Note 10 - Derivative Liabilities

3 Months Ended

Mar. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 10. DERIVATIVE LIABILITIES

During fiscal 2010, the Company issued shares of Series C Preferred Stock and Series D Preferred Stock and associated warrants.  The terms of the Series C Preferred Stock and Series D Preferred Stock and associated warrants include a subsequent financing reset provision which lapsed in July 2011 and March 2011, respectively.  Additionally, holders of the warrants issued pursuant to Series D have a right to net settle their warrants in cash if there are not enough shares of common stock authorized to cover the issuance of shares pursuant to the exercise of such warrants.  The net settlement effective price per warrant is the difference between the fair value as defined and the effective exercise price.  Furthermore, the maximum number of shares required to be delivered during the period under which the warrants issued pursuant to the Series D transaction, together with all outstanding convertible debt, stock options, warrants, and Series A, Series C and Series D Preferred shares, exceeded the amount of authorized shares at September 29, 2010, their date of issuance.  Furthermore, the warrants issued in connection with the sale of the Company’s common stock in December 2010 also exceeded the amount of authorized shares at the date of issuance.

During April 2011, the Company’s shareholders approved an increase of its authorized shares of common stock from 50,000,000 to 150,000,000 and its authorized shares of preferred stock from 200,000 to 10,000,000. Additionally, the subsequent financing reset provision of Series D Preferred Stock  and related warrants lapsed in March 2011.  Furthermore, the Company believes that, as of March 31, 2011, the likelihood that it will enter into any financing terms which would trigger resets of the conversion price of the Series C Preferred Stock and of the exercise price of the related warrants prior to July 2011 was remote.

The Company accounted for the embedded conversion features included in its Series C Preferred Stock and Series D Preferred Stock as well as the related warrants and the warrants issued in connection with the issuance of the Company’s shares of common stock during December 2010 as derivative liabilities through March 31, 2011. At March 31, 2011, all such financial instruments were reclassified as equity contracts.

There were no derivative liabilities at March 31, 2012, and September 30, 2011.

The fair value of the embedded conversion features and warrants outstanding and issued as of December 31, 2011 and at their date of issuance during the three-month period ended December 31, 2010 were based on the Company’s quoted traded price and the Black Scholes method, respectively, at each measurement date.

The fair value of the derivative instruments were based on the following assumptions:

	March 31, 2011 (prior to reclassification)	Issuance during the six-month period ended March 31, 2011	September 30, 2010
Embedded Conversion Features:
Exercise price	$0.50	N/A	$0.40
market value	$0.50	N/A	$0.40
Warrants:
Effective Exercise price	$0.50	$0.50	$0.50
Effective Market price	$0.48-$0.50	$0.34-$0.35	$0.34-$0.40
Volatility	75%	75%	76%
Risk-free interest	2.24%	2.06%	1.27%
Terms	4.25-4.75 years	5 years	5 years
Expected dividend rate	0%	0%	0%

The fair value of derivative liabilities increased by $1.6 million between measurement dates during the six-month period ended March 31, 2011.  Such increase is recorded as other expense in the accompanying statement of operations.

The reclassification of the Series C and Series D Preferred Stock and aforementioned warrants, previously accounted for as liability, to equity contracts, including the fair value of derivative liabilities of $6,465,000 and the carrying value of the Series C and Series D Preferred Stock of $513,000 resulted in the following increases at March 31, 2011:

Series C and Series D Preferred Stock	$	6,156,000
Additional paid-in capital		846,000