STOCK OPTIONS AND WARRANTS

3 Months Ended

Sep. 30, 2011

STOCK OPTIONS AND WARRANTS

STOCK OPTIONS AND WARRANTS

7. STOCK OPTIONS AND WARRANTS

On February 18, 2010, at our annual meeting of stockholders, the stockholders approved the 2010 Equity Incentive Plan (the “2010 Plan”). Prior to the 2010 stockholder meeting, we had two stock award plans: the Stock and Stock Option Plan, which was adopted in 1997 (“1997 Plan”) and the 2008 Restricted Stock Award Plan (“2008 Plan”). In conjunction with the approval of the 2010 Plan, the 1997 Plan and the 2008 Plan were terminated as of February 18, 2010.

The 2010 Plan provides for the grants of shares of common stock, restricted stock units or incentive stock options and/or nonqualified stock options to purchase our common stock to selected employees, directors, officers, agents, consultants, attorneys, vendors and advisors. The 2010 Plan provides a means to attract and retain the services of participants and also to provide added incentive to such persons by encouraging stock ownership in us. Plan grants are administered by the Compensation Committee, which has substantial discretion to determine which persons, amounts, time, price, exercise terms, and restrictions, if any. Shares of common stock, options, or restricted stock units can only be granted under this plan within 10 years from the effective date of February 18, 2010. A maximum of 5,000,000 shares are issuable under the 2010 Plan and at September 30, 2011, no shares remained issuable under the 2010 Plan.

Additionally, from time to time, we issue non-compensatory warrants, such as warrants issued to investors.

The fair value of non-market based options or warrants is estimated using the Black-Scholes valuation model. For market based options, the fair value was estimated using a Black-Scholes option pricing model with inputs adjusted for the probability of the vesting criteria being met and the median expected term for each grant as determined by utilizing a Monte Carlo simulation. Expected volatility is based solely on historical volatility of our common stock over the period commensurate with the expected term of the stock options. We rely solely on historical volatility as we do not have traded options. The expected term calculation for stock options is based on the simplified method as described in the SEC Staff Accounting Bulletin number 107. We use this method because we do not have sufficient historical information on exercise patterns to develop a model for expected term. The risk-free interest rate is based on the U. S. Treasury yield in effect at the time of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The dividend yield rate of zero is based on the fact that we have never paid cash dividends on our common stock and we do not intend to pay cash dividends on our common stock.

2010 Equity Incentive Plan

The following table provides information about options during the three months ended September 30, 2011 and 2010:

	2011		2010
Number of options granted	1,069,480		75,000
Amortized compensation expense recognized as general and administrative expense	$	1,114,000	$	195,000
Amortized compensation cost capitalized in full cost pool	497,000		—
Weighted average fair value of options	$	1.98	$	0.57

The following table details the significant assumptions used to compute the fair market values of employee stock options granted during the three months ended September 30, 2011 and 2010:

	2011		2010
Risk-free interest rate	0.19 - 0.49	%	2.68	%
Dividend yield	0	%	0	%
Volatility factor	90-95	%	127	%
Expected life (years)	2		0.92

At September 30, 2011, there was $9,293,000 of unrecognized compensation costs related to non-vested share based compensation arrangements granted to employees and directors under the plan. We expect to amortize this cost over the next three to four years.

Summary information regarding employee and director stock options issued and outstanding as of September 30, 2011 is as follows:

	Options		Weighted Average Share Price		Weighted average remaining contractual term (years)	Aggregate intrinsic value
Outstanding at year ended June 30, 2011	9,274,854		$	1.85
Granted	1,069,480		3.46
Exercised	(643,333	)	0.91
Forfeited	—		—
Expired	—		—
Outstanding at September 30, 2011	9,701,001		$	2.09	5.45	$	17,752,653

Options outstanding and exercisable as of September 30, 2011
Exercise Price		Outstanding Number of Shares	Remaining Life	Exercisable Number of Shares
$	0.01 – 0.49	45,000	1 year	45,000
$	0.01 – 0.49	3,230,000	3 years	1,032,500
$	0.50 – 1.00	60,000	1 year	60,000
$	0.50 – 1.00	443,334	3 years	246,667
$	1.00 – 1.49	720,000	3 years	640,000
$	1.00 – 1.49	750,667	9 years	213,667
$	1.50 – 1.99	551,000	3 years	260,333
$	2.00 – 3.00	280,000	9 years	140,000
$	3.00 – 4.00	840,000	5 years	—
$	3.00 – 4.00	536,000	9 years	140,000
$	4.00 – 5.00	229,480	5 years	—
$	4.00 – 5.00	1,585,520	9 years	—
$	5.00 – 6.00	310,000	9 years	—
$	6.00 – 7.00	30,000	9 years	—
$	7.00 – 8.00	90,000	9 years	—
		9,701,001		2,778,167

Options exercisable had an intrinsic value of $7,273,000 at September 30, 2011.

Liability Awards

After reaching the limit of shares available under the 2010 Plan during the first quarter of fiscal 2012, we have concluded that all additional awards granted should be classified as liabilities until approval of additional shares under the 2010 plan are approved. During the first quarter of fiscal 2012, we granted options to purchase 425,520 shares of our common stock to employees after reaching the limit of shares available under the 2010 Plan.

The following table provides information about liability awards during the three months ended September 30, 2011:

	2011
Number of options granted	425,580
Amortized compensation expense recognized as general and administrative expense	$	30,000
Amortized compensation cost capitalized in full cost pool	—
Weighted average fair value of options	$	1.71

The following table details the significant assumptions used to compute the fair market value of liability awards outstanding as of September 30, 2011:

	2011
Risk-free interest rate	0.25	%
Dividend yield	0	%
Volatility factor	98	%
Expected life (years)	2

Warrants

During the three months ended September 30, 2011, we did not grant any warrants and no warrants were exercised.

Summary information regarding common stock warrants issued and outstanding as of September 30, 2011 is as follows:

	Warrants	Weighted Average Share Price		Weighted average remaining contractual term (years)	Aggregate intrinsic value
Outstanding at year ended June 30, 2011	3,858,693	$	1.26
Granted	—	—
Exercised	—	—
Forfeited	—	—
Expired	—	—
Outstanding at September 30, 2011	3,858,693	$	1.26	2.77	$	9,542,000

Warrants outstanding and exercisable as of September 30, 2011
Exercise Price		Outstanding Number of Shares	Remaining Life	Exercisable Number of Shares
$	0.90	3,240,000	3 years	3,240,000
$	0.98	10,833	3 years	10,833
$	1.58	207,860	4 years	207,860
$	4.00	400,000	3 years	400,000
		3,858,693		3,858,693

The outstanding warrants had an intrinsic value of $9,542,000 at September 30, 2011. All of the 3,858,693 warrants outstanding at September 30, 2011, are exercisable.