Note 6 - Warrants and Options

Warrants

From time to time, we compensate consultants, advisors and investors 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 September 30, 2011.

	Three Months Ended
	September 30, 2011
			Weighted-
			Average
	Number		Exercise
	of Shares		Price
Outstanding at beginning of period		5,218,381	$	1.20
Granted during the period		133,755		0.77
Exercised during the period
Cancelled during the period		-
Outstanding at end of the period		5,352,136	$	1.19

Exercisable at end of period		5,102,803	$	1.20

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 September30, 2011 – (i) no dividend yield, (ii) expected volatility of between 95% and 130%, (iii) risk-free interest rates of between 0.3% and 0.9%, and (iv) expected lives of between three years and four years.

Of the warrants to purchase 133,755 shares of our common stock granted during the three months ended September 30, 2011 we issued warrants to purchase 33,750 shares of our common stock at a weighted average exercise price of $1.27 per share to various consultants for services performed or to be performed, on our behalf. The warrants had a fair value of $23,359 at the date of grant and were recognized in general and administrative expenses during the period. The remaining warrants to purchase 100,005 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 $72,971 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 approximately 1.4 million shares remaining available for grant as of September 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 September 30, 2011 – (i) no dividend yield, (ii) expected volatility of between 82% and 126%, (iii) risk-free interest rates of between 0.4% and 0.9%, and (iv) expected lives of between three and five years.

During the three months ended September 30, 2011, we issued options to purchase 75,000 shares of our common stock at an exercise price of $1.11per share, to an employee. The right to exercise certain of these options is based on the optionee’s achievement of specific objectives. As of September 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 $46,818 at the date of grant based on the Black-Scholes pricing model, of which $29,261 was recognized in general and administrative expenses during the period. The remaining unamortized fair value of $17,557 will be recognized over the remaining vesting periods. In addition, when it becomes more than likely that the optionee will achieve their stipulated objectives, the fair value will then be determined and the balance amortized to general and administrative expenses.

In addition, during the three months ended September 30, 2011, we issued options to purchase 82,500 shares of our common stock at exercise prices ranging from $0.88 to $1.00, to certain consultants. These options had a fair value of $$68,153 at the date of grant based on the Black-Scholes option pricing model.

In addition, the fair value of certain options awarded in prior periods is being amortized over their vesting periods. During the three months ended September 30, 2011, $153,247 was recognized in general and administrative expenses. The remaining unamortized fair value of $263,036 will be recognized over the remaining vesting periods.

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

	Three Months Ended
	September 30, 2011
				Weighted-
				Average
	Number			Exercise
	of Shares			Price
Outstanding at beginning of period		5,803,761		$	1.13
Granted during the period		157,500			1.05
Exercised during the period		-			-
Cancelled during the period		(200,000	)		1.40
Outstanding at end of the period		5,761,261		$	1.12

Exercisable at end of period		2,924,703		$	1.04

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

Weighted

Average

Aggregate

Number of

Exercise

Remaining

Intrinsic

Price

Life

Value

Options outstanding

5,761,261

1.12

4.1 years

846,200

Options vested and exercisable

2,924,703

1.04

3.5 years

280,369

Unvested options expected to vest

2,836,558

1.20

4.6 years

565,831