OPTIONS AND WARRANTS

12 Months Ended

Aug. 31, 2012

Notes to Financial Statements

Note 9 - OPTIONS AND WARRANTS

Stock Options

During November, 2007 the Board of Directors of the Company adopted and the stockholders at that time approved the 2007 Stock Plan (“the Plan”).  The Plan provides both for the direct award or sale of shares and for the granting of options to purchase shares.  Options granted under the plan may include qualified and non-qualified stock options.  The aggregate number of shares that may be issued under the plan shall not exceed 750,000 shares of common stock, and are issuable to directors, officers, and employees of the Company.  Awards under the plan will be granted as determined by Committees of the Board of Directors or by the Board of Directors.  The options will expire after 10 years or 5 years if the option holder owns at least 10% of the common stock of the Company.  The exercise price of a non-qualified option must be at least 85% of the market price on the date of issue.  The exercise price of a qualified option must be at least equal to the market price or 110% of the market price on the date of issue if the option holder owns at least 10% of the common stock of the Company.  

In November 2007, 200,000 stock options were granted with an exercise price equal to fair value at the date of grant.  The term of the options granted under the Plan could not exceed 10 years and the stock options granted were vested immediately.

 On August 1, 2008, we agreed to issue 30,000 stock options to certain board members for their services to the board.

On September 1, 2008 we granted 15,000 stock options to a certain officer and board member for his services performed as Chair of the Audit Committee and Chair of the Compensation Committee. The estimated value of the compensatory common stock purchase options granted to non-employees in exchange for services and financing expenses was determined using the Black-Scholes pricing model and the following assumptions: expected term of 10 years, a risk free interest rate of 3.97% to 4.40%, a dividend yield of 0% and volatility of 136.94% to 147.95%. On August 31, 2012, we cancelled 25,000 stock options that were issued to a certain board member.

During the years ended August 31, 2012 and 2011, the amount of the expense charged to operations for compensatory options granted in exchange for services was $-0- and $-0-, respectively.

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees and non-employees of the Company. These options were granted in lieu of cash compensation for services performed.

	Shares		Weighted Average Exercise Price
Outstanding, September 1, 2008		230,000	$	9.70
Granted		15,000		7.10
Expired/Cancelled		-		-
Exercised		-		-
Outstanding, year ended August 31, 2009		245,000		9.50
Granted		-		-
Expired/Cancelled		(200,000)		-
Exercised		-		-
Outstanding, year ended August 31, 2010		45,000		7.70
Granted		-		-
Expired/Cancelled		(20,000)		-
Exercised		-		-
Outstanding, year ended August 31, 2011		25,000	$	7.86

Granted	-		-
Expired/Cancelled	(25,000)		7.86
Exercised	-		-
Outstanding, period ended August 31, 2012	-0-	$	-0-
Exercisable at August 31, 2012	-0-	$	-0-

Stock Warrants

In September 2008, we entered into a subscription agreement with Richard Genovese and/or his affiliates (collectively “Genovese”) whereby Genovese purchased 100,000 shares of our common stock and 100,000 warrants with an exercise price of $2.00 for $150,000.

In November 2008, we borrowed $5,000 from a consultant to the Company which was payable by December 6, 2008.  The lender was to receive 200 shares of our common stock per month as interest and an additional consideration of 25,000 warrants with an exercise price of $0.25.  In February 2009 we repaid the principal and interest in full and no shares or warrants were issued.

On January 15, 2009 we entered into an agreement with Genovese whereby Genovese and/or his affiliates (collectively “Genovese”) advanced to the Company $250,000 for a convertible debenture (“Debenture”) for the aggregate principal amount of $250,000.  The Debenture was be non-interest bearing and matured on December 5, 2010.  At the holder’s sole discretion, the holder had the right to elect to convert the Debenture, in whole or in part into common shares of the Company at a conversion price of $0.10 per share.  As additional compensation, Genovese was issued a share purchase warrant certificate for 2,500,000 warrants with each warrant exercisable into one common share at $0.15 per share for a period of three years commencing from the date of the issuance of the warrant certificate.  The Company and Genovese further agreed to establish five (5) mutually agreed upon milestones to be attained no later than September 2009 with each milestone generally occurring approximately every forty five (45) days. In conjunction with the attainment of each individual milestone, Genovese agreed to advance to the Company an additional $250,000. In connection with each $250,000 advance, Genovese was issued an additional $250,000 Convertible Debenture. The Debentures were non-interest bearing and matured two years from the date of issuance of each subsequent debenture (“Subsequent Debentures”).

At the Holders’ sole discretion, the Holder had the right to elect to convert the Subsequent Debentures, in whole or in part, at any time prior to maturity, into common shares of the Company at a conversion price of $0.10 per share. As additional compensation, Genovese was issued a share purchase warrant certificate for 2,500,000 warrants with each warrant exercisable into one common share at $0.15 per share for a period of three years commencing from the date of the issuance of the warrant certificate for each Subsequent Debenture issued. We further agreed that (1) Genovese would be granted the right of first refusal/ right of participation in connection with any additional financing of the Company for two (2) years, (2) Genovese would be entitled to two board seats, (3) we would obtain directors and officers insurance, and (4) the parties would work together commencing December 2008 to address other matters. The Debenture was subsequently amended for an aggregate principal amount of $545,000.

 Additional Debentures for $455,000, $250,000, and $50,000 and $195,000 were issued during the year ended August 31, 2009.  In April 2009, the amount of convertible debentures available to be issued was increased by $255,000 for an aggregate of $1,750,000.    As of August 31, 2009 a total of $1,750,000 had been issued as Debentures.  On September 25, 2009 all of the $1,750,000 of debentures were converted into 17,500,000 common shares and 17,500,000 share purchase warrants exercisable at $0.15 per share remain unexercised, respective exercise periods thereof having been extended for an additional year from the original expiration dates.

In May 2009, we entered into a subscription agreement with Robert Kolson, pursuant to which Mr. Kolson purchased 75,000 shares of our common stock and 37,500 warrants with an exercise price of $3.00 for $150,000.

On October 30, 2009 we entered into a subscription agreement with Janspec Holdings Limited ("Janspec"), pursuant to which Janspec purchased 428,572 common shares and 428,572 warrants with an exercise price of $0.60 for $150,000.

On November 7, 2009 we entered into a subscription agreement with Peninsula Merchant Syndications Corp. ("Peninsula"), pursuant to which Peninsula purchased 285,715 shares of our common stock and 285,715 warrants with an exercise price of $0.60 for $100,000.

On November 13, 2009 we entered into a subscription agreement with Robert Kolson, pursuant to which Mr. Kolson purchased 285,715 shares of our common stock and 285,715 warrants with an exercise price of $0.60 for $100,000.

During the year ended August 31, 2012, the Company issued 400,000 warrants in connection with the sales of common stock and conversion of debt into common stock.  The fair value of the warrants in connection with the allocation of sale and conversion was $64,200.

	Warrants			Weighted Average Exercise Price
Outstanding, September 1, 2008		100,000		$	2.00
Granted		17,500,000			0.15
Expired/Cancelled		-			-
Exercised		-			-
Granted		37,500			3.00
Outstanding, year ended August 31, 2009		17,637,500			0.17
Expired/Cancelled		-			-
Exercised		-			-
Granted		1,000,002			0.60
Outstanding, year ended August 31, 2010		18,637,502			0.19
Granted		14,440,625			0.20
Expired/Cancelled		(37,500	)		3.00
Outstanding, September 1, 2011		33,040,627		$	0.19
Granted		400,000		$	0.25
Expired/Cancelled		(1,000,002	)	$	0.60
Exercised
Outstanding, period ended August 31, 2012		32,440,625		$	0.18
Exercisable, period ended August 31, 2012		32,440,625		$	0.18

	Warrants Outstanding						Warrants Exercisable
Year	Exercise  Price		Number of  Warrants Issued		Weighted Average Contractual Life (Years)		Number Exercisable		Weighted Average Exercise Price
2008	$	2.00		100,000		0.65		100,000		2.00
2009		0.15		*10,000,000		0.42		10,000,000		0.15
2009		0.15		*2,500,000		0.48		2,500,000		0.15
2009		0.15		*500,000		0.50		500,000		0.15
2009		0.15		*1,700,000		0.64		1,700,000		0.15
2009		0.15		*150,000		0.66		150,000		0.15
2009		0.15		*50,000		0.68		50,000		0.15
2009		0.15		*50,000		0.70		50,000		0.15
2009		0.15		*500,000		0.97		500,000		0.15
2009		0.15		*2,050,000		0.97		2,050,000		0.15
2011		0.30		6,600,625		3.25		6,600,625		0.30
2011		0.30		500,000		3.35		500,000		0.30
2011		0.10		6,840,000		3.75		6,840,000		0.10
2011		0.10		500,000		3.86		500,000		0.10
2012		0.25		400,000		4.21		400,000		0.25
Total				32,440,625				32,440,625

As of August 31, 2012, 1,000,002 of the Company's warrants issued and outstanding as of August 31, 2011 have expired.

* The 17,500,000 warrants (“2009 Warrants”) issued in conjunction with the 2009 Convertible Debentures contain an anti-dilution provision that states it is specifically agreed that in the event that the Company shall reduce the number of outstanding shares of Common Stock by combining such shares into a smaller number of shares, then, in such case, the then applicable Exercise Price per Warrant Share purchasable pursuant to the Warrant Certificate in effect at the time of such action will not be changed. On January 30, 2012, the Company extended respective exercise dates of the 2009 Warrants for one additional year from their original expiry dates.

The following table sets forth common stock equivalents (potential common stock) for the years ended August 31, 2012 and 2011 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:

	For the Years Ended  August 31,
	2012		2011
Plan Stock Options		-0-		25,000
Warrants		32,440,625		33,040,627
Convertible notes		-		-