INTEGRATED BIOPHARMA INC filed 10-Q on May 15

INTEGRATED BIOPHARMA INC files 10-Q in a filing on Wed, May 15 accessible here.

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 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%.

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 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) $8.0 million 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.

maturities thereof. The Amended Loan Agreement also contains customary representations and warranties, covenants and events of default, including, without limitation, (i) a fixed charge coverage ratio maintenance requirement and (ii) an event of default tied to any change of control as defined in the Amended Loan Agreement. As of March 31, 2019, 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.

On June 27, 2012, the Company also entered into an Amended and Restated Securities Purchase Agreement (the ‘CD SPA’) with CD Financial, which amended and restated the Securities Purchase Agreement, dated as of February 21, 2008, between the Company and CD Financial, pursuant to which the Company issued to CD Financial a 9.5% Convertible Senior Secured Note in the original principal amount of $4,500 (the ‘Original CD Note’). Pursuant to the CD SPA, the Company issued to CD Financial (i) the Amended and Restated Convertible Promissory Note in the principal amount of $5,350 (the ‘CD Convertible Note’) and (ii) the Promissory Note in the principal amount of $1,714 (the ‘Liquidity Note’, and collectively with the CD Convertible Note, the ‘CD Notes’). The CD Notes had an original maturity date of July 7, 2017, however, on February 19, 2016, the CD Notes were amended to extend the maturity date thereof to February 29, 2020.

The CD Notes are secured by all assets of the Borrowers, including, without limitation, machinery and equipment, real estate owned by IHT Properties, and iBio Stock owned by the Company. The CD Notes bear interest at an annual rate of 6% and have a default rate of 10%.

Related Party Debt. On June 27, 2012, MDC and the Company entered into a promissory note with Vitamin Realty Associates, LLC (‘Vitamin Realty’) in the principal amount of approximately $686 (the ‘Vitamin Note’). The principal amount of the Vitamin Note represents the aggregate amount of unpaid, past due rent owing by MDC under the Lease Agreement, dated as of January 10, 1997, between MDC, as lessor, and Vitamin Realty, as landlord, pertaining to the real property located at 225 Long Avenue, Hillside, New Jersey. (See Note 6. Commitments and Contingencies (a) Leases – Related Parties Leases). The Vitamin Note matures on February 29, 2020, as amended on February 19, 2016. The Vitamin Note accrues interest at an annual rate of 4% per annum. Interest in respect of the Vitamin Note is payable on the first business day of each calendar month. Pursuant to the terms of the Amended Loan Agreement, during the effectiveness of the Senior Credit Facility, the Vitamin Note may only be repaid or prepaid if certain conditions set forth in the Amended Loan Agreement are satisfied.

Capitalized Lease Obligations. On February 1, 2019, the Company entered into a capitalized lease obligation with First American Equipment Finance (‘First American’) in the amount of $233, which lease is secured by certain machinery and equipment and matures on February 1, 2021. The Company sold certain machinery, purchased from equipment suppliers other than First American in the aggregate amount of $233, to First American for $233 and leased the sold equipment back from First American for monthly payments in the amount of approximately $10 with an imputed interest rate of 7.28%.

On February 1, 2019, the capitalized lease obligation entered into by the Company on March 17, 2017 with First American in the amount of $158, 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 $7 and had an imputed interest rate of 3.86%.

Note 5. Significant Risks and Uncertainties (a) Major Customers. For the three and nine months ended March 31, 2019 and 2018, approximately 92% and 91% of consolidated net sales, respectively, were derived from two customers. These two customers are in the Company’s Contract Manufacturing Segment and net sales to these two customers represented approximately 72% and 22% in the three months ended March 31, 2019 and 74% and 21% of net sales in the three months ended March 31, 2018, respectively and approximately 71% and 24% in the nine months ended March 31, 2019 and 72% and 22% of net sales in the nine months ended March 31, 2018, respectively. Accounts receivable from these two major customers represented approximately 92% and 87% of total net accounts receivable as of March 31, 2019 and June 30, 2018, respectively. The loss of any of these customers could have an adverse effect on the Company’s operations. Major customers are those customers who account for more than 10% of net sales. (b) Other Business Risks. Approximately 72% 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.

(a) Major Customers. For the three and nine months ended March 31, 2019 and 2018, approximately 92% and 91% of consolidated net sales, respectively, were derived from two customers. These two customers are in the Company’s Contract Manufacturing Segment and net sales to these two customers represented approximately 72% and 22% in the three months ended March 31, 2019 and 74% and 21% of net sales in the three months ended March 31, 2018, respectively and approximately 71% and 24% in the nine months ended March 31, 2019 and 72% and 22% of net sales in the nine months ended March 31, 2018, respectively. Accounts receivable from these two major customers represented approximately 92% and 87% of total net accounts receivable as of March 31, 2019 and June 30, 2018, respectively. The loss of any of these customers could have an adverse effect on the Company’s operations. Major customers are those customers who account for more than 10% of net sales.

(b) Other Business Risks. Approximately 72% 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.

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 8 years. The components of lease expense for the three months ended March 31, 2019 were as follows: The components of lease expense for the nine months ended March 31, 2019 were as follows: -15- INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) (Unaudited) Operating Lease Liabilities Related Party Operating Lease Liabilities. Warehouse and office facilities are leased from Vitamin Realty, which is 100% owned by the Company’s chairman, and a major stockholder and certain of his family members, who are also 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, lease amortization costs and interest expense on these related party leases were $203 and $204 for the three months ended March 31, 2019 and 2018, and $630 and $619 for the nine months ended March 31, 2019 and 2018, respectively, and are included in cost of sales, selling and administrative expenses and interest expense in the accompanying Condensed Consolidated Statements of Operations. As of March 31, 2019 and June 30, 2018, the Company had outstanding current obligations to Vitamin Realty of $761 and $827, respectively, included in accounts payable, accrued expenses and other liabilities and long term debt in the accompanying Condensed Consolidated Balance Sheet. Additionally, the Company has operating lease obligations of $3,353 with Vitamin Realty as noted in the accompany Condensed Consolidated Balance Sheet. Other Operating Lease Liabilities. The Company has entered into certain non-cancelable operating lease agreements expiring up through May, 2023, related to machinery and equipment and office equipment. As of March 31, 2019, the Company’s ROU assets, lease obligations and remaining cash commitment on these leases is as follows: The Company’s weighted average discount rate and remaining term on lease liabilities is approximately 3.76% and 6.6 years, respectively. Supplemental cash flows information related to leases for the nine months ended March 31, 2019 is as follows: -16- INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) (Unaudited) The Company entered into a sales/lease back commitment in the nine months ended March 31, 2019 in the amount of $233, see Note 4 – Senior Credit Facility, Subordinated Convertible Note, net – CD Financial, LLC and other Long Term Debt. Maturities of operating lease liabilities as of March 31, 2019 were as follows: Total rent expense, including real estate taxes and maintenance charges, was approximately $249 and $245 and $756 and $741 for the three months and nine months ended March 31, 2019 and 2018, respectively. Rent and lease amortization and interest expense are included in cost of sales, selling and administrative expenses and interest expense 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.

Related Party Operating Lease Liabilities. Warehouse and office facilities are leased from Vitamin Realty, which is 100% owned by the Company’s chairman, and a major stockholder and certain of his family members, who are also 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.

The Company’s weighted average discount rate and remaining term on lease liabilities is approximately 3.76% and 6.6 years, respectively.

For the nine months ended March 31, 2019, our net sales from operations increased by $5,248 to approximately $36,393 from approximately $31,145 in the nine months ended March 31, 2018. The increase in net sales was from the Contract Manufacturing Segment with increased net sales of $5,421, offset with decreases in our other two segments, Branded Proprietary Products and Other Nutraceuticals Segment, of $56 and $117, respectively. Net sales increased in our Contract Manufacturing Segment by $5,421 primarily due to increased sales volumes with our two major customers, Life Extension in the amount of $3,392 and Herbalife in the amount of $1,668. For the nine months ended March 31, 2019, we had operating income of approximately $2,130, an increase of approximately $1,061 from operating income of approximately $1,069 for the nine months ended March 31, 2018. Our profit margins increased from approximately 11% of net sales in the nine months ended March 31, 2018 to approximately 13% of net sales in the nine months ended March 31, 2019, primarily as a result of the increased sales in our Contract Manufacturing Segment of approximately $5,421. Our consolidated selling and administrative expenses increased by approximately $60 or approximately 2.4% in the nine months ended March 31, 2019 compared to the nine months ended March 31, 2018.

In the nine months ended March 31, 2019 and 2018, a significant portion of our consolidated net sales, approximately 92% and 91%, respectively, were concentrated among two customers in our Contract Manufacturing Segment, Life Extension and Herbalife. Life Extension and Herbalife represented approximately 71% and 24% in the nine months ended March 31, 2019 and 72% and 22% in the nine months ended March 31, 2018, respectively, of our Contract Manufacturing Segment’s net sales, respectively. The loss of either of these customers could have a significant adverse impact on our financial condition and results of operations.

Cost of sales. Cost of sales increased by approximately $4,127 to $31,750 for the nine months ended March 31, 2019, as compared to $27,623 for the nine months ended March 31, 2018 or approximately 15%. Cost of sales decreased as a percentage of sales to 87.2% for the nine months ended March 31, 2019 as compared to 88.7% for the nine months ended March 31, 2018. The increase in the cost of goods sold amount is consistent with the increased net sales of approximately 17%. 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 decreased sales in each of the other two segments.

Selling and Administrative Expenses. There was an increase in selling and administrative expenses of $60, approximately 2.4% in the nine months ended March 31, 2019 as compared to the nine months ended March 31, 2018. As a percentage of sales, net, selling and administrative expenses was approximately 7% and 8% in the nine months ended March 31, 2019 and 2018, respectively. The increase was primarily from increases (i) in salaries and employees benefits of approximately $149, as the result of: (a) replacing our headcount with higher salaried employees, net of a pay structure change for the sales staff ($35); (b) an increase in employee benefits due to the change in personnel and an increase in premiums ($83) and; (c) an increase in our vacation pay liability ($31); and (ii) in professional and consulting fees of approximately $27 primarily as the result of outsourcing our information technology function beginning in April 2018 and increased legal expenses for our SEC filings. These increases were offset by decreases in (i) advertising and marketing of $34 as a result of decreased sales in the Branded Nutraceutical Segment, (ii) commissions and license fees of $18, also as a result of decreased sales relating to these payments and (iii) an aggregate of approximately $99 in other components of our selling and administrative expenses including decreases in depreciation and amortization expenses of approximately $47.

The change in fair value of derivative liabilities in the nine months ended March 31, 2018 was mainly the result of the decreased closing trading price of the Company’s stock, as traded on the OTC Bulletin Board, from $0.19 as of June 30, 2017 to $0.17 as of March 31, 2018 and the change in the volatility of the closing trading price of our common stock from 98.11% as of June 30, 2017 to 110.80% as of March 31, 2018. The closing trading price and the volatility of the closing trading price of our common stock are two of the variables used to calculate the estimated fair value of our derivative liabilities associated with the underlying derivative instrument.

The increase in state income tax expense of $105 is the result of the increased net income for MDC and the decrease in the federal income tax expense of $245 is the result of the one-time charge for the change in the effective federal tax rate from 34% as of December 31, 2017 to 21% as of January 1, 2018 which resulted in a decrease to our deferred tax assets of $263 offset by a current federal tax benefit of approximately $24 in the nine month period ended March 31, 2018 with no such rate change in the nine month period ended March 31, 2019.

For the three months ended March 31, 2019 and 2018 a significant portion of our consolidated net sales, approximately 92% and 91%, respectively, were concentrated among two customers, Life Extension and Herbalife, customers in our Contract Manufacturing Segment. Life Extension and Herbalife represented approximately 72% and 22% in the three months ended March 31, 2019 and 74% and 21% in the three months ended March 31, 2018, 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.

Cost of sales. Cost of sales increased by $2,889, approximately 32%, to $11,995 for the three months ended March 31, 2019, as compared to $9,106 for the three months ended March 31, 2018. Cost of sales decreased as a percentage of sales to 85.1% for the three months ended March 31, 2019 as compared to 86.1% for the three months ended March 31, 2018. The increase in the cost of goods sold amount is consistent with the increased net sales of approximately 33%. 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 decreased sales in each of the other two segments.

Selling and Administrative Expenses. There was an increase in selling and administrative expenses of $47 in the three months ended March 31, 2019 as compared to the three months ended March 31, 2018, approximately 6%. As a percentage of sales, net, selling and administrative expenses were approximately 6% and 8% for the three months ended March 31, 2019 and 2018, respectively. The increase was primarily due to an increase in salaries and employees benefits of approximately $86, as the result of replacing an administrative staff with a higher paid individual; offset, in part, by decreases of approximately $24 in amortization as the result of intangible assets being fully amortized in October 2018 and $23 in advertising and marketing expenses as a result of lower sales in the Branded Nutraceutical Segment. No other expense within our selling and administrative expenses changed by more than $10.

Our interest expense for the three months ended March 31, 2019 decreased by $36 from the three month period ended March 31, 2018, primarily as the result of CD Financial exercising its conversion right to convert the $5,350 CD Convertible Note to equity on July 24, 2018 (See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q), an interest savings of $80. This decrease was offset in part, by increased amounts outstanding under our revolving credit facility along with increased interest rates on the senior debt of 1.0% from March 31, 2018 to March 31, 2019 coupled with the adoption of ASU 2016-02 on July 1, 2018, which classifies a portion of the operating lease payments as interest. Accordingly, in the three month period ended March 31, 2019, we incurred additional interest cost on our senior debt of $11 and an interest cost of $33 on our operating lease liabilities.

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