UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
____________

FORM 10-Q

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

For the quarterly period ended December 31, 2015

OR

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

For the transition period from        to


Commission File Number 001-31668

INTEGRATED BIOPHARMA, INC.
(Exact name of registrant, as specified in its charter)

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

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

(888) 319-6962
(Registrant's telephone number, including Area Code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)



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

Yes ■
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 ■

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

Yes □
No ■

Applicable only to Corporate Issuers:

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

Class
Outstanding at February 19, 2016
Common Stock, $0.002 par value
21,105,174 Shares



INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES

FORM 10-Q QUARTERLY REPORT
For the Six Months Ended December 31, 2015
INDEX


   
Page
 
Part I. Financial Information
 
 
Item 1.
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2015 and 2014 (unaudited)
2
 
Condensed Consolidated Balance Sheets as of December 31, 2015 and June 30, 2015 (unaudited)
3
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2015 and 2014 (unaudited)
4
 
Notes to Condensed Consolidated Statements
5
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
17  
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
25
     
Item 4.
Controls and Procedures
25
     
 
Part II. Other Information
 
     
Item 1.
Legal Proceedings
25
     
Item 1A.
Risk Factors
25
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
25
     
Item 3.
Defaults Upon Senior Securities
25
     
Item 4.
Mine Safety Disclosure
25
     
Item 5.
Other Information
26
     
Item 6.
Exhibits
26
 
 
Other
 
Signatures
 
27
     
     
     

Cautionary Statement Regarding Forward-Looking Statements
 
Certain statements in this 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 ("SEC"), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Integrated BioPharma, Inc. and its subsidiaries (the "Company") or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors including, among others, changes in general economic and business conditions; loss of market share through competition; introduction of competing products by other companies; the timing of regulatory approval and the introduction of new products by the Company; changes in industry capacity; pressure on prices from competition or from purchasers of the Company's products; regulatory changes in the pharmaceutical manufacturing industry and nutraceutical industry; regulatory obstacles to the introduction of new technologies or products that are important to the Company; availability of qualified personnel; the loss of any significant customers or suppliers; and other factors both referenced and not referenced in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015 ("Form 10-K"), as filed with the SEC. 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 Item 1 of the Company's Annual Report filed on Form 10-K for the year ended June 30, 2015 and in 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.  The Company's future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date hereof and the Company does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.
1

ITEM 1. FINANCIAL STATEMENTS
                   
                   
                   
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
   
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
   
(in thousands, except for share and per share amounts)
   
(Unaudited)
   
                   
 
Three months ended
Six months ended
   
 
December 31,
 
December 31,
   
 
2015
 
2014
 
2015
 
2014
   
                   
Sales, net
 $10,413
 
 $10,290
 
 $19,859
 
 $18,872
   
                   
Cost of sales
 9,438
 
 9,035
 
 17,569
 
 16,316
   
                   
Gross profit
 975
 
 1,255
 
 2,290
 
 2,556
   
                   
Selling and administrative expenses
 807
 
 856
 
 1,637
 
 1,708
   
                   
Operating income
 168
 
 399
 
 653
 
 848
   
                   
Other income (expense), net
                 
Change in fair value of derivative liabilities
 6
 
 447
 
 3
 
 661
   
Other income, net
 26
 
 18
 
 50
 
 27
   
Interest expense
 (243)
 
 (250)
 
 (480)
 
 (490)
   
Other income (expense), net
 (211)
 
 215
 
 (427)
 
 198
   
                   
(Loss) income before income taxes
 (43)
 
 614
 
 226
 
 1,046
   
                   
Income tax expense, net
 20
 
 67
 
 48
 
 96
   
                   
Net (loss) income
 (63)
 
 547
 
 178
 
 950
   
Change in fair value of derivative liability
 -
 
 (447)
 
 -
 
 (661)
   
Interest expense on Convertible debt-CD Financial, LLC
 -
 
 82
 
 -
 
 164
   
Accretion of Convertible debt - CD Financial, LLC
 -
 
 28
 
 -
 
 55
   
Diluted net (loss) income
 $(63)
 
 $210
 
 $178
 
 $508
   
                   
                   
Basic net (loss) income per common share
 $(0.00)
 
 $0.03
 
 $0.01
 
 $0.05
   
                   
Diluted net (loss) income per common share
 $(0.00)
 
 $0.01
 
 $0.01
 
 $0.02
   
                   
                   
Weighted average common shares outstanding - basic
 21,105,174
 
 21,105,174
 
 21,105,174
 
 21,105,174
   
Add: Stock options
 -
 
 -
 
 -
 
 99,887
   
    Shares issuable upon conversion of
                 
Convertible Debt - CD Financial, LLC
 -
 
 8,230,769
 
 -
 
 8,230,769
   
Weighted average common shares outstanding - diluted
 21,105,174
 
 29,335,943
 
 21,105,174
 
 29,435,830
   
                   
See accompanying notes to condensed consolidated financial statements.
           
                       
2


INTEGRATED BIOPHARMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share amounts)
(Unaudited)
 
 
December 31,
 
June 30,
 
2015
 
2015
Assets
     
Current Assets:
     
Cash
 $60
 
 $71
Accounts receivable, net
 3,991
 
 2,638
Inventories
 7,019
 
 5,778
Investment in iBio, Inc.
 501
 
 501
Other current assets
 368
 
 334
Total current assets
 11,939
 
 9,322
       
Intangible assets, net
 688
 
 743
Property and equipment, net
 1,488
 
 1,373
Security deposits and other assets
 105
 
 185
Total Assets
 $14,220
 
 $11,623
       
Liabilities and Stockholders' Deficiency:
     
Current Liabilities:
     
Advances under revolving credit facility
 $5,967
 
 $4,462
Accounts payable (includes $292 and $290 due to related party)
 6,533
 
 5,148
Accrued expenses and other current liabilities
 1,149
 
 1,536
Current portion of long term debt
 713
 
 719
Total current liabilities
 14,362
 
 11,865
       
Long term debt
 3,794
 
 3,942
Subordinated convertible note, net - CD Financial, LLC
 5,176
 
 5,120
Derivative liabilities
 9
 
 12
Total liabilities
 23,341
 
 20,939
       
Commitments and Contingencies
     
       
Stockholders' Deficiency:
     
Common Stock, $0.002 par value; 50,000,000 shares authorized;
     
21,140,074 and 21,105,174 shares issued and outstanding, respectively
 42
 
 42
Additional paid-in capital
 44,692
 
 44,676
Accumulated deficit
 (53,756)
 
 (53,935)
Less:  Treasury stock, at cost, 34,900 shares
 (99)
 
 (99)
Total Stockholders' Deficiency
 (9,121)
 
 (9,316)
Total Liabilities and Stockholders' Deficiency
 $14,220
 
 $11,623
       
       
       
See accompanying notes to condensed consolidated financial statements.
     
3


INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share amounts)
(Unaudited)
         
 
Six months ended
 
 
December 31,
 
 
2015
 
2014
 
Cash flows from operating activities:
       
Net income
 $178
 
 $950
 
Adjustments to reconcile net income to net cash
       
from operating activities:
       
Depreciation and amortization
 171
 
 199
 
Accretion of financing instruments and other non-cash interest
 121
 
 120
 
Compensation expense for employee stock options
 17
 
 -
 
Change in fair value of derivative liabilities
 (3)
 
 (661)
 
Gain on sale of fixed assets
 (3)
 
 (2)
 
Changes in operating assets and liabilities:
       
Decrease (increase) in:
       
Accounts receivable
 (1,353)
 
 (1,207)
 
Inventories
 (1,240)
 
 (1,052)
 
Other current assets
 (34)
 
 (96)
 
Security deposits and other assets
 -
 
 (15)
 
(Decrease) increase in:
       
Accounts payable
 1,378
 
 310
 
Accrued expenses and other liabilities
 (388)
 
 (16)
 
Net cash used in operating activities
 (1,156)
 
 (1,470)
 
         
Cash flows from investing activities:
       
Purchase of property and equipment
 (40)
 
 (188)
 
Cash proceeds from sale of equipment
 2
 
 -
 
Net cash used in investing activities
 (38)
 
 (188)
 
         
Cash flows from financing activities:
       
Advances under revolving credit facility
 19,022
 
 18,861
 
Repayments of advances under revolving credit facility
 (17,518)
 
 (17,553)
 
Proceeds from Line of Credit Note
 43
 
 284
 
Repayments under term note payables
 (300)
 
 (270)
 
Repayments under capital lease obligations
 (64)
 
 (67)
 
Net cash provided by financing activities
 1,183
 
 1,255
 
         
Net decrease in cash
 (11)
 
 (403)
 
Cash at beginning of period
 71
 
 451
 
Cash at end of period
 $60
 
 $48
 
         
Supplemental disclosures of cash flow information:
       
Cash paid during the periods for:
       
Interest
 $344
 
 $351
 
Income taxes
 $54
 
 $45
 
Supplemental disclosures of non-cash transactions:
       
Accretion on embedded derivative feature of convertible note payable
 $56
 
 $55
 
Amortization of prepaid financing costs
 $65
 
 $65
 
Financing on capitalized lease obligations
 $182
 
 $185
 
         
         
See accompanying notes to condensed consolidated financial statements.
     

 
4

 
Note 1. Principles of Consolidation and Basis of Presentation
 
Basis of Presentation of Interim Financial Statements

The accompanying condensed consolidated financial statements for the interim periods are unaudited and include the accounts of Integrated BioPharma, Inc., a Delaware corporation (together with its subsidiaries, the "Company"). The interim condensed consolidated financial statements have been prepared in conformity with 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 consolidated financial statements should be read in conjunction with the financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015 ("Form 10-K"), as filed with the SEC. The June 30, 2015 balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three and six months ended December 31, 2015 are not necessarily indicative of the results for the full fiscal year ending June 30, 2016 or for any other period.

Nature of Operations

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, Luxembourg and Canada. The Company was previously known as Integrated Health Technologies, Inc. and, prior to that, as Chem International, Inc. The Company was reincorporated in its current form in Delaware in 1995. The Company continues to do business as Chem International, Inc. with certain of its customers and certain vendors.

The Company's business segments include: (a) Contract Manufacturing operated by InB:Manhattan Drug Company, Inc. ("MDC"), which manufactures vitamins and nutritional supplements for sale to distributors, multilevel marketers and specialized health-care providers; (b) Branded Proprietary Products operated by AgroLabs, Inc. ("AgroLabs"), which distributes healthful nutritional products for sale through major mass market, grocery, drug and vitamin retailers,  under the following brands: Naturally Noni, Coconut Water, Aloe Pure, Peaceful Sleep, Green Envy, ACAI Extra, ACAI Cleanse, Wheatgrass and other products which are being introduced into the market (these are referred to as our branded proprietary nutraceutical business and/or products); and (c) Other Nutraceutical Businesses which includes the operations of (i) The Vitamin Factory (the "Vitamin Factory"), which sells private label MDC products, as well as our AgroLabs products, through the Internet,  (ii) IHT Health Products, Inc. ("IHT") a distributor of fine natural botanicals, including multi minerals produced under a license agreement and (iii) Chem International, Inc. ("Chem"), a distributor of certain raw materials for DSM Nutritional Products LLC.

Significant Accounting Policies

There have been no material changes during fiscal year 2016 in the Company's significant accounting policies to those previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

Investment in iBio, Inc. The Company accounts for its investment in iBio, Inc. ("iBio") common stock on the cost basis as it retained approximately 6% of its interest in iBio (1,266,706 common shares) (the "iBio Stock") at the time of the spin-off of this subsidiary in August 2008.  The Company reviews its investment in iBio for impairment and records a loss when there is deemed to be a permanent impairment of the investment.  To date, there were cumulative impairment charges of approximately $2.2 million.  The market value of the iBio Stock as of December 31, 2015 was approximately $0.7 million based on the trade price at the close of trading on December 31, 2015.
5

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share amounts)
(Unaudited)
 
Pursuant to the Company's Loan Agreement with PNC Bank, National Association ("PNC"), the Company was required to sell the iBio Stock when the trading price of the iBio Stock is less than $0.88 per share for a period of fifteen (15) consecutive trading days on the applicable exchange and utilize all proceeds from such sale to prepay the outstanding principal of the term loan outstanding under the Loan Agreement at such time.  During certain periods in the six months ended December 31, 2015 and the fiscal years ended June 30, 2015, 2014 and 2013, the trading price of the iBio Stock was less than $0.88 for a period of fifteen (15) consecutive trading days.  (See Note 5. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt).

As of February 19, 2016, PNC has not required the Company to sell any of the iBio Stock but reserves the right to do so at any time in the future.  Although not required to do so, in the quarter ended June 30, 2015, the Company sold 73,191 shares of iBio Stock providing net trading proceeds of approximately $79 which were used to prepay principal outstanding under the Term Loan.  (See Note 5. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt).
 
Additionally, on February 19, 2016, the Loan Agreement with PNC was amended to remove the requirement to sell the iBio Stock based on the selling price of $0.88 per share, the requirement to use all the net proceeds from the sale of any of the iBio Stock to prepay the outstanding principal of the term loan outstanding under the Amended Loan Agreement remains.  (See Note 5. Senior Credit Facility, Subordinated Convertible Note, Net – CD Financial, LLC and other Long Term Debt).

Earnings Per Share . Basic earnings per common share amounts are based on the 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 debt subject to anti-dilution limitations using the treasury stock method and if converted method.

The following options and potentially dilutive shares for convertible notes payable (see Note 5. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt) were not included in the computation of weighted average diluted common shares outstanding as the effect of doing so would be anti-dilutive for the three and six months ended December 31, 2015 and 2014:

           
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2015
2014
 
2015
2014
           
Anti-dilutive stock options
 2,900,450
 888,950
 
 2,900,450
 401,200
Anti-dilutive shares for
         
convertible notes payable
 8,230,769
 -
 
 8,230,769
 -
           
Anti-dilutive shares
 11,131,219
 888,950
 
 11,131,219
 401,200


Note 2. Inventories

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

   
December 31,
 
June 30,
   
2015
 
2015
         
Raw materials
 $4,762
 
 $2,371
Work-in-process
 1,178
 
 2,061
Finished goods
 1,079
 
 1,346
Total
 
 $7,019
 
 $5,778



6

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share amounts)
(Unaudited)

Note 3. Intangible Assets, net

Intangible assets consist of trade names, license fees from the Branded Proprietary Products Segment, and unpatented technology from the Other Nutraceutical Businesses Segment.  The carrying amount of intangible assets, net is as follows as of:

               
 
December 31, 2015
 
June 30, 2015
 
Gross Carrying
Accumulated
   
Gross Carrying
Accumulated
 
 
Amount
Amortization
Net
 
Amount
Amortization
Net
               
Trade names and patents
 $1,525
 $928
 $597
 
 $1,525
 $891
 $634
Unpatented technology
 547
 547
 -
 
 547
 540
 7
License agreement
 347
 256
 91
 
 347
 245
 102
Total
 $2,419
 $1,731
 $688
 
 $2,419
 $1,676
 $743


Amortization expense recorded on intangible assets for three and six months ended December 31, 2015 and 2014 was $24 and $55 and $34 and $69, respectively.  Amortization expense is recorded on the straight-line basis over periods ranging from 13 years to 20 years based on contractual or estimated lives and is included in selling and administrative expenses. Tests for impairment or recoverability are performed at least annually and require significant management judgment and the use of estimates which the Company believes are reasonable and appropriate at the time of the impairment test.  Future unanticipated events affecting cash flows and changes in market conditions could affect such estimates and result in the need for an impairment charge.  The Company also re-evaluates the periods of amortization to determine whether circumstances warrant revised estimates of current useful lives.  No impairment losses were identified or recorded in the three and six months ended December 31, 2015 and 2014 on the Company's intangible assets.

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

Year ending
 
Amortization
June 30,
 
Expense
       
Remaining in 2016
 
 $49
 
2017
 
 97
 
2018
 
 97
 
2019
 
 97
 
2020
 
 93
 
2021
 
 76
 
Thereafter
 
 179
 
Total
 
 $688
 


7

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share amounts)
(Unaudited)
Note 4. Property and Equipment, net

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

   
December 31,
 
June 30,
   
2015
 
2015
         
Land and building
 
 $1,250
 
 $1,250
Leasehold improvements
 
 1,207
 
 1,159
Machinery and equipment
 
 5,402
 
 5,362
Transportation equipment
 
 11
 
 16
   
 7,870
 
 7,787
Less: Accumulated depreciation
       
         and amortization
 
 (6,382)
 
 (6,414)
Total
 
 $1,488
 
 $1,373


Depreciation and amortization expense recorded on property and equipment was $59 and $70 for the three months ended December 31, 2015 and 2014, respectively and $115 and $131 for the six months ended December 31, 2015 and 2014, respectively.  Additionally, the Company disposed of fully depreciated property of $131 and $58 in the six months ended December 31, 2015 and 2014, respectively.



8

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share amounts)
(Unaudited)
 
Note 5. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt

As of December 31, 2015 and June 30, 2015, the Company had the following debt outstanding:
 
 
 
Principal Amount
 
Interest Rate
 
Maturity Date
 
As of December 31, 2015
 
As of        June 30, 2015
       
Revolving advances under Senior Credit
             
  Facility with PNC Bank, National Association
 $5,967
 
 $4,462
 
3.50%
 
2/19/2020
Installment Note with PNC Bank
 1,535
 
 1,802
 
4.00%
 
2/19/2020
Line of Credit Note with
             
 PNC Equipment Finance
 317
 
 307
 
4.57%
 
7/29/2019
Promissory Note with CD Financial, LLC
 1,714
 
 1,714
 
6.00%
 
2/29/2020
Promissory Note with Vitamin Realty, LLC
 686
 
 686
 
4.00%
 
2/29/2020
Capitalized lease obligations  228    125    0.00% - 7.10%    2/26/2016 - 12/8/2020
               
Promissory Note with E. Gerald Kay
 27
 
 27
 
4.00%
 
7/7/2017
Total outstanding debt
 10,474
 
 9,123
       
Less: Revolving Advances
 (5,967)
 
 (4,462)
       
          Current portion of long term debt
 (713)
 
 (719)
       
Long term debt
 $3,794
 
 $3,942
       
               
Convertible Note payable - CD Financial, LLC
 $5,350
 
 $5,350
 
6.00%
 
2/29/2020
Discount for embedded derivative
 (174)
 
 (230)
       
Convertible Note payable, net - CD Financial, LLC
 $5,176
 
 $5,120
       
               
 

SENIOR CREDIT FACILITY
 
On February 19, 2016, the Company, MDC, AgroLabs, IHT, IHT Properties Corp. ("IHT Properties") and Vitamin Factory (collectively, the "Borrowers") amended the Revolving Credit, Term Loan and Security Agreement (the "Amended Loan Agreement") with PNC Bank, National Association as agent and lender ("PNC") and the other lenders party thereto entered into on June 27, 2012.

The Amended Loan Agreement provides for a total of $11,422 in senior secured financing (the "Senior Credit Facility") as follows: (i) discretionary advances ("Revolving Advances") based on eligible accounts receivable and eligible inventory in the maximum amount of $8,000 (the "Revolving Credit Facility") and (ii) a term loan in the amount of $3,422 (the "Term Loan"). The Senior Credit Facility is secured by all assets of the Borrowers, including, without limitation, machinery and equipment, real estate owned by IHT Properties, and common stock of iBio owned by the Company.  Revolving Advances bear interest at PNC's Base Rate or the Eurodollar Rate, at Borrowers' option, plus 2.75% (3.50% as of December 31, 2015 and 3.25% as of June 30, 2015). The Term Loan bears interest at PNC's Base Rate or the Eurodollar Rate, at Borrowers' option, plus 3.25% (4.00% as of December 31, 2015 and 3.75% as of June 30, 2015).  Upon and after the occurrence of any event of default under the Amended Loan Agreement, and during the continuation thereof, interest shall be payable at the interest rate then applicable plus 2%.  The Senior Credit Facility matures on February 19, 2020 (the "Senior Maturity Date").

The principal balance of the Revolving Advances is payable on the Senior Maturity Date, subject to acceleration, based upon a material adverse event clause, as defined, subjective accelerations for borrowing base reserves, as defined or upon the occurrence of any event of default under the Amended Loan Agreement or earlier termination of the Amended Loan Agreement pursuant to the terms thereof.  The Term Loan shall be repaid in eighty-four (84) consecutive monthly installments of principal, the first eighty-three (83) of which shall be in the amount of $41, commencing on the first business day of March, 2016, and continuing on the first business day of each month thereafter, with a final payment of any unpaid balance of principal and interest payable on the Senior Maturity Date. The foregoing is subject to customary mandatory prepayment provisions and acceleration upon the occurrence of any event of default under the Amended Loan Agreement or earlier termination of the Amended Loan Agreement pursuant to the terms thereof.



9

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share amounts)
(Unaudited)
 

 
The Revolving Advances are subject to the terms and conditions set forth in the Amended Loan Agreement and are made in aggregate amounts at any time equal to the lesser of (x) $8.0 million or (y) an amount equal to the sum of: (i) up to 85%, subject to the provisions in the Amended Loan Agreement, of eligible accounts receivables ("Receivables Advance Rate"), plus (ii) up to the lesser of (A) 75%, subject to the provisions in the Amended Loan Agreement, of the value of the eligible inventory ("Inventory Advance Rate" and together with the Receivables Advance Rate, collectively, the "Advance Rates"), (B) 85% of the appraised net orderly liquidation value of eligible inventory (as evidenced by the most recent inventory appraisal reasonably satisfactory to PNC in its sole discretion exercised in good faith) and (C) the inventory sublimit in the aggregate at any one time ("Inventory Advance Rate" and together with the Receivables Advance Rate, collectively, the "Advance Rates"), minus (iii) the aggregate Maximum Undrawn Amount of all outstanding Letters of Credit, minus (iv) such reserves as PNC may reasonably deem proper and necessary from time to time.

The Amended Loan Agreement contains customary mandatory prepayment provisions, including, without limitation the requirement to use any sales proceeds from the sale of iBio Stock to repay the Term Loan and to   prepay the outstanding amount of the Advances in an amount equal to twenty-five percent (25%) of Excess Cash Flow for each fiscal year commencing with the fiscal year ending June 30, 2016, payable upon delivery of the financial statements to PNC referred to in and required by the Amended Loan Agreement for such fiscal year but in any event not later than one hundred twenty (120) days after the end of each such fiscal year, which amount shall be applied ratably to the outstanding principal installments of the Term Loan in the inverse order of the maturities thereof.  The Amended Loan Agreement also contains customary representations and warranties, covenants and events of default, including, without limitation, (i) a fixed charge coverage ratio maintenance requirement and (ii) an event of default tied to any change of control as defined in the Amended Loan Agreement.  As of December 31, 2015, the Company was not in compliance with the fixed charge coverage ratio maintenance requirement and received a waiver from PNC for the testing period ended on December 31, 2015.  The Company has represented to PNC that it will be back in compliance with the fixed charge coverage ratio maintenance for the next testing period for the trailing twelve months ending March 31, 2016.

During certain periods in the fiscal year ended June 30, 2013 and continuing through the six months ended December 31, 2015, the trading price of the iBio Stock was less than $0.88 for a period of fifteen (15) consecutive trading days.  However, PNC temporarily waived the requirement to sell the iBio Stock due to certain trading rules and restrictions under Rule 144 under the Securities Act of 1933, as amended.  As of February 19, 2016, PNC has not required the Company to sell any of the iBio Stock.  Although not required to do so, in the quarter ended June 30, 2015, the Company sold 73,191 shares of iBio Stock, providing net trading proceeds of approximately $79 which proceeds were used to prepay principal outstanding under the Term Loan.  On February 19, 2016, the Amended Loan Agreement with PNC removed the requirement to sell the iBio Stock based on the selling price of $0.88 per share, however, the requirement to use all the net proceeds from the sale of any of the iBio Stock to prepay the outstanding principal of the term loan outstanding under the Amended Loan Agreement remains a requirement under the Amended Loan Agreement.

In connection with the Senior Credit Facility, PNC and CD Financial entered into the Intercreditor and Subordination Agreement (the "Intercreditor Agreement"), which was acknowledged by the Borrowers, pursuant to which, among other things, (a) the lien of CD Financial on assets of the Borrowers is subordinated to the lien of PNC on such assets during the effectiveness of the Senior Credit Facility, and (b) priorities for payment of the debt for the Company and its subsidiaries (as described in this Note 5) are established.
 
 
10

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share amounts)
(Unaudited)
In addition, in connection with the Senior Credit Facility, the following loan documents were executed: (i) a Stock Pledge Agreement with PNC, pursuant to which the Company pledged to PNC the iBio Stock; (ii) a Mortgage and Security Agreement with PNC with IHT Properties; and (iii) an Environmental Indemnity Agreement with PNC.

CD FINANCIAL, LLC TROUBLED DEBT RESTRUCTURING

On June 27, 2012, the Company also entered into an Amended and Restated Securities Purchase Agreement (the "CD SPA") with CD Financial, which amended and restated the Securities Purchase Agreement, dated as of February 21, 2008, between the Company and CD Financial, pursuant to which the Company issued to CD Financial a 9.5% Convertible Senior Secured Note in the original principal amount of $4,500 (the "Original CD Note").  Pursuant to the CD SPA,  the Company issued to CD Financial (i) the Amended and Restated Convertible Promissory Note in the principal amount of $5,350 (the "CD Convertible Note") and (ii) the Promissory Note in the principal amount of $1,714 (the "Liquidity Note", and collectively with the CD Convertible Note, the "CD Notes"). The CD Notes originally matured on July 7, 2017, however, on February 19, 2016, the CD Notes were amended to extend the maturity date to February 29, 2020.

The proceeds of the CD Notes were used to refinance (a) the Original CD Note, (b) a $300,000 note issued by MDC to CD Financial which was assigned by MDC to the Company, (c) past due interest in the aggregate amount of $333 and (d) other expenses owed to CD Financial by the Company in the aggregate amount of approximately $217.

The CD Notes are secured by all assets of the Borrowers, including, without limitation, machinery and equipment, real estate owned by IHT Properties, and iBio Stock owned by the Company. The CD Notes bear interest at an annual rate of 6% and have a default rate of 10%.

The CD Convertible Note is convertible at the option of CD Financial into common stock of the Company at a conversion price of $0.65 per share, subject to customary adjustments including conversion price protection provisions.

Pursuant to the terms of the Amended Loan Agreement and the Intercreditor Agreement, during the effectiveness of the Senior Credit Facility, (i) the principal of the CD Convertible Note may not be repaid, (ii) the principal of the Liquidity Note may only be repaid if certain conditions under the Amended Loan Agreement are satisfied, and (iii) interest in respect of the CD Notes may only be paid if certain conditions under the Intercreditor Agreement are satisfied.

The CD SPA contains customary representations and warranties, covenants and events of default, including, without limitation, an event of default tied to any change of control as defined in the CD SPA.

In connection with the CD SPA, the Borrowers entered into an Amended and Restated Security Agreement and Amended and Restated Subsidiary Guaranty.

As of December 31, 2015 and June 30, 2015, the related embedded derivative liability with respect to conversion price protection provisions on the CD Convertible Note has an estimated fair value of $9 and $12, respectively.


 
11

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share amounts)
(Unaudited)
The Company used the following assumptions to calculate the fair value of the derivative liability using the Black-Scholes option pricing model:

   
December 31,
 
June 30,
 
June 27,
   
2015
 
2015
 
2012
             
Risk Free Interest Rate
 
0.65%
 
0.64%
 
0.72%
Volatility
 
70.60%
 
71.60%
 
144.10%
Term
 
1.5 years
 
2 years
 
5 years
Dividend Rate
 
0.00%
 
0.00%
 
0.00%
Closing Price of
           
  Common Stock
 
 $0.10
 
 $0.09
 
 $0.09

OTHER LONG TERM DEBT

Related Party Debt.  On June 27, 2012, MDC and the Company entered into separate promissory notes with (i) Vitamin Realty Associates, LLC ("Vitamin Realty"), which is 100% owned by E. Gerald Kay, the Company's Chairman of the Board, Chief Executive Officer and major shareholder and certain of his family members, who are also executive officers and directors of the Company, and (ii) E. Gerald Kay, in the principal amounts of approximately $686 (the "Vitamin Note") and $27 (the "Kay Note"), respectively (collectively the "Related Party Notes"). The principal amount of the Vitamin Note represents the aggregate amount of unpaid, past due rent owing by MDC under the Lease Agreement, dated as of January 10, 1997, between MDC, as lessor, and Vitamin Realty, as landlord, pertaining to the real property located at 225 Long Avenue, Hillside, New Jersey.  (See Note 7. Commitments and Contingencies (a) Leases – Related Party Leases).  The Kay Note represents amounts owed to Mr. Kay for unreimbursed business expenses incurred by Mr. Kay in the fiscal year ended June 30, 2008.  The Related Party Notes mature on July 7, 2017 and accrue interest at an annual rate of 4% per annum. Interest in respect of the Related Party Notes is payable on the first business day of each calendar month.  Pursuant to the terms of the Amended Loan Agreement, during the effectiveness of the Senior Credit Facility, the Related Party Notes may only be repaid or prepaid if certain conditions set forth in the Loan Agreement are satisfied.  On February 19, 2016, the Vitamin Note was amended to mature on February 29, 2020.

Capitalized Lease Obligations.   On September 17, 2015, the Company entered into a capitalized lease obligation with Regents Capital Corporation ("Regents") in the amount of $90 (with the ability to borrow up to $150), which lease is secured by certain machinery and equipment to be financed with funds available from Regents and which lease matures on September 21, 2017.  As of December 31, 2015 and February 19, 2016, the Company has borrowed $54 and $106, respectively, of the $150 available from Regents. The lease payment amount (based on the amount outstanding under the lease as of February 19, 2016) of approximately $5 is payable monthly and has an imputed interest rate of 5.7%.

On December 8, 2015, the Company entered into a capitalized lease obligation with Wells Fargo Equipment Finance, Manufacturer Services Group ("Wells Fargo") in the amount of $129 which matures on December 8, 2020.  The lease payment amount of approximately $2 is payable monthly and has an imputed interest rate of 4.01%.

Equipment Financing Note.   On September 22, 2014, MDC entered into a Convertible Line of Credit Note (the "LC Note") in the amount of $350 with PNC Equipment Finance, LLC ("PNCEF").  The LC Note is convertible into a term note upon completion of the advances under the LC Note.  During the period from September 22, 2014 to and including the Conversion Date (defined below), the Company was able to borrow up to the full value of the LC Note ($350).  The "Conversion Date" is the earliest to occur of (i) July 31, 2015 or (ii) the date when the Company notifies PNCEF that no more advances will be requested or (iii) the date when PNCEF has made advances in an aggregate amount of $350.  The Company completed the advances on July 29, 2015 and converted the LC Note to a four year term note in the amount of $350.  Prior to the Conversion Date, amounts outstanding under the LC Note bore interest at a rate per annum ("Floating Rate") which is at all times equal to the sum of LIBOR Rate plus 325 basis points (3.25%).  On the Conversion Date, the Company elected a fixed rate interest of 4.57% as offered by PNCEF.
 
 
12

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share amounts)
(Unaudited)
 
In addition, in connection with the LC Note, the following loan documents were executed: (i) a Security Agreement with PNCEF and MDC; (ii) a Guaranty and Security Agreement with PNCEF and the Company; and (iii) a Cross Collateralization Agreement with PNC, PNCEF and MDC.

Note 6. Significant Risks and Uncertainties

(a) Major Customers. For the three months ended December 31, 2015 and 2014, approximately 91% and 86%, respectively of consolidated net sales, were derived from two customers. These two customers are in the Company's Contract Manufacturing Segment and represent approximately 31% and 65% and 47% and 44% of this Segment's net sales in the three months ended December 31, 2015 and 2014, respectively.  A third customer in the Branded Nutraceutical Segment, while not a significant customer of the Company's consolidated net sales, represented approximately 25% and 65% of net sales in the three months ended December 31, 2015 and 2014, respectively, of the Branded Nutraceutical Segment.

For the six months ended December 31, 2015 and 2014, approximately 89% and 83%, respectively of consolidated net sales, were derived from two customers. These two customers are in the Company's Contract Manufacturing Segment and represent approximately 39% and 57% and 54% and 36% of this Segment's net sales in the six months ended December 31, 2015 and 2014, respectively.  A third customer in the Branded Nutraceutical Segment, while not a significant customer of the Company's consolidated net sales, represented approximately 62% and 74% of net sales in the six months ended December 31, 2015 and 2014, respectively, of the Branded Nutraceutical Segment.

Accounts receivable from these two major customers represented approximately 87% and 83% of total net accounts receivable as of December 31 and June 30, 2015, respectively. The loss of any of these customers could have an adverse affect on the Company's operations. Major customers are those customers who account for more than 10% of net sales.

(b) Other Business Risks. Approximately 62% of the Company's employees are covered by a union contract and are employed in its New Jersey facilities. The contract was renewed on September 1, 2015 and will expire on August 31, 2018.

Note 7. Commitments and Contingencies

(a) Leases

Related Party Leases. Warehouse and office facilities are leased from Vitamin Realty, which is 100% owned by the Company's chairman, Chief Executive Officer and major stockholder and certain of his family members, who are also executive officers and directors of the Company.  On January 5, 2012, MDC, a wholly-owned subsidiary of the Company, entered into a second amendment of lease (the "Second Lease Amendment") with Vitamin Realty for its office and warehouse space in New Jersey increasing its rentable square footage from an aggregate of 74,898 square feet to 76,161 square feet and extending the expiration date to January 31, 2026.  This Second Lease Amendment provides for minimum annual rental payments of $533, plus increases in real estate taxes and building operating expenses.  On May 19, 2014, AgroLabs entered into an Amendment to the lease agreement entered into on January 5, 2012, with Vitamin Realty for an additional 2,700 square feet of warehouse space in New Jersey, the term of which was to expire on January 31, 2019 to extend the expiration date to January 1, 2024.  This additional lease provides for minimum lease payments of $27 with annual increases plus the proportionate share of operating expenses.
 
 
13

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share amounts)
(Unaudited)

 
Rent expense for the three and six months ended December 31, 2015 and 2014 on these leases were $219 and $204 and $403 and $414, respectively, and are included in both cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. As of December 31, 2015 and June 30, 2015, the Company had an outstanding obligation to Vitamin Realty of $1.1 million and $1.0 million, respectively, included in accounts payable, accrued expenses and other liabilities and long term debt in the accompanying Condensed Consolidated Balance Sheet.

Other Lease Commitments. The Company has entered into certain non-cancelable operating lease agreements expiring up through January 31, 2026, related to office and warehouse space, equipment and vehicles (inclusive of the related party lease with Vitamin Realty).

The minimum rental commitments for long-term non-cancelable leases are as follows:


   
Operating
 
Related Party
   
Year ending
 
Lease
 
Lease
   
June 30,
 
Commitment
 
Commitment
 
Total
             
2016, remaining
 $26
 
 $281
 
 $307
2017
 
 33
 
 563
 
 596
2018
 
 24
 
 563
 
 587
2019
 
 6
 
 563
 
 569
2020
 
 1
 
 563
 
 564
2021
 
 -
 
 563
 
 563
Thereafter
 
 -
 
 2,517
 
 2,517
Total
 
 $90
 
 $5,613
 
 $5,703


Total rent expense, including real estate taxes and maintenance charges, was approximately $259 and $245 and $485 and $497 for the three and six months ended December 31, 2015 and 2014, respectively.  Rent expense is included in cost of sales and selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

(b) Legal Proceedings.

The Company is subject, from time to time, to claims by third parties under various legal theories.  The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company's liquidity, financial condition and cash flows.

(c) Other Claims.

On May 15, 2012, Cedarburg Pharmaceuticals, Inc. ("Cedarburg") sent the Company a letter (the "Demand Letter") setting forth a demand for indemnification under the Stock Purchase Agreement, dated March 17, 2009 (the "Cedarburg SPA"), by and among Cedarburg, InB: Hauser Pharmaceutical Services, Inc., InB: Paxis Pharmaceuticals, Inc. and the Company.  In the Demand Letter, Cedarburg demanded payment by the Company of $0.6 million in respect of the Company's indemnification obligations under the Cedarburg SPA.  In addition, in the Demand Letter, Cedarburg informed the Company that there are also environmental issues pending which may lead to additional costs to Cedarburg which will likely be in excess of $0.3 million.

On May 30, 2012, the Company sent a letter responding to the Demand Letter and setting forth the Company's position that it has no obligation to indemnify Cedarburg as demanded.  On June 18, 2012, Cedarburg responded to the Company's letter and, on July 27, 2012, the Company sent another letter to Cedarburg reiterating its position that the Company has no obligation to indemnify Cedarburg as demanded.  On December 18, 2012, Cedarburg responded to the Company's letter and, on January 15, 2013, the Company sent another letter to Cedarburg reiterating its position that the Company has no obligation to indemnify Cedarburg as demanded.   As of February 19, 2016, the Company has not received any further communication from Cedarburg with respect to its demand for indemnification as set forth in the Demand Letter.  The Company intends to vigorously contest Cedarburg's demand as set forth in the Demand Letter.
 
 
14

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share amounts)
(Unaudited)

 
Note 8. Related Party Transactions

See Note 5. Senior Credit Facility, Subordinated Convertible Note, net - CD Financial, LLC and other Long Term Debt for related party securities transactions.

See Note 7(a). Leases for related party lease transactions.

Note 9. Segment Information

The basis for presenting segment results generally is consistent with overall Company reporting. The Company reports information about its operating segments in accordance with GAAP which establishes standards for reporting information about a company's operating segments.

The Company has divided its operations into three reportable segments as follows: Contract Manufacturing, Branded Proprietary Products and Other Nutraceutical Businesses.  The international sales, concentrated primarily in Europe and Canada, for the three months ended December 31, 2015 and 2014 were $1,826 and $2,112, respectively and for the six months ended December 31, 2015 and 2014 were $3,818 and $4,395, respectively.

Financial information relating to the three months ended December 31, 2015 and 2014 operations by business segment are as follows:

                                 
   
Sales, Net
 
Segment
               
   
U.S.
 
International
     
Gross
     
Capital
       
   
Customers
 
Customers
 
Total
 
Profit (loss)
 
Depreciation
 
Expenditures
       
Contract Manufacturing
2015
 $8,077
 
 $1,814
 
 $9,891
 
 $842
 
 $55
 
 $176
       
2014
 7,636
 
 2,006
 
 9,642
 
 1,134
 
 69
 
 23
       
                                 
Branded Proprietary Products
2015
 84
 
 3
 
 87
 
 (19)
 
 -
 
 -
       
2014
 69
 
 76
 
 145
 
 (76)
 
 -
 
 -
       
                               
                                 
Other Nutraceutical Businesses
2015
 426
 
 9
 
 435
 
 152
 
 1
 
 -
       
2014
 473
 
 30
 
 503
 
 198
 
 1
 
 -
       
                                 
Total Company
2015
 8,587
 
 1,826
 
 10,413
 
 975
 
 56
 
 176
       
 
2014
 8,178
 
 2,112
 
 10,290
 
 1,255
 
 70
 
 23
       
                                 



 
15

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share amounts)
(Unaudited)
 
Financial information relating to the six months ended December 31, 2015 and 2014 operations by business segment are as follows:

                                 
   
Sales, Net
 
Segment
               
   
U.S.
 
International
     
Gross
     
Capital
       
   
Customers
 
Customers
 
Total
 
Profit (loss)
 
Depreciation
 
Expenditures
       
Contract Manufacturing
2015
 $15,007
 
 $3,629
 
 $18,636
 
 $1,883
 
 $114
 
 $230
       
2014
 13,379
 
 4,071
 
 17,450
 
 2,285
 
 129
 
 374
       
                                 
Branded Proprietary Products
2015
 232
 
 175
 
 407
 
 109
 
 -
 
 -
       
2014
 198
 
 286
 
 484
 
 (70)
 
 1
 
 1
       
                               
                                 
Other Nutraceutical Businesses
2015
 802
 
 14
 
 816
 
 298
 
 1
 
 1
       
2014
 900
 
 38
 
 938
 
 341
 
 1
 
 -
       
Total Company
2015
 16,041
 
 3,818
 
 19,859
 
 2,290
 
 115
 
 231
       
 
2014
 14,477
 
 4,395
 
 18,872
 
 2,556
 
 131
 
 375
       
                                 
                                 




   
Total Assets as of
   
December 31,
 
June 30,
   
2015
 
2015
Contract Manufacturing
 
 $11,087
 
 $8,482
         
Branded Proprietary Products
 
 1,325
 
 1,324
         
Other Nutraceutical Businesses
 
 1,808
 
 1,817
         
Total Company
 
 $14,220
 
 $11,623

16

 
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 Quarterly Report on Form 10-Q for additional factors relating to such statements. The following discussion should also be read in conjunction with the condensed consolidated financial statements of the Company and Notes thereto included herein and the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

The Company is engaged primarily in the manufacturing, distributing, marketing and sales of vitamins, nutritional supplements and herbal products. The Company's customers are located primarily in the United States, Luxembourg and Canada.

Business Outlook

Our future results of operations and the other forward-looking statements contained in this Quarterly Report on 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 potential legal proceedings. We are focusing our efforts to improve operational efficiency and reduce spending that may have an impact on expense levels and gross margin. In addition to the various important factors discussed above, a number of other important factors could cause actual results to differ significantly from our expectations. See the risks described in "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q.

For the six months ended December 31, 2015, our net sales from operations increased by $1.0 million to approximately $19.9 million from approximately $18.9 million in our six months ended December 31, 2014.  For the six months ended December 31, 2015 and 2014 we had operating income of approximately $0.6 million and $0.8 million, respectively.  In the six months ended December 31, 2015, our gross profit of $2.3 million was approximately $0.3 million less than it was for the six months ended December 31, 2014 of approximately $2.6 million, as a result of our cost of goods sold increasing by approximately $1.3 million. Our profit margins decreased primarily as a result of decreased margins in our Contract Manufacturing Segment, as our net sales increased by $1.2 million and our cost of sales increased by $1.6 million, resulting in a net decrease in our gross profit of $0.4 million in this segment.  The increase in the cost of sales was primarily due to the higher cost of the raw materials used in the products manufactured for Life Extensions.  The decrease in the Contract Manufacturing Segment was offset by an increase in profit margins of $0.2 million in the Branded Nutraceutical Segment.  We maintained our consolidated selling and administrative expenses at approximately $1.7 million in each of the six months ended December 31, 2015 and 2014.

We continue to focus on our core businesses and push forward in maintaining our cost structure in line with our sales.  In our branded product segment, we are developing new customer relationships focused on the international markets in Canada, Mexico and Asia.  We are also developing new products to include branded products for solid dosage which will be manufactured by MDC and sold using our AgroLabs brand or to our customer contacts developed through selling our branded product for private label. We believe that this will increase sales and further leverage our fixed manufacturing and selling costs in each of these segments as we diversify our branded product offerings to our existing and developing customers.  While this sale cycle has taken longer than management had anticipated, we expect these relationships to produce sales in the fiscal year ending June 30, 2016.
 
On February 19, 2016, we amended the maturity date of our Senior Credit Facility, Subordinated Convertible Note, Net – CD Financial, LLC and certain other Long Term Debt, from June 27, 2017 and July 7, 2017 to February 19, 2020 and February 29, 2020, respectively.  Certain other terms were amended under our Senior Credit Facility, see Note 5 to the condensed financial statements included in this Quarterly Report on Form 10-Q.  These amendments, will continue to provide the working capital and liquidity required to support our business growth in the Contract Manufacturing and Branded Nutraceutical Segments outlined above.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies in the six months ended December 31, 2015. Critical accounting policies and the significant estimates made in accordance with them are regularly discussed by management with our Audit Committee. Those policies are discussed under "Critical Accounting Policies" in our "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of our Annual Report on Form 10-K for the year ended June 30, 2015.
 
17

Results of Operations

Our results from operations in the following table, sets forth the income statement data of our results as a percentage of net sales for the periods indicated:

 
For the three months
 
For the six months
 
ended December 31,
 
ended December 31,
 
2015
 
2014
 
2015
 
2014
               
Sales, net
 100.0%
 
 100.0%
 
 100.0%
 
 100.0%
               
Costs and expenses:
             
Cost of sales
 90.6%
 
 87.8%
 
 88.5%
 
 86.5%
Selling and administrative
 7.8%
 
 8.3%
 
 8.2%
 
 9.1%
 
 98.4%
 
 96.1%
 
 96.7%
 
 95.5%
Income from operations
 1.6%
 
 3.9%
 
 3.3%
 
 4.5%
               
Other income (expense), net
             
Change in fair value of derivative liabilities
 0.1%
 
 4.3%
 
 0.0%
 
 3.5%
Interest expense
 (2.3%)
 
 (2.4%)
 
 (2.4%)
 
 (2.6%)
Other income, net
 0.2%
 
 0.2%
 
 0.2%
 
 0.1%
Other income (expense), net
 (2.0%)
 
 2.1%
 
 (2.2%)
 
 1.0%
               
               
(Loss) income before income taxes
 (0.4%)
 
 6.0%
 
 1.1%
 
 5.5%
               
Federal and state income taxes, net
 0.2%
 
 0.7%
 
 0.2%
 
 0.5%
               
Net (loss) income
 (0.6%)
 
 5.3%
 
 0.9%
 
 5.0%

For the Six Months Ended December 31, 2015 compared to the Six Months Ended December 31, 2014

Sales, net.   Sales, net, for the six months ended December 31, 2015 and 2014 were $19.9 million and $18.9 million, respectively, an increase of 5.2%, and are comprised of the following:


 
Six months ended
 
Dollar
 
Percentage
 
December 31,
 
Change
 
Change
 
2015
 
2014
 
2015 vs 2014
 
2015 vs 2014
 
(amounts in thousands)
   
Contract Manufacturing:
             
US Customers
 $15,007
 
 $13,379
 
 $1,628
 
 12.2%
International Customers
 3,629
 
 4,071
 
 (442)
 
 (10.9%)
Net sales, Contract Manufacturing
 18,636
 
 17,450
 
 1,186
 
 6.8%
               
Branded Nutraceutical Products:
             
US Customers
 232
 
 198
 
 34
 
 17.2%
International Customers
 175
 
 286
 
 (111)
 
 (38.8%)
Net sales, Branded Nutraceutical Products
 407
 
 484
 
 (77)
 
 (15.9%)
               
Other Nutraceuticals:
             
US Customers
 802
 
 900
 
 (98)
 
 (10.9%)
International Customers
 14
 
 38
 
 (24)
 
 (63.2%)
Net sales, Other Nutraceuticals
 816
 
 938
 
 (122)
 
 (13.0%)
               
Total net sales
 $19,859
 
 $18,872
 
 $987
 
 5.2%


18


For the six months ended December 31, 2015 and 2014 a significant portion of our consolidated net sales, approximately 89% and 83%, respectively, were concentrated among two customers, Herbalife and Life Extensions, customers in our Contract Manufacturing Segment.  Herbalife and Life Extensions represented approximately 39% and 57% and 54% and 36%, respectively of our Contract Manufacturing Segment's net sales in the six months ended December 31, 2015 and 2014, respectively.  The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations.  Costco Wholesale Corporation ("Costco") (a customer of our Branded Proprietary Products Segment), while not a significant customer of our consolidated net sales represented approximately 62% and 74% of net sales in the six months ended December 31, 2015 and 2014, respectively of the Branded Propriety Products Segment.

The increase in net sales of approximately $1.0 million was primarily the result of:

·
Net sales increase in our Contract Manufacturing Segment by $1.2 million primarily due to increased sales volumes to one of our major customers, Life Extensions, in the six months ended December 31, 2015, of approximately $4.3 million, offset in part by, a decrease in net sales volume to Herbalife of approximately $2.2 million compared to the comparable prior period.
·
Net sales in our Branded Nutraceutical Segment decreased by approximately $0.1 million in the six months ended December 31, 2015, primarily as the result of the decreased sales volume of $0.1 million to Costco.  The decrease to Costco was primarily the result of a timing difference in shipping product for a promotion that shipped in December a year ago with no such promotion in the six months ended December 31, 2015.  Other customer sales in this segment increased slightly due to the availability of product to sell that was not available in the prior period.
·
Net sales in our Other Nutraceutical segments decreased by $0.1 million primarily as a result of decreased sales volumes to customers of Chem.

Cost of sales.   Cost of sales increased by $1.3 million to $17.6 million for the six months ended December 31, 2015, as compared to $16.3 million for the six months ended December 31, 2014.  Cost of sales increased as a percentage of sales to 88.5% for the six months ended December 31, 2015 as compared to 86.5% for the six months ended December 31, 2014. The increase in the cost of goods sold amount, as well as the increase in the cost of goods sold as a percentage of net sales, was primarily the result of the increased sales to Life Extension.  The cost of the raw materials for the Life Extension finished goods, on average, cost more per bottle than goods produced for our other customers in the Contract Manufacturing Segment as they tend to use raw materials with trademarked characteristics which limits the ability to negotiate pricing.  A secondary cause is the production of more capsules than tablets.  There is a higher loss factor in the production of capsules than in tablets.  Our Contract Manufacturing Segment had a $1.6 million increase in the cost of goods sold with the Other Nutraceutical Businesses Segment decreasing by $0.3 million (primarily as the result of decreased sales).

Selling and Administrative Expenses.   There was a slight decrease in selling and administrative expenses of $71,000 or approximately 4% in the six months ended December 31, 2015 as compared to the six months ended December 31, 2014.  As a percentage of sales, net, selling and administrative expenses were approximately 8% and 9% for the six months ended December 31, 2015 and 2014, respectively.  No one expense within our selling and administrative expenses changed by more than $28,000.

Other income (expense), net. Other income (expense), net was approximately $0.4 million for the six months ended December 31, 2015 compared to $0.2 million for the six months ended December 31, 2014, and is composed of:
 

 
19


       
 
Six months ended
 
December 31,
 
2015
 
2014
 
(dollars in thousands)
Interest expense
 $(480)
 
 $(490)
Change in fair value of
     
derivative instruments
 3
 
 661
Other, net
 50
 
 27
Other income (expense), net
 $(427)
 
 $198


The variance in the change in fair value of derivative liabilities from the six months ended December 31, 2014 to the December 31, 2015 was mainly the result of the decreased closing trading price of our common stock from $0.25 as of June 30, 2014 to $0.09 as of December 31, 2014.  As noted above, there was not a significant change in the estimated fair value of derivative instruments from June 30, 2015 to December 31, 2015, approximately three thousand dollars.  The volatility of the closing trading price of our stock is one of the variables used to calculate the estimated fair value of our derivative liabilities associated with the underlying derivative instruments.  The other components of other income (expense) were not significant.  Our interest expense for each of the six months ended December 31, 2015 and 2014 was substantially the same and other income increased by approximately twenty-three thousand dollars of additional earned income from providing back office support, logistics and operational support for a start-up company which sells over the counter pharmaceutical and nutraceutical products through retail and internet based outlets.

Federal and state income tax, net. For the six months ended December 31, 2015 and 2014, we had a state tax expense of approximately $48,000 and $96,000, respectively.  We continue to maintain a full reserve on our deferred tax assets as it has been determined that based upon past losses, the Company's past liquidity concerns and the current economic environment, that it is "more likely than not" the Company's deferred tax assets may not be realized.  The state tax expense is the result of MDC using all of its state net operating losses in the fiscal year ended 2013 tax period.  All of our other subsidiaries still have adequate net operating losses for state income tax purposes to absorb any taxable income for state tax purposes.

Net income. Our net income for the six months ended December 31, 2015 and 2014 was approximately $0.2 million and $1.0 million, respectively.

 
20


For the Three Months Ended December 31, 2015 compared to the Three Months Ended December 31, 2014

Sales, net.   Sales, net, for the three months ended December 31, 2015 and 2014 were $10.4 million and $10.3 million, respectively, an increase of 1.2%, and are comprised of the following:


 
Three months ended
 
Dollar
 
Percentage
 
December 31,
 
Change
 
Change
 
2015
 
2014
 
2015 vs 2014
 
2015 vs 2014
 
(amounts in thousands)
   
Contract Manufacturing:
             
US Customers
 $8,077
 
 $7,636
 
 $441
 
 5.8%
International Customers
 1,814
 
 2,006
 
 (192)
 
 (9.6%)
Net sales, Contract Manufacturing
 9,891
 
 9,642
 
 249
 
 2.6%
               
Branded Nutraceutical Products:
             
US Customers
 84
 
 69
 
 15
 
 21.7%
International Customers
 3
 
 76
 
 (73)
 
 (96.1%)
Net sales, Branded Nutraceutical Products
 87
 
 145
 
 (58)
 
 (40.0%)
               
Other Nutraceuticals:
             
US Customers
 426
 
 473
 
 (47)
 
 (9.9%)
International Customers
 9
 
 30
 
 (21)
 
 (70.0%)
Net sales, Other Nutraceuticals
 435
 
 503
 
 (68)
 
 (13.5%)
               
Total net sales
 $10,413
 
 $10,290
 
 $123
 
 1.2%


For the three months ended December 31, 2015 and 2014 a significant portion of our consolidated net sales, approximately 91% and 86%, respectively, were concentrated among two customers, Herbalife and Life Extensions, customers in our Contract Manufacturing Segment.  Herbalife and Life Extensions represented approximately 31% and 65% and 47% and 71%, respectively of our Contract Manufacturing Segment's net sales in the three months ended December 31, 2015 and 2014, respectively.  The loss of any of these customers could have a significant adverse impact on our financial condition and results of operations.  Costco Wholesale Corporation ("Costco") (a customer of our Branded Proprietary Products Segment), while not a significant customer of our consolidated net sales represented approximately 25% and 65% of net sales in the three months ended December 31, 2015 and 2014, respectively of the Branded Propriety Products Segment.

The increase in net sales of approximately $0.1 million was primarily the result of net sales increasing in our Contract Manufacturing Segment by approximately $0.2 million primarily due to increased sales volumes to one of our major customers, Life Extensions of approximately $2.2 million, offset by, in part, by a decrease in net sales volume to Herbalife of approximately $1.5 million in the three months ended December 31, 2015, compared to the comparable prior period.

Cost of sales.   Cost of sales increased by $0.4 million to $9.4 million for the three months ended December 31, 2015, as compared to $9.0 million for the three months ended December 31, 2014.  Cost of sales increased as a percentage of sales to 90.6% for the three months ended December 31, 2015 as compared to 87.8% for the three months ended December 31, 2014. The increase in the cost of goods sold amount, as well as the increase in the cost of goods sold as a percentage of net sales, was primarily the result of the increased sales to Life Extension.  The cost of the raw materials for the Life Extension finished goods, on average, cost more per bottle than goods produced for our other customers in the Contract Manufacturing Segment as they tend to use raw materials with trademarked characteristics which limits the ability to negotiate pricing.  A secondary cause is the production of more capsules than tablets.  There is a higher loss factor in the production of capsules than in tablets.  Our Contract Manufacturing Segment had a $0.5 million increase in the cost of goods sold with the Branded Nutraceutical Segment decreasing by $0.1 million (primarily as the result of decreased sales and secondarily as the result of increased markdowns relating to expiring inventory and the disposal of packaging material that was deemed no longer usable).
 
 
21


Selling and Administrative Expenses.   There was a slight decrease in selling and administrative expenses of $50,000 in the three months ended December 31, 2015 as compared to the three months ended December 31, 2014 or approximately 5%.  As a percentage of sales, net, selling and administrative expenses were approximately 8% in each of the three months ended December 31, 2015 and 2014.  No one expense within our selling and administrative expenses changed by more than $15,000.

Other income (expense), net. Other income (expense), net was approximately $0.2 million for each of the three months ended December 31, 2015 and 2014, and is composed of:

       
 
Three months ended
 
December 31,
 
2015
 
2014
 
(dollars in thousands)
Interest expense
 $(243)
 
 $(250)
Change in fair value of
     
derivative instruments
 6
 
 447
Other, net
 26
 
 18
Other income (expense), net
 $(211)
 
 $215


The variance in the change in fair value of derivative liabilities from the three months ended December 31, 2014 to the December 31, 2015 was mainly the result of the decreased closing trading price of our common stock from $0.24 as of September 30, 2014 to $0.09 as of December 31, 2014.  As noted above, there was not a significant change in the estimated fair value of derivative instruments from September 30, 2015 to December 31, 2015.  The volatility of the closing trading price of our stock is one of the variables used to calculate the estimated fair value of our derivative liabilities associated with the underlying derivative instruments.  The other components of other income (expense) were not significant.  Our interest expense for each of the three months ended December 31, 2015 and 2014 was substantially the same and other income increased by approximately eight thousand dollars of additional earned income from providing back office support, logistics and operational support for a start-up company which sells over the counter pharmaceutical and nutraceutical products through retail and internet based outlets.

Federal and state income tax, net. For the three months ended December 31, 2015 and 2014, we had a state tax expense of approximately $20,000 and $67,000, respectively.  We continue to maintain a full reserve on our deferred tax assets as it has been determined that based upon past losses, the Company's past liquidity concerns and the current economic environment, that it is "more likely than not" the Company's deferred tax assets may not be realized.

Net (loss) income. Our net loss for the three months ended December 31, 2015 was approximately $63,000 compared to net income of $0.5 million.

Seasonality

The nutraceutical business 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, as well as sales orders from our customers in our contract manufacturing segment, seem to increase in late December to early January as consumers become health conscious as they enter the new year.
 

 
22

The Company believes that there are other non-seasonal factors that also may influence the variability of quarterly results including, but not limited to, general economic and industry conditions that affect consumer spending, changing consumer demands and current news on nutritional supplements. Accordingly, a comparison of the Company's results of operations from consecutive periods is not necessarily meaningful, and the Company's results of operations for any period are not necessarily indicative of future periods.

Liquidity and Capital Resources

The following table sets forth, for the periods indicated, the Company's net cash flows used in operating, investing and financing activities, its period end cash and cash equivalents and other operating measures:
 
       
 
For the six months ended
 
December 31,
 
2015
 
2014
 
(dollars in thousands)
       
Net cash  used in operating activities
 $(1,156)
 
 $(1,470)
Net cash used in investing activities
 $(38)
 
 $(188)
Net cash provided by financing activities
 $1,183
 
 $1,255
       
Cash at end of period
 $60
 
 $48


At December 31, 2015, our working capital deficit was approximately $2.4 million, a decrease of approximately $0.1 million in our working capital deficit of approximately $2.5 million at June 30, 2015. Our current assets increased by approximately $2.6 million and our current liabilities increased by approximately $2.5 million.

Net cash used in operating activities of $1.2 million in the six months ended December 31, 2015, includes net income of approximately $0.2 million.  After excluding the effects of non-cash expenses, including depreciation and amortization, 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 $0.5 million. Cash was used in operations from our working capital assets and liabilities in the amount of approximately $1.6 million and was primarily the result of increases in accounts receivable of $1.4 million and inventories of $1.2 million offset, in part, by a net increase in accounts payable and accrued expenses and other liabilities of approximately $1.0 million.

Net cash used in operating activities of $1.5 million in the six months ended December 31, 2014, includes net income of approximately $1.0 million.  After excluding the effects of non-cash expenses, including depreciation and amortization, 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 $0.6 million. Cash was used in operations from our working capital assets and liabilities in the amount of approximately $2.1 million and was primarily the result of increases in accounts receivable of $1.2 million and inventories of $1.1 million offset, in part, by a net increase in accounts payable and accrued expenses and other liabilities of approximately $0.3 million.

Cash used in investing activities of $38,000 and $188,000 in the six months ended December 31, 2015 and 2014, respectively, was for the purchase of property and equipment primarily in our Contract Manufacturing Segment.

Cash provided by financing activities was approximately $1.2 million for the six months ended December 31, 2015, $19.0 million from advances under our revolving credit facility offset, in part, by repayments of advances under our revolving credit facility of $17.5 million and repayments of principal under our term note in the amount of $0.3 million.

Cash provided by financing activities was approximately $1.3 million for the six months ended December 31, 2014, $18.9 million from advances under our revolving credit facility and $0.3 million from proceeds under our convertible line of credit for equipment financing offset, in part, by repayments of advances under our revolving credit facility of $17.6 million and repayments of principal under our term note in the amount of $0.3 million.
 

 
23

As of December 31, 2015, we had cash of $60,000, funds available under our revolving credit facility of approximately $0.6 million and a working capital deficit of approximately $2.4 million. Our working capital deficit includes $6.0 million outstanding under our revolving line of credit which is not due until February 2020 but classified as current due to a subjective acceleration clause that could cause the advances to become currently due. (See Note 5 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q).  Furthermore, we had income from operations of approximately $0.4 million in the six months ended December 31, 2015.  After taking into consideration our interim results and current projections, management believes that operations, together with the revolving credit facility, will support our working capital requirements through the period ending December 31, 2016.

Our total annual commitments at December 31, 2015 for long term non-cancelable leases of approximately $596,000 consists of obligations under operating leases for facilities and operating lease agreements for the rental of warehouse equipment, office equipment and automobiles.

On May 15, 2012, Cedarburg Pharmaceuticals, Inc. ("Cedarburg") sent us a letter (the "Demand Letter") setting forth a demand for indemnification under the Stock Purchase Agreement, dated March 17, 2009 (the "Cedarburg SPA"), by and among Cedarburg, InB: Hauser Pharmaceutical Services, Inc., InB: Paxis Pharmaceuticals, Inc. and the Company.  In the Demand Letter, Cedarburg demanded payment by us of $0.6 million in respect of the Company's indemnification obligations under the Cedarburg SPA.  In addition, in the Demand Letter, Cedarburg informed us that there are also environmental issues pending which may lead to additional costs to Cedarburg which will likely be in excess of $0.3 million.

On May 30, 2012, we sent a letter responding to the Demand Letter and setting forth our position that we have no obligation to indemnify Cedarburg as demanded.  On June 18, 2012, Cedarburg responded to our letter and, on July 27, 2012, we sent another letter to Cedarburg reiterating our position that we have no obligation to indemnify Cedarburg as demanded.  On December 18, 2012, Cedarburg responded to our letter and, on January 15, 2013, we sent another letter to Cedarburg reiterating our position that we have no obligation to indemnify Cedarburg as demanded. As of February 19, 2016, we have not received any further communication from Cedarburg with respect to its demand for indemnification as set forth in the Demand Letter.  We intend to vigorously contest Cedarburg's demand as set forth in the Demand Letter.

Capital Expenditures

The Company's capital expenditures for the six months ended December 31, 2015 and 2014 were approximately $231,000 ($43,000 funded with proceeds under our convertible line of credit for equipment financing and $191,000 funded with capitalized lease financing) and $375,000 ($146,000 funded with capitalized lease financing and $185,000 funded with capitalized lease financing), respectively.  The Company has budgeted approximately $0.3 million for capital expenditures for fiscal year 2016.  The total amount is expected to be funded from lease financing and cash provided from the Company's operations.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Recent Accounting Pronouncements

None.

Impact of Inflation

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

 
24


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 December 31, 2015, 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 six months ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

None.

Item 1A. Risk Factors

The risks described in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended June 30, 2015, 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, 2015.

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

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY DISCLOSURE

Not Applicable.
 

 
25

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

(a)              Exhibits

Exhibit
Number
 
10.1
First Amendment to Revolving Credit, Tem Loan and Security Agreement dated as of February 19, 2016 by and among Integrated BioPharma, Inc., InB: Manhattan Drug Company, Inc., AgroLabs, Inc., IHT Health Products, Inc., IHT Properties, Inc. and Vitamin Factory, Inc. and PNC Bank, National Association.
10.2
Amended and Restated Term Note dated as of February 19, 2016 by and among Integrated BioPharma, Inc., InB: Manhattan Drug Company, Inc., AgroLabs, Inc., IHT Health Products, Inc., IHT Properties, Inc. and Vitamin Factory, Inc. and PNC Bank, National Association in the original principal amount of $3,422,160.00.
10.3
First Amendment to Amended Restated Promissory Note dated as of February 19, 2016 by and among Integrated BioPharma, Inc. and InB: Manhattan Drug Company, Inc. and Vitamin Realty Associates, LLC in the original principal amount of $685,985.61.
10.4
First Amendment to Notes dated as of February 19, 2016 by and Integrated BioPharma, Inc., InB: Manhattan Drug Company, Inc., AgroLabs, Inc., IHT Health Products, Inc., IHT Properties, Inc. and Vitamin Factory, Inc. and CD Financial, LLC in the original principal amounts of $1,714,000.00 and $5,350,000.00.
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.
101
The following financial information from Integrated BioPharma, Inc.'s Quarterly Report on Form 10-Q for the quarter ended December 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2015 and 2014, (ii) Condensed Consolidated Balance Sheets as of December 31, 2015 and June 30, 2015, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2015 and 2014, and (iv) the Notes to Condensed Consolidated Statements.


26

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:  February 19, 2016
By: /s/ E Gerald Kay
 
E. Gerald Kay,
 
President and Chief Executive Officer


Date:  February 19, 2016
By: /s/ Dina L. Masi
 
Dina L. Masi,
 
Chief Financial Officer & Senior Vice President









 
27


Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, E. Gerald Kay certify that:
1.              I have reviewed this quarterly report on Form 10-Q of Integrated BioPharma, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  February 19, 2016
By: /s/ E Gerald Kay
 
Name:  E. Gerald Kay,
 
Title:  President and Chief Executive Officer
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dina L. Masi, certify that:
1.              I have reviewed this quarterly report on Form 10-Q of Integrated BioPharma, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  February 19, 2016
By: /s/ Dina L. Masi
 
Name:  Dina L. Masi,
 
Title:  Chief Financial Officer & Senior Vice President

Exhibit 32.1

CERTIFICATION OF PERIODIC REPORT
As adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q for the quarter ended December 31, 2015 of Integrated BioPharma, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), E. Gerald Kay, the President and Chief Executive Officer of Integrated BioPharma, Inc.   certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to his knowledge:

(1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certification accompanies the Report pursuant to Section 906 of Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.


Date:  February 19, 2016
By: /s/ E Gerald Kay
 
Name:  E. Gerald Kay,
 
Title:  President and Chief Executive Officer

Exhibit 32.2

CERTIFICATION OF PERIODIC REPORT
As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q for the quarter ended December 31, 2015 of Integrated BioPharma, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Dina L. Masi, the Senior Vice President and Chief Financial Officer of Integrated BioPharma, Inc.   certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to her knowledge:

(1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certification accompanies the Report pursuant to Section 906 of Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.


Date:  February 19, 2016
By: /s/ Dina L. Masi
 
Name:  Dina L. Masi,
 
Title:  Chief Financial Officer & Senior Vice President
Exhibit 10.1
 
 
 
 
FIRST AMENDMENT TO
REVOLVING CREDIT, TERM LOAN AND SECURITY AGREEMENT

THIS FIRST AMENDMENT TO REVOLVING CREDIT, TERM LOAN AND SECURITY AGREEMENT (this "Agreement") is entered into February 19, 2016 by and among INTEGRATED BIOPHARMA, INC., a corporation organized under the laws of the State of Delaware ("Integrated"), InB:MANHATTAN DRUG COMPANY, INC., a corporation organized under the laws of the State of New York ("MD"), AGROLABS, INC., a corporation organized under the laws of the State of New Jersey ("AL"), IHT HEALTH PRODUCTS, INC., a corporation organized under the laws of the State of Delaware ("IHT"), IHT PROPERTIES CORP., a corporation organized under the laws of the State of Delaware ("IHTP"), and VITAMIN FACTORY, INC. (also known as The Vitamin Factory), a corporation organized under the laws of the State of Delaware ("Vitamin") (Integrated, MD, AL, IHT, IHTP and Vitamin, each a "Borrower", and collectively "Borrowers"), the financial institutions which are now or which hereafter become a party hereto (collectively, the "Lenders" and individually a "Lender") and PNC BANK, NATIONAL ASSOCIATION ("PNC"), as agent for Lenders (PNC, in such capacity, the "Agent").
RECITALS
Whereas, Borrowers and PNC entered into a certain Revolving Credit, Term Loan and Security Agreement dated June 27, 2012 (which is being and may be further amended, replaced, restated, modified and/or extended, the "Loan Agreement"); and
Whereas, Borrowers and PNC have agreed to modify the terms of the Loan Agreement as set forth in this Agreement.
Now, therefore, in consideration of PNC's continued extension of credit and the agreements contained herein, the parties agree as follows:
AGREEMENT
1)
ACKNOWLEDGMENT OF BALANCE. Borrowers acknowledge that the most recent statement of account sent to Borrowers with respect to the Obligations is correct.
2)
MODIFICATIONS.  The Loan Agreement be and hereby is modified as follows:
(a)
The following definition is hereby added to Section 1.2 of the Loan Agreement to read as follows:
" First Amendment Closing Date " shall mean February 19, 2016.
(b)
The following definitions contained in Section 1.2 of the Loan Agreement are hereby deleted and are replaced to read as follows:
" Maximum Loan Amount " shall mean $11,422,160 minus repayments under the Term Loan, provided , however , for calculation of the Maximum Loan Amount in Section 13.1 herein the Maximum Loan Amount shall mean $11,422,160.

" Maximum Term Loan Amount " shall mean $3,422,160.
 
" Termination Date " shall mean February 19, 2020 or such other date as the Lenders may agree in writing to extend the Termination Date until, without there being any obligation on the part of the Lenders to extend the Termination Date.
 
1



(c)
Subsection 2.1 is hereby deleted from the Loan Agreement and replaced to read as follows:
2.1              Revolving Advances .

(a)              Amount of Revolving Advances .  Subject to the terms and conditions set forth in this Agreement including Section 2.1(b), each Lender, severally and not jointly, will make Revolving Advances to Borrowers in aggregate amounts outstanding at any time equal to such Lender's Commitment Percentage of the lesser of (x) the Maximum Revolving Advance Amount less the aggregate Maximum Undrawn Amount of all outstanding Letters of Credit or (y) an amount equal to the sum of:

(i)              up to 85%, subject to the provisions of Section 2.1(b) hereof ("Receivables Advance Rate"), of Eligible Receivables, plus

(ii)              up to the lesser of (A) 75%, subject to the provisions of Section 2.1(b) hereof, of the value of the Eligible Inventory ("Inventory Advance Rate" and together with the Receivables Advance Rate, collectively, the "Advance Rates"), (B) 85% of the appraised net orderly liquidation value of Eligible Inventory (as evidenced by the most recent Inventory appraisal reasonably satisfactory to Agent in its sole discretion exercised in good faith) and (C) the Inventory Sublimit in the aggregate at any one time (" Inventory Advance Rate " and together with the Receivables Advance Rate, collectively, the " Advance Rates "), minus

(iii)              the aggregate Maximum Undrawn Amount of all outstanding Letters of Credit, minus

(iv)              such reserves as Agent may reasonably deem proper and necessary from time to time.

The amount derived from the sum of (x) Sections 2.1(a)(y)(i) and (ii) minus (y) Section 2.1 (a)(y)(iii) and (iv) at any time and from time to time shall be referred to as the "Formula Amount".  The Revolving Advances shall be evidenced by one or more secured promissory notes (collectively, the "Revolving Credit Note") substantially in the form attached hereto as Exhibit 2.1(a).  Notwithstanding anything to the contrary herein, for purposes of determining Section 2.1(a)(y)(i), the maximum amount that can be included in such determination with respect to Eligible Receivables arising from Foreign Subsidiaries of Herbalife shall not exceed the Herbalife Foreign Subsidiary Sublimit at any time.

(b)              Discretionary Rights .  The Advance Rates may be increased or decreased by Agent at any time and from time to time in the exercise of its reasonable discretion.  Each Borrower consents to any such increases or decreases and acknowledges that decreasing the Advance Rates or increasing or imposing reserves may limit or restrict Advances (other than the Term Loan) requested by Borrowing Agent.  The rights of Agent under this subsection are subject to the provisions of Section 16.2(b).
 
 
2


(d)
Subsection 2.4 is hereby deleted from the Loan Agreement and replaced to read as follows:
2.4              Term Loan .  Subject to the terms and conditions of this Agreement, each Lender, severally and not jointly, will make additional Advances so that the Term Loan to Borrowers is in an amount equal to the Maximum Term Loan Amount, on the First Amendment Closing Date.  The Term Loan shall be advanced on the First Amendment Closing Date and shall be, with respect to principal, payable as follows, subject to acceleration upon the occurrence of an Event of Default under this Agreement or termination of this Agreement: eighty-four (84) consecutive monthly principal installments, the first eighty-three (83) of which shall be in the amount of $40,740.00 commencing on the first Business Day of March, 2016, and continuing on the first Business Day of each month thereafter, with a final payment of any unpaid balance of principal and interest payable on the first Business Day of February, 2023, all as more particularly described in this Agreement and in the Note, and subject to mandatory prepayment and acceleration upon the occurrence of an Event of Default under this Agreement, on the Termination Date and/or earlier termination of the Loan Agreement pursuant to the terms thereof.  The Term Loan shall be evidenced by one or more secured promissory notes (collectively, the "Term Note") in substantially the form attached hereto as Exhibit 2.4.  The Term Loan may consist of Domestic Rate Loans or Eurodollar Rate Loans, or a combination thereof, as Borrowing Agent may request.  In the event that Borrowers desire to obtain or extend a Eurodollar Rate Loan or to convert a Domestic Rate Loan to a Eurodollar Rate Loan, Borrowing Agent shall comply with the notification requirements set forth in Sections 2.2(b) and (d) and the provisions of Sections 2.2(b) through (g) shall apply.
(e)
Subsection 2.21(b) is hereby deleted from the Loan Agreement and replaced to read as follows:
(b)              The Borrowers shall prepay the outstanding amount of the Advances in an amount equal to twenty-five percent (25%) of Excess Cash Flow for each fiscal year commencing with the fiscal year ending June 30, 2016, payable upon delivery of the financial statements to Agent referred to in and required by Section 9.7 for such fiscal year but in any event not later than one hundred twenty (120) days after the end of each such fiscal year, which amount shall be applied ratably to the outstanding principal installments of the Term Loan in the inverse order of the maturities thereof.  In the event that the financial statement is not so delivered, then a calculation based upon estimated amounts shall be made by Agent upon which calculation Borrowers shall make the prepayment required by this Section 2.21(b), subject to adjustment when the financial statement is delivered to Agent as required hereby.  The calculation made by Agent shall not be deemed a waiver of any rights Agent or Lenders may have as a result of the failure by Borrowers to deliver such financial statement.
(f)
A new Subsection 2.22(c) is hereby added to the Loan Agreement to read as follows:

(c)              The proceeds of the Term Loan advanced on the First Amendment Closing Date shall be applied to the outstanding principal balance of the Revolving Advances.

(g)
Subsection 6.9 is hereby deleted from the Loan Agreement.

(h)
Subsection 7.23 is hereby deleted from the Loan Agreement and replaced to read as follows:
 
 

 
3

 
7.23              Payments of EGK Debt .  Make any payments, prepayments or repayments of principal and interest on the EGK Debt unless (i) no Default and/or Event of Default has occurred and is continuing prior to and immediately after making such payment, prepayment or repayment, and (ii) the Borrowers provide to the Agent reasonable evidence that the Borrowers are and will be in compliance on a pro forma basis with the Fixed Charge Coverage Ratio set forth in Section 6.5(a) herein, as of the end of the then most recently completed fiscal quarter, prior to and immediately after making such payment, prepayment or repayment.  In the event that the EGK Debt is not paid in full by September 30, 2016, then, in that event, the EGK Note shall be amended so that the due date with respect to the EGK Note shall be a date beyond the Termination Date.

(i)
A new Subsection 7.25 is hereby added to the Loan Agreement to read as follows:

7.25              Sale of iBio Stock .  Sell the iBio Stock pledged in favor of the Agent for the benefit of the Lenders pursuant to the Stock Pledge Agreement, unless all proceeds from such sale are utilized to prepay the outstanding balance of the Term Loan at such time.

(j)
Subsection 13.1 is hereby deleted from the Loan Agreement and replaced to read as follows:

13.1              Term .  This Agreement, which shall inure to the benefit of and shall be binding upon the respective successors and permitted assigns of each Borrower, Agent and each Lender, shall become effective on the date hereof and shall continue in full force and effect until the Termination Date (the "Term") unless sooner terminated as herein provided.  Borrowers may terminate this Agreement at any time upon ninety (90) days' prior written notice upon payment in full of the Obligations.  In the event the Obligations are prepaid in full prior to the last day of the Term (the date of such prepayment hereinafter referred to as the "Early Termination Date"), Borrowers shall pay to Agent for the benefit of Lenders an early termination fee in an amount equal to (x) two percent (2.00%) of the Maximum Loan Amount if the Early Termination Date occurs on or after the First Amendment Closing Date to and including the date immediately preceding the first anniversary of the First Amendment Closing Date, (y) one percent (1.00%) of the Maximum Loan Amount if the Early Termination Date occurs on or after the first anniversary of the First Amendment Closing Date to and including the date immediately preceding the second anniversary of the First Amendment Closing Date, and (z) one half of one percent (0.50%) of the Maximum Loan Amount  if the Early Termination Date occurs on or after the second anniversary of the First Amendment Closing Date to and including the date immediately preceding the third anniversary of the First Amendment Closing Date.

3)
WAIVER OF DEFAULT .  The Agent, on behalf of the Lenders, hereby waives Borrowers' failure to comply with Section 6.5(a) of the Loan Agreement (the "Fixed Charge Coverage Ratio") for the period ended December 31, 2015.  Such waiver does not extend to any other Default or Event of Default which might exist now or in the future.
4)
ACKNOWLEDGMENTS.   Borrowers acknowledge and represent that:
 
 
 
4

 
(A)
the Loan Agreement and Other Documents, each as amended hereby, are in full force and effect without any defense, claim, counterclaim, right or claim of set-off;
(B)
to the best of their knowledge, no default by the Agent or Lenders in the performance of their duties under the Loan Agreement or the Other Documents has occurred;
(C)
all representations and warranties of the Borrowers contained herein, in the Loan Agreement and in the Other Documents are true and correct in all material respects as of this date, except for any representation or warranty that specifically refers to an earlier date;
(D)
Borrowers have taken all necessary action to authorize the execution and delivery of this Agreement; and
(E)
this Agreement is a modification of an existing obligation and is not a novation.
5)
PRECONDITIONS .  As preconditions to the effectiveness of any of the modifications, consents, or waivers contained herein, the Borrowers agree to:
(A)
provide the Agent with this Agreement and the Amended and Restated Term Note each properly executed;
(B)
provide the Agent with secretary's certificates and resolutions of the Borrowers, in form and substance acceptable to the Agent;
(C)
provide the Agent with amendments to each of the following: (i) the Subordinated Securities Note; (ii) the Subordinated Liquidity Note; and (iii) the Vitamin Note; which amendments shall extend the maturity date of each such note to February 29, 2020.
(D)
provide the Agent with all information and documentation required by the Agent;
(E)
pay to the Agent an Amendment Fee in the amount of $50,000.00;
(F)
pay all reasonable legal fees incurred by the Agent in entering into this Agreement to Wilentz, Goldman & Spitzer; and
(G)
pay all other costs and expenses incurred by the Lenders in entering into this Agreement.
6)
MISCELLANEOUS.   This Agreement shall be construed in accordance with and governed by the laws of the State of New York, without reference to that state's conflicts of law principles.  This Agreement, the Loan Agreement and the Other Documents constitute the sole agreement of the parties with respect to the subject matter thereof and supersede all oral negotiations and prior writings with respect to the subject matter thereof.  No amendment of this Agreement, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in writing and signed by the parties hereto.  The illegality, unenforceability or inconsistency of any provision of this Agreement shall not in any way affect or impair the legality, enforceability or consistency of the remaining provisions of this Agreement, the Loan Agreement or the Other Documents.  This Agreement, the Loan Agreement and the Other Documents are intended to be consistent.  However, in the event of any inconsistencies among this Agreement, the Loan Agreement and/or any of the Other Documents, the terms of this Agreement, then the Loan Agreement, shall control.  This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts.  Each such counterpart shall be deemed an original, but all such counterparts shall together constitute one and the same agreement.
7)
DEFINITIONS.   The terms used herein and not otherwise defined or modified herein shall have the meanings ascribed to them in the Loan Agreement.  The terms used herein and not otherwise defined or modified herein or defined in the Loan Agreement shall have the meanings ascribed to them by the Uniform Commercial Code as enacted in State of New York.


5


[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]


[SIGNATURE PAGES TO FOLLOW]
 
 
 
 
 
 
 
 
6


IN WITNESS WHEREOF, the parties hereto have hereunto executed this Agreement the day and year first above mentioned.

ATTEST:
INTEGRATED BIOPHARMA, INC.
 
 
By:  /s/ Dina L. Masi
By:  /s/ E. Gerald Kay
Name:  DINA L. MASI   
Name:  E. GERALD KAY
Title:  Secretary Title:  President and Chief Executive Officer
 
 
ATTEST:
InB:MANHATTAN DRUG COMPANY, INC.
 
 
By:  /s/ Dina L. Masi
By:  /s/ Riva Sheppard
Name:  DINA L. MASI   
Name:  RIVA SHEPPARD
Title:  Secretary Title:  President and Chief Executive Officer
 
 
ATTEST:
AGROLABS, INC.
 
 
By:   /s/ Dina L. Masi
By:  /s/ Christina Kay
Name:  DINA L. MASI   
Name:  CHRISTINA KAY
Title:  Secretary Title:  President and Chief Executive Officer
 
 
ATTEST:
IHT HEALTH PRODUCTS, INC.
 
 
By:   /s/ Dina L. Masi
By:  /s/ Christina Kay
Name:  DINA L. MASI   
Name:  CHRISTINA KAY
Title:  Secretary Title:  President and Chief Executive Officer
 
 
7


 
 
ATTEST:
IHT PROPERTIES CORP.
 
 
By:   /s/ Dina L. Masi
By:  /s/ Riva Sheppard
Name:  DINA L. MASI   
Name:   RIVA SHEPPARD
Title:  Secretary Title:  President and Chief Executive Officer
 
 
ATTEST:
VITAMIN FACTORY, INC.
(also known as The Vitamin Factory)
 
 
By:   /s/ Dina L. Masi
By:  /s/ E. Gerald Kay
Name:  DINA L. MASI   
Name:  E. GERALD KAY
Title:  Secretary Title:  President and Chief Executive Officer
 
 
 
PNC BANK, NATIONAL ASSOCIATION,
 
as Lender and as Agent
   
By:  /s/ Joanne Fu
Name:  JOANNE FU
Title:  Assistant Vice President
   
   340 Madison Avenue
   New York, New York  10173
                                                                                                                                    
                                                                                                                                                   


                                                                           
 
 
                                                                             
                                                                                    
                                                                                   

 
 
 
 


8
Exhibit 10.2
 
 
AMENDED AND RESTATED TERM NOTE
PNC Bank, National Association

 
$3,422,160
February __, 2016
Woodbridge, New Jersey

                     This Amended and Restated Term Note (this "Note") is executed and delivered under and pursuant to the terms of that certain Revolving Credit, Term Loan and Security Agreement dated as of June 27, 2012 (as amended, supplemented, restated or modified from time to time, the "Loan Agreement") by and among INTEGRATED BIOPHARMA, INC. , a corporation organized under the laws of the State of Delaware ("Integrated"), InB:MANHATTAN DRUG COMPANY, INC ., a corporation organized under the laws of the State of New York ("MD "), AGROLABS, INC. , a corporation organized under the laws of the State of New Jersey ("AL"), IHT HEALTH PRODUCTS, INC. , a corporation organized under the laws of the State of Delaware (IHT"), VITAMIN FACTORY, INC. , a corporation organized under the laws of the State of Delaware ("Vitamin") and IHT PROPERTIES CORP., a corporation organized under the laws of the State of Delaware ("IHTP) (Integrated, MD, AL, IHT, Vitamin and IHTP each a "Borrower", and collectively "Borrowers") and PNC BANK, NATIONAL ASSOCIATION, a national banking association organized under the laws of the United States of America ("PNC"), the various financial institutions named therein or which hereafter become a party thereto (together with PNC collectively, "Lenders"), and PNC as agent for Lenders (in such capacity, "Agent").  Capitalized terms not otherwise defined herein shall have the meanings provided in the Loan Agreement.

FOR VALUE RECEIVED, Borrower hereby promise to pay to the order of PNC, at the office of Agent located at PNC Bank Center, Two Tower Center, East Brunswick, New Jersey 08816, or at such other place as Agent may from time to time designate to Borrower in writing:

(i)  the principal sum of THREE MILLION FOUR HUNDRED TWENTY-TWO THOUSAND ONE HUNDRED SIXTY DOLLARS AND 00/100 ($3,422,160.00) shall be paid in eighty-four (84) consecutive monthly principal installments, the first eighty-three (83) of which shall be in the amount of $40,740.00 commencing on the first Business Day of March, 2016, and continuing on the first Business Day of each month thereafter, with a final payment of any unpaid balance of principal and interest payable on the first Business Day of February, 2023, all as more particularly described in the Loan Agreement, and subject to mandatory prepayment and acceleration upon the occurrence of an Event of Default under the Loan Agreement or earlier termination of the Loan Agreement pursuant to the terms thereof; and

(ii) interest on the principal amount of this Note from time to time outstanding until such principal amount is paid in full at the Term Loan Rate in accordance with the provisions of the Loan Agreement.  In no event, however, shall interest exceed the maximum interest rate permitted by law.  Upon and after the occurrence of an Event of Default, and during the
 
 
 
1


 
continuation thereof, interest shall be payable at the Default Rate in accordance with the Loan Agreement;

(iii) notwithstanding anything to the contrary herein, in the Loan Agreement and/or in any Other Document, all outstanding principal and interest hereunder is due and payable on the Termination Date.

This Note is a "Term Note" referred to in the Loan Agreement and is secured, inter   alia , by the Liens granted pursuant to the Loan Agreement and the Other Documents, is entitled to the benefits of the Loan Agreement and the Other Documents and is subject to all of the agreements, terms and conditions therein contained.

This Note is intended to amend, restate and replace a certain Term Note issued by the Borrowers in favor of the Lenders dated June 27, 2012 in the original principal amount of $3,727,000.

This Note is subject to mandatory prepayment, and may be voluntarily prepaid, in whole or in part, in each case on the terms and conditions set forth in the Loan Agreement.

If an Event of Default under Section 10.7 or 10.8 of the Loan Agreement shall occur and be continuing, then this Note shall immediately become due and payable, without notice, together with reasonable attorneys' fees if the collection hereof is placed in the hands of an attorney to obtain or enforce payment hereof.  If any other Event of Default shall occur and be continuing under the Loan Agreement or any of the Other Documents, which is not cured within any applicable grace period, then this Note may, as provided in the Loan Agreement, be declared to be immediately due and payable, without notice, together with reasonable attorneys' fees, if the collection hereof is placed in the hands of an attorney to obtain or enforce payment hereof.

Lenders may at any time pledge or assign all or any portion of their rights under the Loan Agreement or the Other Documents (including any portion of this Note) to any of the twelve (12) Federal Reserve Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341.  No such pledge or assignment or enforcement thereof shall release Lenders from their obligations under the Loan Agreement or any of the Other Documents.

This Note shall be construed and enforced in accordance with the laws of the State of New York.

The Obligations evidenced by this Note are the same Obligations set forth in Section 2.4 of the Loan Agreement.

Borrowers expressly waive any presentment, demand, protest, notice of protest, or notice of any kind except as expressly provided in the Loan Agreement.

SIGNATURE PAGES TO FOLLOW
 
 
 
 
2

 
 
 
ATTEST:
INTEGRATED BIOPHARMA, INC.
 
 
By:  /s/ Dina L. Masi
By:  /s/ E. Gerald Kay
Name:  DINA L. MASI   
Name:  E. GERALD KAY
Title:  Secretary Title:  President and Chief Executive Officer
 
 
ATTEST:
InB:MANHATTAN DRUG COMPANY, INC.
 
 
By:  /s/ Dina L. Masi
By:  /s/ Riva Sheppard
Name:  DINA L. MASI   
Name:  RIVA SHEPPARD
Title:  Secretary Title:  President and Chief Executive Officer
 
 
ATTEST:
AGROLABS, INC.
 
 
By:   /s/ Dina L. Masi
By:  /s/ Christina Kay
Name:  DINA L. MASI   
Name:  CHRISTINA KAY
Title:  Secretary Title:  President and Chief Executive Officer
 
 
ATTEST:
IHT HEALTH PRODUCTS, INC.
 
 
By:   /s/ Dina L. Masi
By:  /s/ Christina Kay
Name:  DINA L. MASI   
Name:  CHRISTINA KAY
Title:  Secretary Title:  President and Chief Executive Officer
 
 
 ATTEST:  VITAMIN FACTORY, INC.
 
 
By:   /s/ Dina L. Masi
By:  /s/ E. Gerald Kay
Name:  DINA L. MASI   
Name:  E. GERALD KAY
Title:  Secretary Title:  President and Chief Executive Officer
 
 
ATTEST:
IHT PROPERTIES CORP.
 
 
By:   /s/ Dina L. Masi
By:  /s/ Riva Sheppard
Name:  DINA L. MASI   
Name:   RIVA SHEPPARD
Title:  Secretary Title:  President and Chief Executive Officer
 
 
 
 
 
 
 
 
3

Exhibit 10.3
FIRST AMENDMENT TO PROMISSORY NOTE
This FIRST AMENDMENT TO PROMISSORY NOTE, dated as of February 19, 2016 (this " Amendment "), among INTEGRATED BIOPHARMA, INC., a Delaware corporation (the " Company "), INB:MANHATTAN DRUG COMPANY, INC., a New York corporation (" MDC ", and together with the Company, collectively,  the " Loan Parties ", and each, a " Loan Party "), and VITAMIN REALTY ASSOCIATES, LLC, a New Jersey limited liability company (" Vitamin ").
W I T N E S S E T H
WHEREAS, reference is made to the Promissory Note the, dated June 27, 2012, made by the Loan Parties and payable to the order of Vitamin in the original principal amount of $685,985.61 (the " Note ");
WHEREAS, capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Note;
WHEREAS, the Loan Parties have requested that Vitamin amend the Note, as provided herein; and
WHEREAS, Vitamin is willing to amend the Note as set forth below, all on and subject to the terms set forth herein.
NOW, THEREFORE, in consideration of the premises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:
1.              Amendment to the Note .  The definition of the term "Maturity Date" appearing in Section 1(a) of the Note is hereby amended by deleting such term in its entirety and inserting the following in replacement thereof:
" Maturity Date " means  February 29, 2020.
2.              Representations and Warranties .  Each Loan Party hereby represents and warrants that:
(a)              No Event of Default has occurred or is continuing.

(b)              Such Loan Party is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, and has all requisite power and authority to carry on its business as now conducted.

(c)              The execution and delivery of this Amendment, and the performance by such Loan Party of its obligations under this Amendment are within such Loan Party's organizational powers and have been duly authorized by all necessary organizational actions and, if required, actions by equity holders.
(d)              This Amendment has been duly executed and delivered by such Loan Party and this Amendment constitutes a legal, valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.
 
 

 
3.              Effectiveness Conditions.   This Amendment and the amendment set forth in Section 1 , shall be effective as of the date hereof when the following condition precedent is satisfied (the " Amendment Effective Date "): Vitamin shall have received an original counterpart of this Amendment, duly executed by each of the parties hereto.
4.              Acknowledgment, Ratification and Reaffirmation .  Each Loan Party hereby:  (i) acknowledges, confirms, ratifies and affirms in all respects the Note (as amended by this Amendment); (ii) acknowledges, ratifies and affirms its respective obligations under the Note (as amended by this Amendment); and (iii) acknowledges, confirms and agrees that all of the terms and provisions of the Note (as amended by this Amendment) remain in full force and effect.
5.              References .  From and after the Amendment Effective Date, any and all references in the Note to "this Note", "hereof", "hereunder" or words of like import referring to the Note shall mean the Note as amended hereby.
6.              Limited Effect.   The amendment set forth in Section 1 hereof is limited precisely as written and shall not be deemed to (a) be a waiver of or amendment to any other term or condition of the Note, or (b) prejudice any right which Vitamin may now have or may have in the future under or in connection with the Note.  The Note (as amended by this Amendment) is hereby ratified and confirmed in all respects, and shall continue in full force and effect.
7.              Amendment.   This Amendment may be amended or modified only by an instrument signed by each of the parties hereto.
8.              Governing Law .  This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts made and to be performed entirely within the State of New York.
9.              WAIVER OF JURY TRIAL .  EACH PARTY HERETO WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE RIGHT TO TRIAL BY JURY.
10.              Counterparts .  This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.  Delivery of an executed counterpart of a signature page of this Amendment by telecopy, emailed pdf. or any other electronic means that reproduces an image of the actual executed signature page shall be effective as delivery of a manually executed counterpart of this Amendment.
11.              Severability . Any provision of this Amendment held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions thereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.
 [SIGNATURE PAGES FOLLOW]
 
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IN WITNESS WHEREOF, each of the parties hereto has executed this Amendment by its duly authorized officers, all as of the day and year first above written.
 
 
INTEGRATED BIOPHARMA, INC.
   
   
 
By:  /s/ Dina Masi
 
Name:  Dina Masi
 
Title:  CFO
   
   
   
 
INB:MANHATTAN DRUG COMPANY, INC.
   
   
 
By:  /s/ Riva Sheppard
 
Name:  Riva Sheppard
 
Title:  President

 
 
 
[Signature Page to First Amendment to Promissory Note (Vitamin Note)]



 
 
VITAMIN REALTY ASSOCIATES, LLC
 
 
 
By:  /s/ E. Gerald Kay
 
Name:  E. Gerald Kay
 
Title:  Partner
   
 
 
 
 

[Signature Page to First Amendment to Promissory Note (Vitamin Note)]
Exhibit 10.4

FIRST AMENDMENT TO NOTES
This FIRST AMENDMENT TO NOTES, dated as of February 19, 2016 (this " Amendment "), among INTEGRATED BIOPHARMA, INC., a Delaware corporation (the " Company "), AGROLABS, INC., a New Jersey corporation (" AgroLabs "), IHT HEALTH PRODUCTS, INC., a Delaware corporation (" IHT Health "), IHT PROPERTIES CORP., a Delaware corporation (" IHT Properties "), VITAMIN FACTORY, INC., a Delaware Corporation (" Vitamin "), INB:MANHATTAN DRUG COMPANY, INC., a New York corporation (" MDC ", and together with AgroLabs, IHT Health, IHT Properties and Vitamin, collectively, the " Company Subsidiaries ", and each, a " Company Subsidiary ", and together with the Company, collectively the " Loan Parties ", and each, a " Loan Party "), and CD FINANCIAL, LLC, a Florida limited liability company (" CD Financial ").
W I T N E S S E T H
WHEREAS, reference is made to the following: (i) the Amended and Restated Convertible Secured Promissory Note, dated June 27, 2012, made by the Company and payable to the order of CD Financial in the original principal amount of $5,350,000 (the " Consolidated Note "); and (b) the Promissory Note, dated June 27, 2012, made by the Company and payable to the order of CD Financial in the original principal amount of $1,714,000 (the " Liquidity Note ", and together with the Consolidated Note, collectively, the " Notes ").
WHEREAS, capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Notes or the Securities Purchase Agreement (as defined in each of the Notes), as applicable;
WHEREAS, the Company has requested that CD Financial amend each of the Notes, as provided herein; and
WHEREAS, CD Financial is willing to amend each of the Notes as set forth below, all on and subject to the terms set forth herein.
NOW, THEREFORE, in consideration of the premises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:
1.              Amendment to the Consolidated Note .  The definition of the term "Maturity Date" appearing in Section 1(a) of the Consolidated Note is hereby amended by deleting such term in its entirety and inserting the following in replacement thereof:
" Maturity Date " means February 29, 2020.
2.              Amendment to the Liquidity Note .  The definition of the term "Maturity Date" appearing in Section 1(a) of the Liquidity Note is hereby amended by deleting such term in its entirety and inserting the following in replacement thereof:
" Maturity Date " means February 29, 2020.
3.              Representations and Warranties .  Each Loan Party hereby represents and warrants that:
(a)              No Event of Default has occurred or is continuing.
 
 


(b)              Such Loan Party is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, and has all requisite power and authority to carry on its business as now conducted.

(c)              The execution and delivery of this Amendment, and the performance by such Loan Party of its obligations under this Amendment and the Transaction Documents (as amended by this Amendment) are within such Loan Party's organizational powers and have been duly authorized by all necessary organizational actions and, if required, actions by equity holders.
(d)              This Amendment has been duly executed and delivered by such Loan Party and this Amendment and the other Transaction Documents (as amended by this Amendment) to which such Loan Party is a party each constitute a legal, valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.
4.              Effectiveness Conditions.   This Amendment and the amendments set forth in Sections 1 and 2 hereof shall be effective as of the date hereof when the following condition precedent is satisfied (the " Amendment Effective Date "): CD Financial shall have received an executed counterpart of this Amendment, duly executed by each of the parties hereto.
5.              Acknowledgment, Ratification and Reaffirmation .  Each Loan Party hereby: (i) acknowledges, confirms, ratifies and affirms in all respects each Transaction Document (as amended by this Amendment) to which such Loan Party is party; (ii) acknowledges, ratifies and affirms its respective obligations, guarantees and security interests under each Transaction Document (as amended by this Amendment) to which is a party; and (iii) acknowledges, confirms and agrees that all of the terms and provisions of each Transaction Document (as amended by this Amendment) remain in full force and effect.
6.              References .
(a)              From and after the Amendment Effective Date, (i) any and all references in each Note to "this Note", "hereof", "hereunder" or words of like import referring to such Note shall mean such Note as amended hereby, and (ii) all references in any other Transaction Document or any other agreement, instrument or document executed and delivered in connection therewith to "Note" or "Notes", "thereto", "thereof", "thereunder" or words of like import referring to the Consolidated Note or the Liquidity Note, as applicable, shall mean each such Note as amended hereby.
(b)              This Amendment shall constitute a Transaction Document for all purposes of the Securities Purchase Agreement.
7.              Limited Effect.   The amendments set forth in Sections 1 and 2 hereof are limited precisely as written and shall not be deemed to (a) be a waiver of or amendment to any other term or condition of any Transaction Document, or (b) prejudice any right which CD Financial may now have or may have in the future under or in connection with any Transaction Document.  The Transaction Documents (as amended by this Amendment) are hereby ratified and confirmed in all respects, and shall continue in full force and effect.
8.              Amendment.   This Amendment may be amended or modified only by an instrument signed by each of the parties hereto.
 
 
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9.              Governing Law .  This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts made and to be performed entirely within the State of New York.
10.              WAIVER OF JURY TRIAL .  EACH PARTY HERETO WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE RIGHT TO TRIAL BY JURY.
11.              Counterparts .  This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.  Delivery of an executed counterpart of a signature page of this Amendment by telecopy, emailed pdf. or any other electronic means that reproduces an image of the actual executed signature page shall be effective as delivery of a manually executed counterpart of this Amendment.
12.              Severability . Any provision of this Amendment held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions thereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.
 [SIGNATURE PAGE FOLLOWS]
 
 
 
 
3

 
IN WITNESS WHEREOF, each of the parties hereto has executed this Amendment by its duly authorized officers, all as of the day and year first above written.
 
INTEGRATED BIOPHARMA , INC.
 
 
By:  /s/ Dina L. Masi
Name:   Dina L. Masi
Title:  CFO
 
AGROLABS, INC.
 
 
By:  /s/ Christina Kay
Name:  Christina Kay
Title:  President 

 
IHT HEALTH PRODUCTS, INC.
 
 
By:  /s/ Christina Kay
Name:  Christina Kay
Title:  President and CEO
 
IHT PROPERTIES CORP.
 
 
By:  /s/Riva Sheppard
Name:  Riva Sheppard
Title:  President and CEO
 
INB:MANHATTAN DRUG COMPANY, INC.
 
 
By:  /s/Riva Sheppard
Name:  Riva Sheppard
Title:  President and CEO
 
VITAMIN FACTORY, INC.
 
 
By:  /s/ E. Gerald Kay
Name:  E. Gerald Kay
Title:  President and CEO
 
 
[Signature Page to First Amendment to Notes (Consolidated Note and Liquidity Note)]
 

 
 
 
CD FINANCIAL, LLC
 
 
By:  /s/ William B. Milmoe
Name:  William B. Milmoe
Title:  Manager
 
 
[Signature Page to First Amendment to Notes (Consolidated Note and Liquidity Note)]