EQUITY

12 Months Ended

Dec. 31, 2011

EQUITY [Text Block]

NOTE 9.  EQUITY

Common and Preferred Stock

The Company is authorized to issue 150,000,000 shares of common stock, $0.01 par value, of which 74,171,998 common shares were issued and outstanding as of December 31, 2011. The Company is authorized to issue 10,000,000 shares of Series A Convertible Preferred Stock, $0.001 par value, of which 0 shares were issued and outstanding as of December 31, 2011. The Company is authorized to issue 1,000 shares of its 10% Cumulative Perpetual Series B Preferred Stock, of which 103.3 were issued and outstanding as of December 31, 2011. The Company recorded an accumulated dividend of $588,709 on its Cumulative Perpetual Series B Preferred Stock, which was recorded against accumulated deficit and payable in kind. The outstanding 10% Cumulative Perpetual Series B Preferred has a liquidation preference of $10,000 per share. The Company is authorized to issue 500 shares of its Series C Convertible Preferred Stock, of which 125 were issued and outstanding as of December 31, 2011. The Series C Preferred Stock is convertible at $0.25 per share and has a liquidation preference of $10,000 per share.

Options

As of December 31, 2011, 500,000 options to purchase common stock of the Company were issued and outstanding.

Warrants

The Company values all warrants using the Black-Scholes option-pricing model.  Critical assumptions for the Black-Scholes option-pricing model include the market value of the stock price at the time of issuance, the risk-free interest rate corresponding to the term of the warrant, the volatility of the Company’s stock price, dividend yield on the common stock, as well as the exercise price and term of the warrant.  The Black Scholes option-pricing model was the best determinable value of the warrants that the Company “knew up front” when issuing the warrants in accordance with Topic 505.  Other than as expressly noted below, the warrants are not subject to any form of vesting schedule and, therefore, are exercisable by the holders anytime at their discretion during the life of the warrant.  No discounts were applied to the valuation determined by the Black Scholes option-pricing model; provided, however, that in determining volatility the Company utilized the lesser of the 90-day volatility as reported by Bloomberg or other such nationally recognized provider of financial markets data and 40.0%.  

As of December 31, 2011, 15,018,582 warrants to purchase common stock of the Company were issued and outstanding, additional information on which is included in the following table:

Issued		Exercise Price		Issuance Date	Expiration Date	Vesting
	2,520,000	$	1.500	01/31/08	01/31/13	No
	175,864	$	0.770	12/31/09	12/31/14	No
	3,511,540	$	0.750	09/30/09	10/01/12	No
	100,000	$	0.700	12/31/09	12/31/14	No
	375,000	$	0.500	08/20/09	08/20/14	No
	50,000	$	0.500	11/01/09	11/01/12	No
	65,000	$	0.500	12/21/09	12/21/12	No
	350,000	$	0.375	01/31/08	01/31/13	No
	500,000	$	0.375	12/31/08	12/31/13	No
	200,000	$	0.375	10/09/09	10/09/12	No
	142,593	$	0.360	05/14/10	05/14/15	Yes
	60,000	$	0.350	07/01/09	07/01/12	No
	175,000	$	0.350	08/20/09	08/20/14	No
	2,218,125	$	0.350	09/01/09	09/01/12	No
	50,000	$	0.350	11/01/09	11/01/12	No
	100,000	$	0.350	12/31/09	12/31/14	No
	2,500,000	$	0.300	11/15/10	11/15/15	No
	20,833	$	0.300	04/01/09	04/01/14	Yes
	206,400	$	0.200	06/29/10	06/29/15	No
	212,400	$	0.200	07/21/10	07/21/15	No
	90,000	$	0.200	09/03/10	09/03/15	No
	1,395,827	$	0.150	12/31/08	12/31/13	Yes
	15,018,582
		Expected Dividend Yield			0.0%
		Volatility			40.0%
		Weighted average risk free interest rate			0.2%
		Weighted average expected life (in years)			1.7

Private Placements, Other Issuances and Cancellations

The Company periodically issues shares of its common stock and warrants to purchase shares of common stock to investors in connection with private placement transactions, as well as, to advisors and consultants for the fair value of services rendered. Absent an arm’s length transaction with an independent third-party, the value of any such issued shares is based on the trading value of the stock at the date on which such transactions or agreements are consummated or such shares are issued. The Company expenses the fair value of all such issuances in the period incurred.

The Company issued and cancelled shares of its common stock issued for services during the year ended December 31, 2011, for which it recorded a net expense of $81,100, as compared to a net expense of $686,408 for the year ended December 31, 2010.  During the year ended December 31, 2011 the Company also issued and cancelled options and warrants to purchase shares of its common stock issued for services, for which it recorded a net contra-expense of $298,541, as compared to a net contra-expense of $273,861 for the year ended December 31, 2010.

2011

During the year ended December 31, 2011, the Company issued and cancelled 2,428,750 and 455,000 shares of its common stock, respectively, for an aggregate net issuance of 1,973,750 shares. Of those amounts, (i) 1,250,000 shares were issued to consultants for the fair value of services rendered, which amount included 625,000 shares issued in exchange for the cancellation of 981,250 warrants previously issued, (ii) 455,000 shares previously issued to consultants for the services promised but never rendered were cancelled, (iii) 362,500 shares were issued to investors in prior year private placement activity to correct an error with the original issuance instructions provided to the transfer agent, and (iv) 816,250 shares issued to employees for the fair value of services rendered in connection with an employee stock award program, which amount included 250,000 shares issued in exchange for the cancellation of 487,013 warrants previously issued to an employee.  In addition to the above, during the year ended December 31, 2011 the Company issued 500,000 options to purchase common stock in the Company under the terms of the Company’s qualified plan. The Company did not issue any shares of its common stock to investors for cash during the year ended December 31, 2011.

The offer and sale of all such shares of our common stock were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Rule 506 promulgated under the Securities Act and in Section 4(2) of the Securities Act, based on the following: (a) the investors confirmed to us that they were “accredited investors,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to the offering; (c) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequent registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

During the year ended December 31, 2011, the Company valued shares issued for services rendered based on the trading value of the stock at the time of issuance.

2010

During the year ended December 31, 2010, the Company issued and cancelled 16,928,666 and 896,240 shares of its common stock, respectively, for an aggregate net issuance of 16,032,426 shares. Of those amounts, 2,850,812 shares were issued to investors for cash in connection with a bridge financing with gross proceeds to the Company of $424,000 and 43,750 shares previously issued to investors in error were cancelled. Under the terms of the bridge financing, investors received a promissory note issued at par plus one half share of common stock and one common stock purchase warrant with an exercise price of $0.40 per share for each dollar invested in the bridge financing. The entire principal amount of the outstanding promissory notes was subsequently exchanged for 2,638,812 additional shares of common stock per the terms of the promissory note in connection with the Series C Preferred Stock financing which closed November 15, 2010. During the year ended December 31, 2010, the Company also issued (i) 3,939,168 shares of common stock to consultants for the fair value of services received, 425,000 of which were subsequently cancelled; (ii) 5,148,646 shares of common stock in connection with the exchange of 5,148,646 shares of its Series A Preferred Stock; (iii) 4,640,000 shares of common stock in connection with the exchange of 116 shares of its Series B Preferred Stock with an aggregate liquidation preference of $1,160,000, or $10,000 per share; and (iv) 250,297 shares of common stock to employees. The Company also cancelled 427,490 and reissued as 99,743 shares of common stock subject to vesting previously issued to an employee that was terminated during the year ended December 31, 2010.

During the year ended December 31, 2010, the Company issued 125 shares of newly created Series C Preferred Stock for aggregate gross proceeds to the Company of $1,250,000. The transaction closed on November 15, 2010. Each share of Series C Preferred Stock has a liquidation preference of $10,000 per share, is convertible into 40,000 shares of common stock of the Company and ranks senior to all other classes of preferred stock issued and outstanding by the Company. Beginning January 1, 2012 the Series C Preferred Stock shall accrue a dividend of 4% per annum, which shall increase to 5% per annum on January 1, 2014. In connection with the issuance of the Series C Preferred Stock, the Company also issued a total of 2,500,000 common stock purchase warrants with an exercise price of $0.30 per share.

  The offer and sale of all such shares of our common stock were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Rule 506 promulgated under the Securities Act and in Section 4(2) of the Securities Act, based on the following: (a) the investors confirmed to us that they were “accredited investors,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to the offering; (c) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequent registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

During the year ended December 31, 2010, the Company valued shares issued for services rendered based on the trading value of the stock at the time of issuance.