**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington D.C. 20549**

**____________**

**FORM 10-Q**

**| X |  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934         **

For the quarterly period endedDecember 31, 2008         

OR         

**|  | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**         

**For the transition period from       to**

Commission File Number 001-31668

**INTEGRATED BIOPHARMA, INC.**

*(Exact name of registrant, as specified in its charter)*

 

| **Delaware **                     |   |  **22-2407475**     |   |
|----------------------------------------|--------|--------------------------|--------|
| *(State or other jurisdiction of*      |   | * (I.R.S. Employer* |   |
| *incorporation or organization) * |   | *Identification No.)*    |        |

| **225 Long Ave., Hillside, New Jersey**          |   | **07205**    |   |
|--------------------------------------------------|--------|--------------|--------|
| *(Address of principal executive offices) * |   | *(Zip Code)* |   |

 

**(888) 319-6962**

*(Registrant’s telephone number, including Area Code)*

 

**Not Applicable**

*(Former name, former address and former fiscal year, if changed since last report)*

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

| Yes þ |   | No o |   |
|-------------|--------|------|--------|

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check        one):

|                           |   |                     |   |                               |   |                                   |
|--------------------------------|--------|--------------------------|--------|------------------------------------|--------|----------------------------------------|
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer  o |   | Smaller reporting company þ |

Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

 

| Yes o |   | No þ |   |
|-------|--------|------------|--------|

   

          

**Applicable only to Corporate Issuers:**

The number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date:

 

| *Class      *      |   | *Outstanding at**February**1**3**, 200**9* |   |
|--------------------------------------------------|--------|--------------------------------------------|--------|
| Common Stock, $0.002 par value    |   | 20,207,343 Shares      |   |

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**INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES         **

FORM 10-Q QUARTERLY REPORT

For the Six Months Ended December 31, 2008

INDEX

|       |                                                                                                                              | **Page** |
|------------|-----------------------------------------------------------------------------------------------------------------------------------|----------|
|       | **Part I. Financial Information**                                                                                                 |     |
| Item 1.    | Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2008 and 2007 (unaudited)         | 2        |
|       | Condensed Consolidated Balance Sheets as of December 31, 2008 (unaudited) and June 30, 2008                                       | 3        |
|       | Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended December 31, 2008 (unaudited) | 4        |
|       | Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2008 and 2007 (unaudited)                   | 5        |
|       | Notes to Condensed Consolidated Statements                                                                                        | 6        |
|       |                                                                                                                              |     |
| Item 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                       | 21       |
|       |                                                                                                                              |     |
| Item 3.    | Quantitative and Qualitative Disclosures about Market Risk                                                                        | 29       |
|       |                                                                                                                              |     |
| Item 4T.   | Controls and Procedures                                                                                                           | 29       |
|       |                                                                                                                              |     |
|       | **Part II. Other Information**                                                                                                    |     |
|       |                                                                                                                              |     |
| Item 1.    | Legal Proceedings                                                                                                                 | 31       |
|       |                                                                                                                              |     |
| Item 1A.   | Risk Factors                                                                                                                      | 31       |
|       |                                                                                                                              |     |
| Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds                                                                       | 31       |
|       |                                                                                                                              |     |
| Item 3.    | Defaults Upon Senior Securities                                                                                                   | 31       |
|       |                                                                                                                              |     |
| Item 4.    | Submission of Matters to a Vote of Security Holders                                                                               | 31       |
|       |                                                                                                                              |     |
| Item 5.    | Other Information                                                                                                                 | 32       |
|       |                                                                                                                              |     |
| Item 6.    | Exhibits                                                                                                                          | 32       |
|       | **Other**                                                                                                                         |     |
| Signatures |                                                                                                                              | 34       |
|       |                                                                                                                              |     |
|       |                                                                                                                              |     |
|       |                                                                                                                              |     |

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**Disclosure Regarding Forward-Looking Statements**

 

Certain statements in the Quarterly Report on Form 10-Q may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the        “PSLRA”) or in releases made by the Securities and Exchange Commission, all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Integrated BioPharma, Inc. (the “Company”) or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking        statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words, “plan”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “project”, “may”, “will”, “would”, “could”, “should”,        “seeks”, or “scheduled to”, or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. The Company cautions investors that any forward-looking statements made        by the Company are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements with respect to the Company, include, but are not limited to, the risks and uncertainties affecting its businesses described in Items 1 and 1A of the Company’s Annual Report filed on Form 10-K for the year ended June 30, 2008 and in registration statements and other        securities filings by the Company.

 

Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection or assumption in any of its forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this        Quarterly Report on Form 10-Q are made only as of the date hereof and the Company does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.

 

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**ITEM 1. FINANCIAL****STATEMENTS**

 

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007

*(in thousands, except share and per share amounts)*

***Note 1. Principles of Consolidation******,******L******iquidity******and Basis of Presentation***

The accompanying financial statements for the interim periods are unaudited and include the accounts of the Company. The interim financial statements have been prepared in conformity with Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and therefore do not include information or footnotes necessary        for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented have been included. These financial statements should be read in conjunction with the        financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2008 (“10-K”), as filed with the SEC. The June 30, 2008 balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of        America. The results of operations for the threeand sixmonths endedDecember 31, 2008 are not necessarily indicative of the results for the full fiscal year ending June 30, 2009 or for any other period.

 

Integrated BioPharma, Inc., a Delaware corporation (together with its subsidiaries, the “Company” or “INB”), is engaged primarily in manufacturing, distributing, marketing and sales of vitamins, nutritional supplements and herbal products; the manufacture and distribution of Paclitaxel, which is the primary        chemotherapeutic agent in the treatment of breast cancerandpharmaceutical technical services through its contract research organization.The Company’s customers are located primarily in the United States. The Company was previously known as Integrated Health Technologies, Inc. and, prior to that, as Chem International, Inc. The Company was reincorporated in its current        form in Delaware in 1995. The Company is registered on theNASDAQ Global Marketand its common stock trades using the symbol “INBP”. The Company continues to do business as Chem International, Inc. with its customers and certain vendors.                 The Nutraceutical segment includes: InB:Manhattan Drug Company, Inc. (“Manhattan Drug”), which manufactures vitamins and nutritional supplements for sale to distributors, multilevel marketers and specialized health-care providers; AgroLabs, Inc., which manufactures products carrying the “Naturally” label and natural and organic product ingredients; The Vitamin Factory and Scientific Sports Nutrition, which sells private label Manhattan Drug products through mail        order catalogs and the Internet and through wholesalers and distributors targeting consumers who are professional, amateur and recreational athletes, respectively. The Company also distributes fine natural chemicals through its wholly-owned subsidiary IHT Health Products, Inc. During fiscal year 2007, The Organic Beverage Company (TOBC), formerly Bioscience Technologies, Inc., completed the acquisitionfrom BevSpec, Inc.        (“BevSpec”)of the SyzmoTM product, which is a USDA organic energy drink.During the first quarter of the fiscal year ending2009,the Companycurtailed operations ofitsTOBCsubsidiary and combined the sales efforts for this product line with the AgroLabs products.                 The Pharmaceutical segment includes InB:Paxis Pharmaceuticals, Inc. (“Paxis”) and InB:Hauser Pharmaceutical Services, Inc. (“Hauser”). Paxis manufactures and distributes Paclitaxel, which is the primary chemotherapeutic agent in the treatment of breast cancer. Hauser is a contract research organization (“CRO”) which provides research, development manufacturing at testing services to the specialty chemical, pharmaceutical and natural products        industries. In September 2008, the Company announced the engagementofan investment advisor to explore sellingsubstantially all of thePharmaceutical segment’s net assets.

The Biotechnologies segment includediBioPharma, Inc.(“iBio”),whichwasfocused on the discovery, development and commercialization of proprietary products from plants.On August 18, 2008, theCompany’s distributionof the Biotechnologies segmentwas completed and each shareholder of Integrated BioPharma, Inc.

 

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received one share of iBio’scommon stock for each share the shareholder owned as of August 12, 2008, the Record Date (See Note2.Discontinued Operations).

***Liquidity.***As of December 31, 2008, the Company has working capitaldeficitof $342caused primarily by the Notes Payable outstanding in the amount of $7,016with a principal amount of $7,805 due November 15, 2009 being classified as a current liability. The Company’s expected return to profitability in the latter months of fiscal year 2009, which cannot be        assured (although it still expects to report a loss for fiscal year 2009), could provide a portion of cash needsover the ensuing twelve-month period to meet capital expenditure needs and daily operational needs. In addition, in February 2009 the Company obtained a Working Capital Bridge Loan from a related party, major shareholder and director, (see Note 13. Subsequent Events) andthe Companymaysellor otherwise dispose ofsubstantially all of the net assets of the Pharmaceutical segment to further fund its cash needs. Even with        the expected return to profitability, the Working Capital Bridge Loan and the potential tosell orotherwisedispose ofCompany assets,the        Company’s current cash flows will not be able to repay the Notes Payable without refinancing, or obtaining additional debt or capital from other sources. There can be no assurance thatthe Companywill be successful in these efforts, which raises substantial doubt as tothe        Company’sability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

***Reclassifications.***Certain reclassifications have been made to the prior year data to conform with the current year presentation.

***Principles of Consolidation.***The accompanyingcondensed consolidated financial statementsinclude the accounts of the Company and its wholly-owned subsidiaries, and any majority-owned investment. Intercompany transactions and accounts        are eliminated in consolidation.

***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; |
|--|----------------------------------------|-------------------------------|

|  | ·      | trade marketing and merchandising; |
|--|----------------------------------------|------------------------------------|

|  | ·      | allowance for doubtful accounts; |
|--|----------------------------------------|----------------------------------|

|  | ·      | inventory valuation; |
|--|----------------------------------------|----------------------|

|  | ·      | valuation and recoverability of long-lived and intangible assets, including the values assigned to acquired intangible assets; |
|--|----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|

|  | ·      | income taxes and valuation allowance on deferred income taxes, and; |
|--|----------------------------------------|---------------------------------------------------------------------|

|  | ·      | accruals for, and the probability of, the outcome of current litigation. |
|--|----------------------------------------|--------------------------------------------------------------------------|

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. Nothing has come to our attention which would cause        a change in these estimates.         

***Revenue Recognition.***For product sales, the Company recognizes revenue when the product’s title and risk of loss transfers to the customer. The Company believes this revenue recognizing practice is appropriate because the Company’s sales policies meet the four criteria of SAB 104        which are: (i) persuasive evidence that an arrangement exists, (ii) delivery has occurred, (iii) the seller’s price to the buyer is fixed and determinable and (iv) collectability is reasonably assured. The Company’s sales policy is to require customers to provide purchase

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007

*(in thousands, except share and per share amounts)*

 

orders establishing selling prices and shipping terms. The Company evaluates the credit risk of each customer and establishes an allowance of doubtful accounts for any credit risk. Sales returns and allowances are estimated upon shipment. The Company recognizes income in its Hauser subsidiary upon monthly customer invoicing. The invoice amount        is based upon time and materials spent in the month.

***Shipping and Handling Costs.***Shipping and handling costs are included in cost of sales.

***Trade Marketing and Merchandising.***In order to support the Company’s proprietary Nutraceutical product lines, various promotional activities are conducted through the retail trade, distributors or directly with consumers, including in-store display and product placement programs, feature price discounts,        coupons, and other similar activities. The Company regularly reviews and revises, when it deems necessary, estimates of costs to the Company for these promotional programs based on estimates of what will be redeemed by the retail trade, distributors, or consumers. These estimates are made using various techniques, including historical data on performance of similar promotional programs. Differences between estimated expense and actual performance are generally not material and are        recognized as a change in management’s estimate in a subsequent period.

***Supplemental Statement of Cash Flows***

 

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007        (in thousands, except share and per share amounts)

 

***Earnings Per Share***. In accordance with FASB Statement No. 128, “Earnings Per Share,” basic earnings per common share are based on weighted average number of common shares outstanding. Diluted earnings per share amounts are based on the weighted average number of common shares outstanding, plus the        incremental shares that would have been outstanding upon the assumed exercise of all potentially dilutive stock options, warrants and convertible preferred stock, subject to anti-dilution limitations.

At December 31, 2008 and 2007, total options and warrants of 3,073,017 and 2,443,852, respectively, to purchase shares of common stock, were outstanding but were not included in the computation of diluted earnings per share as they were anti-dilutive as a result of net losses applicable to common shareholders during the periods.                 At December 31, 2008 and 2007, options and warrants to purchase 25,000 and 2,540,567 shares of common stock with exercise prices below the market price, respectively, were outstanding but were not included in the computation of diluted earnings per share as they are anti-dilutive as a result of net losses during the period.

For both the three and six month periods ended December 31, 2008, common share equivalents of 1,779,755 related to the Convertible Note Payable were not included in the computation of diluted earnings per share as they were anti-dilutive as a result of net losses applicable to common shareholders.

***Recent Accounting Pronouncements.*** In October 2008, the Financial Accounting Standards Board (“FASB”) issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides        an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective for us on September 30, 2008 for all financial assets and liabilities recognized or disclosed at fair value in our Condensed Financial Statements on a recurring basis (at least annually).                 In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP. Prior to the issuance of SFAS No. 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (“AICPA”) Statement        on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Unlike SAS No. 69, SFAS No. 162 is directed to the entity rather than the auditor. Statement No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. SFAS No. 162 is not expected        to have any material impact on the Company’s results of operations, financial condition or liquidity.

***Note 2. Discontinued Operations***

In August 2008, we completed the spin-off of iBio. The Company has classified iBio as discontinued operations for the current and prior periods and the associated results of operations, financial position and cash flows are separately reported for all periods presented. As a result, we recognized an after-tax loss of $105 during the first quarter of the fiscal year ended        2009. iBio revenues from discontinued operations were $240 for the three months ended December 31, 2007, and $169, and $480 for the six months ended December 31, 2008 and 2007, respectively. The Company’s loss from discontinued operations, net of taxes, was $246 for the three months ended December 31, 2007 and $105 and $518 for the six months ended December 31, 2008 and 2007, respectively.

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007        (in thousands, except share and per share amounts)

The net assets of iBio are classified as assets and liabilities related to discontinued operations in the Company’s condensed consolidated balance sheet at June 30, 2008. The net assets were comprised of the following:

 

The Distribution was completed on August 18, 2008 and each shareholder of the Company received one share of iBio for each share the shareholder owned as of August 12, 2008.The Distribution should qualify as a tax-free reorganization under Section 355 of the Internal Revenue Code of 1986, as amended. The Separation and Distribution Agreement        prohibitsiBiofrom issuing more than 19,845,061 of additional shares of its common stock (representing the number of shares issued in connection with the Distribution) for the two years immediately following the effective date of the Distribution.

On August 19, 2008, the Company entered into a Conversion Agreement, whereby the Company causedapproximately $5,209of the intercompany debt to be contributed to additional paid in capital and used $2,700 of

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007        (in thousands, except share and per share amounts)

 

the intercompany debt to purchase approximately 1,266,706commonshares ofiBio, representing 6% of the then outstandingcommonshares ofiBio.The Company is carrying its investment in iBio of $2,700 on the cost basis.The Company owns 5.4% of the shares outstanding of iBio as ofDecember 31, 2008.

In August 2008, the Company ceased allocating corporate overhead to iBio (formerly Biotechnologies Segment) and entered into a Transitional Services Agreement (the “TS Agreement”) with iBiopharma, Inc. The transitional services agreement permits the Company to continue to provide certain corporate services in exchange for a management charge. The scope of these        services is limited to legal, strategic financial planning and SEC reporting, and tax services by certain corporate employees of the Company. In exchange for these services, iBio will pay approximately $50 for certain financial and tax services over an estimated period of six months; the TS Agreement provides for a per annum fee of $100. In the three and six months ended December 31, 2008, the Company billed iBio approximately $25 and $37, respectively under the TS Agreement.

***Note 3. Other Intangible Assets***

Other intangible assets with indefinite lives are tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Application of the        impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, and determination of the fair value of each reporting unit.

Other intangible assets consist of intellectual property, trademarks, license fees, and unpatented technology. The carrying amount of other intangible assets as of December 31, 2008 and June 30, 2008 is as follows:         

 

Amortization expense from continuing operations recorded on the intangible assets for the three and six months ended December 31, 2008 and 2007 was $60 and $119, and $92 and $200, respectively. Amortization expense is recorded on the straight-line method over periods ranging from 2 years to 20 years based on contractual or estimated lives and is included in selling and        administrative expenses. Included in the Company’s loss from discontinued operations is amortization expense of $56 for the three months ended December 31, 2007 and $33 and $126 related to iBio’s intangible assets for the six months ended December 31, 2008 and 2007, respectively.

The estimated annual amortization expense for intangible assets for the five succeeding fiscal years is as follows:

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007        (in thousands, except share and per share amounts)         

***Note 4. Inventories***

Inventories are stated at the lower of cost or market using the first-in, first-out method and consist of the following as of December 31, 2008 and June 30, 2008:         

 

***Note 5. Property and Equipment***

Property and equipment consists of the following as of:

 

***Note 6. Notes Payable******and******Convertible Note Payable – CD Financial, LLC***

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007        (in thousands, except share and per share amounts)

On February 19, 2008, the Company entered into two Securities Purchase Agreements (the "SPAs") relating to a private placement of securities with two investors, one of whom is an affiliate of Carl DeSantis, a director of the Company, which resulted in gross proceeds of $17,337 to the Company. The private placement involvedthe sale of (i) 6,000 shares of newly designated redeemable Series C Convertible Preferred Stock (the “Series C Preferred”) with a stated value of $1,000 pershare(see Note 10(d)Series C Redeemable Convertible Preferred Stock), (ii) $4,500 in principal amount of 9.5% Convertible        Note Payable (the “Convertible Note Payable”), (iii) $7,000 in principal amount of 8.0% Notes Payable, which was amended on October 14, 2008(the “Notes Payable”)and (iv) 200,000 shares of the Company’s common stock. The Company also recorded $218 of deferred financing costs associated with the two SPA's,$130 ofsuchdeferred financing costs were netted against the gross proceeds received. These costs were allocated to the each of the components of the transaction, based on the relative fair values and are amortized based on the terms of the component of the transaction for which the costs were allocated to respectively. As ofJune 30, 2008 andDecember        31, 2008, the Company haddeferred financing costs remaining of$113 and$55, respectively,which is to be amortized to interest expense over one to three years. The Notes Payable and the Convertible Note Payable are secured by a pledge of substantially all of our assets.

 

The Company has accreted $54and $1,137for thesix months ended December 31, 2008 for theSeries C Preferred Stock Dividend and for the acceleration of the deemed dividend from thebeneficial conversion feature of the Series C Preferred Stock, respectively (See Note 10(d) Series C Redeemable Convertible Preferred Stock). Such amounts areincludedin the accompanyingCondensedConsolidated Statement of Operations.

***(a)******Convertible Note Payable -******CD Financial, LLC,***a related party, providedgrossproceeds of $7,500,in exchange for 3,000 shares of Series C Preferred Stock and a Convertible Note Payable.        The Convertible Note Payable has a principal amount of $4,500 withan annual interest rate of9.5%andmatureson February 21, 2011. The Company allocated the proceedsof $4,500 andthe discountof $98based the relative fair value of the Convertible Note Payable in connection with this transaction. The Company is amortizing to interest expense the discount applied to the Convertible Note Payable over the term of the note. The Company recorded a beneficial conversion feature, in accordance with EITF 00-27, on the Convertible Note Payable of $715 to be accreted over the three-year period until maturity or the        redemption of theConvertibleNotePayable.For thethreeand sixmonths endedDecember 31, 2008, included in interestexpensein the accompanying Condensed ConsolidatedStatement of Operations,are$65and $130related to the accretion of the discount and accretion of the beneficial

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007        (in thousands, except share and per share amounts)

 

conversion feature on the Convertible Notes, respectively.As ofDecember 31,2008 andJune 30, 2008, the unpaid discountwhich was allocated as of the date of the transaction        based on the gross proceeds provided by CD Financial, LLC was$163. Thisis included in accrued expenses in the accompanyingCondensedConsolidated Balance Sheet.Also, in accordance with the Convertible NotePayable, the Company will issue and deliver to CD Financial        LLC, for no additional consideration, 50,000 shares of Common Stock, on a quarterly basis in arrears, commencing with the three-month anniversary of the issuance date, until theConvertibleNote has been repaid in full, after which the Company's obligations to issue shares of Common Stock will no longer be applicable.As ofDecember 31,        2008, the Company had accrued and unpaid interest of approximately $36, for the Convertible Note Payablein the accompanying Condensed Consolidated Balance Sheet.

The beneficial conversion featurefor the Convertible Note Payablewill be accreted using the effective interest rate method. TheConvertible Note Payablemay be converted, at any time and at the holder’s        option, into shares of our common stock based on a conversion price as set out in the Convertible NotePayable. The conversion price is a formula that bases the conversion price on the greater of (i) 90% of the average Volume Weighted Average Price (the "VWAP") market price of our common stock for 20 trading days immediately preceding theconversion date and (ii) $2.00, subject to adjustment in the event of a        stock dividend, stock split or combination, reclassification or similar event and upon certain issuances below the conversion price. We have the option to prepay the Convertible NotePayable at any time.         

***(b) Notes Payable******,***provided proceeds of $9,837, which includes a discount of $163 in exchange for 3,000 shares of Series C Preferred Stock, Notes Payable and 200,000 shares of the Company’s common stock.The Company        allocated the proceedsfrom the$10,000 and the discount of $163 to the components of the transaction based the relative fair value of the Notes Payable, the Series C Preferred Stock and the Company’s common stock in connection with this transaction.         

On October 14, 2008, the Company andthe Notes Payable holdersamended the SPA to extend the maturity from February21, 2009 to November 15, 2009.In        consideration for extending the maturity of the Notes Payable, the Notes Payable holderswill forgo the 200,000 shares of Common Stock as additional interest and the Company will (i) grant a 11.5% premium on the principal, thus aggregating a principal balance due of $7,805and certain other amounts payable under the NotesPayable, if any, (ii) certain new covenants will be        applicable to the Company effective October 14, 2008, (iii) the Company shall issue warrants to purchase 500,000 shares of the Company’s Common Stock, with a five year term and an exercise price of $0.80 per share, and (iv) the registration of the resale of the shares of the Company’s Common Stock for which the warrants are exercisable.Sincethe October 14, 2008        amendment significantly modified the terms of the original Notes Payable,the Company hasaccounted forthe amendment as an extinguishment of the original Notes Payable and issuance of new Notes Payable, per EITF Issue No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.” As a        result, the Companyaccelerated theamortization oftheremaining discountof $178and prepaid financing costsof $32applied to the original Notes        Payable tointerest expenseas a result of theextinguishment. Furthermore, the Company reversed the accrual of additional considerationof $208 related to the 200,000 shares of the Company’s common stock.                 TheamendedNotes Payable of $7,000bearan interest rate of 8.0% and will mature on November 15, 2009. The Company is accreting the premium of $805 over the term of the amendment, using the effective interest method,whichhas resulted in additional interest        expensefor the threeand sixmonths endedDecember 31, 2008of$152. The warrants issued with the amended Notes Payable were valued atafair valueof        $169using the Black-Scholesoption pricingmodel as of the issuance date.The Company used the following assumptions to calculate the fair value of the warrants; risk free interest rate of 3.0%, expected volatility of 75.8%, a term of 5 years and a dividend yield of zero.The discount to theamendedNotes Payablefor the warrantswhichare being accreted using the effective interest method,has resulted in additional interest expense for the three and six months endedDecember 31, 2008of        $33.The Company also recorded an additional $10 of deferred financing costs as a result of the issuance of the

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007        (in thousands, except share and per share amounts)

 

amended Notes Payable.The amended Notes Payable agreement requires the Company to register for resale the shares of Common Stock for which the warrants are exercisable prior to 90 days after the closing date of October 14, 2008. The Company had not registered the warrants as of December 31, 2008. The failure to register        the warrantsresults in a default payment of the greater of $8 or 2.0% of the market price as of the date on which the registration default occurred multiplied by the number of unregistered warrants. As of the date of the filing, the Company has not registered the securities.The Company will incur ade-minimispenalty amount in the third        quarter of the fiscal year ending June 30,2009.The Company is amortizing to interest expense the deferred financing costs using the effective interest method. The amount amortized related to the amended Notes Payable for the three and six months endedDecember 31, 2008is $2.         

For thethreeand sixmonthsendedDecember 31,2008, included ininterestexpense in the accompanying ConsolidatedStatement of Operations, is $448and $637related to the accretion of the discount on theoriginal and amendedNotes Payable.As of December 31, 2008, the Company had accrued and unpaid interest of        approximately $47, for theamendedNotes Payable in the accompanying Condensed Consolidated Balance Sheet.

As of December 31, 2008 the Company is in default of the covenants of the Notes Payable. The Company is currently working with the holders to obtain a waiver for the default of the covenants; however at this time the Company has not obtained such waiver.

***Note 7. Significant Risks and Uncertainties***

***(a) Concentrations of Credit Risk-Cash.***The Company maintains balances at several financial institutions. Deposits at each institution are insured by the Federal Deposit Insurance Corporation up to $250through December 31, 2009. As of December 31, 2008,        the Company had uninsured cash balances of approximately $207 on deposit with JP Morgan Chase. The FDIC is temporarily insuring deposits up to $250,000 at financial institutions through December 31, 2009. Additionally, JP Morgan Chase is participating in the FDIC’s Transaction Account Guarantee Program, whereby all non-interest bearing checking accounts (including accounts with interest rates less than 0.50%) are fully guaranteed by the FDIC for the entire amount through December        31, 2009.

***(c) Major Customers.***For the three months endedDecember 31, 2008 and 2007 approximately72.1% and approximately68.4%, respectively, of revenues were derived from three customers.For the six months ended December 31, 2008 and 2007 approximately 70.1% and approximately67.1%, respectively, of revenues were derived from three customers.Accountsreceivable from these customers represented approximately52.9% of total accounts receivable as ofDecember        31, 2008. The loss of any of these customers would have an adverse affect on the Company’s operations. Major customers are those customers who account for more than 10% of net sales.         

***(d) Other Business Risks.***The Company insures itsbusiness and assets against insurable risks, to the extent that it deems appropriate, based upon an analysis of the relative risks and costs. The Company believes that the risk of loss from non-insurable events would not        have a material adverse effect on the Company’s operations as a whole.         

The raw materials used by the Company are primarily commodities and agricultural-based products. Raw materials used by the Company in the manufacture of its Nutraceutical products are purchased from independent suppliers. Raw materials are available from numerous sources and the Company believes that it will continue to obtain adequate supplies.         

Of the employees located in the Company’s New Jersey facility, approximately 54% the employees are covered by a union contract, which expires August 31, 2010.

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007        (in thousands, except share and per share amounts)

***Note 8. Commitments and Contingencies***

***(a) Leases***         

***Related Party Leases.***Warehouse and office facilities are leased from Vitamin Realty Associates, L.L.C., a limited liability company, which is 90% owned by theChairman of the Company’s Board of Directors, a directorandmajority shareholderand certain family members and 10% owned by an employee of the Company. The lease provides for minimum annual rentalpayment of $324 through May 31, 2015 plus increases in real estate taxes and building operating expenses. On July 1, 2004, the Company leased an additional 24,810 square feet of warehouse space on a month-to        month basis. Rent expense for the threeand sixmonths endedDecember 31,2008 and 2007 on these leases were $183and $179, respectively, andare included in bothcost of sales and selling and administrative expenses in the        accompanyingCondensedConsolidated Statements of Operations. AtDecember 31, 2008 and June 30, 2008 the Company had an outstanding obligationof $278and $224 included in accounts payable in the accompanying Consolidated Balance Sheet.

***Other Lease Commitments.***The Company has entered into certain non-cancelable operating lease agreements expiring up through May 31, 2015, related to office and warehouse space,equipment and vehicles. Total rent expense, including real estate taxes and maintenance charges,        was approximately $390and $440for the three months ended December 31, 2008 and 2007, respectively;and $844and $860 for thesixmonthsendedDecember 31,2008 and 2007, respectively. Rent expense is stated net of sublease income of approximately$9for the three months ended December 31, 2008 and 2007; and$17and $25for thesixmonthsendedDecember31, 2008 and 2007, respectively. This is included in both cost of sales and selling and administrative expenses in the accompanyingCondensedConsolidated Statements of Operations.

     

The minimum rental commitment for long-term non-cancelable leases is as follows:         

***(******c******) Paxis Purchase Agreement.***In connection with the Company’s acquisition of Paxis from Trade Investment Services, LLC (“TIS”), which funded Paxis’ and Natex’s development, TIS        has the right to receive twenty-five (25%) of the after-tax profits of Paxis until TIS has received an additional $49.5 million. At this time, the Company is unable to estimate the amount or timing of any potential contingent payments.

E. Gerald Kay, the Chairman of the Company’s Board of Directors, a director and majority shareholder of INBP; Robert Kay, the brother of E. Gerald Kay, shareholder of INB; and Carl DeSantis, a director and shareholder of INB, each own one-third (1/3) of the equity of TIS.

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007        (in thousands, except share and per share amounts)         

***(******d******) Consulting Agreement******s******.***

 

Effective July 1, 2008, the Company entered into a consulting agreement, pursuant to which the consultant is to provide consulting and specialized services to the Company in the area of finance, acquisition of product lines, refinancing of existing debt and capital raising under the direction of the Company, including for any company in which the Company has an ownership interest. In connection with the agreement, the Company        issued 100,000 shares of the Company’s common stock associated with the three year consulting agreement (See Note 10. Equity Transactions).

Effective July 1, 2008, the Company entered into a consulting agreement with Jeffrey R. Leach (an employee of the Company as of the date of the agreement) its current President and Chief Executive Officer, pursuant to the consulting agreement, Mr. Leach is to provide consulting and specialized services to the Company in the area of finance, acquisition of product lines, refinancing of existing debt and capital raising under        the direction of the Company, including for any company in which the Company has an ownership interest. In connection with the agreement, the Company issued 250,000 shares of the Company’s common stock associated with the three year consulting agreement (See Note 10. Equity Transactions).

***Note 9. Related Party Transactions***

The Company is a party to a verbal consulting agreement with Eugene Kay, a former employee of the Company and a brother of E. Gerald Kay, the Chairman of the Company’s Board of Directors, a director and majority shareholder of the Company. This agreement provides for consulting services on a month-to-month basis for $1 per month. The total consulting expense recorded for the three and six months ended        December 31, 2008 and 2007 was $3 in each period. The Company was party to another consulting agreement with EVJ, LLC, a limited liability company controlled by Robert Kay, a shareholder of the Company, the Chairman of its subsidiary, InB: Paxis, and a brother of E. Gerald Kay and Eugene Kay. This agreement was assumed by and became a liability of the Company as a part of the Company's acquisition of Paxis Pharmaceuticals Inc. in fiscal year ended June 30, 2004. This agreement was        terminated in during the first quarter of fiscal year 2009. The total consulting expense under this agreement was $15 and $30 for each of the three month period ended December 31, 2007 and $15 and $60 for the six month period ended December 31, 2008 and 2007, respectively.

See Note 2 – Discontinued Operations for related party transactional service agreement with iBioPharma, Inc.

See Note 6(a) – Notes Payable and Convertible Note Payable – CD Financial, LLC for related party securities transactions.

See Note 8(a) - Leases for related party lease transactions.

See Note 8(d) – Consulting Agreements for related party consulting agreements.

***Note 1******0******. Equity Transactions***         

***(a) Stock Option Plan and Warrants.***During the three and six months ended December 31, 2008, there was 1,000,000stock optionsauthorized by the Board of Directors and issued to Company employees, andwarrantsto purchase 500,000 shares of common stock at $0.80 in connection with the amended Notes Payable agreement (See Note 6(b) Notes Payable). During the three and six months ended December 31, 2007the Companyissuedstock options of 690,800 and 700,800; respectively. There were no warrants issued in the three and six month periods ended December 31,        2007.During the threeand sixmonthsendedDecember 31,2008 and 2007, theCompany has incurred stock compensation expense of $304and $869,and $777 and        $1,010;respectively. Included is stock compensation related to the Biotechnologies Segment,of $4 for the six months ended December 31,

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007        (in thousands, except share and per share amounts)

 

2008, and$14and $28 for the three and six months ended December 31, 2007, respectively.During the first quarter of fiscal year 2009,certain key executives and a significant shareholder of the Company exercised stock options for shares of common        stock of 2,095,852 which provided cash proceeds to the Company of approximately $1,341.

***(b) Restricted Stock Award.***There werenorestricted stock awardsissued in thethreeand six months ended December 31, 2008,        respectively.There were 735,000 restricted stock awards issued in the three and six months ended December 31, 2007, respectively.

In May 2007, the Company entered into a separate one-year financial advisor agreement (the “Engagement”), whereby it issued 30,000 shares of restricted stock of the Company to the financial advisor. As such, on the effective date, the Company recognized prepaid consulting expenses of $173 with a corresponding increase in equity. In September 2007, the Company terminated the Engagement        with the financial advisor and charged off the remaining prepaid balance of approximately $159 to consulting fee expense during the three months ended September 30, 2007. Such shares of common stock have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and were issued and sold in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and Regulation D promulgated there under. These shares of common stock may        not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act.

***(c)******Consulting******Agreements***. Effective July 1, 2008,the Company entered into twoconsultingagreementswhich resulted in issuing 350,000 shares of the Company’s common stock associated with thesethree year consulting agreements.As such, on the effective date, the Company recognized prepaid consulting expenses of $830with a corresponding increase incommon stock and additional paid in capital.During the threeand sixmonths endedDecember 31,2008, the Company has amortized $69and $138, respectively,to selling and administrative expenses in the Company’sCondensedConsolidated Statement of Operations.The consulting expenses willcontinue tobe amortized into selling and administrative expenses over the three year terms,of theconsultingagreements.

Of the common stock issued in connection with the consulting agreements, 100,000 shares of common stock have not been registered under the Securities Act, and were issued and sold in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and Regulation D promulgated there under. These shares of common stock may not be offered or sold in the United States in the        absence of an effective registration statement or exemption from the registration requirements under the Securities Act.

***(******d******) Series C Redeemable Convertible Preferred Stock.***On February 21, 2008, theCompany raised $5,788 in net proceeds from the sale of 6,000 shares of the        Company’s Series C Redeemable Convertible Preferred Stock, par value $1,000 per share (the “Series C Preferred Shares”), at a purchase price of $1,000 per share.Upon issuance of the Series C Preferred Shares, the Company recorded the beneficial conversion feature of $1,216 in accordance with EITF 00-27 and such amountswerebeing accreted over the five year period until the mandatory redemption date of the Series C Preferred Shares, the fifth anniversary of closing.         

During July and August 2008, all 6,269Series C Preferred Shares(inclusive of cumulative dividends of 269 shares of Series C Preferred Stock)were converted into 2,639,204 shares of the Company’s common stock.        The conversion resulted in an increase to common stock of $5 and additional paid in capital of $6,264. Alsoduring the six months ended December 31, 2008,the Company incurred adeemeddividendfrom beneficial conversion feature oftheSeries C Preferred Sharesof $1,137 as a result of accelerating the accretion of the beneficial conversion feature and the discount, respectively.         Dividends of the Series C Preferred Shareswere 10% per annum, payable on anannual basis, by the Company in

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007        (in thousands, except share and per share amounts)

 

shares of the Company'sSeries C Preferred Stock. Accordingly, the Company hadaccrued approximately $216atJune 30, 2008, and incurred $54 during the six        months ended December 31, 2008, which werepaid in Series C PreferredSharesand cashfor the fractional sharesduring theperiodended December 31, 2008. Theredemptionof the shares of Series C Preferred Stockacceleratedapayment ofadividend ontheSeries C Preferred StockShares.         

***Note 11. Income Taxes***

The Company recognizes deferred tax assets, net of applicable valuation allowances, related to net operating loss carry-forwards and certain temporary differences and deferred tax liabilities related to certain temporary differences. The Company recognizes a future tax benefit to the extent that realization of such benefit is considered to be more likely than not. This        determination is based on projected taxable income and tax planning strategies. Otherwise, a valuation allowance is applied.

During the second quarter, the deferred tax asset as well as projected taxable income was reviewed for expected utilization using the “more likely than not” approach by assessing the available positive and negative evidence surrounding its recoverability. Accordingly, a full valuation allowance of $5,955 has been recorded in the three and six month periods        ended December 31, 2008, against the Company’s deferred tax asset, as it was determined based upon past losses, the Company’s liquidity concerns and the current economic environment, that it was “more likely than not” that the Company’s deferred tax assets may not be realized. In future years, if the deferred tax assets are determined by management to be more likely than not to be realized, the recognized tax benefits relating to the reversal of the        valuation allowance will be recorded.

***Note 12. Segment Information***

The basis for presenting segment results generally is consistent with overall Company reporting. The Company reports information about its operating segments in accordance with Financial Accounting Standard Board Statement No. 131, “Disclosure About Segments of an Enterprise and Related Information,” which establishes standards for reporting information about a        company’s operating segments.

The Company, subsequent to the spin-off of its Biotechnologies segment as discussed in Note 2. Loss from Discontinued Operations, has divided its operations into two reportable segments as follows: Nutraceuticals and Pharmaceuticals. The international sales, concentrated primarily in Europe, for the three and six months ended December 31, 2008 and 2007 were $2,736 and        $5,774, and $2,410 and $4,217, respectively.

Financial information relating to operations by business segment for the three and six months ended December 31, 2008 and 2007 is as follows:

 

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES        NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF DECEMBER 31, 2008 AND JUNE 30, 2008 AND FOR THE        THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007        (in thousands, except share and per share amounts)

Note 13. Subsequent Event.

**Working Capital Bridge Loan**, in February 2009, CD Financial, LLC, a related party, provided the Company gross proceeds of $750 at an interest rate of 9.5% with a maturity date of the earlier of the sale of substantially all of the net assets of the Pharmaceutical segment or February 28, 2010. The proceeds were provided to the Company on various dates in        February 2009.

 

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**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND RESULTS OF OPERATION**

 

Certain statements set forth under this caption constitute “forward-looking statements.” See “Disclosure Regarding Forward-Looking Statements” on page 1 of this Report for additional factors relating to such statements. The following discussion should also be read in conjunction with the CondensedCondensed consolidated financial statementsof the Company and Notes thereto included elsewhere herein and the Company’s Annual Report on Form 10-K.

The Company is engaged primarily in the manufacturing, distributing, marketing and sales of vitamins, nutritional supplements and herbal products; the manufacture and distribution of paclitaxel, which is the primary chemotherapeutic agent in the treatment of breast cancer; and Pharmaceutical technical services through its contract research organization. The        Company’s customers are located primarily throughout the United States.

***Business Outlook***

Our future results of operations and the other forward-looking statements contained in this Form 10-Q, including this MD&A, involve a number of risks and uncertainties—in particular, the statements regarding our goals and strategies, new product introductions, plans to cultivate new businesses, pending divestitures, future economic        conditions, revenue, pricing, gross margin and costs, the tax rate, and pending legal proceedings. We are focusing on efforts to improve operational efficiency and reduce spending that may result in several actions that could have an impact on expense levels and gross margin. In addition to the various important factors discussed above, a number of other important factors could cause actual results to differ significantly from our expectations. See the risks described in “Risk        Factors” in Part II, Item 1A of this Form 10-Q.         

Our financial results are substantially dependent on net sales of our Nutraceutical product lines. Net sales is partly a function of the mix of branded proprietary Nutraceutical products,contract manufactured products, our SyzmoTM product and other Nutraceutical and Pharmaceutical products sold and        services rendered, all of which are difficult to forecast. The varied sales price among our products and promotional support in the form of consumer coupons or other sales price allowances, along with the mix of products sold affects the average selling price that we will realize and has a large impact on our revenue and gross margins. Net sales is affected by the timing of new product introductions and the demand for and market acceptance of our products; actions taken by our        competitors, including new product offerings and introductions, marketing programs and pricing pressures, and our response to such actions; our ability to respond quickly to consumer tastes and needs; and the availability of sufficient raw materials and production lead-time from suppliers to meet demand. Factors that could cause demand to be different from our expectations include customer acceptance of our products and our competitors products; changes in customer order patterns,        including order returns; changes in the level of inventory at customers; 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 products.         

We believe that we have the product offerings and introductions, facilities, personnel, and competitive 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.         

***Critical Accounting Policies and Estimates***

There have been no changes to our critical accounting policies in the threeand sixmonths endedDecember 31,2008.        Critical accounting policies and the significant estimates made in accordance with them are regularly discussed 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, 2008.

 

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***Results of Operations***

Our results from operations in the following table, which have been reclassified as a result of our spin-off of our Biotechnologies segment during the first quarter of fiscal year 2009, sets forth the income statement data of our results as a percentage of net sales for the periods indicated:

 

 

***For the******six******month******s******ended******December 31******, 2008 compared to the******six******month******s******ended******December 31******, 2007***

**Sales, net.**Sales, net, for thesixmonths endedDecember 31, 2008 and 2007 were $22.9million and $26.1million, respectively, a decrease of $3.2million or12.3%. The decrease is comprised of the following:

 

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For the six months ended December 31, 2008, approximately 71% of total net sales were derived from three customers as compared to 67% of total net sales for the six months ended December 31, 2007. The loss of any of these customers would have an adverse affect on our operations. We continue to expand our customer base by expanding from selling our proprietary branded        Nutraceutical products primarily to “club” stores to the retail sales segment and expanding our sales in the international market and e-commerce markets.

Sales, net for the Nutraceutical segment for the six months ended December 31, 2008 and 2007 were $20.7 million and $23.6 million, respectively, a decrease of approximately $2.9 million or 12.2%. This decrease is, in part, the result of a decrease in sales from our branded proprietary Nutraceutical product line of approximately $1.5 million in part due to increased        promotional programs offering discounts to our customers which resulted in a lower selling price point on our products at our club stores as compared to the six months ended December 31, 2007. In addition the Company’s contract manufacturing products sales decreased approximately $1.5 million, primarily due to lower volume and selling prices to our major customer. The remaining Nutraceutical product lines had net sales growth of approximately $0.1 million compared to the prior        period. During the six months ended December 31, 2008 we launched six to eight new products in test markets, a few of the products launched are receiving positive indicators; however the success of these product launches are too early to project future impact.

Pharmaceutical sales for the six months ended December 31, 2008 were $2.1 million compared to $2.5 million, a decrease of $0.4 million or 13.3% from the comparable period. This decrease is primarily due to decreased sales of our Approved Pharmaceutical Ingredients (API) business.

**Cost of sales**. Cost of sales decreased by $3.4 million to $17.2 million for the six months ended December 31, 2008 as compared to $20.6 million for the six months ended December 31, 2007. Cost of sales decreased as a percentage of sales to 75.1% for the six months ended December 31, 2008 as compared to 79.2% for the six months        ended December 31, 2007.         

The Nutraceutical segment cost of sales increased by $0.5 million to $15.5 million for the six months ended December 31, 2008 as compared to $15.0 million for the six months ended December 31, 2007. Cost of sales increased as a percentage of Nutraceutical sales to 74.6% for the six months ended December 31, 2008 as compared to 63.6% for the six months ended December 31,        2007. This increase in costs of sales as a percentage of net sales is a result of a higher raw material costs, increased freight costs and lower net sales in both our Naturally branded product lines and our contract manufacturing products. A majority of our manufacturing costs for our contract manufacturing business is fixed, which will increase the cost of sales as a percentage of sales as there are fewer sales to spread the fixed costs over.

The Pharmaceutical segment cost of sales was $1.7 million and $2.2 million for the six months ended December 31, 2008 and 2007, respectively. As a percentage of net sales, the cost of sales decreased 7.8%, from 88.1% to 80.3% for the six months ended December 31, 2007 and 2008, respectively. This decrease is due to lower variable

 

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costs in both our API business and our CRO business.

**Selling and Administrative Expenses.**Selling and administrative expenses were $9.9million for thesixmonths endedDecember 31,2008, a decrease of        $0.2million or1.7% as compared with $10.1million for thesixmonths endedDecember 31,2007. As a percentage of sales, net, selling andadministrative expenses were 43.3% for thesixmonths endedDecember 31,2008 and38.6% for the prior comparable period.         

 

Selling and administrative expenses for our Nutraceuticals segment were $8.0million for thesixmonths endedDecember 31,2008, adecrease of $0.1million or0.8% as compared with $8.1million for thesixmonths endedDecember 31,2007. As a percentage of Nutraceutical sales, net, selling and administrative expenses were38.5% for thesixmonths endedDecember 31,2008 and 34.1% for the prior comparable period.The decrease in selling and administrative expenses of $0.1 million is mainly due to decreases in marketing expenses, commissions, tradeshows and stock compensation expenses off-set by        increased in advertising costs, such as in store demos, employee salary and benefits and professional and consulting expenses.         

The Pharmaceutical selling and administrative expenseswere $1.9 million for the six months ended December 31, 2008, a decrease of $0.1 million or 5.1% as compared with $2.0 million for the six months ended December 31, 2007.         

**Other expense, net****.**Other expense,net increased approximately $0.4million for thesixmonths endedDecember        31,2008 as compared to thesixmonths endedDecember 31,2007. This is primarily attributable to an increase in interest expense due to the increased average total of outstanding obligations for the period endingDecember 31,2008        as compared toDecember 31,2007and higher interest rates on the outstanding obligations.

**Federal and state income tax, net.** For the six months ended December 31, 2008, we had a net tax expense of $6.0 million as compared to a net tax benefit of $0.8 million for the six months ended December 31, 2007. The tax expense increased $6.8 million as a result of fully reserving our deferred tax asset as it was determined based upon past losses, the        Company’s liquidity concerns and the current economic environment, that it was “more likely than not” that the Company’s deferred tax assets would not be realized.

**Loss from discontinued operations.** On August 18, 2008, we completed our distribution of our Biotechnologies segment. The net loss from our Biotechnologies Segment, included in our results for the period ended December 31, 2008, was $0.1 million as compared to $0.5 million for the period ended December 31, 2007. This decrease of        approximately $0.4 million is primarily the result of a six months of revenues and expenses in the period ended December 31, 2007 versus revenues and expenses of approximately one and a half months during the period ended December 31, 2008.         

**Net loss****applicable to common shareholder****s****.** Our net loss applicable to common shareholders for the six months ended December 31, 2008 was $12.5 million as compared to $5.0 million for the six months        ended December 31, 2007. This increase of approximately $7.5 million is primarily the result of fully reserving our deferred tax asset of $6.0 million as it was determined based upon past losses, the Company’s liquidity concerns and the current economic environment, that it was “more likely than not” that the Company’s deferred tax assets would not be realized. In addition to the increase in our tax expense for the current year as compared to a tax

 

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benefit of the prior year of $6.8 million our other expense increased by approximately $0.4 million mainly attributable to increased interest expenses in the current fiscal year. This was partially offset by an increase in gross profit of $0.3 million and a decrease in selling and administrative expenses of $0.2 million. The Series C preferred stock dividend of $0.1        million and $1.1 million related to the deemed dividend from the beneficial conversion feature of the Series C preferred stock dividend was a result of the Series C preferred stockholders converting their respective Series C shares into shares of our common stock. This results in permanent equity for us, as the Series C preferred stock replaced $6.0 million of current and long-term obligations.

***For the three months ended December 31, 2008 compared to the three months ended December 31, 2007***

**Sales, net.**Sales, net, for the three months endedDecember 31,2008 and 2007 were $12.2million and $13.6million, respectively, a decrease of $1.4million or10.1%. The decrease is comprised of the following:         

 

For the three months ended December 31, 2008, approximately 72% of total net sales were derived from three customers as compared to 68% of total net sales for the three months ended December 31, 2007. The loss of any of these customers would have an adverse affect on our operations. We continue to expand our customer base by expanding from selling our proprietary branded        Nutraceutical products primarily to “club” stores to the retail sales segment and expanding our sales in the international market and e-commerce markets.

Sales, net for the Nutraceutical segment for the three months ended December 31, 2008 and 2007 were $11.2 million and $12.8 million, respectively, a decrease of approximately $1.6 million or 13.0%. This decrease is, in part, the result of a decrease in sales from our branded proprietary Nutraceutical product line of approximately $0.5 million in part due to increased        promotional programs offering discounts to our customers which resulted in a lower selling price point on our products at our club stores as compared to the three months ended December 31, 2007. In addition the Company’s contract manufacturing products sales decreased approximately $1.2 million, primarily due to lower international reorders from our customers and decreased selling prices to our major customer. The remaining Nutraceutical product lines had net sales growth of        approximately $0.1 million compared to the prior period. During the second quarter we started seeing some organic growth from a few of the new products we launched during the first quarter; however the success of these product launches are too early to project future impact.

Pharmaceuticals sales for the three months ended December 31, 2008 were $1.0 million compared to $0.7 million, an increase of $0.3 million or 40.2% from the comparable period. This increase is primarily due to increased sales of our contract research organization (“CRO”).

**Cost of sales**. Cost of sales decreased by $2.4 million to $9.2 million for the three months ended December 31, 2008 as compared to $11.6 million for the three months ended December 31, 2007. Cost of sales decreased as a percentage of sales to 74.9% for the three months ended December 31, 2008 as compared to 85.6% for the        three

 

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months ended December 31, 2007.         

The Nutraceutical segment cost of sales decreased by $2.5 million to $8.5 million for the three months ended December 31, 2008 as compared to $10.9 million for the three months ended December 31, 2007. Cost of sales decreased as a percentage of Nutraceutical sales to 75.2% for the three months ended December 31, 2008 as compared to 85.4% for the three months ended December        31, 2007. This decrease in costs of sales as a percentage of net sales is mainly as a result of a one-time inventory write-down in the three months ended December 31, 2007, which resulted in an increase to cost of sales of $2.4 million. Excluding this item, cost of sales as a percentage of net sales is higher due higher raw material costs, increased freight costs and lower net sales in both our Naturally branded product lines and our contract manufacturing products. A majority of our        manufacturing costs for our contract manufacturing business is fixed, which will increase the cost of sales as a percentage of sales as there are fewer sales to spread the fixed costs over.                 The Pharmaceutical segment cost of sales was $0.7 million for each of the three months ended December 31, 2008 and 2007, respectively. As a percentage of net sales, the cost of sales decreased 0.6%, from 89.0% to 71.6% for the three months ended December 31, 2007 and 2008, respectively. This decrease is due to lower variable costs in both our API business and our CRO business.

**Selling and Administrative Expenses.**Selling and administrative expenses were $4.7million for the three months endedDecember 31,2008, a decrease of $0.7million or12.0% as compared with $5.4million for the three months endedDecember 31,2007. As a percentage of sales, net, selling andadministrative expenses were 38.9% for the three months endedDecember 31,2008 and39.7% for the prior comparable period.         

 

Selling and administrative expenses for our Nutraceuticals segment were $3.8million for the three months endedDecember 31,2008, an increase of $0.6million or 12.9% as compared with $4.4million for the three months endedDecember 31,2007. As a percentage of Nutraceutical sales, net, selling and administrative expenses were 34.0% forboththe three monthsendedDecember 31,2008and 2007, respectively.This decreaseof $0.6 millionismainly attributable todecreased non cash stock compensation expenseof approximately $0. 5 millionas a result of the forfeiture of        approximately 45% of the stock options and restricted stock awards grantedand certain stock options and restricted stock awards which were granted in the prior year with accelerated vesting features. Additional decreases to selling and administrative expenses are a result of a reduction in tradeshow expenses of $0.3 million, lower commissions of $0.1 million offset by increases in indirect advertising expenses of $0.1 million, salaries and employee        benefits of $0.1 million and increased professional and consulting fees of $0.1 million.

The Pharmaceutical selling and administrative expensesdecreased by $0.1 million from $1.0 million for the three months ended December 31, 2007 to $0.9 million for the three months ended December 31, 2008.         

**Other expense, net****.**Other expense,net increased approximately $0.2million for the three months endedDecember 31,2008 as compared to the three        months endedDecember 31,2007. This is primarily attributable to an increase in interest expense due to the increased average total of outstanding obligations for the period endingDecember 31,2008 as compared toDecember 31,2007 and higher interest rates on the        outstanding obligations.

 

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**Federal and state income tax, net.** For the three months ended December 31, 2008, we had a net tax expense of $6.0 million as compared to a net tax benefit of $0.4 million for the six months ended December 31, 2007. The tax expense increased $6.4 million as a result of fully reserving our deferred tax asset as it was determined based upon past losses, the        Company’s liquidity concerns and the current economic environment, that it was “more likely than not” that the Company’s deferred tax assets would not be realized.

**Loss from discontinued operations.** On August 18, 2008, we completed our distribution of our Biotechnologies segment. The net loss from our Biotechnologies Segment, included in our results for the three months ended December 31, 2007, was $0.2 million. The Biotechnologies Segment was not included in the results for the three        months ended December 31, 2008.         

**Net loss applicable to common shareholders.** Our net loss applicable to common shareholders for the three months ended December 31, 2008 was $8.1 million as compared to $3.6 million for the three months ended December 31, 2007. This increase of approximately $4.5 million is primarily the result of fully reserving our deferred tax        asset of $6.0 million as it was determined based upon past losses, the Company’s liquidity concerns and the current economic environment, that it was “more likely than not” that the Company’s deferred tax assets would not be realized. In addition to the increase in our tax expense for the current year as compared to a tax benefit of the prior year of $6.8 million our other expense increased by approximately $0.2 million mainly attributable to increased interest        expenses in the current fiscal year. This was partially offset by an increase in gross profit of $1.1 million and a decrease in selling and administrative expenses of $0.6 million.         

***Seasonality.***The Company’s results of operations in its Pharmaceuticals segmentisnot significantly affected by seasonal factors. The Nutraceutical business segment tends to be seasonal. The Company has found that        in its first fiscal quarter ending in September, orders for its branded proprietary Nutraceutical products slow (absent the addition of new customers with a significant first time order), as buyers in their markets may have purchased sufficient inventory to carry them through the summer months. Conversely, in the Company’s second fiscal quarter, ending in December, orders for its products increase as the demand for the Company’s branded Nutraceutical products seems to        increase in late December to early January as consumers become health conscious as they enter the new year.         

The Company believes that there are other non-seasonal factors that also may also 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. In addition, our recent growth has caused        additional variability in our quarterly results. 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:

 

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At December 31, 2008, the Company’s working capital deficit was approximately $0.3 million, a decrease of $7.6 million from working capital at June 30, 2008 of $7.3 million. The decrease in our working capital is a result of the Notes Payable coming due within the next twelve months and recording a full valuation allowance against our deferred tax assets in the        second quarter of fiscal year 2009 as a result of past losses, the Company’s liquidity concerns and the current economic environment. Cash and cash equivalents were $0.4 million at December 31, 2008, a decrease of $0.5 million from $0.9 million at June 30, 2008.

Net cash used by operating activities of $1.7 million for the six months ended December 31, 2008 included a net loss of $11.3 million. After excluding the effects of non-cash expenses, including the net loss from discontinued operations, deferred taxes, impairment charges, depreciation and amortization and compensation expense for employee stock options, the adjusted cash        used before the effect of the changes in working capital components was $8.6 million. Additional cash provided by continuing operations of approximately $1.0 million was the result of a decrease in accounts receivable of $0.7 million, inventory of $0.4 million, other assets of $0.4 million and an increase in accrued expenses and other liabilities of $0.8 million, these increases to cash were partially offset by a decrease in accounts payable and income taxes payable of $1.0 million and        an increase to other current assets of $0.3 million. Cash used of approximately $0.1 million were for operating activities from our discontinued operations.

Net cash provided by operating activities of $1.3 million for the six months ended December 31, 2007 included a net loss of $5.0 million. After excluding the effects of non-cash expenses, including the net loss from discontinued operations, deferred taxes, impairment charges, depreciation and amortization and compensation expense for employee stock options, the adjusted        cash provided before the effect of the changes in working capital components was $3.7 million. Cash provided by continuing operations for working capital components of approximately $3.0 million was the result of an increase in inventory of $0.7 million, accounts receivable of $0.8 million, other current and non-current assets of $0.5 million and a decrease of accounts payable of approximately $2.0 million, these reductions to cash were partially offset by an increase in accrued        expenses and other liabilities of $0.9 million and income taxes payable of $0.1 million. Cash used of approximately $0.4 million were for operating activities of our discontinued operations.

We used cash in continuing operations of $0.1 million and $0.3 million of cash in investing activities for the six months ended December 31, 2008 and 2007, respectively. The use of cash was to purchase property and equipment and intangible assets of $0.1 million and $0.3 million, for the six months ended December 31, 2008 and 2007, respectively. An insignificant amount of        cash was used during each period ended December 31, 2008 and 2007, respectively for investing activities related to our discontinued operations.

 

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Cash provided by financing activities was $1.3 million for the three months ended December 31, 2008. Cash provided during the six months ended December 31, 2008 was the result of proceeds of $1.3 million from employees exercising stock options during the period.

Cash provided by financing activities was $0.6 million for the six months ended December 31, 2007. Cash provided during the six months ended December 31, 2007 was the result of proceeds of $5.0 million from the revolving credit facility offset by repayments of the revolving credit facility of $4.5 million and a payment of $1.0 million on term credit facility.

Management believes consolidated net sales for the remainder of fiscal year 2009 will be between $25.0 million and $30.0 million, and we believe thiswill be sufficient to fund our operations.Our expected return to profitability in the latter months of fiscal year 2009, which cannot be assured (although we still expect to report a loss for fiscal year 2009), could provide a portion of cash needsover the ensuing twelve-month period toreduce our expenditures andmeet capital expenditure needs and daily operational needs. In addition, we obtained a Working Capital Bridge Loan from a related party, major shareholder and director, and we maysell orotherwisedispose ofsubstantially all of our net assets of our Pharmaceutical segment to further fund our cash needs. Even with the expected return to profitability, the Working Capital Bridge Loan and the potentialsell        orotherwisedispose ofCompany assets, ourcurrent cash flows will not be able to repay the Notes Payable without refinancing, or obtaining additional debt or capital from other sources. There can be no assurance        that we will be successful in these efforts, which raises substantial doubt as to our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our total annual commitments at December 31, 2008 for long term non-cancelable leases of approximately $4.5 million consists of obligations under operating leases for facilities and lease agreements for the rental of warehouse equipment, office equipment and automobiles.

***Capital Expenditures***

The Company's capital expenditures for the six months ended December 31, 2008 and 2007 were $0.1 million and $0.3 million, respectively. The Company has budgeted approximately $0.5 million for capital expenditures for fiscal 2009. The total amount is expected to be funded from cash provided from its operations.         

***Off-Balance Sheet Arrangements***

The Company has no off-balance sheet arrangements.         

***Recent Accounting Pronouncement***

Pleaserefer to Note 1in our financial statements which can be found at page6, herein.

***Impact of Inflation***

The Company does not believe that inflation has significantly affected its results of operations.

**Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Not applicable.         

**Item 4****T****. CONTROLS AND PROCEDURES**

**Disclosure Controls and Procedures**

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by the Companyin the reports it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed,        summarized, and reported within the time periods specified by the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the

 

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Company in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer,the Companyhas evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the        Exchange Act) as ofDecember 31, 2008, and, based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective in providing reasonable assurance of compliance.

**Changes in Internal Control over Financial Reporting**

No change in our internal control over financial reporting occurred during the threeand sixmonths endedDecember 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial        reporting.

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**PART II – OTHER INFORMATION**             

**Item 1. LEGAL PROCEEDINGS**

None

 

****

Item 1A. Risk Factors

The risks described in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended June 30, 2008, could materially and adversely affect our business, financial condition and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by            additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.There have been no material changes to our risk factors from those disclosed in our Form 10-K for the year ended June 30, 2008, other than as set forth below.             

**Current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance.**

Our operating results are impacted by the health of the North American economies. Our business and financial performance, including collection of our accounts receivable, recoverability of assets including investments, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial market            volatility, recession, etc.                         Additionally, we may experience difficulties in scaling our operations to react to economic pressures in the U.S.

**Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

**Item 3. DEFAULTS UPON SENIOR SECURITIES**

None.             

**Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

Two matters were submitted for a vote at the Company’s Annual Meeting ofStockholders held on November 26, 2008by holders of record of the Company’s common stock, par value of $0.002 per share at the close of business onOctober            31,2008(the “Record Date”), which was determined to be19,931,617shares of common stock. The holders of14,198,792shares of common stock, a majority, were present in person or represented by proxy at the meeting. The two matters and the results of            the voting at the Annual Meeting are as follows:             
|  | 1.      | To elect three Class I directors for a three year term to serve until 2011Annual Meeting of Stockholders. The number of votes cast at the meeting for the election of the three (3) directors for a three year term to the 2011Annual Meeting of Stockholders were as follows: |
|--|----------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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|  | 2.      | To ratify the appointment of Amper Politziner & Mattia, P.C. as the Company’s independent auditors. The number of votes cast at the meeting for the proposal to ratify Amper Politziner & Mattia, P.C. as the Company’s independent auditors were as follows: |
|--|----------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Item 5. OTHER INFORMATION     **

On February 5, 2009 the Company entered into a $250,000 promissory note and on February 17, 2009, the Company entered into a $500,000 promissory note, both promissory notes are with CD Financial, LLC, of whom is an affiliate of Carl DeSantis, a director and major shareholder of the Company. The gross proceeds of $750,000 bear an interest rate of 9.5% with a maturity date            of the earlier of the sale of substantially all of the net assets of the Pharmaceutical segment or February 28, 2010. In the event of default or change of control occurs, CD Financial, LLC has the right to accelerate the payment of all unpaid principal and accrued and unpaid Interest (including default interest (if any)) on this promissory note. For a more detailed description of the promissory notes from CD Financial, LLC, please see copies of the Promissory notes attached as            Exhibits 10.1 and 10.2 to this Quarterly Report on Form 10-Q.

**Item 6. EXHIBITS**             

**(a)     Exhibits**             

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**Exhibit**

**Number**
| 10.1 | 9.5% Promissory Note, dated February 5, 2009                                                                                     |
|------|----------------------------------------------------------------------------------------------------------------------------------|
| 10.2 | 9.5% Promissory Note , dated February17, 2009                                                                                    |
| 31.1 | Certification of pursuant to Section 302 of Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.            |
| 31.2 | Certification of pursuant to Section 302 of Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.            |
| 32.1 | Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. |
| 32.2 | Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. |

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.                     

**INTEGRATED BIOPHARMA, INC.**

Date:     February20, 2009     By:/s/Jeffrey R. Leach

  Jeffrey R. Leach,

  President andChief Executive Officer

Date:     February 20, 2009     By:/s/ Dina L. Masi

   Dina L. Masi,

                                                                                     Chief Financial Officer & Senior Vice President

 

 

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