General form of registration statement for all companies including face-amount certificate companies

Note 8 - Stockholders' Equity

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Note 8 - Stockholders' Equity
 12 Months Ended
Dec. 31, 2012
Stockholders' Equity Note Disclosure [Text Block]
8.   Stockholders’ Equity

July 2012 Private Placement

In July 2012, the Company entered into securities purchase agreements for the private placement of shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock, at a purchase price of $1.10 per unit (the “July PIPE Financing”).  Each unit consisted of one share of common stock and a warrant to purchase one-half share of common stock.  The pricing for the July PIPE Financing was set by the Company on June 25, 2012.

In the July PIPE Financing, the Company sold to the investors 5,454,523 shares of common stock, together with warrants to purchase 2,727,274 shares of common stock, for aggregate gross proceeds of $6,000,000.  Each warrant is exercisable for five years from the date of issuance and has an exercise price of $1.45 per share, subject to adjustment from time to time for stock splits or combinations, stock dividends, stock distributions, recapitalizations and other similar transactions.  In addition, the exercise price of the warrants will be subject to weighted average anti‐dilution protection, such that the exercise price will be adjusted downward on a weighted average basis to the extent the Company issues common stock or common stock equivalents in a financing transaction at a price below the then prevailing warrant exercise price (see Note 11).  Non-employee directors of the Company invested a total of $269,980 in the July PIPE Financing. The Company’s placement agent for the July PIPE Financing, and its sub-placement agents, earned cash commissions of $480,000 as well as warrants to purchase 409,093 shares of the Company’s common stock. The placement agent warrants have the same terms and conditions as the investor warrants, except that the placement agent warrants have an exercise price of $1.10 per share.

In connection with the July PIPE Financing, the Company entered into registration rights agreements with the investors pursuant to which the Company agreed to prepare and file a registration statement with the SEC covering the resale of the shares of common stock and the shares of common stock underlying the warrants issued in the transaction. The Company filed that registration statement on August 13, 2012, and the registration statement became effective on September 21, 2012.  In the event the Company fails to continuously maintain the effectiveness of the registration statement (with certain permitted exceptions), the Company will incur certain liquidated damages to investors in the July PIPE Financing, up to a maximum amount of 6% of the investors’ investment in that transaction, or $360,000.  The Company must bear the costs, including legal and accounting fees, associated with the registration statement. Management believes the Company will be able to maintain continuous effectiveness of the registration statement and, as such, no liability has been recorded related to this liquidated damages provision.

Preferred Stock

In 2006, the Company issued 7,965,000 shares of Series A Convertible Preferred Stock. The holders of Series A Convertible Preferred Stock had the right to convert such shares, at any time, into shares of common stock at the then applicable conversion rate. In addition, the terms of the Series A Convertible Preferred Stock provided for automatic conversion into common stock at the then applicable conversion rate upon the closing of an initial public offering or the consent of holders of a majority of the outstanding shares of the Series A Convertible Preferred Stock. In connection with any of the foregoing conversion events, every four shares of Series A Convertible Preferred Stock would convert into one share of common stock, subject to adjustment for certain corporate events, including stock splits, stock dividends and recapitalizations. However, on December 15, 2011, the Company’s Board of Directors approved an amendment to the terms of the Series A Convertible Preferred Stock providing for the automatic conversion of all outstanding shares of Series A Convertible Preferred Stock into shares of common stock, on a 1-for-1 basis, upon the effectiveness of a Form 10 registration statement filed by the Company with the SEC under the Exchange Act. That amendment was approved by the stockholders of the Company on February 10, 2012, and a Certificate of Amendment effecting the change to the terms of the Series A Convertible Preferred Stock was filed with the State of Delaware on that same day. Accordingly, upon the effectiveness of the Company’s Form 10 on February 27, 2012, the outstanding shares of Series A Convertible Preferred Stock converted into 7,965,000 shares of the Company’s common stock.

On February 10, 2012, the stockholders of the Company also approved an Amended and Restated Certificate of Incorporation to be filed in connection with the effectiveness of the Company’s Form 10 registration statement.  The Company filed the Amended and Restated Certificate of Incorporation with the state of Delaware on February 27, 2012, and it became effective upon filing.  Under such Amended and Restated Certificate of Incorporation, the Company has the authority to issue up to 25,000,000 shares of preferred stock, and the Board of Directors has the authority, without further action by the stockholders, to issue up to that number of shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series, but not below the number of shares of such series then outstanding.  In June 2012, the Board of Directors established the terms of a series of preferred stock known as “Series A Convertible Preferred Stock”.  The Board of Directors designated the Series A Convertible Preferred Stock solely to provide BSC a series of the Company’s preferred stock into which BSC could elect to convert the BSC Notes other than in connection with a qualified financing (see Note 6).  The Company has not issued any shares of the Series A Convertible Preferred Stock.  Likewise, the Company has not filed a Certificate of Designations with the Secretary of State of the State of Delaware to create the Series A Convertible Preferred Stock.  The Company does not intend to file such Certificate of Designations unless and until BSC elects to convert its BSC Notes into shares of the Series A Convertible Preferred Stock.

Summary of Conversions to Common Stock Upon Effectiveness of the Form 10

The table below summarizes the impact on the Company’s balance sheet and shares outstanding of the conversions to common stock that occurred upon the effectiveness of the Company’s Form 10 registration statement on February 27, 2012:

   
Impact to Balance Sheet
   
Increase in
 
   
Before
Conversions
   
Impact of
Conversions
   
After
Conversions
   
Common Shares
Outstanding
 
                         
Impact on assets
                       
Deferred costs
  $ 799,123     $ (799,123 )   $ -       -  
                                 
Impact on liabilities and equity
                               
Accrued interest on converted notes
  $ 974,311     $ (974,311 )   $ -       1,092,559  
Summer 2011 Notes, net
    904,397       (904,397 )     -       2,183,334  
March 2010 Notes, net
    4,057,500       (4,057,500 )     -       4,071,000  
2011 Unit Offering Notes, net
    4,367,482       (4,367,482 )     -       9,050,834  
Total impact on liabilities
    10,303,690       (10,303,690 )     -       16,397,727  
Series A convertible preferred stock
    7,965,000       (7,965,000 )     -       7,965,000  
Additional paid-in capital and common stock
    -       19,345,209       19,345,209       -  
Accumulated deficit
    -       (1,875,642 )     (1,875,642 )     -  
Total impact on equity
    7,965,000       9,504,567       17,469,567       7,965,000  
Total impact on liabilities and equity
  $ 18,268,690     $ (799,123 )   $ 17,469,567       24,362,727  

The impact to accumulated deficit relates to the write-off of unamortized debt discounts and deferred financing costs.

Stock Incentive Plans

At December 31, 2011, the Company had four share-based compensation plans (a “1998 Plan”, a “2007 Plan”, and two “2010 Plans”, and referred to collectively herein as the “Plans”). The Plans provide for the granting of share-based awards, such as incentive and non-qualified stock options, to employees, directors, consultants and advisors. One of the 2010 Plans also provides for cash-based awards. Awards may be subject to a vesting schedule as set forth in each individual award agreement. The Company terminated the 1998 Plan, effective June 24, 2008, with respect to future grants such that no new options may be awarded under the 1998 Plan on or after June 24, 2008. Upon adoption of the 2010 Plans, the Company also ceased making awards under its 2007 Plan. A total of 3,815,675 shares of the Company’s common stock were reserved for issuance under the 2010 Plans, and awards with respect to a total of 3,246,450 shares have been made under the 2010 Plans.  In February 2012, the stockholders of the Company approved the creation of a new share-based incentive plan (the “2012 Plan”). With the adoption of the 2012 Plan, no additional grants under the 2010 Plans will be made. A total of 3,000,000 shares of the Company’s common stock were reserved for issuance under the 2012 Plan, of which awards as to 2,947,400 shares had been made as of December 31, 2012, thus, 52,600 shares remained available for award grants as of December 31, 2012 under the 2012 Plan.

Activity with respect to stock options issued by the Company is summarized as follows:

   
Options
Outstanding
   
Options
Exercisable
   
Range of
Exercise Prices
   
Weighted-
average
Exercise
price per
share
   
Intrinsic
Value (1)
 
Balance at January 1, 2010
    669,777           $ 0.88 - 24.00     $ 4.28     $ 3,694,400  
Exercisable at January 1, 2010
            483,364       0.88 - 24.00       2.78       3,424,333  
Granted (2)
    3,246,450                 1.80         1.80          
Cancelled or forfeited
    (153,750 )             3.20 - 24.00       5.06          
Outstanding at December 31, 2010
    3,762,477               0.88 - 24.00       2.11       262,500  
Exercisable at December 31, 2010
            433,746       0.88 - 24.00       3.03       262,500  
Cancelled or forfeited
    (82,500 )             1.80 - 24.00       4.93          
Outstanding at December 31, 2011
    3,679,977               0.88 - 9.64       2.05       -  
Exercisable at December 31, 2011
            1,501,659       0.88 - 9.64       2.15       -  
Granted (2)
    3,097,400               1.00   2.13       1.08          
Exercised
    (14,000 )             1.80 - 9.64       1.80          
Cancelled or forfeited
    (331,250 )             1.80 - 9.64       2.14          
Outstanding at December 31, 2012
    6,432,127               0.88 - 9.64       1.58       1,846,040  
Exercisable at December 31, 2012
            2,386,909       0.88 - 9.64       2.13       205,000  

(1)
Intrinsic value is calculated as the estimated fair value of the Company’s stock at the end of the related period less the option exercise price of in-the-money options.
(2)
All options granted during the years ended December 31, 2010 and 2012 were granted with exercise prices which were deemed to be the fair market value of the Company’s stock on the date of grant.

The following table summarizes information about stock options at December 31, 2012:

     
Options Outstanding
         
Options Exercisable
 
Range of
Exercise Prices
   
Number
Outstanding
   
Weighted -
Average
Remaining
Contractual
Life
   
Weighted -
Average
Exercise
Price
   
Number
Exercisable
   
Weighted -
Average
Exercise
Price
 
  $0.88 - 1.17       3,033,900       8.53     $ 0.99       287,500     $ 0.89  
  1.63 - 2.13       3,216,700       8.16       1.79       1,917,882       1.80  
  3.20 - 9.64       181,527       3.55       7.61       181,527       7.61  
              6,432,127       8.20       1.58       2,386,909       2.13  

The weighted average grant date fair value of options granted during the years ended December 31, 2010 and 2012 was $0.83 and $0.48, respectively, and no options were granted in 2011.  A summary of the status of the Company’s nonvested stock options during the years ended December 31, 2010, 2011 and 2012 is presented below:

Nonvested Stock Options
 
Shares
   
Weighted -
Average
Grant Date
Fair Value
 
Nonvested January 1, 2010
    186,413     $ 2.41  
Granted
    3,246,450       0.83  
Forfeited
    (41,667 )     1.92  
Vested
    (62,465 )     2.31  
Nonvested December 31, 2010
    3,328,731       0.88  
Forfeited
    (51,833 )     0.88  
Vested
    (1,098,580 )     0.89  
Nonvested December 31, 2011
    2,178,318       0.87  
Granted
    3,097,400       0.48  
Forfeited
    (258,517 )     0.85  
Vested
    (971,984 )     1.04  
Nonvested December 31, 2012
    4,045,218       0.56  
                 

As of December 31, 2012 there was a total of approximately $1,948,000 of unrecognized compensation cost related to share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of approximately 1.8 years.

The assumptions used in calculating the fair value using the Black-Scholes option-pricing model are set forth in the following table for options issued by the Company in 2012 and 2010 (no options were issued in 2011):

   
Years Ended December 31,
   
   
2012
   
2010
   
Dividend yield
    0%         0%    
Expected Volatility
  45.17% to
45.32%
      44.81%    
Risk free Interest rates
  0.83%
to
1.13%       2.36%    
Expected lives (years)
    6.0         6.0    

Warrants

In May 2012, the Company issued an aggregate of 1,250,000 common stock warrants to two non-employee directors in recognition of their long-standing support of the Company.  The warrants were immediately vested and exercisable upon issuance, have an exercise price of $1.00 per share, and have a term of five years.  The fair value of the 1,250,000 warrants issued was $514,250, which was calculated using the Black-Scholes valuation model. In addition, during year ended December 31, 2012, the Company issued 421,666 warrants to third parties with an exercise price of $1.00 and having a fair value of $349,003. The aggregate fair value of the aforementioned warrants of $863,253 was recorded as a selling, general and administrative expense during year ended December 31, 2012.

Warrants have been issued for terms of up to five years. Common stock warrants issued, expired, and outstanding during the years ended December 31, 2010, 2011 and 2012 are as follows:

   
Shares
   
Weighted -
Average
Exercise
Price
 
Outstanding at January 1, 2010
    410,542     $ 0.42  
Issued
    25,444       8.00  
Outstanding at December 31, 2010
    435,986       3.74  
Expired
    (410,542 )     3.48  
Issued
    2,122,500       0.29  
Exercised
    (225,000 )     0.01  
Outstanding at December 31, 2011
    1,922,944       0.43  
Issued
    7,652,071       1.05  
Shares withheld on net settled exercises
    (186,347 )     0.70  
Exercised
    (624,832 )     0.67  
Outstanding at December 31, 2012
    8,763,836       0.95  
                 

The assumptions used in calculating the fair value of warrants utilizing the Black-Scholes pricing model are as follows:

   
Year Ended December 31,
 
   
2012
   
2011
 
2010
 
Dividend yield
    0%         0%       0%  
Expected Volatility
  40.96% to
46.88%
    48.67% to
49.36%
    44.81%  
Risk free Interest rates
  0.19%
to
0.77%     0.81%
to
1.13%     2.36%  
Expected lives (years)
  1.6
to
5.0      
5.0
     
5.0