NOTE 7– SHAREHOLDERS' EQUITY

Our authorized capital stock consists of 100,000,000 shares of common stock, with a par value of $0.01 per share, and 10,000,000 preferred shares with a par value of $0.001 per share.

All shares of common stock have equal voting rights and, when validly issued and outstanding, are entitled to one non-cumulative vote per share in all matters to be voted upon by shareholders. The shares of common stock have no pre-emptive, subscription, conversion or redemption rights and may be issued only as fully paid and non-assessable shares. Holders of the common stock are entitled to equal ratable rights to dividends and distributions with respect to the common stock, as may be declared by our Board of Directors (our “Board”) out of funds legally available. In the event of a liquidation, dissolution or winding up of the affairs of the Corporation, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment or provision for all liabilities and any preferential liquidation rights of any preferred stock then outstanding.

During the year ended August 31, 2015, we expensed approximately $440,000 in non-cash stock-based compensation to directors and outside consultants.

On September 30, 2014, October 31, 2014, November 30, 2014, December 31, 2014, January 31, 2015, February 28, 2015, March 31, 2015, April 30, 2015, May 31, 2015, and August 31, 2015 the Board approved a total grant of 120,000 options to a consultant to the Company. The options are exercisable at $0.30 per share for a period of five years. All options vest immediately. With respect to these options, the Black-Scholes pricing model was used to estimate the fair value of the 90,000 options issued during the period to this advisor, using the assumptions of a risk free interest rate of 1.43% to 1.78%, dividend yield of 0%, volatility of 441% to 457%, and an expected life of 5 years. These options were expensed immediately in the amount of approximately $31,000.

On December 30, 2014, we appointed Mr. Eric Noyrez to serve as a member of our Board of Directors. Mr. Noyrez was granted 400,000 options to purchase shares of our common stock, vesting immediately with a term of 5 years and at an exercise price of $0.21. The Black-Scholes pricing model was used to estimate the fair value of the 400,000 options issued during the period to these consultants, using the assumptions of a risk free interest rate of 1.68%, dividend yield of 0%, volatility of 198%, and an expected life of 5 years. These options are valued at approximately $82,000 and expensed immediately.

On January 21, 2015 we completed our previously announced rights offering. We raised approximately $940,000 in aggregate gross proceeds, before expenses, through shareholder subscriptions for 4,272,275 Units including the exercise of over-subscription rights. Each Unit consisting of one share of the Company's common stock, one five year non-transferable Class A warrant exercisable for one share of the Company's common stock at $0.35 per share and one five-year non-transferable Class B warrant exercisable for one share of the Company's common stock at $0.50 per share. The Black-Scholes pricing model was used to estimate the relative fair value of the 8,544,550 warrants issued during the period, using the assumptions of a risk free interest rate of 1.39%, dividend yield of 0%, volatility of 195%, and an expected life of 5 years. The Class A and B warrants have a relative fair value of approximately $305,000 and $303,000 respectively and recorded in additional paid-in capital.

On February 13, 2015, the Compensation Committee of the Board approved a grant of 5,000 options to a consultant of the Company. The options are exercisable at $0.20 per share for a period of five years. All options vest immediately. With respect to these options, the Black-Scholes pricing model was used to estimate the fair value of the 5,000 options issued during the period to the consultant, using the assumptions of a risk free interest rate of 2.88%, dividend yield of 0%, volatility of 848.37%, and an expected life of 5 years. These options were expensed immediately in the amount of approximately $1,000.

On February 19, 2015, the Compensation Committee of the Board approved a total grant of 800,000 options to certain members of our Board of Directors. The options are exercisable at $0.22 per share for a period of ten years. All options vest immediately. With respect to these options, the Black-Scholes pricing model was used to estimate the fair value of the 800,000 options issued during the period to the Board members, using the assumptions of a risk free interest rate of 2.88%, dividend yield of 0%, volatility of 848.37%, and an expected life of 10 years. These options were expensed immediately in the amount of approximately $176,000.

On February 26, 2015, all members of the Board of Directors were offered shares of the Company's common stock at a 20% discount in lieu of cash compensation owed to them for Board services. Three members of the Board of Directors elected to receive approximately 59,000 shares of the Company's common stock in lieu of cash compensation totaling $10,000.

During the period ended August 31, 2015, the Company recognized stock compensation expense of approximately $142,000 for 1,425,000 stock options issued to Board members in prior year for services vesting over one to three years. As of August 31, 2015, there remains approximately $107,000 of stock compensation expense to be recognized.

As of August 31, 2015, we have approximately 41 million shares of common stock outstanding. In addition to our common stock, we have (i) warrants that may be exercised into 7,840,000 shares of common stock exercisable at $2.50 per share, (ii) warrants that may be exercised into 4,272,275 shares of common stock exercisable at $0.35 per share, (iii) warrants that may be exercised into 4,272,275 shares of common stock exercisable at $0.50 per share, (iv) warrants that may be exercised into 1,497,000 shares of common stock at $2.50 per share, (v) warrants that may be exercised into 250,000 shares of common stock at $5.00 per share, (vi) warrants that may be exercised into 160,000 shares of common stock at $0.20 per share, and (vii) options that may be exercised into 6,290,000 shares of common stock at $0.30 to $1.00 issued to directors, officers and consultants. The issuance of shares upon exercise of these options and warrants may result in substantial dilution to the interests of other stockholders and may adversely affect the market price of our common stock.

In September 2008, the Board adopted our 2008 Stock Option Plan (the “2008 Plan”), which was also approved by our shareholders in September 2008. In May 2011, the board of directors adopted an amendment to our 2008 Plan (the “Amended 2008 Plan”), which was also approved by our shareholders in August 2011. The Amended 2008 Plan increased the number of shares available for grant from 2,000,000 to up to 5,000,000 shares of our common stock for awards to our officers, directors, employees and consultants. On February 15, 2012, our stockholders approved an increase of 2,000,000 of shares of common stock available for issuance under the amended 2008 Stock Option Plan (the “Plan”). As amended, the Plan provides for 7,000,000 shares of common stock for all awards. Other provisions of the Amended 2008 Plan remain the same as under our 2008 Plan. As of August 31, 2015, a total of 1,005,000 shares of our common stock remained available for future grants under the Amended 2008 Plan.

The following table sets forth certain information as of August 31, 2015 concerning our common stock that may be issued upon the exercise of options or warrants or pursuant to purchases of stock under the Amended 2008 Plan:

Plan Category	(a) Number of Securities to be Issued Upon the Exercise of Outstanding Options		(b) Weighted-Average Exercise Price of Outstanding Options		(c) Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity compensation plans approved by stockholders		5,995,000	$	0.32		1,005,000
Equity compensation plans not approved by stockholders		295,000	$	0.32		--

Total		6,290,000	$	0.32		1,005,000

Warrants

Warrant activity for the year ended August 31, 2015, was as follows:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)		Grant Date Fair Value

Outstanding at August 31, 2014		9,587,000	$	2.57		1.54	$	3,659,998

Warrants granted		8,704,550	$	1.54		2.37	$	631,421

Warrants exercised		-		-		-		-

Warrants cancelled/forfeited/expired		-		-		-		-

Outstanding at August 31, 2015		18,291,550	$	1.54		2.37	$	4,291,419


Vested at August 31, 2015		18,291,550	$	1.54		2.37	$	4,291,419

Exercisable at August 31, 2015		18,291,550	$	1.54		2.37	$	4,291,419

The assumptions used and the weighted average calculated value of warrants issued during the year, were as follows:

Risk-free interest rate		1.39-1.49	%
Expected dividend yield		0.00	%
Expected volatility		195-198	%
Expected life	5 Years