UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington
D.C. 20549


____________





FORM
10-Q





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





For the
quarterly period ended March 31, 2010





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 incorporation or
      organization)
            (I.R.S.
      Employer 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



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 
            
            Accelerated
      filer 
            
            Non-accelerated
      filer 
            
            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   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 May 19,
      2010Common Stock, $0.002
      par value
            20,519,342
      Shares







INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES





FORM
10-Q QUARTERLY REPORT


For
the Nine Months Ended March 31, 2010


INDEX








PagePart
      I. Financial InformationItem
      1.
            Condensed
      Consolidated Statements of Operations for the Three and Nine Months Ended
      March 31, 2010 and 2009 (unaudited)
            2Condensed
      Consolidated Balance Sheets as of March 31, 2010 (unaudited) and June 30,
      2009
            3Condensed
      Consolidated Statements of Changes in Stockholders’ Deficit for the Nine
      Months Ended March 31, 2010 (unaudited)
            4Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended March 31,
      2010 and 2009 (unaudited)
            5Notes
      to Condensed Consolidated Statements
            6Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            23Item
      3.
            Quantitative
      and Qualitative Disclosures about Market Risk
            31Item
      4T.
            Controls
      and Procedures
            31Part
      II. Other InformationItem
      1.
            Legal
      Proceedings
            32Item
      1A.
            Risk
      Factors
            33Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            33Item
      3.
            Defaults
      Upon Senior Securities
            33Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            33Item
      5.
            Other
      Information
            33Item
      6.
            Exhibits
            33OtherSignatures
            
            34





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, 2009
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
the forward-looking statements and are subject to change due 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.





1







Item 1. FINANCIAL
STATEMENTS












2








3




4







5




INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS OF
MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE AND
NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share
amounts)





Note
1. Principles of Consolidation and Basis of Presentation




The
accompanying condensed financial statements for the interim periods are
unaudited and include the accounts of the Company. The interim condensed
consolidated 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 condensed 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, 2009 (“10-K”), as filed with the SEC. The June 30, 2009
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 three and nine
months ended March 31, 2010, are not necessarily indicative of the results for
the full fiscal year ending June 30, 2010 or for any other period.





Integrated
BioPharma, Inc., a Delaware corporation (together with its subsidiaries, the
“Company”), is engaged primarily in manufacturing, distributing, marketing and
sales of vitamins, nutritional supplements and herbal products.  The
Company’s customers are located primarily in the United States. 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. As of September 22, 2009, the Company’s common stock trades on
the OTC Bulletin Board under the symbol INBP.OB.  From February 27,
2009 through September 22, 2009, the Company’s common stock traded on the Pink
Sheets under the symbol INBP.PK.  Immediately prior to February 27,
2009, the Company’s common stock traded on the NASDAQ Global Market under the
symbol “INBP.”  The Company continues to do business with certain of
its customers and vendors as Chem International, Inc.





The
Company, subsequent to the spin-off of its Biotechnologies segment and the sale
of the Pharmaceutical segment, which occurred in Fiscal 2009, see Note 3. –
Discontinued Operations, has one remaining reportable segment for its operation,
the Nutraceutical segment.





The
Nutraceutical segment, our one remaining business operation, 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. (“AgroLabs”), which
distributes for sale through major mass market, grocery, drug and vitamin
retailers, healthful nutritional products under the following brands: Naturally
Noni, Naturally Pomegranate, Naturally Aloe, Aloe Pure, Naturally Thai
Mangosteen, Peaceful Sleep, Green Envy, 1st
Choice Multi-Vitamin, ACAI Extra, ACAI Immune, ACAI Cleanse, and other products
which are being introduced into the market, these are referred to as our branded
proprietary Nutraceutical business and/or products; and The Vitamin Factory,
which sells private label Manhattan Drug products, as well as our AgroLabs
products, through mail order catalogs and the Internet.





The
Company also distributes fine natural chemicals through its wholly-owned
subsidiary IHT Health Products, Inc. and is a distributor of certain raw
materials for DSM Nutritional Products, Inc.





These
condensed consolidated financial statements, reflect the spin-off of iBio, Inc.
(“iBio”), the sale of InB: Hauser Pharmaceuticals, Inc. (“Hauser”), the
discontinued operations of The Organic Beverage Company (“TOBC”), and related
transactions (see Note 3. – Discontinued Operations).





6


INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)





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





Principles of
Consolidation. The accompanying condensed consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. 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.





Investment in
iBio, Inc. The Company accounts for its investment in iBio on the cost
basis as it retained approximately 6% of its interest in iBio at the time of the
spin-off of this subsidiary (see Note 3. Discontinued
Operations).  The Company reviews its investment in iBio for
impairment and records a loss when there is deemed to be an impairment of the
investment.




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 recognition practice is appropriate because the Company’s sales
policies meet the four criteria of Staff Accounting Bulletin 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 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.





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.





7





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)




Supplemental
Statement of Cash Flows











Earnings Per
Share. Basic earnings per common share amounts are based on weighted
average number of common shares outstanding. Diluted earnings per share amounts
are based on the weighted average number of common shares outstanding, plus the
incremental shares that would have been outstanding upon the assumed exercise of
all potentially dilutive stock options, warrants and convertible preferred
stock, subject to anti-dilution limitations using the treasury stock
method.





For both
the three and nine months periods ended March 31, 2010 and 2009, total options
and warrants of 3,268,721 and 3,073,017, 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.





8





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS OF
MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE AND
NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)





For both
the three and nine month periods ended March 31, 2010, 25,000 options to
purchase shares of common stock with exercise prices below the market price,
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 nine month periods ended March 31, 2010 and 2009, common share
equivalents of 2,250,000 and 1,779,755, respectively, 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.





Note
2. Liquidity and Going Concern. The Company’s condensed consolidated
financial statements have been prepared assuming that it will continue as a
going concern. The Company has incurred recurring operating losses and negative
operating cash flows for the three consecutive fiscal years ended June 30, 2009,
including a net loss attributable to common stockholders of $19,367 and negative
operating cash flows of $2,752 for the year ended June 30, 2009. For the nine
months ended March 31, 2010, the Company had a net operating loss of $2,433 and
a net loss of $3,864.  At March 31, 2010, the Company had cash and
cash equivalents of $735, a working capital deficit of $8,381, primarily
attributable to the amended Notes Payable (See Note 7(a)(ii)) in the amount of
$7,805, which were due on November 15, 2009, the Convertible Note Payable in the
amount of $3,354 (See Note 7(a)(i)) and an accumulated deficit of
$48,229.  These factors raise substantial doubt as to the Company’s
ability to continue as a going concern.




The Company defaulted on the $7,805
outstanding amount of Notes Payable by failing to repay them on the scheduled
maturity date of November 15, 2009. The Notes Payable are secured by a pledge of
substantially all of the Company’s assets. On March 19, 2010, the Company
received a payment demand (the “Notice”) for default interest from one of the
holders of the Notes Payable representing approximately 73% of the outstanding
balance. The Company has engaged a financial advisory firm to assist it in
developing a comprehensive strategy regarding a financial and/or business
restructuring.  As of May 19, 2010, the Company has not repaid the
Notes Payable or the default interest referenced in the Notice; however, the
Company is in negotiations to restructure or amend the Notes Payable with
the holder who sent the Notice. There can be no assurance that the Company will
be able to negotiate a successful restructuring or amendment of the Notes
Payable.  In the interim, the Company has continued to make timely
interest payments to the Note Payable holders at the non default rate of 8% per
annum.  As a result of the event of default that arose based upon the
Company’s failure to pay the Notes at maturity, the note holders have the right
to: (i) give the Company an Acceleration Notice, which would (a) accelerate the
payment of all unpaid principal and accrued and unpaid interest (including
default interest (if any)) on the Notes Payable, and (b) require the Company to
pay an amount equal to the sum of all of the amounts described in the preceding
clause (a) in same day funds on the payment date specified in the notice,
provided such date must be at least two (2) business days following the date on
which the notice is delivered to the Company and (ii) foreclose on the Company’s
assets, which are pledged as collateral.  As of May 19, 2010, the
Company has not received any additional demand of payment notices from the
amended Notes Payable holders nor have the note holders exercised these
rights.


Assuming
the Company is able to raise additional capital and/or refinance its Notes
Payable, and it is not adversely affected by the current economic conditions,
the Company believes that its available capital as of March 31, 2010 will enable
it to continue as a going concern.  However, there can be no assurance that
the Company will be able to raise additional capital or successfully refinance
the amended Notes Payable of at least $7,805, upon acceptable terms, nor that
the current economic conditions will not negatively impact it. If the Company is
unable to raise additional capital or successfully refinance its amended Notes
Payable of at least $7,805 upon acceptable terms, it would have a material
adverse effect on the Company. The accompanying condensed consolidated financial
statements do not include any adjustments that might result from this
uncertainty.





Note
3. Discontinued Operations





In the
fiscal year ended June 30, 2009, the Company classified the spin-off of iBio in
August 2008, the sale of Hauser in March 2009 and the discontinued operations of
TOBC in June 2009 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. The remaining net assets of TOBC
are classified as assets and liabilities related to discontinued operations in
the Company’s condensed consolidated balance sheet as of March 31, 2010 and June
30, 2009.





9


INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS OF
MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE AND
NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)





The net
assets from discontinued operations were comprised of the
following:











(a)
            Spin-off of
      iBio –In August 2008, the Company completed the spin-off of
      iBio.  iBio revenues from discontinued operations were $169 for
      the nine months ended March 31, 2009.  The Company’s loss from
      the discontinued operations of iBio, net of taxes, was $105 for the nine
      months ended March 31, 2009.





(b)
            Sale of
      Hauser –In March 2009, the Company entered into a stock purchase
      agreement and consummated the sale of all of the issued and outstanding
      shares of common stock of its wholly owned subsidiary Hauser to Cedarburg
      Pharmaceuticals, Inc. (“Cedarburg”). Prior to the sale of Hauser, the
      Company sold substantially all the assets of INB: Paxis Pharmaceuticals,
      Inc. (“Paxis”) and transferred outstanding payables owed by Paxis (the
      “Net Assets of Paxis”) to Hauser in consideration for the outstanding
      intercompany debt between these two subsidiaries of the
      Company.  The Net Assets of Paxis transferred under this
      transaction were owned by Hauser at the time of the sale of Hauser’s
      common stock to Cedarburg and are no longer assets and liabilities of the
      Company. The Company continues to own certain assets of Paxis through its
      ownership of common stock of Paxis. The purchase price received by the
      Company in connection with the sale of Hauser consisted of $1,160 in cash
      and a promissory note in favor of the Company in the principal amount of
      $340. The promissory note matured on March 17, 2010 and had an interest
      rate of 12% per annum, payable quarterly. On April 7, 2009, this
      promissory note was sold to CD Financial, LLC, a related party and the
      holder of the Company’s Convertible Note Payable (see Note 7(a)(i)), for
      the full principal amount of $340 and accrued interest of $2.


10


INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS OF
MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE AND
NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)





The
Hauser revenues from discontinued operations were $578 and $2,761 for the three
and nine months ended March 31, 2009, respectively. The Company’s net loss from
the Hauser discontinued operations, net of taxes were $476 and $2,249 for the
three and nine months ended March 31, 2009, respectively.  As a result
of the sale of Hauser, the Company recognized a loss of $627 during the three
and nine months ended March 31, 2009, as follows:









(c)
            Discontinued
      operations of TOBC –During the nine months ended March 31, 2009,
      the Company curtailed its operations of TOBC and combined the sales
      efforts for the SyzmoTM product line with the AgroLabs
      products.  In June 2009, the Company determined that the SyzmoTM
      product line was to be discontinued as the Company did not have the
      financial resources to pursue the further development of the SyzmoTM
      product in the very competitive energy drink market
  place.





Revenues
from TOBC’s discontinued operations were $55 and $206 for the three and nine
months ended March 31, 2009. The Company’s net losses from TOBC’s discontinued
operations were $597 and $969 for the three and nine months ended March 31,
2009.





The
Company’s revenue and loss from discontinued operations, net of taxes, from
these events were $633 and $1,073 for the three months ended March 31, 2009,
respectively, as follows:











The
Company’s revenue and loss from discontinued operations, net of taxes, from
these events were $3,136 and $3,323 for the nine months ended March 31, 2009,
respectively, as follows:








11





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)




Note 4.
Intangible Assets, net





Intangible
assets consist of trade names, license fees, and unpatented technology. The
carrying amount of other intangible assets, net is as follows as
of:







Amortization
expense from continuing operations recorded on the intangible assets for each of
the three and nine months ended March 31, 2010 and 2009 was $34 and $104,
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 $18 and
$68 for the three and nine months ended March 31, 2009,
respectively.





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








Note
5. 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:









12


INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)




Note
6. Property and Equipment, net





Property
and equipment consists of the following as of:









Depreciation
and amortization expense was $81 and $78 for the three months ended March 31,
2010 and 2009, respectively and $235 and $298 for the nine months ended March
31, 2010 and 2009, respectively.





Note
7. Notes Payable, Convertible Note Payable – CD Financial, LLC and Series C
Redeemable Convertible Preferred Stock





(a)  On
February 21, 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, in the aggregate, of $17,337 to the Company. The
private placement involved the sale of (i) 6,000 shares of newly designated
Series C Redeemable Convertible Preferred Stock (the “Series C Preferred Stock”)
with a stated value of $1,000 per share (see Note 11(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 (the “Notes Payable”) and (iv) 200,000
shares of the Company’s common stock. The Company also has recorded $218 of
deferred financing costs associated with the SPAs and $130 of such deferred
financing costs were netted against the gross proceeds received. These costs
were allocated to 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 to which the costs were allocated. As of March 31, 2010 and June
30, 2009, the Company had $24 and $41 of deferred financing costs remaining,
respectively.  As of March 31, 2010, the remaining balance will be
amortized to interest expense over eleven months. The Notes Payable and the
Convertible Note Payable are secured by a pledge of substantially all of the
Company’s assets. Concurrently with entry into the SPAs, the Company terminated
its outstanding credit facilities with Amalgamated Bank in the amount of $16,333
with the repayment of $16,006.


(i) CD
Financial, LLC (“CD Financial”), a related party, provided gross proceeds of
$7,500, exclusive of a $163 discount to be repaid by the Company at a future
date, in exchange for 3,000 shares of Series C Preferred Stock, with a stated
value of $1,000 per share, and $4,500 in principal amount of Convertible Note
Payable. The Company allocated the proceeds and the discount based on the
relative fair value of the Convertible Note Payable and the Series C Preferred
Stock. The Company is amortizing to interest expense the discount applied to the
Convertible Note Payable over the term of the note, and charged to Additional
Paid in Capital the discount applied to the Series C Preferred Stock. The
Company recorded a beneficial conversion feature of $715 on the Convertible Note
Payable that was being accreted over the three-year period until maturity or the
redemption of the Convertible Note Payable. The Company also recorded a
beneficial conversion feature on the Series C Preferred Stock of $608 which was
accreted over the five-year maturity period until the redemption of the Series C
Preferred Stock in August 2008. As of March 31, 2010 and June 30, 2009, the
unpaid discount on the Series C Preferred Stock and Convertible Note Payable in
the amount of $163 is included in accrued expenses in the accompanying Condensed
Consolidated Balance Sheet.





13





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)





The
beneficial conversion features were accreted using the effective interest rate
method until July 1, 2009 when the Company adopted “Accounting For Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock”.  As of July 1, 2009, the Company recorded an accumulated
adjustment to account for the embedded derivative liability of the conversion
feature of the Convertible Note Payable, resulting in a decrease to additional
paid in capital of $715, a decrease in accumulated deficit of $2,097, a decrease
in the carry value of the Convertible Note Payable of $1,426 and the recognition
of a derivative liability of $44.  As of March 31, 2010, the related
derivative liability to the Convertible Note Payable decreased to $2 and is
included in accrued expenses and other current liabilities in the accompanying
condensed balance sheets.




The
Company used the following assumptions to calculate the fair value of the
derivative liability using the Black-Scholes options pricing model:











The
Convertible Note Payable bears interest at an annual rate of 9.5% and matures on
or before February 21, 2011. It may 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 Note Payable. 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 the conversion 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 Note
Payable.





Included
in Other Expense, net in the accompanying Condensed Consolidated Statement of
Operations, is $8 and $25 related to the accretion of the discount and $255 and
$716 related to the accretion of the embedded derivative liability related to
the Convertible Note Payable, for the three and nine months ended March 31,
2010, respectively, and $8 and $16 related to the accretion of the discount and
$65 and $195 accretion of the embedded derivative and beneficial conversion
feature on the Convertible Note Payable, respectively, for the three and nine
months ended March 31, 2009, respectively.  As of March 31, 2010, the
Company had interest in arrears of $182 on the Convertible Note
Payable.  In March 2009, the Company and CD Financial entered into an
oral agreement to suspend the cash interest payments on the Convertible Note
Payable until the Company returned to positive cash flows in its
operations.  In this oral agreement, CD Financial agreed not to give
any default notices or increase interest rates due to such default (the default
interest rate as defined in the Convertible Note Payable is 18%).  The
Company resumed interest payments on the Convertible Note Payable in August of
2009.  In March 2010, CD Financial orally agreed to defer the interest owed
for April 2010, in the amount of $36, to assist the Company in meeting its short
term cash flow requirements.  Monthly interest payments will resume for
interest owed for May 2010.


14





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)





Also, in
accordance with the Convertible Note Payable, the Company will issue and deliver
to CD Financial, 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 the Convertible Note Payable has been repaid in full,
after which the Company's obligations to issue shares of common stock will no
longer be applicable.





(ii)
Imperium, provided gross proceeds of $9,837, including a discount of $163, in
exchange for 3,000 shares of Series C Preferred Stock, with a stated value of
$1,000 per share, $7,000 in principal amount of 8.0% Notes Payable and 200,000
shares of the Company’s common stock. The Notes Payable originally matured on
February 21, 2009. The Company allocated the proceeds and the discount based on
the relative fair value of the Notes Payable, the Series C Preferred Stock and
the Company’s common stock. The Company amortized, to interest expense, the
discount applied to the Notes Payable over the term of the notes and charged to
Additional Paid in Capital the discounts applied to the Series C Preferred Stock
and the common stock. The Company recorded a beneficial conversion feature on
the Series C Preferred Stock of $608. The beneficial conversion feature was
accreted over the five-year maturity period until the redemption of the Series C
Preferred Stock in August 2008. The beneficial conversion features were accreted
using the effective interest rate method. For the three and nine months ended
March 31, 2009, included in Other Expense, net in the accompanying Condensed
Consolidated Statement of Operations, is none and $322, respectively, related to
the accretion of the discount on the Notes Payable.





On
October 14, 2008, the Company and the Notes Payable holders amended their SPA to
extend the maturity from February 21, 2009 to November 15, 2009 (See Note 2.
Liquidity and Going Concern). In consideration for extending the maturity of the
Notes Payable, the Notes Payable holders will forgo the 200,000 shares of common
stock as additional interest and the Company  (i) granted a 11.5%
premium on the principal, thus aggregating a principal balance due of $7,805 and
certain other amounts payable under the Notes Payable, if any, (ii) certain new
covenants are applicable to the Company effective October 14, 2008, (iii) the
Company issued warrants to purchase 500,000 shares of the Company’s Common
Stock, with a five year term at 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. Since the October 14, 2008 amendment
significantly modified the terms of the original Notes Payable, the Company
accounted for the amendment as an extinguishment of the original Notes Payable
and issuance of new Notes Payable.  As a result of the extinguishment
of the original Notes Payable, the Company accelerated the amortization of the
then remaining discount of $178 and prepaid financing costs of $32 applied to
the original Notes Payable to interest expense. Furthermore, the Company
reversed the accrual of additional consideration of $208 related to the 200,000
shares of the Company’s common stock.





The
amended Notes Payable in the amount of $7,000 bear an interest rate of 8.0% and
matured on November 15, 2009. The Company accreted the premium of $805 over the
term of the amendment, using the effective interest method, which resulted in
additional interest expense for the three and nine months ended March 31, 2010
of none and $288, respectively.  As of July 1, 2009, the warrants
issued were deemed to have a derivative liability resulting in an accumulated
adjustment to account for the embedded derivative liability of the strike price
resulting in a decrease to additional paid in capital of $169, a decrease in
accumulated deficit of $141, a decrease in the carry value of the amended Notes
Payable of $6 and the recognition of a derivative liability of
$34.  As of March 31, 2010, the related derivative liability to the
warrants decreased to $26 and is included in accrued expenses and other current
liabilities in the accompanying condensed balance sheets.





15


INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)





The
Company used the following assumptions to calculate the fair value of the
derivative liability using the Black-Scholes options pricing model:













The
discount to the amended Notes Payable for the embedded derivative was accreted
using the effective interest method and resulted in interest expense for the
three and nine months ended March 31, 2010 of none and $65, respectively and the
discount expensed in the three and nine months ended March 31, 2009 were $179
and $402 of interest expense for the three and nine months ended March 31, 2009,
respectively. The Company also recorded an additional $10 of deferred financing
costs as a result of the issuance of the amended Notes Payable and amortized the
deferred financing costs to interest expense using the effective interest
method. The amount amortized to interest expense relating to the amended Notes
Payable for the three and nine months ended March 31, 2010 was less than $1 and
$3, respectively and $2 and $5 for the three and nine months ended March 31,
2009, respectively.





(b) On
November 24, 2009, MDC, a wholly owned subsidiary of the Company, entered into a
$300 promissory note (the “CD Note”) with CD Financial (see Note
7(a)(i)).  The CD Note matures on November 24, 2010 and bears interest
at the rate of 5%.  Interest is accrued monthly and is payable upon
maturity.





The
following table presents the stated value/principal of each of the securities
issued in connection with the debt outstanding as of March 31,
2010:









The
Company accreted $54 and $1,137, in the nine months ended March 31, 2009, for
the Series C Preferred Stock dividend and for the acceleration of the deemed
dividend from the beneficial conversion feature of the Series C Preferred Stock,
respectively (See Note 11(d) Series C Redeemable Convertible Preferred
Stock).  Such amounts are included in the accompanying Condensed
Consolidated Statement of Operations.





16
 INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)





The
weighted average interest rate paid was 8.59% in each of the three and nine
months ended March 31, 2010 and 2009.  As of March 31, 2010 and June
30, 2009, the Company had accrued and unpaid interest of approximately $267 and
$192, respectively, for the Notes Payable and Convertible Note
Payable.  (See Note 7(a) above).





On March
19, 2010, the Company received a payment demand (the “Notice”) for default
interest from one of the holders of the Notes Payable representing approximately
73% of the outstanding balance. The Company has engaged a financial advisory
firm to assist it in developing a comprehensive strategy regarding a financial
and/or business restructuring.  As of May 19, 2010, the Company has
not repaid the Notes Payable or the default interest referenced in the Notice;
however, the Company is in negotiations to restructure or amend the Notes
Payable with the holder who sent the Notice. There can be no assurance that the
Company will be able to negotiate a successful restructuring or amendment of the
Notes Payable.  In the interim, the Company has continued to make
timely interest payments to the Note Payable holders at the non default rate of
8% per annum.  As a result of the event of default that arose based
upon the Company’s failure to pay the Notes at maturity, the note holders have
the right to:  (i)  give the Company an Acceleration Notice,
which would (a) accelerate the payment of all unpaid principal and accrued and
unpaid interest (including default interest (if any)) on the Notes Payable, and
(b) require the Company to pay an amount equal to the sum of all of the amounts
described in the preceding clause (a) in same day funds on the payment date
specified in the notice, provided such date must be at least two (2) business
days following the date on which the notice is delivered to the Company and (ii)
foreclose on the Company’s assets which are pledged as collateral.  As
of May 19, 2010, the Company has not received any additional demand of payment
notices from the amended Notes Payable holders nor have the note holders
exercised these rights.
  Note
8. 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 $250 through December 31, 2013. As
of March 31, 2010, the Company had $272 of uninsured deposits at these financial
institutions.





(b)
Concentrations of Credit Risk-Receivables. The Company routinely assesses
the financial strength of its customers and, based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited. The Company does not require
collateral in relation to its trade accounts receivable credit risk. The amount
of the allowance for uncollectible accounts and other allowances was $240 and
$298 at March 31, 2010 and June 30, 2009, respectively.





(c) Major
Customers.For the three and nine months ended March 31, 2010,
approximately 63.8% and 77.9%, respectively, of revenues was derived from two
customers.  For the three and nine months ended March 31, 2009
approximately 74.2% and 80.1% of revenues were derived from three
customers.  Accounts receivable as of March 31, 2010 from the two
major customers represented approximately 41% of total accounts receivable. The
loss 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 it business 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.





17


INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)





Approximately
50% the Company’s employees, located in its New Jersey facility, are covered by
a union contract. The contract was renewed in August 2006 and will expire in
August 2010.





Note
9. 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 the
Chairman of the Company’s Board of Directors, a director and majority
shareholder and certain of his family members and 10% owned by an employee of
the Company. The lease provides for minimum annual rental payment 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 three and
nine months ended March 31, 2010 and 2009 on these leases were $195 and $217 and
$560 and $610, respectively, and are included in both cost of sales and selling
and administrative expenses in the accompanying Condensed Consolidated
Statements of Operations. At March 31, 2010 and June 30, 2009, the Company had
an outstanding obligation of $668 and $443, respectively, included in accounts
payable in the accompanying Condensed 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 $286 and $267 for the
three months ended March 31, 2010 and 2009 and $817 and $774 for the nine months
ended March 31, 2010 and 2009, respectively. Rent expense is stated net of
sublease income of approximately $3 and $9 for the three months ended March 31,
2010 and 2009, respectively and $21 and $26 for the nine month periods ended
March 31, 2010 and 2009, respectively.  This is included in both cost
of sales and selling and administrative expenses in the accompanying Condensed
Consolidated Statements of Operations.





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








(b)
Consulting Agreements.





Effective
July 1, 2008, the Company entered into a three year consulting agreement with
Jeffrey Leach (an employee of the Company as of the date of the agreement and
its former 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 consulting agreement, the Company issued 250,000 shares of the
Company’s common stock to Mr. Leach.  In each of the three and nine
months ended March 31, 2010 and 2009, the Company recorded $49 and $148,
respectively, in stock compensation expense and is included in Selling and
Administrative Expenses.  As of March 31, 2010, pre paid consulting fees of
$247 will be expensed over the remaining period under the consulting
agreement.





18





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)





(c)
Legal Proceedings.





On June
16, 2008, the State of Texas filed an Original Petition for injunctive relief
and civil penalties in the 101st Judicial District, Dallas, Texas (the "Court"),
against AgroLabs Inc., the Company, Kurt Cahill and Gerald Kay (collectively the
"Defendants").  The State alleged that the Defendants sold or
distributed juices and dietary supplements marketed with inappropriate disease
and nutritional claims.  AgroLabs has appeared in the lawsuit and
filed an answer denying all claims.  Additionally, AgroLabs filed a
counterclaim against the State for declaratory relief, in which AgroLabs sought
a declaratory judgment from the Court that the State's causes of action were
preempted under federal law because the product benefit claims at issue are
fully compliant with applicable federal law.





The
Company and Mr. Kay filed motions to dismiss the lawsuit for lack of personal
jurisdiction.  In November 2009, the State of Texas agreed to dismiss
the Company and Mr. Kay from the lawsuit.  The parties have now
resolved all of the remaining issues in this lawsuit.  Neither party
has admitted any liability.  Under the settlement agreement, the
Company will make a payment to the State of Texas in the amount of $130 to be
allocated to the State of Texas' judicial fund for programs approved by the
Texas Supreme Court that provide basic civil legal services to the indigent;
attorneys' fees and investigation costs incurred by the Office of the Attorney
General; and investigative costs incurred by the Texas Department of State
Health Services.  The Company recognized this payment obligation in
its results of operations for the nine months ended March 31, 2010.





On April
23, 2009, Braker Five & Eight Investors, L.P., (the “Landlord”) filed an
Original Petition relief and damages pursuant to a Lease Agreement for the
premises located in Austin, Texas in the 126th Judicial District, Travis County,
Texas, against BevSpec, Inc., Bioscience Technologies, Inc. dba The Organic
Beverage Company, and Integrated BioPharma, Inc., as Guarantor (collectively,
the “Defendants”).  The Landlord has sued for sums due under the Lease
under breach of contract and guaranty theories.  The Company believed
it had several meritorious defenses which would relieve it of all liability to
the Landlord and had filed an answer in which it generally denied liability to
the Landlord and asserted several affirmative defenses.  On April 23,
2010, the Landlord and the Company, attended a mediation meeting, during
which the parties agreed to settle the suit for $38.  On April
28, 2010, the parties entered into a Compromise, Settlement and Mutual Release
Agreement, settling the suit for the $38.  On May 11, 2010, an Order
of Dismissal was adjudged and ordered in the District Court of Travis County,
Texas in the 126th
Judicial District dismissing all claims and counterclaims among the Landlord and
the Defendants that have been or could have been brought.  The
settlement amount was included in current liabilities related to discontinued
operations as of June 30, 2009 and therefore, had no impact on the Company’s
results of operations for the three and nine months ended March 31,
2010.





On or
about August 10, 2009, AgroLabs, Inc. commenced an action in the Superior Court
of New Jersey, Law Division, against defendants Kurt E. Cahill, Cheryl A.
Cahill, Joseph E. Cahill, Jr. and Monty C. Lloyd (all of whom were previously
employed by AgroLabs, Inc.) (the “Defendants”) for, among other things, breach
of contract, breach of fiduciary duty, negligent performance of duties and other
related relief.  On or about September 1, 2009, the defendants removed the
action to the United States District Court for the District of New Jersey. 
On or about September 15, 2009, the defendants filed an answer and affirmative
defenses.  The defendants, however, asserted no counterclaims.  The
parties exchanged initial disclosures and other
information.  On February 19, 2010, the parties entered into a
Settlement Agreement and Release, whereby, the Defendants paid AgroLabs $500 in
settlement of the action.  An order of dismissal was entered on
February 19, 2010, dismissing the case with each party bearing their own
costs.  The settlement amount of $500 is included in Other expense,
net in the Condensed Consolidated Statement of Operations for the three and nine
months ended March 31, 2010.





19





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)





Note
10. Related Party Transactions





The
Company has 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. This agreement is on a
month-to-month basis for $1 per month. The total consulting expense recorded per
this agreement for each of the three and nine months ended March 31, 2010 and
2009 was $3 and $9 in each period. The Company had another consulting agreement
with EVJ, LLC, a limited liability company controlled by Robert Kay, a director
of the Company, the Chairman of its subsidiary, 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 in the fiscal
year ended June 30, 2004. The total consulting expense under this agreement was
$15 for the nine month period ended March 31, 2009 and is included in
discontinued operations in the accompanying condensed consolidated statement of
operations.  The agreement was terminated in August 2008.





Carl
DeSantis, a director of the Company and a member of CD Financial (see Note
7(a)(i)) and CD Financial have guaranteed certain liabilities of the
Company.  On April 7, 2009, CD Financial entered into a Guaranty
Agreement with Creative Flavors, Inc. (“CFC”), a major supplier of the Company,
guaranteeing up to $500 of the Company’s outstanding obligation with
CFC.  The guaranty was terminated on March 10, 2010 by written notice
to CFC from CD Financial.  As of March 31, 2010, the Company had a
remaining outstanding obligation to CFC in the amount of $151 under the
guarantee, which amount is included in accounts payable in the Company’s
Condensed Consolidated Balance Sheet.





On July
1, 2009, the Company entered into a credit and payment agreement (the “Payment
Agreement”) with a major supplier, Triarco, Inc. (“Triarco”).  Under
the terms of the Payment Agreement, the Company is obligated to pay its past due
balance in eight equal installments of $50 beginning August 1, 2009 and Mr.
DeSantis agreed to separately guaranty (the “Personal Guaranty”) the Company’s
obligations to Triarco. In exchange, Triarco agreed to extend additional credit
of $400 (the “Additional Amount Outstanding”) on net thirty day terms beginning
with trade payables dated June 24, 2009.  The Personal Guaranty was
limited to the lesser of the aggregate amount owed to Triarco, or
$800.  On March 10, 2010, Mr. DeSantis decreased his Personal Guaranty
to $200.  As of March 31, 2010, the Company owes Triarco $334 under
the Additional Amount Outstanding, this amount is included in accounts payable
in the Company’s Condensed Consolidated Balance Sheet.





CD
Financial and Mr. DeSantis did not receive any compensation from the Company in
connection with these guarantees.





See Note
7(a)(i) and 7(b) – Notes Payable and Convertible Note Payable – CD Financial,
LLC for related party securities transactions.





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





Note
11. Equity Transactions





(a) Stock Option
Plan and Warrants. There were no stock options or warrants issued in the
three and nine months ended March 31, 2010.  During the nine months
ended March 31, 2009, there were stock options authorized by the Board of
Directors to Company employees and Directors to purchase 1,000,000 shares of
common stock and warrants to purchase 500,000 shares of common stock at $0.80 in
connection with the amended Notes Payable agreement (See Note 7(a)(ii) Notes
Payable). During the three and nine months ended March 31, 2010 and 2009, the
Company has incurred stock compensation expense of $169 and $284 and $728 and
$1,045, respectively.  Included in discontinued operations is stock
compensation of $1 and $22 for the three and nine months ended March 31,
2009.  In the nine month period ended March 31, 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.





20


INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)




(b) Restricted
Stock Award.There were no
restricted stock awards issued in the three and nine months ended March 31, 2010
and 2009, respectively.





(c) Consulting
Agreements. Effective July 1, 2008, the Company entered into two
three-year consulting agreements which resulted in the issuance of 350,000
shares of the Company’s common stock.  On the effective date of these
consulting agreements, the Company recognized prepaid consulting expenses of
$830 with a corresponding increase in common stock and additional paid in
capital. During the three and nine months ended March 31, 2010 and 2009, the
Company amortized $49 and $10, and $148 and $148, respectively, to selling and
administrative expenses in the Company’s Condensed Consolidated Statement of
Operations. The consulting expenses will continue to be amortized into selling
and administrative expenses over the three year terms, of the consulting
agreements.





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 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 thereunder. 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.  In March 2009, these 100,000 shares were cancelled as the
related consulting agreement was rescinded by both parties.





(d) Series C
Preferred Stock.On February 21, 2008, the Company raised
$5,788 in net proceeds from the sale of 6,000 shares of the Company’s Series C
Preferred Stock, par value $1,000 per share, at a purchase price of $1,000 per
share. Upon issuance of the Series C Preferred Stock, the Company recorded the
beneficial conversion feature of $1,216 and such amounts were being accreted
over the five year period until the mandatory redemption date of the Series C
Preferred Stock, the fifth anniversary of closing.





During
July and August 2008, all 6,269 Series C Preferred Stock (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. Also
during the nine months ended March 31, 2009, the Company incurred a deemed
dividend from beneficial conversion feature of the Series C Preferred Stock of
$1,137 as a result of accelerating the accretion of the beneficial conversion
feature and the discount, respectively.





Dividends
of the Series C Preferred Stock were 10% per annum, payable on an annual basis,
by the Company in shares of the Company's Series C Preferred Stock. Accordingly,
the Company had accrued approximately $216 at June 30, 2008, and incurred $54
during the nine months ended March 31, 2009, which were paid in Series C
Preferred Stock and cash for the fractional shares during the period ended March
31, 2009. The redemption of the shares of Series C Preferred Stock accelerated a
payment of a dividend on the Series C Preferred Stock.





Note
12. 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.







21


INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2010 AND JUNE 30, 2009 AND FOR THE
 THREE
AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
 (in
thousands, except share and per share amounts)





In the
fiscal year ended June 30, 2009, the Company’s 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. A full valuation allowance of $5,955
was recorded in the fiscal year ended June 30, 2009, 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.





22


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 condensed consolidated financial
statements of 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 Company’s
customers are located primarily throughout North America.





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 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 and other
Nutraceutical, all of which are difficult to forecast.  The varied
sales pricing 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 and financial resources in place for business
success; however, future revenue, costs, gross margins, and profits are all
influenced by a number of factors, including those discussed above, all of which
are inherently difficult to forecast.





Critical
Accounting Policies and Estimates




There
have been no changes to our critical accounting policies in the nine months
ended March 31, 2010. 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, 2009.





23


Results
of Operations





Our
results from operations in the following table, which for the three and nine
months ended March 31, 2009, have been reclassified as a result of discontinued
operations, sets forth the income statement data of our results as a percentage
of net sales for the periods indicated:









For
the nine months ended March 31, 2010 compared to the nine months ended March 31,
2009





Sales, net.Sales, net, for the nine months ended
March 31, 2010 and 2009 were $27.3 million and $28.8 million, respectively, a
decrease of approximately $1.5 million or 5.4%. The decrease is comprised of the
following:










For the
nine months ended March 31, 2010, approximately 78% of total net sales were
derived from two customers as compared to 80% of total net sales from three
customers for the nine months ended March 31, 2009.  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.





24


The
decrease in our net sales is the result of a decrease in sales of our branded
proprietary Nutraceutical product line of approximately $4.8 million due to
declining sales of our original three products introduced to the market four
years ago and increased promotional pressures of one of our major customers
as a result of increased competition for our liquid nutraceutical
products.  Management believes that the original three products
introduced into the market four years ago, have reached their marketing life
cycle and has focused its efforts on introducing new products into the market
place, including packaging, product size and new formulations.  Our
contract manufacturing product sales increased by approximately $3.4 million
primarily from increased sales to its major customer, Herbalife.  The
remaining Nutraceutical product lines had net sales decreases of approximately
$0.2 million compared to the prior period.





Cost of
sales.  Cost of sales decreased by $0.5 million to $21.2
million for the nine months ended March 31, 2010 as compared to $21.7 million
for the nine months ended March 31, 2009. Cost of sales increased as a
percentage of sales to 77.8% for the nine months ended March 31, 2010 as
compared to 75.1% for the nine months ended March 31, 2009. The increase in cost
of goods sold amount was primarily the result of increased promotional and sales
allowances in our branded proprietary Nutraceutical product line (this increase
in sales allowances decreases the effective selling price to our customer,
thereby increasing the cost of goods sold on these products), offset by a
decrease in costs of goods sold as a percentage of sales for our contract
manufacturing business which has fixed manufacturing costs regardless of the
dollars sold and when sales increase in this area, our cost of goods sold as a
percentage will decrease.


Selling and
Administrative Expenses.Selling and administrative expenses
were $8.5 million for the nine months ended March 31, 2010, as compared to $11.0
million for the nine months ended March 31, 2009, a decrease of $2.5 million or
22.6%. As a percentage of sales, net, selling and administrative expenses were
31.2% for the nine months ended March 31, 2010 and 38.0% for the prior
comparable period.





The net
decrease in selling and administrative expenses of $2.5 million is mainly due to
decreases in:


·
            advertising
      and marketing ($1.0 million),


·
            compensation
      and employee benefits ($0.4
million),


·
            stock
      compensation expenses ($0.3
million),


·
            travel
      and entertainment ($0.3 million),


·
            investor,
      public relations and regulatory ($0.2
million),


·
            insurance
      ($0.1 million), and


·
            other
      expenses ($0.2 million);





Our
advertising and marketing costs decreased by approximately $1.0 million in the
nine months ended March 31, 2010 compared to the nine months ended March 31,
2009 primarily as a result of a decrease in in-store demonstrations (“demos”) of
our products.  Advertising and marketing costs as a percentage of
sales that the advertising relates to was approximately 20% of net sales in both
periods.





Our
compensation and employee benefits decreased by $0.4 million as a result of
decreasing our corporate staff by two employees, the suspension of the company
match of employee’s retirement savings deferrals in the profit sharing plan and
the decreased cost resulting from switching professional employment
organizations (reduced administrative costs with outsourcing our human resources
functions and employee benefits).  Our stock compensation expense
decreased by $0.3 million primarily due to the significant decrease in the
market value of our common stock from year to year at the measurement date of
the stock option grants (the market value of our common stock is one of several
factors used in determining the fair value of the stock compensation at the time
of the award and ultimate expense to our consolidated financial statements) and
there were no stock options granted in the nine months ended March 31,
2010.





Travel
and entertainment decreased by $0.3 million as a result of the decreased head
count in the corporate staff and decreased spending on meals and
entertainment.  Investor, public relations and regulatory fees
decreased by $0.3 million as result of our common stock not trading on the
NASDAQ for the nine months ended March 31, 2010 compared to part of the nine
month period ended March 31, 2009.  Insurance expense decreased by
$0.1 million due to decreases in our premiums and the decrease in
sales.  Other expenses decreased by $0.2 million as a result of
decreased spending primarily on office expenses and bad debt
expense.





25


Other expense,
net.Other
expense, net was approximately $1.4 million for the nine months ended March 31,
2010 compared to $1.5 million for the nine months ended March 31, 2009, and is
composed of:









The
increase in interest expense of approximately $0.2 million is attributable to
the adoption of the accounting for derivative liabilities in connection with
embedded derivatives in our Convertible Note Payable and Warrants issued in
connection with our amended Notes Payable.  Litigation settlements,
net represents $0.5 million received from the settlement of the suit with the
former management of AgroLabs and offset by $0.1 million paid to the State of
Texas settling the related lawsuit in the nine months ended March 31, 2010, with
no such amounts received or occurred in nine months ended March 31,
2009.





Federal and state income tax,
net. For the nine months ended March 31, 2010 and March 31, 2009, we had
a small amount of state tax expenses. We continue to provide a full reserve on
our deferred tax assets as it has been determined that based upon past losses,
the Company’s liquidity concerns and the current economic environment, that it
is “more likely than not” that the Company’s deferred tax assets may 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 nine months ended March 31, 2009, was $0.1 million.





On March
17, 2009, we entered into a stock purchase agreement and consummated the sale of
all of the issued and outstanding shares of common stock of our wholly owned
subsidiary Hauser to Cedarburg. On January 31, 2009, the Company sold
substantially all the assets of Paxis net of its outstanding payables, to Hauser
in consideration for the outstanding intercompany debt between these two
subsidiaries of the Company.  The net loss from the Pharmaceuticals
segment, included in our results for the nine months ended March 31, 2009, was
$2.2 million.  We also had a loss on the sale of Hauser of $0.6
million in the nine months ended March 31, 2009.





In June
2009, we discontinued the operations of our subsidiary TOBC, as we do not have
the financial resources to pursue the further development of the SyzmoTM product
in the very competitive energy drink market place.  The net loss from
this discontinued product line was $1.0 million for the nine months ended March
31, 2009.





Net loss applicable to common
shareholders.Our net loss applicable to common shareholders for the nine
months ended March 31, 2010 was $3.9 million as compared to $16.0 million for
the nine months ended March 31, 2009. This decrease in net loss applicable to
common shareholders of approximately $12.1 million is primarily the result of
decreases in: (i) operating losses from continuing operations of $1.4 million,
(ii) income tax expense of $5.6 million, (iii) net losses from discontinued
operations of $4.0 million; and (iv) Series C Preferred Stock dividend and
deemed dividend from beneficial conversion of the preferred stock of $1.2
million, which was a result of the holders of the Series C Preferred Stock
converting their respective shares of Series C Preferred Stock into shares of
our common stock in the nine months ended March 31, 2009.  This
conversion resulted in permanent equity for us, as the Series C Preferred Stock
replaced $6,000 of our current and long-term obligations. These decreases were
offset by an increase in other expenses, net of $0.1 million.





26


For
the three months ended March 31, 2010 compared to the three months ended March
31, 2009





Sales, net.Sales, net, for the three months ended
March 31, 2010 and 2009 were $7.5 million and $8.3 million, respectively, a
decrease of $0.8 million or 9.8%. The decrease is comprised of the
following:










For the
three months ended March 31, 2010, approximately 64% of total net sales were
derived from two customers as compared to 74% of total net sales from three
customers for the three months ended March 31, 2009.  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.





The
decrease in our net sales is the result of decreased sales in our branded
proprietary Nutraceutical product line of approximately $3.5 million in part due
to decreased sales to the club stores that we have been dependent on for sales
of our branded proprietary Nutraceutical product line.  In the three
months ended March 31, 2010, the Company experienced increased competition in
the market place for product placement in the club level stores and increased
spending in promotional dollars and sales allowances. Our contract manufacturing
business had increased net sales of approximately $2.7 million.  The
performance of our remaining Nutraceutical product lines were about the same in
each of the three month periods ended March 31, 2010 and 2009.





Cost of
sales.  Cost of sales increased by $0.6 million to
approximately $7.0 million for the three months ended March 31, 2010 as compared
to $6.4 million for the three months ended March 31, 2009. Cost of sales
increased as a percentage of sales to 93.6% for the three months ended March 31,
2010 as compared to 77.4% for the three months ended March 31, 2009. The
increase in costs of sales as a percentage of net sales is primarily the result
of our sales and returns allowance increasing from a rate of approximately 20%
for our branded proprietary Nutraceutical product line to approximately 43% for
the three months ended March 31, 2010.  This sudden increase was
primarily attributable to one customer and is not expected to be repeated in the
three months ended June 30, 2010.  These increases in the cost of
goods sold as a percentage of net sales were offset by decreases in the contract
manufacturing business cost of goods sold as a percentage of sales as there were
$2.7 million in more sales in the three months ended March 31, 2010 to absorb
more of the fixed overhead of operating the manufacturing facility compared to
the three months ended March 31, 2009.


Selling and
Administrative Expenses.Selling and administrative expenses
were $2.4 million for the three months ended March 31, 2010, as compared to $3.2
million for the three months ended March 31, 2009, a decrease of $0.8 million or
approximately 26.5%. As a percentage of sales, net, selling and administrative
expenses were 31.9% for the three months ended March 31, 2010 and 39.2% for the
prior comparable period.





The net
decrease in selling and administrative expenses of $0.8 million is mainly due to
decreases in:


·
            advertising
      and marketing ($0.3 million)


·
            other
      expenses ($0.2 million)


·
            travel
      and entertainment ($0.1 million)


·
            non
      cash compensation ($0.1 million),
and


·
            compensation
      and employee benefits ($0.1
million).





27


Our
advertising and marketing costs decreased by approximately $0.3 million in the
three months ended March 31, 2010 compared to the three months ended March 31,
2009 primarily as a result of a net decrease of $0.3 million in in-store
demonstrations (“demos”) of our products at our customers stores’ locations.
Other expenses decreased by $0.2 million as a result of decreased spending
primarily on product liability insurance, office expenses, investor relations
and regulatory costs.  Travel and entertainment decreased by $0.1
million as a result of the decreased head count in the corporate staff and
decreased spending on meals and entertainment.  Non cash compensation
decreased by $0.1 million due to no additional stock options granted in the nine
months ended March 31, 2010 which, if granted would have generated a new layer
of non cash compensation cost for the three months ended March 31, 2010 that
would not have existed for the three months ended March 31,
2009.  Lastly, our compensation and employee benefits decreased by
$0.1 million from the three months ended March 31, 2010 from the three months
ended March 31, 2009 due a reduction of work force and the decreased cost
resulting from switching professional employment organizations (reduced
administrative costs with outsourcing our human resources functions and employee
benefits).





Other expense,
net.Other
expense, net was less than $0.01 million for the three months ended March 31,
2010 compared to approximately $0.5 million for the three months ended March 31,
2009, a net decrease of approximately $0.49 million.








The
decrease in interest expense of approximately $0.04 million is attributable to
the maturity of the amended Notes Payable on November 15, 2009, offset by an
increase in interest as a result of the accounting policy adoption for
derivative liabilities in connection with embedded derivatives in our
Convertible Note Payable and Warrants issued in connection with our amended
Notes Payable.  Litigation settlements, net represents $0.5 million
received from the settlement of the suit with the former management of AgroLabs
in the three months ended March 31, 2010 with no such receipt in the three
months ended March 31, 2009.





Federal and state income tax,
net. For the three months ended March 31, 2010 and March 31, 2009, we had
a small amount of state tax expenses. We continue to provide a full reserve on
our deferred tax assets as it has been determined that based upon past losses,
the Company’s liquidity concerns and the current economic environment, that it
is “more likely than not” that the Company’s deferred tax assets may not be
realized.





Loss from discontinued operations.On March 17, 2009, we entered into a stock purchase agreement and
consummated the sale of all of the issued and outstanding shares of common stock
of our wholly owned subsidiary Hauser to Cedarburg. On January 31, 2009, the
Company sold substantially all the assets of Paxis net of its outstanding
payables, to Hauser in consideration for the outstanding intercompany debt
between these two subsidiaries of the Company.  The net loss from the
Pharmaceuticals segment, included in our results for the three months ended
March 31, 2009, was $0.5 million.  We also had a loss on the sale of
Hauser of $0.6 million in the three months ended March 31, 2009.





In the
June 2009, we discontinued the operations of our subsidiary TOBC, as we do not
have the financial resources to pursue the further development of the SyzmoTM
product in the very competitive energy drink market place.  The net
loss from this discontinued product line was $0.6 million for the three months
ended March 31, 2009.




28


Net loss applicable to common
shareholders.Our net loss applicable to common shareholders for the
three months ended March 31, 2010 was $1.9 million as compared to $3.6 million
for the three months ended March 31, 2009. This decrease in net loss applicable
to common shareholders of approximately $1.7 million is primarily the result of
the decrease in net losses from discontinued operations of $1.7 million. Our
operating losses from continuing operations increased by $0.5 million offset by
a decrease in other expense, net of $0.5 million.





Seasonality





The
Nutraceutical business segment tends to be seasonal. We have found that in our
first fiscal quarter ending on September 30th of
each year, orders for our branded proprietary Nutraceutical products usually
slow (absent the addition of new customers or a new product launch with a
significant first time order), as buyers in various markets may have purchased
sufficient inventory to carry them through the summer months. Conversely, in our
second fiscal quarter, ending on December 31st of
each year, orders for our products increase as the demand for our 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:










At March
31, 2010, our working capital deficit was approximately $8.4 million, an
increase of approximately $5.5 million from the working capital deficit of
approximately $2.9 million at June 30, 2009. Our current assets decreased by
$1.7 million and our current liabilities increased by $3.8 million, $3.4 million
relating to the reclassification of our Convertible Note Payable – CD Financial
LLC, net becoming current in February 2010.





Net cash
used in operating activities of $0.05 million in the nine months ended March 31,
2010, includes a net loss of $3.9 million. After excluding the effects of
non-cash expenses, including, depreciation and amortization, compensation
expense for employee stock options and consultants and changes in the fair value
of derivative liabilities, the adjusted cash used in operations before the
effect of the changes in working capital components was $1.6 million. Cash
provided by continuing operations from our working capital assets and
liabilities in the amount of approximately $1.6 million, was the result of a
decreases in accounts receivable of $1.3 million and in inventory of $0.5
million, and decreases in accounts payable, accrued expenses and other
liabilities of $0.2 million.  Less than approximately $0.02 million of
cash was provided by operating activities from our discontinued
operations.





29


Net cash
used in operating activities of $2.3 million for the nine months ended March 31,
2009 included a net loss of $14.8 million. After excluding the effects of
non-cash expenses, including the net loss from discontinued operations, deferred
taxes, deferred income 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 approximately
$2.8 million. Cash provided by continuing operations from working capital
components in the amount of approximately $1.4 million was the result of
decreases in accounts receivable of $0.9 million, prepaid expenses and other
assets of $0.3 million and a net increase in accounts payable and accrued
expenses and other liabilities of approximately $0.5 million; offset by an
increase in inventory of $0.3 million.  Approximately $0.9 million of
cash was used in operating activities of our discontinued
operations.


Cash used
in investing activities was used for the purchase of fixed assets and was less
than $0.1 million in each of the periods ended March 31, 2010 and 2009,
respectively.  Additionally, in the nine months ended March 31, 2009,
the sale of Hauser provided approximately $1.0 million of cash in our investing
activities.  Cash used in our discontinued operations for investing
activities for the nine months ended March 31, 2009 was approximately $0.1
million.





Cash
provided by financing activities was approximately $0.3 million in the nine
months ended March 31, 2010 and was provided by financing under a short term
promissory note entered into with CD Financial, a related party and the holder
of our Convertible Note Payable, offset by payments made on capitalized lease
obligations of approximately $0.014 million.  Cash provided by
financing activities was approximately $1.3 million for the nine months ended
March 31, 2009 and was the result of proceeds from employees exercising stock
options during the period.





Our
condensed consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. We have incurred recurring operating
losses and negative operating cash flows for our past three fiscal years ended
June 30, 2009, including a net loss attributable to common stockholders of $19.4
million and negative operating cash flows of $2.8 million for the fiscal year
ended June 30, 2009. For the nine months ended March 31, 2010, we had net
operating losses of approximately $2.4 million and a net loss of approximately
$3.9 million.  As of March 31, 2010, we had cash and cash equivalents
of approximately $0.7 million, a working capital deficit of approximately $8.4
million, primarily attributable to the matured amended Notes Payable in the
amount of $7.8 million which were due on November 15, 2009, Convertible Debt in
the amount of $3.4 and an accumulated deficit of $48.2 million.




The
Company defaulted on the $7,805 outstanding amount of Notes Payable by failing
to repay them on the scheduled maturity date of November 15, 2009. The Notes
Payable are secured by a pledge of substantially all of the Company’s assets. On
March 19, 2010, the Company received a payment demand (the “Notice”) for default
interest from one of the holders of the Notes Payable representing approximately
73% of the outstanding balance. The Company has engaged a financial advisory
firm to assist it in developing a comprehensive strategy regarding a financial
and/or business restructuring.  As of May 19, 2010, the Company has
not repaid the Notes Payable or the default interest referenced in the Notice;
however, the Company is in negotiations to restructure or amend the Notes
Payable with the holder who sent the Notice. There can be no assurance that the
Company will be able to negotiate a successful restructuring or amendment of the
Notes Payable.  In the interim, the Company has continued to make
timely interest payments to the Note Payable holders at the non default rate of
8% per annum.  As a result of the event of default that arose based
upon the Company’s failure to pay the Notes at maturity, the note holders have
the right to: (i) give the Company an Acceleration Notice, which would (a)
accelerate the payment of all unpaid principal and accrued and unpaid interest
(including default interest (if any)) on the Notes Payable, and (b) require the
Company to pay an amount equal to the sum of all of the amounts described in the
preceding clause (a) in same day funds on the payment date specified in the
notice, provided such date must be at least two (2) business days following the
date on which the notice is delivered to the Company and
(ii)  foreclose on the Company’s assets pledged as
collateral.  As of May 19, 2010, the Company has not received any
additional demand of payment notices from the amended Notes Payable holders nor
have the note holders exercised these rights.





We have
historically raised capital in private placements; however, we continue to
sustain losses and we only recently had positive to break even cash flows from
our operations; this may hinder our efforts in raising new capital or
refinancing our matured debt. Additionally, current economic conditions may
cause a decline in business and consumer spending which could adversely affect
our business and financial performance. These factors raise substantial doubt as
to our ability to continue as a going concern. Assuming we are able to raise
additional capital and/or refinance our Notes Payable, and we are not adversely
affected by the current economic conditions, we believe that our available
capital as of March 31, 2010, plus the additional $7.8 million of additional
capital and/or refinancing of our amended Notes Payable, will enable us to
continue as a going concern. There are no assurances that we will be able to
raise additional capital as needed or refinance our current Notes Payable upon
acceptable terms, nor that the current economic conditions will not negatively
impact us. If the current economic conditions negatively impact us or our
operations, or we are unable to raise additional capital as needed upon
acceptable terms, it would have a material adverse effect on the
Company.





30


Our total
annual commitments at March 31, 2010 for long term non-cancelable leases of
approximately $553 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 nine months ended March 31, 2010 and 2009
were approximately $0.1 million and less than $0.1 million, respectively. The
Company has budgeted approximately $0.3 million for capital expenditures for
fiscal 2010. The total amount is expected to be funded from cash provided from
its operations and from lease financing.





Off-Balance
Sheet Arrangements





The
Company has no off-balance sheet arrangements.





Recent
Accounting Pronouncement


Please
refer to Note 1 to our condensed financial statements which can be found at page
6, 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
4T. CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures


Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by the Company in the
reports it files or submits under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) is recorded, processed, summarized, and reported
within the time periods specified by the 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 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 Company has evaluated the
effectiveness of its disclosure controls and procedures (as such term is defined
in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31,
2010, 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 three and
nine months ended March 31, 2010 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





31


PART
II – OTHER INFORMATION





Item
1. LEGAL PROCEEDINGS





On June
16, 2008, the State of Texas filed an Original Petition for injunctive relief
and civil penalties in the 101st Judicial District, Dallas, Texas (the "Court"),
against AgroLabs Inc., the Company, Kurt Cahill and Gerald Kay (collectively the
"Defendants").  The State alleged that the Defendants sold or
distributed juices and dietary supplements marketed with inappropriate disease
and nutritional claims.  AgroLabs has appeared in the lawsuit and
filed an answer denying all claims.  Additionally, AgroLabs filed a
counterclaim against the State for declaratory relief, in which AgroLabs sought
a declaratory judgment from the Court that the State's causes of action were
preempted under federal law because the product benefit claims at issue are
fully compliant with applicable federal law.





The
Company and Mr. Kay filed motions to dismiss the lawsuit for lack of personal
jurisdiction.  In November 2009, the State of Texas agreed to dismiss
the Company and Mr. Kay from the lawsuit.  The parties have now
resolved all of the remaining issues in this lawsuit.  Neither party
has admitted any liability.  Under the settlement agreement, the
Company will make a payment to the State of Texas in the amount of $130,000 to
be allocated to the State of Texas' judicial fund for programs approved by the
Texas Supreme Court that provide basic civil legal services to the indigent;
attorneys' fees and investigation costs incurred by the Office of the Attorney
General; and investigative costs incurred by the Texas Department of State
Health Services.  The Company recognized this payment obligation in
its results of operations for the nine months ended March 31, 2010.





On April
23, 2009, Braker Five & Eight Investors, L.P., (the “Landlord”) filed an
Original Petition relief and damages pursuant to a Lease Agreement for the
premises located in Austin, Texas in the 126th Judicial District, Travis County,
Texas, against BevSpec, Inc., Bioscience Technologies, Inc. dba The Organic
Beverage Company, and Integrated BioPharma, Inc., as Guarantor (collectively,
the “Defendants”).  The Landlord sued for sums due under the Lease
under breach of contract and guaranty theories.  The Company believes
it had several meritorious defenses which would relieve it of all liability to
the Landlord and filed an answer in which it generally denied liability to the
Landlord and asserted several affirmative defenses.  On April 23,
2010, the Landlord and the Company, attended a mediation meeting, during
which the parties agreed to settle the suit for $37,500.  On April 28,
2010, the parties entered into a Compromise, Settlement and Mutual Release
Agreement, settling the suit for the $37,500.  On May 11, 2010, an
Order of Dismissal was adjudged and ordered in the District Court of Travis
County, Texas in the 126th
Judicial District dismissing all claims and counterclaims among the Landlord and
the Defendants that have been or could have been brought.  The
settlement amount was included in current liabilities related to discontinued
operations as of June 30, 2009 and therefore, had no impact on the Company’s
results of operations for the three and nine months ended March 31,
2010.





On or
about August 10, 2009, AgroLabs, Inc. commenced an action in the Superior Court
of New Jersey, Law Division, against defendants Kurt E. Cahill, Cheryl A.
Cahill, Joseph E. Cahill, Jr. and Monty C. Lloyd (all of whom were previously
employed by AgroLabs, Inc.) for, among other things, breach of contract, breach
of fiduciary duty, negligent performance of duties and other related
relief.  On or about September 1, 2009, the defendants removed the action
to the United States District Court for the District of New Jersey.  On or
about September 15, 2009, the defendants filed an answer and affirmative
defenses.  The defendants, however, asserted no counterclaims.  The
parties exchanged initial disclosures and other
information.  On February 19, 2010, the parties entered into a
Settlement Agreement and Release, whereby, the Defendants paid AgroLabs $500 in
settlement of the action.  An order of dismissal was entered on
February 19, 2010, dismissing the case with each party bearing their own
costs.  The settlement amount of $500 is included in Other expense,
net in the Condensed Consolidated Statement of Operations for the three and nine
months ended March 31, 2010.




32


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, 2009, 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, 2009, except as follows:




Our
inability to repay or refinance our Notes Payable, with a stated principal
balance of $7.8 million, upon any default notice could adversely affect our
liquidity, business, financial performance and going concern.
  The
Company defaulted on the $7,805 outstanding amount of Notes Payable by failing
to repay them on the scheduled maturity date of November 15, 2009. The Notes
Payable are secured by a pledge of substantially all of the Company’s assets. On
March 19, 2010, the Company received a payment demand (the “Notice”) for default
interest from one of the holders of the Notes Payable representing approximately
73% of the outstanding balance. The Company has engaged a financial advisory
firm to assist it in developing a comprehensive strategy regarding a financial
and/or business restructuring.  As of May 19, 2010, the Company has
not repaid the Notes Payable or the default interest referenced in the Notice;
however, the Company is in negotiations to restructure or amend the Notes
Payable with the holder who sent the Notice. There can be no assurance that the
Company will be able to negotiate a successful restructuring or amendment of the
Notes Payable.  In the interim, the Company has continued to make
timely interest payments to the Note Payable holders at the non default rate of
8% per annum.  As a result of the event of default that arose based
upon the Company’s failure to pay the Notes at maturity, the note holders have
the right to: (i)  give the Company an Acceleration Notice, which
would (a) accelerate the payment of all unpaid principal and accrued and unpaid
interest (including default interest (if any)) on the Notes Payable, and (b)
require the Company to pay an amount equal to the sum of all of the amounts
described in the preceding clause (a) in same day funds on the payment date
specified in the notice, provided such date must be at least two (2) business
days following the date on which the notice is delivered to the Company and
(ii)  foreclose on the Company’s assets pledged as collateral. As of
May 19, 2010, the Company has not received any additional demand of payment
notices from the amended Notes Payable holders nor have the note holders
exercised these rights.
 In
addition, if we are unsuccessful in our negotiating efforts to restructure or
amend the Notes Payable with our current lenders and/or replacing our current
lenders, our ability to continue as a going concern is at
risk.





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





None.





Item
5. OTHER INFORMATION





None.





Item
6. EXHIBITS





(a)           Exhibits





Exhibit


Number





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.







33


SIGNATURES








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





INTEGRATED BIOPHARMA,
INC.








Date:  May 19,
      2010
            
            By:
            /s/ E Gerald
      KayE. Gerald
      Kay,President and
      Chief Executive Officer








Date:  May 19,
      2010
            
            By:
            /s/ Dina L.
      MasiDina L.
      Masi,President and
      Chief Executive Officer






34