STOCKHOLDERS' DEFICIT, STOCK OPTIONS AND WARRANTS

6 Months Ended

Jun. 30, 2011

Stockholders' Equity Note [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

NOTE 3 – STOCKHOLDERS’ DEFICIT, STOCK OPTIONS AND WARRANTS

In connection with the financing completed in October 2008, the Company has effected two reverse stock splits, one on June 6, 2008 and another on October 20, 2008. In accordance with SAB Topic 4C, all stock options and warrants and their related exercise prices are stated at their post-reverse stock split values.

The Company has an equity incentive plan, which allows issuance of incentive and non-qualified stock options to employees, directors and consultants of the Company, where permitted under the plan. The exercise price for each stock option is determined by the board of directors. Vesting requirements are determined by the board of directors when granted and currently range from immediate to three years. Options under this plan have terms ranging from three to ten years.

Accounting for share-based payment

The Company applies ASC 718- Compensation-Stock Compensation ("ASC 718"). Under ASC 718 stock-based employee compensation cost is recognized using the fair value based method for all new awards granted after January 1, 2006 and unvested awards outstanding at January 1, 2006. Compensation costs for unvested stock options and non-vested awards that were outstanding at January 1, 2006, are being recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under SFAS 123 for pro forma disclosures, using a straight-line method. We elected the modified-prospective method under which prior periods are not retroactively restated.

ASC 718 requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model or other acceptable means. The Company uses the Black-Scholes option valuation model which requires the input of significant assumptions including an estimate of the average period of time employees will retain vested stock options before exercising them, the estimated volatility of th Company's common stock price over the expected term, the number of options that will ultimately be forfeited before completing vesting requirements, the expected dividend rate and the risk-free interest rate. Changes in the assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense recognized. The assumptions the Company uses in calculating the fair value of stock-based payment awards represent the Company's best estimates, which involve inherent uncertainties and the application of management's judgment. As a result, if factors change and the Company uses different assumptions, the Company's equity-based compensation expense could be materially different in the future.

Since the Company's common stock has no significant public trading history, and the Company has experienced no significant option exercises in its history, the Company is required to take an alternative approach to estimating future volatility and estimated life and the future results could vary significantly from the Company's estimates. The Company compiled historical volatilities over a period of 2-7 years of 15 small-cap medical companies traded on major exchanges and 10 mid-range medical companies on the OTC Bulletin Board and combined the results using a weighted average approach. In the case of ordinary options to employees the Company determined the expected life to be the midpoint between the vesting term and the legal term. In the case of options or warrants granted to non-employees the Company estimated the life to be the legal term unless there was a compelling reason to make it shorter.

When an option or warrant is granted in place of cash compensation for services the Company deems the value of the service rendered to be the value of the option or warrant. In most cases, however, an option or warrant is granted in addition to other forms of compensation and its separate value is difficult to determine without utilizing an option pricing model. For that reason the Company also uses the Black-Scholes-Merton option-pricing model to value options and warrants granted to non-employees, which requires the input of significant assumptions including an estimate of the average period the investors or consultants will retain vested stock options and warrants before exercising them, the estimated volatility of the Company's common stock price over the expected term, the number of options and warrants that will ultimately be forfeited before completing vesting requirements, the expected dividend rate and the risk-free interest rate. Changes in the assumptions can materially affect the estimate of fair value of stock-based consulting and/or compensation and, consequently, the related expense recognized.

Since the Company has limited trading history in its stock and no first-hand experience with how its investors and consultants have acted in similar circumstances, the assumptions the Company uses in calculating the fair value of stock-based payment awards represent its best estimates, which involve inherent uncertainties and the application of management's judgment. As a result, if factors change and the Company uses different assumptions, the Company's equity-based consulting and interest expense could be materially different in the future.

Valuation and accounting for options and warrants

The Company determines the grant date fair value of options and warrants using a Black-Scholes-Merton option valuation model based upon assumptions regarding risk-free interest rate, expected dividend rate, volatility and estimated term. For grants during 2008, the Company used a 2.0 to 4.5% risk-free interest rate, 0% dividend rate, 53-66% volatility and estimated term of 2.5 to 7.5 years. Values computed using these assumptions ranged from $.102 per share to $.336 per share. Warrants or options awarded for services rendered are expensed over the period of service (normally the vesting period) as compensation expense for employees or an appropriate consulting expense category for awards to consultants and directors. Warrants granted in connection with a common equity financing are included in shareholders’ equity, provided that there is no re-pricing provision that requires they be treated as a liability (See Note 10) and warrants granted in connection with a debt financing are treated as a debt discount and amortized using the interest method as interest expense over the term of the debt. Warrants issued in connection with the $100,000 convertible debt that closed March 1, 2007 created a debt discount of $40,242 that is being amortized as additional interest over its 5-year term.

Warrants issued in connection with the $170,000 in convertible “bridge” debt that closed in July 2007 created a calculated debt discount of $92,700 that was fully expensed over its loan term that matured April 30, 2008. The Company issued $100,000 in convertible debt in October 2009 and issued a warrant, in connection with the debt, for 200,000 shares of common stock at $.65 per share. The Company determined that the warrant had an initial value of $30,150 that was treated as a debt discount and is being amortized as additional interest expense over the 24-month term of the note. The Company also issued $200,000 in convertible debt in June 2010 and issued a warrant, in connection with the debt, to purchase 1,111,112 shares at $.46 per share.

The Company determined that the value of the June 2010 warrant is $96,613.This value is treated as a debt discount and amortized as additional interest expense over the 22-month term of the note. The Company also issued $32,000 in convertible debt in September, 2010 and issued a warrant to purchase 320,000 shares at $.46 per share.  The Company determined that this warrant has a value of $15,553 that was treated as a debt discount and amortized as additional interest expense over the 18 month term of the note. In January, 2011 the Company issued three convertible notes of $50,000 each and also issued warrants to purchase 1,595,239 common shares at $.20 per share. The value of the warrants was determined to be $47,908 and this amount is being treated as a debt discount and amortized as additional interest expense over the 24 month term of the notes.

During June 2011 the Company issued stock options to buy 300,000 shares each at $.01 per share to two employees and a consultant.  The options have a term of ten years and vested immediately.  The estimated life of the options was determined to be five years for the employees and ten years for the consultant.  The Company determined the value of these options, using the Black-Scholes valuation model, to be $65,204 and this amount was expensed in June 2011.  

The Company also issued warrants, with a three year term, to purchase 1,338,236 shares at $.12 to $.17 per share.  The value of the warrants was determined to be $20,694 and that value was initially added to liability for Equity-Linked Financial Instruments and re-valued at the end of June 2011 to be $19,740.  The decline in the liability was included in the total gain on valuation of equity linked financial instruments during the quarter.

The following summarizes transactions for stock options and warrants for the periods indicated:

Stock Options (1)						Warrants (1)
	Number of Shares			Average Exercise Price			Number of Shares			Average Exercise Price
Outstanding at December 31, 2005		17,956		$	1.67			20,950		$	2.62
Issued		23,942			1.67			71,826			0.85
Outstanding at December 31, 2006		41,898			1.67			92,776			1.25
Issued		5,984			1.67			28,502			0.35
Outstanding at December 31, 2007		47,882			1.67			121,278			1.04
Issued		1,243,292			0.20			5,075,204			0.45
Expired								(11,971	)		3.76
Outstanding at December 31, 2008		1,291,174			0.26			5,184,511			0.45
Issued		205,000			0.37			2,188,302			0.65
Outstanding at December 31, 2009		1,496,174			0.27			7,372,813			0.49
Issued		2,210,000			0.17			3,435,662			0.34
Expired		(207,956	)		0.43			(8,979	)		1.67
Exercised								(128,571	)		0.46
Outstanding at December 31, 2010		3,498,218			0.19			10,670,925			0.44
Issued		900,000			0.10			11,372,691			0.16
Expired		(60,000	)		0.35			(1,702,146)			0.46
Outstanding at June 30, 2011		4,338,218		$	0.15			20,341,470		$	0.28

(1) Adjusted for the reverse stock splits in total at June 6, 2008 and October 20, 2008.

At June 30, 2011, 4,338,218 stock options are fully vested and currently exercisable with a weighted average exercise price of $.15 and a weighted average remaining term of 7.64 years. There are 20,341,470 warrants that are fully vested and exercisable. Stock based compensation recognized in the six months ended June 30, 2011 was $65,204 and was $82,000 in the six months ended June 30, 2010.

The following summarizes the status of options and warrants outstanding at June 30, 2011:

Range of Exercise Prices		Shares		Weighted Average Remaining Life
Options
$	0.01		1,443,292		8.82
$	0.15		2,060,000		9.10
$	0.35		775,000		2.06
$	0.50		30,000		1.38
$	1.67		29,926		0.52
Total			4,338,218
Warrants
$	0.01		200,000		4.44
$	0.02		71,826		2.95
$	0.075		400,000		2.64
$	0.10		1,700,000		1.86
$	0.12		500,000		2.21
$	0.15		5,333,334		2.84
$	0.16		500,000		2.77
$	0.17		1,544,118		2.99
$	0.18		200,000		2.61
$	0.20		2,445,239		2.55
$	0.35		998,597		0.99
$	0.46		4,572,893		1.31
$	0.65		1,839,550		1.17
$	1.67		35,913		0.45
Total			20,341,470

Stock options and warrants expire on various dates from July 2011 to November 2020.

Under the terms of the Company's agreement with investors in the October 2008 financing, 1,920,000 shares of common stock were the maximum number of shares allocated to the Company's existing shareholders at the time of the offering (also referred to as the original shareholders or the "Founders"). Since the total of the Company's fully-diluted shares of common stock was greater than 1,920,000 shares, in order for the Company to proceed with the offering, the board of directors approved a reverse stock split of 1-for-1.2545. After this split was approved, additional options and warrants were identified, requiring a second reverse stock split in order to reach the 1,920,000 shares. The second reverse stock split on the reduced 1-for-1.2545 balance was determined to be 1-for 1.33176963. Taken together, if only one reverse stock were performed, the number would have been a reverse stock split of 1-for 1.670705.

On June 6, 2008, the board of directors approved the first reverse stock split. The authorized number of common stock of 20,000,000 shares was proportionately divided by 1.2545 to 15,942,607.

On October 20, 2008, the board of directors (i) approved the second reverse stock split pursuant to which the authorized number of shares of common stock of 15,942,607 was proportionately divided by 1.33177 to 11,970,994 shares and (ii) approved a resolution to increase the number of authorized shares of the Company's common stock from 11,970,994 to 40,000,000, which was approved by the Company’s shareholders holding a majority of the shares entitled to vote thereon at a special meeting of shareholders held on December 3, 2008.

Stock, Stock Options and Warrants Granted by the Company

The following table is the listing of stock options and warrants as of June 30, 2011 by year of grant:

Stock Options:
Year	Shares		Price
2006		23,941	$	1.67
2007		5,985		.35-1.67
2008		1,243,292		.01-.35
2009		105,000		.35-.50
2010		2,060,000		.15
2011		900,000		.01
		4,338,218	$	.01-1.67
Warrants:
Year	Shares		Price
2006		71,826	$	.02-1.67
2007		28,502		.35
2008		3,244,487		.02-.46
2009		2,188,302		.35-.65
2010		3,435,662		.01-.65
2011		11,372,691		.075-.20
Total		20,341,470	$	.01-1.67