Quarterly report pursuant to sections 13 or 15(d)

Note 5 - Stockholders' Equity

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Note 5 - Stockholders' Equity
 3 Months Ended
Mar. 31, 2013
Stockholders' Equity Note Disclosure [Text Block]
5.    Stockholders’ Equity

January 2013 Private Placement

In January 2013, the Company entered into a securities purchase agreement 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 $1.20 per unit (the “January Financing Transaction”). Each unit consisted of one share of common stock and a warrant to purchase one-half share of common stock.

In the January Financing Transaction, the Company sold to the investors 9,201,684 shares of common stock, together with warrants to purchase 4,600,842 shares of common stock, for aggregate gross proceeds of $11,042,021, before commissions and offering expenses. Non-employee directors of the Company invested a total of $402,000 in the January Financing Transaction. Each warrant is exercisable for five years from the date of issuance and has an exercise price of $1.75 per share, subject to adjustment from time to time for stock splits or combinations, stock dividends, stock distributions, recapitalizations and other similar transactions. In the event the Company issues shares of its common stock or common stock equivalents in a financing transaction after the January Financing Transaction at a price below the then prevailing warrant exercise price, the exercise price of the warrants will be adjusted downward to the price at which the Company issues the common stock or common stock equivalents.

Additionally, the warrants contain a net-cash settlement feature which gives the warrant holder the right to net-cash settlement in the event certain transactions occur. The Company applied guidance in ASC 815-40, “Contracts in Entity's Own Equity,” to account for the net-cash settlement provision of the warrants. Under ASC 815-40, financial instruments which require net-cash settlement are recorded as an asset or a liability.  As such, a portion of the net proceeds of the January Financing Transaction was recorded as a derivative liability. Pursuant to the net-cash settlement provision of the warrants, if such a transaction occurs the warrant holder will be entitled to a value calculated under the Black-Scholes valuation model using (i) an expected volatility equal to the greater of 100% and the 100-day volatility obtained from the HVT function on Bloomberg, (ii) an expected term equal to the remaining term of the warrant, and (iii) an interest rate equal to the U.S. Treasury risk-free rate for the term of the lesser of the remaining term of the warrant or twenty-four months. The fair value of this derivative liability will be calculated each reporting period and the liability adjusted through charges or credits to the statements of operations. The assumptions used in the Black-Scholes calculations were as follows:

   
Transaction
Date
   
March 31,
2013
 
Dividend yield
    0 %     0 %
Expected volatility
    100.00 %     100.00 %
Risk free interest rate
    0.28 %     0.25 %
Expected remaining term (years)
    5       4.83  
Common stock price
  $ 1.58     $ 1.21  

The change in the fair value of the warrants issued in the January Financing Transaction is reflected below:

Fair value on transaction date
  $ 5,267,964  
Decrease in fair value
    1,496,654  
Fair value at March 31, 2013
  $ 3,771,310  

The Company’s placement agents earned commissions of $1,104,202 and the Company incurred other transaction costs of $133,024 related to the January Financing Transaction.

In connection with the January Financing Transaction, the Company entered into a registration rights agreement with the investors pursuant to which the Company filed 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 financing. The Company must bear the costs, including legal and accounting fees, associated with the registration of those shares. If the Company fails to continuously maintain the effectiveness of the registration statement (with certain permitted exceptions), the Company will incur certain damages to the investors, up to a maximum amount of 12% of the investors’ investments in the January Financing Transaction, or approximately $1,300,000.

Stock Options

In February 2012, the stockholders of the Company approved the creation of a new share-based incentive plan (the “2012 Plan”). Following stockholder approval of the 2012 Plan, no new grants under the Company’s prior stock plans were made. A total of 3,000,000 shares of the Company’s common stock are reserved for issuance under the 2012 Plan, of which awards as to 2,957,400 shares had been made as of March 31, 2013.  Thus, 42,600 shares remained available for award grants as of March 31, 2013 under the 2012 Plan.

Activity under all of the Company’s equity compensation plans during the three months ended March 31, 2013 is summarized below:

   
Shares
   
Weighted -
Average
Exercise
Price
 
Outstanding at January 1, 2013
    6,432,127     $ 1.58  
Issued
    10,000       1.45  
Outstanding at March 31, 2013
    6,442,127     $ 1.58  

The estimated grant date fair values of options granted under the 2012 Plan during the three months ended March 31, 2013 were calculated using the Black-Scholes valuation model, based on the following assumptions:

Dividend yield
    0 %
Expected Volatility
    45.41 %
Risk free Interest rates
    0.99 %
Expected lives (years)
    6.0  

The Company records share-based compensation expense on a straight-line basis over the vesting period. Employee share-based compensation expense for the three months ended March 31, 2013 and 2012, was $318,467 and $229,855, respectively. As of March 31, 2013, there was unrecognized compensation expense of $1,639,708 related to outstanding stock options which is expected to be recognized over a weighted average period of approximately 1.6 years.

On March 5, 2013, the Company’s Board of Directors adopted a new share-based incentive plan (the “2013 Plan), subject to the approval of the Company’s stockholders.  A total of 1,250,000 shares are reserved for issuance under the 2013 Plan.

Warrants

Warrants have generally been issued for terms of up to five years. Common stock warrant activity for the three months ended March 31, 2013 is as follows:

   
Shares
   
Weighted -
Average
Exercise
Price
 
Outstanding at January 1, 2013
    8,763,836     $ 0.95  
Issued
    4,600,842       1.75  
Exercised
    (51,000 )     0.95  
Outstanding at March 31, 2013
    13,313,678       1.23  

During the three months ended March 31, 2013, warrants were exercised on a net settlement basis which resulted in the Company withholding 25,237 shares out of the warrants exercised for 51,000 shares of the Company’s common stock.