Note 6

Warrants and Options

Warrants

From time to time, we compensate consultants with warrants to purchase shares of our common stock, in lieu of cash payments. Net share settlement is available to warrant holders. The following table sets forth our warrant activity during the three months ended June 30, 2011.

	Three Months Ended
	June 30, 2011
			Weighted-
			Average
	Number		Exercise
	of Shares		Price
Outstanding at beginning of period		4,971,709		$	1.21
Granted during the period		246,672			1.04
Exercised during the period
Cancelled during the period		-
Outstanding at end of the period		5,218,381		$	1.20

Exercisable at end of period		4,930,381		$	1.22

We estimated the fair value of each warrant at the grant date by using the Black-Scholes option pricing model with the following range of assumptions for the warrants granted during the three months ended June30, 2011 – (i) no dividend yield, (ii) expected volatility of between 101% and 129%, (iii) risk-free interest rates of between 0.7% and 1.8%, and (iv) expected lives of between three years and five years.

Of the warrants to purchase 246,672 shares of our common stock granted during the three months ended June 30, 2011 we issued warrants to purchase 130,000 shares of our common stock at a weighted average exercise price of $1.44 per share to various consultants for services performed or to be performed, on our behalf. The warrants had a fair value of $125,497 at the date of grant, of which $41,476 was recognized in general and administrative expenses during the period. The unamortized fair value will be recognized over the remaining period the services are to be provided. The remaining warrants to purchase 116,672 shares of our common stock granted during the period, were issued to the holders of our 10% convertible debentures pursuant to their amended terms. These warrants had a fair value of $114,049 at the date of grant which was charged to interest expense during the period. The fair values at date of grant for these warrants were based on the Black-Scholes pricing model.

Options

We have two nonqualified stock option plans approved by shareholders with 1,330,198 shares remaining available for grant as of June 30, 2011. The exercise price of the options are established by the Board of Directors on the date of grant and are generally equal to the market price of the stock on the grant date. The Board of Directors may determine the vesting period for each new grant. Options issued are exercisable in whole or in part for a period as determined by the Board of Directors of up to ten years from the date of grant.

We estimated the fair value of each option award at the grant date by using the Black-Scholes option pricing model with the following range of assumptions for the awards during the three months ended June 30, 2011 – (i) no dividend yield, (ii) expected volatility of between 102% and 136%, (iii) risk-free interest rates of between 0.8% and 2.6%, and (iv) expected lives of between three and seven years.

During the three months ended June 30, 2011, we issued options to purchase 2,000,000 shares of our common stock at exercise prices ranging from $1.20 to $2.00 per share, to our directors, officer, employees and a consultant. The right to exercise certain of these options is based on the optionee’s achievement of specific objectives. As of June 30, 2011, the likelihood of, and the date on which the optionee might achieve the objectives was not apparent, therefore the fair value was not estimated. The remaining options had fair values which totaled $1,274,510 at the date of grant based on the Black-Scholes pricing model, of which $1,094,456 was recognized in general and administrative expenses during the period. The remaining unamortized fair value of $180,054 will be recognized over the remaining vesting periods. In addition, when it becomes more than likely that an optionee will achieve their stipulated objectives, the fair value will then be determined and the balance amortized to general and administrative expenses.

In addition, the fair value of certain options awarded in prior periods is being amortized over their vesting periods. During the three months ended June 30, 2011, $134,885 was recognized in general and administrative expenses. The remaining unamortized fair value of $253,110 will be recognized over the remaining vesting periods.

The following table summarizes our stock option activity for the three months ended June 30, 2011:

	Three Months Ended
	June 30, 2011
			Weighted-
			Average
	Number		Exercise
	of Shares		Price
Outstanding at beginning of period		3,803,761	$	1.06
Granted during the period		2,000,000		1.27
Exercised during the period		-		-
Cancelled during the period		-		-
Outstanding at end of the period		5,803,761	$	1.13

Exercisable at end of period		2,451,685	$	1.12

The following table summarizes options outstanding at June 30, 2011:

Weighted

Average

Aggregate

Number of

Exercise

Remaining

Intrinsic

Price

Life

Value

Options outstanding

5,803,761

1.13

4.3 years

1,391,228

Options vested and exercisable

2,451,685

1.12

3.9 years

246,372

Unvested options expected to vest

3,352,076

1.14

4.6 years

1,144,855