Stock Options and Warrants

3 Months Ended

Mar. 31, 2013

Disclosure Of Compensation Related Costs, Share-Based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

Note E – Stock Options and Warrants

Imperium Financing Stock Options and Warrants

On January 16, 2013, in connection with the Imperium Line of Credit, we granted Imperium a 7-year warrant to purchase 2,000,000 common shares of the Company at an exercise price of $0.18, the closing price of our common shares on January 16, 2013 (the “Imperium Warrant”). The Imperium Warrant was 100% (or 2,000,000 common shares) exercisable on the date of issuance. The fair value of the Imperium Warrant is $290,000 and was estimated using the Black-Scholes pricing model using the following weighted average assumptions: dividend yield of 0%; risk-free interest rate of 1.84; expected life of 7 years; and stock price volatility of 82%. We are capitalizing this cost as deferred financing cost amortized over the term of the Imperium LSA (3 years). We amortized $24,000 of this deferred financing cost in the First Quarter 2013. We amortized $0 in deferred financing cost in the First Quarter 2012, as the Imperium Warrant was not issued until January 16, 2013). As of March 31, 2013, there was $266,000 in unrecognized cost related to the Imperium Warrant with 33 months remaining.

On January 16, 2013, as compensation for his execution of a Personal Guarantee required under the Imperium LSA, our Chief Executive Officer, Stan Cipkowski (“Cipkowski”) was awarded an option grant representing 500,000 common shares of the Company under our Fiscal 2001 Stock Option Plan (“2001 Option Plan”), at an exercise price of $0.15, the closing price of our common shares on January 16, 2013 (the “Cipkowski Imperium Stock Option”). The Cipkowski Imperium Stock Option vests over three (3) years in equal installments as follows: 165,000 common shares on January 16, 2014, 165,000 common shares on January 16, 2015 and 170,000 common shares on January 16, 2016. The fair value of the Cipkowski Imperium Stock Option is $73,000 and was estimated using the Black-Scholes pricing model using the following weighted average assumptions: dividend yield of 0%; risk-free interest rate of 1.84; expected life of 10 years; and stock price volatility of 82%. We will amortize this share based payment expense over the vesting period (3 years). We amortized $6,000 of this share based payment expense in the First Quarter 2013 (we amortized $0 in share based payment expense in the First Quarter 2012 as the Cipkowski Imperium Stock Option was not issued until January 16, 2013). As of March 31, 2013, there was $67,000 in unrecognized expense related to the Cipkowski Imperium Stock Option with 33 months remaining.

On January 16, 2013, as part of their finder’s fee compensation, we issued Monarch Capital Group, LLC (“Monarch”) a 5-year warrant representing 3% of the Imperium Warrant, or a 5-year warrant to purchase 60,000 common shares of the Company, also at a strike price of $0.18, the closing price of our common shares on January 16, 2013 (the “Monarch Warrant”). The Monarch Warrant was 100% (or 60,000 common shares) exercisable on the date of issuance. The fair value of the Monarch is $9,000 and was estimated using the Black-Scholes pricing model using the following weighted average assumptions: dividend yield of 0%; risk-free interest rate of 1.84; expected life of 5 years; and stock price volatility of 82%. We are capitalizing this cost as deferred financing cost amortized over the term of the Imperium LSA (3 years). We amortized $1,000 of this deferred financing cost in the First Quarter 2013. We amortized $0 in deferred financing cost in the First Quarter 2012, as the Monarch Warrant was not issued until January 16, 2013). As of March 31, 2013, there was $8,000 in unrecognized cost related to the Monarch Warrant with 33 months remaining.

February 2013 Employee/Consultant Stock Options

On February 21, 2013, we issued options to purchase 77,000 shares of common stock under our 2001 Option Plan to 1 executive officer (Melissa Waterhouse), 13 non-executive employees of the Company, and 1 consultant at an exercise price of $0.26, the closing price of our common shares on February 21, 2013 (the “February 2013 Stock Options”). The February 2013 Stock Options vest 100% on the one-year anniversary of the date of the grant, or on February 21, 2014. The fair value of the February 2013 Stock Options is $20,000 and was estimated using the Black-Scholes pricing model using the following weighted average assumptions: dividend yield of 0%; risk-free interest rate of 1.99; expected life of 10 years; and stock price volatility of 82%. We will amortize this share based payment expense over the vesting period of the February 2013 Stock Options (1 year). We amortized $4,000 of this share based payment expense in the First Quarter 2013 (we amortized $0 in share based payment expense in the First Quarter 2012 as the February 2013 Stock Options were not issued until February 21, 2013). As of March 31, 2013, there was $22,000 in unrecognized expense related to the February 2013 Stock Options with 10 months remaining.

In addition to the Stock Options and Warrants issued in the First Quarter 2013, the following stock options have been issued prior to the First Quarter 2013, and have a portion of their expense recognized in either the First Quarter 2013 or First Quarter 2012:

Debenture Warrants

Cantone Research Inc. Warrants

In connection with their services as placement agent in the Company’s Series A Debenture offering, on July 17, 2008, we issued Cantone a 4-year warrant to purchase 30,450 shares of our common stock at an exercise price of $0.37 per share, the closing price of our common shares on July 17, 2008 (the “July 2008 CRI Warrant”). The July 2008 CRI Warrant was 100% exercisable on July 17, 2008. The fair value of the July CRI Warrant was $5,000 and was estimated using the Black Scholes pricing model using the following assumptions: dividend yield of zero, risk free interest rate of 3.12%, volatility of 46.0%, and expected life of 4 years. We amortized this share based payment expense over the term of the Series A Debenture (4 years). We amortized $0 in expense in the First Quarter 2013 (as 100% of the expense was amortized prior to December 31, 2012) and less than $1,000 in expense in the First Quarter 2012.

On August 4, 2008, we issued Cantone another 4-year warrant to purchase 44,550 shares of our common stock at an exercise price of $0.40 per share, the closing price of our common shares on August 4, 2008 (the “August 2008 CRI Warrant”). The August 2008 CRI Warrant was 100% exercisable on August 4, 2008. The fair value of the August 2008 CRI Warrant was $7,000 and was estimated using the Black Scholes pricing model using the following assumptions: dividend yield of zero, risk free interest rate of 3.02%, volatility of 46.0%, and expected life of 4 years. We amortized this share based payment expense over the term of the Series A Debenture (4 years). We amortized $0 in expense in the First Quarter 2013 (as 100% of the expense was amortized prior to December 31, 2012) and less than $1,000 in expense in the First Quarter 2012.

The Cantone Research Inc. Warrants (“CRI Warrants”) were amended on July 31, 2012 in connection with the extension and amendment of the Series A Debentures; more specifically they were amended to reflect an exercise price of $0.17 per share and a new term of three years (see Part I, Item 1, Note E – Line of Credit and Debt; Series A Debenture Extension). The CRI Warrant is now exercisable through July 31, 2015 (see Part I, Item 1, Note E – Line of Credit and Debt; Series A Debenture Extension). The fair value of the amended CRI Warrant is $12,000 and was estimated utilizing the Black-Scholes pricing model using the following weighted average assumptions: dividend yield of 0%; risk-free interest rate of 1.51; expected life of 3 years; and stock price volatility of 77%. We amortized $0 in share based payment expense in the First Quarter 2013 and although share based payment expense was amortized in the year ended December 31, 2012, given the amendment did not occur until July 31, 2012, there was $0 in share based payment expense in the First Quarter 2012. As of March 31, 2013, there is $0 remaining in expense related to the CRI Warrant.

Medallion Line of Credit Stock Options

As a condition to the Medallion Line of Credit, Stan Cipkowski, our Chief Executive Officer (“Cipkowski”), and our controller J. Duncan Urquhart (“Urquhart”) were each required to execute Validity Guarantees (the “Validity Guarantees”). Under the Validity Guarantees, Cipkowski and Urquhart provide representations and warranties with respect to the validity of our receivables as well as guaranteeing the accuracy of our reporting to Medallion related to the Company’s receivables.

Cipkowski Medallion Stock Option

As compensation for his execution of the Validity Guarantee, on April 20, 2012, Cipkowski was awarded an option grant representing 250,000 common shares of the Company under the our 2001 Option Plan, at an exercise price of $0.18, the closing price of our common shares on April 20, 2012 (“Cipkowski Medallion Stock Option”). The Cipkowski Medallion Stock Option vests over 3 years in installments as follows: of 82,500 common shares on April 20, 2013, 82,500 common shares on April 20, 2014 and 85,000 common shares on April 20, 2015.

The fair value of the Cipkowski Medallion Stock Option is $45,000 and was estimated utilizing the Black-Scholes pricing model using the following weighted average assumptions: dividend yield of 0%; risk-free interest rate of 1.99; expected life of 10 years; and stock price volatility of 88%. We will recognize this share-based payment expense over the vesting period of 3 years. We amortized $4,000 in share-based payment expense in the First Quarter 2013 (we amortized $0 in share based payment expense in the First Quarter 2012 as the Cipkowski Medallion Stock Option was not issued until April 20, 2012). As of March 31, 2013, there was $30,000 in unrecognized expense related to the Cipkowski Medallion Stock Option with 24 months remaining.

Urquhart Medallion Stock Option

As compensation for his execution of the Validity Guarantee, on April 20, 2012, Urquhart was awarded an option grant representing 250,000 common shares of the Company under our 2001 Option Plan, at an exercise price of $0.18, the closing price of our common shares on April 20, 2012 (“Urquhart Medallion Stock Option”). The Urquhart Medallion Stock Option vests over 3 years in installments as follows: 82,500 common shares on April 20, 2013, 82,500 common shares on April 20, 2014 and 85,000 common shares on April 20, 2015.

The fair value of the Urquhart Medallion Stock Option is $45,000 and was estimated utilizing the Black-Scholes pricing model using the following weighted average assumptions: dividend yield of 0%; risk-free interest rate of 1.99; expected life of 10 years; and stock price volatility of 88%. We will recognize this share-based payment expense over the vesting period of 3 years. We amortized $4,000 in share-based payment expense in the First Quarter 2013, (we amortized $0 in share based payment expense in the First Quarter 2012 as the Urquhart Medallion Stock Option was not issued until April 20, 2012). As of March 31, 2013 there was $30,000 in unrecognized expense related to the Urquhart Medallion Stock Option with 24 months remaining.

Jaskiewicz Medallion Stock Option

As another condition to the Medallion Line of Credit, Edmund M. Jaskiewicz, our President and Chairman of the Board, was required to execute another Subordination Agreement (“Subordination Agreement”) related to the Jaskiewicz Debt (the $124,000 currently owed to Jaskiewicz by the Company for legal services rendered). Under the Subordination Agreement, the Jaskiewicz Debt is not payable, is junior in right to the Medallion Line of Credit and no payment may be accepted or retained by Jaskiewicz for the Jaskiewicz Debt unless and until we have paid and satisfied in full any obligations to Medallion. As compensation for his execution of the Subordination Agreement, on April 20, 2012, Jaskiewicz was awarded an option grant representing 150,000 common shares of the Company under our 2001 Option Plan, at an exercise price of $0.18, the closing price of our common shares on April 20, 2012 (the “Jaskiewicz Medallion Stock Option”). The Jaskiewicz Medallion Stock Option vests over three (3) years in installments as follows: 49,500 common shares on April 20, 2013, 49,500 common shares on April 20, 2014 and 51,000 common shares on April 20, 2015.

The fair value of the Jaskiewicz Medallion Stock Option is $27,000 and was estimated utilizing the Black-Scholes pricing model using the following weighted average assumptions: dividend yield of 0%; risk-free interest rate of 1.99; expected life of 10 years; and stock price volatility of 88%. We will recognize this share-based payment expense over the vesting period of 3 years. We amortized $2,000 in share-based payment expense in the First Quarter 2013 (we amortized $0 in share based payment expense in the First Quarter 2012 as the Jaskiewicz Medallion Stock Option was not issued until April 20, 2012). As of March 31, 2013, there was $18,000 in unrecognized expense related to the Jaskiewicz Medallion Stock Option with 24 months remaining.

September 2012 Employee Stock Options

On September 20, 2012, we issued 2 stock option grants to purchase 50,000 shares each (for a total of 100,000) of the Company’s common stock to 2 non-executive employees at an exercise price of $0.18 (the closing price of the Company’s common shares on the date of the grant) (“September 2012 Stock Options”). The September 2012 Stock Options vest over 3 years in installments as follows: 33,000 common shares on September 20, 2013, 33,000 common shares on September 20, 2014 and 34,000 common shares on September 20, 2015. The fair value of the September 2012 Stock Options is $18,000 and was estimated using the Black-Scholes pricing model using the following weighted average assumptions: dividend yield of 0%; risk-free interest rate of 1.80; expected life of 10 years; and stock price volatility of 85%. We will amortize this share based payment expense over the vesting period of the September 2012 Stock Options (3 years). We amortized $2,000 of this share based payment expense in the First Quarter 2013 (we amortized $0 in share based payment expense in the First Quarter 2012 as the September 2012 Stock Options were not issued until September 20, 2012). As of March 31, 2013, there was $15,000 in unrecognized expense related to the September 2012 Stock Options with 29 months remaining.

Rosenthal Line of Credit Stock Options

Cipkowski Rosenthal Stock Option

As a condition to the Rosenthal Line of Credit closing, Cipkowski was required to execute a Validity Guarantee. As part of the compensation for his execution of the Validity Guarantee, on July 1, 2009, Cipkowski was awarded an option grant representing 500,000 common shares of the Company under our 2001 Option Plan, at an exercise price of $0.20, the closing price of the Company’s common shares on July 1, 2009 (“Cipkowski Rosenthal Stock Option”). The Cipkowski Rosenthal Stock Option vested over three years in equal installments as follows: 165,000 on July 1, 2010, 165,000 on July 1, 2011 and 170,000 on July 1, 2012

The fair value of the Cipkowski Rosenthal Stock Options was $78,000 and was estimated using the Black-Scholes pricing model using the following weighted average assumptions: dividend yield of 0%; risk-free interest rate of 4.34%, expected life of 10 years; and stock price volatility of 69%. We amortized this share-based payment expense over the vesting period of 3 years. We amortized $0 in expense in the First Quarter 2013 (as 100% of the share based payment expense was amortized prior to December 31, 2012), and $7,000 in share-based payment expense in the First Quarter 2013. As of March 31, 2013, there was $0 in unrecognized expense related to the Cipkowski Rosenthal Stock Option and 0 months remaining.

In addition to the Stock Options and Warrants previously disclosed in this Note E, the following warrant was issued in the year ended December 31, 2012, however, no expense was recognized in either the First Quarter 2013 or the First Quarter 2012. Given this, the information below is purely for disclosure purposes:

Cantone Asset Management, LLC Warrants

On August 1, 2012, we entered into a Consulting Agreement (“Consulting Agreement”) with Cantone Asset Management, LLC (“CAM”). The Consulting Agreement commenced August 1, 2012 and ends on August 1, 2013. Under the terms of the Consulting Agreement, CAM will provide the Company with financial advisory services and advice related to debt refinancing. On August 1, 2012, we issued CAM a 3-year warrant to purchase 300,000 shares of our common stock at an exercise price of $0.16 per share, the closing price of the Company’s common shares on August 1, 2012 (the “CAM Warrant”). The fair value of the CAM Warrants is $48,000 and was estimated utilizing the Black-Scholes pricing model using the following weighted average assumptions: dividend yield of 0%; risk-free interest rate of 1.56; expected life of 3 years; and stock price volatility of 77%. We recognized $0 in share based payment expense in the First Quarter 2013 and 100% of this expense, or $48,000 was recognized in the quarter ended September 30, 2012 so, $0 in expense was recognized in the First Quarter of 2012. As of March 31, 2013, there is $0 remaining in share based payment expense related to the CAM Warrant.