Note 7 - Shareholders' Equity

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Note 7 - Shareholders' Equity

NOTE 7 – SHAREHOLDERS’ EQUITY

Common Stock

During the three months ended March 31, 2011, we raised $986,332, net of offering costs, from the sale of 52,248,537 shares of our common stock to various investors in a private placement. During the three months ended June 30, 2011, we raised $500,000, net of offering costs, from the sale of 5,000,000 shares of our common stock to various investors in a private placement.

Restricted Stock Issuances

On May 20, 2011, we issued an aggregate of 140,000 shares of restricted common stock in exchange for professional services. We recognized $35,000 of professional fee expense related to the issuance of these shares based upon the trading price on the date the shares were issued.

On July 1, 2011, we issued 750,000 shares of restricted common stock in exchange for professional services. We recognized $465,000 of professional fee expense related to the issuance of these shares based upon the trading price on the date the shares were issued.

On November 1, 2011, we issued to Trilogy Capital Partners 180,000 shares for investor relations services that commenced in July 2011 and went through December 2011. The Company recognized $21,600 of expense based upon a stock price of $0.12 based upon the trading price on the date the shares were issued.

On December 24, 2011, we issued to 20259 Ventura Blvd LP 1,884,796 shares of restricted common stock valued at $113,088. The purpose of this issuance was to buy-out the remaining lease obligation. The stock price on the date of grant was $0.06 per share. Since these shares vest immediately and there is no service period, the Company expensed these shares on the date of grant. 20259 Ventura Blvd LP is an affiliate of a stockholder of our Company.

Stock Options

In 2010, Phototron adopted a Stock Incentive Plan (the “2010 Plan”). Pursuant to the 2010 Plan, Phototron’s board of directors or a committee appointed thereby may grant, at its discretion, qualified or nonqualified stock options, and may grant or sell restricted stock to key individuals, including employees, nonemployee directors, consultants and advisors. The options vest over periods determined by the administrator of the 2010 Plan.

On February 14, 2011, Phototron amended the 2010 Plan. The amendment increased the number of shares reserved by the 2010 Plan from 333,333 to 433,333 shares of Phototron’s common stock (26,124,268 to 33,961,557 shares of our common stock accounting for the exchange ratio in the PHI Merger) and increased the number of shares that may be granted to any participant from 200,000 to 250,000 (15,674,577 to 19,593,221 shares of our common stock accounting for the exchange ratio in the PHI Merger).

Concurrent with the February 14, 2011 amendment to the 2010 Plan, Phototron issued options to purchase 333,333 shares of Phototron’s common stock to its directors and officers, which, after assumption in the PHI Merger, now entitle such officers and directors to purchase 26,124,268 shares of our common stock, and options to purchase 100,000 shares of Phototron’s common stock to certain of its employees and consultants, which, after assumption in the PHI Merger, now entitle such holders to purchase 7,837,289 shares of our common stock. All of the options have an exercise price of approximately $0.02 per share, which was management’s estimate of the fair value of the common stock on the date of grant, and a ten-year term. The options granted to directors and officers vest one-half upon issuance and one-half on the one year anniversary. All other options vested immediately upon issuance.

Included in the options issued above were 16,719,522 options issued to Craig Ellins, our Executive Chairman, and 4,702,373 options issued to Brian B. Sagheb, our Chief Executive Officer, Chief Financial Officer and Secretary. The options were valued in the aggregate at $270,326 at the date of grant based on a black scholes option pricing model. On October 26, 2011, Craig Ellins agreed to terminate without consideration options to purchase 10,719,522 shares of our common stock and Brian B. Sagheb agreed to terminate without consideration options to purchase 1,175,593 shares of our common stock. During the year, the Company recognized compensation costs of $148,144 on the options that vested.

On May 17, 2011, our board of directors approved the 2011 Stock Incentive Plan (the “2011 Plan”). Pursuant to the 2011 Plan, our board of directors of a committee appointed thereby may grant, at its discretion, qualified or nonqualified stock options, stock appreciation rights and may grant or sell restricted stock to key individuals, including employees, nonemployee directors, consultants and advisors. The options vest over periods determined by the administrator of the 2011 Plan. The 2011 Plan reserved 18,870,184 shares. Option prices issued under the plan may not be less than 100% of the fair market value of the common stock on the date the option is granted. The options are exercisable no later than ten years from date of grant.

On May 20, 2011, we issued 11,500,000 stock options with an exercise price of $0.25 per share to three of our employees that were to vest monthly over terms ranging from two to three years. The options were valued in the aggregate at $1,911,960 at the date of grant based on a black scholes option pricing model. During the year two of the employees were terminated, and their unvested options were forfeited. The other employee entered into a termination of Services Agreement whereby accelerating the vesting of his unvested options. During the year, the Company recognized compensation costs of $958,128 on the options that vested.

On September 22, 2011 we issued 5,000,000 stock options to an employee at an exercise price of $0.13 per share. The options vest over two years, have a ten-year term, and were valued $417,000 on the date of grant based on a black scholes option pricing model. .During the year, the Company recognized compensation costs of $233,924 on the options that vested.

During the year ended December 31, 2011, we issued 5,000,000 stock options to outside consultants. The options have an exercise price of $0.31 per share, which was the stock price on the date of grant and a ten-year term. One-half of these stock options vested upon issuance and the remainder vest in periods of up to two years from the grant date. These options were subsequently cancelled as of December 31, 2011. During the year, the Company recognized compensation costs of $364,833 on the options that vested.

The weighted average grant date fair value of the stock options granted during the year ended December 31, 2011 was $0.068. The total stock based compensation recognized on our statement of operations for the year ended December 31, 2011 was $1,851,151. As of December 31, 2011, the aggregate value of unvested stock options was $192,848, which will vest over an average period of approximately ten months.

Fair value was estimated at the date of grant using the Black-Scholes option pricing model, with the following weighted average assumptions:

	Year Ended December 31, 2011
Risk-free interest rate		3.34	%
Expected dividend yield		None
Expected life		5.21 years
Expected volatility		77	%

The following table summarizes stock option activity for our company during the years ended December 31, 2011 and 2010:

	Options		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding December 31, 2010	-	$	-	-		$	-
Granted	55,461,557		0.10	-		-
Exercised	-		-	-		-
Forfeited or expired	(24,600,471)		0.14	-		-
Outstanding December 31, 2011	30,861,086		0.07		5.81		2,898,302
Vested or expected to vest at December 31, 2011	25,146,808	$	0.07		5.11	$	2,392,544

The aggregate intrinsic value was calculated as the difference between the market price and the exercise price of our common stock, which was $0.15 as of December 31, 2011.

A summary of the status of our nonvested shares granted under our stock option plan as of December 31, 2011 and changes during the year then ended is presented below:

	Shares			Weighted- Average Grant Date Fair Value
Nonvested at December 31, 2010		—		$	—
Granted		55,461,557		$	0.07
Vested		(32,068,921	)	$	0.06
Forfeited		(17,660,355	)	$	0.09
Nonvested at December 31, 2011		5,714,281		$	0.04

Warrants

The following table summarizes warrant activity for our company during the years ended December 31, 2011 and 2010:

	Warrants		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding December 31, 2010	-	$	-	-		$	-
Issued	2,248,954		0.10	-		-
Outstanding December 31, 2011	2,248,954	$	0.10		4.75	$	22,490

The aggregate intrinsic value was calculated as the difference between the market price and the exercise price of our common stock, which was $0.15 as of December 31, 2011.

On October 8, 2011, in connection with the issuance of the Europa Note (Note 5), we also issued to Europa a Common Stock Purchase Warrant to purchase 500,000 shares of our common stock, at a per share price of $0.10, with a term of five years. Europa is an affiliate of a stockholder of our company.

On October 12, 2011, in connection with the issuance of the W-Net Note (Note5 ), we also issued to W-Net a Common Stock Purchase Warrant to purchase 1,748,954 shares of our common stock, at a per share price of $0.10, with a term of five years. W-Net is an affiliate of a stockholder of our company.