Stockholder's Equity

6 Months Ended

Jun. 30, 2012

Stockholder's Equity

Note 10 - Stockholder’s Equity

We are authorized to issue up to 100,000,000 shares of common stock, no par value, and up to 2,500,000 shares of preferred stock, no par value. There were 26,188,550 and 25,257,261 shares of common stock issued and outstanding at June 30, 2012 and December 31, 2011, respectively.  During the year ended December 31, 2011, we designated 880,000 shares of preferred stock as 10% convertible preferred stock and had outstanding 726,023 and 752,273 shares of 10% convertible preferred stock at June 30, 2012 and December 31, 2011, respectively. We may issue additional shares of preferred stock, with dividend requirements, voting rights, redemption prices, liquidation preferences and premiums, conversion rights and other terms without a vote of the shareholders.

As of June 30, 2012, we had outstanding options, warrants and other convertible securities that, when exercised or converted, could result in the issuance of up to approximately 23.4 million shares of common stock.

Common Stock Issuances for the Six Months Ended June 30, 2012

During January 2012, we issued 125,000 shares of common stock with a fair value on the date of issuance of $90,000, to a consultant pursuant to the terms of an agreement to provide services.

We paid the December 31, 2011 accrued dividend on our 10% convertible preferred stock with 247,538 shares of our common stock, with a fair value on the effective date of issuance of $176,620.

During March 2012, we issued 62,500 shares of common stock upon conversion of 6,250 shares of our 10% convertible preferred stock, with a value of $62,500.

We paid the March 31, 2012 accrued dividend on our 10% convertible preferred stock with 286,251 shares of our common stock, with a fair value on the effective date of issuance of $171,751.

Upon termination, and pursuant to an employment agreement, we issued 10,000 shares of our common stock during May 2012, to an employee, with a fair value on the date of issuance of $6,400.

During May 2012, we issued 200,000 shares of our common stock upon conversion of 20,000 shares of our 10% convertible preferred stock, with a value of $200,000.

Warrants - Common Stock

From time to time, we compensate consultants, advisors and investors with warrants to purchase shares of our common stock, in lieu of cash payments. Net share settlement is available to warrant holders. Such warrants are marked to market at each reporting period.

The following table sets forth our warrant activity during the period presented.

	Six Months Ended
	June 30, 2012
			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price
Outstanding – January 1, 2012		5,452,141	$	1.18
Granted during the period		3,928,040		0.98
Exercised during the period		-		-
Outstanding – June 30, 2012		9,380,181	$	1.10
Exercisable at end of period		9,164,181	$	1.10

For the warrants granted during the six months ended June 30, 2012, we estimated the fair value of each warrant at the grant date by using the Black-Scholes option pricing model with the following range of assumptions for the warrants granted during the three months ended June 30, 2012 - (i) no dividend yield, (ii) expected volatility of between 83% and 100%, (iii) risk-free interest rates of between 0.3% and 0.6%, and (iv) expected lives of approximately three years.

During the three and six months ended June 30, 2012, we issued warrants to purchase 100,005 and 166,675 shares of our common stock, respectively at a weighted average exercise price of $0.60 to the holders of our 10% convertible debentures pursuant to their amended terms. These warrants had a fair value of approximately $18,900 and $57,000, respectively at the date of grant which was charged to common stock upon issuance.

Of the warrants to purchase shares of our common stock granted during the six months ended June 30, 2012, we issued warrants to purchase 3,761,365 shares of our common stock at an exercise price of $1.00 to the holders of our 10% convertible preferred stock pursuant to the Make Good Adjustment. The warrants had a fair value at date of grant of $1,875,463 which was based on the Black-Scholes pricing model.

In addition, certain previously issued warrants are amortized over a service period spanning multiple reporting periods. During the three and six months ended June 30, 2012, we amortized $2,866 and $21,799, respectively of fair value of these previously granted warrants, to our statement of operations.

Warrants - 10% Convertible Preferred Stock

We issued warrants to the placement agents for the sale of our 10% convertible preferred stock, to purchase 58,352 shares of 10% convertible preferred stock at $10 per share. Since the underlying 10% convertible preferred stock is redeemable by the holder after three years from the date of purchase, we recorded the fair value of the warrants at issuance, as a liability on our balance sheet and we re-value the warrant liability at each reporting date, with any changes in fair value recognized in earnings each reporting period. The fair value of the warrant liability at June 30, 2012 was $140,458, and we recognized the change in fair value of the warrant liability during the three and six months ended June 30, 2012 of $104,539 and $347,097, respectively.

Options – Common Stock

We have two nonqualified stock option plans approved by shareholders with an aggregate of approximately 1.2 million shares remaining available for grant as of June 30, 2012.  The exercise price of the options are established by the Board of Directors on the date of grant and are generally equal to the market price of the stock on the grant date.  The Board of Directors may determine the vesting period for each new grant. Options issued are exercisable in whole or in part for a period as determined by the Board of Directors of up to ten years from the date of grant.

For the six months ended June 30, 2012, we estimated the fair value of each option award at the grant date by using the Black-Scholes option pricing model based on the following assumptions for the awards - (i) no dividend yield, (ii) expected volatility of 125%, (iii) risk-free interest rate of 0.8%, and (iv) expected life of five years. No options were awarded during the three months ended June 30, 2012.

In prior periods, we awarded options which provide the optionee with the right to exercise certain of these options based on the optionee’s achievement of specific performance conditions. During the three months ended June 30, 2012, we concluded that it was more probable then not, that certain of these performance condition options would be met at the end of an estimated service period. The fair value of the option is determined on the date the option was granted using the Black-Scholes option pricing model and amortized over the service period to operating expenses. During the three and six months ended June 30, 2012, we amortized $105,980 and $138,385, respectively of the fair values of these performance condition options to operating expenses.

In addition to options awarded during the three and six months ended June 30, 2012, options awarded in prior periods are being amortized over a service period encompassing multiple reporting periods. During the three and six months ended June 30, 2012, we recognized in operating expenses $45,537 and $240,457, respectively. Compensation expense to be recognized in periods subsequent to June 30, 2012 is approximately $71,800.

The following table summarizes our stock option activity for the period presented:

	Six Months Ended
	June 30,2012
			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price
Outstanding – January 1, 2012		5,886,261	$	1.11
Granted during the period		300,000		0.72
Exercised during the period		-		-
Cancelled during the period		-		-
Outstanding – June 30, 2012		6,186,261	$	1.10
Exercisable at June 30, 2012		3,734,703	$	1.05

The following table summarizes options outstanding at June 30, 2012:

	Number of Shares Issuable		Weighted- Average Exercise Price		Weighted- Average Remaining Term (Years)		Aggregate Intrinsic Value
Total shares issuable upon exercise		6,186,261	$	1.10		3.4	$	363,419
Options exercisable		3,734,703		1.05		3.1		106,229
Options not vested		2,451,558		1.19		3.8		257,190