NOTE 9 - STOCKHOLDERS' EQUITY (DEFICIT)

3 Months Ended

Mar. 31, 2013

Equity [Abstract]

NOTE 9 - STOCKHOLDERS' EQUITY (DEFICIT)

NOTE 9 – STOCKHOLDERS’ EQUITY (DEFICIT)

Preferred Stock

On May 26, 2011, our board of directors designated 350,000 shares of preferred stock as Series A preferred stock, $0.001 par value. The Series A preferred stock is entitled to a liquidation preference in the amount of $5 per share, votes on an as converted basis with the common stock on all matters as to which holders of common stock shall be entitled to vote, and is currently convertible into common stock on a one-for-ten basis.

During the first quarter 2013, we issued 36,400 shares of Series A Preferred stock for $182,000 cash and a note holder converted their $15,000 note along with $750 of accrued interest for 3,162 shares of Series A Preferred stock. The note was unsecured, accruing interest at 5% per annum and was due to mature on June 30, 2013.

Common stock

There were no transactions related to common stock during the first quarter 2013 and 666 shares of common stock were issued during the same period in 2012. This stock had a fair market value of $400.

Stock incentive plan

On September 17, 2010, our Board of Directors adopted the 2010 Stock Incentive Plan (“Plan”). The Plan provides for the grant of options to purchase shares of our common stock, and stock awards consisting of shares of our common stock, to eligible participants, including directors, executive officers, employees and consultants of the Company. We have reserved 1,600,000 shares of common stock for issuance under the Plan with an annual increase in shares of 50,000 as of January 1 of each year; commencing January 1, 2012. Stock options are granted at or below the closing price of our stock on the date of grant for terms ranging from four to fifteen years and generally vest over a five year period. The fair value of option grants were calculated at the date of the grants using the Black-Scholes option pricing model with the following assumptions:

	March 31, 2013	December 31, 2012
Expected dividend yield	-	-
Expected stock price volatility	236.55%	183.17% - 187.30%
Risk-free interest rate	1.08%	1.27% - 2.80%
Expected term (in years)	5 years	4 - 10 years
Weighted-average granted date fair value	$0.38	$0.51

A summary of option activity under the stock option plan as of March 31, 2013 and changes during the quarter then ended is presented below:

				Weighted
				Average
			Weighted	Remaining	Aggregate
	Number of	Exercise Price	Average Exercise	Contractual Term	Intrinsic
	Shares	Range	Price	(Years)	Value
Outstanding, December 31, 2011	659,242	$ 0.47-$1.00	$ 0.62	10	-
Granted	542,857	$ 0.40-$0.50	$ 0.45	9	-
Exercised	-	-	-	-	-
Expired	-	-	-	-	-
Outstanding, December 31, 2012	1,202,099	$ 0.40-$1.00	$ 0.56	7.74	-
Exercisable, December 31, 2012	830,504	$ 0.40-$1.00	$ 0.57	8.19	-
Granted	55,000	$ 0.38	$ 0.38	5	-
Exercised	-	-	$ -	-	-
Expired	-	-	$ -	-	-
Outstanding, March 31, 2013	1,257,099	$ 0.38-$1.00	$ 0.55	7.62	-
Exercisable, March 31, 2013	1,001,361	$ 0.38-$1.00	$ 0.57	8.09	-

The range of exercise prices for options outstanding under the 2010 Stock Incentive Plan at March 31, 2013 are as follows:

Number of	Exercise
shares	Price
55,000	$ 0.38
15,000	$ 0.40
20,000	$ 0.44
180,000	$ 0.45
247,242	$ 0.47
247,857	$ 0.49
254,000	$ 0.50
200,000	$ 0.85
38,000	$ 1.00
1,257,099

At March 31, 2013, the Company had 342,901 unissued shares available under the Plan. Also, at March 31, 2013, the Company had $125,361 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 7 years.

Warrants – Consulting Agreements

Outstanding warrants to purchase common stock are as follows:

Date of Issue	March 31, 2013	Exercise Price	Expiration
March-13	88	$0.70	03/2017
February-13	35	$5.00	02/2019
January-13	20,201	$0.49 - $5.00	06/2017 - 01/2020
As of December 2012	2,516,402	$0.36 - $10.00	04/2013 - 10/2021
Total	2,536,726

We use the Black-Scholes option-pricing model to determine the fair value of warrants on the date of grant. In determining the fair value of warrants, we employed the following key assumptions:

	March 31, 2013	March 31, 2012
Risk-Free interest rate	0.84% - 1.09%	1.08%
Expected dividend yield	0%	0%
Volatility	236.81% - 248.63%	202.65%
Expected life	5 - 7 years	7 years

At March 31, 2013 and 2012, the weighted-average Black-Scholes value of warrants granted was $0.56 and $0.89, respectively.