Stockholders' (Deficiency) Equity

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Stockholders' (Deficiency) Equity

9.   Stockholders’ (Deficiency) Equity

Common and Treasury Stock

During the years ended December 31, 2011 and 2010, convertible debentures in the aggregate amount of $225,000 and $550,000 were converted into 144,618 and 343,000 shares of common stock, respectively.

On July 1, 2011, the Company’s Chief Financial Officer exercised options to purchase 50,000 shares of common stock for aggregate cash proceeds of $40,000.

On September 2, 2011, the Company purchased 1,179,212 shares of its common stock from Rock Castle Holdings, LLC, a more than 10% stockholder of the Company (“Rock Castle”), at the time, which constituted all of the outstanding shares of Common Stock owned by Rock Castle. The purchase price was $2.90 per share, or a total purchase price of $3,419,715 that is recorded as treasury stock on the Company’s consolidated balance sheet at December 31, 2011.

On November 2, 2011, the Company’s Chief Financial Officer was issued 31,934 shares upon the cashless exercise of 37,875 options to purchase common stock.

During the year ended December 31, 2011, the Company sold an aggregate of 597,542 shares of its common stock to investors, for aggregate net proceeds of approximately $1,972,000.

Preferred Stock

The Company has designated 200,000 of the 1,000,000 authorized shares of preferred stock as convertible Series A Preferred Stock (“Series A Preferred Stock”). The Series A Preferred Stock is non-voting, has a liquidation preference equal to its purchase price, and does not pay dividends. The holders can call the conversion of the Series A Preferred Stock at any time.

On October 29, 2010, all 107,501 Series A Preferred Stock shares outstanding were converted into 53,752 shares of the Company’s common stock.

The Company has designated 625,000 of the 1,000,000 authorized shares of preferred stock as Series B Convertible Preferred Stock (“Series B Preferred Stock”). The Series B Preferred Stock is non-voting, has a liquidation preference equal to its purchase price, and receives preferred dividends equal to 7% of all outstanding shares in either cash or payment-in-kind. As of December 31, 2011 and 2010, the Company had accrued contractual dividends of $244,001 and $33,992, respectively, related to the Series B Preferred Stock.

On January 1, 2011, the Company granted 3,597 shares of Series B convertible preferred stock valued at $33,992 to the Series B convertible preferred stock owners as payment in kind for dividends.

On October 17, 2011, the Company filed a Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware fixing the rights, preferences and restrictions of newly formed class of Series C Preferred Stock.  The Certificates of Designation designates 10,000 shares of the Company's preferred stock as Series C Preferred Stock to be issued at an original issue price of $100 per share.  The Series C Preferred Stock has voting rights equal to one vote for each share held, has a liquidation preference equal to its purchase price, and has certain redemption rights available at the option of the holder.  The holder can make a redemption request at any time on or after the earliest of (i) January 15, 2013, (ii) any date prior to January 15, 2013 on which the Senior Secured Notes are declared by the holders thereof to be, or automatically become, due and payable on an event of default, acceleration event or otherwise, (iii) immediately prior to an Asset Transfer or Acquisition, or (iv) the date on which the Senior Secured Notes are no longer outstanding.  The Series C Preferred Stock is non-convertible and does not pay dividends.

On October 17, 2011, the Company received net cash proceeds of $1,000,000 for the sale of 10,000 shares of Series C Preferred Stock to a more than 10% stockholder of the Company. The Series C Preferred Stock is redeemable upon request of the holders at any time on or after January 15, 2013. The Company applies the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable preferred shares, which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity.  As of December 31, 2011, in accordance with ASC 480-10-S99, since certain of the Company’s preferred shares contain redemption rights which are not solely within the holders’ control, these issuances of preferred stock have been presented as temporary equity. In connection with the issuance, the investors received five year immediately exercisable warrants to purchase 270,000 shares of the Company’s common stock at an exercise price of $2.90 per share and which have a relative fair value of $526,522 on the date of grant. In connection with the accretion of the discount, the Company recorded $92,916 as a deemed dividend during the year ended December 31, 2011.

Incentive Compensation/Stock Option Plans

On May 15, 2009, the Company adopted its 2009 Incentive Compensation Plan (the “2009 Plan”). The total number of shares of common stock that may be subject to the granting of awards under the 2009 Plan(as amended) is 2,700,000, plus 181,425 shares that remained available to be issued on May 15, 2009 and were assumed as part of the share exchange from Clacendix’ previously existing stock option plans. The 2009 Plan imposes individual limitations on the amount of certain awards. Under these limitations, during any fiscal year of the Company, the number of options, stock appreciation rights, shares of restricted stock, shares of deferred stock, performance shares and other stock based-awards granted to any one participant under the 2009 Plan may not exceed 250,000 shares, subject to adjustment in certain circumstances. The maximum amount that may be paid out as performance units in any 12-month performance period is an aggregate value of $2,000,000, and the maximum amount that may be paid out as performance units in any performance period greater than 12 months is an aggregate value of $4,000,000. The maximum term of each option or stock appreciation right, the times at which each option or stock appreciation right will be exercisable, and provisions requiring forfeiture of unexercised options or stock appreciation rights at or following termination of employment generally are fixed by the board of directors or committee of the Company’s board of directors designated to administer the 2009 Plan (the “committee”), except that no option or stock appreciation right may have a term exceeding ten years. The exercise price per share subject to an option and the grant price of a stock appreciation rights are determined by the committee, but in the case of an incentive stock option (ISO) must not be less than the fair market value of a share of common stock on the date of grant.

During the year ended December 31, 2010, the Company granted options to purchase an aggregate of 512,000 shares of common stock to certain employees and directors. These options vest over a three year period, have a term of 10 years, and contain an exercise price between $2.75 and $3.75 per share. The options were granted under a previously approved plan and had an aggregate grant date fair value of $796,053.

During the year ended December 31, 2010, the Company granted options to purchase an aggregate of 122,500 shares of common stock to consultants. These options vest over a three year period, have a term of 10 years, and contain an exercise price between $2.40 and $3.60 per share. The options were granted under a previously approved plan and had an aggregate grant date fair value of $202,919.

During the year ended December 31, 2011, the Company granted options to purchase an aggregate of 360,000 shares of common stock to certain employees and directors. These options vest over a three year period, have a term of 10 years, and contain an exercise price between $3.30 and $4.62 per share. The options were granted under a previously approved plan and had an aggregate grant date fair value of $1,106,879.

During the year ended December 31, 2011, the Company granted options to purchase an aggregate of 140,000 shares of common stock to consultants. These options vest over a three year period, have a term of 10 years, and contain an exercise price between $4.10 and $4.62 per share. The options were granted under a previously approved plan and had an aggregate grant date fair value of $399,989.

On August 31, 2011, the Company granted an option to an officer of the Company for 250,000 shares of common stock at $3.80 per share subject to securing a financing transaction. The shares vest when the financing is secured. The option has a term of 5 years and a fair value of $891,567 on the date of grant. Since these warrants contain performance conditions, the fair value of such options has been measured but not recorded since they have not been pledged and are not considered probable.

As of December 31, 2011, stock compensation of approximately $1,500,000 remains unamortized and is being amortized on a straight-line basis over three years from the date of grant.

Details of the options outstanding under all plans are as follows:

	Shares			Weighted Average Exercise Price ($)		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Options outstanding at January 1, 2010		1,514,300		$	1.80		7.48
Granted		634,500		$	3.07		-
Expired		-			-		-
Cancelled		(152,500	)	$	2.47		-
Exercised		-			-		-
Options outstanding at January 1, 2011		1,996,300		$	2.14		6.92	$	1,383,760
Granted		750,000		$	4.08		-
Expired		-			-		-
Canceled		(492,500	)	$	1.96		--
Exercised		(87,875	)	$	0.80		--
Options outstanding at December 31, 2011		2,165,925		$	2.89		6.25	$	6,528,818
Options exercisable at December 31, 2011		870,644		$	1.72		5.31	$	3,638,864

Range of Exercise	Number Outstanding		Weighted Average Remaining Contractual Term		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$0.80 – 2.00		358,925		4.44	$	0.88		569,007	$	1.33
$2.00 – 4.62		1,807,000		6.61	$	3.29		301,637	$	2.46
$0.80 – $4.62		2,165,925		6.25	$	2.89		870,644	$	1.72

Warrants

During the year ended December 31, 2010, the Company granted its investment advisor, as part of the compensation related to securing certain loans, a warrant to purchase 18,750 shares of the Company’s common stock with a 5 year term at an exercise price of $1.60 per share for a total fair value of $25,245. The chairman of the Company’s Audit Committee was a senior managing director of this investment advisory firm, at the time, On May 13, 2011, the holder of this warrant elected to exercise the warrant on a cashless basis, and received a total of 14,135 net shares of common stock.

On August 31, 2011, the Company granted to a shareholder a warrant to purchase 250,000 shares of common stock at $2.90 per share subject to securing a financing transaction. The shares vest when the financing is secured. The warrant has a term of five years, and a fair value of $891,567 on the date of grant. Since these warrants contain performance conditions, the fair value of such options has been measured but not recorded since they have not been pledged and are not considered probable.

Details of outstanding warrants are as follows:

	Shares			Weighted Average Exercise Price ($)		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Warrants outstanding at January 1, 2010		312,500			1.60		4.62	$	62,500
Granted		1,602,840			2.71		-		-
Expired		-			-		-		-
Exercised		-			-		-		-
Warrants outstanding at January 1, 2011		1,915,340			2.53		4.62	$	740,313
Granted		1,020,000			2.90		-		-
Expired		-			-		-		-
Exercised		(18,750	)		1.60		-		-
Warrants outstanding at December 31, 2011		2,916,590			2.67		4.00	$	9,435,111
Warrants exercisable at December 31, 2011		2,666,590			2.64		3.94	$	8,685,111