Equity Instruments

6 Months Ended

Jun. 30, 2013

Equity [Abstract]

Equity Instruments

NOTE 7 – 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 June 30, 2013).

We also have a class of convertible preferred stock, Series D, for which 7,000 shares are authorized and 250 shares were issued and outstanding as of June 30, 2013. 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 June 30, 3013, approximately $3.2 million of compensation expense remained to be recognized over the next 8.5 years related to the Series D shares.

We may periodically issue shares of common stock as payment for services, interest and debt. During the six months ended June 30, 2013, we issued approximately 2.9 million shares of common stock to consultants, vendors, and creditors in lieu of cash payment.

Our common stock activity for the six months ended June 30, 2013 and 2012 is summarized below:

	Share Quantity 2013		Share Value ($)		Share Quantity 2012		Share Value ($)
Shares outstanding, January 1,		59,451,836				59,251,836
Shares issued as compensation for services		425,000	$	83,805
Shares issued in connection with Revolving Credit Facility		1,470,588	$	125,000
Shares issued as payment for interest and fees		969,078	$	96,908
Shares outstanding, June 30,		62,316,502				59,251,836

STOCK INCENTIVE COMPENSATION PLANS

WARRANTS:

During the six months ended June 30, 2013, we issued to note holders and consultants warrants to purchase an aggregate of 3.7 million shares of our common stock. The warrants were immediately exercisable at prices ranging from $0.15 to $0.25 and had terms of from two to three years. We recognized approximately $109,000 and $165,000, respectively, of compensation costs related to warrants during the three and six months ended June 30, 2013. Total unrecognized compensation costs related to warrants as of June 30, 2013 was approximately $1,000 which is expected to be recognized over a weighted-average period of six months. The total fair value of warrants vested during the three and six months ended June 30, 2013 was approximately $108,000 and $167,000.

A summary of our warrant activity for the three and six months ended June 30, 2013 and 2012 follows:

Warrants	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term
Outstanding at January 1, 2013		35,957,583		$	0.33	4.26 years
Granted		1,700,000		$	0.25
Forfeited or expired		(325,000	)	$	0.37
Outstanding at March 31, 2013		37,332,583		$	0.33	4.00 years
Granted		2,010,000		$	0.20
Cancelled		(2,000,000	)	$	0.20
Outstanding at June 30, 2013		37,342,583		$	0.33	3.75 years
Exercisable at June 30, 2013		37,308,583		$	0.33	3.75 years
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
Exercisable at June 30, 2012		37,615,583		$	0.33	4.62 years

OPTIONS:

As of June 30, 2013, there were a total of 44,518,000 options available for grant and 6,443,000 options outstanding, 6,116,334 of which were exercisable, under our employee stock option plans.

As of June 30, 2013, there were 801,668 shares available for option grants and 100,000 options outstanding under the non-qualified directors’ plan, 80,000 of which were exercisable.

A summary of our option activity for the three and six months ended June 30, 2013 and 2012 follows:

Options	Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual  Term
Outstanding at January 1, 2013		6,618,000		$	0.32	8.29 years
Forfeited or expired		(190,000	)	$	0.79
Outstanding at March 31, 2013		6,428,000		$	0.31	8.15 years
Granted		300,000		$	0.25
Forfeited or expired		(185,000	)	$	0.38
Outstanding at June 30, 2013		6,543,000		$	0.31	7.86 years
Exercisable at June 30, 2013		6,196,334		$	0.31	7.86 years
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
Exercisable at June 30, 2012		7,978,000		$	0.33	7.15 years

Total recognized compensation costs during the three and six months ended June 30, 2013 were approximately $8,000 and $23,000, respectively. As of June 30, 2013, there was approximately $35,000 of unrecognized compensation cost related to options expected to be recognized over a weighted-average period of 10 months. We might have recognized approximately $5,000 and $8,000, respectively, of tax benefits attributable to stock-based compensation expense recorded during the three and six months ended June 30, 2013. 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 six months ended June 30, 2013 was approximately $20,000 and $30,000, respectively.

The following table lists the assumptions utilized in applying the Black-Scholes valuation model for options and warrants.

	Six months ended June 30,
	2013	2012
Expected volatility	160%		160	%
Expected life (in years) of options	3			*
Expected life (in years) of warrants	2-3		3
Risk-free interest rate range, options	0.66%			*
Risk-free interest rate range, warrants	0.23-0.74%		0.57	%
Expected dividend yield	0%		0	%

* None were granted during the period.