INTEGRATED BIOPHARMA INC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

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CONDENSED CONSOLIDATED STATEMENTS OF****FINANCIAL CONDITION

(in thousands, except share and per share amounts)

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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF STOCKHOLDERS’** EQUITY**

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2023 AND 2022

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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Note1. Nature of Operations, Principles of Consolidation and Basis of Presentation of Interim Financial Statements**

Nature of Operations

Integrated BioPharma, Inc., a Delaware corporation (together with its subsidiaries, 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 and Luxembourg. The Company was originally incorporated in the state of Delaware on* August 31, 1995under the name Chem International, Inc. On December 5, 2000,the Company changed its name to Integrated Health Technologies, Inc. and on January 29, 2003changed its name to Integrated BioPharma, Inc. The Company restated its certificate of incorporation in Delaware in June 2006.*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 and (b) Other Nutraceutical Businesses which includes the operations of (i) AgroLabs, Inc. (“AgroLabs”), which distributed healthful nutritional products for sale through major mass market, grocery and drug and vitamin retailers under the following brands: Peaceful Sleep, and Wheatgrass and other products introduced into the market using the AgroLabs name (these are referred to as our branded products); (ii) The Vitamin Factory (the “Vitamin Factory”), which sells private label MDC products, as well as our AgroLabs products, through the Internet, (iii) IHT Health Products, Inc. (“IHT”) a distributor of fine natural botanicals, including multi minerals produced under a license agreement, (iv) MDC Warehousing and Distribution, Inc. (“MDC Warehousing“), a service provider for warehousing and fulfilment services and (v) Chem International, Inc., a distributor of certain raw materials for DSM Nutritional Products LLC. The Vitamin Factory hadno products available for sale and AgroLabs hadno sales of its branded products in thethree andsix months ended* December 31, 2023and2022.*

Principles of Consolidation

The accompanying condensed consolidated financial statements for the interim periods are unaudited and include the accounts of Company. Intercompany transactions and accounts have been eliminated in consolidation.

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 Rule8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and therefore donot 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 (“GAAP”). 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 Form10-K for the fiscal year ended* June 30, 2023 (“Form10*-K”), as filed with the SEC. The* June 30, 2023*balance sheet was derived from audited financial statements,

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but doesnot include all disclosures required by GAAP. 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 thethree andsix months ended* December 31, 2023arenot* necessarily indicative of the results for the full fiscal year ending* June 30, 2023*or for any other period.

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 ASC606, the Company performs the followingfive steps:

**Income Taxes.The Company accounts for income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. Tax benefits are recognized when it is probable that the deduction will be sustained. A valuation allowance is established when it is more likely thannot that all or a portion of a deferred tax asset willnot be realized.

For thethree months ended* December 31, 2023and2022,* the Company had a federal income tax benefit of $76 and $4, respectively and state income tax expense, net of approximately $6 and $14, respectively. For thesix months ended* December 31, 2023and2022,* the Company had a federal tax benefit of $70 and a deferred tax expense of $17, respectively and state income tax expense, net of approximately $13 and $44, respectively.

Leases. The Company determines 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 its consolidated balance sheets. Finance leases are included in property and equipment, current portion of long term debt, and long-term debt obligation on our condensed consolidated statement of financial condition.

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 donot 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.

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The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, the Company accounts 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, subject to anti-dilution limitations using the treasury stock method.

The following options and potentially dilutive shares for stock options werenot included in the computation of weighted average diluted common shares outstanding as the effect of doing so would be anti-dilutive for thethree andsix months ended* December 31, 2023and2022:*

Note2. Inventories**

Inventories are stated at the lower of cost or net realizable value using thefirst-in,first-out method and consist of the following:

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Note3. Property and Equipment, net**

Property and equipment, net consists of the following:

Depreciation and amortization expense recorded on property and equipment was $78 and $93 for thethree months and $155 and $181 forsix months ended* December 31, 2023and2022,* respectively. Additionally, the Company disposed of property of $34 and $19 in thesix months ended* December 31, 2023and2022,* respectively and in thethree andsix months ended* December 31, 2023,*recognized a loss on disposal of fixed assets of $2.

Note4. Senior Credit Facility**

As of* December 31, 2023and June 30, 2023,*the Company hadno debt outstanding under its Senior Credit Facility.

On* March 16, 2023,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, 2016and May 15, 2019.*

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. ("iBio Stock") owned by the Company. Revolving Advances bear interest at PNC’s Base Rate (8.50% and 8.25% as of* December 31, 2023and June 30, 2023,*respectively) or the Eurodollar Rate, at Borrowers’ option, plus 2.50%.

As of* March 16, 2023,the Amended Loan Agreement provides that any loans, advances and/or other extensions of credit denominated in U.S. Dollars prior to March 16, 2023that bear interest or are permitted to bear interest, and have fees, commissions or other amounts based on the London Interbank Offered Rate administered by the ICE Benchmark Administration (which may*be referred to as the “Eurodollar Rate” ( “LIBOR”) shall thereafter bear interest based on the Term SOFR Rate plus the SOFR Adjustment . The Term SOFR Rate, for any day, shall be equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York (or a successor administrator of the secured overnight financing rate). The SOFR Adjustment is defined as 10 basis points (0.10%).

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”).

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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 ineighty-four (84) consecutive monthly installments of principal, thefirst eighty-three (83) of which shall be in the amount of $43, commencing on thefirst business day of* June 2019,and continuing on thefirst* 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 Company satisfied all the principal payments under the Term Note on* January 3, 2022.*

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 anyone time (“Inventory Advance Rate” and together with the Receivables Advance Rate, collectively, the “Advance Rates”), minus (iii) the aggregate Maximum Undrawn Amount, as defined in the Amended Loan Agreement, of all outstanding letters of credit, minus (iv) such reserves as PNC** may** reasonably deem proper and necessary from time to time.

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.

Note5. Significant Risks and Uncertainties**

(a) Major Customers.In thethree months ended December 31, 2023and2022, approximately 89% and 91%, respectively, of consolidated net sales were derived fromtwo customers. Thesetwo customers are in the Company’s Contract Manufacturing Segment and represented approximately 70% and 23% and 70% and 25% in thethree months ended* December 31, 2023and2022,* respectively of the Contract Manufacturing Segment net sales. In thesix months ended* December 31, 2023and2022,* approximately 90% and 88% of consolidated net sales, respectively, were derived from the sametwo customers and net sales to thesetwo customers represented approximately 73% and 21% in thesix months ended* December 31, 2023and 66% and 27% of net sales in thesix* months ended* December 31, 2022,respectively of the Contract Manufacturing Segment net sales. Accounts receivable from thesetwo major customers represented approximately 78% and 84% of total net accounts receivable as of December 31and June 30, 2023,respectively. Two other customers in the other Nutraceutical Segment, whilenot* significant customers of the Company’s consolidated net sales, represented approximately 40% and 22% and 81% and 1% of net sales of the Other Nutraceutical Segment in thethree months ended* December 31, 2023and2022,* and 41% and 28% and 66% and 15%, of net sales of the Other Nutraceutical Segment in thesix months ended* December 31, 2023and2022,* 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 than10% of net sales.

**(b) Other Business Risks.Approximately 76% of the Company’s employees are covered by a union contract and are employed in its New Jersey facilities. The contract was renewed effective September 1, 2023and will expire on August 31, 2026.

The Company has seen a negative impact in its margins due to inflation and tightened labor markets. The Company* may**not* be able to timely increase its selling prices to its customer resulting from price increases from its suppliers due to various economic factors, including inflation, labor and shipping costs and its own increases in shipping, labor and other operating costs. The Company’s results of operations* mayalso be affected by economic conditions, including inflationary pressures, that can impact consumer disposable income levels and spending habits, thereby reducing the orders it may*receive from the Company’s significant customers.

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The Company continues to experience minimal supply chain disruptions relating to fuel refinery and transportation issues as it pertains to shipping. These issuesfirst arose as result of the COVID-19 pandemic and other geo-political events. Currently, the drought in Panama is slowing down shipping container traffic, contributing to continued shipping delays in the receipt of certain raw materials used in the Company’s manufacturing process.

During thefirst quarter of calendar2022, the war in Ukraine affected the Company’s customer’s business operations in Ukraine and Russia, resulting in the cancelation of some future orders. The war resulted in the imposition of sanctions by the United States, the United Kingdom, and the European Union, that affect the cross-border operations of businesses operating in Russia. In addition, many multinational companies ceased or suspended their operations in Russia. Therefore, the ability to continue operations in Russia by the Company’s customers is uncertain.

Additionally, the current Israel-Hamas war in the Middle East could negatively impact the sales and margins of the Company. Certain customers sell into Israel and the Company sources certain raw materials from Israel. If the Israel-Hamas war carries on for a significant time frame, it could have a negative impact on the sales and margins of the Company if the Company is unable to replace these sales with other sales and/or obtain the same raw materials at substantially the same price as currently paid.

Note6. 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 5 years.

The components of lease expense for thethree months ended* December 31, 2023and2022,* were as follows:

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The components of lease expense for thesix months ended* December 31, 2023and2022,* were as follows:

Rent and lease amortization costs are included in cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

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 estate of the Company’s former 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 asecond* 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 provided for minimum annual rental payments of $533, plus increases in real estate taxes and building operating expenses. On July 15, 2022,MDC entered into athird* amendment of the lease (the “Third Lease Amendment”) with Vitamin Realty, increasing its rentable square footage to 116,175. The Third Lease Amendment provides for minimum annual rental payments of $842, plus increases in real estate taxes and the building operating expenses allocation percentage and is effective as of* July 1, 2022.*

Rent expense and lease amortization costs for thethree months ended* December 31, 2023and2022* on these leases were $338 and $321 respectively, and for thesix months ended* December 31, 2023and2022* were $642 and $637, respectively, and are included in cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. As of* December 31, 2023and June 30, 2023,the Company hadno current obligations to Vitamin Realty. Additionally, the Company has operating lease obligations of $1,679 and $2,061 with Vitamin Realty as noted in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2023and June 30, 2023,*respectively.

Other Operating Lease Liabilities. The Company has entered into certain non-cancelable operating lease agreements expiring up through* May, 2027,*related to office equipment.

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As of* December 31, 2023,*the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases were as follows:

As of* June 30, 2023,*the Company’s ROU assets, lease obligations and remaining cash commitment on these leases were as follows:

As of* December 31, 2023and June 30, 2023,*the Company’s weighted average discount rate and remaining term on operating lease liabilities were approximately 4.96% and 4.41% and 2.5 years and 2.9 years, respectively.

Financed Lease Obligation.

As of each* December 31,and June 30, 2023,*the Company’s weighted average discount rate for the outstanding finance lease obligation is 0% and the remaining term on finance lease obligation is approximately 0.7 years and 1.2 years, respectively. The related ROU asset and lease obligation are included in Property and Equipment, net and Finance Lease Obligation, respectively in the accompanying Condensed Consolidated Balance Sheet.

Supplemental cash flows information related to leases for thesix months ended* December 31, 2023,*is as follows:

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Supplemental cash flows information related to leases for thesix months ended* December 31, 2022,*is as follows:

Maturities of operating lease liabilities as of* December 31, 2023*were as follows:

(b) Legal Proceedings.

The Company is subject, from time to time, to claims bythird 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.

Note7. Related Party Transactions**

Information related to related party transactions are disclosed in Note6(a). Leases for related party lease transactions.

Note8. Equity Transactions and Stock-Based Compensation**

In* November 2023,*the Board of Directors authorized the issuance of up to 597,500 stock options to Company officers and employees. The Company issued 582,500 stock options with an exercise price ranging from $0.24 to $0.26, vesting over three years, with expiration terms often years from the date of grant.

Additionally, in* July 2023,the Board of Directors authorized the issuance of 200,000 stock options (50,000 each) to the non-executive directors of with an exercise price of $0.33, vesting overone year,25% at the end of each quarter ending September 30, 2023,** December 21, 2023,** March 31, 2024and June 30, 2024.*

For thethree andsix months ended* December 31, 2023and2022,* the Company incurred stock-based compensation expense of $61 and $86, and $133 and $167, respectively. The Company expects to record additional stock-based compensation of $328 over the remaining vesting periods of approximatelyone tothree years for all non-vested stock options.

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The Company used the following assumptions to calculate the fair value of the stock option grants using the Black-Scholes option pricing model on the measurement date during thesix months ended* December 31, 2023:*

The Company calculates expected volatility for a stock-based grant based on historic daily stock price observations of its common stock during the period immediately preceding the grant that is equal in length to the expected term of the grant. The expected term of the options is estimated based on the Company’s historical exercise rate and forfeiture rates are estimated based on employment termination experience. The risk free interest rate is based on U.S. Treasury yields for securities in effect at the time of grants with terms approximating the term of the grants. The assumptions used in the Black-Scholes option valuation model are highly subjective, and can materially affect the resulting valuations.

A summary of the Company’s stock option activity, and related information for thesix months ended* December 31, 2023*follows:

Note9. 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 intotwo reportable segments as follows: Contract Manufacturing, and Other Nutraceutical Businesses. International sales, concentrated primarily in Europe, for thethree months ended* December 31, 2023and2022* were $1,656 and $1,914, respectively and for thesix months ended* December 31, 2023and2022* were $3,265 and $2,473, respectively.

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Financial information relating to thethree months ended* December 31, 2023and2022* operations by business segment and disaggregated revenues was as follows:

Financial information relating to thesix months ended* December 31, 2023and2022* operations by business segment and disaggregated revenues was as follows:

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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, 2023.

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 and Luxembourg.

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, 2023.

For the six months ended December 31, 2023, our net sales from operations decreased by $156 to approximately $24,424 from approximately $24,580 in the six months ended December 31, 2022, less than 1%. Our net sales in the Contract Manufacturing Segment increased by $247 or approximately 1.1%, offset by a decrease in our Other Nutraceuticals Segment of $403. Net sales increased in our Contract Manufacturing Segment primarily due to increased sales volumes to Life Extension of $1,959 offset by decreases in the amounts of $1,482 and $ 230 from Herbalife and all other customers, respectively. Net sales in the six months ended December 31, 2023 were lower by approximately $403 from the in the six months ended December 31, 2022 in our Other Nutraceuticals Segment by $403, primarily due to MDC Warehousing and CII with decreased net sales in the amounts of $238 and $171, respectively. The declines were from two major customers in this segment, which represented 41% and 4% in the six months ended December 31, 2023 compared to 66% and 15% in the three months ended December 31, 2022. The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations.

For the six months ended December 31, 2023, we had an operating loss of approximately $506, an increase of approximately $503 from the operating loss of approximately $3 for the six months ended December 31, 2022. Our profit margins decreased from approximately 8.4% of net sales in the six months ended December 31, 2022 to approximately 5.5% of net sales in the six months ended December 31, 2023, primarily as a result of the increased cost of sales of $559. The increase of $559 in the cost of goods sold amount is from increased manufacturing costs $585 and $116 from increased cost of goods in our Contract Manufacturing Segment offset by a decrease of $142 in our Other Nutraceuticals Segment. Our consolidated selling and administrative expenses decreased by approximately $212 or approximately 10.2% in the six months ended December 31, 2023 compared to the six months ended December 31, 2022. Our salaries and employee benefits decreased by approximately $100 as a result of decreased (i) bonuses of $43, (ii) base pay of $33 and (iii) payroll taxes and other employee benefits of $24. Other selling and administrative expenses decreased by $112 primarily as a result of decreased stock compensation expense of $34 and all other selling and administrative expenses of $78.

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 believe that this focus will produce a reduction of the reliance on our two significant customers in our fiscal year ending June 30, 2025.

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We have seen a negative impact in our margins due to inflation and tightened labor markets. We may not be able to timely increase our selling prices to our customers resulting from price increases from our suppliers due to various economic factors, including inflation, labor and shipping costs and our own increases in shipping, labor and other operating costs. Our results of operations may also be affected by economic conditions, including inflationary pressures, that can impact consumer disposable income levels and spending habits, thereby reducing the orders we may receive from our significant customers.

We continue to experience minimal supply chain disruptions relating to fuel refinery and transportation issues as it pertains to shipping. These issues first arose as result of the COVID-19 pandemic and other geo-political events. Currently, the drought in Panama is slowing down shipping container traffic, contributing to continued shipping delays in the receipt of certain raw materials used in our manufacturing process.

During the first quarter of calendar 2022, the war in Ukraine affected our customer’s business operations in Ukraine and Russia, resulting in the cancelation of some future orders. The war resulted in the imposition of sanctions by the United States, the United Kingdom, and the European Union, that affect the cross-border operations of businesses operating in Russia. In addition, many multinational companies ceased or suspended their operations in Russia. Therefore, the ability to continue operations in Russia by our customers is uncertain.

Additionally, the current Israel-Hamas war in the Middle East could negatively impact our sales and margins. Certain of our customers sell into Israel and we source certain raw materials from Israel. If the Israel-Hamas war carries on for a significant time frame, it could have a negative impact on our sales and margins if we are unable to replace these sales with other sales and/or obtain the same raw materials at substantially the same price as currently paid.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies in the three months ended December 31, 2023, 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, 2023 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.

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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 Six Months Ended December 31, 2023 compared to the Six Months Ended December 31, 2022

**Sales, net.**Sales, net, for the six months ended December 31, 2023 and 2022 were $24,424 and $24,580, respectively, a decrease of 0.6%, and were comprised of the following:

In the six months ended December 31, 2023 and 2022, a significant portion of our consolidated net sales, approximately 90% and 88%, were concentrated among two customers in our Contract Manufacturing Segment, Life Extension and Herbalife. Life Extension and Herbalife represented approximately 70% and 23% and 66% and 27%, respectively, of our Contract Manufacturing Segment’s net sales in the six months ended December 31, 2023 and 2022, respectively.

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The decrease in net sales of approximately $156 in the six months ended December 31, 2023 was primarily the result of decreased sales in the Other Nutraceutical Segment of approximately $403, offset by the increase in the Contract Manufacturing Segment of $247, from the in the six months ended December 31, 2022. The decrease in our Other Nutraceuticals Segment by $403, was primarily due to MDC Warehousing and CII with decreased net sales in the amounts of $238 and $171, respectively. The declines were from two major customers in this segment, which represented 41% and 4% in the six months ended December 31, 2023 compared to 66% and 15% in the three months ended December 31, 2022. 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 approximately $559 to $23,072 for the six months ended December 31, 2023, as compared to $22,513 for the six months ended December 31, 2022 or approximately 2.5%. Cost of sales increased as a percentage of sales to 94.5% for the six months ended December 31, 2023 as compared to 91.6% for the six months ended December 31, 2022. The increase of $559 in the cost of goods sold amount is from increased manufacturing costs $585 and $116 from increased cost of goods in our Contract Manufacturing Segment offset by a decrease of $142 in our Other Nutraceuticals Segment. The increase in the cost of goods sold as a percentage of net sales, was primarily the result of substantially the same sales in the Contract Manufacturing net sales used to offset the increased manufacturing overhead costs.

Selling and Administrative Expenses. There was a decrease in selling and administrative expenses of approximately $212 or approximately 10.2% in the six months ended December 31, 2023 compared to the six months ended December 31, 2022. As a percentage of sales, net, selling and administrative expenses were approximately 7.6% and 8.4% in the six months ended December 31, 2023 and 2022, respectively. Our salaries and employee benefits decreased by approximately $100 as a result of decreased (i) bonuses of $43, (ii) base pay of $33 and (iii) payroll taxes and other employee benefits of $24. Other selling and administrative expenses decreased by $112 primarily as a result of decreased stock compensation expense of $34 and all other selling and administrative expenses of $78.

Other income (expense), net. Other income (expense), net was approximately $8 for the six months ended December 31, 2023 compared to $(26) for the six months ended December 31, 2022, and was composed of:

In the six months ended December 31, 2022, we sold our remaining iBio Stock, for a loss of $35 offset with an unrealized gain on the remaining iBio Stock of approximately $27, resulting in net other expense of $8,

Income tax benefit (expense), net. For the six months ended December 31, 2023 and 2022, we had a state income tax provision of approximately $13 and $44, respectively and federal income benefit of $70 and federal income tax expense of $17, in the six months ended December 31, 2023 and 2022, respectively.

Net loss. We had a net loss for the six months ended December 31, 2023 and 2022 of approximately $441 ad $90, respectively. The increase of approximately $351 in net losses was primarily the result of the increased operating loss of $503 offset, in part, by the change in the provision for income taxes of $118.

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For the Three Months Ended December 31, 2023 compared to the Three Months Ended December 31, 2022

**Sales, net.**Sales, net, for the three months ended December 31, 2023 and 2022 were $12,509 and $12,254, respectively, a decrease of 6.1%, and are comprised of the following:

For the three months ended December 31, 2023 and 2022, a significant portion of our consolidated net sales, approximately 89% and 91%, respectively, were concentrated among two customers, Life Extension and Herbalife, in our Contract Manufacturing Segment. Life Extension and Herbalife, represented approximately 70% and 23% and 70% and 25%, respectively, of our Contract Manufacturing Segment’s net sales in the three months ended December 31, 2023 and 2022, respectively.

Revenues in the three months ended December 31, 2023 were lower than the three months ended December 31, 2022 in our Other Nutraceuticals Segment by $116, primarily due to a decrease of $175 from MDC Warehousing offset, in part, by an increase in sales from CII of $52. One customer that represented 81% of revenues in our Other Nutraceutical Segment in the three months ended December 31, 2022, declined by $282 in sales and represented 40% of sales in this segment for the three months ended December 31, 2023. This was offset by another customer in our Other Nutraceuticals Segment customer with increased sales of $83, increasing from representing 3% of sales in this segment in the three months ended December 31, 2022 to 22% in the three months ended December 31, 2023. 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 $745 was primarily the result of decreased net sales in our Contract Manufacturing Segment of $629 primarily due to decreased sales volumes to Life Extension and Herbalife of $420 and $390, respectively.

Cost of sales. Cost of sales decreased by approximately $195 to $10,989 for the three months ended December 31, 2023, as compared to $11,184 for the three months ended December 31, 2022 or approximately 2%. Cost of sales increased as a percentage of sales to 95.5% for the three months ended December 31, 2023 as compared to 91.3% for the three months ended December 31, 2022. The increase in the cost of goods sold as a percentage of net sales, was primarily the result of the decreased net sales used to offset the fixed manufacturing overhead.

Selling and Administrative Expenses. There was a decrease in selling and administrative expenses of $132, approximately 12% in the three months ended December 31, 2023 as compared to the three months ended December 31, 2022. As a percentage of sales, net, selling and administrative expenses were approximately 8.4% and 9.0% in the three months ended December 31, 2023 and 2022, respectively. The decrease of $132 was primarily from decreases in (i) salaries and employee benefit costs of $63 ($43 in lower bonuses and $17 in lower employee benefits), (ii) stock compensation expense of $25 and (iii) all other selling and administrative expenses of $44.

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Other income (expense), net. Other income (expense), net was approximately $0 for the three months ended December 31, 2023 compared to $(12) for the three months ended December 31, 2022, and is composed of:

In the three months ended December 31, 2023, we had a loss on disposals of machinery of $2 and in the three months ended December 31, 2022, we sold our remaining iBio Stock, for a loss of $35 which was offset by an unrealized gain on the remaining iBio Stock of approximately $31, for a net loss of $4.

Income tax benefit (expense), net. For the three months ended December 31, 2023 and 2022, we had federal income tax benefits of $76 and $4, respectively and state income tax expense, net of approximately $6 and $14, in the three months ended December 31, 2023 and 2022, respectively.

Net loss. We had a net loss of $382 and $55 in the three months ended December 31, 2023 and 2022, respectively. The increase of loss of approximately $327 was primarily the result of the decrease in operating income of $419 offset by the change in the provision for income taxes of $80.

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:

At December 31, 2023, our working capital was approximately $11,262, a decrease of $312 from our working capital of $11,544 at June 30, 2023. The decrease in our working capital was the result of our current liabilities increasing by of $1,005 and was offset by an increase in our current assets of $693, $1,888 from the increase in inventory offset primarily by decreases in accounts receivable, net and cash of $778 and $584, respectively.

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Operating Activities

Net cash used in operating activities of $514 in the six months ended December 31, 2023 includes net loss of approximately $441. After excluding the effects of non-cash expenses, including depreciation and amortization, and changes in deferred tax assets, the adjusted cash provided from operations before the effect of the changes in working capital components was $232. Net cash used in our operations in the six months ended December 31, 2023 included cash from our working capital assets and liabilities in the amount of approximately $746 and was primarily the result of an increase in our inventory of $1,888 and the decrease in operating lease obligations of $446 offset by an increase in accounts payable of $1,039 and the decrease in accounts receivable of $778.

Net cash provided by operating activities of $948 in the six months ended December 31, 2022 includes net loss of approximately $90. After excluding the effects of non-cash expenses, including depreciation and amortization, and changes in deferred tax assets, the adjusted cash provided from operations before the effect of the changes in working capital components was $680. Net cash provided by our operations in the six months ended December 31, 2023 included cash from our working capital assets and liabilities in the amount of approximately $268 and was primarily the result of decreases in our inventory and accounts receivable, net of $791 and $379, respectively, offset by an aggregate decrease in accounts payable, accrued expenses and other liabilities of $321 and operating lease obligations of $373 and an increase in prepaid expenses and other assets of $208.

Investing Activities

Cash used in investing activities of $62 in the six months ended December 31, 2023 was for the purchase of machinery and equipment.

Cash used in investing activities in the six months ended December 31, 2022 of approximately $78 was for the purchase of machinery and equipment of $82 offset by proceeds from the sale of iBio Stock in the amount of $4.

Financing Activities

Cash used in financing activities was approximately $8 for the six months ended December 31, 2023, and was primarily from principal payments under our financed lease obligations of $21, offset by proceeds from exercises of stock options of $13.

Cash used in financing activities was approximately $116 for the six months ended December 31, 2022, and was primarily from repayments of net advances under our revolving credit facility of $101 and principal payments under our financed lease obligations of $15.

As of December 31, 2023, we had cash of $732, funds available under our revolving credit facility of approximately $5,107 and working capital of approximately $11,232. We had an operating loss of $506, in the six months ended December 31, 2023, which included non-cash expenses of $288 such as amortization, depreciation and employee stock compensation expense. After taking into consideration our interim results and current projections, management believes that operations, together with the revolving credit facility will support our working capital requirements at least through the period ending February 12, 2025.

Our current total annual commitments at December 31, 2023 for long term non-cancelable leases of approximately $1,018 consists of obligations under operating leases for office and warehouse facilities and operating and finance lease obligations for the rental of machinery, transportation and office equipment.

Capital Expenditures

The Company's capital expenditures for the six months ended December 31, 2023 and 2022 were approximately $62 and $82, respectively. The Company has budgeted approximately $750 for capital expenditures for fiscal year 2024. The total amount is expected to be funded from lease financing and cash provided from the Company’s operations.

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Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Recent Accounting Pronouncements

None.

Impact of Inflation

The Company may not be able to timely increase its selling prices to its customer resulting from price increases from its suppliers due to various economic factors, including inflation, labor and shipping costs and its own increases in shipping, labor and other operating costs. The Company’s results of operations may also be affected by economic conditions, including inflationary pressures, that can impact consumer disposable income levels and spending habits, thereby reducing the orders it may receive from the Company’s significant customers.