Equity Instruments

9 Months Ended

Sep. 30, 2012

Equity Instruments [Abstract]

EQUITY INSTRUMENTS

NOTE 6 – EQUITY INSTRUMENTS

Our Series C preferred stock is currently convertible into common stock at the rate of approximately 316.28 common shares for each share of Series C preferred, adjustable for any dilutive issuances of common occurring in the future. Series C preferred shares vote with the common stockholders on an as-converted basis. The shares are nonparticipating except that dividends, when declared by our Board of Directors on the common stock, must be paid on the Series C stock on an as-converted basis before any dividends are paid on our common stock. The Series C is also cumulative with respect to dividends on common stock and junior series of preferred stock. Other significant rights and preferences of the Series C preferred include:

• the right to vote as a separate class to appoint five directors of the Company, and

• liquidation preferences, whereby the Series C holders have a claim against our assets senior to the claim of the holders of our common stock in the event of our liquidation, dissolution or winding-up (the value of the liquidation preference is $250 per share, or approximately $2.6 million at September 30, 2012).

We also have a class of convertible preferred stock, Series D, for which 7,000 shares are authorized and 250 shares were issued during the nine months ended and outstanding as of September 30, 2012. The shares, which were granted in January 2012, do not vest until the tenth anniversary of the grant date. Such shares were issued in exchange for the cancelation of 120 previously granted warrants to purchase Series D shares. Once vested, a Series D preferred share will be convertible at any time into 100,000 shares of common stock, subject to adjustment in the event of any common stock dividend, split, combination thereof or other similar recapitalization, without additional consideration. Prior to vesting and thereafter, each Series D convertible preferred share is entitled to all voting, dividend, liquidation and other rights accorded a share of Series D convertible preferred stock. As to dividends, the Series D stock is noncumulative. If a dividend is declared on the common stock, each share of Series D stock is entitled to receive a dividend equal to 50% of the dividend declared for the common stock as if the Series D stock had been converted. Despite their nonvested status, voting rights of each share nevertheless consist of the right to cast the number of votes equal to those of 500,000 shares of common stock. Unless otherwise required by applicable law, holders of shares of Series D have the right to vote together with holders of common stock as a single class on all matters submitted to a vote of our stockholders. At September 30, 2012, approximately $3.5 million of compensation expense remained to be recognized over the next 9.3 years related to the Series D shares.

STOCK INCENTIVE COMPENSATION PLANS

WARRANTS:

To Purchase Common Stock

We periodically issue warrants to purchase shares of our common stock for the services of employees and non-employee directors.

Due to employee and director resignations, we derecognized net compensation costs of approximately $23,000, related to warrants to purchase common stock during the nine months ended September 30, 2012. Total unrecognized compensation costs related to warrants as of September 30, 2012, was approximately $3,000 which is expected to be recognized over a weighted-average period of 15 months. The total fair value of warrants vested during the three and nine months ended September 30, 2012 was $9,610 and 15,318.

A summary of our warrant activity for the three and nine months ended September 30, 2012 and 2011 follows:

Warrants	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term
Outstanding at January 1, 2012		41,057,583		$	0.35		4.86 years
Granted		25,000		$	0.25
Forfeited or expired		(100,000	)	$	0.53
Outstanding at March 31, 2012		40,982,583		$	0.35		4.61 years
Forfeited or expired		(2,300,000	)	$	0.32
Outstanding at June 30, 2012		38,682,583		$	0.35		4.58 years
Granted		100,000		$	0.25
Forfeited or expired		(2,075,000	)	$	0.63
Outstanding at September 30, 2012		36,707,583		$	0.33		4.43 years
Exercisable at September 30, 2012*		36,640,583		$	0.33		4.43 years
Outstanding at January 1, 2011		27,209,750		$	0.38		4.25 years
Granted		1,291,500		$	0.89
Reclassified		500,000		$	0.55
Forfeited, expired, or cancelled		(650,000	)	$	0.51
Outstanding at March 31, 2011		28,351,250		$	0.40		4.05 years
Granted		433,000		$	0.25
Forfeited or expired		(1,000,000	)	$	1.00
Outstanding at June 30, 2011		27,784,250		$	0.37		3.77 years
Granted		3,373,333		$	0.44
Outstanding at September 30, 2011		31,157,583		$	0.38		3.57 years
Exercisable at September 30, 2011*		29,357,583		$	0.35		3.56 years

* No aggregate intrinsic value.

OPTIONS:

From time-to-time, we grant stock options as compensation for services to our employees, non-employee directors and certain consultants (“grantees”) allowing grantees to purchase our common stock pursuant to stockholder-approved stock option plans. We currently have three active incentive qualified option plans, the 1995 Incentive Plan, the 2002 Incentive Plan and the 2009 Equity Compensation Plan (collectively, the “Plans”), that provide for the granting of stock options, stock appreciation rights, limited stock appreciation rights, restricted preferred stock, and common stock grants to grantees. Grants issued under the Plans may qualify as incentive stock options (“ISOs”) under Section 422A of the Internal Revenue Code of 1986, as amended. Options for ISOs may be granted for terms of up to ten years. The vesting of options issued under the 1995 and 2002 plans generally occurs after six months for one-half of the options and after 12 months for the remaining options. For the 2009 Equity Compensation Plan, the vesting period is determined by the Compensation and Stock Option Committee. The exercise price for ISOs must equal or exceed the fair market value of the underlying shares on the date of grant. The Plans also provide for the full vesting of all outstanding options under certain change of control events. The maximum number of common shares authorized for issuance under the Plans is 52,000,000. As of September 30, 2012, there were a total of 44,616,000 shares available for grant and 6,353,000 options outstanding, 5,769,100 of which were exercisable, under the Plans.

In addition, under our Non-employee Directors’ Stock Option Plan, we are authorized to issue non-qualified stock options to our non-employee directors for up to 1,000,000 common shares. Each non-qualified stock option is exercisable at a price equal to the average of the closing bid and asked prices of the common stock in the over-the-counter market for the most recent preceding day there was a sale of the stock prior to the grant date. Grants of options vest in accordance with vesting schedules established by our Board of Directors’ Compensation and Stock Option Committee. Upon joining our Board of Directors, directors receive an initial grant of 25,000 options. Annually, directors are granted 15,000 options on the date of our annual meeting. As of September 30, 2012, there were 796,668 shares available for option grants and 105,000 options outstanding under the non-qualified directors’ plan, 65,000 of which were exercisable.

As of September 30, 2012, we also had 1,500,000 options outstanding and exercisable. These options were issued outside the option plans described above.

A summary of our option activity for the three and nine months ended September 30, 2012 and 2011 follows:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term
Outstanding at January 1, 2012		8,795,400		$	0.33		7.74 years
Forfeited or expired		(40,000	)	$	0.38
Outstanding at March 31, 2012		8,755,400		$	0.33		7.49 years
Forfeited or expired		(119,500	)	$	0.35
Outstanding at June 30, 2012		8,635,900		$	0.33		7.24 years
Forfeited or expired		(677,900	)	$	0.29
Outstanding at September 30, 2012		7,958,000		$	0.33		6.85 years
Exercisable at September 30, 2012*		7,334,100		$	0.34		6.75 years
Outstanding at January 1, 2011		2,611,100		$	0.50		8.09 years
Granted		25,000		$	0.23		9.82 years
Forfeited or expired		(464,750	)	$	0.30
Outstanding at March 31, 2011		2,171,350		$	0.54		7.77 years
Forfeited or expired		(116,500	)	$	0.38
Outstanding at June 30, 2011		2,054,850		$	0.55		7.47 years
Forfeited or expired		(126,450	)	$	0.55
Outstanding at September 30, 2011		1,928,400		$	0.55		7.22 years
Exercisable at September 30, 2011*		1,019,300		$	0.69		6.40 years

* No aggregate intrinsic value.

Total recognized compensation costs during the three and nine months ended September 30, 2012 were approximately $32,000 and $200,000, respectively. As of September 30, 2012, there was approximately $68,000 of unrecognized compensation cost related to options expected to be recognized over a weighted-average period of 10 months. We might have recognized approximately $1,000 and $35,000 of tax benefits attributable to stock-based compensation expense recorded during the three and nine months ended September 30, 2012. However, this potential benefit was fully offset by our valuation allowance due to the aforementioned significant uncertainty of future realization. The total fair value of options vested during the three and nine months ended September 30, 2012, was $0 and $11,148, respectively.