OPTIONS, WARRANTS AND STOCK-BASED COMPENSATION

3 Months Ended

Sep. 30, 2012

Options Warrants and Stock Based Compensation [Abstract]

Options, Warrants and Stock-Based Compensation [Text Block]

8.  OPTIONS, WARRANTS AND STOCK-BASED COMPENSATION

2011 Equity Incentive Plan

On March 4, 2011, the Board of Directors adopted the 2011 Equity Incentive Plan and reserved up to 50,000,000 shares of common stock for issuance to employees, directors and consultants, subject to stockholder approval.  On February 17, 2012, the stockholders approved the plan.  The plan also provides for automatic annual increases on January 1st of each year (commencing on January 1, 2012 and ending on January 1, 2021), in the aggregate number of shares reserved equal to the lesser of (a) five percent of the total number of shares outstanding on December 31st of the preceding year or (b) 3,000,000 shares.  As of January 1, 2012, the number of shares reserved under the plan automatically increased to 53,000,000.  Under the plan, the Board may grant stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other stock awards.

Valuation and amortization method. The fair value of each stock award is estimated on the grant date using the Black-Scholes option-pricing model.  The estimated fair value of employee stock options is amortized to expense using the straight-line method over the vesting period.

Volatility. The Company estimates volatility based on the Company’s historical volatility.

Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption.

Expected term. The expected term of stock options granted is based on an estimate of when options will be exercised in the future.  The Company applied the simplified method of estimating the expected term of the options, as described in the SEC’s Staff Accounting Bulletins 107 and 110, as the Company has had a significant change in its business operations and the historical experience is not indicative of the expected behavior in the future.  The expected term, calculated under the simplified method, is applied to groups of stock options that have similar contractual terms.  Using this method, the expected term is determined using the average of the vesting period and the contractual life of the stock options granted.

Forfeitures.   Stock-based compensation expense is recorded only for those awards that are expected to vest.  FASB ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option.  An annual forfeiture rate of 0% was applied to all unvested options as of September 30, 2012 which was management’s best estimate.  This analysis will be re-evaluated semi-annually and the forfeiture rate will be adjusted as necessary.  Ultimately, the actual expense recognized over the vesting period will be for only those shares that vest.

The following weighted average assumptions were used to estimate the fair value of stock options using the Black-Scholes option pricing model:

	Three Months	Three Months
	Ended	Ended
	September 30, 2012	September 30, 2011
Risk-free interest rate	0.62% - 0.68%	0.96%
Expected dividend yield	—	—
Expected term	4.5 - 5.5 years	5.5 years
Forfeiture rate	0%	0%
Expected volatility	244.90% - 246.91%	122.33%

A summary of option activity as of September 30, 2012 and for the three months then ended is presented below:

Options	Shares		Weighted- Average Exercise Price	Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at July 1, 2012	46,690,000	$	0.062	8.83 years	$	588
Granted	240,000		0.008
Exercised	—	$	—
Forfeited or expired	—	$	—
Outstanding at September 30, 2012	46,930,000	$	0.062	8.59 years	$	2,472
Exercisable at September 30, 2012	16,634,667	$	0.058	8.62 years	$	—

On August 6, 2012, the Board of Directors granted stock options to purchase 120,000 shares of common stock at an exercise price of $0.0067.  The weighted average fair value of the options on the grant date was estimated at $0.0067 per share. These options vest over one year and have a contractual term of 10 years.

On September 6, 2012, the Board of Directors granted stock option to purchase 120,000 shares of common stock at an exercise price of $0.009.  The weighted average fair value of the options on the grant date was estimated at $0.009 per share. These options vest over one year and have a contractual term of 10 years.

Stock-based compensation expense for options for the three months ended September 30, 2012 and 2011 was $189,128 and $171,147, respectively.  At September 30, 2012, unrecognized total compensation cost related to all unvested awards of $894,849 is expected to be recognized over a weighted average period of 1.55 years.

On March 15, 2012, the Company agreed to issue a restricted stock award of 2,500,000 shares of common stock to a consultant for services to be rendered with 1,250,000 shares vesting on June 15, 2012 and 1,250,000 shares vesting on September 15, 2012.  Consulting expense recorded for the restricted stock award was $20,833 for the three months ended September 30, 2012.

At September 30, 2012 there were 3,570,000 shares reserved for future grants.

Warrants

No warrants were exercised during the three months ended September 30, 2012.    During the three months ended September 30, 2012, the Company issued 320,000 warrants in connection with convertible notes payable (see Note 4).  The warrants have an exercise price of $0.01 per share, are immediately exercisable and expire in five years. The Company has reserved 2,395,000 shares of common stock for the exercise of outstanding warrants.  

The following table summarizes the warrants outstanding at September 30, 2012:

	Exercise price	Number	Expiration Date
$	5.85	75,000	08/03/2013
	0.01	500,000	02/10/2017
	0.01	1,000,000	02/17/2017
	0.01	500,000	04/18/2017
	0.01	20,000	08/15/2017
	0.01	50,000	08/20/2017
	0.01	250,000	09/14/2017
		2,395,000

The weighted average grant date fair value of the warrants granted during the three months ended September 30, 2012 was $0.006 per share.  The warrants were valued using the Black-Scholes option pricing model.  The following assumptions were used for warrants issued during the three months ended September 30, 2012; risk free interest rates of 0.60% - 0.72%; expected dividend yield of 0%; expected term of 5 years and expected volatility of  244.07% - 248.52%.  The weighted average remaining life of the warrants at September 30, 2012 was 4.4 years.  At September 30, 2012, all warrants are exercisable and the aggregate intrinsic value for the warrants outstanding is $8,816. 

Stock Award Plan

Under the 2006 Stock Award Plan the Company may award shares of common stock to employees, officers, directors, consultants and advisors and may make grants subject to such terms and conditions as determined by the Board of Directors.  As of September 30, 2012, the Company has 111,845 shares available for future grant under the Plan.