Note 7. Stockholders' Equity

12 Months Ended

Jun. 30, 2012

Stockholders' Equity Note Disclosure [Text Block]

7.     STOCKHOLDERS' EQUITY:

Series B Preferred stock:

At July 1, 2011, the Company had 28,170 shares of Series B redeemable convertible Preferred stock outstanding with a par value of $0.01, and convertible at the option of the holder at $2.00 per share, with dividends accrued and payable at 2.5% per quarter.  The Series B Preferred stock is mandatorily redeemable at $2.00 per share by the Company three years after issuance and accordingly was classified outside of shareholders’ equity.

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 year ended June 30, 2012, 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).  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, and the Company issued 121,590 warrants to brokers as a cost of the conversion.   The Company allocated the value between the restricted common stock and the warrants based upon their relative fair values 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.

During the years ended June 30, 2012 and 2011, the Company declared dividends of $72,550 and $281,700 respectively. At June 30, 2012 and 2011, dividends payable are $4,500 and $70,425, respectively.

During September 2012 the Company redeemed 250 shares of its Series B Preferred stock plus accrued dividends of $2,500 for $27,500.  The remaining 200 shares have reached their maturity date but due to the cash constraints of the Company have not been redeemed as of September 12, 2012.

Series C Preferred stock:

At July 1, 2011 the Company had 32,150 shares of Series C Preferred stock outstanding, which have a par value of $0.01 per share and are 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 year ended June 30, 2012, 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 was accounted for as an inducement and resulted in a conversion inducement of $755,258.  Pursuant to the Series C Conversion Agreement the Company paid fees to any licensed/registered broker(s)/advisor(s) who assisted in the conversion process.  During the year ended June 30, 2012, 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 values 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 also paid cash commissions of $11,122 related to the Series C Conversion Agreement.   The $755,258 conversion inducement, which is reflected as part of the value of the Series C Preferred stock with an offset to reduce additional paid-in capital, is included in the determination of net loss applicable to common stockholders.

During the years ended June 30, 2012 and 2011, the Company declared dividends of $82,625 and $274,675 respectively. At June 30, 2012 and 2011 dividends payable are $3,000 and $80,375, respectively.

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 year ended June 30, 2011, the Company sold 311,746 of the Company’s common stock for net proceeds of $813,200.

During the year ended June 30, 2011, the Company issued 152,715 shares of the Company’s restricted common stock at prices ranging from $1.50 to $3.19 per share for consulting services valued at $382,839, in the aggregate, to various consultants and an employee.

On December 31, 2010, the Company declared stock bonuses to certain key employees and recorded non-cash compensation expense of $536,500 during the year ended June 30, 2011for services performed through December 31, 2010.  The Company issued 185,000 shares of its common stock at $2.90 per share, the approximate market value on the date of the grant.

On January 1, 2011 the Company declared a contingent stock bonus of 50,000 shares to Mr. Smith and recognized $145,000 of non-cash compensation expense.  The stock bonus is contingent upon the Company’s stock price exceeding $10.00 and does not require that Mr. Smith remain employed by the Company.

During the year ended June 30, 2011, 20,000 warrants were exercised at $2.00 per share for the purchase of 20,000 shares of the Company’s common stock for proceeds of $40,000.

During the year ended June 30, 2012, the Company issued 131,918 shares of the Company’s restricted common stock at prices ranging from $2.00 to $3.27 per share for consulting services valued at $331,126, in the 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 year ended June 30, 2012, 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 year ended June 30, 2012.

During the year ended June 30, 2012, the Company entered into subscription agreements to sell 2012 A UNITS.  As of June 30, 2012, the Company had issued a total of 556,000 2012 A  UNITS, consisting of 140,000 under new subscription agreements for total proceeds of $350,000 and 416,000 upon the amendment of the 2011 UNITS.  Mr. Bassani and Mr. Smith each amended their subscriptions for 60,000 2012 A UNITS on identical terms with other electing parties.

In June 2012, the Company entered into subscription agreements to sell 2012 B UNITS for $2.25 each, with each 2012 B UNIT consisting of one 2012 B share of the Company’s restricted common stock and one 2012 B warrant to purchase one half of a share of the Company’s restricted common stock for $3.10 per share until December 31, 2014 (the “2012 B UNITS”).  As of June 30, 2012, the Company had issued a total of 193,000 2012 B UNITS for total proceeds of $434,250.  The Company allocated the proceeds from the 2012 B shares and the 2012 B warrants based upon their relative fair values, using the share price on the day each of the subscription agreements were entered into and the fair value of the 2012 B Warrants, which was determined to be $0.075 per 2012 B Warrant.  As a result, $7,311 was allocated to the 2012 B Warrants and $426,939 was allocated to the 2012 B Shares, and both were recorded as additional paid in capital.

Warrants:

As of June 30, 2012, the Company had approximately 6.5 million warrants outstanding, with exercise prices from $0.75 to $4.25 and expiring on various dates through January 15, 2019.

The weighted-average exercise price for the outstanding warrants is $2.17, and the weighted-average remaining contractual life as of June 30, 2012 is 5.67 years.

In July 2010, warrants to purchase 200,000 shares of the Company’s common stock at $2.00 per share were issued pursuant to an extension agreement with Mr. Smith (Note 12).  These warrants were determined to have a fair value of $0.10 per warrant and expire on January 15, 2019.  The Company recorded non-cash compensation expense of $20,000 related to the warrant issuance.

From July 1, 2010 through March 1, 2011, warrants to purchase 135,000 shares of the Company’s common stock at $2.25 per share were issued pursuant to an agreement with two consultants.  The warrants were determined to have a fair value of $0.25 per warrant and expire on December 31, 2015.  The Company recorded non-cash compensation expense of $33,750 related to the warrant issuances.

During the year ended June 30, 2012, the Company issued warrants to purchase 55,000, 70,000 and 96,500 shares of the Company’s common stock in connection with the sale of 2011 UNITS (Note 6),  2012 A UNITS (Note 7) and 2012 B UNITS (Note 7), respectively.  The Company also issued warrants in connection with the conversions of its Series B and Series C Preferred stock and the Company issued 208,000 warrants in connection with the amendments of the 2011 UNIT subscription agreements (Note 6).

During the year ended June 30, 2012 warrants to purchase 10,000 shares of the Company’s common stock at $2.25 per share were issued pursuant to an agreement with a consultant.  The warrants were determined to have a fair value of $0.10 per warrant and expire on June 30, 2017.  The Company recorded non-cash compensation expense of $1,000 related to the warrant issuance.

During the year ended June 30, 2012, 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.  Also during the year ended June 30, 2012, 10,000 warrants issued to a consultant to purchase common shares of the Company at $2.20 per share expired.

Stock options:

The Company’s 2006 Consolidated Incentive Plan (the “2006 Plan”), as amended, provides for the issuance of options 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 December 2010, the Board of Directors, in an effort to retain key employees and consultants, approved the modification of certain options to certain employees and consultants resulting in the extension of certain expiration dates.  As a result of the modifications, the Company recorded incremental non-cash compensation expense of approximately $7,000 and $891,000 for the years ended June 30, 2012 and 2011, respectively.

In January and March 2011, the Company entered into new employment agreements with two employees that vested stock options previously granted to the employees during May 2008, with issuance and vesting contingent upon the signing of new employment agreements.  The new employment agreements also entitled the employees to modifications of existing stock options resulting in the extension of certain expiration dates, resulting in incremental non-cash compensation expense of approximately $263,700 for the year ended June 30, 2011.

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 existing stock options resulting in the extension of certain expiration dates and resulted in incremental non-cash compensation expense of approximately $94,800 for the year ended June 30, 2012.

In January 2012, the Company entered into a new employment agreement with an employee which entitled the employee to a modification of existing stock options resulting in the extension of certain expiration dates.  The modification did not result in incremental non-cash compensation expense.

The Company recorded compensation expense related to employee stock options of $2,630,853 and $3,253,532 for the years ended June 30, 2012 and 2011, respectively.  The Company granted 1,475,000 and 2,045,000 options during the years ended June 30, 2012 and 2011, respectively and nil and 679,688 options were forfeited during the years ended June 30, 2012 and 2011, respectively.  The fair value of the options granted during the years ended June 30, 2012 and 2011 were estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	Weighted average, June 30, 2012			Range, June 30, 2012					Weighted average, June 30, 2011			Range, June 30, 2011
Volatility		83	%		61%	-	88	%		90	%		84%	-	105	%
Dividend yield		-				-				-				-
Risk-free interest rate		1.31	%		.25%	-	2.02	%		1.03	%		.72%	-	2.02	%
Expected term (years)		4.02			2	-	4.5			3.49			2	-	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 two years ended June 30, 2012 is as follows:

	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at July 1, 2010		2,270,833		$	2.85		3.4	$	81,250
Granted		2,045,000			2.91
Exercised		-			-
Forfeited		(679,688	)		3.10
Expired		-			-
Outstanding at June 30, 2011		3,636,145			2.83		3.8		478,375
Granted		1,475,000			2.97
Exercised		-			-
Forfeited		-			-
Expired		-			-
Outstanding at June 30, 2012		5,111,145		$	2.86		4.6	$	274,200
Exercisable at June 30, 2012		4,521,145		$	2.88		4.4	$	274,200

The following table presents information relating to nonvested stock options as of June 30, 2012:

	Options			Weighted Average Grant-Date Fair Value
Nonvested at July 1, 2011		687,500		$	1.74
Granted		1,475,000			1.57
Vested		(1,572,500	)		(1.54	)
Forfeited		-			-
Nonvested at June 30, 2012		590,000		$	1.83

The total fair value of stock options that vested during the years ended June 30, 2012 and 2011 was $2,434,200 and $1,780,100, respectively.  As of June 30, 2012, the Company had $487,290 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 years ended June 30, 2012 and 2011 are as follows:

	Year ended June 30, 2012		Year ended June 30, 2011
General and administrative:
Fair value of stock bonuses expensed	$	1,035,300	$	684,867
Fair value of stock issued to an employee		99,996		-
Change in fair value from modification of option terms		94,820		954,703
Fair value of stock options expensed		2,485,782		1,830,512
Total	$	3,715,898	$	3,470,082
Research and development:
Change in fair value from modification of option terms	$	-	$	200,200
Fair value of stock options expensed		50,251		268,117
Total	$	50,251	$	468,317