Note 5 - Stockholders' Equity

9 Months Ended

Sep. 30, 2012

Stockholders' Equity Note Disclosure [Text Block]

5.           Stockholders’ Equity

Series A Convertible Preferred Stock

Our Certificate of Incorporation authorizes us to issue up to 10,000,000 shares of preferred stock, $.01 par value.  In March 2012, we established from the authorized preferred stock a series of preferred stock, consisting of 2,200 shares of Series A Convertible Preferred Stock, $1,000 stated value (“Series A Preferred Shares”) and entered into a Securities Purchase Agreement (“SPA”) whereby we issued to three institutional investors (“Purchasers”) the Series A Preferred Shares for gross proceeds of $2.2 million.  Net proceeds to the Company from this transaction, after deduction of placement agent fees and other expenses, were approximately $2.0 million.

The Series A Preferred Shares may be converted at any time at the option of the Purchasers into shares of our common stock at a conversion price of $0.75 per share (“Conversion Price”), for an initial aggregate total of 2,933,333 shares of our common stock (“Conversion Shares”).  The Series A Preferred Shares have a liquidation preference equal to the initial purchase price, have no voting rights, and are not entitled to a dividend.  Through September 30, 2012, a total of 1,412 Series A Preferred Shares have been converted into 1,882,667 shares of our common stock.  As of September 30, 2012, there were 788 shares of Series A Preferred Shares outstanding, convertible into 1,050,667 shares of our common stock.

Pursuant to the terms of the SPA, we issued to each Purchaser Series A, B and C Warrants (collectively, the “Warrants”), each to purchase up to a number of shares of our common stock equal to 100% of the Conversion Shares underlying the Series A Preferred Shares (up to 2,933,333 shares in the aggregate for each of the three series of warrants, or 8,799,999 shares in total) (“Warrant Shares”).  The Series A Warrants have an exercise price of $1.00 per share, are exercisable immediately, and expire on March 21, 2017.  The Series B Warrants have an exercise price of $0.75 per share, are exercisable immediately, and expire on March 21, 2013. The Series C Warrants have an exercise price of $1.00 per share and expire on March 21, 2017, but only vest and become exercisable upon, and in proportion to, the exercise of the one-year Series B Warrants.  The Warrants contain anti-dilution provisions, which may, under certain circumstances, reduce the exercise price (but have no effect on the number of shares subject to the Warrants) if we sell or grant options to purchase, including rights to reprice, our common stock or common stock equivalents at a price lower than the exercise price of the Warrants, or if we announce plans to do so.

In connection with the sale of the Series A Preferred Shares, we entered into a Registration Rights Agreement (“RRA”) with the Purchasers, pursuant to which we filed a registration statement with the Securities and Exchange Commission (“SEC”) on April 3, 2012 covering resale of the Conversion Shares and the Warrant Shares.   It was declared effective by the SEC on April 13, 2012

Accounting Treatment and Allocation of Proceeds.  We first assessed the Series A Preferred Shares under ASC Topic 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and determined such preferred stock not to be a liability under ASC 480.  We next assessed the preferred stock under ASC Topic 815. “Derivatives and Hedging” (“ASC 815”).  The preferred stock contains an embedded feature allowing an optional conversion by the holder into common stock which meets the definition of a derivative.  However, we believe that the preferred stock is an “equity host” (as described by ASC 815) for purposes of assessing the embedded derivative for potential bifurcation and determined that the optional conversion feature is clearly and closely associated to the preferred stock host; we therefore determined that the embedded derivative does not require bifurcation and separate recognition under ASC 815.  We then assessed the preferred stock under ASC Topic 470, “Debt” (“ASC 470”), and determined there to be a beneficial conversion feature (“BCF”) requiring recognition at its intrinsic value.  Since the conversion option of the preferred stock was immediately exercisable, the amount allocated to the BCF was immediately accreted to preferred dividends, resulting in an increase in the carrying value of the preferred stock.  We also assessed the warrants issued in connection with the financing under ASC 815 and determined that they do not initially meet the definition of a derivative, but will require evaluation on an on-going basis.

The following is a summary of the allocation of the net proceeds from the preferred stock financing, and reconciliation to the carrying value at September 30, 2012:

Net proceeds after transaction costs	$	1,999,032
Less:       Fair value of warrants (recorded to Additional Paid-in Capital)		(1,127,418	)
Beneficial conversion feature (recorded to Additional Paid-in Capital)		(762,667	)
Net proceeds allocated to preferred stock		108,947
Accretion of beneficial conversion feature (deemed dividend)		762,667
Initial carrying value of preferred stock		871,614
Conversions to common stock		(559,418	)
Carrying value of preferred stock at September 30, 2012	$	312,196

Common Stock Transactions

During January 2012, we sold an aggregate of 407,999 shares of our common stock to twelve individual accredited investors (including 45,000 shares sold to members of our board of directors and management) for an aggregate purchase price of $273,360.  We also issued to the investors warrants to purchase an aggregate of 612,001 shares of common stock at a price of $1.00 per share, which expire in January 2017.  Additionally, during January, we received $36,800 as payment in full against a stock subscription receivable for common stock and warrants sold during December 2011.

We occasionally issue shares of our common stock to third party financial advisors or consultants in exchange for services.  During the nine month period ended September 30, 2011 we issued 129,245 shares for such purposes and recorded $150,000 of general and administrative expense.  During the nine month period ended September 30, 2012, no such shares were issued.

Stock Options

The Company maintains a stock option plan that provides the Board of Directors broad discretion in creating equity incentives for employees, officers, directors and consultants.  The following table presents a summary of stock option transactions during the nine months ended September 30, 2012:

	Number of Shares			Weighted Average Exercise Price
Outstanding at December 31, 2011		928,242		$	5.43
Granted		39,500			0.93
Exercised		--			--
Forfeited or expired		(80,600	)		4.60
Outstanding at September 30, 2012		887,142		$	5.30
Exercisable at September 30, 2012		593,432		$	7.11

During the three month and nine month periods ended September 30, 2012, we recorded share-based compensation expense related to stock options of $84,742 and $247,318, as compared to $102,804 and $364,410 for the three month and nine month periods ended September 30, 2011, respectively.  Share-based compensation expense is recognized on a straight-line basis over the requisite service period for the award and is allocated to research and development expense or general and administrative expense based upon the related employee/consultant classification.  As of September 30, 2012, there was $240,751 of unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 1.6 years.

Stock Purchase Warrants

We have issued stock purchase warrants in connection with financing transactions and also in exchange for services from consultants and others.  The following table presents a summary of stock purchase warrant transactions during the nine months ended September 30, 2012:

	Number of Shares			Weighted Average Exercise Price
Outstanding at December 31, 2011		1,870,559		$	7.96
Issued – Series A Warrants (1)		2,933,333			1.00
Issued – Series B Warrants (1)		2,933,333			0.75
Issued – Series C Warrants (1)		2,933,333			1.00
Issued – Other Warrants (2)		612,001			1.00
Exercised		--			--
Forfeited or expired		(57,000	)		7.00
Outstanding at September 30, 2012		11,225,559		$	2.06
Exercisable at September 30, 2012		8,288,526		$	2.44

(1)      See discussion under “Series A Convertible Preferred Stock” above.

(2)      See discussion under “Common Stock” above.

From time to time we may issue stock purchase warrants to consultants or other service providers in exchange for services, and record the related expense over the service period, or upon the date, that the service was rendered.  During the three and nine month periods ended September 30, 2012, we recorded no expense for such warrants, as compared to general and administrative expense of $1,779 and $5,337 for the comparable periods of 2011, respectively.  As of September 30, 2012, there was no unrecognized compensation expense related to compensatory warrant arrangements.

Common Stock Reserved

A summary of our common stock reserved for future issuance is as follows as of September 30, 2012:

Series A Convertible Preferred Stock	1,050,667
Common Stock Purchase Warrants	11,225,559
Equity Incentive Plans	1,197,529
Total	13,473,755