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12. Shareholders' Deficit | 9 Months Ended
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Sep. 30, 2012
Shareholders Deficit |
NOTE 12 - Shareholders' Deficit | Series C 10% Preferred Stock As of December 31, 2011, all Series C Preferred Stock had been converted into common stock. Series D 10% Preferred Stock The Company had 18,999 shares of its Series D 10% Preferred Stock (“Series D”) outstanding as of September 30, 2012 and December 31, 2011. Each share of Series D sold for $30, can be converted at any time into 60 shares of common stock and has voting rights of 60 shares of common stock. In connection with the issuance of Series D, the Company issued warrants to purchase 179,970 shares of common stock. The warrants have a life of five years to purchase a share of common stock for $1.00 and expire between November 2015 and April 2016. The Series D has liquidation preference over common stock at a liquidation value of $30 and pays a cumulative dividend of 10% per year, payable on July 31 and December 31 of each year that the Series D is outstanding. Interest payments may be made in cash or in common stock at the discretion of the Company. The Series D automatically convert into 60 shares of common stock when the closing price for a share of common stock is $5.00 or above and the average daily trading volume for the 10 previous trading days is above 200,000 shares. Given the losses recorded by the Company, the stock equivalents related to the Series D are not included in the calculation of earnings per share since the effect of such inclusion would be antidilutive. Since the Series D contains an embedded conversion feature, the Company performed an analysis of the Series C under ASC 815 “Derivatives and Hedging.” This analysis determined that the embedded conversion feature was not required to be bifurcated and accounted separately from the Series D because the economic risks and characteristics of the embedded conversion feature were clearly and closely related to the economic risks and characteristics of the host contract Series D, namely the risks of the common stock. The value of the BCF was $26,945 which was charged to equity at the time of issuance and was not included in the calculation of earnings per share. The BCF was calculated as the difference of the FV of the conversion price and the intrinsic value of the preferred shares. The Series D contains a share adjustment provision that provides for additional shares to be issued if the thirty-day volume weighted average price of the Company’s common stock (“VWAP”) is between $0.50 and $1.00 180 days after the purchase of Series D. If the VWAP is above $1.00, no action is taken. If the VWAP is between $0.50 to $1.00, additional shares are issued to the holder such that the total of the number of common shares issuable upon conversion, which is the number of Series D shares times 60 (“Conversion Shares”), plus the additional shares together equals the VWAP price equals the Conversion Shares times $1.00. If the VWAP is below $0.50 the number of additional shares are calculated as if the price were $0.50, not the actual VWAP. Once this 180-day period passes and the Company has issued the appropriate shares, if any, then Price Protection provisions of this Agreement will expire and the Company will be completely released from any future claims by the Purchaser related to this share adjustment provision. The price protection provisions have expired. The Company determined that derivative accounting for the embedded conversion and the share adjustment features was not required pursuant to ASC 815-10-15-74 because these features are indexed to the Company’s own stock under ASC 815-40-15 (EITF Issue 07-5); the features can be classified in shareholders’ equity under ASC 815-40 (EITF Issue 00-19, paragraphs 1-11) and that Series D is classified as a conventional convertible so the features can be classified in stockholders’ equity under ASC 815-40 (Issue 00-19, paragraphs 12-32). The determination was made by the Company that the Series D is a conventional convertible because the freestanding warrant is indexed to the company’s own stock under ASC 815-40-15 (EITF Issue 07-5); the freestanding warrant is classified in shareholders’ equity under ASC 815-40 (Issue 00-19, paragraphs 1-32); and the financial instrument does not include embedded puts and/or calls or other features that require bifurcation from the host contract under ASC 815. As of September 30, 2012 there were 18,999 shares of Series D Preferred Stock outstanding. Series E 5% Preferred Stock On May 24, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with eight investors (collectively, the “Investors”) pursuant to which the Company sold the Investors 8,700 shares of a new series of convertible preferred stock designated as Series E Convertible Preferred Stock (the “Series E”), the terms of which are set forth in the Certificate of Designations of Series E Preferred Stock (the “Certificate”), for $1,000 per share, or $8,700,000 in the aggregate. As of September 30, 2012 and December 31, 2011, there were 8,450 and 8,500 shares of Series E outstanding. In connection with the sale of the Preferred Shares, the Company also agreed to issue to the Investors (a) warrants (“A Warrants”) to purchase up to one additional share of Common Stock for each share of Common Stock issuable upon conversion of the Preferred Shares, and (b) warrants (“B Warrants”) to purchase up to 0.50 additional shares of Common Stock for each share of Common Stock issuable upon conversion of the Preferred Shares. The Warrants are exercisable for five years commencing on the date of first issuance and are exercisable only for cash if there is an effective registration statement covering the resale of the shares issuable upon exercise of the Warrants. In the absence of such a registration statement, the Warrants are exercisable for cash or on a cashless basis at the option of the holder thereof. The exercise price of the A Warrant is $0.30 per share and the B Warrant has an exercise price of $0.30 per share, subject in each case to full ratchet anti-dilution protection. The exercise price of the A Warrant was originally $0.65 and the exercise price of the B Warrant was originally $1.00 but were adjusted pursuant to the full ratchet anti-dilution protection when $249,999 of notes were issued on April 4, 2012 that contained a $0.30 conversion feature. Pursuant to the Certificate, the Preferred Shares bear a dividend of 5%, payable quarterly in cash, or, if the dividend shares are registered for resale, in shares of the Company’s Common Stock. The effective conversion rate for the Preferred Shares was originally is $0.40 per share of Common Stock, but was adjusted to $0.30 pursuant to the full ratchet anti-dilution protection mentioned above. The Preferred Shares have voting rights on an as-converted to Common Stock basis, with the Investors (subject to certain exceptions) having the right to elect two members to the Company’s Board of Directors (“BOD”) for so long as at least 50% of the total number of Preferred Shares purchased pursuant to the Purchase Agreement are outstanding, and the right to elect one member to the Company’s BOD for so long as least 25% but less than 50% of the total number of Preferred Shares issued pursuant to the Purchase Agreement are outstanding. The Company is required to redeem any unconverted Preferred Shares on the fifth anniversary of the date of first issuance of the Preferred Shares, and has the right to require conversion at any time if the average daily trading value for any 20 consecutive trading days exceeds $250,000 and the weighted average price per share is at least $2.50 for each of those 20 consecutive trading days. To secure the Company’s obligation to redeem the Preferred Shares, the Company entered into a Security Agreement dated May 24, 2011, pursuant to which the Company agreed to grant the holders of the Preferred Shares a first priority security interest in all of its assets. The Company filed a registration statement with the SEC covering the resale of the shares (a) issuable upon conversion of the Preferred Shares or exercise of the Warrants, (b) issued as dividends payable in shares of Common Stock pursuant to the Certificate, and (c) issuable upon exercise of the Placement Agent Warrants. This registration statement was declared effective on February 13, 2012. Upon the occurrence of certain events set forth in the Purchase Agreement, including the failure to timely file the registration statement or have the registration statement timely declared effective, the Company will pay to the Investors cash of 1% of the aggregate purchase price of the Series E Preferred Stock and Warrants for each 30-day period during such default; provided, however, that the payments will not exceed 10% of the aggregate purchase price. As of September 30, 2012 there were 8,450 shares of Series D Preferred Stock outstanding. Common Stock During the nine months ended September 30, 2012, there were no sales of the Company’s common stock. During the nine months ended September 30, 2011, the Company raised $3,609,359 from the issuance of 7,957,141 shares of common stock. Stock Options During the nine months ended September 30, 2012, the Company cancelled 4,660,994 options for employees whose employment had been terminated and granted 2,300,000 options to Jerold Rubinstein, the Company’s new Chairman of the Board and CEO on June 28, 2012, pursuant to an employment contract, 450,000 options to a director and 300,000 options to an officer. These options have a strike price of $0.35 - $0.38, which were the closing prices of the Company’s common stock on the day of grant and a five-year life. Mr. Rubinstein’s options vest monthly over a twelve-month period unless the employment contract is terminated for any reason, at which time the options vest in full. The director’s options vest ratably over a 36-month period, and the officer’s options vest one third at grant, one third after the first year and one third after the second year. The Black Scholes value of these options was $706,250 which is being amortized over the respective vesting periods. The following assumptions were used for the Black Scholes calculation to determine this expense:
Estimated fair value of underlying common stock |  |  | $0.35 - $0.38 |
Remaining life |  |  | 5.0 |
Risk-free interest rate |  |  | 0.69% - 0.80% |
Expected volatility |  |  | 80% - 89% |
Dividend yield |  |  | – |
The following table sets forth the activity of our stock options:
|  | Options Outstanding |  |  | Options Exercisable |
|  |  |  |  | Range of |  |  | Weighted Average Remaining |  |  | Weighted Average |  |  |  |  |  | Weighted Average Remaining |  |  | Weighted Average |
|  | Options |  |  | Exercise |  |  | Life in |  |  | Exercise |  |  | Options |  |  | Life in |  |  | Exercise |
|  | Outstanding |  |  | Prices |  |  | Years |  |  | Price |  |  | Exercisable |  |  | Years |  |  | Price |
As of December 31, 2010 |  |  | 10,269,852 |  |  |  | $0.14 - $3.50 |  |  |  | 2.4 |  |  | $ | 0.94 |  |  |  | 8,512,684 |  |  |  | 2.0 |  |  | $ | 0.94 |
Cancelled |  |  | (3,110,000 | ) |  |  | – |  |  |  | – |  |  | $ | 0.43 |  |  |  | (3,110,000 | ) |  |  | – |  |  | $ | 0.00 |
Exercised |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Granted |  |  | 5,010,000 |  |  | $ | 0.54 |  |  |  | 5.0 |  |  | $ | 0.54 |  |  |  | 3,355,000 |  |  |  | 5.0 |  |  | $ | 0.54 |
As of December 31, 2011 |  |  | 12,169,852 |  |  |  | $0.14 - $1.50 |  |  |  | 3.2 |  |  | $ | 0.49 |  |  |  | 8,757,684 |  |  |  | 3.2 |  |  | $ | 0.40 |
Cancelled |  |  | (7,276,329 | ) |  |  | – |  |  |  | – |  |  |  | – |  |  |  | (4,660,994 | ) |  |  | – |  |  |  | – |
Exercised |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |
Granted |  |  | 3,050,000 |  |  |  | $0.35 - $0.38 |  |  |  | 4.8 |  |  | $ | 0.36 |  |  |  | 734,333 |  |  |  | 4.8 |  |  | $ | 0.36 |
As of September 30, 2012 |  |  | 7,943,523 |  |  |  | $0.35 -$0.54 |  |  |  | 3.6 |  |  | $ | 0.46 |  |  |  | 4,831,023 |  |  |  | 2.9 |  |  | $ | 0.50 |
Warrants During the nine months ended September 30, 2012, the Company issued six five-year warrants to purchase a total of 13,530,000 shares at prices of $0.38 to $0.75 in connection with consulting and advisory contracts. The Black Scholes value of these warrants is $4,133,690, which is being recognized over the twelve to twenty-four months of the contracts. The following assumptions were used for the Black Scholes calculation to determine this expense:
Estimated fair value of underlying common stock |  |  | $0.38 - $0.75 |
Remaining life |  |  | 5.0 |
Risk-free interest rate |  |  | 0.74% - 1.80% |
Expected volatility |  |  | 84% - 132% |
Dividend yield |  |  | – |
A summary of the warrants:
|  | Warrants Outstanding |  |  | Warrants Exercisable |
|  |  |  |  | Range of |  |  | Weighted Average Remaining |  |  | Weighted Average |  |  |  |  |  | Weighted Average Remaining |  |  | Weighted Average |
|  | Warrants |  |  | Exercise |  |  | Life in |  |  | Exercise |  |  | Warrants |  |  | Life in |  |  | Exercise |
|  | Outstanding |  |  | Prices |  |  | Years |  |  | Price |  |  | Exercisable |  |  | Years |  |  | Price |
As of December 31, 2010 |  |  | 2,472,676 |  |  |  | $1.00 - $2.00 |  |  |  | 4.4 |  |  | $ | 1.37 |  |  |  | 2,472,676 |  |  |  | 4.4 |  |  | $ | 1.37 |
Exercised |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |
Granted |  |  | 57,057,569 |  |  |  | $0.65 - $1.00 |  |  |  | 4.5 |  |  | $ | 0.75 |  |  |  | 57,057,569 |  |  |  | 4.5 |  |  | $ | 0.75 |
As of December 31, 2011 |  |  | 59,530,245 |  |  |  | $0.65 - $2.00 |  |  |  | 3.5 |  |  | $ | 2.00 |  |  |  | 59,530,245 |  |  |  | 3.5 |  |  | $ | 2.00 |
Exercised |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |
Ratchet-down impact |  |  | 56,991,667 |  |  | $ | 0.30 |  |  |  | – |  |  | $ | 0.30 |  |  |  | 56,991,667 |  |  |  | – |  |  | $ | 0.30 |
Granted |  |  | 14,363,330 |  |  |  | $0.30 - $0.40 |  |  |  | 4.6 |  |  | $ | 0.40 |  |  |  | 6,488,330 |  |  |  | 4.6 |  |  | $ | 0.40 |
As of September 30, 2012 |  |  | 130,885,242 |  |  |  | $0.30 - $2.00 |  |  |  | 3.7 |  |  | $ | 0.40 |  |  |  | 123,010,242 |  |  |  | 3.7 |  |  | $ | 0.40 |
The exercise price of the A Warrant for Series E Preferred was originally $0.65 and the exercise price of the B Warrant for Series E Preferred was originally $1.00, but both warrants were adjusted pursuant to the full ratchet anti-dilution protection when $249,999 of notes were issued on April 4, 2012 that contained a $0.30 conversion feature. Calculations of the ratchet-down impact:
|  |  | Original |  | After Ratchet Down |
|  |  | Shares x |  |  |  | Strike = |  |  |  | Aggregate Exercise Price |  |  |  | Shares x |  |  |  | Strike = |  |  |  | Aggregate Exercise Price |
Series A warrants |  |  | 21,750,000 |  |  | $ | 0.65 |  |  | $ | 14,137,500 |  |  |  | 47,125,000 |  |  | $ | 0.30 |  |  | $ | 14,137,500 |
Series B warrants |  |  | 10,875,000 |  |  | $ | 1.00 |  |  | $ | 10,875,000 |  |  |  | 36,250,000 |  |  | $ | 0.30 |  |  | $ | 10,875,000 |
Placement agent warrant |  |  | 3,600,000 |  |  | $ | 0.65 |  |  | $ | 2,340,000 |  |  |  | 7,800,000 |  |  | $ | 0.30 |  |  | $ | 2,340,000 |
Broker-dealer warrant |  |  | 1,000,000 |  |  | $ | 0.65 |  |  | $ | 650,000 |  |  |  | 2,166,667 |  |  | $ | 0.30 |  |  | $ | 650,000 |
Advisory warrant |  |  | 750,000 |  |  | $ | 0.65 |  |  | $ | 487,500 |  |  |  | 1,625,000 |  |  | $ | 0.30 |  |  | $ | 487,500 |
|  |  | 37,975,000 |  |  |  |  |  |  |  |  |  |  |  | 94,966,667 |  |  |  |  |  |  |  |  |
Additional warrants from ratchet-down |  |  |  |  | 56,991,667 |  |  |  |  |  |  |  |  |

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- Definition The entire disclosure for shareholders' equity, comprised of portions attributable to the parent entity and noncontrolling interest, if any, including other comprehensive income (as applicable). Including, but not limited to: (1) balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings; (2) accumulated balance for each classification of other comprehensive income and total amount of comprehensive income; (3) amount and nature of changes in separate accounts, including the number of shares authorized and outstanding, number of shares issued upon exercise and conversion, and for other comprehensive income, the adjustments for reclassifications to net income; (4) rights and privileges of each class of stock authorized; (5) basis of treasury stock, if other than cost, and amounts paid and accounting treatment for treasury stock purchased significantly in excess of market; (6) dividends paid or payable per share and in the aggregate for each class of stock for each period presented; (7) dividend restrictions and accumulated preferred dividends in arrears (in aggregate and per share amount); (8) retained earnings appropriations or restrictions, such as dividend restrictions; (9) impact of change in accounting principle, initial adoption of new accounting principle and correction of an error in previously issued financial statements; (10) shares held in trust for Employee Stock Ownership Plan (ESOP); (11) deferred compensation related to issuance of capital stock; (12) note received for issuance of stock; (13) unamortized discount on shares; (14) description, terms, and number of warrants or rights outstanding; (15) shares under subscription and subscription receivables, effective date of new retained earnings after quasi-reorganization and deficit eliminated by quasi-reorganization and, for a period of at least ten years after the effective date, the point in time from which the new retained dates; and (16) retroactive effective of subsequent change in capital structure. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 04 -Article 3 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21488-112644 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 29, 30, 31 -Article 5 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Staff Accounting Bulletin (SAB) -Number Topic 4 -Section E Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Glossary Preferred Stock -URI http://asc.fasb.org/extlink&oid=6521494 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 10 -Section 50 -Paragraph 11 -URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21564-112644 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 10 -Section S99 -Paragraph 4 -Subparagraph (SAB TOPIC 4.C) -URI http://asc.fasb.org/extlink&oid=6959260&loc=d3e187143-122770 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21484-112644 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21475-112644 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21506-112644 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6405834&loc=d3e23285-112656 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Accounting Research Bulletin (ARB) -Number 43 -Section B -Paragraph 7, 11A -Chapter 1 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Staff Accounting Bulletin (SAB) -Number Topic 4 -Section C Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21463-112644 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph d -Article 4 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 210 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.5-02.29-31) -URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB TOPIC 4.E) -URI http://asc.fasb.org/extlink&oid=6228006&loc=d3e74512-122707 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 5 -Paragraph 15 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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