Stockholders' Equity

6 Months Ended

Jun. 30, 2011

Stockholders' Equity

Note 7. Stockholders’ Equity

On July 28, 2008, the Company completed a self-directed private placement of 6,450,000 units at a price of $0.50 per unit or $3,225,000 in the aggregate. Each unit consists of one share of the Company’s common stock, one Series A stock purchase warrant (“Series A warrant”) to purchase one share of common stock at $0.60 per share for a period of 18 months from the date of issuance and one Series B stock purchase warrant (“Series B warrant”) to purchase one share of common stock at $0.75 per share for a period of 24 months from the date of issuance (refer to the “Warrants” section below for a discussion of the extension of the expiration date of the warrants).

In the event that during the period when the warrants are outstanding, if the Company issues common stock or common stock equivalents at a price per share which is less than the warrant exercise price, $0.60 per share for Series A warrants and $0.75 per share for Series B warrants, then the exercise price for the warrants shall be reduced to equal the share price of the new issuance and the number of warrant shares issuable shall be increased such that the aggregate exercise price payable shall be equal to the aggregate exercise price prior to such adjustment according to the Securities Purchase Agreement (the “Dilutive Issuance”).

Warrants

Each of the Company’s warrants outstanding entitles the holder to purchase one share of the Company’s common stock for each warrant share held. No warrants were exercised during the six month periods ended June 30, 2011 and June 30, 2010.

On August 27, 2010, the Company extended the expiration date of the 6,450,000 Series A warrants and the 6,450,000 Series B warrants to December 31, 2011. The exercise price of the warrants was not changed.

The potential of a Dilutive Issuance to the warrants’ exercise price and number of underlying shares of common stock may result in a settlement amount that does not equal the difference between the fair value of a fixed number of the Company’s common stock and a fixed exercise price. Accordingly, the warrants are not considered indexed to the Company’s stock and, therefore, are accounted for as a derivative pursuant to ASC 815-40 Contracts in an Entity’s Own Equity which became effective January 1, 2009. Upon the adoption of this guidance, the Company recognized a one-time decrease to opening accumulated deficit of $1,624,513.

As of June 30, 2011, the Company has not sold any shares of common stock or common stock equivalents that would result in an adjustment to the exercise price or number of shares of common stock underlying the warrants outstanding. Additionally, the Company does not intend to sell any shares of common stock or common stock equivalents at a price that is below the exercise price of the warrants, prior to their expiration dates, which would result in a Dilutive Issuance. Since the Company determined that the future probability of a Dilutive Issuance is deemed unlikely, it did not have a material impact on the fair value estimate of the warrant liability at June 30, 2011 as it relates to the Series A or Series B Warrants.

At June 30, 2011, the Company valued the warrant liability using a Black-Scholes model (Level 3 inputs) containing the following assumptions:

	Series A Warrants			Series B Warrants
Warrants outstanding and exercisable at June 30, 2011		6,450,000			6,450,000
Exercise price	$	0.60		$	0.75
Black-Scholes option pricing model assumptions:
Risk-free interest rate		0.100	%		0.100	%
Expected term (in years)		0.50			0.50
Expected volatility		47.12	%		47.12	%
Dividend per share	$	0		$	0
Expiration date	December 31, 2011			December 31, 2011

The following table is a roll forward of the fair value of the warrant liability related to the common stock warrants using the Black-Scholes assumptions as of June 30, 2011 (Level 3 inputs):

	Series A Warrants			Series B Warrants			Total
Balance as of December 31, 2010	$	2,744,200		$	2,503,841		$	5,248,041
Change in fair value		58,652			(64,488	)		(5,836	)
Ending balance, March 31, 2011	$	2,802,852		$	2,439,353		$	5,242,205
Change in fair value		(1,367,682	)		(1,627,130	)		(2,994,812	)
Ending balance, June 30, 2011	$	1,435,170		$	812,223		$	2,247,393

As a result of adjusting the warrant liability to fair value, the Company recorded a non-cash gain of $1,367,682 and $1,627,130 relating to the Series A and Series B Warrants, respectively, for the three month period ended June 30, 2011.