STOCKHOLDERS’ EQUITY

6 Months Ended

Oct. 31, 2011

Notes to Financial Statements

STOCKHOLDERS’ EQUITY

During the six months ended October 31, 2011:

(1)The Company issued 12,455 shares of its common stock as compensation. These shares had a fair value at the grant date of $28,940.

(2)The Company recorded $23,398 for the fair value of restricted stock grants issued to nonemployee directors.

(3)The Company issued 7,333 shares of common stock from the cashless exercise of 40,000 stock options.

(4)The Company issued 366,379 shares of common stock from the exercise of warrants. The shares were issued at an exercise price of $1.69 for a payment of $619,181.

(5)As further discussed below, the company recorded $50,905 for the computed fair value of options issued to employees, nonemployee directors, and consultants.

(6)The Company issued 78,197 shares of common stock for the payment of interest accrued on convertible notes. The shares were issued at a conversion price of $2.255 for the payment of $176,333 interest payable on convertible notes with a gross carrying value of $4,600,000.

(7)As further discussed in note 5 above, the Company recorded $1,960,497 for the computed fair value of 2,172,949 warrants issued with convertible notes issued on June 29, 2011 and July 1, 2011. In addition, the Company recorded $2,939,504 for the computed beneficial conversion features for the intrinsic value of the notes at the commitment date. The total value allocated to the warrants and beneficial conversion features was approximately $4.9 million and was recorded as additional paid in capital.

During the six months ended October 31, 2010:

(1)The Company received $4,401,400 (net of closing costs) from the issuance of 1,724,138 shares of common stock as part of the registered direct offering (the "Offering") described below.

(2)The Company received $500,000 (net of closing costs), from the issuance of 133,334 shares of restricted common stock in accordance with the Securities Purchase Agreement with Vatea Fund. An additional 53,334 shares of common stock were issued as compensation for services provided in closing the Securities Purchase Agreement.

(3)The Company issued 2,018 shares of common stock from the cashless exercise of 6,333 stock options.

(4)The Company issued 2,350 shares of common stock for the conversion of notes payable with a gross carrying value of $8,707, at a conversion price of $3.705 per share. These notes included a discount totaling $868, and thus had a net carrying value of $7,839. The unamortized discount of $868 was recognized as interest expense upon conversion. The remaining unamortized discount of $4,859 was also recognized as interest expense.

(5)The Company issued 17,782 shares of its common stock as compensation. These shares had a fair value at the grant date of $53,250.

(6)The company recorded $91,931 for the computed fair value of options issued to employees, nonemployee directors, and consultants.

Warrants

On June 29 and July 1, 2011, the Company issued 133,038 and 2,039,911, respectively, warrants to purchase restricted common stock as part of the Offering further described in Note 5 above.

On August 2, 2011, the Company received $619,181 and issued 366,379 shares of common stock for the exercise of certain outstanding warrants. The warrants were issued in May 2010 and had an exercise price of $1.69, as adjusted for anti-dilution provisions triggered by the Offering further described in Note 5 above.

The following table summarizes its warrant activity for the six months ended October 31, 2011:

	Warrants		Weighted Average Exercise Price
Outstanding at April 30, 2011	3,581,347		$                              3.90
Granted	2,172,949		2.53
Exercised	(366,379)		1.69
Forfeited	(636,144)		3.68
Other	232,082	(1)	2.15	(1)
Outstanding at October 31, 2011	4,983,855		$                              2.82	(2)

(1)The Company has a class of warrants outstanding that contain an anti-dilution clause requiring a repricing in the event of a capital raise whereby the equity shares sold were priced below the exercise price of the outstanding warrants. Subsequent to the convertible note issuance in June 2011, the repricing of these warrants resulted in an increase of 232,082 potentially issuable shares. The exercise price of these warrants was $2.90 prior to the issuance.

(2)The Company has a class of warrants outstanding that contain a price protection clause requiring a repricing in the event of a capital raise whereby the equity shares sold were priced below the exercise price of the outstanding warrants. Subsequent to the convertible note issuance in June 2011, resulted in repricing these warrants to $2.15. The exercise price of these warrants was $5.32 prior to the issuance.

1999 Amended Stock Plan

In October 2000, the Company adopted the 1999 Stock Plan (the "Plan"), as amended and restated on June 17, 2008. Under the Plan, with the approval of the Compensation Committee of the Board of Directors, the Company may grant stock options, restricted stock, stock appreciation rights and new shares of common stock upon exercise of stock options. On September 30, 2011, the Company’s shareholders approved amendment 1 to the Plan which increased the amount of shares authorized for issuance under the Plan to 6,000,000, up from 800,000 previously authorized. Stock options granted under the Plan may be either incentive stock options ("ISOs"), or nonqualified stock options ("NSOs"). ISOs may be granted only to employees. NSOs may be granted to employees, consultants and directors. Stock options under the Plan may be granted with a term of up to ten years and at prices no less than fair market value for ISOs and no less than 85% of the fair market value for NSOs. To date, stock options granted generally vest over one to three years and vest at a rate of 34% upon the first anniversary of the vesting commencement date and 33% on each anniversary thereafter. As of October 31, 2011 we had 5,462,484 shares of common stock available for grant under the Plan.

Plan Stock Options and Restricted Stock

Stock option and restricted stock activity under the Plan for the six months ended October 31, 2011 is as follows:

			Outstanding Options
	Shares Available for Grant		Number of Shares			Weighted Average Exercise Price
Balances, at April 30, 2011	243,832		515,071		$	4.54
Options granted	(43,000	)	43,000		$	2.03
Options cancelled	3,556		(3,556	)	$	5.81
Restricted stock granted	(132,900	)
Restricted stock cancelled	7,322
Balances, at July 31, 2011	78,810		554,515		$	4.33
Additional shares reserved	5,200,000
Options granted	(2,500	)	2,500		$	2.50
Options exercised			(7,333	)	$	1.96
Options cancelled	95,334		(95,334	)	$	3.62
Restricted stock granted	(35,412	)
Restricted stock cancelled	126,252
Balances, at October 31, 2011	5,462,484		454,348		$	4.51

The following table summarizes the grant date fair value stock-based compensation expense for stock options and the restricted stock issued during the six months ended October 31, 2011 and 2010, respectively:

	For the the six months ended October 31
	2011		2010
Research and development	$	63,532	$	19,428
Marketing and sales		2,174		—
General and administrative		2,024		47,566
	$	67,730	$	66,994

We used the following assumptions to estimate the fair value of options granted under our stock option plans for the six months ended October 31, 2011 and 2010:

	For the the six months ended October 31
	2011			2010
Risk-free interest rate (weighted average)		2.38	%		1.83	%
Expected volatility (weighted average)		78.47	%		86.44	%
Expected term (in years)		7			6
Expected dividend yield		0.00	%		0.00	%

Risk-Free Interest Rate	The risk-free interest rate assumption was based on U.S. Treasury instruments with a term that is consistent with the expected term of our stock options.
Expected Volatility	The expected stock price volatility for our common stock was determined by examining the historical volatility and trading history for our common stock over a term consistent with the expected term of our options.
Expected Term	The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. It was calculated based on the historical experience that we have had with our stock option grants.
Expected Dividend Yield	The expected dividend yield of 0% is based on our history and expectation of dividend payouts. We have not paid and do not anticipate paying any dividends in the near future.
Forfeitures	Stock compensation expense recognized in the statements of operations for the six months ended October 31, 2011 and 2010 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC 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. Forfeitures were estimated based on our historical experience.

As of October 31, 2011, there were unrecognized compensation costs of approximately $19,500 related to non-vested stock option awards granted after May 1, 2004 that will be recognized on a straight-line basis over the weighted average remaining vesting period of 1.03 years.

Restricted Stock Grants

Pursuant to certain officer employment contracts, on May 19, 2011, the CEO was granted 100,000 shares of restricted common stock, vesting quarterly over a three-year period and 16,800 shares of restricted common stock vesting monthly over a 12-month period. The Chief Financial Officer was granted 8,600 shares of restricted common stock vesting over a 12-month period, of which 3,600 shares will only vest so long as he continues serving as the Company's Corporate Secretary. The Chief Medical Officer was granted 7,500 shares of restricted common stock, vesting monthly over a 12-month period.

For the six months ended October 31, 2011, the Company recorded $84,748 as compensation expense for these restricted stock grants.

Pursuant to certain Board of Directors compensation agreements, on June 24, 2011, the Board Members were granted 31,812 shares of restricted common stock, vesting annually over a three-year period and 19,076 shares of restricted common stock granted on September 30, 2011, vesting quarterly over a one-year period.

For the six months ended October 31, 2011, the Company recorded $22,398 as compensation expense for these restricted stock grants.

Other Stock Options

In the past, the Company issued options outside the 1999 Amended Stock Plan. These options were granted with an exercise price of $3.68, and a 10 year term. As of October 31, 2011, there were 266,667 non-qualified options outstanding.