UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington
D.C. 20549


____________





FORM
10-Q





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





For the
quarterly period ended September 30, 2009





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
      
            Noþ





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 November 16, 2009Common Stock, $0.002 par
    value
            20,249,442
Shares












INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES





FORM
10-Q QUARTERLY REPORT


For
the Three Months Ended September 30, 2009


INDEX


PagePart
      I. Financial InformationItem
      1.
              Condensed
      Consolidated Statements of Operations for the Three Months Ended September
      30, 2009 and 2008 (unaudited)
              2Condensed
      Consolidated Balance Sheets as of September 30, 2009 (unaudited) and June
      30, 2009
              3Condensed
      Consolidated Statements of Changes in Stockholders’ Equity for the Three
      Months Ended September 30, 2009 (unaudited)
              4Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended September
      30, 2009 and 2008 (unaudited)
              5Notes
      to Condensed Consolidated Statements
              6Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              29Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              36Item
      4.
              Controls
      and Procedures
              36Part
      II. Other InformationItem
      1.
              Legal
      Proceedings
              37Item
      1A.
              Risk
      Factors
              38Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              38Item
      3.
              Defaults
      Upon Senior Securities
              38Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              38Item
      5.
              Other
      Information
              38Item
      6.
              Exhibits
              38OtherSignatures
              39





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
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





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
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 months ended
September 30, 2009 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, as discussed in 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 oversees
the manufacture of and distributes for sales 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.





6





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)








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).




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, and any majority-owned investment. Intercompany transactions and
accounts are eliminated in consolidation.





Estimates.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. The
most significant estimates include:





·
            sales
      returns and allowances;


·
            trade
      marketing and merchandising;


·
            allowance
      for doubtful accounts;


·
            inventory
      valuation;


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


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


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




7





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)








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.





8








INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)








Supplemental
Statement of Cash Flows









9





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





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.





During
the three months ended September 30, 2009 and 2008, total options and warrants
of 3,061,785 and 3,066,650, 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. For the three month periods ended
September 30, 2009 and 2008, options and warrants to purchase 25,000 and 165,000
shares of common stock with exercise prices below the market price,
respectively, were outstanding but were not included in the computation of
diluted earnings per share as they are anti-dilutive as a result of net losses
during the period.





For the
three month periods ended September 30, 2009 and 2008, 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.





Recent Accounting
Pronouncements.





In June
2009, the Financial Accounting Standards Board (FASB) issued its final
"Statement of Financial Accounting Standards" (SFAS) No. 168 – "The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles" a replacement of FASB Statement No. 162. SFAS
No. 168 made the FASB Accounting Standards Codification (the Codification) the
single source of U.S. GAAP used by nongovernmental entities in the preparation
of financial statements, except for rules and interpretive releases of the SEC
promulgated under authority of federal securities laws, which are sources of
authoritative accounting guidance for SEC registrants. The Codification is meant
to simplify user access to all authoritative accounting guidance by reorganizing
U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent
structure; its purpose is not to create new accounting and reporting guidance.
The Codification supersedes all existing non-SEC accounting and reporting
standards and was effective for the Company beginning July 1,
2009.  Following SFAS No. 168, the FASB will not issue new standards
in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts; instead, it will issue Accounting Standards Updates. The FASB will
not consider Accounting Standards Updates as authoritative in their own right;
these updates will serve only to update the Codification, provide background
information about the guidance, and provide the bases for conclusions on the
change(s) in the Codification. In the description of Accounting Standards
Updates that follows, references in “italics” relate to Codification Topics and
Subtopics, and their descriptive titles, as appropriate.





10





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





In
October 2009, an update was issued to “Revenue Recognition – Multiple
Deliverable Revenue Arrangements.” This update removes the
objective-and-reliable-evidence-of-fair-value criterion from the separation
criteria used to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting, replaces references to
“fair value” with “selling price” to distinguish from the fair value
measurements required under the “Fair Value Measurements and Disclosures”
guidance, provides a hierarchy that entities must use to estimate the selling
price, eliminates the use of the residual method for allocation, and expands the
ongoing disclosure requirements. This update is effective for the company
beginning January 1, 2011 and can be applied prospectively or retrospectively.
Management is currently evaluating the effect that adoption of this update will
have, if any, on the company’s consolidated financial position and results of
operations when it becomes effective in 2011.





Other
Accounting Standards Updates not effective until after September 30, 2009, are
not expected to have a significant effect on the company’s consolidated
financial position or results of operations.





Effective
July 1, 2009, the Company adopted, “Accounting for Convertible Debt Instruments
That May be Settled in Cash upon Conversion”, which requires separate accounting
for the debt and equity components of convertible debt issuances. The
requirements for separate accounting is applied retrospectively to previously
issued cash-settleable convertible instruments as well as prospectively to newly
issued instruments, negatively affecting both net income and earnings per share
for issuers of the instruments. The adoption did not impact the Company’s
results of operations, financial condition or liquidity in the three month
period ended September 30, 2009, as the Company does not have the option to
settle its outstanding Convertible Note Payable for cash upon a conversion
notice from the holder (See Note 7. (a) – CD Financial, LLC).





Effective
July 1, 2009, the Company adopted, "Accounting For Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock."  The adoption of this policy, as of July 1, 2009, resulted in
a decrease to the Company’s accumulated deficit of $2,237, a decrease in
additional paid in capital of $883 (total increase in equity of $1,354), with a
corresponding decrease in liabilities of $1,354.  The impact on our
consolidated results of operations for the three months ended September 30,
2009, was an increase to interest expense of $165 and an increase to the change
in derivative financial instruments of $255, resulting in an increase in the
Company’s net loss of $420.  There was no impact on the Company’s
liquidity as a result of adopting the accounting for derivative financial
instruments indexed to and potentially settled in the Company’s own
stock.





Note 2.
Liquidity. 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 in 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 three months ended September
30, 2009, the Company had net operating income of $26 and a net loss of
$937.  At September 30, 2009, the Company had cash and cash
equivalents of $1,987, a working capital deficit of $3,277, primarily
attributable to the discounted amended Notes Payable (See Note 7. (b)) in the
amount of $7,689, with a stated principal  amount of $7,805, and which
are due on the earlier of the date stated in an Acceleration Notice
(which  must be at least two (2) business days following the date on
which the notice is delivered), if any, or November 15, 2009, and an accumulated
deficit of $45,303.





11








INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





As of the
date of this filing, November 19, 2009, the Company has not received an
Acceleration Notice, nor has it finalized any extensions or refinancing of the
discounted amended Notes Payable with the stated maturity of November 15,
2009.  The Company has historically raised capital in private
placements, but continues to sustain losses and has only recently had positive
cash flows from its operations.  These factors may hinder the
Company’s efforts in raising new capital or refinancing its matured debt.
Additionally, current economic conditions may cause a decline in business and
consumer spending which could adversely affect the Company’s business and
financial performance. These factors raise substantial doubt as to the Company’s
ability to continue as a going concern. Assuming the Company is able to raise
additional capital and/or refinance at least $7,800 of the discounted Notes
Payable, and it is not adversely affected by the current economic conditions,
the Company believes that its available capital as of September 30, 2009 will
enable it to continue as a going concern through the second quarter of the
fiscal year ending June 30, 2011. There can be no assurance that the Company
will be able to raise additional capital or successfully refinance its
discounted amended Notes Payable of at least $7,800, 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
discounted amended Notes Payable of at least $7,800 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 September 30, 2009 and
June 30, 2009.





12





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





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.
      As a result, the Company recognized an after-tax loss of $105 during the
      first quarter of the fiscal year ended June 30, 2009. iBio revenues from
      discontinued operations were $169 for the three months ended September 30,
      2008.  The Company’s loss from the discontinued operations of
      iBio, net of taxes, was $105 for the three months ended September 30,
      2008.





(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 matures on March 17, 2010 and bears interest at
      a 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)), for the
      full principal amount of $340 and accrued interest of
  $2.





13





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





As a
result of the sale of Hauser, the Company recognized a loss of $629 during the
fiscal year ended June 30, 2009. The Hauser revenues from discontinued
operations were $1,140 for the three months ended September 30, 2008. The
Company’s net loss from the Hauser discontinued operations, net of taxes was
$787 for the three months ended September 30, 2008.





(c)
            Discontinued
      operations of TOBC –During the three months ended September 30,
      2008, 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 does 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 $156 for the three months ended
September 30, 2008. The Company’s net loss from TOBC’s discontinued operations
was $253 for the three months ended September 30, 2008.





The
Company’s revenue and loss from discontinued operations, net of taxes, from
these events was $1,465 and $1,145 for the three months ended September 30,
2008, respectively, as follows:










14








INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





Note 4.
Intangible Assets, net





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





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 months ended September 30, 2009 and 2008 was $35. 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 none and $58 related to discontinued
operations of intangible assets for the three months ended September 30, 2009
and 2008, respectively.





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









15





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





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:









Note
6. Property and Equipment, net





Property
and equipment, net consists of the following as of:









Depreciation
and amortization expense was $75 and $116 for the three months ended September
30, 2009 and 2008, respectively.





16





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





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





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 September 30 and June
30, 2009, the Company had $34 and $41 of deferred financing costs remaining,
respectively, of which is to be amortized to interest expense over two to
eighteen 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.




(a) 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 September 30 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. The beneficial conversion features were accreted
using the effective interest rate method until July 1, 2009 when the Company
adopted the "Accounting For Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock."





17





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





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 September 30, 2009, the related derivative liability to
the Convertible Note Payable increased to $229 and is included in accrued
expenses and other current liabilities in the accompanying condensed balance
sheets.  The embedded derivative liability created in connection with
the Convertible Note Payable was valued at a fair value using the Black-Scholes
option pricing model as of the issuance date and subsequently as of July 1, 2009
and September 30, 2009. The Company used the following assumptions to calculate
the fair value of the derivative liability:










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 $221 related to the accretion of the discount and
accretion of the embedded derivative liability related to the Convertible Note
Payable, respectively, for the three months ended September 30, 2009 and $8 and
$56 related to the accretion of the discount and accretion of the beneficial
conversion feature on the Convertible Note Payable, respectively, for the three
months ended September 30, 2008.  As of September 30, 2009, 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%).  In
September 2009, the Company made an interest payment of $37, representing the
payment of one month’s interest arrearage.





18








INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





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.





(b)
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 months ended September
30, 2009 and 2008, included in Other Expense, net in the accompanying Condensed
Consolidated Statement of Operations, is none and $124, 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). 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 in accordance with "Debtor’s Accounting for a
Modification or Exchange of Debt Instruments." 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 months ended September 30, 2009 of
$193. 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 $140, a decrease
in the carry value of the amended Notes Payable of $6 and the recognition of a
derivative liability of $34.





19





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





As of
September 30, 2009, the related derivative liability to the amended Notes
Payable increased to $104 and is included in accrued expenses and other current
liabilities in the accompanying condensed balance sheets.  The
embedded derivative liability created in connection with the Convertible Note
Payable was valued at a fair value using the Black-Scholes option pricing model
as of the issuance date and subsequently as of July 1, 2009 and September 30,
2009.





The
Company used the following assumptions to calculate the fair value of the
derivative liability:










The
discount to the amended Notes Payable for the warrants which is being accreted
using the effective interest method resulted in interest expense for the three
months ended September 30, 2009 of $43. The Company also recorded an additional
$10 of deferred financing costs as a result of the issuance of the amended Notes
Payable.





The
amended SPA and Notes Payable agreements require the Company to register for
resale the shares of common stock for which the warrants are exercisable prior
to 90 days after the closing date of October 14, 2008. The failure to register
the warrants results in a default payment of the greater of $8 or 2.0% of the
market price as of the date on which the registration default occurred
multiplied by the number of unregistered warrants. As of the date of the filing,
the Company has not registered the securities. The Company will incur a
de-minimis penalty amount when it completes the registration of the warrants.
The Company is amortizing to interest expense the deferred financing costs using
the effective interest method. The amount amortized to interest expense relating
to the amended Notes Payable for the three months ended September 30, 2009 was
$2.





20





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





The
following table presents the stated value/principal of each of the securities
issued in connection with the debt outstanding as of September 30,
2009:










The
Company accreted $54 and $1,137, in the three months ended September 30, 2008,
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.




The
weighted average interest rate paid was 8.59% in each of the three months ended
September 30, 2009 and 2008.  As of September 30, 2009 and June 30,
2009, the Company had accrued and unpaid interest of approximately $264 and
$192, respectively, for the Notes Payable and Convertible Note
Payable.  (See Note 7(a) above).





As of
September 30, 2009, the Company is in technical default of the financial
covenants of the amended Notes Payable relating to the Company’s tangible net
worth requirements and minimum net capital requirements. The Company continues
to work with the note holders to obtain a formal waiver for the default of the
covenants, however at this time the Company has not obtained such waiver and the
note holders have not exercised their rights, with respect to the amended Notes
Payable, based on the Company’s technical default.  Upon the
occurrence of an event of default, the note holders have the right, to give the
Company an Acceleration Notice, which would (i) accelerate the payment of all
unpaid principal and accrued and unpaid interest (including default interest (if
any)) on the Notes Payable, and (ii) require the Company to pay an amount equal
to the sum of all of the amounts described in the preceding clause (i) 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.





21





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





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. The
FDIC is temporarily insuring deposits up to $250 at financial institutions
through December 31, 2013. Additionally, JP Morgan Chase, the Company’s main
financial institution, is participating in the FDIC’s Transaction Account
Guarantee Program, whereby all non-interest bearing checking accounts (including
accounts with interest rates less than 0.50%) are fully guaranteed by the FDIC
for the entire amount through December 31, 2009. As of September 30, 2009, all
the Company’s cash on deposit with JP Morgan Chase (and other financial
institutions) was insured pursuant to this FDIC program.





(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 $241 and
$298 at September 30, 2009 and June 30, 2009, respectively.





(c) Major
Customers.For the three months ended September 30, 2009, approximately
76.2% of revenues were derived from two customers and for the three month ended
September 30, 2008 approximately 78.8% of revenues were derived from three
customers. Accounts receivable as of September 30, 2009 from these two customers
represented approximately 40% of total accounts receivable. The loss of any of
these customers would have an adverse affect on the Company’s operations. Major
customers are those customers who account for more than 10% of net
sales.





(d) Other
Business Risks.The Company insures 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.





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.





22





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





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 months
ended September 30, 2009 and 2008 on these leases were $228 and $210,
respectively, and are included in both cost of sales and selling and
administrative expenses in the accompanying Condensed Consolidated Statements of
Operations. At September 30, 2009 and June 30, 2009, the Company had an
outstanding obligation of $522 and $443, respectively, included in accounts
payable in the accompanying Consolidated Balance Sheet.





Other Lease
Commitments. The Company has entered into certain non-cancelable
operating lease agreements expiring up through May 31, 2015, related to office
and warehouse space, equipment and vehicles. Total rent expense, including real
estate taxes and maintenance charges, was approximately $292 and $265 for the
three months ended September 30, 2009 and 2008, respectively. Rent expense is
stated net of sublease income of approximately $9 for each of the three months
ended September 30, 2009 and 2008.  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:








23





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





(b)
Consulting Agreements.





Effective
July 1, 2008, the Company entered into a 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.





(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, against
AgroLabs Inc., the Company, Kurt Cahill and Gerald Kay (collectively the
“Defendants”). The State alleges 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 has filed a counterclaim against the
State for declaratory relief, in which AgroLabs seeks a declaratory judgment
from the Court that the State’s causes of action are preempted under federal law
because the product benefit claims at issue are fully compliant with applicable
federal law.  The Company and Mr. Kay have filed motions to dismiss
the lawsuit for lack of personal jurisdiction.  On November 12, 2009,
the State of Texas agreed to dismiss the Company and Mr. Kay from the
lawsuit.  The parties are currently engaged in discussions to resolve
the remaining claims.  AgroLabs, the Company and Mr. Kay vigorously
contest the allegations set forth in the Petition.  The Company is
unable to make a determination as to the likelihood of an unfavorable outcome or
to estimate the amount or range or possible loss or gain and the impact, if any,
of such claims will have on the Company and its operations.





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 believes
it has several meritorious defenses which would relieve it of all liability to
the Landlord and has filed an answer in which it generally denies liability
to the Landlord and asserts several affirmative defenses.  The parties
are presently engaged in the discovery process; no trial date has been
set.  The Company is unable, at this time, to make a determination as
to the likelihood of an unfavorable outcome or to estimate the amount or range
or possible loss or gain and the impact, if any, this claim will have on the
Company and its operations.





24





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





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 and 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 are required to exchange initial
disclosures and other information, and are scheduled to appear for an initial
conference with the Court on November 18, 2009.  The Company is unable
to make a determination as to the likelihood of a favorable outcome or to
estimate the amount or range or possible loss or gain and the impact, if any, of
this claim will have on the Company and its operations.




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 months ended September 30, 2009 and 2008
was $3 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
three month period ended September 30, 2008 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 9(a))
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 is continuing and remains in effect until
terminated by written notice to CFC.  As of September 30, 2009, the
Company had an outstanding obligation to CFC in the amount of $442, which amount
is included in accounts payable in the Company’s Condensed Consolidated Balance
Sheet.





25





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





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 is
limited to the lesser of the aggregate amount owed to Triarco, or
$800.  As of September 30, 2009, the Company owes Triarco $438, $184
under the Additional Amount Outstanding and $254 was past due, these amounts are
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.





In August
2008, the Company ceased allocating corporate overhead to iBio and entered into
a Transitional Services Agreement (the “TS Agreement”) with iBio.  The
transitional services agreement permitted the Company to continue to provide
certain corporate services to iBio in exchange for a management charge. The
scope of these services was limited to legal, strategic financial planning, SEC
reporting, and tax services by certain corporate employees of the Company. The
TS Agreement provided for a per annum fee of $100.  In the three
months ended September 30, 2009 and 2008, the Company billed iBio approximately
$8 and $12, respectively under the TS Agreement.  The TS Agreement was
terminated in August 2009.





See Note
5(a) – 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 months ended September 30, 2009 and 2008. During the three months ended
September 30, 2009 and 2008, the Company has incurred stock compensation expense
of $281 and $463, respectively. Included in discontinued operations is stock
compensation of $16 for the three months ended September 30, 2008. In the three
month period ended September 30, 2008, certain key executives and a significant
shareholder of the Company exercised stock options for shares of common stock of
2,095,852 which provided cash proceeds to the Company of approximately
$1,341.




(b) Restricted
Stock Award.There were no
restricted stock awards issued in the three months ended September 30, 2009 and
2008, respectively.




26





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





(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 months ended September 30, 2009 and 2008, the Company
amortized $49 and $69, 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 the Series C Preferred Stock, 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 three months ended September 30, 2008, 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 three months ended September 30, 2008, which were paid in Series C
Preferred Stock and cash for the fractional shares during the period ended
September 30, 2008. The redemption of the shares of Series C Preferred Stock
accelerated a payment of a dividend on the Series C Preferred
Stock.





27





INTEGRATED
BIOPHARMA, INC. AND SUBSIDIARIES


NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009 AND FOR THE


THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(in
thousands, except share and per share amounts)


(Unaudited)





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.





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.





Note
13. Subsequent Event.





As of
November 19, 2009, the Company has not repaid its amended Notes Payable in the
amount of $7,805, nor has it negotiated an extension or refinancing
thereof.  The Company also has not received any demand of payment from
the amended Notes Payable holders nor have they exercised their rights to
foreclose on substantially all of the assets of the Company which were
pledged as collateral for the Company's obligation under the amended Notes
Payable.  The Company is in negotiations with the amended Notes
Payable holders to modify the current terms of the amended Notes Payable,
including, but not limited to, an extension of the due date (See Note 2.
Liquidity).





28





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 the United States.





Business
Outlook





Our
future results of operations and the other forward-looking statements contained
in this Form 10-Q, including this MD&A, involve a number of risks and
uncertainties—in particular, the statements regarding our goals and strategies,
new product introductions, plans to cultivate new businesses, pending
divestitures, future economic conditions, revenue, pricing, gross margin and
costs, the tax rate, and pending legal proceedings. We are focusing on efforts
to improve operational efficiency and reduce spending that may 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.





29





Critical
Accounting Policies and Estimates




There
have been no changes to our critical accounting policies in the three months
ended September 30, 2009. 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.




Results
of Operations





Our
results from operations in the following table, which for the three months ended
September 30, 2008, 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:














30





For
the three months ended September 30, 2009 compared to the three months ended
September 30, 2008





Sales, net.Sales, net, for the three months ended
September 30, 2009 and 2008 were $11.0 million and $9.4 million, respectively,
an increase of $1.7 million or 17.9%. The increase is comprised of the
following:









For the
three months ended September 30, 2009, approximately 76% of total net sales were
derived from two customers as compared to 79% of total net sales from three
customers for the three months ended September 30, 2008.  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
increase in our net sales is the result, in part, of an increase in our contract
manufacturing products sales of approximately $0.7 million, and from an increase
in sales from our branded proprietary Nutraceutical product line of
approximately $1.2 million in part due to the introduction of new products and
expansion into the international markets (primarily Canada). 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 increased by $0.9 million to $7.8 million
for the three months ended September 30, 2009 as compared to $6.9 million for
the three months ended September 30, 2008. Cost of sales decreased as a
percentage of sales to 70.6% for the three months ended September 30, 2009 as
compared to 73.7% for the three months ended September 30, 2008. The decrease in
costs of sales as a percentage of net sales is primarily the result of increased
sales in our contract manufacturing of 19.2% which covered more of the fixed
manufacturing costs.  Our fixed manufacturing costs were substantially
the same for the three months September 30, 2009 as compared to September 30,
2008.  We also experienced a decrease in the cost of freight of
approximately $0.3 million in the three months ended September 30, 2009 compared
to the three months ended September 30, 2008, as a result of changing our
products over from glass to plastic, decreasing the weight factor in our
shipping costs.




Selling and
Administrative Expenses.Selling and administrative expenses
were $3.2 million for the three months ended September 30, 2009, as compared to
$3.9 million for the three months ended September 30, 2008, a decrease of $0.7
million or 17.6%. As a percentage of sales, net, selling and administrative
expenses were 29.1% for the three months ended September 30, 2009 and 41.7% for
the prior comparable period.





The net
decrease in selling and administrative expenses of $0.7 million is mainly due to
decreases aggregating approximately $0.7 million in:





·
            advertising
      and marketing ($0.4 million)


·
            stock
      compensation expenses ($0.2 million),
and


·
            compensation
      and employee benefits ($0.1
million);





31





Our
advertising and marketing costs decreased by approximately $0.4 million in the
three months ended September 30, 2009 compared to the three months ended
September 30, 2008 primarily as a result of a decrease in in-store
demonstrations (“demos”) of our products at one of our customers store
locations.  Our management has temporally suspended demos as a form of
advertising with this customer as it was determined that it was not producing a
significant enough increase in the number of units being sold through to the
consumer.  Our stock compensation expense decreased by $0.2 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).  Lastly, our
compensation and employee benefits decreased by $0.1 million from the three
months ended September 30, 2009 from the three months ended September 30, 2008
due a reduction of work force, 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).





Other expense,
net.Other
expense, net was approximately $0.9 million for the three months ended September
30, 2009 compared to $0.5 million for the three months ended September 30, 2008,
an increase of $0.4 million.  Interest expense represents
approximately $0.74 million of other expense in the three months ended September
30, 2009 compared to $0.58 million in the three months ended September 30, 2008,
an increase of $0.16 million.  The increase in interest expense 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.  The
balance of the increase, or approximately $0.25 million, is also a result of the
adoption of the accounting for derivative liabilities and relates to the
increased fair value of the derivative liabilities from the date of adoption,
July 1, 2009 to September 30, 2009, resulting in a loss (additional expense) of
$0.25 million for the three months ended September 30, 2009.





Federal and state income tax,
net. For the three months ended September 30, 2009 and September 30,
2008, 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 three months ended September 30, 2008, 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 three months ended September 30, 2008,
was $0.8 million.





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 $0.3 million for the three months
ended September 30, 2008.





32





Net loss applicable to common
shareholders.Our net loss applicable to common shareholders for the
three months ended September 30, 2009 was $0.9 million as compared to $4.3
million for the three months ended September 30, 2008. This decrease in net loss
applicable to common shareholders of approximately $3.4 million is primarily the
result of decreases in: (i) operating losses from continuing operations of $1.5
million, (ii) net losses from discontinued operations of $1.1 million; and (iii)
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 three months ended
September 30, 2008.  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 $0.4 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:








33





At
September 30, 2009, our working capital deficit was approximately $3.3 million,
an increase of approximately $0.4 million from the working capital deficit of
approximately $2.9 million at June 30, 2009. Our current assets decreased by
$0.2 million and our current liabilities increased by $0.2 million.





Net cash
provided by operating activities of $1.5 million in the three months ended
September 30, 2009, includes a net loss of $0.9 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 provided from
operations before the effect of the changes in working capital components was
$0.2 million. Cash was provided by continuing operations from our working
capital assets and liabilities in the amount of approximately $1.2 million, was
the result of a decrease in accounts receivable of $1.2 million and inventory of
$0.4 million, offset by a net decrease in accounts payable, accrued expenses and
other liabilities of $0.4 million.  Less than approximately $0.05
million of cash was provided by operating activities from our discontinued
operations.





Net cash
used in operating activities of $1.0 million for the three months ended
September 30, 2008 included a net loss of $3.2 million. After excluding the
effects of non-cash expenses, including the net loss from discontinued
operations, deferred taxes, impairment charges, depreciation and amortization
and compensation expense for employee stock options, the adjusted cash used
before the effect of the changes in working capital components was approximately
$1.0 million. Cash provided by continuing operations from working capital
components in the amount of approximately $0.5 million was the result of a
decrease in accounts receivable of $1.1 million and inventory of $0.1 million,
offset by a net decrease in accounts payable and accrued expenses and other
liabilities of approximately $0.7 million.  Approximately $0.5 million
of cash used was for 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 September 30, 2009 and
2008.  Cash used in our discontinued operations for investing
activities for the three months ended September 30, 2008 was approximately $0.06
million.





Cash
provided by financing activities was approximately $1.3 million for the three
months ended September 30, 2008 and was the result of proceeds from employees
exercising stock options during the period.  There were no financing
activities for the three months ended September 30, 2009.





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 three months ended September 30, 2009, we had net
operating income of approximately $26,000 and a net loss of approximately $0.9
million.  As September 30, 2009, we had cash and cash equivalents of
approximately $2.0 million, a working capital deficit of approximately $3.3
million, primarily attributable to the discounted amended Notes Payable in the
amount of $7.7 million, with a stated principal amount of $7.8 million, which
are due on the earlier of the date stated in an Acceleration Notice (which must
be at least two (2) business days following the date on which the notice is
delivered), if any, or November 15, 2009, and an accumulated deficit of $47.2
million.





34





As of the
date of this filing, November 19, 2009, we have not received an Acceleration
Notice, nor have we finalized any extensions or refinancing of the discounted
amended Notes Payable with the stated maturity of November 15,
2009.   We have historically raised capital in private
placements; however, we continue to sustain losses and we only recently had
positive 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 at least $7.8 million of
the discounted amended Notes Payable, and we are not adversely affected by the
current economic conditions, we believe that our available capital as of
September 30, 2009, plus the additional $7.8 million of additional capital
and/or refinancing of our discounted amended Notes Payable, will enable us to
continue as a going concern through the second quarter of our fiscal year ending
June 30, 2011. There are no assurances that we will be able to raise additional
capital as needed or refinance our current amended 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.





Our total
annual commitments at September 30, 2009 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 three months ended September 30, 2009 and
2008 were less than $0.1 million for each period, 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.





35





Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.





Item
4. 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 September 30,
2009, 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
months ended September 30, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.


36





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, against
AgroLabs Inc., the Company, Kurt Cahill and Gerald Kay (collectively the
“Defendants”). The State alleges 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 has filed a counterclaim against the
State for declaratory relief, in which AgroLabs seeks a declaratory judgment
from the Court that the State’s causes of action are preempted under federal law
because the product benefit claims at issue are fully compliant with applicable
federal law.  The Company and Mr. Kay have filed motions to dismiss
the lawsuit for lack of personal jurisdiction.  On November 12, 2009,
the State of Texas agreed to dismiss the Company and Mr. Kay from the
lawsuit.  The parties are currently engaged in discussions to resolve
the remaining claims.  AgroLabs, the Company and Mr. Kay vigorously
contest the allegations set forth in the Petition.  The Company is
unable to make a determination as to the likelihood of an unfavorable outcome or
to estimate the amount or range or possible loss or gain and the impact, if any,
of such claims will have on the Company and its operations.





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 believes
it has several meritorious defenses which would relieve it of all liability
to the Landlord and has filed an answer in which it generally denies
liability to the Landlord and asserts several affirmative
defenses.  The parties are presently engaged in the discovery process;
no trial date has been set.  The Company is unable, at this time, to
make a determination as to the likelihood of an unfavorable outcome or to
estimate the amount or range or possible loss or gain and the impact, if any,
this claim will have on the Company and its operations.





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 and 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 are required to exchange initial
disclosures and other information, and are scheduled to appear for an initial
conference with the Court on November 18, 2009.  The Company is unable
to make a determination as to the likelihood of a favorable outcome or to
estimate the amount or range or possible loss or gain and the impact, if any, of
this claim will have on the Company and its operations.





37





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, other than as set forth
below.





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.




38





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:           November
      19, 2009
            By:
      /s/ E. Gerald
      KayE.
      Gerald KayPresident
      and Chief Executive Officer





Date:           November
      19, 2009
            By:
      /s/ Dina L.
      MasiDina
      L. MasiChief
      Financial Officer & Senior Vice
President







39