Common Stock Warrants, Stock Options, and Employee Stock Benefit Plan

6 Months Ended

Mar. 31, 2014

Senior Secured Revolving Credit Facility Loan Net Of Unamortized Discount Of

Note 5 - Common Stock Warrants and Stock Based Compensation

Common Stock Warrants. As of March 31, 2014, warrants to purchase a total of 282.2 million shares of the Company’s Common Stock were outstanding, with a weighted average exercise price of $0.07 per share and exercise prices ranging from $0.001 per share to $0.55 per share.

Stock Incentive Plans. The Company’s stockholders approved the Company’s 2006 Omnibus Incentive Plan (the “2006 Plan”), which is designed to serve as a comprehensive equity incentive program to attract and retain the services of individuals essential to the Company’s long-term growth and financial success. Upon approval of the 2006 Plan, the Company’s 2003 Stock Incentive Plan (the “2003 Plan”), 2001 Non-Qualified Stock Option Plan (the “2001 Non-Qualified Plan”), was terminated, but existing options issued pursuant to the Prior Plans remain outstanding in accordance with the terms of their original grants.

 As of March 31, 2014, there were 74,000 outstanding and exercisable options to purchase the Company’s Common Stock under the 2003 Plan with exercise prices ranging from $17.00 to $26.40.

 As of March 31, 2014, there were 441,000 outstanding and exercisable options to purchase the Company’s Common Stock under the 2006 Plan with exercise prices ranging from $0.16 to $13.00.

 In December 2010, the Company’s Board adopted the Company’s 2010 Non-Qualified Stock Option Plan (the “2010 Plan”) under which the Company’s eligible officers, directors and employees, consultants and advisors who qualify as “accredited investors” within the meaning of Rule 501 under the Securities Act, may be granted non-qualified stock options. 18,500,000 shares of the Company’s Common Stock were reserved for issuance under the 2010 Plan, and options to purchase 18,500,000 shares of the Company’s Common Stock at an exercise price of $0.09 per share were issued to certain of the Company’s officers and directors in December 2010 pursuant to the 2010 Plan. As of March 31, 2014, there are 9,000,000 outstanding and exercisable options to purchase the Company’s Common Stock under the 2010 Plan at an exercise price of $0.09 per share. No further grants may presently be made under the 2010 Plan.

 In March 2011, the Company’s stockholders approved the Company’s 2011 Omnibus Incentive Plan (the “2011 Plan”). The number of shares reserved for issuance under the 2011 Plan was increased to 646,500,000 shares, effective January 16, 2014. The 2011 Plan is designed to promote the interests of the Company and its stockholders by serving as a comprehensive equity incentive program to attract and retain the services of individuals capable of assuring the future success of the Company and to afford such persons an opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Company. The 2011 Plan permits grants of stock options (including both incentive and non-qualified stock options), stock-only appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance awards of cash, stock or property, other stock grants and other stock-based awards. As of March 31, 2014, there were options to purchase 142,717,000 shares of the Company’s Common Stock outstanding under the 2011 Plan, of which options to purchase 91,917,000 shares were exercisable, at exercise prices ranging from $0.042 to $0.150 per share. The aggregate number of shares of Common Stock issuable under all stock-based awards that may be made under the 2011 Plan at March 31, 2014 is 503,027,000 shares.

 Below is a summary of stock option transactions during the six months ended March 31, 2014:

	Number of Shares			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life (yrs)		Aggregate Intrinsic Value
Outstanding at September 30, 2013		51,752,000		$	0.20		7.7	$	-
Granted		149,438,000			0.04		9.6		-
Exercised		-			-		-		-
Forfeited/Cancelled		(48,958,000	)		0.10		8.3		-
Outstanding at March 31, 2014		152,232,000			0.07		9.2		-
Vested and expected to vest, March 31, 2014		129,398,000			0.07		9.2		-
Exercisable, March 31, 2014		101,432,000			0.08		9.0		-

For the six months ended March 31, 2014 and 2013, the Company utilized the Black-Scholes valuation model for estimating the fair value of share-based compensation with the following assumptions:

	Six Months Ended March 31,
	2014		2013
Expected life	5.4 years		6.7 years
Expected volatility		169%		88.1% -99.3%
Expected dividend	None		None
Risk-free rate		1.6%		1.1%-1.3%

 The Company issues new shares of Common Stock to satisfy option exercises. Based on historical experience of option cancellations, the Company has estimated an annualized forfeiture rate of 15% and 7% for employee options for the three months ended March 31, 2014 and 2013, respectively.  Forfeiture rates are adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate.

 During the six months ended March 31, 2014, a total of 149.4 million options to purchase shares of the Company’s Common Stock were granted under the 2011 Plan, with an exercise price of $0.042.  Of the total options granted, 146.9 million were issued in exchange for the cancellation of previously granted options to purchase 27.1 million shares of Common Stock that were both vested and unvested, pursuant to the Option Exchange Program.  One-third of the grant vests immediately and the remaining two thirds vest in equal monthly installments over two years and expire on October 21, 2023.  The Company treated these exchanges as a modification to the existing options.  The Company recorded the incremental cost of the modification measured by the excess of the fair value of the modified award over the fair value of the original award immediately before the modification as additional compensation cost recognized over the requisite service period.  For the six months ended March 31, 2014, $1.5 million in stock option expense was recognized related to these transactions under the Option Exchange Program.

 Employee Stock Benefit Plan. The Company has established an employee retirement plan (the “ESBP”). This plan provides for annual contributions to the Company’s Employee Stock Bonus Trust (“SBT”) to be determined by the Board of Directors and which will not exceed 15% of total payroll.  As of March 31, 2014, the Company has not made any contributions to the SBT for the year ended September 30, 2014.  In Fiscal 2013, the Company made a contribution of 9.1 million shares of Common Stock with an estimated market value of $272,000 to the SBT.

 Deferred Compensation Plan. In September 2002, the Company established a deferred compensation plan, the Non-Qualified Deferred Compensation Plan, for certain key employees with long-term service with the Company. Annual contributions of Common Stock of the Company were made to a Rabbi Trust under such plan to be held for the benefit of the deferred compensation plan participants. During Fiscal 2013 the Board of Directors authorized a contribution of 14,000 shares to the Non- Qualified Deferred Compensation Plan. Participants’ potential distributions from the Rabbi Trust represent unsecured claims against the Company. The Rabbi Trust was established by the Company and is subject to creditors’ claims. Shares in this plan may be distributed to each plan beneficiary when they retire from service with the Company. At March 31, 2014, and September 30, 2013 there were 44,000 shares of the Company’s Common Stock were in the Rabbi Trust.