8. STOCKHOLDERS' EQUITY: Series B Preferred stock:

In March 2009, the Company authorized the issuance of 50,000 shares of Series B Preferred stock; which have a par value of $0.01 per share and are issuable at a price of $100 per share. The Series B Preferred stock is convertible for three years from the date of issuance at the option of the holder into shares of the Company's common stock calculated by dividing the sum of the $100 per share purchase price plus any accrued and unpaid dividends by $2.00 (the Conversion Rate). The Series B Preferred stock shall be automatically and mandatorily converted into shares of the Company's common stock at the Conversion Rate upon each occasion (at least 30 calendar days apart) after a date of six months subsequent to the initial issuance of the Series B Preferred stock on which the closing price of the Company's common stock has been equal to or greater than 150% of the Conversion Rate (initially $3.00) for twenty consecutive trading days with a reported average daily trading volume of 10,000 shares or more. The Series B Preferred stock may be redeemable at the option of the Company after one year from the issuance with 10 days written notice, at a price equal to $100 per share plus any accrued unpaid dividends. During the 10 day period, the holder may elect to convert the Series B Preferred stock to the Company's common stock at the Conversion Rate. On the third anniversary of issuance, the Company shall redeem the outstanding Series B Preferred stock at the price of $100 per share plus any accrued unpaid dividends. The Series B Preferred stock accrues dividends at a rate of 2.5% per quarter (10% per year) and shall be earned and accrued or paid quarterly.

Because the Series B Preferred stock is redeemable, unless converted, in cash at a fixed price ($100 per share plus accrued unpaid dividends) on a fixed date (the third anniversary of issuance), the Company has classified the Series B Preferred stock outside of stockholders' equity. Therefore, the Series B Preferred stock has been recorded at its redemption value as "temporary equity" in the accompanying consolidated balance sheet. Dividends on the Series B Preferred stock are reflected as part of the redemption value with an offset to reduce additional paid-in capital, and are included in the determination of net loss applicable to common stockholders.

During August 2011, 500 shares of Series B Preferred stock plus accrued dividends of $1,250 were converted into 25,625 shares of the Company's common stock and $51,250 was recorded as additional paid in capital.

During the six months ended December 31, 2011, the Company offered its Series B Preferred stockholders the ability to participate in a Series B Preferred Stock Conversion Subscription Agreement ("Series B Conversion Agreement") pursuant to which the Series B Preferred stockholders agreed to convert Series B Preferred shares plus accrued dividends into restricted common stock of the Company at a conversion price of $2.00 per share and receive warrants to purchase restricted common stock of the Company at a price of $3.10 per share until December 31, 2014 at a rate of one warrant per each 10 shares of common stock, (collectively the stock and warrants are the B Conversion Units). Pursuant to the Series B Conversion Agreement, the Company pays fees to any licensed/registered broker(s)/advisor(s) who assist with the conversion process composed of: a) a cash commission of $0.01 per share of common stock received by the subscribed shareholders, and b) the same number of warrants with the same terms received by the subscribed shareholders. The initial closing of the Series B Conversion Agreement occurred on September 30, 2011 and subsequent closings occurred on October 24, 2011 and October 31, 2011, pursuant to which a total of 27,220 shares of Series B Preferred stock and accrued dividends of $68,050 were converted into 1,395,031 B Conversion Units, consisting of 1,395,031 shares of common stock and 139,530 warrants. Additionally, the Company issued 121,590 warrants to the brokers. The Company allocated the value between the restricted common stock and the warrants based upon their relative fair value to the total value of the issuances using the share price of the common stock on the day of the Series B Conversion Agreement closing and the fair value of the warrants, which was determined to be $0.10 per warrant. As a result, $19,402 and $2,410,288 was allocated to the warrants and restricted common stock, respectively, all of which was recorded as additional paid-in capital. The Company paid commissions of $11,234 related to the Series B Conversion Agreement which resulted in a reduction of additional paid-in capital.

The Company declared dividends on August 29, 2011 for the Series B Preferred stockholders with a record date of June 30, 2011, totaling $70,425, which were accrued as of June 30, 2011 and $69,175 were paid on September 1, 2011 and $1,250 were converted into common shares.

At September 30, 2011, the Company accrued dividends of $69,175 for the Series B Preferred stockholders with a record date of September 30, 2011, of which $68,050 were converted per the terms of the Series B Conversion Agreement.

At December 31, 2011, the Company accrued dividends of $1,125 for the Series B Preferred stockholders with a record date of December 31, 2011.

Series C Preferred stock:

During December 2009, the Company authorized the issuance of 60,000 shares of Series C Preferred stock, which have a par value of $0.01 per share and are issuable at a price of $100 per share. The Series C Preferred stock is convertible at the option of the holder at any time from the date of issuance, into shares of the Company's common stock calculated by dividing the sum of the $100 per share purchase price plus any accrued and unpaid dividends by $4.00 (the Conversion Rate), provided the shares have not been redeemed into common shares by the Company at is sole election. A portion (up to 100% as calculated below) of each share of Series C Preferred stock shall be automatically and mandatorily converted into shares of the Company's common stock at the Conversion Rate upon each occasion (at least 30 calendar days apart) after a date of six months subsequent to the initial issuance of the Series C Preferred stock on which the closing price of the Company's common stock has been equal or greater than 150% of the Conversion Rate (initially $6.00) for twenty consecutive trading days with a reported average daily trading volume of 10,000 shares or more. On each occasion for mandatory conversion as set forth above, a sufficient portion of the outstanding shares of Series C Preferred stock shall be prorata converted so that the holders of the Series C Preferred stock receive an aggregate number of shares of the Company's restricted common stock equal to 7.5 times the average reported daily volume of trading in the Company's publicly traded common stock for the applicable twenty day period and each outstanding share shall thereafter be proportionately reduced in its rights to represent the effect of the partial conversions. The Series C Preferred stock accrues dividends at a rate of 2.5% per quarter (10% per year) and shall be earned and accrued or paid quarterly.

Dividends on the Series C Preferred stock are reflected as part of the redemption value with an offset to reduce additional paid-in capital, and are included in the determination of net loss applicable to common stockholders.

During the six months ended December 31, 2011, the Company offered its Series C Preferred stockholders the ability to participate in a Series C Preferred Stock Conversion Subscription Agreement ("Series C Conversion Agreement") pursuant to which the Series C Preferred stockholders agreed to convert Series C Preferred shares plus accrued dividends into restricted common stock of the Company at a conversion price of $3.00 per share. The conversion price of $3.00 per share represents a $1.00 per share reduction from the original terms of the Series C Preferred stock and due to the limited time in which the Series C stockholders had to subscribe to the Series C Conversion Agreement, the reduction in the conversion price is accounted for as an inducement. Pursuant to the Series C Conversion Agreement the Company pays fees to any licensed/registered broker(s)/advisor(s) who assist in the conversion process composed of: a) a cash commission of $0.01 per share of common stock received by the subscribed shareholders, and b) one warrant for each 10 shares received by the participating Series C stockholders. Each warrant allows for the purchase of one share of the Company's restricted common stock at $3.10 per share until expiration on December 31, 2014. The Company had the initial closing of the Series C Conversion Agreement on September 30, 2011, followed by additional closings on October 24, 2011 and October 31, 2011, pursuant to which a total of 31,850 shares of Series C Preferred stock and accrued dividends of $79,625 were converted into 1,088,238 shares of common stock and 102,017 warrants were issued to brokers. The Company allocated the value between the restricted common stock and the warrants based upon their relative fair value to the total value of the issuances using the share price of the common stock on the day of the Series C Conversion Agreement closing and the fair value of the warrants, which was determined to be $0.10 per warrant. As a result, $13,498 and $3,592,386 was allocated to the warrants and restricted common stock, respectively, all of which was recorded as additional paid-in capital. The Company paid commissions of $11,122 related to the Series C Conversion Agreement which resulted in a reduction of additional paid-in capital. The Company recorded $755,258 related to the conversion inducement of the Series C stock, which is reflected as part of the value of the Series C Preferred stock with an offset to reduce additional paid-in capital, and is included in the determination of net loss applicable to common stockholders .

The Company declared dividends on August 29, 2011 for the Series C Preferred stockholders with a record date of June 30, 2011 totaling $80,375, which were accrued as of June 30, 2011 and were paid on September 1, 2011.

At September 30, 2011, the Company accrued dividends of $80,375 for the Series C Preferred stockholders with a record date of September 30, 2011, of which $76,625 were converted per the terms of the Series C Conversion Agreement.

At December 31, 2011, the Company accrued dividends of $750 for the Series C Preferred stockholders with a record date of December 31, 2011.

Common stock:

Holders of common stock are entitled to one vote per share on all matters to be voted on by common stockholders. In the event of liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share in all assets remaining after liabilities have been paid in full or set aside and the rights of any outstanding preferred stock have been satisfied. Common stock has no preemptive, redemption or conversion rights. The rights of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of any outstanding series of preferred stock or any series of preferred stock the Company may designate in the future.

Centerpoint holds 704,309 shares of the Company's common stock. These shares of the Company's common stock held by Centerpoint are for the benefit of its shareholders without any beneficial interest. The Company accounts for these shares similar to treasury stock.

During the six months ended December 31, 2011, the Company issued 87,867 shares of the Company's restricted common stock at prices ranging from $2.10 to $3.27 per share for consulting services valued at $226,018, in aggregate, to various consultants and an employee. The Company also expensed $1,035,300 for fully vested stock bonuses that have been earned but not issued.

During the six months ended December 31, 2011, the Company granted Mr. Bassani and Mr. Smith shares of the Company's common stock as bonuses for signing extensions to their employment agreements. Mr. Bassani will be issued 300,000 shares of the Company's common stock issuable in three tranches of 100,000 shares on each of January 15, 2015, 2016 and 2017, respectively. Mr. Smith will be issued 90,000 shares of the Company's common shares in two tranches of 45,000 shares on each of January 15, 2013 and 2014, respectively. The Company recorded non-cash compensation of $795,000 and $240,300 related to the future stock issuances to Mr. Bassani and Mr. Smith, respectively, as the bonuses were fully vested upon grant date during the six months ended December 31, 2011.

Warrants:

As of December 31, 2011, the Company had the following common stock warrants outstanding:


Exercise Price		Number of Shares	Expiration Date
$	0.75	1,315,000	December 31, 2018
$	1.00	600,000	December 31, 2018
$	1.25	53,324	December 31, 2018
$	1.50	32,292	December 31, 2012
$	2.00	25,000	May 31, 2014
$	2.00	200,000	January 15, 2019
$	2.20	10,000	June 15, 2012
$	2.25	9,000	February 17, 2013
$	2.25	183,000	December 31, 2015
$	2.50	275,000	April 30, 2015
$	2.50	877,500	December 31, 2018
$	2.50	800,000	January 15, 2019
$	3.00	50,000	December 31, 2014
$	3.00	208,000	December 31, 2016
$	3.00	900,000	December 31, 2018
$	3.10	363,137	December 31, 2014
$	3.50	107,500	December 31, 2018
$	4.25	125,000	December 31, 2018
		6,133,753

The weighted-average exercise price for the outstanding warrants is $2.12, and the weighted-average remaining contractual life as of December 31, 2011 is 6.35 years.

During the six months ended December 31, 2011, the Company issued warrants to purchase 55,000 shares of the Company's common stock in connection with the sale of Units (Note 7). The Company also issued warrants in connection with the conversions of its Series B and Series C Preferred stock (Note 8). During the six months ended December 31, 2011, 150,000 warrants issued to a consultant to purchase common shares of the Company at $3.00 per share expired. The Company elected to extend the expiry date of 50,000 warrants to December 31, 2014 and recorded expense related to the modification of $5,000.

Stock options:

The Company's 2006 Consolidated Incentive Plan (the "2006 Plan"), as amended, provides for the issuance of options (or other securities of the Company) to purchase up to 8,000,000 shares of the Company's common stock. Terms of exercise and expiration of options granted under the 2006 Plan may be established at the discretion of the Board of Directors, but no option may be exercisable for more than ten years.

In September 2011, the Company entered into a new employment agreement with an employee which vested stock options previously granted to the employee during May 2008, with issuance and vesting contingent upon the signing of new employment agreement. The new employment agreement also entitled the employee to modifications of stock options resulting in the extension of certain expiry dates which resulted in incremental non-cash compensation expense of $94,820 being recorded for the six months ended December 31, 2011.

The Company recorded compensation expense related to employee stock options of $319,422 and $1,936,926 for the three months ended December 31, 2011 and 2010, respectively, and $2,206,286 and $2,032,035 for the six months ended December 31, 2011 and 2010, respectively. The Company granted 1,400,000 and 1,100,000 options during the six months ended December 31, 2011 and 2010, respectively. The fair value of the options granted during the six months ended December 31, 2011 and 2010 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:


	Weighted average December 31, 2011				Weighted average December 31, 2010
			Range December 31, 2011				Range December 31, 2010


Volatility	84	%	61	%-88%	96	%	95%-102%
Dividend yield	-		-		-		-
Risk-free interest rate	1.37	%	0.25%-2.02%		0.81	%	0.72%-0.81%
Expected term (years)	4.1		2-4.5		3.46		2.67-3.5

The expected volatility was based on the historical price volatility of the Company's common stock. The dividend yield represents the Company's anticipated cash dividend on common stock over the expected term of the stock options. The U.S. Treasury bill rate for the expected term of the stock options was utilized to determine the risk-free interest rate. The expected term of stock options represents the period of time the stock options granted are expected to be outstanding based upon management's estimates.

A summary of option activity under the 2006 Plan for the six months ended December 31, 2011 is as follows:


		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life
					Aggregate Intrinsic Value

	Options
Outstanding at July 1, 2011	3,636,145	$	2.83	3.8	$	478,375
Granted	1,400,000		3.00
Exercised	-		-
Forfeited	-		-
Expired	-		-
Outstanding at December 31, 2011	5,036,145	$	2.87	5.0	$	973,125
Exercisable at December 31, 2011	4,167,395	$	2.89	4.7	$	823,125

The following table presents information relating to nonvested stock options as of December 31, 2011:


			Weighted Average Grant-Date Fair Value

	Options
Nonvested at July 1, 2011	687,500		$	1.74
Granted	1,400,000			1.60
Vested	(1,218,750	)		(1.54	)
Forfeited	-			-
Nonvested at December 31, 2011	868,750		$	1.80

The total fair value of stock options that vested during the six months ended December 31, 2011 and 2010 was $1,871,725 and $701,750, respectively. As of December 31, 2011, the Company had $734,537 of unrecognized compensation cost related to stock options that will be recorded over a weighted average period of less than two years.

Stock-based compensation charges in operating expenses in the Company's financial statements for the three and six months ended December 31, 2011 and 2010 are as follows:


	Three months ended December 31, 2011		Three months ended December 31, 2010		Six months ended December 31, 2011		Six months ended December 31, 2010




General and administrative:
Fair value of stock bonuses expensed	$	-	$	538,183	$	1,035,300	$	539,867
Fair value of stock issued to an employee		24,999		-		49,998		-
Change in fair value from modification of option terms		-		1,276,203		94,820		1,276,203
Fair value of stock options expensed		319,422		660,071		2,165,688		755,180
Total	$	344,421	$	2,474,457	$	3,345,806	$	2,571,250

Research and development:
Fair value of stock options expensed	$	-	$	652	$	40,598	$	652
Total	$	-	$	652	$	40,598	$	652

- Definition

The entire disclosure for shareholders' equity, comprised of portions attributable to the parent entity and noncontrolling interest, if any, including other comprehensive income (as applicable). Including, but not limited to: (1) balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings; (2) accumulated balance for each classification of other comprehensive income and total amount of comprehensive income; (3) amount and nature of changes in separate accounts, including the number of shares authorized and outstanding, number of shares issued upon exercise and conversion, and for other comprehensive income, the adjustments for reclassifications to net income; (4) rights and privileges of each class of stock authorized; (5) basis of treasury stock, if other than cost, and amounts paid and accounting treatment for treasury stock purchased significantly in excess of market; (6) dividends paid or payable per share and in the aggregate for each class of stock for each period presented; (7) dividend restrictions and accumulated preferred dividends in arrears (in aggregate and per share amount); (8) retained earnings appropriations or restrictions, such as dividend restrictions; (9) impact of change in accounting principle, initial adoption of new accounting principle and correction of an error in previously issued financial statements; (10) shares held in trust for Employee Stock Ownership Plan (ESOP); (11) deferred compensation related to issuance of capital stock; (12) note received for issuance of stock; (13) unamortized discount on shares; (14) description, terms, and number of warrants or rights outstanding; (15) shares under subscription and subscription receivables, effective date of new retained earnings after quasi-reorganization and deficit eliminated by quasi-reorganization and, for a period of at least ten years after the effective date, the point in time from which the new retained dates; and (16) retroactive effective of subsequent change in capital structure.

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