NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Liquidity and Basis of Presentation

The Company has incurred significant losses and negative cash flows from operations since its spinoff from its Former Parent, Integrated Bio Pharma, Inc. in August 2008. As of June 30, 2012, the Company’s accumulated deficit was approximately $31,338,000 and had cash used in operating activities for the years ended June 30, 2012 and 2011 of approximately $6,010,000 and $5,338,000, respectively. The Company has historically financed its activities through the sale of common stock and warrants. Through June 30, 2012, the Company has dedicated most of its financial resources to investing in its iBioLaunch™ platform, advancing its intellectual property and general and administrative activities. Cash on hand as of June 30, 2012 was approximately $5,624,000 and is expected to support the Company’s activities through the end of the second calendar quarter of 2013.

These matters raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements were prepared under the assumption that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of that uncertainty.

The Company plans to fund its development and commercialization activities through the end of the second quarter of calender 2013 and beyond through milestone receipts from licensing arrangements including royalties and/or the sale of equity securities. The Company cannot be certain that such funding will be available on acceptable terms or available at all. To the extent that the Company raises additional funds by issuing equity securities, its stockholders may experience significant dilution. If the Company is unable to raise funds when required or on acceptable terms, it may have to: a) significantly delay, scale back, or discontinue the development and/or commercialization of one or more product candidates; b) seek collaborators for product candidates at an earlier stage than would otherwise be desirable and/or on terms that are less favorable than might otherwise be available; or c) relinquish or otherwise dispose of rights to technologies, product candidates, or products that it would otherwise seek to develop or commercialize itself and possibly cease operations.

In addition to the normal risks associated with a new business venture, there can be no assurance that the Company’s research and development will be successfully completed or that any product will be approved or commercially viable. The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, dependence on collaborative arrangements, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with Food and Drug Administration (“FDA”) and other governmental regulations and approval requirements.

Revenue Recognition

The Company recognizes revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the fees earned can be readily determined; and (iv) collectability of the fees is reasonably assured.

Commencing in February 2011, the Company recognized service revenue when earned.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates. The significant estimates are valuation and recovery of intangible assets, stock-based compensation expenses, valuation of derivative instruments and income taxes and valuation of income taxes.

Concentration of Credit Risk

The Company invests its excess cash to ensure both liquidity and safety of principal. Excess cash is invested in a strong financial grade institution to reduce the Company’s credit risk. At times, the Company’s cash balances may exceed federally insured limits.

The Company has an exposure to credit risk in its trade accounts receivable from sales of its services. The entire accounts receivable and service revenues are derived from one customer that is located in Brazil. The Company invoices the customer in U.S. dollars.

The Company relies on the Center for Molecular Biotechnology of Fraunhofer USA, Inc. (“FhCMB”) to perform the majority of its research and development.

Research and Development

Research and development costs primarily consist of salaries, benefits, research contracts for the advancement of product development, stock-based compensation, and consultants. The Company expenses all research and development costs in the periods in which they are incurred.

Stock-Based Compensation

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period. The grant-date fair value of employee share options is estimated using the Black-Scholes option pricing model adjusted for the unique characteristics of those instruments.

Compensation expense for options and warrants granted to non-employees is determined by the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for options granted to non-employees is measured each period as the underlying options or warrants vests.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. Tax benefits are recognized when it is probable that the deduction will be sustained. A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain. As of June 30, 2012 and 2011, the Company had recognized a valuation allowance to the full extent of our net deferred tax assets since the likelihood of realization of the benefit does not meet the more likely than not threshold.

The Company files a U.S. Federal income tax return as well as returns for various states. The Company’s income taxes have not been examined by any tax jurisdiction since its spin off in August 2008. Uncertain tax positions taken on our tax returns will be accounted for as liabilities for unrecognized tax benefits. The Company will recognize interest and penalties, if any, related to unrecognized tax benefits in general and administrative expenses in the Statements of Operations. There were no liabilities recorded for uncertain tax positions at June 30, 2012 or 2011. The open tax years, subject to potential examination by the applicable taxing authority, for the Company are 2008-2011.

Loss Per Share

Basic loss per share is computed by dividing the net loss allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the additional potential dilution that could occur if options or warrants were exercised or converted into common stock, using the treasury stock method. Since the Company incurred a net loss in each of those periods, diluted loss per share for the years ended June 30, 2012 and 2011, were the same as basic loss per share. There were 26,450,796 and 12,298,607 options and warrants for the years ended June 30, 2012 and 2011, respectively, that were excluded from the calculation of dilutive earnings per share since they were anti-dilutive.

The following table summarizes the number of common shares excluded from the calculations of weighted average common shares outstanding for the years ended June 30, 2012 and 2011:

Fair Value of Financial Instruments

The Company’s financial instruments primarily include cash, accounts receivable, other receivables, other current assets and accounts payable. Due to the short-term nature of cash, accounts receivable, other receivables, current assets and accounts payable, the carrying amounts of these assets and liabilities approximate their fair value.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company categorizes its derivative financial instrument liability in Level 2 of the hierarchy. The derivative financial liability relating to a warrant with an anti-dilution feature is valued using the Black-Scholes option pricing model. The fair value of the derivative financial liability is based principally on Level 2 inputs. For this liability, the Company developed its own assumptions based on observable inputs or available market data to support the fair value.

The following table sets forth the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis, by input level, in the balance sheets at June 30, 2012 and 2011:

The valuations were determined using Level 2 observable inputs, as described in Note G (derivative financial liabilites).

The reconciliation of the derivative financial liability measured at fair value on a recurring basis using observable inputs (Level 2) is as follows:

Derivatives and Hedging-Contracts in Entity’s Own Equity

In accordance with the provisions of Accounting Standards Codification (“ASC”) 815 “Derivatives and Hedging” the embedded August 2008 warrants are not considered to be indexed to our stock. As a result of the anti-dilution provision per the warrant agreement from the August 2008 equity offering the August 2008 warrants were required to be accounted for as a derivative financial liability and have been recognized as a liability on the balance sheets. The fair value of the derivative financial liability is determined using the Black-Scholes option pricing model and is affected by changes in inputs to that model including the Company’s stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. The derivative financial liability is subject to remeasurement at each balance sheet date and any changes in fair value is recognized as a component in other income (expenses).

Fixed Assets

Fixed assets are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful life of the related assets, which is three or five years.

Intangible Assets

The Company accounts for intangible assets at their historical cost and records amortization utilizing the straight-line method based upon their estimated useful lives. Intellectual property is amortized over a period from 18 to 23 years and patents over 10 years. The Company reviews the carrying value of its intangible assets for impairment whenever events or changes in business circumstances indicate the carrying amount of such assets may not be fully recoverable. Evaluating for impairment requires judgment, including the estimation of future cash flows, future growth rates and profitability and the expected life over which cash flows will occur. Changes in the Company’s business strategy or adverse changes in market conditions could impact impairment analyses and require the recognition of an impairment charge equal to the excess of the carrying value over its estimated fair value.

Reclassification

Certain items in the 2011 Financial Statements have been reclassified to conform to the 2012 presentation. The primary reclassification relates to the presentation of stock-based compensation expense in the Statements of Cash Flows.

Recently Adopted Accounting Pronouncements

In May of 2011, ASC Topic 820, Fair Value Measurement was amended to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles.