NOTE J – STOCKHOLDERS’ EQUITY

October and November 2010

Between October 2010 and November 2010, the Company raised $8,000,000 through the sale of 4,000,000 shares of common stock at $2.00 per unit. Additionally, each investor was issued a five-year warrant to purchase 4,000,000 shares of common stock at $2.20 per share. The Placement Agent was paid $530,000 and was issued five-year cashless exercise warrants to purchase 249,324 shares of the Company’s common stock at exercise prices ranging from $2.16 to $2.30 per share. The Company received net proceeds of $7,235,644 from this transaction.

Based upon the down round provisions from the August 2008 equity offering, the following resulted (see Note B – Fair Value of Financial Instruments relating to derivative financial liability):

January 2012 Units

On January 13, 2012, the Company raised net proceeds of approximately $9,036,000 after offering expenses of approximately $964,000 by issuing 15,385,000 shares of common stock at $0.65 per share and warrants to purchase 11,538,750 shares of common stock. The Company paid to the underwriter a fee of approximately $700,000. The common stock and warrants were sold together as units (the “Units”), each Unit consisting of one share of common stock and 0.75 of one warrant to purchase one share of common stock. Each warrant has an exercise price of $0.88 per share and will be exercisable after the first anniversary of issuance and will expire on the second anniversary date of issuance. The warrants will be registered using the effective shelf registration statement when the warrants are available for exercise. In the event the Company issues rights, options or warrants to holders of its common stock, the exercise price of the warrants may be adjusted for the anti-dilutive effects of such an issuance. The Company used its effective registration statement on Form S-3 for this offering.

This equity offering triggered the anti-dilution provisions applicable to all August 2008 equity offering and the following resulted (see Note B – Fair Value of Financial Instruments relating to derivative financial liability):

Stock-Based Compensation - Stock Options and Warrants

The Company accounts for options granted to employees by measuring the cost of services received in exchange for the award of equity instruments based upon the fair value of the award on the date of grant. The fair value of that award is then ratably recognized as expense over the period during which the recipient is required to provide services in exchange for that award. Options and warrants granted to consultants and other non-employees are recorded at fair value as of the grant date and subsequently adjusted to fair value at the end of each reporting period until such options and warrants vest, and the fair value of such instruments, as adjusted, is expensed over the related vesting period. Adjustments to fair value at each reporting date may result in income or expense, depending upon the estimate of fair value and the amount of expense recorded prior to the adjustment. The Company reviews its agreements and the future performance obligation with respect to the unvested options or warrants for its vendors or consultants. When appropriate, the Company will expense the unvested options or warrants at the time when management deems the service obligation for future services has ceased.

On August 12, 2008, the Company adopted the iBioPharma (former Parent’s) 2008 Omnibus Equity Incentive Plan (the “Plan”) for employees, officers, directors, or external service providers. Under the provisions of the Plan, the Company may grant options to purchase stock and/or make awards of restricted stock up to an aggregate amount of 10,000,000 shares. There are 4,490,000 options available for future issuance under the Plan. Options granted under the Plan may be either incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or non-statutory stock options at the discretion of the Board of Directors and as reflected in the terms of the written option agreement. Options granted under the Plan vest ratably at the end of each twelve month period and a three or five year period from the date of grant.

Stock-based compensation expense for options and warrants was recorded as follows:

The Company utilizes the Black-Scholes option pricing model to estimate the fair value of such instruments. The risk-free interest rate assumptions were based upon the observed interest rates appropriate for the expected term of the equity instruments. The expected dividend yield was assumed to be zero as the Company has not paid any dividends since its inception and does not anticipate paying dividends in the foreseeable future. The expected volatility was based upon historical volatility of the Company’s common stock. The Company routinely reviews its calculation of volatility based upon historical prices, expected changes in future volatility, the Company’s life cycle, its peer group, and other factors.

In November and December 2011, the Board of Directors modified the cancellation provision of previously issued options, permitting an option holder, upon termination without cause, to exercise the vested portion of an option post-termination for up to ten years after the grant date. Current period option awards granted also include this provision. Effective September 30, 2011, the Company ceased using the simplified method for share-based compensation expense and now estimates the expected term for each award to approximate its contractual term. Subsequent to September 30, 2011, the Company estimates the fair value of option awards, using the expected term for share-based compensation in its option-pricing model. The Company uses its historical stock price volatility consistent with the expected term of grant as the basis for its expected volatility assumption. The Company estimated the effect of the modification to be approximately $633,000. Such value was based upon the fair market value of the options prior to the modification and the fair market value after the modification. Accordingly, for the year ended June 30, 2012 the Company recorded a modification charge to research and development and to general and administrative expenses of approximately $17,000 and $552,000 respectively. The balance of $64,000 will be recorded over the remaining vesting period.

In May 2012, the Board of Directors modified an option agreement to change the terms to reinstate forfeited options for non-employee options. The Company estimated the effect of the modification to be approximately $35,000. Such value was based upon the fair market value of the options prior to the modification and the fair market value after the modification and will be expensed over the vesting terms. The amount that was recorded in research and development expense at June 30, 2012 was approximately $7,000 and the Company is required to mark to market in each reporting period the value of the option and record an increase or decrease in the expense at the end of each reporting date.

During the years ended June 30, 2012 and 2011, the Company granted options to members of the Board of Directors and Officers to purchase 960,000 and 1,910,000 shares of common stock, respectively. These options vest ratably on their anniversary each year from three to five years, expire in ten years from the date of grant, and have a weighted average exercise price of $1.90 and $2.54 per share, respectively. See Note K for related party transactions. During the years ended June 30, 2012 and 2011, the Company granted options to employees to purchase 200,000 and 230,000 shares of common stock, respectively. These options vest ratably on their anniversary each year for three years, expire in ten years from the date of grant, and have a weighted average exercise price of $1.37 and $2.51 per share, respectively.

On March 1, 2012, the Company’s CSO ceased his employment as CSO and instead became a consultant to the Company as its Chief Scientific Advisor. As of February 29, 2012, the former CSO had a prior outstanding option grant to purchase 500,000 shares of common stock of which 200,000 were vested. As compensation for his prospective role as Chief Scientific Advisor, the 300,000 unvested options that the former CSO had were allowed to continue to vest in accordance with the original terms of his option award agreement. The fair market value of this non-employee option award at the date of grant for the unvested options was $234,000, and will continue to be amortized over the vesting terms. The initial option was granted on February 25, 2010 with an exercise price of $0.87 per share, and expires in ten years subject to other vesting conditions. The remaining options will vest ratably on January 1, 2013 and on each of the two subsequent anniversary dates.

A summary of the changes in options outstanding during the years ended June 30, 2012 and 2011 is as follows:

The weighted average fair value of options granted during the years ended June 30, 2012 and 2011 were $1.56 and $1.98, respectively, on the date of grant using the Black-Scholes option pricing model with the following assumptions:

A summary of the changes in warrants outstanding during the years ended June 30, 2012 and 2011 is as follows:

The following assumptions were used to estimate fair value or share-based compensation awards:

The fair value of each warrant was estimated using the Black-Scholes option pricing model using the following assumptions:

The weighted average fair value of warrants granted during the years ended June 30, 2012 and 2011 were $0.71 and $1.29, respectively, on the date of grant.

In October 2011, the Company issued 100,000 warrants to purchase common stock at $2.00 per share to a consultant for investor relations services. The warrant has a term for two years and the fair market value at the date of grant was $0.71 per share using the Black-Scholes option pricing model.

In October 2010, the Company issued a warrant to a marketing development firm to purchase 300,000 shares of common stock at $1.38 per share that expire in five years that were fully vested. This warrant was cancelled and the Company reissued warrants with the same terms to purchase 75,000 shares of common stock at $1.38 per share. The reason for the reissuance of the warrants was to terminate the agreement. The Company accounted for the cancellation and reissuance of these warrants as a modification. As a result of this transaction, the difference between the estimated fair market value of the warrants at the date of modification was recorded to expense using the Black-Scholes option-model. For the years ended June 30, 2012 and 2011, the Company recorded an expense of approximately $0 and $204,000, respectively, in general and administrative expenses.

In July 2010, the Company issued a warrant to a financial advisor to purchase 500,000 shares of common stock at $1.10 per share that expire in ten years. The warrants vested monthly and the Company recorded the estimated value at each month and revalues the unvested warrants at each reporting period until such warrants are fully vested. The Company recorded an expense for the years ended June 20, 2012 and 2011 of approximately $18,000 and $874,000, respectively, to general and administrative expenses.