Capital Stock

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Note 4.Capital Stock

Preferred Stock

The Company has authorized 10,000,000 shares of preferred stock with a par value of $0.001 per share.

In April 2008, the Company designated the Series A Preferred Stock, with a par value of $0.001 per share, and authorized the issuance of 100 shares to the Company’s Chairman and Chief Executive Officer. The Series A Preferred Stock provides voting rights as if each share of Series A Preferred Stock is equal to 80,000 shares of the Company’s common stock. The holder of Series A Preferred Stock is entitled to vote together with the holders of the common stock on all matters that the common stock is entitled to vote on.

Effective February 24, 2009, the Company acquired, and retired, from its former Chairman and Chief Executive Officer, the 100 shares of Series A preferred stock then outstanding, in exchange for a commitment by the Company to issue its former Chairman and Chief Executive Officer a warrant to purchase 1,500,000 shares of the Company’s common stock at $8.00 per share, with a five-year exercise period.

Common Stock

The Company has authorized 100,000,000 shares of common stock with a par value of $0.001.

On March 20, 2012, pursuant to a debt settlement agreement (see Note 2), the Company issued 3,000,000 shares of its common stock to a note holder who will sell these shares, and the net proceeds will reduce the Company's liability to the note holder. The Company estimated the fair market value of the common stock to be $30,000 on the date of issuance (based on the closing share price on the issuance date) and recorded the amount in prepaid expenses and other current assets. The Company will record the change in fair value of the shares still held by the note holder on each reporting date with the change in fair value being recorded as a change in fair value of shares issued to note holder within the condensed consolidated statement of operations. The fair market value of the shares still held by the note holder (3,000,000 shares are still held by the note holder) at March 31, 2012 was $120,000. As a result, the Company recorded a change in fair value of $90,000 in the condensed consolidated statement of operations for the period ended March 31, 2012.

On March 23, 2012, the Board of Directors agreed to exchange their accrued and future compensation for fiscal 2012 for 29,478,000 shares of the Company’s common stock valued at $1,473,900. Total accrued compensation as of that date was $1,248,900, of which $75,000 was incurred during the three months ended March 31, 2012 and $1,173,900 was included in accrued compensation at December 31, 2011.  The future compensation for 2012 is expected to be $225,000 which in aggregate was agreed by both parties to be exchanged into shares at a price of $0.05 per share. The Company recorded $225,000 related to the estimated value of the shares to prepaid expenses as the services are expected to be provided over the remaining period of fiscal 2012 and $1,248,900 being recorded against accrued compensation during the period ended March 31, 2012. The prepaid expense of $225,000 will be recorded to professional fees in the accompanying condensed consolidated statements of operations over the next three quarters as services are provided to the Company.

On March 23, 2012, the Board of Directors authorized the Company to issue stock for consulting services to be performed on behalf of the Company. The Board authorized the issuance of 16,950,000 shares of common stock to various consultants, of which, 5,000,000 shares are to be  issued to Mr. Stan Weiner, the Company’s Chief Executive Officer, and 10,750,000 to be issued to the other various consultants.  As of the date of this report, the Company was in the process of cancelling 1,200,000 of the shares that were part of the original 16,950,000 shares to be issued for consulting services to be performed.  As of March 31, 2012, none of the shares have been issued related to the services to be performed pursuant to such consulting agreements. The Company estimated the fair value of the shares to be approximately $786,000 based on the fair value of the share price on the commitment date. The Company will record estimated fair value to expense for such services as they are performed ratably over the term of the consulting agreements. Upon issuance of shares, the Company will re-class such accrued amount to equity at such time. The consulting agreements mature on various dates through April 2013. As of March 31, 2012, the Company has accrued $8,000 in the accompanying condensed consolidated balance sheet under - Accrued consulting fees – share based and expensed $8,000 in the accompanying condensed consolidated statement of operations under – shares issued or to be issued for compensation. The Company expects to record approximately $285,000, $201,000 and $203,000 to expense during the second, third and fourth quarters, respectively, for fiscal year 2012.

On March 23, 2012, the Board authorized the issuance of 425,000 shares of the Company’s common stock to its Advisory Board members. The Company estimated the fair market value to be $8,500 based on the closing share price on the date of issuance.

On March 23, 2012, the Company issued 18,750 shares to a consultant. The Company estimated the fair market value to be $375 based on the closing share price on the date of issuance.

As of March 31, 2012, the Company has an aggregate of common stock issued and outstanding plus common stock equivalents which, if fully converted, would be in excess of the 100,000,000 authorized shares permitted by the articles of incorporation of the Company. Total common shares outstanding plus common stock equivalents (warrants and conversion features) totaled approximately 168,000,000 as of March 31, 2012. As a result, the Company has recorded all common stock equivalents as a derivative liability in the accompanying condensed consolidated balance sheet at March 31, 2012 (see Note 3).

Total Dilutive Securities

As of March 31, 2012, the Company had the following outstanding dilutive securities to acquire the Company’s common stock:

	Number of
	Underlying
	Common		Exercise
Security	Shares		Price		Expire
Warrants associated with the $2.00 Unit Offering		1,948,300	$	0.30		2013
Warrants associated with the $2.00 Unit Offering		1,948,300		0.60		2013
Warrants associated with the $2.00 Unit Offering		1,948,300		1.20		2013
Warrants issued for Professional Services		1,500,000		4.00		2014
Warrants associated with the January 14, 2009 Bridge Note		480,000		3.00		2014
Warrants associated with the acquisition of the Company's
Preferred Shares outstanding		1,500,000		8.00		2014
Warrants associated with the 12% Convertible Notes		1,641,496		0.02		2014-2015
Common stock associated with the 12% Convertible Notes		26,443,250		0.02		2010-2011
Warrants associated with the 2010 Unit Offering		1,430,000		0.50		2012
Warrant associated with Revenue Participating Notes		181,500		0.20		2014
Warrants issued to Placement Agent		566,667		0.20		2013
Warrants associated with the 14% Convertible Notes		16,840,371		0.20		2013
Common stock associated with the 14% Convertible Notes		32,460,500		0.08		2013
		88,888,684

Warrants

A summary of the Company’s warrant activity and related information during the period ended March 31, 2012 follows:

	Number of Shares		Weighted- Average Exercise Price		Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2012		29,803,434	$	0.93
Issued		181,500	$	0.20
Exercised		-
Forfeited		-
Cancelled		-	$	-
Expired		-
Outstanding at March 31, 2012		29,984,934	$	0.93	1.67	$	-
Exercisable		29,984,934	$	0.93	1.67	$	-