Quarterly report pursuant to sections 13 or 15(d)

Note 8 - Stockholders' Equity

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Note 8 - Stockholders' Equity
 9 Months Ended
Sep. 30, 2012
Stockholders' Equity Note Disclosure [Text Block]
8.     Stockholders’ Equity

July 2012 Private Placement

In July 2012, the Company entered into securities purchase agreements with certain investors 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.  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 will bear the costs, including legal and accounting fees, associated with the registration statement. Management believes that 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, on the effective date of a Form 10 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.  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.  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 to the Company’s balance sheet and to shares outstanding of the conversions to common stock that occurred upon the effectiveness of the Company’s Form 10, which occurred 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 Options

At September 30, 2012, the Company had five share-based compensation plans (a “1998 Plan,” a “2007 Plan,” two “2010 Plans,” and a “2012 Plan,” which are 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 and the 2012 Plan also provide 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. The 2012 Plan was adopted by the Company’s Board of Directors in January 2012 and approved by the Company’s stockholders in February 2012. A total of 3,000,000 shares of the Company’s common stock have been reserved for issuance under the 2012 Plan, of which 2,797,400 shares were subject to outstanding options at September 30, 2012. With the adoption of the 2012 Plan, no additional grants under the 2010 Plans have been or will be made subsequent to December 31, 2011.

Activity under the Plans during the nine months ended September 30, 2012 is summarized below:

   
Shares
   
Weighted -
Average
Exercise
Price
 
Outstanding, January 1, 2012
    3,679,977     $ 2.05  
Granted
    2,797,400       1.02  
Exercised, including 16,000 shares withheld on net settled exercises
    (30,000 )     1.80  
Forfeited
    (315,250 )     2.16  
Outstanding, September 30, 2012
   
6,132,127
      1.58  

The estimated grant date fair values of options granted under the 2012 Plan during the nine months ended September 30, 2012 were calculated using the Black-Scholes valuation model, based on the following assumptions:

Dividend yield
  0%
 
Expected Volatility   45.2%  
Risk free Interest rates  0.83% - 1.13% 
Expected lives (years)
  6.0  

The Company records share-based compensation expense on a straight-line basis over the vesting period. For the periods indicated below, employee share-based compensation expense was:

 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 
2012
 
2011
   
2012
   
2011
 
$ 
        299,083
  $ 248,540     $ 842,645     $ 757,200  

 As of September 30, 2012, there was unrecognized compensation expense of $2,061,237 related to outstanding stock options which is expected to be recognized over a weighted average period of approximately 1.9 years.

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 the nine months ended September 30, 2012, the Company issued 366,666 warrants to third parties with an exercise price of $1.00 and having a fair value of $293,163. The aggregate fair value of the aforementioned warrants of $808,636 was recorded as a selling, general and administrative expense during the nine months ended September 30, 2012, of which $214,637 was recorded as expense during the three months ended September 30, 2012.

Warrants have generally been issued for terms of up to five years. Common stock warrants issued and outstanding during the nine months ended September 30, 2012 are as follows:

   
Shares
   
Weighted -
Average
Exercise
Price
 
Outstanding, January 1, 2012
    1,922,944     $ 0.43  
Issued
    7,607,071       1.05  
Exercised, including 158,078 shares withheld on net settled exercises
    (584,768 )     0.69  
Outstanding, September 30, 2012
    8,945,247       0.94  

The assumptions used in calculating the fair value of warrants issued during the nine months ended September 30, 2012, utilizing the Black-Scholes valuation model are as follows:

Dividend yield
    0%    
Expected Volatility   41.3% - 49.0%   
Risk free Interest rates   0.19% - 0.93%   
Expected lives (years)
   1.7 -
5.0