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SHAREHOLDERS' EQUITY NOTE
 12 Months Ended
Dec. 31, 2011
Notes to Financial Statements  
SHAREHOLDERS' EQUITY NOTE

NOTE 6. SHAREHOLDERS' EQUITY

 

The Company's Board of Directors may, without further action by the Company's stockholders, from time to time, direct the issuance of any authorized but unissued or unreserved shares of preferred stock in series and at the time of issuance, determine the rights, preferences and limitations of each series. The holders of preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of the common stock. Furthermore, the board of directors could issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of the common stock.

 

Convertible Series A Preferred Stock

 

The Company has authorized 1,000,000 shares of Convertible Series A Preferred Stock, $0.001 par value. At December 31, 2011 and 2010, there were 510,000 shares issued and outstanding.

 

Common Stock

 

The Company has authorized 200,000,000 shares of common stock, par value $0.01. At December 31, 2011 and 2010, there were 64,629,033 and 48,282,871 shares issued and outstanding, respectively.

 

On April 13, 2010, the Company’s Board of Directors rescinded a transaction entered into in February 2009 with Taurus Global Opportunity Fund, canceled 3,250 shares of the Series B preferred stock and 350,000 common shares and paid the holders $3,563,062 from the proceeds of the restricted investment. The accrued dividends on the Series B stopped upon the effective date of the cancellation of the agreement on April 13, 2010 and the accrued dividend of $265,787 was reversed into additional paid in capital. In connection with this transaction, the Company recognized a loss on investment of $1,238,652 for the year ended December 31, 2009.

 

In July 2010, the Company cancelled 190,000 shares valued at $902,500 due to a recession of the Adtec agreement to acquire 19% of the issued and outstanding member interest of Adtec. Accordingly, the Company recognized a credit of $902,500 which offset the $902,500 research and development expense originally recognized in 2009.

 

In August 2010, the Company issued to Dr. Shane 2,500,000 shares of common stock as consideration for payment of $125,000 accrued compensation. These shares were valued at $275,000 which was the quoted market value on the date of issuance. Accordingly, the Company recorded compensation expense of $150,000 in connection with this transaction.

 

In September 2010 and in a private placement transaction, the Company sold 1,875,000 restricted common shares to investors for $75,000.

 

In October and November of 2010, a total of $12,000 principal convertible notes payable were converted into 374,883 common shares.

 

In November 2010, and in a private placement transaction, the company sold 5,555,556 restricted common shares for $250,000.

 

In September 2010, the Company issued 300,000 common shares valued at $18,000 in settlement of a lawsuit.

 

During the year ended December 31, 2010, the Company issued 2,989,952 common shares valued at $211,712 as compensation for consulting services.

 

During the year ended December 31, 2010, the Company cancelled 200,000 common shares valued at $40,000 that was previously issued to a consultant due to cancellation of a consulting agreement. This amount was credited to professional fees. In addition, the Company reversed a liability to issue common stock amounting to $250,000. This amount has been credited to other general and administrative expenses.

 

In December 2010, the Company issued 100,000 and 50,000 shares of common stock as consideration for payment of $5,000 and $2,500 principal loans payable to the Company’s CEO and a third party, respectively.

 

 

 

F-13

 

 

 

 

 

In February 2011, the Company issued 572,115 common shares with a fair market value of $22,975 for payment of accrued legal fees in the amount of $14,875; the excess fair market value of the common shares of $8,100 was recorded as legal expenses.

 

In February 2011, the Company issued 14,076,923 shares of common stock with a fair market value of $563,077 to the CEO as consideration for payment of $366,000 accrued compensation; the excess fair market value of $197,077 has been recorded as share-based compensation during the three months ended March 31, 2011. Further, the CEO forgave accrued compensation due him amounting to $700,269. The compensation forgiven by the CEO has been treated as a capital contribution to the Company and therefore has been recorded as additional paid-in capital in February 2011.

 

In February 2011, the Company sold 750,000 shares of common stock for $63,750.

 

In February 2011, 20,000 stock options were exercised at a value of $0.05 per common stock.

 

In April 2011, the Company sold 750,000 common shares valued at $63,750.

 

In September 2011, the Company issued 171,500 shares of common stock to Harold Paul valued at $8,575 as consideration for payment of accrued legal services amounting to $6,000. The company recorded additional share-based compensation expense of $2,575 in connection with this transaction. The Company also issued 5,626 shares valued at $1,650 to a vendor for services rendered.

 

Stock Options

 

The Company issued a total of 40,000 options valued at $84,000 to two directors in January 2010. The options have an exercise price of $2.10 and a fair market value of $2.10 per option. The options expire on January 2020. The options were valued using the black-scholes model using the following assumptions: volatility - 316%; dividend yield – 0%; zero coupon rate – 3.85% and a life of 10 years.

 

The Company issued a total of 40,000 options valued at $2,000 to two directors in January 2011. The options have an exercise price of $0.05 and a fair market value of $0.05 per option. The options expire on January 2021. The options were valued using the Black-Scholes model using the following assumptions: volatility - 348%; dividend yield - 0%; zero coupon rate 3.50% and a life of 10 years.

 

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models may not necessarily provide a reliable single measure of the fair value of its options.

 

A summary of the status of the Company’s options is presented below.

 

  December 31, 2011 December 31, 2010
  Number of Weighted Average Number of Weighted Average
  Options Exercise Price Options Exercise Price
Outstanding, beginning of year 40,000 $2.10 - $2.10
Granted 40,000 .05 40,000 -
Exercised (20,000) (.05) - -
Outstanding, end of year 60,000 $1.42 40,000 $2.10
         

 

 

Options outstanding and exercisable by price range as of December 31, 2011 were as follows:

 

Outstanding Options   Exercisable Options
Range Number

Average

Weighted

Remaining Contractual

Life in Years

 Number

Weighted

Average

Exercise Price

$2.10 40,000 8 40,000 $2.10
$0.05 20,000 7 20,000 $0.05