Compliance Authority; (c) the funds used to repay the Facility are not derived from any unlawful activity; and (d) each Covered Entity is in compliance with, and no Covered Entity engages in any dealings or transactions prohibited by, any laws of the United States, including but not limited to any Anti-Terrorism Laws. Borrower covenants and agrees that it shall immediately notify the Bank in writing upon the occurrence of a Reportable Compliance Event. As used herein: “Anti-Terrorism Laws” means any laws relating to terrorism, trade sanctions programs and embargoes, import/export licensing, money laundering, or bribery, all as amended, supplemented or replaced from time to time; “Compliance Authority” means each and all of the (a) U.S. Treasury Department/Office of Foreign Assets Control, (b) U.S. Treasury Department/Financial Crimes Enforcement Network, (c) U.S. State Department/Directorate of Defense Trade Controls, (d) U.S. Commerce Department/Bureau of Industry and Security, (e) U.S. Internal Revenue Service, (f) U.S. Justice Department, and (g) U.S. Securities and Exchange Commission; “Covered Entity” means the Borrower, its affiliates and subsidiaries, all guarantors, pledgors of collateral, all owners of the foregoing, and all brokers or other agents of the Borrower acting in any capacity in connection with the Facility; “Reportable Compliance Event” means that any Covered Entity becomes a Sanctioned Person, or is indicted, arraigned, investigated or custodially detained, or receives an inquiry from regulatory or law enforcement officials, in connection with any Anti-Terrorism Law or any predicate crime to any Anti-Terrorism Law, or self-discovers facts or circumstances implicating any aspect of its operations with the actual or possible violation of any Anti-Terrorism Law; “Sanctioned Country” means a country subject to a sanctions program maintained by any Compliance Authority; and “Sanctioned Person” means any individual person, group, regime, entity or thing listed or otherwise recognized as a specially designated, prohibited, sanctioned or debarred person or entity, or subject to any limitations or prohibitions (including but not limited to the blocking of property or rejection of transactions), under any order or directive of any Compliance Authority or otherwise subject to, or specially designated under, any sanctions program maintained by any Compliance Authority.
13. Release and Indemnity. The Borrower agrees to indemnify each of the Bank, each legal entity, if any, who controls, is controlled by or is under common control with the Bank, and each of their respective directors, officers and employees (the “Indemnified Parties”), and to defend and hold each Indemnified Party harmless from and against any and all claims, damages, losses, liabilities and expenses (including all fees and charges of internal or external counsel with whom any Indemnified Party may consult and all expenses of litigation and preparation therefor) which any Indemnified Party may incur or which may be asserted against any Indemnified Party by any person, entity or governmental authority (including the Borrower or any person or entity claiming derivatively on behalf of the Borrower), in connection with or arising out of the Program or relating to the matters referred to in this Note or in the other Loan Documents or the use of any advance hereunder, whether (a) arising from or incurred in connection with any breach of a representation, warranty or covenant by the Borrower, or (b) arising out of or resulting from any suit, action, claim, proceeding or governmental investigation, pending or threatened, whether based on statute, regulation or order, or tort, or contract or otherwise, before any court or governmental authority; provided, however, that the foregoing indemnity shall not apply to any claims, damages, losses, liabilities and expenses solely attributable to an Indemnified Party's gross negligence or willful misconduct. The release and indemnity agreements contained in this paragraph shall survive the termination of this Note, payment of any advance hereunder and the assignment of any rights hereunder. The Borrower may participate at its expense in the defense of any such action or claim.
14. Miscellaneous. All notices, demands, requests, consents, approvals and other communications required
or permitted hereunder (“Notices”) must be in writing (except as may be agreed otherwise above with respect to borrowing requests or as otherwise provided in this Note) and will be effective upon receipt. Notices may be given in any manner to which the parties may agree. Without limiting the foregoing, first-class mail, postage prepaid, facsimile transmission and commercial courier service are hereby agreed to as acceptable methods for giving Notices. In addition, the parties agree that Notices may be sent electronically to any electronic address provided by a party from time to time. Notices may be sent to a party’s address as set forth above or to such other address as any party may give to the other for such purpose in accordance with this paragraph. No delay or omission on the Bank’s part to exercise any right or power arising hereunder will impair any such right or power or be considered a waiver of any such right or power, nor will the Bank’s action or inaction impair any such right or power. The Bank’s rights and remedies hereunder are cumulative and not exclusive of any other rights or remedies which the Bank may have under other agreements, at law or in equity. No modification, amendment or waiver of, or consent to any departure by the Borrower from, any provision of this Note will be effective unless made in a writing signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Notwithstanding the foregoing, the Bank may modify this Note for the purposes of completing missing content or correcting erroneous content, without the need for a written amendment, provided that the Bank shall send a copy of any such modification to the Borrower (which notice may be given by electronic mail). The Borrower agrees to pay on demand, to the extent permitted by law, all costs and expenses incurred by the Bank in the enforcement of its rights in this Note and in any security therefor, including without limitation reasonable fees and expenses of the Bank’s counsel. If any provision of this Note is found to be invalid, illegal or unenforceable in any respect by a court, all the other provisions of this Note will remain in full force and effect. The Borrower and all other makers and indorsers of this Note hereby forever waive presentment, protest, notice of dishonor and notice of non-payment. The Borrower also waives all defenses based on suretyship or impairment of collateral. If this Note is executed by more than one Borrower, the obligations of such persons or entities hereunder will be joint and several. This Note shall bind the Borrower and its heirs, executors, administrators, successors and assigns, and the benefits hereof shall inure to the benefit of the Bank and its successors and assigns; provided, however, that the Borrower may not assign this Note in whole or in part without the Bank’s written consent and the Bank at any time may assign this Note in whole or in part.
This Note has been delivered to and accepted by the Bank and will be deemed to be made in the State of Delaware. THIS NOTE WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE BANK AND THE BORROWER DETERMINED IN ACCORDANCE WITH (I) FEDERAL REGULATIONS, AND (II) TO THE EXTENT NOT PREEMPTED BY FEDERAL LAWS OR REGULATIONS, THE LAWS OF THE STATE OF DELAWARE, EXCLUDING ITS CONFLICT OF LAWS RULES, INCLUDING WITHOUT LIMITATION THE ELECTRONIC TRANSACTIONS ACT (OR EQUIVALENT) IN EFFECT IN THE STATE OF DELAWARE (OR, TO THE EXTENT CONTROLLING, THE LAWS OF THE UNITED STATES OF AMERICA, INCLUDING WITHOUT LIMITATION THE ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT). The Borrower hereby irrevocably consents to the exclusive jurisdiction of any state or federal court in the State of Delaware; provided that nothing contained in this Note will prevent the Bank from bringing any action, enforcing any award or judgment or exercising any rights against the Borrower individually, against any security or against any property of the Borrower within any other county, state or other foreign or domestic jurisdiction. The Borrower acknowledges and agrees that the venue provided above is the most convenient forum for both the Bank and the Borrower. The Borrower waives any objection to venue and any objection based on a more convenient forum in any action instituted under this Note.
15. Commercial Purpose. The Borrower represents that the indebtedness evidenced by this Note is being incurred by the Borrower solely for the purpose of acquiring or carrying on a business, professional or commercial activity, and not for personal, family or household purposes.
16. USA PATRIOT Act Notice. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies each Borrower that opens an account. What this means: when the Borrower opens an account, the Bank will ask for the business name, business address, taxpayer identifying number and other information that will allow the Bank to identify the Borrower, such as organizational documents. For some businesses and organizations, the Bank may also need to ask for identifying information and documentation relating to certain individuals associated with the business or organization.
17. Authorization to Obtain Credit Reports. By signing below, each person, who is signing in his or her individual capacity, requests and provides written authorization to the Bank or its designee (and any assignee or potential assignee hereof) to obtain such individual’s personal credit profile from one or more national credit bureaus. This authorization extends to obtaining a credit profile in (i) considering an application for credit that is evidenced, guaranteed or secured by this document, (ii) assessing creditworthiness and (iii) considering extensions of credit, including on an ongoing basis, as necessary for the purposes of (a) update, renewal or extension of such credit or additional credit, (b) reviewing, administering or collecting the resulting account and (c) reporting on the repayment and satisfaction of such credit obligations. By signing below, such individual further ratifies and confirms his or her prior requests and authorizations with respect to the matters set forth herein. For the avoidance of doubt, this provision does not apply to persons signing below in their capacities as officers or other authorized representatives of entities, organizations or governmental bodies.
18. Electronic Signatures and Records. Notwithstanding any other provision herein, the Borrower agrees that this Note, the Loan Documents, any amendments thereto, and any other information, notice, signature card, agreement or authorization related thereto (each, a “Communication”) may, at the Bank’s option, be in the form of an electronic record. Any Communication may, at the Bank’s option, be signed or executed using electronic signatures. For the avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance by the Bank of a manually signed paper Communication which has been converted into electronic form (such as scanned into PDF format) for transmission, delivery and/or retention.
19. Depository. Unless the Bank otherwise agrees, the Borrower will establish and maintain with the Bank the Borrower’s primary depository accounts.
20. Federal Law. When the U.S. Small Business Administration (“SBA”) is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. The Bank or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, the Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.
21. DISPUTE RESOLUTION.
(a) |
WAIVER OF JURY TRIAL. FOR ANY DISPUTE THAT IS NOT ARBITRATED, AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE BORROWER AND THE BANK IRREVOCABLY WAIVES ANY AND ALL RIGHTS THE BORROWER OR THE BANK MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS NOTE, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS NOTE OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY. |
(b) |
ARBITRATION OF DISPUTES. The Borrower or the Bank may elect to submit any and all disputes arising out of or relating to the Loan Documents or any breach thereof (a “Dispute”) to binding arbitration |
(i) |
Arbitration. Any arbitration shall be conducted pursuant to and in accordance with the AAA Commercial Arbitration Rules and, where applicable, the Supplementary Rules for Large, Complex Commercial Disputes, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Such arbitration shall be conducted in a mutually acceptable location. Except as expressly set forth below, the procedures specified herein shall be the sole and exclusive procedures for the resolution of Disputes; provided, however, that the Borrower or the Bank may seek provisional or ancillary remedies, such as preliminary injunctive relief, from a court having jurisdiction, before, during or after the pendency of any arbitration proceeding. The institution and maintenance of any action for such judicial relief, or pursuit of provisional or ancillary remedies, shall not constitute a waiver of the right or obligation of any party to submit any claim or dispute to arbitration. Nothing herein shall in any way limit or modify any remedies available to the Bank under the Loan Documents or otherwise at law or in equity. |
(ii) |
Motion Practice. In any arbitration hereunder, the arbitrator(s) shall decide any prehearing motions which are substantially similar to pre-hearing motions to dismiss for failure to state a claim or motions for summary adjudication. |
(iii) |
Discovery. Discovery shall be limited to the pre-hearing exchange of all documents which the Borrower and the Bank intend to introduce at the hearing and any expert reports prepared by any expert who will testify at the hearing. |
(iv) |
Sequential Hearing Days. At the administrative conference conducted by the AAA, the Borrower and the Bank and the AAA shall determine how to ensure that the hearing is started and completed on sequential hearing days. Potential arbitrators shall be informed of the anticipated length of the hearing and they shall not be subject to appointment unless they agree to abide by the parties’ intent that, absent exigent circumstances, the hearing shall be conducted on sequential days. |
(v) |
Award. The award of the arbitrator(s) shall be accompanied by a statement of the reasons upon which such award is based. |
(vi) |
Fees and Expenses. The Borrower and the Bank shall each bear equally all fees and costs and expenses of the arbitration, and each shall bear its own legal fees and expenses and the costs of its experts and witnesses; provided, however, that if the arbitration panel shall award to a party substantially all relief sought by such party, then, notwithstanding any applicable governing law provisions, the other party shall pay all costs, fees and expenses incurred by the prevailing party and such costs, fees and expenses shall be included in such award. |
(vii) |
Confidentiality of Disputes. The entire procedure shall be confidential and none of the parties nor arbitrator(s) may disclose the existence, content, or results of any arbitration hereunder without the written consent of all parties to the Dispute, except (i) to the extent disclosure is required to enforce any applicable arbitration award or may otherwise be required by law and (ii) that either party may make such disclosures to its regulators, auditors, accountants, attorneys and insurance representatives. No conduct, statements, promises, offers, views, or opinions of any party involved in an arbitration hereunder shall be discoverable or admissible for any purposes in litigation or other proceedings involving the parties to the Dispute and shall not be disclosed to anyone not an agent, employee, expert, witness, or representative for any of such parties. |
(viii) |
CLASS ACTION WAIVER. THE BORROWER HEREBY WAIVES, WITH RESPECT TO ANY DISPUTE: (I) THE RIGHT TO PARTICIPATE IN A CLASS ACTION, PRIVATE ATTORNEY GENERAL ACTION OR OTHER REPRESENTATIVE ACTION IN COURT OR IN ARBITRATION, EITHER AS A CLASS REPRESENTATIVE OR CLASS MEMBER; AND (II) THE RIGHT TO JOIN OR CONSOLIDATE CLAIMS WITH CLAIMS OF ANY OTHER PERSON. The foregoing waiver is referred to herein as the “class action waiver”. The Bank and the Borrower agree that no arbitrator shall have authority to conduct any arbitration in violation of the class action waiver or to issue any relief that applies to any person or entity other than the Borrower and/or the Bank individually. The parties acknowledge that this class action waiver is material and essential to the arbitration of any claims and is non-severable from this Dispute Resolution section. If the class action waiver is voided, found unenforceable, or limited with respect to any claim for which the Borrower seeks class-wide relief, then this Dispute Resolution section (except for this sentence) shall be null and void with respect to such claim, subject to the right to appeal the limitation or invalidation of the class action waiver. However, this Dispute Resolution section shall remain valid with respect to all other claims and Disputes. The parties acknowledge and agree that under no circumstances will a class action be arbitrated. |
(ix) |
Applicability of Federal Arbitration Act. This Note evidences transaction(s) in interstate commerce, and thus the Federal Arbitration Act governs the interpretation and enforcement of this Dispute Resolution section. |
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
If the Borrower is a legal entity, the undersigned certifies to the Bank that the undersigned (individually and collectively if more than one, the “Authorized Representative”) is and was authorized and directed to (i) execute and deliver, including to electronically execute and deliver, in the name of and on behalf of the Borrower, this Note and any other documents executed in connection with this Note or the Facility, all in such form as may be requested by the Bank or required under the Program and any of which may contain a provision waiving the right to trial by jury; (ii) execute and deliver to or in favor of, including to electronically execute and deliver to or in favor of, the Bank any amendments, modifications, renewals or supplements of or to any of the foregoing agreements, documents or instruments; (iii) take any other action requested, required or deemed advisable by the Bank in order to effectuate the foregoing; and (iv) delegate the foregoing duties to other representatives of the Borrower. The undersigned further certifies that the Authorized Representative holds the office, title or status with the Borrower specified below the Authorized Representative’s signature.
The Borrower acknowledges that it has read and understands all the provisions of this Note, including the waiver of jury trial, arbitration and class action waiver, and has been advised by counsel as necessary or appropriate, or has elected not to seek the advice of counsel.
WITNESS the due execution hereof as a document under seal, as of the date first written above, with the intent to be legally bound hereby.
INTEGRATED BIOPHARMA INC
By:E-Signed by Dina Masi
(SEAL)
Dina L. Masi, Chief Financial Officer
By: E-Signed by Christina Kay
(SEAL)
Christina Kay, Co-Chief Executive Officer
Exhibit 31.1
Certification of Co-Chief Executive Officers
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
We, Christina Kay and Riva Sheppard certify that:
1. We have reviewed this quarterly report on Form 10-Q of Integrated BioPharma, Inc.;
2. |
Based on our knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
2. |
Based on our knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant's other certifying officer and we are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. |
5. |
The registrant's other certifying officer and we have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: May 13, 2020 | By: /s/ Christina Kay |
Name: Christina Kay, | |
Title: Co-Chief Executive Officer | |
By: /s/ Riva Sheppard | |
Name: Riva Sheppard, | |
Title: Co-Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dina L. Masi, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Integrated BioPharma, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. |
5. |
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: May 13, 2020 | By: /s/ Dina L. Masi |
Name: Dina L. Masi | |
Title: Chief Financial Officer & Senior Vice President |
Exhibit 32.1
CERTIFICATION OF PERIODIC REPORT
As adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q for the second quarter ended March 31, 2020 of Integrated BioPharma, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Christina Kay and Riva Sheppard, Co-Chief Executive Officers of Integrated BioPharma, Inc. certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to their knowledge:
1. |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
2. |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
This certification accompanies the Report pursuant to Section 906 of Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Dated: May 13, 2020 | By: /s/ Christina Kay |
Name: Christina Kay, | |
Title: Co-Chief Executive Officer | |
By: /s/ Riva Sheppard | |
Name: Riva Sheppard, | |
Title: Co-Chief Executive Officer |
Exhibit 32.2
CERTIFICATION OF PERIODIC REPORT
As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q for the second quarter ended March 31, 2020 of Integrated BioPharma, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Dina L. Masi, the Senior Vice President and Chief Financial Officer of Integrated BioPharma, Inc. certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to her knowledge:
1. |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
2. |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
This certification accompanies the Report pursuant to Section 906 of Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
May 13, 2020 | By: /s/ Dina L. Masi |
Name: Dina L. Masi | |
Title: Chief Financial Officer & Senior Vice President |