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C. STOCKHOLDERS EQUITY

6 Months Ended

Mar. 31, 2013

Below is a chart of the stock options, stock bonuses and compensation granted by the Company as of March 31, 2013. Each option represents the right to purchase one share of the Company’s common stock.

Name of Plan	Total Shares Reserved Under Plans		Shares Reserved for Outstanding Options		Shares Issued as Stock Bonus Compensation		Remaining Options/Shares Under Plans

Incentive Stock Option Plans		21,100,000		13,898,275		N/A		5,135,225
Non-Qualified Stock Option
Plans (1)		57,760,000		34,574,813		N/A		16,870,573
Stock Bonus Plans		15,940,000		N/A		8,519,747		7,415,739
Stock Compensation Plan		13,500,000		N/A		6,886,531		6,613,469

(1)

The 2013 Non-Qualified Plan was adopted by the Company’s directors on December 18, 2012 and authorizes the issuance of up to 20,000,000 shares of the Company’s common stock to persons that exercise options granted pursuant to the Plan. As of the date of this Form 10-Q, the Company had granted 3,344,166 options under the 2013 Non-Qualified Plan. Any options granted pursuant to the 2013 Plan may not be exercised until shareholders approve the adoption of the Plan.

There were 14,375,664 and 3,120,372 options granted to employees and directors during the six- months ended March 31, 2013 and 2012, respectively. There were 1,000 and -0- options granted to employees and directors during the three months ended March 31, 2013 and 2012, respectively.

In December 2012, the Company offered employees and directors holding options that expire on April 1, 2013 the opportunity to forfeit these options and have new options issued with an expiration date of December 17, 2017. All twelve employees and directors eligible for this offer accepted the terms. This resulted in the cancellation of 3,874,664 options priced at $0.22 per share and the concurrent issuance of the same number of options at $0.28 per share. In accordance with ASC 718, the Company recorded the incremental compensation cost of the options. The incremental compensation cost is the excess of the fair value of the replacement award over the fair value of the cancelled award at the cancellation date. At the cancellation date, the incremental compensation cost was $477,879.

In November 2011, the Company modified the number of options issued to certain employees and directors, as well as the exercise prices and the expiration dates of the options. This resulted in the cancellation of 3,900,465 options priced between $0.54 and $1.94 per share and the issuance of 3,120,372 options exercisable at $0.30 per share. In accordance with ASC 718, the incremental compensation cost was $409,370. In December 2011, the Company extended the expiration date of certain employee options resulting in an additional option cost of $36,990.

Stock-Based Compensation Expense

	Six months Ended March 31,
	2013		2012

Employees	$	1,523,349	$	1,261,060
Non-employees	$	208,355	$	243,708

	Three months Ended March 31,
	2013		2012

Employees	$	556,764	$	423,602
Non-employees	$	100,537	$	205,038

At March 31, 2013 and September 30, 2012, respectively, non-employee stock compensation expense excluded $176,628 and $53,333 for future services to be performed.

Derivative Liabilities, Warrants and Other Options

Below is a chart showing the derivative liabilities and the number of warrants outstanding at March 31, 2013:

Warrant	Issue Date	Shares Issuable upon Exercise of Warrant		Exercise Price		Expiration Date	Reference

Series N	8/18/08		5,187,709		0.30	8/18/14		1
Series A	6/24/09		1,303,472		0.50	12/24/14		1
C. Schleuning (Series A)	7/8/09		167,500		0.50	01/08/15		1
Series B	9/4/09		500,000		0.68	9/4/14		1
Series C	8/20/09 – 8/26/09		4,634,886		0.55	2/20/15		1
Series E	9/21/09		714,286		1.75	8/12/14		1
Series F	10/6/11		12,000,000		0.40	10/6/14		1
Series G	10/6/11		666,667		0.40	8/12/14		1
Series H	1/26/12		12,000,000		0.50	8/1/15		1
Series Q	6/21/12		12,000,000		0.50	12/22/15		1
Series R	12/6/12		26,250,000		0.40	12/6/16		1

Series L	4/18/07		250,000		0.75	4/17/14		2
Series L (repriced)	4/18/07		1,000,000		0.34	4/17/13		2
Series M (modified)	4/18/07		6,000,000		0.34	7/31/14		2

Series P	2/10/12		5,900,000		0.45	3/6/17		3

Private Investors	5/30/03- 6/30/09		8,609,375		0.47 – 1.25	5/30/13 - 7/18/14		4

Warrants held by Officer and Director	6/24/09- 7/6/09		3,497,539		0.40 – 0.50	12/24/14 – 1/6/15		5

Consultants	5/22/03 – 12/28/12		1,437,500		0.28 – 2.00	5/22/13 - 12/27/17		6

1.	Derivative Liabilities

See below for details of the balances of derivative instruments at March 31, 2013 and September 30, 2012.

	March 31, 2013		September 30,2012
Series A through E warrants	$	188,176	$	786,989
Series N warrants		259,385		830,034
Series F and G warrants		506,667		1,646,667
Series H warrants		600,000		1,800,000
Series Q warrants		720,000		1,920,000
Series R warrants		2,625,000		-

Total derivative liabilities	$	4,899,228	$	6,983,690

The Company reviews all outstanding warrants in accordance with the requirements of ASC 815. This topic provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The warrant agreements provide for adjustments to the exercise price for certain dilutive events, which includes an adjustment to the number of shares issuable upon the exercise of the warrant in the event that the Company makes certain equity offerings in the future at a price lower than the exercise prices of the warrant instruments. Under the provisions of ASC 815, the warrants are not considered indexed to the Company’s stock because future equity offerings or sales of the Company’s stock are not an input to the fair value of a “fixed-for-fixed” option on equity shares, and equity classification is therefore precluded.

In accordance with ASC 815, derivative liabilities must be measured at fair value upon issuance and revalued at the end of each reporting period through their expiration. Any change in fair value between the respective reporting dates is recognized as a gain or loss.

Series K and Series A through E Warrants

The Company accounted for the Series K and A through E warrants as derivative liabilities in accordance with ASC 815. In accordance with ASC 815, derivative liabilities must be revalued at the end of each interim period and at the end of the fiscal year, as long as they remain outstanding. These warrants do not qualify for equity accounting and must be accounted for as a derivative liability since the Warrant Agreement provides the holder with the right, at its option, to require the Company to a cash settlement of the warrants at Black-Scholes value in the event of a Fundamental Transaction, as defined in the Warrant Agreement. Since the occurrence of a Fundamental Transaction is not entirely within the Company's control, there exist circumstances that would require net-cash settlement of the warrants while holders of shares would not receive a cash settlement.

In October 2011, 2,318,396 Series K warrants held by the investors were reset from $0.40 to $0.30. In addition, the investors were issued 772,799 warrants exercisable at $0.30 per share at an initial cost of $30,912. This cost was accounted for as a debit to loss on derivatives and a credit to derivative liabilities.

In February 2012, all the Series K warrants were exercised, and the Company received $927,359 from the exercise of Series K warrants to purchase 3,091,195 of the Company’s common shares. As of September 30, 2012, all Series K warrants had been exercised and no liability was recorded. When the warrants were exercised, the value of these warrants was converted from derivative liabilities to equity. For the six months and three months ended March 31, 2012, Series K warrants transferred to equity totaled $122,367. For the six months and three months ended March 31, 2012, the Company recorded a loss of $52,815 and $91,455, respectively, on Series K warrants.

For the six months and three months ended March 31, 2013, the Company recorded a gain of $598,813 and $266,377, respectively, on the Series A through E, warrants. For the six months and three months ended March 31, 2012, the Company recorded a loss of $330,002 and $764,926, respectively, on the Series A through E warrants.

In June 2009, the Company issued 10,116,560 Series A warrants exercisable at $0.50 per share in connection with the June financing. The cost of the warrants of $2,775,021 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities. As of March 31, 2013, 1,303,472 of these warrants remained outstanding. As of March 31, 2013 and September 30, 2012, the fair values of the remaining Series A warrants were $39,104 and $156,417, respectively.

In July 2009, the Company issued warrants to a private investor. The 167,500 warrants were issued with an exercise price of $0.50 per share and valued at $43,550 using the Black Scholes method. The cost of the warrants was accounted for as a debit to additional paid-in capital and a credit to derivative liabilities. As of March 31, 2013, 167,500 warrants remained outstanding. As of March 31, 2013 and September 30, 2012, the fair values of the remaining warrants were $5,025 and $20,100, respectively.

In connection with a loan received and fully repaid in a prior period, the Company issued 500,000 Series B warrants with an exercise price of $0.68 per share. As of March 31, 2013, 500,000 Series B warrants remained outstanding. As of March 31, 2013 and September 30, 2012, the fair values of the remaining Series B warrants were $5,000 and $40,000, respectively.

In connection with an August 2009 financing, the Company issued 5,392,218 Series C warrants exercisable at $0.55 per share. As of March 31, 2013, 4,634,886 of these warrants remained outstanding. As of March 31, 2013 and September 30, 2012, the fair values of the remaining Series C warrants were $139,047 and $556,186, respectively.

In September 2009, 714,286 Series E warrants were issued with an exercise price of $1.75 per share to the placement agent in connection with a financing. As of March 31, 2013, 714,286 Series E warrants remained outstanding. In accordance with ASC 815, derivative liabilities must be revalued at the end of each interim period and at the end of the fiscal year, as long as they remain outstanding. As of March 31, 2013 and September 30, 2012, the fair values of the remaining Series E warrants were $0 and $14,286, respectively.

Series N Warrants

In August 2008 and June 2009, 3,890,782 Series N warrants were issued to two investors in connection with a financing and a reset provision. In October 2011, the 3,890,782 warrants held by the investors were reset from $0.40 to $0.30. In addition, the investors were issued 1,296,927 warrants exercisable at $0.30 per share at an initial cost of $220,478. The cost was accounted for as a debit to loss on derivatives and a credit to derivative liabilities.

As of March 31, 2013, 5,187,709 Series N warrants remained outstanding. As of March 31, 2013 and September 30, 2012, the fair values of the Series N warrants were $259,385 and $830,034, respectively. During the six and three months ended March 31, 2013, the Company recorded a derivative gain on Series N warrants of $570,649 and $259,387 respectively. During the six and three months ended March 31, 2012, the Company recorded a derivative loss of $466,895 and $726,280, respectively.

Series F and G warrants

In October 2011, the Company issued 12,000,000 Series F warrants with an exercise price of $0.40 per share at any time prior to October 6, 2014 in connection with a financing. The Company also issued 666,667 Series G warrants with an exercise price of $0.40 per share to the placement agent for this offering. The Series G warrants are exercisable at any time prior to August 12, 2014. The initial cost of the warrants of $2,146,667 was recorded as a debit to additional paid-in-capital and a credit to derivative liabilities. As of March 31, 2013 and September 30, 2012, the fair values of the Series F and G warrants were $506,667 and $1,646,667, respectively. During the six and three months ended March 31, 2013, the Company recorded a derivative gain of $1,140,000 and $500,000 respectively on the Series F and G warrants. During the six and three months ended March 31, 2012, the Company recorded a derivative loss of $1,146,667 and $1,526,666, respectively.

Series H Warrants

In January 2012, the Company issued 12,000,000 Series H warrants with an exercise price of $0.50 per share at any time on or after August 1, 2012 and prior to August 1, 2015 in connection with a financing. The initial cost of the warrants of $2,400,000 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities. As of March 31, 2013 and September 30, 2012, the fair values of the Series H warrants were $600,000 and $1,800,000, respectively. During the six and three months ended March 31, 2013, the Company recorded a derivative gain of $1,200,000 and $600,000 respectively on the Series H warrants. During the six and three months ended March 31, 2012, the Company recorded a derivative loss of $1,080,000.

Series Q Warrants

In June 2012, the Company issued 12,000,000 Series Q warrants with an exercise price of $0.50 per share at any time on or after December 22, 2012 and prior to December 22, 2015 in connection with a financing. The initial cost of the warrants of $2,160,000 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities. As of March 31, 2013 and September 30, 2012, the fair values of the Series Q warrants were $720,000 and $1,920,000, respectively. During the six and three months ended March, 31, 2013 the Company recorded a derivative gain of $1,200,000 and $600,000, respectively, on the Series Q warrants.

Series R Warrants

On December 4, 2012 the Company sold 35,000,000 shares of its common stock for $10,500,000, or $0.30 per share, in a registered direct offering. The investors in this offering also received Series R warrants which entitle the investors to purchase up to 26,250,000 shares of the Company’s common stock. The Series R warrants may be exercised at any time on or after June 6, 2013 and on or before December 6, 2016 at a price of $0.40 per share. The Company paid the placement agent for this offering a cash commission of $682,500. The initial cost of the warrants of $4,200,000 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities. As of March 31, 2013, the fair value of the Series R warrants was $2,625,500. During the six and three months ended March 31, 2013, the Company recorded a derivative gain of $1,575,000 and $1,312,500, respectively, on the Series R warrants.

Senior Convertible Notes

In March 2012, the Company repaid the remaining Senior Secured Convertible Notes derived from the settlement, thereby completely eliminating the Senior Secured Convertible Notes, satisfying the settlement and having the lien on the Company’s assets removed.

The accounting for the Senior Secured Convertible Notes was within the scope of ASC 815. Under ASC 815 or ASC 825, the Company may make an irrevocable election to initially and subsequently measure a hybrid financial instrument in its entirety at fair value. Any change in fair value between the respective reporting dates shall be recognized as a gain or loss. Based on the analysis of the Senior Secured Convertible Notes, the Company identified several embedded derivative features. The Company elected, in accordance with ASC 825, to initially and subsequently carry the instrument at fair value without bifurcating the embedded derivatives. For the six and three months ended March 31, 2012, respectively, the Company recorded at gain of $49,000 and a loss of $15,000 on the Senior Convertible Notes.

2.	Series L and M Warrants

In April 2007, the Company completed a $15 million private financing. Shares were sold at $0.75, a premium over the closing price of the previous two weeks. The financing was accompanied by 10,000,000 warrants with an exercise price of $0.75 and 10,000,000 warrants with an exercise price of $2.00. The warrants are known as Series L and Series M warrants, respectively. The warrants issued with the financing qualified for equity treatment in accordance with ASC 815. The cost of Series L and series M warrants were recorded as a debit and a credit to additional paid-in capital.

In November 2011, the Company repriced 1,600,000 of the Series L warrants to $0.34. The additional cost of $86,826 was recorded as a debit and a credit to additional paid-in capital and was a deemed dividend. This cost is included in modification of warrants and increased the net loss available to shareholders on the statements of operations. In March 2012, 600,000 Series L warrants were exercised at a price of $0.34, and the Company received proceeds of $204,000.

In April 2012, the 250,000 Series L warrants were transferred to a consultant exercisable at a price of $0.75 per share and were extended for two years from the current expiration date. The additional value of $43,910 was accounted for as a credit to additional paid-in capital and a debit to general and administrative expense. In June 2012, 101,669 Series L warrants with an exercise price of $0.75 per share, expired. As of March 31, 2013, 1,000,000 of the Series L warrants at the reduced exercise price of $0.34 and 250,000 at the original exercise price of $0.75 remained outstanding.

In November 2011, the Company repriced 6,000,000 of the Series M warrants from $0.60 to $0.34. The additional cost of $238,794 was recorded as a debit and a credit to additional paid-capital and was a deemed dividend. This cost was included in modification of warrants and increased the net loss available to shareholders on the statements of operations. As of March 31, 2013, 6,000,000 Series M warrants at the reduced exercise price of $0.34 remained outstanding.

3.	Series O and P Warrants

In March 2009, as further consideration for its rights under a licensing agreement, Byron Biopharma LLC (“Byron”) purchased 3,750,000 Units from the Company at a price of $0.20 per Unit. Each Unit consisted of one share of the Company’s common stock and two Series O warrants. Each Series O warrant entitles the holder to purchase one share of the Company’s common stock at a price of $0.25 per share. The Series O warrants expire on March 6, 2016. The Units were accounted for as an equity transaction using the Black Scholes method to value the warrants. The fair value of the warrants was calculated to be $1,015,771. During the year end September 30, 2012, all Series O warrants were exercised for which the Company received $1,625,000.

On February 10, 2012, the Company issued 5,900,000 Series P warrants to the former holder of the Series O warrants as an inducement for the early exercise of the Series O warrants. Series O warrants entitled the holder to purchase 5,900,000 shares of the Company’s common stock at a price of $0.25 per share at any time on or prior to March 6, 2016. The Series P warrants allow the holder to purchase up to 5,900,000 shares of the Company’s common stock at a price of $0.45 per share. The Series P warrants are exercisable at any time on or after August 12, 2012 and prior to March 6, 2017. The warrants were accounted for as an equity transaction using the Black-Scholes method to value the warrants. The fair value of the warrants was calculated to be $1,593,000. This cost was recorded as a debit and a credit to additional paid-in capital. This cost was included in inducement warrants and increased the net loss available to shareholders on the condensed statements of operations. As of March 31, 2013, 5,900,000 Series P warrants remained outstanding.

4.	Private Investor Warrants

Between May 2003 and April 2006, the Company issued 1,900,000 warrants as part of a financing to a private investor at exercise prices between $0.47 and $1.25. As of March 31, 2013, 1,200,000 warrants remain outstanding. The fair value of the warrants has been recorded as an addition to additional paid-in capital and also as a charge to additional paid-in capital since they qualified for equity accounting.

Between July 2005 and May 2006, 1,925,000 warrants were issued to a private investor with an exercise price between $0.56 and $0.82. As of March 31, 2013, 1,325,000 warrants remained outstanding.

In January 2009, as part of an amended lease agreement on the manufacturing facility, the Company repriced 3,000,000 warrants issued to the lessor in July 2007 at $1.25 per share and which were to expire on July 12, 2013. These warrants were repriced at $0.75 per share and expire on January 26, 2014. The cost of this repricing and extension of the warrants was $70,515 and was accounted for as a debit to the deferred rent asset and a credit to additional paid-in capital. In addition, 787,500 additional warrants were given to the lessor of the manufacturing facility on the same date, exercisable at a price of $0.75 per share, and will expire on January 26, 2014. The cost of these warrants was $45,207 and was accounted for as a debit to the deferred rent asset and a credit to additional paid-in capital. As of March 31, 2013, 3,787,500 warrants remained outstanding.

Between March 31 and June 30, 2009, 2,296,875 warrants were issued at $0.75 to the leaseholder on the manufacturing facility in consideration for the deferral of rent payments. As of March 31, 2013, 2,296,875 warrants remained outstanding.

5.	Warrants Held by Officer and Director

Between December 2008 and June 2009, Maximilian de Clara, the Company’s President and a director, loaned the Company $1,104,057 under a note payable. In June 2009, the Company issued 1,648,244 warrants exercisable at $0.40 per share to the holder of the note. The warrants are exercisable at any time prior to December 24, 2014. These warrants were valued at $65,796 using the Black Scholes method. In July 2009, as consideration for a further extension of the loan, the Company issued 1,849,295 warrants exercisable at $0.50 per share to the holder of the note that was amended for the second time. These warrants were valued at $341,454 using the Black Scholes method and can be exercised at any time prior to January 6, 2015. The first warrants were recorded as a discount to the loan and a credit to additional paid-in capital. The second warrants were recorded as a debit to derivative loss of $831,230, a premium of $341,454 on the loan and a credit to additional paid-in capital of $489,776. The first warrants were amortized as interest expense at the time of the second amendment. On the second amendment, $338,172 of the premium was amortized as a reduction to interest expense as of September 30, 2009. The balance of the premium of $3,282 was amortized as a reduction to interest expense in October 2009. As of March 31, 2013, 3,497,539 warrants remained outstanding. See Note E for additional information.

6.	Options and Shares Issued to Consultants

As of March 31, 2013, 1,437,500 options issued to consultants as payment for services remained outstanding, of which 1,342,500 options were issued from the Non-Qualified Stock Option plans.

On December 28, 2012, the Company entered into a consulting agreement for services to be provided through December 27, 2013. In consideration for the services to be provided, the Company issued the consultant 500,000 shares of common stock and 500,000 options to purchase common stock at a price of $0.28 per share. The common shares were issued at the fair market value on the agreement date of $0.28. The aggregate fair market value of $140,000 was recorded as a prepaid expense and will be charged to general and administrative expense over the period of service. The fair value of the options issued, as calculated using the Black-Scholes method, was determined to be $98,150 and will also be charged to general and administrative expense over the period of service. During the six and three months ended March 31, 2013, the Company recorded $61,522 and $59,537 of expense relating to this consulting arrangement. As of March 31, 2013, the Company has recorded $176,628 in prepaid consulting expenses.

In March 2012, 50,000 options were issued to a consultant with an exercise price of $0.35 which vested immediately and expire on March 5, 2017. The cost of these options was $12,037 calculated using the Black Scholes method and was accounted for as a credit to additional paid-in capital and a debit to general and administrative expense.

In December 2011, 50,000 options were issued to a consultant with an exercise price of $0.30 which vested immediately and expire on December 1, 2016. The cost of these options was $10,211 calculated using the Black-Scholes method and was accounted for as a credit to additional paid-in capital and a debit to general and administrative expense.