STOCKHOLDERS EQUITY

3 Months Ended

Mar. 31, 2012

Stockholders' Equity:

STOCKHOLDERS EQUITY

NOTE I – STOCKHOLDERS’ EQUITY

Common Stock

At March 31, 2012, the Company had 250,000,000 shares of Common Stock, $0.001 par value authorized, with 84,829,311 shares of Common Stock issued and outstanding.

Warrants

The valuation methodology used to determine the fair value of Common Stock purchase warrants (“Warrants”) is the Black-Scholes-Merton option-pricing model (“Black-Scholes Model”).  The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the risk-free interest rate and the term of the Common Stock purchase warrant.  The weighted average fair value per share of Warrants granted and the assumptions used in the Black-Scholes Model during the three months ended March 31, 2012 are described below.  The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term.  Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the term of the award.  The Company’s estimated volatility is an average of the historical volatility of the stock prices of its peer entities whose stock prices were publicly available.  The Company’s calculation of estimated volatility is based on historical stock prices over a period equal to the term of the awards.  The Company used the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.

Warrants (continued)

On February 24, 2012, the Company granted an aggregate of 5,685,300 Warrants in connection with the modification of certain existing promissory notes, and 3,314,700 Warrants with the issuance of secured promissory notes (see NOTE H – NOTES PAYABLE for more details).  The Modification Warrants’ fair value of $10,505,247 was determined by using the Black-Scholes Model on the date of the grant.  The relative fair value of the warrants of $859,647 was determined by using the Black-Scholes Model on the date of the grant.  At March 31, 2012, $816,076 was reported as debt discount and for the three months ended March 31, 2012, $43,571was recorded as interest expense on the accompanying condensed consolidated financial statements.  Both valuations used a term of 5 years; a volatility of 44.5%; risk free rate of 0.89%; and a dividend yield of 0%.

On March 30, 2012, the Company granted an aggregate of 31,000 Warrants to five unaffiliated individuals for services rendered.  The Warrants were valued on the date of the grant using a term of 5 years; a volatility of 44.81%; risk free rate of 1.04%; and a dividend yield of 0%; $29,736 was recorded as consulting expense in the accompanying condensed consolidated financial statements.

A summary of the Company’s Common Stock purchase warrant activity and related information for 2012 follows:

	Number of Shares Under Company Warrant		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Balance at December 31, 2011		3,057,627	$	0.36		7.9	$	3,483,691
Granted		9,031,000	$	0.39		4.9	$	18,180,000
Exercised		-0-
Expired		-0-
Cancelled		-0-
Balance at March 31, 2012		12,088,627	$	0.38		5.6	$	24,415,551
Vested and Exercisable at March 31, 2012		11,326,667					$	22,846,372

As of March 31, 2012, the Company had Warrants outstanding for an aggregate of 12,088,627 shares of the Company’s Common Stock with a weighted average contractual life of 5.6 years and exercise prices ranging from $0.24 to $2.40 per share resulting in a weighted average exercise price of $0.38 per share.  As of March 31, 2012, unamortized costs associated with Warrants totaled approximately $186,000.

Stock Options

In 2009, the Company adopted the 2009 Long Term Incentive Compensation Plan (the “LTIP”) to provide financial incentives to employees, members of the Board, and advisers and consultants of the Company who are able to contribute towards the creation of or who have created stockholder value by providing them stock options and other stock and cash incentives (the “Awards”).  The Awards available under the LTIP consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, EVA awards, and other stock or cash awards as described in the LTIP.  There are 25,000,000 shares authorized for issuance thereunder. Prior to the Merger, no awards had been issued under the LTIP.

On February 23, 2012, the Company’s Board of Directors adopted the 2012 Stock Incentive Plan, a non-qualified plan not requiring approval by the Company’s shareholders (“2012 SOP”).  The 2012 SOP was designed to serve as an incentive for retaining qualified and competent key employees, officers and directors, and certain consultants and advisors of the Company. There are 10,000,000 shares authorized for issuance thereunder.  No shares have been issued under the 2012 SOP.

The valuation methodology used to determine the fair value of Options is the Black-Scholes-Merton option-pricing model (“Black-Scholes Model”).  The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the risk-free interest rate, and the expected life.

The assumptions used in the Black-Scholes Model during the three months ended March 31, 2012 are set forth in the table below.

Risk-free interest rate	0.84-2.23%
Volatility	41.53-43.1%
Expected life (in years)	5.5-6.75
Dividend yield	0.00%

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the expected life.  Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the term of the award.  The Company’s estimated volatility is an average of the historical volatility of the stock prices of its peer entities whose stock prices were publicly available.  The Company’s calculation of estimated volatility is based on historical stock prices over a period equal to the term of the awards.  The Company used the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.  The average expected life is based on the contractual term of the option using the simplified method.

In January 2012, certain individuals exercised their right to purchase an aggregate of 1,630,022 shares of the Company’s Common Stock for an aggregate purchase price of $166,000.  The shares were issued in reliance upon an exemption from the registration provisions of the Securities Act of 1933 due to Section 4(1) of the Act and Rule 144 and are covered by a Lock Up Agreement.

On February 27, 2012, the Company issued options for the purchase of the Company’s Common Stock (“Options”) to certain officers and directors of the Company.  The ten-year Options are for the purchase of an aggregate of 600,000 shares and have an exercise price of $2.20 per share.  The Options vest in full on February 27, 2013.

Stock Options (continued)

On March 30, 2012, the Company issued ten-year Options to employees and consultants for the purchase of an aggregate of 480,000 shares with an exercise price of $2.40.  An aggregate of 405,000 shares available under the Options vest over a four-year period on anniversary of issuance, an aggregate of 60,000 shares vest over a two-year period on the anniversary of issuance, and 15,000 shares vest monthly over a twelve-month period from the date of issuance.

On March 30, 2012, the Company’s Board of Directors approved a cashless exercise provision for use by holders of Company Options.  Also on March 30, 2012, an individual exercised his right to purchase 245,485 shares of the Company’s Common Stock.  The aggregate purchase price of approximately $60,000 was paid pursuant to a cashless exercise provision wherein the individual surrendered his right to receive 25,000 shares thereunder.  The 220,485 shares were issued in reliance upon an exemption from the registration provisions of the Securities Act of 1933 due to Section 4(1) of the Act and Rule 144 and are covered by a Lock Up Agreement.

A summary of activity under the LTIP and related information follows:

	Number of Shares Under Company Option			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Balance at December 31, 2011		10,590,161		$	0.16		7.6	$	14,067,649
Granted		1,080,000		$	0.96		9.9	$	120,000
Exercised		(1,875,507	)
Expired		-0-
Cancelled		-0-
Balance at March 31, 2012		9,794,654		$	0.41		7.7	$	19,447,493
Vested and Exercisable at March 31, 2012		5,532,255		$	0.13		7.2	$	12,572,651

The weighted-average issue date fair value of Options issued during the three months ended March 31, 2012 was $0.96.

As of March 31, 2012 Options outstanding covered an aggregate of 9,794,654 shares with a weighted average contractual life of 7.7 years and exercise prices ranging from $0.10 to $2.40 per share resulting in a weighted average exercise price of $0.41 per share.

Share-based compensation expense for Options recognized in our results for the three months ended March 31, 2012 and 2011 ($88,585 and $52,268 respectively) is based on awards vested and we estimated no forfeitures.  ASC 718-10 requires forfeitures to be estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from the estimates.

Stock Options (continued)

At March 31, 2012, total unrecognized estimated compensation expense related to non-vested Options granted prior to that date was approximately $1,206,000 which is expected to be recognized over a weighted-average period of 2.2 years. No tax benefit was realized due to a continued pattern of operating losses.