Stockholders' Deficiency

3 Months Ended

Mar. 31, 2013

Stockholders Deficiency

Note 7 - Stockholders' Deficiency

Common Stock

During the three months ended March 31, 2013, pursuant to a private placement offering of units that commenced on October 4, 2012 (the “Private Placement”), the Company received an aggregate of $3,376,975 of proceeds related to the sale of 3,376,975 units at a price of $1.00 per unit. The aggregate amount includes $500,000, which was received from an officer, and $850,002, which was received during the fourth quarter of 2012 and classified as restricted cash as of December 31, 2012. Each unit consists of (i) one share of the Company’s common stock and (ii) a five-year warrant to purchase three shares of the Company’s common stock at an exercise price of $0.25 per share, such that warrants to purchase an aggregate of 10,130,925 shares of common stock were issued. Substantially all of the proceeds from the sale of the units were used by the Company to satisfy all of its obligations under the convertible notes and notes (see Notes 5 and 6). In connection with the Private Placement, an officer has entered into repurchase agreements with certain purchasers of units, pursuant to which he has agreed to repurchase, subject to certain conditions, one-half of these holder’s units at a purchase price of $1.00 per unit if the closing price of the Common Stock is less than $0.25 on five consecutive trading days at any time within one year of February 1, 2013. Cape Bear, which holds a substantial equity position in the Company, also entered into repurchase agreements with certain purchasers, other than the officer, that are substantially similar to the officer’s agreements, except that Cape Bear’s obligations are secured by a lien over certain real estate.

On March 13, 2013, the Company exchanged $761,000 of notes payable and other advances – related parties and $72,000 of accounts payable to a related party into an aggregate of 833,000 units at a price of $1.00 per unit. Each unit consists of (i) one share of the Company’s common stock, and (ii) a five-year warrant to purchase two and three-quarters shares of the Company’s common stock at an exercise price of $0.25 per share (such that warrants to purchase an aggregate of 2,290,750 shares of common stock were issued). The $3,625,900 aggregate fair value of the securities issued ($2,639,700 related to the warrants and $986,200 related to the common stock) was credited to equity at conversion. The Company recorded a $2,792,900 extinguishment loss which represents the incremental fair value of the securities issued as compared to the carrying value of the liabilities.

Series B Preferred Stock

On January 1, 2013, the Company issued 27,630 shares of Series B Convertible Preferred Stock valued at $261,084, representing approximately $0.66 in value per share of Series B Preferred Stock outstanding to the Series B Convertible Preferred Stockholders as payment in kind for dividends (the “2013 Series B Dividend”). In connection with the 2013 Series B Dividend, the Company recognized a $202,305 beneficial conversion feature during the three months ended March 31, 2013, which represents the difference between the commitment date value of the shares and the effective conversion price. In connection with the outstanding preferred stock, during the three months ended March 31, 2013 and 2012, the Company recorded $69,840 and $65,271 as contractual 7% dividends, respectively. As of December 31, 2012, February 1, 2013, March 13, 2013 and April 11, 2013, Series B holders are entitled to convert into 5.00, 7.61, 8.07 and 8.14 shares, respectively, of the Company’s common stock for each share of Series B Preferred Stock due to the anti-dilution provision. The anti-dilution provision represents a contingent beneficial conversion feature.  As of March 31, 2013, an incremental 1,295,738 shares of common stock are issuable at conversion of the Series B Convertible Preferred Stock as compared to the original terms.   Using the commitment date common stock price in effect, the commitment date value of the incremental shares is $3,332,792. However, recognition of beneficial conversion features is limited to the aggregate gross proceeds allocated to the preferred stock of $3,199,689 (422,315 shares of Series B Convertible Preferred Stock times $9.45 per share less the relative fair value of the warrants of $791,188) less the $1,666,967 beneficial conversion feature already recognized on the original issuance of 365,265 shares of Series B Preferred Stock (prior to the issuance of additional shares as payment-in-kind in lieu of cash dividends) and the $202,305 recognized related to the 2013 Series B Dividend. Due to these limitations, a beneficial conversion feature of $1,330,417 related to the incremental shares was recognized during the three months ended March 31, 2013.

Series C Preferred Stock

On February 13, 2013, the Company received a Notice of Redemption of Series C Preferred Stock. As a result of the Convertible Notes coming due and not being paid on December 31, 2012, the Company accelerated the accretion rate of the deemed dividend on the Redeemable Preferred Stock – Series C and reclassified the Redeemable Preferred Stock – Series C from temporary equity to current liabilities. The Company recorded Series C deemed dividends of $92,916 during the three months ended March 31, 2012.  As of December 31, 2012, the discount associated with the Series C Preferred Stock was fully amortized.

Stock Options

In applying the Black-Scholes option pricing model to stock options granted, the Company used the following weighted average assumptions:

	For The Three Months Ended
	March 31,
	2013			2012
Risk free interest rate		1.13	%		1.04	%
Dividend yield		0.00	%		0.00	%
Expected volatility		166.0	%		172.2	%
Expectd life in years		6.00			6.00

The weighted average fair value of the stock options granted during the three months ended March 31, 2013 and 2012 was $1.20 and $5.27 per share, respectively.

On February 15, 2013, the Company granted options to employees to purchase an aggregate of 330,500 shares of common stock under the 2009 Plan at an exercise price of $1.60 per share for an aggregate grant date value of $395,041. The options vest over a three year period and have a term of ten years.

Stock-based compensation expense related to stock options for the three months ended March 31, 2013 and 2012 was recorded in the condensed consolidated statements of operations as a component of selling, general and administrative expenses and totaled $312,444 and $259,409, respectively.  As of March 31, 2013, stock-based compensation expense related to stock options of $2,916,160 remains unamortized, including $2,024,591 which is being amortized over the weighted average remaining period of 2.3 years.  The remaining $891,569 is related to a performance based option where vesting is currently deemed to be improbable and no amount is being amortized.

A summary of the stock option activity during the three months ended March 31, 2013 is presented below:

						Weighted
				Weighted		Average
	Number			Average		Remaining
	of			Exercise		Life		Intrinsic
	Options			Price		In Years		Value
Outstanding, January 1, 2013		2,183,899		$	3.42
Granted		330,500			1.60
Exercised		-			-
Forfeited		(62,916	)		3.11
Outstanding, March 31, 2013		2,451,483		$	3.18		6.2	$	77,331
Exercisable, March 31, 2013		1,192,649		$	2.66		4.7	$	77,331

The following table presents information related to stock options at March 31, 2013:

	Options Outstanding		Options Exercisable
	Weighted		Weighted	Weighted
Range of	Average	Outstanding	Average	Average	Exercisable
Exercise	Exercise	Number of	Exercise	Remaining Life	Number of
Price	Price	Options	Price	In Years	Options
$0.80 - $2.20	$         1.59	806,400	$         1.58	2.5	485,900
$2.21 - $3.80	3.19	924,083	2.91	5.6	510,083
$3.81 - $6.99	4.94	721,000	4.65	8.1	196,666
	$         3.18	2,451,483	$         2.66	4.7	1,192,649

Warrants

In applying the Black-Scholes option pricing model to stock warrants granted, the Company used the following weighted average assumptions:

	For The Three Months Ended
	March 31,
	2013			2012
Risk free interest rate		0.88	%		n/a
Dividend yield		0.00	%		n/a
Expected volatility		164.3	%		n/a
Expectd life in years		5.00			n/a

The weighted average fair value of the stock warrants granted during the three months ended March 31, 2013 was $1.38 per share.  There were no warrants granted during the three months ended March 31, 2012.

On February 15, 2013, the Company granted vested five-year warrants to purchase an aggregate of 408,348 shares of common stock at an exercise price of $1.00 per share to investors who purchased shares in private placements at $4.50 per share during 2012. The warrants had an aggregate issuance date fair value of $487,200 which was expensed immediately.

See Note 7 – Stockholders’ Deficiency – Common Stock for details regarding warrants granted in connection with the Private Placement and the conversion of related party notes and accounts payable into equity.

During the three months ended March 31, 2013, the Company issued an aggregate of 6,934,784 shares of common stock to several holders of warrants who elected to exercise warrants to purchase an aggregate of 8,125,750 shares of common stock on a "cashless" basis under the terms of the warrants. The warrants had an exercise price of $0.25 per share. The aggregate intrinsic value of the warrants exercised was $11,840,859 for the three months ended March 31, 2013.

Stock-based compensation expense related to warrants for the three months ended March 31, 2013 and 2012 was recorded in the condensed consolidated statements of operations as a component of selling, general and administrative expenses and totaled $504,777 and $0, respectively. As of March 31, 2013, stock-based compensation expense related to warrants of $674,312 remains unamortized, including $97,472 which is being amortized over the weighted average remaining period of 2.5 years.  The remaining $576,840 is related to a performance based warrant where vesting is currently deemed to be improbable and no amount is being amortized.

A summary of the stock warrant activity during the three months ended March 31, 2013 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining
	Number of			Exercise		Life		Intrinsic
	Warrants			Price		In Years		Value
Outstanding, January 1, 2013		592,846		$	3.01
Granted		13,580,023			0.28
Exercised		(8,125,750	)		0.25
Forfeited		-			-
Outstanding, March 31, 2013		6,047,119		$	0.58		4.7	$	4,618,507
Exercisable, March 31, 2013		5,767,119		$	0.46		4.8	$	4,618,507

The following table presents information related to stock warrants at March 31, 2013:

	Warrants Outstanding		Warrants Exercisable
	Weighted		Weighted	Weighted
Range of	Average	Outstanding	Average	Average	Exercisable
Exercise	Exercise	Number of	Exercise	Remaining Life	Number of
Price	Price	Warrants	Price	In Years	Warrants
$0.25 - $0.35	$        0.26	5,045,925	$        0.26	4.9	5,045,925
$0.36 - $1.60	1.00	408,348	1.00	4.9	408,348
$1.61 - $3.00	2.91	562,846	2.91	3.4	312,846
$3.01 - $4.95	4.95	30,000	-	-	-
	$        0.58	6,047,119	$        0.46	4.8	5,767,119

Services Contributed

Effective January 1, 2013, an executive officer of the Company waived payment for services contributed during 2013. As a result, the Company imputed the value of the services contributed and recorded salary expense of $87,500 for the three months ended March 31, 2013 with a corresponding credit to stockholders’ deficiency.