Shareholders’ Equity (Deficiency)

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Shareholders’ Equity (Deficiency)

6. Shareholders’ Equity (Deficiency)

Warrants

The following table summarizes warrant activity for the years ended December 31, 2011 and 2010:

	Year Ended				Year Ended
	December 31, 2011				December 31, 2010
			Wtd. Avg.				Wtd. Avg.
			Exercise				Exercise
	Shares		Price		Shares		Price
Outstanding at beginning of year		4,218,750	$	0.10		2,218,750	$	0.12
Granted		2,000,000		0.06		2,000,000		0.07
Exercised		––		––		––		––
Forfeited		––		––		––		––
Outstanding and exercisable at end of year		6,218,750	$	0.08		4,218,750	$	0.10

During the years ended December 31, 2011 and December 31, 2010, the Company issued a total of 2,000,000 warrants each year to the current note holders in consideration for financing fees related to the restructuring of the existing promissory notes. The warrants were valued using the Black-Scholes option pricing model resulting in a total value of $89,225 in 2011 and $97,220 in 2010, which was recorded as deferred financing costs and is being amortized to expense over the term of the notes.

The outstanding warrants have expiration dates between May 2012 and August 2016.

Stock compensation plans

During 1998, we adopted the 1998 Stock Option Plan (“the Plan”). An aggregate of 4,000,000 shares of common stock were reserved for issuance upon the exercise of options granted under the Plan. In September 2005, the shareholders approved an increase in the number of shares available for issuance to 10,000,000 shares. The Plan expired on August 31, 2008. The options are exercisable for up to ten years from the grant date. As of December 31, 2011, there were outstanding options to purchase 6,300,000 share of Company common stock under the Plan.

Subsequent to the expiration of the Plan, the Company issued, outside of the Plan, non-incentive stock options for an aggregate of 11,573,227 (net of cancellations) shares of Company common stock. All non-incentive stock options issued in 2011 and 2010 were issued outside of the Plan.

Certain options awarded during 2011 and 2010 contain provisions which allow for the automatic proportionate adjustment of the number of shares covered and the exercise price of each share in the event that the Company changes its shares of common stock by a stock dividend, stock split, combination, reclassification, exchange, merger or consolidation.

The following is a summary of stock option activity under the Plan and outside of the Plan for 2011 and 2010, and the status of stock options outstanding at December 31, 2011 and 2010:

	Year Ended						Year Ended
	December 31, 2011						December 31, 2010
				Wtd. Avg.						Wtd. Avg.
				Exercise						Exercise
	Shares			Price			Shares			Price
Outstanding at beginning of year		14,564,815		$	0.09			9,265,000		$	0.09
Granted		6,220,873			0.08			5,324,815			0.10
Exercised		-			-			-			-
Forfeited		(2,912,461	)		(0.08	)		(25,000	)		(0.25	)
Outstanding at end of year		17,873,227		$	0.08			14,564,815		$	0.09
Stock options exercisable at year end		9,667,990		$	0.08			7,896,510		$	0.08

Weighted average fair value of options granted was $0.06 and $0.08 per share for the years ended December 31, 2011 and 2010, respectively.

As of December 31, 2011, there was $5,750 of aggregate intrinsic value of outstanding stock options, including $2,625 of aggregate intrinsic value of exercisable stock options. Intrinsic value is the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on the last trading day of 2011 and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options as of December 31, 2011. This amount will change based on the fair market value of the Company’s stock.

The following table summarizes information about stock options outstanding at December 31, 2011:

		Number
		Outstanding at		Weighted Average
Range of		December 31,		Remaining		Weighted Average
Exercise Prices		2011		Contractual Life		Exercise Price
$	0.04-$0.07		2,800,000		6.20	$	0.06
$	0.08-$0.09		10,728,768		7.22	$	0.08
$	0.10-$0.25		4,344,459		7.67	$	0.11
			17,873,227		7.23	$	0.08

Total unrecognized compensation cost at December 31, 2011 of $330,319 is expected to be recognized over a weighted average period of 2.1 years.

When options and warrants are exercised, it is the Company’s policy to issue new shares.