7. Stock Options and Warrrants

3 Months Ended

Mar. 31, 2013

Share-based Compensation Arrangement by Share-based Payment Award, Options, Additional Disclosures [Abstract]

Stock Options and Warrants

As of March 31, 2013, there were 8.9 million shares of common stock available for issuance pursuant to our equity compensation plans.  Awards of stock options, stock appreciation rights, stock, restricted stock, restricted stock units, performance units and performance shares may be granted under the 2012 Incentive Plan. The 2012 Incentive Plan initially authorizes the issuance of up to 53 million shares of our common stock.   In conjunction with the adoption of the 2012 Incentive Plan, all prior plans were suspended and no further grants are to be made from those plans. Further, any shares subject to outstanding awards under the prior plans on the effective date of the 2012 Incentive Plan that subsequently cease to be subject to such awards (other than by reason of exercise or settlement of the awards in shares), will automatically become available for issuance under the 2012 Incentive Plan, up to an aggregate maximum of 20.5 million shares.

Changes in our outstanding stock options during the three months ended March 31, 2013 were as follows:

	Number of Stock Options		Weighted Average Price		Weighted Average Remaining Contractual Term
Outstanding at December 31, 2012		54,065,045	$	0.12
Granted		4,820,000		0.03
Exercised		–		–
Cancelled or expired		–		–
Outstanding at March 31, 2013		58,885,045	$	0.12		4.82
Exercisable at March 31, 2013		20,547,297	$	0.12
Vested and expected to vest at March 31, 2013		58,885,045	$	0.12		4.82

The fair value of the stock options granted for the three months ended March 31, 2013 was determined to be approximately $.2 million, which will be amortized over the vesting period of three years. At March 31, 2013, there was approximately $3.7 million of unamortized stock-based compensation cost related to non-vested stock options issued.  That cost is expected to be recognized as an expense over a remaining vesting period of approximately 2.25 years.  

Stock based compensation is allocated as follows (in thousands):

Stock-based compensation expense:

	Three Months Ended March 31,
	2013		2012
Sales and marketing	$	131	$	99
General and administrative		264		101
Research and development		75		95
	$	470	$	295

Changes in outstanding warrants were as follows during the three months ended March 31, 2103:

	Shares of Common Stock
	Issuable from Warrants
	Outstanding as of
Date of Issue	March 31, 2013	Exercise Price	Expiration
November 1, 2009	175,000	$3.50	November 1, 2013
July 1, 2009	600,000	$3.20	February 2014
February 1, 2009	644,166	$1.00	February 1, 2014
July 30, 2012	6,627,000	$0.05	July 30, 2017
August 3, 2012	2,667,000	$0.05	August 3, 2017
August 21, 2012	2,625,000	$0.05	August 21, 2017
February 15, 2013	12,000,000	$0.05	February 15, 2018
	25,338,166

In conjunction with Senior Notes issued in July and August, 2012, we issued warrants to purchase up to 12,000,000 shares of common stock at an exercise price of $0.10 per share. The Senior Notes contained protective provisions that provide for a one-time adjustment upon certain issuance of additional equity or the incurrence of certain indebtedness by the Company. Because the issuance of the Bridge Notes without the consent of the holders of a majority of the majority of the indebtedness represented by the Senior Notes would trigger the adjustment, the Company approved the adjustment in connection with obtaining the consent of the Senior Note holders to issuing the Bridge Notes. As a result of the adjustment, the number of shares of common stock issuable pursuant to the warrants increased to 24,000,000 and the exercise price was reduced to $0.05 per share.

The modified warrants and new warrants issued were valued at a relative fair value of approximately $1.2 million which resulted in an adjustment of approximately $0.2 million and was recorded as debt discount and additional paid in capital. After the modification and issue of the additional 12,000,000 warrants debt discount at March 31, 2013, was approximately $1.1 million.

Liability For Potentially Dilutive Securities in Excess of Authorized Number of Common Shares

In accordance with ASC Topic 815, Derivatives and Hedging, the Company accounts for contracts for the issuance of common stock that are in excess of authorized shares as a liability that is recorded at fair value.  This liability is required to be remeasured at each reporting period with any change in value to be included in other income and expense until such time as there is no longer an excess of the number of issued and potentially issuable securities over the number of authorized shares.  This condition will change either because of an increase in the authorized number of shares or a reverse stock split as approved by shareholders or a reduction in the number of potentially issuable securities.  At that time any existing liability will be eliminated.

On January 1, 2013, the combined total of the Company’s issued shares and its potentially issuable shares exceeded the authorized number of shares by 60,100,524 potentially issuable shares.  This excess arose because of the conversion features of certain preferred shares that were triggered on that date, issuance of warrants and stock options.  At this initial measurement date, the fair value of the potentially issuable shares in excess of the authorized number of common shares was approximately $2.1 million, which amount was recorded as a liability for reclassified equity contracts, with a corresponding charge to shareholders’ equity.  This liability was recorded based on the valuation of the last contracts to contribute to the excess.

As of March 31, 2013, potentially issuable shares in excess of the authorized number of common shares remained 60,100,524 potentially issuable shares, the fair value of which was remeasured at approximately $9.5 million.  The adjustment to the liability for reclassified equity contracts at that date resulted in a charge to other income and expense of $7.4 million for the quarter then ended.  The expense has been recorded as valuation of reclassified equity contracts.