Stockholders' Deficit

9 Months Ended

Oct. 31, 2012

Stockholders' Deficit

14. Stockholders’ Deficit

Equity Incentive Plan

On March 4, 2010, the Company’s Board of Directors approved the 2010 Equity Incentive Plan (the “Plan”). The Plan provides for the granting of the following types of awards to persons who are employees, officers, consultants, advisors, or directors of our Company or any of its affiliates:

Under the Plan, the Company may issue a variety of equity vehicles to provide flexibility in implementing equity awards, including incentive stock options, nonqualified stock options, restricted stock grants and stock appreciation rights.

Subject to the adjustment provisions of the Plan that are applicable in the event of a stock dividend, stock split, reverse stock split or similar transaction, up to 5,000,000 shares of common stock may be issued under the Plan. Options granted under the Plan generally vest over a three-year period and generally expire ten years from the date of grant.. 

Stock options and warrants issued to non-employees as compensation for services to be provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair value of the option or warrant, whichever can be more clearly determined. The Company recognizes this expense over the period in which the services are provided.   

On August 31 , 2012 the Company’s Board of Directors amended the 2010 Equity Incentive Plan, and adopted the 2012 Incentive Plan (the “2012 Plan”), which allowed the Board to grant an additional 5,000,000 shares up to 10,000,000 shares of the Company’s common stock. The 2012 Plan awards include incentive stock option, non-qualified options, restricted common stock, and stock appreciation rights. As of October 31, 2012, approximately 1,658,000 shares are available for future grants under the 2012 Plan. The Company issues new shares to satisfy stock option and warrant exercises

Share Issuances 

The Company’s Board of Directors authorized the issuance 600,000 shares of common stock for compensation related to consulting and directors’ fees during the twelve months ended January 31, 2012. The shares were valued at $90,000 based on the fair values of the shares at the issuance dates. These shares were not issued as January 31, 2012 and were recorded as a liability at January 31, 2012. Included in the issuance of 600,000 shares were 400,000 restricted shares of common stock acquired by Mr. Suresh Nihalani for $0.001 per share in connection with Mr. Nihalani’s re-election to the Company’s Board of Directors. The fair value of the grant to Mr. Nihalani was $60,000 and was recorded as compensation expense during the year ended January 31, 2012.

During the three months ended April 30, 2012, the Company’s Board of Directors authorized: (i) the purchase of 400,000 restricted shares of the Company’s common stock by Mr. Gary Augusta at $0.001 per share by Mr. Augusta in connection with Mr. Augusta’s election to the Company’s Board. The fair value of the shares at grant date was $47,520 and will be accounted for as prepaid consulting and amortized to expense over the related service period, with the unamortized portion presented as a contra equity account on the balance sheet ; (ii) the issuance of 216,000 common shares to SpaGus Capital, LLC with a fair value of $25,661 related to the cost of placing the Senior Secured Note (see Note 8); and (iii) the issuance of 300,000 common shares with a fair value of $41,560 related to consulting services provided by Mr. Augusta during the three months ended April 30, 2012. The Company has the right, but not the obligation, to redeem the unearned service portion of the 400,000 restricted shares purchased by Mr. Nihalani and 400,000 restricted shares purchased by Mr. Augusta at par value.

The Company’s Board of Directors authorized the issuance of 200,000 shares to Mr. Augusta with a fair value of $26,000 during the three months ended July 31, 2012 related to consulting services provided by Mr. Augusta.

On September 15, 2012, the Company’s Board of Directors authorized the issuance of 3,350,000 shares of the Company’s common stock to certain employees and consultants as follows: (i) 1,200,000 common shares purchased by the sole shareholder of Verdugo for $0.001 per share, pursuant to a consulting agreement dated August 1, 2012 in which if the Verdugo shareholder is terminated for “any or no reason”, the Company will have the right, but not the obligation, to repurchase at $0.001 per share 800,000 shares if the agreement is terminated within twelve months of the date of the VMM Purchase Agreement (Note 16), and repurchase 400,000 shares if the agreement is terminated within 24 months. The fair value of the shares was estimated to be $480,000, and the share purchase will be accounted for as prepaid consulting and amortized over the life of the agreement; (ii) 1,000,000 common shares purchased by Dr. Warren Hosseinion, the Company’s Chief Executive Officer, for $0.001 per share with a fair value of $420,000 and expensed at grant date;(iii) 700,000 common shares purchased by Mr. Kyle Francis, the Company’s Chief Financial Officer, for $0.001 per share with a fair value of $269,500 and expensed at grant date; (iv) 316,667 common shares purchased by certain employees and consultants for $0.001 per share with a fair value of $196,000 and expensed at grant date.

On October 15, 2012 the Company’s Board of Directors authorized the issuance of 100,000 shares of the Company’s common stock to SpaGus Capital Partners, LLC in connection with the amendment of the Company’s Senior Secured Promissory Note with a fair value of $50,000 (see Note 8).

On October 18, 2012 the Company’s Board of Directors authorized the issuance of 400,000 restricted shares of the Company’s common stock with a fair value of $168,000 to Mr. Mark Meyers, pursuant to Mr. Meyers’ appointment to the Company’s Board of Directors. On October 22, 2012 the Company’s Board of Directors authorized the issuance of 500,000 restricted shares of the Company’s common stock with a fair value of $210,000 to Mr. Mitch Creem, pursuant to Mr. Creem’s appointment to the Company’s Board of Directors. Mr. Meyers and Mr. Creem’s restricted share grants each vest on a monthly basis over 36 months and will be accounted for as prepaid consulting and amortized over the life of their respective agreements.

On October 29, 2012 the Board of Directors authorized the issuance of 20,000 shares of the Company’s common stock with a fair value of $12,600 to 10% Notes placement agent (see Note 9).

Warrants outstanding

Warrants consisted of the following:

	Aggregate		Number of
	intrinsic value		warrants
Outstanding at January 31, 2012	$	-		1,500,000
Granted		-		2,100,000
Exercised		-		-
Cancelled		-		(1,500,000	)
Outstanding at October 31, 2012	$	-		2,100,000

Exercise Price		Warrants		Weighted		Warrants		Weighted
		outstanding		average		exercisable		average
				remaining				exercise price
				contractual life
$	0.11485		1,250,000		3.76		1,250,000	$0.11485
$	0.11485		250,000		3.76		250,000	$0.11485
$	0.45000		500,000		3.76		500,000	$0.45000
$	0.50000		100,000		5.00		100,000	$0.50000
			2,100,000		3.82		2,100,000	$0.21299

In conjunction with the completion of the private placement on October 16, 2009, the Company issued a total of 1,500,000 warrants (“Warrants”). Of this amount, 1,250,000 warrants were issued to the holders of the Convertible Notes and 250,000 warrants were granted to the placement agent. The warrants are exercisable into shares of Common Stock at an exercise price of $0.11485. The warrants had a five-year term and expire on October 31, 2014. On October 29, 2012 the Company, in connection with amendment of its 10% Senior Subordinated Convertible Notes amended the Warrants in which the exercise price was fixed at $0.11485 per share and in which the term was extended to July 31, 2016. In addition, the Company issued to the 10% Note holders warrants to acquire 500,000 shares of the Company’s common stock at $0.45 per share, which have a term that extends to July 31, 2016. The Company issued to the placement agent in the 10% Notes amendment warrants to acquire 100,000 shares of the Company’s common stock at $0.50 per share (see Note 9).

Options outstanding

During the year ended January 31, 2011, the Company’s Board of Directors granted 1,150,000 options to employees and directors. The fair value of the options was $0.11 per share, or $126,500 aggregate fair value. The fair value of each option award was estimated using the Black-Scholes option pricing model. The calculation was based on the exercise price of $0.15, an expected term of 10.0 years using the simplified method, interest rate of 1.98%, volatility of 80% and no dividends.

Related compensation expense was $6,254 and $7,333 for the three months ended October 31, 2012 and 2011, and related compensation expense was $18,764 and $21,999 for the nine months ended October 31, 2012 and 2011, respectively. Unrecorded compensation cost related to non-vested the 2011option awards was $6,254 at October 31, 2012 and $25,015 at January 31, 2012, respectively.

On February 1, 2012 the Board of Directors approved the grant of 1,000,000 stock options to Mr. Ted Schreck in pursuant to Mr. Schreck’s agreement to join the Company’s Board as director. The options vest in three equal installments on each of February 1, 2012, 2013, and 2014. The options expire on the tenth anniversary of issuance. The fair value of the stock options of $120,000 was determined under the Black-Scholes option pricing model. The calculation was based on the exercise price of $0.15, an expected term of 10.0 years, interest rate of 1.97%, volatility of 80.0% and no dividends.

Total stock option compensation recognized for Mr. Schreck’s stock options was $15,000 and $85,000 for the three and nine months ended October 31, 2012, respectively. Unrecorded compensation cost related to non-vested option awards to Mr. Schreck was $35,000 as of October 31, 2012, which will be recognized through fiscal year ending January 31, 2014, subject to Mr. Schreck’s continued role as director.

On September 15, 2012 the Company’s Board of Directors authorized the issuance of stock options to acquire 3,075,000 shares of the Company’s common stock to certain of the Company’s physicians and medical professionals. The options substantially vest in three equal installments on each September 15, 2012, July 31, 2013 and July 31, 2014, and expire on the tenth anniversary of issuance. The fair value of the options was estimated to be $907,796 determined using the Black-Scholes option pricing model based on the following inputs: exercise price of $0.21, expected term of 3.7 years, interest rate of 0.42%, volatility of 80.0% and no dividends. Related compensation cost was $406,125 for the three months ended October 31, 2012. Unrecorded compensation cost related to these non-vested option awards was $501,611 as of October 31, 2012, which will be recognized through July 31, 2014, subject to the recipients continued role with the Company.

Stock option activity for the nine months ended October 31, 2012 is summarized below:  

	Shares		Weighted		Weighted		Aggregate
			Average		Average		Intrinsic
			Per Share		Remaining		Value
			Exercise		Life
			Price		(Years)
Balance, January 31, 2012		1,150,000	$	0.15		8.9	$	-
Granted		4,075,000		0.19		9.7		-
Exercised		-		-		-		-
Expired		-		-		-		-
Forfeited		-		-		-		-
Balance, October 31, 2012		5,225,000	$	0.18		9.4	$	-
Vested and expected to vest		2,608,336	$	0.18		9.4	$	-
Exercisable, October 31, 2012		2,541,669	$	0.18		9.4	$	-

As of October 31, 2012 and January 31, 2012, there was approximately $542,864 and $25,015, respectively, of total unrecognized compensation cost related to non-vested share-based employee and director compensation arrangements. The remaining unrecognized expense at October 31, 2012 is expected to be recognized through the fiscal year ending January 31, 2015.

Authorized stock

At October 31, 2012 the Company was authorized to issue up to 100,000,000 shares of common stock. The Company is required to reserve and keep available out of the authorized but unissued shares of common stock such number of shares sufficient to effect the conversion of all outstanding shares of the 10% Senior Subordinated Callable Convertible Notes, the 8% Senior Subordinated Convertible Promissory Notes, the exercise of all outstanding warrants exercisable into shares of common stock, and shares granted and available for grant under the Company’s stock option grants. The amount of shares of common stock reserved for these purposes is as follows:

	As of
	October 31, 2012
Common stock issued and outstanding		34,768,441
Conversion of 10% Notes		10,883,761
Conversion of 8% Notes		600,000
Warrants		2,100,000
Stock options outstanding		5,225,000
		53,577,202