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EQUITY ISSUANCES - Note 7
 9 Months Ended
Sep. 30, 2012
Notes to Financial Statements  
EQUITY ISSUANCES - Note 7

NOTE 7 - EQUITY ISSUANCES

Stock Option Activity

On January 21, 2010, our Board of Directors approved an increase to the number of shares authorized for issuance under our 2001 Equity Incentive Plan (the "Plan") from 12,000,000 to 27,000,000 shares as we determined that the number of shares remaining under the Plan was inadequate to retain our key directors, executives and managers. Our stockholders approved the increase to the Plan on June 15, 2010.The Plan expired on June 5, 2011 and no options were issued under the Plan since that date. On September 1, 2011, our Board of Directors approved the adoption of a new plan to replace the Plan under the same general terms. On June 20, 2012, the shareholder voted and approved the 2011 Equity Incentive Plan at the 2012 Annual Shareholder Meeting.

 

A summary of option activity for the nine months ended September 30, 2012 is presented below. Options granted by MMR Inc. prior to the date of the Merger have been retroactively restated to reflect the conversion ratio of MMR Inc. to MMR shares.

 

              Weighted-      
              Average      
          Weighted-   Remaining      
          Average   Contractual     Aggregate
          Exercise   Life     Intrinsic
    Options     Price   (Years)     Value
Outstanding at December 31, 2011   40,773,523    $ 0.12    6.29    $ 1,498,794 
Granted   7,750,000      0.06           
Exercised   -       -            
Cancelled   (6,125,972)     0.11           
Outstanding at September 30, 2012 (Unaudited)   42,397,551    $ 0.10    6.19    $ -  
                     
                     
Vested and expected to vest                    
     at September 30, 2012 (Unaudited)   42,397,551    $ 0.10    6.19    $ -  
                     
Exercisable at September 30, 2012 (Unaudited)   26,747,548    $ 0.12    4.70    $ -  

 

The aggregate intrinsic value in the table above is before applicable income taxes and is calculated based on the difference between the exercise price of the options and the quoted price of the common stock as of the reporting date.

 

Total stock option expenses recorded during the three months ended September 30, 2012 and 2011 were $208,444 and $344,905, respectively.

 

Total stock option expense recorded for the nine months ended September 30, 2012 and 2011 amounted to $655,124 and $1,066,733, respectively.

 

The following table summarizes information about stock options outstanding and exercisable at September 30, 2012.

 

      Options Outstanding   Options Exercisable
            Weighted   Weighted       Weighted   Weighted
            Average   Average       Average   Average
  Exercise   Number     Remaining   Exercise   Number   Remaining   Exercise
  Price   of Shares     Life (Years)   Price   of Shares   Life (Years)   Price
                             
$ 0.05 - 0.09   11,200,000      9.15   $ 0.07    906,249    6.02   $ 0.08 
  0.1 - 0.15   28,312,290      5.06   0.11    22,956,038    4.51   0.11 
  > 0.15   2,885,261      5.81   0.19    2,885,261    5.81   0.19 
      42,397,551              26,747,548         

 

Warrants

 

On February 17, 2012, the Company issued a warrant to purchase 105,000 shares of common stock in connection to the issuance of a Convertible Promissory Note to an unrelated third-party for a principal amount of $35,000. The term of the warrant was one day and the exercise price was equal to the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that was three (3) trading days prior to the applicable investment date. This warrant vested at commencement and had an aggregate value of $1,785. On the date of investment, the holder converted the promissory notes and exercised the attached warrants.

 

On March 21, 2012, the Company granted a third-party two warrants to purchase up to 175,000 shares of our common stock to as payment for serving on our advisory board. These warrants had an exercise price of $0.06 and $0.08 per share, respectively, with a contractual life through March 21, 2017. These warrants vest annually over two years and have an aggregate value of $10,500 and $14,000, of which $513 and $493 were recorded as operating expenses during the three months ended March 31, 2012, respectively.

 

On April 6, 2012, the Company granted Robert H. Lorsch, our Chairman and Chief Executive Officer, a warrant to purchase 470,000 shares of our common stock at an exercise price of $0.0319 per share in consideration of a guarantee given by Mr. Lorsch to a lender, to guarantee payments due to the lender for a bridge loan received by the Company. The warrant vests immediately and expires five years from the date of issuance.

 

On April 24, 2012, the Company granted B.Riley, an investment banking firm, a warrant to purchase 1,000,000 shares of common stock at a price of $0.06 per share and a warrant to purchase 1,000,000 shares of common stock at a price of $0.10 per share, in conjunction with the signing of an engagement letter with the Company. The first 1,000,000 warrants vest immediately and the second 1,000,000 warrants vest upon the signing by us of a definitive term sheet for a transaction. Both warrants expire five years after the issuance date.

 

On June 26, 2012, the Company granted the RHL Group a warrant to purchase 2,852,200 shares of common stock at a price of $0.02 per share as consideration for the renewal of the Sixth Amended and Restated Secured Promissory Note.

 

On August 13, 2012, the Company granted two separate warrants to purchase 1,000,000 shares of our common stock each to two unrelated third-parties in consideration for services. These warrants had an exercise price of $0.02 and $0.06 per share respectively, and an expiration date of August 13, 2014. These warrants vest only when certain conditions are met.

 

On August 13, 2012, the Company granted a warrant to purchase a total of 1,000,000 shares of our common stock to an unrelated third-party. This warrant vests immediately, has an exercise price of $0.02 per share, and an expiration date of August 13, 2017.

 

On August 28, 2012, the Company granted three separate warrants to purchase a total of 3,000,000 shares of our common stock to one unrelated third-party as payment for services. These warrants vest immediately and have an exercise price of $0.02 per share, and an expiration date of August 28, 2017.

 

On August 30, 2012, the Company granted a warrant to purchase 500,000 shares of our common stock to an unrelated third-party as payment for services. This warrant vests immediately and has an exercise price of $0.02 per share, and an expiration date of August 30, 2013.

 

A summary of the activity of the Company's warrants for the nine months ended September 30, 2012 is presented below:

 

        Weighted Avg
  Shares     Exercise Price
Outstanding at December 31, 2011 64,336,691    $ 0.31 
Granted 17,101,940      0.03 
Exercised (1,105,000)     0.05 
Cancelled (11,481,346)     0.21 
Outstanding at September 30, 2012 68,852,285      0.26 

 

The following summarizes the total warrants outstanding and exercisable as of September 30, 2012.

 

  Warrants Outstanding   Warrants Exercisable
  Warrants     Weighted Avg     Weighted Avg   Warrants   Weighted Avg     Weighted Avg
Ranges Outstanding     Remaining Life     Exercise Price   Exercisable   Remaining Life     Exercise Price
                             
$0.03 - $0.25 63,392,375      2.65    $ 0.09    56,300,708    0.09    $ 0.09 
$0.25 - $2.50 1,010,000      1.92      0.31    1,010,000    0.31      0.31 
> $2.50 4,449,910      0.10      2.77    4,449,910    2.77      2.77 
  68,852,285                61,760,618           

 

Shares Issued for Services or Reduction to Liabilities

 

During the nine months ended September 30, 2012, we issued 32,182,522 shares of common stock with a value of $800,916 to various employees, members of the Board of Directors and non- employees and charged the proceeds to the appropriate accounts for the following reasons:

 

    Nine-Months Ended September 30, 2012
    (Unaudited)
           
Purpose   Shares     Value
           
Reduction of payables    17,031,045    $ 373,214 
Services Provided    15,151,477      427,702 
           
Totals    32,182,522    $ 800,916 

 

The 32,182,522 shares were not contractually restricted, however as they have not been registered under the Act, they are restricted from sale until they are registered under the Securities Act of 1933, as amended (the "Act"), or qualify for resale under the rules promulgated under the Act. All such shares were issued at the trading closing price on the date of issuance and the corresponding values were calculated therefrom.

 

Restricted Stock Program

 

Under the Restricted Stock Program, a restricted stock award is an offer by the Company to sell to an eligible person shares that are subject to restrictions relating to the sale or transfer of the shares. A committee appointed by the Board to administer the program or the Board itself shall determine to whom an offer will be made, the number of shares the person may purchase, the price to be paid and the restriction to which the shares shall be subject. The offer must be accepted by the eligible person within thirty days from the date of the offer evidenced by the Restricted Stock Purchase Agreement. The purchase price of shares shall not be less than 85% of the fair market value of such shares on the issue date, with the provision that the purchase price for a 10% stockholder shall not be less than 110% of such fair market value. Shares are either fully and immediately vested upon issuance, or may vest in installments upon attainment of specified performance objectives.

 

Stock Bonus Program

 

Under the Stock Bonus Program, shares are issued as a bonus for past services rendered pursuant to the Stock Bonus Agreement. Stock bonuses may be awarded upon satisfaction of specified performance goals pursuant to the Performance Stock Bonus Agreement. On June 20, 2012 and June 22, 2012, the Company issued a total of 6,250,000 shares of our common stock at $0.02 per share as an incentive to eight employees and three consultants for past services rendered and future services to be rendered under the Stock Bonus Program. All shares vest on January 21, 2013 and are forfeitable before such time.

 

Derivative Liabilities

 

On April 15, 2011, the Company issued a Restated Convertible Promissory Note to an unrelated third-party with a principal amount of $167,387 which included a 7% closing discount in the amount of $10,951. This Note replaced and terminated a promissory note originally issued to a related third-party on July 26, 2010 for $150,000 plus accrued interest of $6,436. The Restated Note was convertible at the option of the holder into common stock at a variable conversion price of seventy percent (70%) multiplied by the lower of the arithmetic average of the volume-weighted average trading price (VWAP) of the Common Stock for the ten (10) consecutive trading days ending on the date of the applicable conversion date, or the closing bid on the applicable conversion date. As of June 30, 2011, the conversion price was to be permanently fixed based on the calculation stated above with June 30, 2011 being the 10th day. The whole note was ratably converted on April 15, May 16, and June 22, 2011. The Company recognized $147,057 as interest expense related to these conversions. In addition, the Note was treated as derivative due to the variable nature of the conversion price for the period from April 15 through June 30. As a result, the Company also recognized a loss of $37,798 as a change in derivative liability as of June 30, 2011.

 

On July 19, 2011, the Company issued a Restated Convertible Promissory Note to an unrelated third-party with a principal amount of $168,442 which included a 7% closing discount in the amount of $11,020. This Note replaced and terminated a portion of a promissory note originally issued to a related third-party on September 21, 2010 for $150,000 plus accrued interest of $7,422. The Restated Note is convertible at the option of the holder into common stock at a variable conversion price of seventy percent (70%) multiplied by the lower of the arithmetic average of the volume-weighted average trading price (VWAP) of the Common Stock for the ten (10) consecutive trading days ending on the date of the applicable conversion date, or the closing bid on the applicable conversion date. As of September 30, 2011, the conversion price was to be permanently fixed based on the calculation stated above with September 30, 2011 being the 10th day. In addition, the Note was treated as derivative due to the variable nature of the conversion price for the period from July 19, 2011 through September 30, 2011. The derivative liability related to this conversion feature was calculated at $108,481. On August 12, 2011, $50,000 or 30% of the note was converted into common stock; the Company valued the contract again using the Black-Scholes option valuation model and recorded the difference between the value at July 19, 2011 of $108,481 and the value at August 12, 2011 of $115,167, as a loss on change in value of derivatives of $6,686. The Company also relieved $34,186 or 30% of the derivative value upon the 30% of the note conversion. On September 30, 2011, the Company re-valued the derivative with the assumptions used and calculated an increase in value of the derivative of $17,210. Per the contract, the note conversion price became fixed at September 30, 2011; therefore, the Company reclassified the entire remaining derivative value of $98,192 to equity on September 30, 2011. There is no derivative liability at September 30, 2012.

 

We did not designate any of the derivatives liabilities as hedging instruments.

 

The inputs used for the Black-Scholes option and warrant valuation model were as follows.

 

  September 30, 2012   September 30, 2011
  (Unaudited)   (Unaudited)
       
Expected life in years 0 - 5 Years    0 - 5 Years 
Stock price volatility 144.34% - 148.34%   147.89% - 148.34%
Risk free interest rate 0.35%   0.03% - 2.14%
Expected dividends None   None 
Forfeiture rate 0%   0%