INTEGRATED BIOPHARMA, INC. Certain statements set forth under this caption constitute "forward-looking statements." See "Cautionary Statement Regarding Forward-Looking Statements" on page 3 of this Annual Report on Form 10-K for additional factors relating to such statements. The Company is engaged primarily in the manufacturing, distributing, marketing and sale of vitamins, nutritional supplements and herbal products. The Company's customers are located primarily throughoutthe United States and Luxembourg. Our financial results are substantially dependent on net sales. Net sales are partly dependent on the mix of contract manufactured products and other nutraceutical sales, which are difficult to forecast. Factors that could cause demand to be different from our expectations include: customer acceptance of our pricing and our competitors' pricing; changes in customer order patterns; changes in the level of customer inventory; and changes in business and economic conditions, including conditions in the credit market that could affect consumer confidence and result in lower than expected demand for our manufactured products and to a lesser extent, our other nutraceutical business products and services. We believe that we have established and developed business relationships, facilities, personnel, product offerings, and competitive and financial resources in place for business success; however, future revenue, costs, gross margins, and profits are all influenced by a number of factors, including those discussed above, all of which are inherently difficult to forecast. Except as otherwise noted, all dollar amounts below are "in thousands". -16-
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In the fiscal year endedJune 30, 2022 , our net sales from operations decreased by$7,313 to approximately$56,246 from approximately$63,559 in the fiscal year endedJune 30, 2021 . Our net sales in the Contract Manufacturing Segment decreased by$7,743 and net sales in our Other Nutraceuticals Segment increased by$431 . Net sales decreased in our Contract Manufacturing Segment primarily due to decreased sales volumes to Life Extension and Herbalife, our two significant customers, in the amount of$6,212 and$1,943 , respectively. In the fiscal year endedJune 30, 2022 , our gross profit decreased by approximately$2,928 to$6,552 from approximately$9,480 for the fiscal year endedJune 30, 2021 . Our profit margins decreased by 3.3% in the fiscal year endedJune 30, 2022 , from 14.9% to 11.6% primarily as a result of the decreased sales volume in the fiscal year endedJune 30, 2022 compared to the fiscal year endedJune 30, 2021 . We had consolidated selling and administrative expenses of approximately$3,807 and$3,696 in the fiscal years endedJune 30, 2022 and 2021, respectively. The increase in the consolidated selling and administrative expenses of$111 , or approximately 3.0%, was primarily from the increase in stock compensation expense, a non-cash item, of$139 and salaries and employee benefits of$60 , offset in part, by a decrease in professional and consulting fees of$57 and insurance costs of$22 . In the fiscal years endedJune 30, 2022 and 2021, we had operating income of approximately$2,745 and$5,784 , respectively. Our revenue from our two significant customers in our Contract Manufacturing Segment is dependent on their demand within their respective distribution channels for the products we manufacture for them. As in any competitive market, our ability to match or beat other contract manufacturers pricing for the same items may also alter our outlook and the ability to maintain or increase revenues. We will continue to focus on our core businesses and push forward in maintaining our cost structure in line with our sales and expanding our customer base. We are still experiencing supply chain disruptions relating to fuel refinery and transportation issues as it pertains to both shipping and production of plastics. These issues first arose as result of the COVID-19 pandemic and other geo-political events. This continues to impact the supply and demand of bottles and caps, key components in our Contract Manufacturing Segment. Transportation, in general, continues to be an issue in the delay of receiving other raw materials and our ability to meet promised delivery dates to our customers in the Contract Manufacturing Segment. Additionally, 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 the Company's products and impact our operating results. While we haven't, to date, seen a significant negative impact in our margins resulting from the coronavirus outbreak, we are experiencing a slight negative impact on our margins due to inflation and tightened labor markets. During the first quarter of calendar 2022, the war inUkraine affected our customer's business operations inUkraine andRussia , resulting in the cancelation of some future orders. The war resulted in the imposition of sanctions bythe United States , theUnited Kingdom , and theEuropean Union , that affect the cross-border operations of businesses operating inRussia . In addition, many multinational companies ceased or suspended their operations inRussia . Therefore, the ability to continue operations inRussia by our customers is uncertain. Also, there may be a shortage of Sunflower Oil products in the near future and this may cause delays in production of certain raw materials and may require reformulation of products. Additionally, unrelated to the war, a recent export ban of palm oil products fromIndonesia may play a role in reformulation of many products. This may cause delays in finished products as these items will need to be reformulated and labels updated and printed with the changes, which may cause further delays. While we haven't, to date, seen a significant negative impact to our margins resulting from the coronavirus outbreak, we are experiencing a slight negative impact on our margins due to inflation and tightened labor markets. -17- --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates include:
? sales returns and allowances;
? allowance for doubtful accounts;
? inventory valuation;
? valuation and recoverability of long-lived assets;
? income taxes and valuation allowances on deferred income taxes; and
? accruals for, and the probability of, the outcome of current litigation, if any.
On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.
Allowances for Doubtful Accounts and Sales Returns
Our management makes judgments as to its ability to collect outstanding
receivables and provides allowances for the portion of receivables for which
collection becomes doubtful. Provisions are made based upon a specific review of
all significant outstanding amounts. We continuously monitor payments from our
customers and maintain allowances for estimated losses for doubtful accounts in
the period they become known.
If the historical data we use to calculate the allowance provided for doubtful
accounts does not reflect the future ability to collect outstanding receivables,
additional provisions for doubtful accounts may be needed and the future results
of operations could be materially affected. In recording any additional
allowances, a respective charge against income is reflected in the general and
administrative expenses; and would reduce the operating results in the period in
which the increase is recorded.
Our return policy in our contract manufacturing business is to only accept
returns for defective products. If defective products are returned, our
agreement with our customers is to cure the defect and re-ship the product.
Based on this policy, when the product is shipped we make an estimate of any
potential returns or allowances. With respect to our branded proprietary
nutraceutical products, our return policy is also to accept returns for
defective products and re-ship replacement items for the damaged product. In
most instances, the damaged goods are a small portion of the overall order and
we instruct our customer to dispose of the damaged product and we issue them a
credit for the dollar amount of the damaged goods plus any cost of disposal. We
also estimate and make allowances at the time of shipment.
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Inventory Valuation
Inventories are stated at the lower of cost or net realizable value, which reflects management's estimates of net realizable value. Cost is determined using the first-in, first-out method. As a result of our inventory being manufactured primarily on a purchase order basis, the quantity of both raw materials and finished goods inventory provides for minimal risk of potential overstock or obsolescence.
Mail and Internet order inventory is expiration date sensitive. Accordingly, we review this inventory, consider sales levels (by SKU), term to expiration date, potential for retesting to extend expiration date, and evaluate potential for obsolescence or overstock. Long Lived Assets We record impairment losses on long lived assets when events and circumstances indicate that such assets might be impaired and the estimated fair value of any such asset is less than its recorded amount. The Company reviews the value of its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Conditions that would necessitate an impairment assessment include material adverse changes in operations, significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon certain acquired products, services, or marketplaces, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable. Tests for impairment or recoverability are performed at least annually and require significant management judgment and the use of estimates which the Company believes are reasonable and appropriate at the time of the impairment test. The Company also re-evaluates the periods of amortization to determine whether circumstances warrant revised estimates of current useful lives. No impairment losses were identified in the fiscal years endedJune 30, 2022 or 2021. Income Taxes The Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating losses and tax credit carry-forwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company reduces deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized. The Company uses a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. General Litigation From time to time, the Company is a defendant or plaintiff in various legal actions which arise in the normal course of business. As such, the Company is required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of the provision required for these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. The provision may change in the future due to new developments or changes in circumstances. Changes in the provision could increase or decrease the Company's earnings in the period the changes are made. In the opinion of management, after consultation with legal counsel, the ultimate resolution of these matters cannot be determined at this time as to the whether there could be material adverse effect on our financial condition or results of operations. -19-
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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:
? identification of the promised goods or services in the contract;
? determination of whether the promised goods or serves are performance
obligations including whether they are distinct in the context of the
contract;
? measurement of the transaction price, including the constraint on variable
consideration;
? allocation of the transaction price to the performance obligations based on
estimated selling prices; and
? 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.
Results of Operations (in thousands, except share and per share amounts)
The following table sets forth the income statement data of the Company as a percentage of net sales for the periods indicated:
For the Fiscal Year Ended June 30,
2022 2021
Sales, net 100.0 % 100.0 %
Costs and expenses:
Cost of sales 88.3 % 85.1 %
Selling and administrative 5.8 % 5.8 %
Total costs and expenses 95.1 % 90.9 %
Income from operations 4.9 % 9.1 %
Other expense, net:
Interest expense (0.3 %) (0.4 %)
Other income (expense):
PPP Note forgiveness - 2.6 %
Unrealized loss on investment in iBio, Inc. (0.1 %) (0.1 %)
Realized gains on sale of iBio, Inc. common stock - 0.1 %
Other income (expense), net 0.1 % 0.1 %
Total other income (expense) 0.0 % 2.7 %
Total other income (expense), net (0.3 %) 2.3 %
Income before income taxes 4.6 % 11.4 %
Federal and state income tax benefit, net 2.2 % 1.2 %
Net income 6.8 % 12.6 %
-20---------------------------------------------------------------------------------
Year ended
Sales, net. Net sales for the fiscal year ended
Fiscal Year Ended Dollar Increase Percentage
June 30, (Decrease) Change
2022 2021 2022 vs 2021 2022 vs 2021
(dollars in thousands)
Contract Manufacturing:
US Customers $ 44,450 $ 52,763 $ (8,313 ) (15.8 %)
International Customers 9,641 9,072 369 6.3 %
Net sales, Contract Manufacturing 54,091 61,835 (7,744 ) (12.5 %)
Other Nutraceuticals :
US Customers 2,067 1,624 443 27.3 %
International Customers 88 100 (12 ) (12.0 %)
Net sales, Other Nutraceuticals 2,155 1,724 431 25.0 %
Total net sales $ 56,246 $ 63,559 $ (7,313 ) (11.5 %)
In the fiscal years ended June 30, 2022 and 2021, a significant portion of our
consolidated net sales, approximately 90% and 92%, respectively, were
concentrated among two customers, Life Extension and Herbalife, customers in our
Contract Manufacturing Segment. Life Extension and Herbalife represented
approximately 67% and 26% and 69% and 26%, respectively, of our Contract
Manufacturing Segment's net sales in the fiscal years ended June 30, 2022 and
2021, respectively. Two other customers, Thermosource Tooling and Manufacturing
and ThermoFisher Scientific, (customers of our Other Nutraceutical Businesses
Segment), while not significant customers of our consolidated net sales,
represented 40% and 19% and 1% and 30%, respectively, of the Other Nutraceutical
Businesses net sales in the fiscal years ended June 30, 2022 and 2021,
respectively. The loss of any of these customers could have a significant
adverse impact on our financial condition and results of operations.
The decrease in net sales of approximately $7,313 was primarily the result of
decreased net sales in our Contract Manufacturing Segment by approximately
$7,744 which was primarily due to decreased sales volumes to each of our major
customers, Life Extension and Herbalife, in the amounts of $6,212 and $1,943 ,
respectively, in the fiscal year ended June 30, 2022 , compared to the comparable
prior year. Net sales increased by $431 in the Other Nutraceuticals Segment
primarily as a result of increased sales of $487 in MDC Warehousing and
Distribution, Inc.
Cost of sales. Cost of sales decreased by $4,385 to $49,694 for the fiscal year
ended June 30, 2022 , as compared to $54,079 for the fiscal year ended June 30,
2021 , a decrease of approximately 8.1%. Cost of sales as a percentage of sales
was approximately 88% and 85% for the fiscal years ended June 30, 2022 and 2021,
respectively. The decrease in the cost of goods sold amount is consistent and
expected with the decrease in net sales. The increase in the cost of goods sold
as a percentage of net sales and the resulting decrease in gross profit, was
primarily the result of the decreased net sales not generated to offset the 9%
increase in manufacturing overhead, which was primarily from increased labor
costs of approximately 12%.
Selling and Administrative Expenses. There was an increase in selling and
administrative expenses of $111 or approximately 3.0% in the fiscal year ended
June 30, 2022 as compared to the fiscal year ended June 30, 2021 . As a
percentage of sales, net, selling and administrative expenses were approximately
6.8% and 5.8% for the fiscal year ended June 30, 2022 and 2021, respectively.
The increase was primarily from increases in employee stock compensation
expense, a non-cash expense, of $139 as a result of issuing stock options in
November 2020 and 2021 and salaries and employee benefits of $60 . These
increases were offset in part by decreases in professional and consulting fees
of $57 and insurance costs of $22 .
-21-
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Other income (expense), net. Other income (expense), net was approximately
Fiscal Year Ended
June 30,
2022 2021
(dollars in thousands)
Interest expense $ (128 ) $ (256 )
Other income (expense):
PPP Note forgiveness - 1,659
Unrealized loss on investment (55 ) (53 )
Realized gain on sale of investment - 56
Other income (expense), net 35 57
Total other income (expense), net (20 ) 1,719
Other income (expense), net $ (148 ) $ 1,463 Our interest expense in the fiscal year endedJune 30, 2022 decreased by$128 from the fiscal year endedJune 30, 2021 , primarily resulting from of lower average daily balances outstanding under the Senior Credit Facility with PNC and and having no other debt outstanding in the fiscal year endingJune 30, 2022 compared to the fiscal year endedJune 30, 2021 . The PPP Note forgiveness amount of$1,659 represents principal of$1,639 and interest of$20 that qualified for loan forgiveness under the SBA guidelines and was paid to PNC Bank by the SBA onJune 28, 2021 , resulting in the other income of$1,659 recorded in the fiscal year endedJune 30, 2021 . In the fiscal years endedJune 30, 2021 , we sold 16,000 shares of iBio Stock (SeeNote 2 to the consolidated financial statements included in this Annual Report on Form 10-K) for a gain of$56 . There were no sales of the iBio Stock in the fiscal year endedJune 30, 2022 . Also, in the fiscal years endedJune 30, 2022 and 2021, we had unrealized losses on the remaining iBio Stock of approximately$55 and$53 , respectively. In the fiscal years endedJune 30, 2022 and 2021, we had other income of$12 and$42 , respectively from providing back office and operational support for unrelated entities that sell consumer products through retail and internet-based outlets. The balance of other income (expense), net was primarily from the disposition of property and equipment. Federal and state income tax, net. In the fiscal years endedJune 30, 2022 and 2021, we released the valuation reserves for the deferred tax assets related to our federal net operating losses in the amount of$2,118 and$2,282 , respectively. Management determined that the amount of the release was more likely than not to be realized by the Company. In the fiscal year endedJune 30, 2022 and 2021, we had deferred income tax benefits of$1,530 and$1,385 , respectively and current state tax expense of approximately$289 and$619 , respectively. We continue to maintain a reserve on a portion of our deferred tax assets as it has been determined that based upon past losses, the Company's past liquidity concerns and the current economic environment, it is "more likely than not" that the Company's deferred tax assets may not be fully realized.
The increase in the state tax expense from 2020 to 2021 was the result of increased taxable income for the combined group.
Net income. Our net income for the fiscal year endedJune 30, 2022 and 2021 was approximately$3,838 and$8,013 , respectively. The decrease of approximately$4,175 was primarily the result of decreased operating income of$3,039 , the PPP Note forgiveness in the amount of$1,659 in the fiscal year endedJune 30, 2021 with no such forgiveness in the fiscal year endedJune 30, 2022 and an increase in the income tax benefit, net in amount$475 . -22- --------------------------------------------------------------------------------
Liquidity and Capital Resources
The following table sets forth, for the periods indicated, the Company's net
cash flows provided by or used in operating, investing and financing activities:
For the fiscal year ended June 30,
2022 2021
(dollars in thousands)
Net cash provided by operating activities $ 4,091 $ 3,050
Net cash used in investing activities $ (465 ) $ (199 )
Net cash used in financing activities $ (3,505 ) $ (3,043 )
Cash at end of year $ 331 $ 210
At June 30, 2022 and 2021, the Company had working capital of $11,363 and
$8,762 , respectively. Our current liabilities decreased by approximately $3,973
offset by a decrease in our current assets of $1,372 from June 30, 2021 to June
30, 2022 . The decrease in current liabilities is primarily from the decrease of
$2,072 in advances under revolving credit facility and the decrease in current
portion of long term debt, net in the amount of $1,425 and the decrease in the
current assets is primarily from decreases in accounts receivable, net and
inventories in the amounts of $888 and $640 , respectively.
Operating Activities
Net cash provided by operating activities of $4,091 in the fiscal year ended
June 30, 2022 includes net income of approximately $3,838 . After excluding the
effects of non-cash expenses and income, depreciation and amortization,
compensation expense for employee stock options, accretion of financial
instruments, changes in deferred tax assets and unrealized gains on investments,
the adjusted cash used in operations before the effect of the changes in working
capital components was an increase of approximately $3,526 . Cash in the amount
of approximately $564 from our working capital assets and liabilities was
provided from our operating activities and was primarily the result of decreases
in accounts receivable of approximately $927 and inventories of $640 , offset, by
decreases in operating lease obligations of $501 and accounts payable and
accrued expenses and other liabilities of $417 , and an increase in prepaid
expenses and other assets of approximately $84 .
Net cash provided by operating activities of $3,050 in the fiscal year ended
June 30, 2021 includes net income of approximately $8,013 . After excluding the
effects of non-cash expenses and income, including PPP Note forgiveness,
depreciation and amortization, compensation expense for employee stock options,
accretion of financial instruments, changes in deferred tax assets and
unrealized gains on investments, the adjusted cash used in operations before the
effect of the changes in working capital components was an increase of
approximately $6,096 . Cash in the amount of approximately $3,046 from our
working capital assets and liabilities was used in our operating activities and
was primarily the result of increases in inventories of approximately $1,594 ,
accounts receivable of $294 , and decreases in operating lease obligations of
$490 and accounts payable and accrued expenses and other liabilities of $711 ,
offset by a decrease in prepaid expenses and other assets of approximately $43 .
Investing Activities
Cash used in investing activities was used for the purchase of machinery and
equipment for approximately $486 and $295 in the fiscal years ended June 30,
2022 and 2021, respectively, offset in the fiscal year ended June 30, 2022 and
2021 by proceeds (i) received from the sale of fixed assets of $21 and $0 , and
(ii) from the sale of iBio, Stock of $0 and $96 , respectively, a net use of cash
approximately $465 and $199 , respectively.
Financing Activities
Cash used in financing activities was approximately $3,505 for the fiscal year
ended June 30, 2022 and consists of; (i) $54,618 received from advances under
our revolving credit facility, and (ii) $34 received from the exercise of
employee stock options, offset by (i) repayments under our revolving credit
facility of $56,691 (See Note 5 to the consolidated financial statements
included in this Annual Report on Form 10-K) and (ii) repayments of principal
under our term notes in the amount of $1,466 (See Note 5 to the consolidated
financial statements included in this Annual Report on Form 10-K).
-23-
--------------------------------------------------------------------------------Cash used in financing activities was approximately$3,043 for the fiscal year endedJune 30, 2021 and consists of; (i)$57,662 received from advances under our revolving credit facility, and (ii)$23 received from the exercise of employee stock options, offset by (i) repayments under our revolving credit facility of$59,535 (See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K), (ii) repayments of principal under our term notes in the amount of$1,118 (See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K) and (iii) repayments of$75 under our financed lease obligations. As ofJune 30, 2022 , we had cash of approximately$331 , funds available under our revolving credit facility of approximately$6,419 and working capital of$11,363 . Our working capital includes approximately$101 outstanding under our revolving line of credit which is not due untilMay 2024 but classified as current due to a subjective acceleration clause that could cause the advances to become currently due. (See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K). Furthermore, we had income from operations of approximately$2,745 in the fiscal year endedJune 30, 2022 and net income of approximately$3,838 . After taking into consideration our interim results and current projections, management believes that operations, together with the revolving credit facility and equipment financing will support our working capital requirements at least through the twelve-month period endingSeptember 13, 2023 . Our total annual commitments atJune 30, 2022 for long term non-cancelable leases of approximately$574 consists of obligations under operating leases for facilities and operating lease agreements for the rental of warehouse equipment and office equipment. Capital Expenditures The Company's capital expenditures in the fiscal years endedJune 30, 2022 and 2021 were approximately$486 and$295 , respectively. The Company has budgeted approximately$500 for capital expenditures for the fiscal year endingJune 30, 2023 . The total amount is expected to be funded from cash provided from the Company's operations and from lease financing.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Impact of Inflation
The Company does not believe that inflation has significantly affected its results of operations.
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