MIME-Version: 1.0 X-Document-Type: Workbook Content-Type: multipart/related; boundary="----=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852" This document is a Single File Web Page, also known as a Web Archive file. If you are seeing this message, your browser or editor doesn't support Web Archive files. Please download a browser that supports Web Archive, such as Microsoft Internet Explorer. ------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Workbook.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"

This page should be opened with Microsoft Excel XP or newer.

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet01.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Mar. 28, 2013
Jun. 29, 2012
Document And Entity Information
Entity Registrant Name Alliqua, Inc.
Entity Central Index Key 0001054274
Document Type 10-K
Document Period End Date Dec 31, 2012
Amendment Flag false
Current Fiscal Year End Date --12-31
Is Entity a Well-known Seasoned Issuer? No
Is Entity a Voluntary Filer? No
Is Entity's Reporting Status Current? Yes
Entity Filer Category Smaller Reporting Company
Entity Public Float $ 8,098,687.35
Entity Common Stock, Shares Outstanding 263,899,966
Document Fiscal Period Focus FY
Document Fiscal Year Focus 2012
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet02.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Condensed Consolidated Balance Sheets (USD $)
Dec. 31, 2012
Dec. 31, 2011
Assets
Cash and Cash Equivalents $ 260,357 $ 260,111
Accounts Receivable, net 108,866 67,773
Due from Employees 7,808   
Inventories 319,326 230,290
Prepaid Expenses 185,839 45,734
Total Current Assets 882,196 603,908
Property and Equipment, net 1,915,179 2,126,811
Intangibles, net 10,329,167 10,679,167
Goodwill 425,969 425,969
Other Assets 174,640 189,240
Total Assets 13,727,151 14,025,095
Liabilities and Stockholders' Equity
Accounts Payable 613,141 251,881
Accrued Expenses 249,728 85,312
Deferred Income 39,000   
Warrant Liability 605,737   
Total Current Liabilities 1,507,606 337,193
Long-term Liabilities
Deferred Rent Payable 24,891 20,816
Deferred Tax Obligation 44,000 33,000
Total Liabilities 1,576,497 391,009
Stockholders' Equity
Preferred stock, par value $0.001; 1,000,000 shares authorized, no shares issued and outstanding      
Common stock, par value $0.001 per share; 500,000,000 shares authorized; 259,202,434 shares issued and outstanding at December 31, 2012 and 209,073,863 shares issued and outstanding at December 31, 2011 259,204 209,075
Additional paid-in capital 34,531,847 31,140,073
Subscription receivable (20,000)   
Accumulated deficit (22,620,397) (17,715,062)
Total Stockholders' Equity 12,150,654 13,634,086
Total Liabilities and Stockholders' Equity $ 13,727,151 $ 14,025,095
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet03.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Stockholders equity:
Preferred stock, par value $ 0.001 $ 0.001
Preferred stock, authorized shares 1,000,000 1,000,000
Preferred stock, issued shares 0 0
Preferred stock, outstanding shares 0 0
Common stock, par value $ 0.001 $ 0.001
Common stock, authorized shares 500,000,000 500,000,000
Common stock, issued shares 259,202,434 209,073,863
Common stock, outstanding shares 259,202,434 209,073,863
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet04.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Condensed Consolidated Statements of Operations (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Income Statement [Abstract]
Revenue, net $ 1,228,674 $ 1,832,234
Cost of Sales 1,837,169 1,918,591
Gross Profit (Loss) (608,495) (86,357)
Operating Expenses
General and Administrative 4,054,373 3,852,706
Research and Product Development 233,819 522,830
Impairment of Goodwill    9,386,780
Total Operating Expenses 4,288,192 13,762,316
Loss from operations (4,896,687) (13,848,673)
Other Income (Expenses)
Interest Income (3,353) (2,509)
Other Income 4,888   
Interest Expense 817 4,349
Change in Value of Warrant Liability    4,630
Loss before provision for income taxes (4,894,335) (13,842,203)
Income Tax Provision 11,000 11,000
Net Loss $ (4,905,335) $ (13,853,203)
Basic and Fully Diluted Loss per Share $ (0.02) $ (0.07)
Weighted-Average Shares Outstanding 235,549,780 207,145,050
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet05.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Condensed Consolidated Statements of Stockholders' Equity (USD $)
Common Stock
Additional Paid-In Capital
Subscription Receivable
Accumulated Deficit
Total
Beginning Balance, Amount at Dec. 31, 2010 $ 199,885 $ 28,481,087 $ (3,861,859) $ 24,819,113
Beginning Balance, Shares at Dec. 31, 2010 199,884,158
Issuance of common stock for cash, shares 6,250,000
Issuance of common stock for cash, amount 6,250 993,750 1,000,000
Placement Fee, Shares 437,500
Placement Fee, Amount 438 (10,438) (10,000)
Cashless exercise of warrants, Shares 2,502,205
Cashless exercise of warrants, Amount 2,502 (2,502)
Share based compensation 1,678,176 1,678,176
Net loss (13,853,203) (13,853,203)
Ending Balance, Amount at Dec. 31, 2011 209,075 31,140,073 (17,715,062) 13,634,086
Ending Balance, shares at Dec. 31, 2011 209,073,863
Issuance of common stock to related party in payment of rent, shares 2,000,000
Issuance of common stock to related party in payment of rent, amount 2,000 98,000 100,000
Issuance of common stock for cash, shares 43,200,000
Issuance of common stock for cash, amount 43,200 1,423,588 1,446,788
Issuance of common stock to related party for services, shares 2,428,571
Issuance of common stock to related party for services, amount 2,429 197,571 200,000
Issuance of common stock for services, shares 2,500,000
Issuance of common stock for services, amount 2,500 247,500 250,000
Warrants issued to vendor for services 3,777 3,777
Share based compensation 1,421,338 1,421,338
Net loss (4,905,335) (4,905,335)
Ending Balance, Amount at Dec. 31, 2012 $ 259,204 $ 34,531,847 $ (20,000) $ (22,620,397) $ 12,150,654
Ending Balance, shares at Dec. 31, 2012 259,202,434
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet06.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Condensed Consolidated Statements of Cash Flows (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Cash Flows From Operating Activities
Net Loss $ (4,905,335) $ (13,853,203)
Depreciation and Amortization 647,818 632,694
Reserve for Obsolete Inventory 17,650 (188)
Share Based Compensation 1,421,338 1,678,176
Impairment of Goodwill    9,386,780
Issuance of Common Stock For Services 250,000   
Warrants Issued For Services 3,777   
Change in Value of Warrant Liability    (4,630)
Deferred Rent 4,075   
Changes in Operating Assets and Liabilities:
Accounts Receivable (41,093) 55,152
Due from Employees (7,808)   
Inventory (106,686) (101,544)
Deposits and Prepaid Expenses 174,495 (7,445)
Accounts Payable and Accrued Expenses 525,676 45,383
Deferred Tax Liability 11,000 11,000
Deferred Revenue 39,000 (39,000)
Net Cash Used in Operating Activities (1,966,093) (2,196,825)
Cash Flows From Investing Activities
Decrease in Restricted Cash    362,546
Purchase of Equipment and Parts Not Placed In Service    (124,616)
Purchase of Property and Equipment (86,186) (164,721)
Net Cash Provided (Used) by Investing Activities (86,186) 73,209
Cash Flows From Financing Activities
Proceeds From Sale of Common Shares and Warrants, Net of Placement Agent Fees of $87,475 2,002,525 990,000
Proceeds From Issuance of Notes Payable 50,000
Net Cash Provided by Financing Activities 2,052,525 990,000
Net Increase (Decrease) in Cash and Cash Equivalents 246 (1,133,616)
Cash and Cash Equivalents - Beginning of period 260,111 1,393,727
Cash and Cash Equivalents - End of period 260,357 260,111
Supplemental Disclosure of Cash Flows Information
Cash paid during the period for interest 3,353 2,509
Non-cash investing and financing activities:
Common stock issued to related party for rent 100,000   
Common Stock issued to a service provider for advertising 200,000   
Common stock issued in a cashless exercise of warrants    2,502
Conversion of Notes Payable to Equity $ 50,000   
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet07.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 1 - ORGANIZATION
12 Months Ended
Dec. 31, 2012
Notes to Financial Statements
NOTE 1 - ORGANIZATION

Alliqua, Inc., formerly Hepalife Technologies, Inc., (“Alliqua” or the "Company"), is a Florida corporation formed on October 21, 1997. On December 20, 2010, the Company changed its name to Alliqua, Inc.

 

AquaMed Technologies, Inc. (“AquaMed”) is a Delaware corporation formed on January 13, 2009. On May 11, 2010, Alliqua consummated a merger acquiring all of the issued and outstanding common and preferred shares of AquaMed. As a result of the transaction, the former owners of AquaMed became the controlling stockholders of Alliqua.

 

The Company is a biomedical company that does business through the following wholly owned subsidiaries:

 

  AquaMed, which was incorporated in Delaware on January 13, 2009. Through AquaMed, the Company develops, manufactures and markets high water content, electron beam cross-linked, aqueous polymerhydrogels (“gels”) used for wound care, medical diagnostics, transdermal drug delivery and cosmetics.
     
  Alliqua Biomedical, Inc. (“Alliqua Biomedical”), which was incorporated in Delaware on October 27, 2010. Through Alliqua Biomedical, the Company focuses on the development of proprietary products for wound care dressings and a core transdermal delivery technology platform designed to deliver drugs and other beneficial ingredients through the skin. The Company intends to market its own branded lines of prescription and over-the-counter (“OTC”) wound care products, as well as to supply products to developers and distributors of prescription and OTC wound healing products for redistribution to healthcare professionals and retailers through Alliqua Biomedical.
     
  HepaLife Biosystems, Inc. (“HepaLife”), which was incorporated in Nevada on April 17, 2007. Through HepaLife, we hold legacy technology called HepaMate™. Since May 2010, we have not allocated resources to HepaMate™ other than for the maintenance of patents and intellectual property related to the technology and instead have focused our resources on products being developed by AquaMed and Alliqua Biomedical. We continue, however, to explore various options to best realize value from our HepaMate™ technology, including selling it or partnering with another company to further develop it. If we are unsuccessful in our efforts to realize value from our HepaMate™ technology, the recorded value of the related intangibles will be subject to significant impairment.
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet08.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 2 - LIQUIDITY
12 Months Ended
Dec. 31, 2012
Notes to Financial Statements
NOTE 2 - LIQUIDITY

 

The Company has experienced negative operating cash flows since inception and has funded its operations primarily from sales of common stock and other securities. The Company’s cash requirements have historically been for product development, clinical trials, marketing and sales activities, finance and administrative costs, capital expenditures and overall working capital.

 

In 2012, the Company raised $2,052,525 of additional financing through common equity issuances as detailed in Note 9. The Company continues to raise additional financing into 2013 through common equity issuances as follows:

 

  On February 22, 2013, the Company sold 4,697,532 shares of common stock including five year warrants to purchase 4,697,532 shares of common stock at an exercise price of $0.097 for total net proceeds of $380,500. The Company intends to use these funds for operations in 2013.
     
  On April 16, 2013, the Company entered into a securities purchase agreement with certain accredited investors pursuant to which we will issue, in the aggregate 6,753,086 shares of common stock and five year warrants to purchase, in the aggregate, up to 6,753,086 shares of common stock at an exercise price of $0.097 per share, in exchange for aggregate consideration of $547,000, of which $311,000 was held in escrow on April 16, 2013 by the placement agent.  The Company intends to use these funds for operations in 2013.

 

The Company believes that it will require additional capital in order to execute the longer term aspects of its business plan, including additional research and development efforts related to HepaMate™.

 

The Company believes that its need for additional equity capital will continue and it intends to pursue additional financing from existing relationships (such as prior shareholders, investors and lenders) and from new investors to support its research and development programs and operations. The Company may pursue sources of additional capital through various means, including joint ventures, debt financing, or equity financing. The Company intends to engage investment banking firms to assist it with these efforts.

 

Future financings are likely to be dilutive to existing stockholders and, the terms of securities issued may be more favorable for new investors. Newly issued securities may include preferences, superior voting rights, and the issuance of warrants or other derivative securities, which may have additional dilutive effects. Further, the Company may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. The Company may also be required to recognize non-cash expenses in connection with certain securities it may issue, such as convertible notes and warrants, which may adversely impact the Company’s financial condition.

 

If the Company is unable to raise additional capital or encounters unforeseen circumstances that place constraints on its capital resources, it will be required to take more severe measures to conserve liquidity, which could include, but are not necessarily limited to, eliminating all non-essential positions, eliminating the Company’s clinical studies, and ceasing all marketing efforts. The Company would have to curtail business development activities and suspend the pursuit of the Company’s business plan. There can be no assurance that the Company will be successful in improving revenues, reducing expenses and/or securing additional capital in sufficient amounts and on terms favorable to it, if needed.

 

These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company’s consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should it be unable to continue as a going concern.

 

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet09.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
12 Months Ended
Dec. 31, 2012
Accounting Policies [Abstract]
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Note 3 – Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements of the Company include the financial statements of Alliqua, Inc. and its subsidiaries, AquaMed Technologies, Inc., HepaLife Biosystems, Inc. and Alliqua Biomedical, Inc.

 

All significant inter-company transactions and accounts have been eliminated in consolidation.

 

 


 

Cash and Cash Equivalents

 

The Company considers all highly liquid securities purchased with original maturities of three months or less to be cash equivalents. From time to time the Company's cash account balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation guarantee limit. The Company reduces its exposure to credit risk by maintaining its cash deposits with major financial institutions and monitoring their credit ratings.

 

Accounts Receivable

 

Trade accounts receivable are stated at the amount the Company expects to collect. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, an allowance for doubtful accounts is not provided since all accounts recorded on the books are deemed collectible.

 

Inventory

 

Inventories are valued at the lower of cost or market on a first-in, first-out basis. Reserves for obsolete inventories are based on expiration dates. At December 31, 2012 and 2011, the Company had reserves for obsolete inventory of $17,650 and $0, respectively.

 

Property and Equipment

 

Property and equipment is stated at cost and is depreciated under the straight-line method over the estimated useful life as follows:

 

Machinery and equipment 10 years
Office equipment 10 years
Furniture and fixtures 10 years

 

Leasehold improvements are amortized using the straight-line method over the lesser of the remaining respective lease term or useful lives.

 

Upon retirement or other disposition of these assets, the cost and related accumulated depreciation and amortization are removed from the accounts and the resulting gains and losses are reflected in the consolidated results of operations. Expenditures for maintenance and repairs are charged to operations as incurred and betterments are capitalized.

 

Intangible Assets

 

The Company recognizes certain intangible assets acquired in acquisitions, primarily goodwill, client relationships and technology. The Company accounts for intangible assets in accordance with Accounting Standards Codification (“ASC”) 350 “Intangibles - Goodwill and Other”. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. Intangible assets with finite lives are amortized on a straight-line basis over their estimated economic lives. The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained annually by the Company.

 

 
 

Goodwill and Impairment

 

Goodwill represents the excess of the purchase price over the fair value of acquired net assets in a business combination, including the amount assigned to identifiable intangible assets. Goodwill is not amortized but rather is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred.

 

When testing goodwill for impairment, qualitative factors are assessed to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. Alternatively, we may bypass this qualitative assessment and perform a detailed quantitative test of impairment (step 1). If we perform the detailed quantitative impairment test and the carrying amount exceeds its fair value, we would perform an analysis (step 2) to measure such impairment. In 2012, we first performed a qualitative assessment to identify and evaluate events and circumstances to conclude whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. Based on our qualitative assessments, we concluded that a positive assertion can be made from the qualitative assessment that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount.

 

On May 11, 2010, at the date of the Merger, $9,386,780 of the goodwill was assigned to the HepaLife Biosystems, Inc. (“Hepa”) reporting unit. Based upon a qualitative assessment of goodwill in 2011, we deemed it necessary to proceed to the two-step impairment analysis. Step 1 of the goodwill impairment test concluded that the market value of the Hepa reporting unit was less than the carrying amount. As a result, we performed the required Step 2 of the analysis to measure any goodwill impairment. To measure the amount of the impairment charge, we determined the implied fair value of goodwill in the same manner as if this reporting unit were being acquired in a business combination. Based on our Step 2 assessment, we concluded, in the fourth quarter of 2011, that the net book value of the Hepa reporting unit exceeded its fair value, and a goodwill impairment charge of $9,386,780 was recorded for the entire goodwill relating to the Hepa reporting unit.

 

Additionally, in 2011, we estimated the fair value of the AquaMed Technologies, Inc. reporting unit using discounted expected future cash flows. We determined the fair value of this reporting unit is greater than the carrying amount and that there was no impairment of the goodwill of this reporting unit.

 

Acquired In-Process Research and Development (“IPR&D”)

 

IPR&D represents the fair value assigned to an incomplete research project, comprised of the HepaMate technology, that the Company acquired through the 2010 merger with AquaMed Technologies, Inc. which, at the time of acquisition, had not reached technological feasibility. The amount is capitalized and is accounted for as an indefinite-lived intangible asset, subject to impairment testing until completion or abandonment of the project. Upon successful completion of the project, a determination will be made as to the then useful life of the intangible asset, generally determined by the period in which substantially all of the cash flows are expected to be generated, and begin amortization. The Company tests IPR&D for impairment at least annually or more frequently if impairment indicators exist after performing our qualitative analysis.  Management has multiple criteria that it considers when performing the qualitative analysis.  The results of this review are then weighed and prioritized.  If the totality of the relevant events and circumstances indicate that it is not more likely than not that the fair value of the IPR&D is less than its carrying amount, the first and second steps of the impairment test are not necessary.

 

 

 

The Company assessed the following qualitative factors that could affect any change in the fair value of the IPR&D:

 

    Analysis of the technology’s current phase.

 

    Additional testing necessary to bring the technology to market.

 

    Development of competing products.

 

    Changes in projections caused by delays.

 

    Changes in regulations.

 

    Changes in the market for the technology.

 

    Changes in cost projections to bring the technology to market.

 

Based on our qualitative assessments, management has concluded that a positive assertion can be made from the qualitative assessment that it is not more likely than not that the fair value of the IPR&D is less than its carrying amount.

 

Impairment of long-lived assets subject to amortization

 

The Company amortizes intangible assets with finite lives over their estimated useful lives and reviews them for impairment annually or whenever an impairment indicator exists. The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, the Company will assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If future undiscounted cash flows are less than the carrying amount of these assets, the Company will recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

 

Management has concluded that there is no impairment of intangible assets subject to amortization and the Company did not recognize any intangible asset impairment charges for the years ended December 31, 2012 and 2011. The Company reevaluates the carrying amounts of its amortizable intangibles at least quarterly to identify any triggering events.

 

Revenue Recognition

 

The Company applies the revenue recognition principles in accordance with ASC 605, “Revenue Recognition,” with respect to recognizing its revenue. Accordingly, the Company records revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.

 

Deposits received on product orders are recorded as deferred revenue until revenues are earned when the products are shipped to customers.

 

The costs associated with shipping physical products are recorded in general and administrative expenses. Currently, shipping charges are not billed to customers.

 

For irradiation services, the Company records revenue based upon an hourly service charge as services are provided.

 

Research and Development

 

Research and development expenses represent costs incurred to develop technology. The Company charges all research and development expenses to operations as they are incurred, including internal costs, costs paid to sponsoring organizations, and contract services for any third party laboratory work. The Company does not track research and development expenses by project. Any purchased in-process research and development technology is capitalized and is amortized when the technology is placed in service. As of December 31, 2012 and 2011 research and development costs totaled $233,819 and $522,830, respectively.

 

Advertising Expenses

 

Advertising and marketing costs are expensed as incurred. Advertising expenses for the years ended December 31, 2012 and 2011 were $139,024 and $379,494, respectively.

 

 

 

Use of Estimates in the Financial Statements

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions, accounts receivable reserves, inventory reserves, deferred taxes and related valuation allowances, and the fair values of long lived assets, intangibles and goodwill. The Company re-evaluates its accounting estimates quarterly and records adjustments, when necessary.

 

Shipping and Handling

 

All shipping and handling costs are paid for by the Company. Shipping and handling costs amounted to approximately $14,635 and $4,820 as of December 31, 2012 and 2011, respectively, and are included in general and administrative expenses.

 

Reclassification

 

Prior period amounts are reclassified, when necessary, to conform to the current period presentation. These reclassifications had no effect on previously reported net loss.

 

Income Taxes

 

The Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed annually for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

 

The Company examined the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise's consolidated financial statements. ASC 740 “Income Taxes.” ASC 740 clarifies the accounting and reporting for uncertainties in income tax law. ASC 740 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.

 

The benefit of tax positions taken or expected to be taken in the Company's income tax returns are recognized in the financial statements if such positions are more likely than not of being sustained. As of December 31, 2012 and December 31, 2011, no liability for unrecognized tax benefits was required to be reported. The guidance also provides direction on derecognition, classification, interest and penalties, accounting in the interim periods, disclosure and transition. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling, general and administrative expenses. No interest or penalties were recorded during the years ended December 31, 2012 and 2011. The Company does not expect any significant changes in its unrecognized tax benefits in the next year. The Company's tax returns beginning with the year ended December 31, 2009 remain subject to examination for federal, state, and local income tax purposes by various taxing authorities.

 

Common stock purchase warrants

 

The Company assesses classification of common stock purchase warrants at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.  The Company’s free standing derivatives consist of warrants to purchase common stock that were issued pursuant to a Securities Purchase Agreement on November 8, 2012.  The Company evaluated the common stock purchase warrants to assess their proper classification in the consolidated balance sheet and determined that the common stock purchase warrants contain exercise reset provisions.  Accordingly, these instruments have been classified as warrant liabilities in the accompanying sheet as of December 31, 2012.  The Company re-measures warrant liabilities at each reporting date, with changes in fair value recognized in earnings for each reporting period.

 

Fair Value of Financial Instruments

 

The carrying amounts reported in the balance sheet for cash, lines of credit and other liabilities approximate fair value based on the short-term maturity of these instruments.

 

Effective January 1, 2008, the Company adopted ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies that fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: 

 

 

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2: Other inputs that are directly or indirectly observable in the marketplace.

 

Level 3: Unobservable inputs supported by little or no market activity.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The adoption of this pronouncement did not have any material impact on the Company’s financial position, results of operations and cash flows.

 

ASC 825, “Fair Value Option” permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings.

 

Stock-Based Compensation

 

The Company accounts for equity instruments issued to employees and consultants in accordance with accounting guidance which requires that such equity instruments are recorded at their fair value on the date of grant, and are amortized over the vesting period of the award. The Company recognizes the compensation costs over the requisite period of the award, which is typically the date the services are performed. Stock based compensation is reflected within operating expenses.

 

Net Loss Per Common Share

 

Basic net loss per common share is computed based on the weighted average number of shares of common stock outstanding during the periods presented. Common stock equivalents, consisting of warrants and stock options, were not included in the calculation of the diluted loss per share because their inclusion would have been anti-dilutive.

 

The potentially dilutive securities are outlined in the table below.

 

The total common shares issuable upon the exercise of stock options and warrants are as follows:

 

    December 31,  
    2012     2011  
             
Stock Options     102,104,742       18,870,000  
Warrants     43,934,000       13,567,201  
Total     146,038,742       32,437,201  

 

Related Party Transactions

 

A related party is generally defined as (i) any person who holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone who directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. (See Note 12).

 

Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued to determine if events or transactions require adjustment to or disclosure in the financial statements.

 

  

Recent Accounting Pronouncements

 

In July 2012, the FASB issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles—Goodwill and Other (Topic 350) — Testing Indefinite-Lived Intangible Assets for Impairment”. In accordance with the amendments in this Update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The standard was adopted and applied during the third quarter of 2012.

 

 

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet10.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 4 - INVENTORIES
12 Months Ended
Dec. 31, 2012
Notes to Financial Statements
NOTE 4 - INVENTORIES

 

Note 4 – Inventories

 

Inventories consist of the following:

 

    As of  
   

December 31,

2012

   

December 31,

2011

 
Raw materials   $ 209,820     $ 216,307  
Work in process     25,119       4,170  
Finished goods     102,037       9,813  
Less: Inventory reserve     (17,650 )     -  
Total   $ 319,326     $ 230,290  

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet11.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 5 - PROPERTY AND EQUIPMENT
12 Months Ended
Dec. 31, 2012
Property, Plant and Equipment [Abstract]
5. PROPERTY AND EQUIPMENT
    2012     2011  
Machinery and equipment   $ 2,869,453     $ 2,789,357  
Computer and office equipment     27,347       23,747  
Furniture and fixtures     12,777       12,777  
Leasehold improvements     108,139       105,649  
Total     3,017,716       2,931,530  
Less: accumulated depreciation     (1,102,537 )     (804,719 )
                 
    Property and Equipment, Net   $ 1,915,179     $ 2,126,811
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet12.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 6 - INTANGIBLE ASSETS
12 Months Ended
Dec. 31, 2012
Goodwill and Intangible Assets Disclosure [Abstract]
6. INTANGIBLE ASSETS

Technology and Customer Relationships

 

Technology and customer relationships consist of the following at December 31, 2012:

 

 

Estimated

Useful Lives

  Cost    

Accumulated

Amortization

    Net  
In process Research and Development -   $ 8,100,000     $ -     $ 8,100,000  
Technology 10 Years     3,000,000       (1,175,000 )     1,825,000  
Customer relationships 12 Years     600,000       (195,833 )     404,167  
                           
Total     $ 11,700,000     $ (1,370,833 )   $ 10,329,167  

 

Technology and customer relationships consist of the following at December 31, 2011:

 

 

Estimated

Useful Lives

  Cost    

Accumulated

Amortization

    Net  
In process Research and Development -   $ 8,100,000     $ -     $ 8,100,000  
Technology 10 Years     3,000,000       (875,000 )     2,125,000  
Customer relationships 12 Years     600,000       (145,833 )     454,167  
                           
Total     $ 11,700,000     $ (1,020,833 )   $ 10,679,167  

 

The Company recorded amortization expense, related to amortizable intangibles, of $350,000 for each of the years ended December 31, 2012 and 2011.

 

In-process research and development technology represents HepaMate™ patented biotech technologies acquired from Alliqua in the Merger which currently have no commercial use. The value assigned to this technology will not be subject to amortization until such time as the technology is placed in service. HepaMate™ is an extracorporeal (outside the body), temporary liver support system designed to provide ‘whole’ liver function to patients with acute or severe liver failure. Unlike conventional technologies which use mechanical methods to perform rudimentary filtration of a patient’s blood or partially detoxify blood by using albumin or sorbents, HepaMate™ combines the process of removing toxins from the patient’s blood (detoxification) with concurrent biologic liver cell therapy. The technology is valued at $8,100,000.

  

The estimated future amortization expense related to technology and customer relationships as of December 31, 2012 is as follows:

 

For the Year Ending December 31,  

 

Technology

   

Customer

Relationships

   

 

Total

 
2013   $ 300,000     $ 50,000     $ 350,000  
2014     300,000       50,000       350,000  
2015     300,000       50,000       350,000  
2016     300,000       50,000       350,000  
2017     300,000       50,000       350,000  
Thereafter     325,000       154,167       479,167  
                         
Total   $ 1,825,000     $ 404,167     $ 2,229,167  

 

Goodwill

 

A summary of the change in the Company’s goodwill for the years ended December 31, 2012 and 2011 is as follows:

 

    December 31, 2012     December 31, 2011  
Goodwill beginning of year   $ 425,969     $ 9,812,749  
Impairment of goodwill     -       (9,386,780)  
Goodwill end of year   $ 425,969     $ 425,969  

 

See Note 3 – Summary of Significant Accounting Policies Goodwill and Impairment for further information.

 

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet13.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
7 - OPERATING LEASES
12 Months Ended
Dec. 31, 2012
Leases [Abstract]
7 - OPERATING LEASES

Note 7 – Operating Leases

 

Manufacturing Facility. The Company has an obligation for its commercial manufacturing facility located at 2150 Cabot Boulevard West, Langhorne, Pennsylvania which is due to expire January 31, 2016. The lease calls for monthly lease payments as follows: $15,627 monthly through January 31, 2014 and $17,187 monthly through January 31, 2016. The Company has the option to extend the lease until January 31, 2021.

 

Rent expense charged to operations amounted to $191,597 for each of the years ended December 31, 2012 and 2011, respectively. In addition, the lease calls for monthly reimbursements which are adjusted annually. The monthly reimbursements for the years ended December 31, 2012 and 2011 amounted to $70,064 and $60,951 respectively.

 

The terms of the Company’s lease obligation provide for scheduled escalations in the monthly rent. Non-contingent rent increases are being amortized over the life of the leases on a straight line basis. Deferred rent of $24,891 and $20,816 represents the unamortized rent adjustment amount at December 31, 2012 and 2011, respectively.

 

The following is a schedule by year of future minimum rental payments, excluding expense reimbursements, required under the operating lease agreements:

 

For the Year Ending December 31,   Amount  
2013   $ 187,524  
2014     204,684  
2015     206,244  
2016     17,187  
Total   $ 615,639  

 

 

Corporate Office. The Company had an agreement obligation effective November 1, 2010, on a month to month basis for shared corporate office space located at 850 3rd Avenue, New York, NY. The agreement called for a monthly fee of $14,000 per month. This agreement was modified in January 2012, such that, the Company issued Harborview Capital Management, LLC 2,000,000 shares of common stock as consideration for an extension of the lease agreement until December 31, 2012 and, effective as of December 1, 2011, the elimination of the requirement to make any further cash payments. At the date of issuance, the common stock was valued at $100,000 and the associated expense was amortized over the term of the lease. The Company does not have any right to extend the terms of the lease agreement past December 31, 2012. As the Company is in the process of moving its corporate headquarters to its Langhorne, PA facility, it has been authorized to occupy this space through June 30, 2013 at no additional cost. The fair value of the stock issued had been classified as rent expense and charged to operations. Total rent expense amounted to $86,000 and $168,000 for the years ended December 31, 2012 and 2011, respectively.

 

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet14.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 8 - COMMITMENTS AND CONTINGENCIES
12 Months Ended
Dec. 31, 2012
Notes to Financial Statements
NOTE 8 - COMMITMENTS AND CONTINGENCIES

Note 8 – Commitments and Contingencies

 

Executive Employment Agreement

 

On May 16, 2012 the Company entered into a three year executive employee agreement retroactive to January 1, 2012. The agreement provides for an annual salary of $200,000 in 2012, $225,000 in 2013 and $250,000 in 2014, payable in a combination of cash and shares of common stock. An option to purchase 5,500,000 shares of common stock, at an exercise price of $.20 per share, was granted and will vest one-third each year on the first, second and third anniversary of the date of grant and will have a term of ten years. In addition, stock options to purchase 3,000,000 shares of common stock previously awarded were accelerated to vest and become exercisable on the date of execution of the employment agreement. If the executive is terminated without cause after January 1, 2013, he would be entitled to twelve monthly payments of salary as well as immediate vesting of any unvested options. On November 27, 2012, the executive resigned from his position. The Company and the executive are currently negotiating the terms of a severance agreement. As of December 31, 2012, $100,000 of accrued compensation was included in accrued expenses pursuant to the agreement.

 

On May 31, 2012 the Company entered into a three year executive employee agreement retroactive to January 1, 2012. The agreement provides for an annual salary of $200,000 in 2012, $225,000 in 2013 and $250,000 in 2014, payable in a combination of cash and shares of common stock. An option to purchase 5,500,000 shares of common stock, at an exercise price of $.20 per share, was granted and will vest one-third each year on the first, second and third anniversary of the date of grant and will have a term of ten years. In addition, stock options to purchase 3,000,000 shares of common stock previously awarded were accelerated to vest and become exercisable on the date of execution of the employment agreement. If the executive is terminated without cause after January 1, 2013, he would be entitled to twelve monthly payments of salary as well as immediate vesting of any unvested options. On November 27, 2012, the executive resigned from his position. The Company and the executive are currently negotiating the terms of a severance agreement. As of December 31, 2012, $100,000 of accrued compensation was included in accrued expenses pursuant to the agreement.

 

On September 28, 2012 the Company entered into a three year executive employee agreement with an effective date of October 1, 2012. The agreement provides for an annual salary of $350,000 and an annual incentive bonus equal to 60 percent of base salary if certain performance criteria are achieved. In addition, an option to purchase common stock equal to three percent of the Company’s total outstanding common stock, 9,286,408 shares, at an exercise price of $.10 per share, was granted and will vest one-third each year on the first, second and third anniversary of the date of grant and will have a term of ten years.  Restricted stock units (“RSUs”) were awarded equal to one percent of the Company’s total outstanding common stock, 3,095,469 RSUs, vesting if and to the extent certain goals are achieved on or before the third anniversary of the date of grant. If the executive is terminated without cause, the agreement calls for a severance payout equal to the greater of 12 months of base pay or the remaining number of months in the initial employment term, not to exceed 36 months, as well as immediate vesting of any unvested options and restricted stock options; the stock options will remain exercisable for two years. If the executive is terminated by non-renewal after the initial three-year term, the agreement calls for a severance payout equal to the sum of six months base salary, payable in six equal monthly installments.

 

Consulting Agreements

 

The Company currently has various consulting agreements for management consulting, marketing, public relations and research and development. Some agreements are based on fixed fee arrangements and others on specified hourly rates.

 

Cooperative and License Agreements

 

USDA, ARS CRADA. In November 2002, Alliqua entered into a Cooperative Research and Development Agreement (“CRADA”) with the U.S. Department of Agriculture (“USDA”), Agricultural Research Service (“ARS”) pertaining to the continued development and use of patented liver cell lines in artificial liver devices and in-vitro toxicological testing platforms. This agreement was amended several times, with a final agreement termination date of November 2008.

 

USDA, ARS License. On November 20, 2007, Alliqua exercised its license right under the CRADA by entering into an exclusive license agreement with the USDA, ARS for existing and future patents related to the PICM-19 hepatocyte cell lines. Under this license agreement, the Company is responsible for annual license maintenance fees commencing in 2010 for the term of the license, which is until the expiration of the last to expire licensed patents unless terminated earlier. The license agreement also requires certain milestone payments, if and when milestones are reached, as well as royalties on net sales of resulting licensed products, if any. License maintenance fees charged to general and administrative expenses for the years ended December 31, 2012 and 2011 were $12,337 and $18,682, respectively. The Company is finalizing its renewal application and plans to submit it shortly.

 

On July 15, 2011, the Company, under its subsidiary Alliqua Biomedical, Inc., entered into a license agreement with Noble Fiber Technologies, LLC, whereby Alliqua Biomedical, Inc. has the exclusive right and license to manufacture and distribute “Silverseal Hydrogel Wound Dressings” and “Silverseal Hydrocolloid Wound Dressings”. The license is granted for ten years with an option to be extended for consecutive renewal periods of two years. An upfront license fee of $100,000 was expensed in 2011 as a general and administrative expense. Royalties are to be paid equal to 9.75% of net sales of licensed products. The agreement calls for minimum royalties to be paid each calendar year as follows: 2012 - $50,000; 2013 - $200,000, 2014 - $400,000; 2015 - $500,000; and 2016 - $600,000. Total royalties charged to general and administrative expenses for the year ended December 31, 2012 were $50,000.

 

Litigation, Claims and Assessments

 

From time to time, in the normal course of business, the Company may be involved in litigation. The Company’s management has determined any asserted or unasserted claims to be immaterial to the consolidated financial statements.

 

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet15.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 9 - STOCKHOLDERS' EQUITY
12 Months Ended
Dec. 31, 2012
Notes to Financial Statements
NOTE 9 - STOCKHOLDERS' EQUITY

 

Note 9 – Stockholders’ Equity 

 

Preferred Stock

 

The Company has authorized 1,000,000 shares of preferred stock, $0.001 par value per share, which may be divided into series and with preferences, limitations and relative rights determined by the board of directors. As of December 31, 2012, no shares of preferred stock are issued or outstanding. 

 

 

 

Common Stock and Warrants

 

The Company has authorized 500,000,000 shares of common stock, $0.001 par value per share, and as of December 31, 2012, 259,202,434 shares were issued and outstanding. The holders of the common stock are entitled to one vote per share. The holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of legally available funds. However, the current policy of the board of directors is to retain earnings, if any, for the operation and expansion of the business. Upon liquidation, dissolution or winding-up of the Company, the holders of common stock are entitled to share ratably in all assets of the Company which are legally available for distribution and after payment of or provision for all liabilities. The holders of Common Stock have no preemptive, subscription, redemption or conversion rights.

 

On March 2, 2011, the Company issued 6,250,000 shares of common stock and a five year warrant to purchase 6,250,000 shares of common stock at an exercise price of $0.17 per share for gross proceeds of $1,000,000. The warrant was exercisable immediately for cash or by way of a cashless exercise which was exercised on May 2, 2011. In connection with this offering, the Company paid a placement agent $10,000 and issued the placement agent 437,500 shares of common stock valued at $91,875 and a five year warrant to purchase 312,500 shares of common stock at an exercise price of $0.20 per share. As a result of this issuance, the total number of warrants issued in 2007 outstanding at December 31, 2011 was adjusted to 942,701 shares with an exercise price of $1.17.

 

On May 2, 2011, 2,502,205 shares of common stock were issued upon the non-cash exercise in full of warrants issued in the March 2011 financing.

 

On January 11, 2012, the Company issued 2,000,000 shares of common stock to Harborview Capital Management, LLC, in satisfaction of its obligation pursuant to the Executive Office License agreement dated November 1, 2010 for office space and services, in lieu of future cash payments due through December 31, 2012. See Note 12 for further information.

 

On February 16, 2012, the Company entered into a securities purchase agreement with certain accredited investors pursuant to which, (i) 21,000,000 shares of common stock and (ii) five year warrants to purchase up to 10,500,000 shares of common stock at an exercise price of $0.069 per share were issued in exchange for gross proceeds of $1,050,000. Each warrant is exercisable immediately for cash or by way of a cashless exercise and contains provisions that protect its holder against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as stock dividends, stock splits and other similar events. Pursuant to the agreement, if the Company subsequently issues or sells common shares at a price lower than the $0.05 per share which was offered to the investors, each investor will be entitled to additional shares to match that lower price per their original investment. In connection with this financing, the Company paid Palladium Capital Advisors, LLC, as placement agent, fees, including expenses, equal to $62,975 and issued the placement agent a five year warrant to purchase 1,109,500 shares of common stock at an exercise price of $0.069 per share. The placement agent warrant has identical terms to the terms of the investor warrants. In addition, the placement agent invested $15,000 in the private placement for 300,000 shares of common stock and a five year warrant to purchase 150,000 shares of common stock at an exercise price of $0.069 per share.

 

On April 10, 2012, the Company entered into an agreement for investment banking services. The agreement was for a term on twelve (12) months for a cash fee of $6,500 per month, and, upon approval from the Board of Directors, 50,000 warrants were to be issued monthly along with the cash payment at an exercise price of $0.08 and expiring upon five years from the date of issuance. Through June 30, 2012, the Company issued 100,000 warrants under this agreement and an issuance of 50,000 warrants was waived by the receiving party due to non-performance. This issuance was recorded as a $3,777 expense. This agreement was subsequently terminated in July of 2012.

 

On June 30, 2012, the Company issued 1,000,000 shares of common stock to the Company's then chairman and 1,428,571 shares of common stock to the Company's then president and director pursuant to executive employment agreements. Salary was payable in a combination of cash and shares of common stock, the ratio of which was determined based upon the fair market value of the common stock and the cash reserves of the Company. These issuances are recorded as $200,000 of compensation expense.

 

On August 14, 2012, the Company entered into a securities purchase agreement with certain members of the Board of Directors and accredited investors pursuant to which, (i) 5,300,000 shares of common stock, and (ii) five year warrants to purchase up to 2,650,000 shares of common stock at an exercise price of $0.05 per share were issued in exchange for net proceeds of $265,000. Pursuant to the agreement, if the Company subsequently issues or sells common shares at a price lower than the $0.05 per share which was offered to the investors, each investor will be entitled to additional shares to match that lower price per their original investment.

 

On each of August 15, 2012 and September 20, 2012, the Company issued 100,000 shares of common stock to a vendor pursuant to a service agreement. Services are payable at the Company’s discretion in cash or shares of common stock at fair market value defined at the greater of $0.10 per share or the average volume weighted average price of the five trading days immediately preceding payment. These issuances are recorded as $20,000 of consulting expense based on the fair value of services provided.

 

On September 28, 2012, pursuant to the securities purchase agreement dated August 14, 2012, the Company issued a certain member of the Board of Directors, (i) 500,000 shares of common stock, and (ii) five year warrants to purchase up to 250,000 shares of common stock at an exercise price of $0.05 per share in exchange for net proceeds of $25,000. Pursuant to the agreement, if the Company subsequently issues or sells common shares at a price lower than the $0.05 per share which was offered to the investors, each investor will be entitled to additional shares to match that lower price per their original investment.

 

On October 11, 2012, pursuant to the securities purchase agreement dated August 14, 2012, the Company issued a certain member of the Board of Directors, (i) 100,000 shares of common stock, and (ii) five year warrants to purchase up to 50,000 shares of common stock at an exercise price of $0.05 per share in exchange for net proceeds of $5,000. Pursuant to the agreement, if the Company subsequently issues or sells common shares at a price lower than the $0.05 per share which was offered to the investors, each investor will be entitled to additional shares to match that lower price per their original investment. 

 

On November 8, 2012, the Company issued 16,300,000 shares of common stock and 16,300,000 five year warrants to purchase common stock at $0.05 for gross proceeds of $815,000, of which $50,000 represented the conversion of debt. Pursuant to the securities purchase agreement, if the Company subsequently issues or sells common shares at a price lower than the $0.05 per share which was offered to the investors, each investor will be entitled to additional shares to match that lower price per their original investment. Palladium Capital Advisors, LLC, as placement agent, was paid a fee of $24,500 and issued a five year warrant to purchase 350,000 shares of common stock at an exercise price of $0.05. The securities pruchase agreement contains the same covenants and penalties as the February 16, 2012 securities purchase agreement, described above.

 

During November, the Company issued 2,300,000 shares of common stock for services. The issuance of these shares were recorded based on the fair value of the services provided.

 

The securities purchase agreements the Company entered into in 2012, contain a variety of contractual provisions, which include certain affirmative and negative covenants made by the Company. The Company’s covenants principally consist of a requirement to reserve sufficient authorized shares to issue upon the exercise of the related warrants, and, subject to certain exceptions, in the event the Company subsequently issues or sells common shares at a price lower than the purchase price per share which was offered to the investors, each investor will be entitled to additional shares such that the total purchase price paid by such investor, when divided by the number of shares held by such investor (including additional shares) equals the lower price.

 

In addition, in connection with the securities purchase agreements entered into on February 16, 2012 and November 8, 2012, pursuant to which Palladium Capital Advisors, LLC served as the placement agent, the Company is required to (i) upon its failure to provide for the timely delivery of shares upon the exercise of the warrants, pay liquidated damages consisting of a cash payment of $10 per trading day (increasing to $20 per trading day on the fifth trading day) for each $1,000 of warrant shares until such certificates are delivered, (ii) upon its failure to maintain timely required filings with the SEC, pay liquidated damages consisting of a cash payment of one percent (1.0%) of the aggregate subscription amount of such purchasers’ securities on the day of the failure to maintain timely filings with the SEC and on every thirtieth (30th) day thereafter, until the required documents are filed with the SEC or such filing is no longer required for the purchaser to transfer the underlying shares pursuant to Rule 144, and (iii) upon its failure to provide for the timely delivery of unlegended shares, upon the satisfaction of certain conditions, pay in cash to the investor (in addition to any other remedies available to or elected by the investor) the amount, if any, by which (A) such investor’s total purchase price (including any brokerage commissions) for the common stock so purchased exceeds (B) the aggregate purchase price of the common shares or warrant shares delivered to the Company for reissuance as unlegended shares.

 

 

The following table sets forth our warrants activity during the years presented:

 

    Number of Shares Issuable     Weighted-Average Exercise Price  
                 
Balance January 1, 2011     13,239,773     $ 0.25  
Granted     6,562,500     $ 0.17  
Anti-Dilutive Adjustment     14,928     $ 1.17  
Exercised     (6,250,000 )   $ 0.17  
Cancelled     -          
Balance December 31, 2011     13,567,201     $ 0.25  
Granted     31,309,500     $ 0.06  
Anti-Dilutive Adjustment     23,581     $ 1.17  
Exercised     -          
Cancelled     (966,282 )   $ 1.17  
Balance December 31, 2012     43,934,000     $ 0.09  

 

The following table sets forth the warrants granted during the year ended December 31, 2012:

 

    Number of Shares Issuable     Weighted-Average Exercise Price  
                 
Issued in connection with February Securities Purchase Agreement     11,609,500     $ 0.069  
Issued in connection with August Securities Purchase Agreement     2,950,000     $ 0.050  
Issued in connection with November Securities Purchase Agreement     16,650,000     $ 0.050  
Issued to Consultant     100,000     $ 0.080  
Total     31,309,500     $ 0.057  

 

 

Warrant shares include warrants issued by the Company on May 11, 2007, with an original amount of warrant shares of 737,000 at an exercise price of $1.50 per share. The related warrant agreement provides for an adjustment to the exercise price and number of shares if the Company issues shares of Common Stock or Common Stock equivalents for consideration less than the then market price at the date of issuance, subject to a 1% adjustment floor. As a result of this provision, on the expiration date of May 11, 2012, the total number of Warrant shares that expired was 966,282.

 

At December 31, 2012, the Company valued the warrant liability for the Warrants using the Black-Scholes pricing-model (Level 3 inputs) which approximates the fair value measured using the Binomial Lattice Model containing the following assumptions: volatility of 97.26%, a risk-free rate of 0.65%, and a term of 5 years. The Company developed the assumptions that were used as follows:   The fair value of the Company’s common stock was obtained from publicly quoted prices. The term represents the remaining contractual term of the derivative; the volatility rate was developed based on analysis of the Company’s historical stock price volatility and the historical volatility rates of several other similarly situated companies (using a number of observations that was at least equal to or exceeded the number of observations in the life of the derivative financial instrument at issue); the risk free interest rates were obtained from publicly available US Treasury yield curve rates; the dividend yield is zero because the Company has not paid dividends and does not expect to pay dividends in the foreseeable future. The change in fair value of warrant liability for the year ended December 31, 2012 was de minimis.

 

The warrant liability recorded at fair value is summarized below:

                                                                                                                                                               

     2012     2011  
Beginning balance as of January 1     -       4,630  
                 
Aggregate value of warrants issued     605,737       -  
                 
Change in Fair Value of warrant liability   -       (4,630)  
                 
Ending balance as of December 31     605,737       -  

 

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet16.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 10 - STOCK OPTIONS
12 Months Ended
Dec. 31, 2012
Notes to Financial Statements
NOTE 10 - STOCK OPTIONS

 

Note 10 – Stock Options

 

Stock Option Plan

 

The Company maintains an active stock option plan that provides shares for option grants to employees, directors and others. A total of 80,000,000 shares of common stock have been reserved for award under the stock option plan, of which 46,020,000 were available for future issuance as of December 31, 2012. Options granted under the option plan generally vest over three years or as otherwise determined by the Board, have exercise prices equal to the fair market value of the common stock on the date of grant, and expire no later than ten years after the date of grant.

 

Stock Based Compensation

 

On January 3, 2011, the Company granted 1,250,000 non-qualified stock options with an exercise price of $0.135 and an expiration date of January 3, 2021, to the new members of its Board of Directors. These options were valued at $138,750 using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 107.7%, risk-free interest rate of 2.02% and an expected life of 5.0 years. These options have a ten year term and vested immediately on the grant date.

 

On March 1, 2011, the Company granted 5,000,000 qualified and non-qualified stock options with an exercise price of $0.21 and an expiration date of March 1, 2021, to certain members of its Board of Directors and employees for their contributions to date to the success of the Company. These options were valued at $815,000 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 106.2%, risk-free interest rate of 2.11% and an expected life of 5.0 years. These options have a ten year term and vested immediately on the grant date.

 

On May 15, 2012, the Company granted 850,000 non-qualified stock options with an exercise price of $0.10 and an expiration date of May 15, 2022, to certain members of its board for their contributions to date to the success of the Company and to one newly appointed member of the board. These options were valued at $40,800 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.9%, risk-free interest rate of 0.74% and an expected life of 5.0 years. These options have a ten year term and vested immediately on the grant date.

 

On May 15, 2012, the Company granted 500,000 qualified and non-qualified stock options with an exercise price of $0.10 and an expiration date of May 15, 2022, to a certain member of its board. These options were valued at $25,000 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.9%, risk-free interest rate of 0.74% and an expected life of 5.5 years. These options have a ten year term and will vest upon strategic events expected to occur within one year.

 

On May 15, 2012, the Company granted 500,000 qualified and non-qualified stock options with an exercise price of $0.10 and an expiration date of May 15, 2022, to a certain member of its board. These options were valued at $24,500 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.9%, risk-free interest rate of 0.74% and an expected life of 5.13 years. These options have a ten year term and vested in August when the Scientific Advisory Board was comprised of at least five members.

 

On May 15, 2012, the Company granted 1,250,000 non-qualified stock options with an exercise price of $0.10 and an expiration date of May 15, 2022, to a certain member of its board. These options were valued at $63,750 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.9%, risk-free interest rate of 0.74% and an expected life of 5.94 years. These options have a ten year term and will vest upon strategic events expected to occur within two years.

 

On May 16, 2012, the Company granted 5,500,000 non-qualified stock options with an exercise price of $0.20 and an expiration date of May 16, 2022, to a certain member of its board and an officer for his services to the success of the Company per his employment agreement. These options were valued at $203,500 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.9%, risk-free interest rate of .75% and an expected life of 6.0 years. These options have a ten year term and vest in one-third increments over the next three years.  

 

On May 17, 2012, the Company granted 3,480,000 non-qualified stock options with an exercise price of $0.10 to a newly appointed member of the board. These options were valued at $139,200 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.9%, risk-free interest rate of 0.74% and an expected life of 5.0 years. These options have a ten year term with an expiration date of May 17, 2022 and vested immediately on the grant date.

 

On May 17, 2012, the Company granted 2,320,000 non-qualified stock options with an exercise price of $0.10 to a newly appointed member of the board. These options were valued at $95,120 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.9%, risk-free interest rate of 0.74% and an expected life of 5.38 years. These options have a ten year term with an expiration date of May 17, 2022 and will vest and become exercisable immediately upon the delivery of a written three year strategic plan to the Company that identifies five disease states and applications for drugs that can be delivered to treat these diseases through the Company’s hydrogel platform, provided such strategic plan is delivered to the Company within nine months of the grant date. On February 17, 2013, these options were cancelled due to performance goals not being achieved under the agreement.

 

On May 17, 2012, the Company granted 2,320,000 non-qualified stock options with an exercise price of $0.10 to a newly appointed member of the board. These options were valued at $102,080 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.9%, risk-free interest rate of 1.16% and an expected life of 6.25 years. These options have a ten year term with an expiration date of May 17, 2022 and will vest and become exercisable immediately upon the two year anniversary of the company hiring a chief medical officer initially identified by this member of the board, provided such chief medical officer is hired by the Company within six months of the grant date. On November 17, 2012 these options were cancelled due to performance goals not being achieved under the agreement.

 

On May 17, 2012, the Company granted 4,640,000 non-qualified stock options with an exercise price of $0.15 to a newly appointed member of the board. These options were valued at $176,320 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.9%, risk-free interest rate of 0.74% and an expected life of 5.50 years. These options have a ten year term with an expiration date of May 17, 2022 and will vest and become exercisable immediately upon the delivery of a written clinical program to the Company for the successful completion of Phase I, II, and III trials with the U.S. Food and Drug Administration (the “FDA”) in order to gain approval for the delivery of an active pharmaceutical ingredient (an “API”) delivered through the Company’s hydrogel platform, provided such clinical program is delivered to the Company within twelve months of the grant date.

 

On May 17, 2012, the Company granted 4,640,000 non-qualified stock options with an exercise price of $0.15 to a newly appointed member of the board. These options were valued at $180,960 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.9%, risk-free interest rate of 0.74% and an expected life of 5.75 years. These options have a ten year term with an expiration date of May 17, 2022 and will vest and become exercisable immediately upon the Company entering into a co-licensing agreement with a third party for the joint development of a product that provides for the delivery of an API using the Company’s hydrogel platform, provided such co-licensing agreement is entered into by the Company within eighteen months of the grant date.

 

On May 17, 2012, the Company granted 5,800,000 non-qualified stock options with an exercise price of $0.15 to a newly appointed member of the board. These options were valued at $220,400 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.9%, risk-free interest rate of 0.74% and an expected life of 5.50 years. These options have a ten year term with an expiration date of May 17, 2022 and will vest and become exercisable immediately upon (i) the newly appointed member delivering a written strategic plan to the Company that sets forth a plan to improve the Company’s HepaMate™ product for internal development, sale and rapid approval by the FDA and (ii) HepaLife BioSystems, Inc., a wholly owned subsidiary of the Company, completing an equity or equity linked financing or series of related equity or equity linked financings that result in gross proceeds to HepaLife BioSystems, Inc. of at least $2,500,000, provided such strategic plan is delivered to the Company and such financing occurs within twelve months of the grant date.

 

On May 31, 2012, the Company granted 5,500,000 non-qualified stock options with an exercise price of $0.20 and an expiration date of May 31, 2022, to a certain member of its board and an officer for his contributions to date to the success of the Company as per his employment agreement. These options were valued at approximately $165,000 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.7%, risk-free interest rate of 0.67% and an expected life of 6.0 years. These options have a ten year term and vest in one-third increments over the next three years.

 

On July 2, 2012, the Company granted 250,000 non-qualified stock options with an exercise price of $0.10 and an expiration date of June 28, 2017 pursuant to a Services Agreement entered on June 28, 2012. The options were valued at approximately $5,300 utilizingthe Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.3%, risk-free interest rate of 0.67% and expected life of 5.0 years. These options have a five year term and half the options vested immediately and the balance will vest in six (6) equal monthly installments commencing each thirty (30) days thereafter.

 

On July 2, 2012, the Company granted 250,000 non-qualified stock options with an exercise price of $0.15 and an expiration date of June 28, 2017 pursuant to a Services Agreement entered on June 28, 2012. The options were valued at approximately $4,200 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.3%, risk-free interest rate of 0.67% and expected life of 5.0 years. These options have a five year term and half the options vested immediately and the balance will vest in six (6) equal monthly installments commencing each thirty (30) days thereafter.

 

On July 31, 2012, the Company granted 1,000,000 non-qualified stock options with an exercise price of $0.10 and an expiration date of July 31, 2017 pursuant to a Services Agreement entered on July 31, 2012. The options were valued at approximately $24,000, and were expensed upon issuance, utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 98.0%, risk-free interest rate of 0.60% and an expected life of 5.0 years. These options have a five year term and vested immediately.

 

On August 15, 2012, the Company granted 500,000 non-qualified stock options with an exercise price of $0.10 and an expiration date of August 15, 2017 pursuant to a Services Agreement entered on August 15, 2012. The options were valued at approximately $12,000, and were expensed upon issuance, utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 97.8%, risk-free interest rate of 0.80% and an expected life of 5.0 years. These options have a five year term and vested immediately.

 

On September 19, 2012, the Company granted 500,000 non-qualified stock options with an exercise price of $0.10 and an expiration date of September 19, 2017 pursuant to two Service Agreements entered on September 19, 2012. The options were valued at approximately $8,500, and were expensed upon issuance, utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 97.3%, risk-free interest rate of 0.67% and expected life of 5.0 years. These options have a five year term and vested immediately.

 

On September 19, 2012, the Company granted 1,500,000 non-qualified stock options with an exercise price of $0.10 and an expiration date of September 19, 2017 pursuant to two Service Agreements entered on September 19, 2012. The options were valued at approximately $25,500 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 97.3%, risk-free interest rate of 0.67% and expected life of 5.0 years. These options have a five year term and vest over a two year period in increments of 200,000 a quarter.

 

On November 8, 2012, pursuant to an executive employment agreement dated September 28, 2012, the Company granted 9,286,408 non-qualified stock options with an exercise price of $0.10 and an expiration date of November 8, 2022. These options were valued at approximately $319,000 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 97.2%, risk-free interest rate of 1.13% and an expected life of 6.0 years. These options have a ten year term and vest in one third increments at the first, second and third year anniversary of the grant date.

 

On November 27, 2012, the Company granted 20,000,000 non-qualified stock options with an exercise price of $0.20 to a newly appointed member of the board. These options were valued at $695,000 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 97.0%, risk-free interest rate of 0.65% and an expected life of 5.0 to 6.5 years. These options have a ten year term with an expiration date of November 21, 2022. 2,500,000 options vested and became exercisable immediately on the date of grant. 7,500,000 options will vest and become exercisable in one third increments at the first, second and third year anniversary of the grant date. 2,500,000 options will vest and become exercisable immediately upon the closing of a transaction pursuant to which the Company acquires control of, or enters into a partnership, joint venture or similar agreement with one or more entities engaged in the wound care, topical delivery or systemic therapeutics business or any other business line of the Company which is approved by the Board. 5,000,000 options will vest and become exercisable immediately upon the listing of the Common Stock on a U.S. national securities exchange by September 30, 2013. 2,500,000 options will vest and become exercisable immediately upon the closing of a sale, spin off or other disposition of either the Company’s wound care or bioartificial liver system businesses by December 31, 2013 or at a target date specified by the Board after considering the current business environment.

 

On November 27, 2012, the Company granted 7,250,000 non-qualified stock options with an exercise price of $0.10 and an expiration date of November 27, 2017, to certain members of its board and officers for their contributions to date to the success of the Company. These options were valued at $224, 750, utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 97.0%, risk-free interest rate of 0.66% and an expected life of 5.0 years. These options have a five year term and vested immediately on the grant date.

 

During 2012, a former officer who previously had vested options to purchase 1,000,000 shares of common stock at an exercise price of $0.145 had those options cancelled pursuant to the option agreement. On November 27, 2012, the Company reissued 1,000,000 non-qualified stock options with an exercise price of $0.145 and an expiration date of May 27, 2014, to the former officer for his contributions to the success of the Company. These options were valued at $9,000, utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 97.0%, risk-free interest rate of 0.27% and an expected life of eighteen months. These options have an eighteen month term and vested immediately on the grant date. The full value of $9,000 was expensed upon issuance.

 

On November 29, 2012 the Company granted 2,590,000 non-qualified stock options with an exercise price of $0.10 and an expiration date of November 29, 2022, to a newly appointed member of the board. These options were valued at approximately $101,000 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 97.0%, risk-free interest rate of 0.69% and an expected life of 5.0 years. These options have a ten year term and vested immediately on the grant date.

 

On November 29, 2012 the Company granted 2,590,000 non-qualified stock options with an exercise price of $0.15 and an expiration date of November 29, 2022, to a newly appointed member of the board. These options were valued at approximately $96,000 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 97.0%, risk-free interest rate of 0.69% and an expected life of 5.5 years. These options have a ten year term and vest upon the first anniversary of the grant date.

 

On November 29, 2012 the Company granted 2,590,000 non-qualified stock options with an exercise price of $0.20 and an expiration date of November 29, 2022, to a newly appointed member of the board. These options were valued at approximately $96,000 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 97.0%, risk-free interest rate of 0.69% and an expected life of 6.0 years. These options have a ten year term and vest upon the second anniversary of the grant date.

 

The expected lives of options granted to employees and board members were calculated using the simplified method set out in SEC Staff Accounting Bulletin No. 110. The simplified method defines the expected life as the average of the contractual term and the vesting period.

 

During the years ended December 31, 2012 and 2011, total stock option compensation expense charged to operations was $1,421,338 and $1,678,176, respectively, with $256,710 and $1,450,913 classified as salaries and benefits, respectively, and $1,124,357 and $227,263 included in director fees, respectively and $40,271 included in consulting fees in 2012. At December 31, 2012, the unamortized value of employee stock options outstanding was approximately $1,742,604. The unamortized portion at December 31, 2012 will be expensed over a weighted average period of 1.39 years.

 

A summary of the status of the Company’s stock option plans and the changes during the year ended December 31, 2012, is presented in the table below:

 

    Number of Shares Issuable     Weighted Average Exercise Price     Weighted Average Remaining Life in Years     Intrinsic Value  
                             
Balance Outstanding January 1, 2011     12,720,000       0.14     -     -  
Granted     6,250,000       0.20     -     -  
Exercised     -       -     -     -  
Cancelled     (100,000 )     0.32     -     -  
Balance Outstanding December 31, 2011     18,870,000       0.16       9.00       -  
Granted     86,606,408       0.14                  
Exercised     -       -                  
Cancelled     (3,371,666 )     0.11                  
Balance Outstanding December 31, 2012     102,104,742       0.15       8.75       -  
Balance Exercisable December 31, 2012     39,188,334       0.14       7.47       -  

 

The following table sets forth information related to stock options at December 31, 2012:

 

Options Outstanding     Options Exercisable  
      Outstanding
Number of Options
    Weighted
Average Remaining
Life in Years
    Exercisable
Number of Options
 
   
Exercise Price  
                     
  0.100       31,755,575       6.96       17,599,167  
  0.135       1,250,000       8.01       1,250,000  
  0.145       12,550,000       7.42       12,550,000  
  0.150       17,899,167       4.49       229,167  
  0.200       33,590,000       9.90       2,500,000  
  0.210       5,000,000       8.17       5,000,000  
  0.260       50,000       5.70       50,000  
  0.610       10,000       5.45       10,000  
          102,104,742       7.47       39,188,334  

 

 

 

 

The intrinsic value is calculated as the difference between the market value as of December 31, 2012, and the exercise price of the shares. The market value as of December 31, 2012, was $0.05 as reported on the OTCBB.

 

Restricted Stock Awards

 

On November 8, 2012, pursuant to an employee agreement, the Company’s CEO was awarded 3,059,469 shares of non-vested restricted stock units which may be converted into the number of shares of common stock of the Company equal to the number of restricted stock units, subject to the terms and conditions of the agreement.   The restricted stock units will vest over three years and is subject to the Company’s achievement of certain market capitalization targets.  The restricted stock units have a grant date fair value of $0.05 per unit with fair value being determined by the quoted market price of the Company’s common stock on the date of grant.  Share based compensation related to the non-vested restricted stock units of approximately $8,600 is included in general and administrative expenses in the accompanying consolidated statements of operations.  At December 31, 2012, there was approximately $146,200 of unrecognized share based compensation expense related to these non-vested unites, which will be recognized over the remaining vesting period of 2.83 years.

 

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet17.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 11- INCOME TAXES
12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]
NOTE 11- INCOME TAXES

Note 11 – Income Taxes

 

The Company files tax returns in the U.S. federal and various state jurisdictions and is subject to audit by tax authorities beginning with the year ended December 31, 2009.

 

The income tax provision (benefit) consists of the following:   Years Ended:  
    2012     2011  
Federal            
Current   $ -     $ -  
Deferred     (1,648,000 )     (1,512,000 )
State and Local                
Current     -       -  
Deferred     (139,000 )     (242,000 )
Change in Valuation Allowance     1,798,000       1,765,000  
Income Tax Provision   $ 11,000     $ 11,000  

 

For the periods ended December 31, 2012, and December 31, 2011, the expected tax expense (benefit) based on the statutory rate reconciled with the actual tax expense (benefit) is as follows:

 

    Years Ended:  
    2012     2011  
U.S. Federal Statutory Rate     (34.0 )%     (34.0 )%
State Income Tax, Net of Federal Benefit     (5.9 )     ( 5.9 )
Other Permanent Differences     3.4       0.1  
Goodwill impairment     -       27.1  
Additional Tax Loss     -       -  
Premerger Net Deferred Tax Assets     -       -  
Change in Valuation Allowance     36.7       12.8  
Effective Income Tax Rate     0.2 %     0.1 %

  

 

As of December 31, 2012, and December 31, 2011, the Company’s deferred tax assets consisted of the effects of temporary differences attributable to the following:

 

    Years Ended:  
    2012     2011  
Deferred Tax Assets:            
Net operating losses   $ 7,940,000     $ 6,892,000  
Stock Compensation Cost     1,469,000       902,000  
Intangible Assets     870,000       834,000  
Other     196,000       108,000  
Total Deferred Tax Assets     10,475,000       8,736,000  
Valuation Allowance     (9,930,000 )     (8,132,000 )
Deferred Tax Asset, Net of Valuation Allowance   $ 545,000     $ 604,000  

 

Deferred Tax Liabilities:            
Excess of book over tax basis of:            
Property and equipment   $ (545,000 )   $ (604,000 )
Goodwill     (44,000 )     (33,000 )
Total Deferred Tax Liabilities     (589,000 )     (637,000 )
                 
Deferred Tax Asset (Liability)   $ (44,000 )   $ (33,000 )

 

For the years ended December 31, 2012, and December 31, 2011, the Company had approximately $20,468,000 and $17,269,000 of federal and state net operating loss carryovers (“NOL”), respectively, which begin to expire in 2018. The net operating loss carryovers may be subject to limitation under Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under the regulations. The Company conducted a preliminary Section 382 analysis and determined an ownership change likely occurred in May 2010. Management has determined that the Company's federal and state NOL carryovers established up through the date of the ownership change are subject to an annual limitation of $ 589,497.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. The deferred tax liability related to goodwill cannot be used in this determination since goodwill is considered to be an asset with an indefinite life for financial reporting purposes. Therefore, the deferred tax liability related to goodwill cannot be considered when determining the ultimate realization of deferred tax assets. Based upon this assessment, management has established a full valuation allowance for the amount of the deferred tax asset which cannot be supported through the production of future taxable income generated through the reversal of the deferred tax liability related to the depreciation of the property and equipment, since it is more likely than not that all the deferred tax assets will not be realized. The change in the valuation allowance for the years ended December 31, 2012, and December 31, 2011, is $1,798,000 and $1,765,000, respectively.

 

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet18.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 12 - RELATED PARTY TRANSACTIONS
12 Months Ended
Dec. 31, 2012
Notes to Financial Statements
NOTE 12 - RELATED PARTY TRANSACTIONS

 

Note 12 – Related Party Transactions

 

The Company incurred $162,000, in Board fees for directors for the year ended December 31, 2011. Agreements called for a total of $13,500 a month to be paid in director fees. Beginning in 2012, the Company discontinued paying cash fees to its directors.

 

On November 8, 2012, we issued 3,900,000 shares of common stock and five year warrants to purchase 3,900,000 shares of common stock at an exercise price of $0.05 per share to certain members of the board of directors in exchange for gross proceeds of $195,000.

 

In November, 2012, a total of 41,506,408 options were granted to officers and members of the board of directors as described in Note 10.

 

On October 11, 2012, we issued 100,000 shares of common stock and five year warrants to purchase 50,000 shares of common stock at an exercise price of $0.05 per share to a member of the board of directors in exchange for gross proceeds of $5,000.

 

On September 28, 2012, we issued 500,000 shares of common stock and five year warrants to purchase 250,000 shares of common stock at an exercise price of $0.05 per share to a member of the board of directors in exchange for gross proceeds of $25,000.

 

On August 14, 2012, we issued 3,800,000 shares of common stock and five year warrants to purchase 1,900,000 shares of common stock at an exercise price of $0.05 per share to officers and members of the board of directors in exchange for gross proceeds of $190,000.

 

On June 30, 2012, we issued 1,000,000 shares of common stock to David Stefansky pursuant to an executive employment agreement. Pursuant to the agreement with the Company, salary is payable in a combination of cash and shares of common stock, the ratio of which is determined based upon the fair market value of the common stock and the cash reserves of the Company.


 

On June 30, 2012, we issued 1,428,571 shares of common stock to Richard Rosenblum pursuant to an executive employment agreement. Pursuant to the agreement with the Company, salary is payable in a combination of cash and shares of common stock, the ratio of which is determined based upon the fair market value of the common stock and the cash reserves of the Company.

 

In May, 2012, a total of 37,300,000 options were granted to officers and members of the board of directors as described in Note 10.

 

On February 16, 2012, we issued 1,000,000 shares of common stock and five year warrants to purchase 500,000 shares of common stock at an exercise price of $0.069 per share to an affiliate of two of our directors in exchange for gross proceeds of $50,000.

 

On February 16, 2012, we issued 2,000,000 shares of common stock and five year warrants to purchase 1,000,000 shares of common stock at an exercise price of $0.069 per share to a director in exchange for gross proceeds of $100,000.

 

On February 16, 2012, we issued 1,000,000 shares of common stock and five year warrants to purchase 500,000 shares of common stock at an exercise price of $0.069 per share to a director in exchange for gross proceeds of $50,000.

 

The Company paid Harborview Capital Management, LLC $168,000 for the year ended December 31, 2011 for sub-leased office space. David Stefansky, a director, and Richard Rosenblum, a director, are the managing members of Harborview Capital Management, LLC. Effective as of December 1, 2011, the Company amended its agreement with Harborview Capital Management, LLC and issued Harborview Capital Management, LLC 2,000,000 shares of common stock as consideration for an extension of the lease agreement until December 31, 2012 and the elimination of the requirement to make any further cash payments. At the date of issuance, the shares had a value of $100,000 and the expense was amortized over the term of the lease.

 

On March 1, 2011, the Company granted 5,000,000 qualified and non-qualified stock options to certain members of the Board of Directors and employees (see Note 10).

 

On January 3, 2011, a total of 1,250,000 non-qualified stock options were granted to the new members of the Board of Directors (see Note 10).

 

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet19.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 13 - MAJOR CUSTOMERS
12 Months Ended
Dec. 31, 2012
Notes to Financial Statements
NOTE 13 - MAJOR CUSTOMERS

Revenues from the Company’s services to a limited number of clients have accounted for a substantial percentage of the Company’s total revenues. For the year ended December 31, 2012, two major customers accounted for approximately 76% of revenue, with each customer individually accounting for 60%, and 16%, respectively. The total accounts receivable balance as of December 31, 2012, due from these two customers was $83,516, representing 77% of the total accounts receivable. Three major customers accounted for approximately 87% of the revenues for the year ended December 31, 2011, with each customer individually accounting for 59%, 15%, and 13%. The total accounts receivable balance as of December 31, 2011, due from these three customers was $65,092.

 

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet20.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 14 -SUPPLIERS AND MATERIALS
12 Months Ended
Dec. 31, 2012
Notes to Financial Statements
NOTE 14 -SUPPLIERS AND MATERIALS

Principal components used in manufacturing are purchased from the following sources: Berry Plastics, Dow Chemical and BASF. The total materials purchased from these single sources in 2012 and 2011 amounted to $124,552 and $224,109, respectively, representing 39% and 44%, respectively, of the total material purchases in each year.

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet21.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 15 - EMPLOYEE BENEFIT PLAN
12 Months Ended
Dec. 31, 2012
Compensation and Retirement Disclosure [Abstract]
NOTE 15 - EMPLOYEE BENEFIT PLAN

The Company adopted a Health Reimbursement Plan on December 1, 2011 whereby participants will be reimbursed for eligible medical expenses up to a maximum each year of $1,500 for single participants and $2,000 for family participants. The reimbursed medical expenses were $10,150 for the year ended December 31, 2012.

 

The Company maintains a 401(K) plan (the “Plan”) for the benefit of all eligible employees. The Plan does not provide for any Company match and therefore no expense was recorded in 2012 and 2011

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet22.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 16 - FAIR VALUE MEASUREMENT
12 Months Ended
Dec. 31, 2012
Fair Value Disclosures [Abstract]
NOTE 16 - FAIR VALUE MEASUREMENT

 

Note 16 – Fair Value Measurement

 

The following table sets forth a summary of the changes in the fair value of Level 3 financial liabilities that are measured at fair value on a recurring basis:

 

     2012     2011  
Beginning balance as of January 1     -       4,630  
                 
Aggregate value of warrants issued     605,737       -  
                 
Change in Fair Value of warrant liability   -       (4,630)  
                 
Ending balance as of December 31     605,737       -  

 

Assets and liabilities measured at fair value on a recurring or nonrecurring basis are as follows:

 

    Level     Level     Level  
    1     2     3  
Recurring:                        
Derivative liabilities     N/A       N/A     $ 605,737  
                         
Non Recurring:                        
Intangible assets     N/A       N/A     $ 8,100,000  
                         
Goodwill     N/A       N/A     $ 425,969  

 

Warrants that contain exercise reset provisions are Level 3 derivative liabilities measured at fair value on a recurring basis using pricing models for which at least one significant assumption is unobservable. The fair value of assets valued on a nonrecurring basis was determined using discounted cash flow methodologies or similar techniques.  For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s chief financial officer, who reports to the chief executive officer, determines its valuation policies and procedures.  The development and determination of the unobservable inputs for Level 3 fair value measurements and the fair value calculations are the responsibility of the Company’s chief financial officer and are approved by the chief executive officer.

 

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet23.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 17 - SUBSEQUENT EVENTS
12 Months Ended
Dec. 31, 2012
Notes to Financial Statements
NOTE 17 - SUBSEQUENT EVENTS

Note 17 – Subsequent Events

 

On February 5, 2013, the Company entered into an Executive Employment Agreement with Mr. David Johnson. The Employment Agreement has an initial term of three years and will be automatically renewed for an additional one-year term unless terminated by either party upon written notice provided not less than four months before the end of the initial term. Under the Employment Agreement, Mr. Johnson is entitled to an annual salary of $350,000, which may be increased, but not decreased, in the Board’s discretion. Mr. Johnson is also eligible to receive an annual bonus of up to 100% of his base salary, provided that he is employed with the Company on December 31 of the year to which the bonus relates. The amount of Mr. Johnson’s annual bonus, if any, will be determined based upon the achievement of certain performance criteria. In addition, the company issued 12,216,195 nonqualified stock options to Mr. Johnson to purchase the equivalent of three percent of the Company’s total outstanding common stock (determined on a fully-diluted basis as of February 4, 2013), with the following terms: (A) an exercise price equal the fair market value of a share of common stock on the date of grant; (B) immediate vesting; and (C) a term of 10 years.

 

On February 15, 2013, the subscription receivable of $20,000 from a director was paid.

 

On February 17, 2013, 2,320,000 non-qualified stock options were cancelled due to performance goals not being achieved under the agreement.

 

On February 22, 2013, we entered into a securities purchase agreement with certain accredited investors pursuant to which we issued, in the aggregate, (i) 4,697,532 shares of common stock and (ii) five year warrants to purchase, in the aggregate, up to 4,697,532 shares of common stock at an exercise price of $0.097 per share, in exchange for aggregate consideration of $380,500. In connection with the Private Placement, each of Jerome Zeldis, David Johnson, David Stefansky, Joseph Leone and an affiliate of Richard Rosenblum invested $100,000, $50,000, $50,000, $20,000 and $50,000, respectively.

 

On April 16, 2013, the Company entered into a securities purchase agreement with certain accredited investors pursuant to which we will issue, in the aggregate 6,753,086 shares of common stock and five year warrants to purchase, in the aggregate, up to 6,753,086 shares of common stock at an exercise price of $0.097 per share, in exchange for aggregate consideration of $547,000, of which $311,000 was held in escrow on April 16, 2013 by the placement agent.

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet24.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
12 Months Ended
Dec. 31, 2012
Note 3 - Summary Of Significant Accounting Policies Policies
Principles of Consolidation

Principles of Consolidation

 

The accompanying consolidated financial statements of the Company include the financial statements of Alliqua, Inc. and its subsidiaries, AquaMed Technologies, Inc., HepaLife Biosystems, Inc. and Alliqua Biomedical, Inc.

 

All significant inter-company transactions and accounts have been eliminated in consolidation.

 

Cash and Cash Equivalents

Cash and Cash Equivalents

 

The Company considers all highly liquid securities purchased with original maturities of three months or less to be cash equivalents. From time to time the Company's cash account balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation guarantee limit. The Company reduces its exposure to credit risk by maintaining its cash deposits with major financial institutions and monitoring their credit ratings.

Accounts Receivable

Accounts Receivable

 

Trade accounts receivable are stated at the amount the Company expects to collect. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, an allowance for doubtful accounts is not provided since all accounts recorded on the books are deemed collectible.

 

Inventory

Inventory

 

Inventories are valued at the lower of cost or market on a first-in, first-out basis. Reserves for obsolete inventories are based on expiration dates. At December 31, 2012 and 2011, the Company had reserves for obsolete inventory of $17,650 and $0, respectively.

Property and Equipment

Property and Equipment

 

Property and equipment is stated at cost and is depreciated under the straight-line method over the estimated useful life as follows:

 

Machinery and equipment 10 years
Office equipment 10 years
Furniture and fixtures 10 years

 

Leasehold improvements are amortized using the straight-line method over the lesser of the remaining respective lease term or useful lives.

 

Upon retirement or other disposition of these assets, the cost and related accumulated depreciation and amortization are removed from the accounts and the resulting gains and losses are reflected in the consolidated results of operations. Expenditures for maintenance and repairs are charged to operations as incurred and betterments are capitalized.

 

Intangible Assets

Intangible Assets

 

The Company recognizes certain intangible assets acquired in acquisitions, primarily goodwill, client relationships and technology. The Company accounts for intangible assets in accordance with Accounting Standards Codification (“ASC”) 350 “Intangibles - Goodwill and Other”. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. Intangible assets with finite lives are amortized on a straight-line basis over their estimated economic lives. The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained annually by the Company.

 

Goodwill and Impairment

Goodwill and Impairment

 

Goodwill represents the excess of the purchase price over the fair value of acquired net assets in a business combination, including the amount assigned to identifiable intangible assets. Goodwill is not amortized but rather is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred.

 

When testing goodwill for impairment, qualitative factors are assessed to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. Alternatively, we may bypass this qualitative assessment and perform a detailed quantitative test of impairment (step 1). If we perform the detailed quantitative impairment test and the carrying amount exceeds its fair value, we would perform an analysis (step 2) to measure such impairment. In 2012, we first performed a qualitative assessment of the recoverability of our goodwill balance in performing our annual impairment test. Based on our qualitative assessments, we concluded that the fair values of each of our reporting units exceeded their carrying values and no impairment was identified.

 

We recorded a non-cash goodwill impairment charge of $9,386,780 for the year ended December 31, 2011. This charge is presented separately in the statement of operations and relates solely to the HepaLife Biosystems, Inc. reporting unit.

 

On May 11, 2010, at the date of the Merger, $9,386,780 of the goodwill was assigned to the HepaLife Biosystems, Inc. (“Hepa”) reporting unit. Based upon a qualitative assessment of goodwill in 2011, we deemed it necessary to proceed to the two-step impairment analysis. Step 1 of the goodwill impairment test concluded that the market value of the Hepa reporting unit was less than the carrying amount. As a result, we performed the required Step 2 of the analysis to measure any goodwill impairment. To measure the amount of the impairment charge, we determined the implied fair value of goodwill in the same manner as if this reporting unit were being acquired in a business combination. Based on our Step 2 assessment, we concluded, in the fourth quarter of 2011, that the net book value of the Hepa reporting unit exceeded its fair value, and a goodwill impairment charge of $9,386,780 was recorded for the entire goodwill relating to the Hepa reporting unit.

 

Additionally, in 2011, we estimated the fair value of the AquaMed Technologies, Inc. reporting unit using discounted expected future cash flows. We determined the fair value of this reporting unit is greater than the carrying amount and that there was no impairment of the goodwill of this reporting unit.

Acquired In-Process Research and Development ("IPR&D")

 

Acquired In-Process Research and Development (“IPR&D”)

 

IPR&D represents the fair value assigned to an incomplete research project, comprised of the HepaMate technology, that the Company acquired through the 2010 merger with AquaMed Technologies, Inc. which, at the time of acquisition, had not reached technological feasibility. The amount is capitalized and is accounted for as an indefinite-lived intangible asset, subject to impairment testing until completion or abandonment of the project. Upon successful completion of the project, a determination will be made as to the then useful life of the intangible asset, generally determined by the period in which substantially all of the cash flows are expected to be generated, and begin amortization. The Company tests IPR&D for impairment at least annually or more frequently if impairment indicators exist after performing our qualitative analysis.  Management has multiple criteria that it considers when performing the qualitative analysis.  The results of this review are then weighed and prioritized.  If the totality of the relevant events and circumstances indicate that it is not more likely than not that the fair value of the IPR&D is less than its carrying amount, the first and second steps of the impairment test are not necessary.

 

 

 

The Company assessed the following qualitative factors that could affect any change in the fair value of the IPR&D:

 

    Analysis of the technology’s current phase.

 

    Additional testing necessary to bring the technology to market.

 

    Development of competing products.

 

    Changes in projections caused by delays.

 

    Changes in regulations.

 

    Changes in the market for the technology.

 

    Changes in cost projections to bring the technology to market.

 

Based on our qualitative assessments, management has concluded that a positive assertion can be made from the qualitative assessment that it is not more likely than not that the fair value of the IPR&D is less than its carrying amount.

 

Impairment of long-lived assets subject to amortization

Impairment of long-lived assets subject to amortization

 

The Company amortizes intangible assets with finite lives over their estimated useful lives and reviews them for impairment annually or whenever an impairment indicator exists. The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, the Company will assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If future undiscounted cash flows are less than the carrying amount of these assets, the Company will recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

 

Management has concluded that there is no impairment of intangible assets subject to amortization and the Company did not recognize any intangible asset impairment charges for the years ended December 31, 2012 and 2011. The Company reevaluates the carrying amounts of its amortizable intangibles at least quarterly to identify any triggering events.

Revenue Recognition

Revenue Recognition

 

The Company applies the revenue recognition principles in accordance with ASC 605, “Revenue Recognition,” with respect to recognizing its revenue. Accordingly, the Company records revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.

 

Deposits received on product orders are recorded as deferred revenue until revenues are earned when the products are shipped to customers.

 

The costs associated with shipping physical products are recorded in general and administrative expenses. Currently, shipping charges are not billed to customers.

 

For irradiation services, the Company records revenue based upon an hourly service charge as services are provided.

 

Research and Development

Research and Development

 

Research and development expenses represent costs incurred to develop technology. The Company charges all research and development expenses to operations as they are incurred, including internal costs, costs paid to sponsoring organizations, and contract services for any third party laboratory work. The Company does not track research and development expenses by project. Any purchased in-process research and development technology is capitalized and is amortized when the technology is placed in service. As of December 31, 2012 and 2011 research and development costs totaled $233,819 and $522,830, respectively.

Advertising Expenses

Advertising Expenses

 

Advertising and marketing costs are expensed as incurred. Advertising expenses for the years ended December 31, 2012 and 2011 were $139,024 and $379,494, respectively.

Use of Estimates in the Financial Statements

Use of Estimates in the Financial Statements

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions, accounts receivable reserves, inventory reserves, deferred taxes and related valuation allowances, and the fair values of long lived assets, intangibles and goodwill. The Company re-evaluates its accounting estimates quarterly and records adjustments, when necessary.

 

Shipping and Handling

Shipping and Handling

 

All shipping and handling costs are paid for by the Company. Shipping and handling costs amounted to approximately $14,635 and $4,820 as of December 31, 2012 and 2011, respectively, and are included in general and administrative expenses.

Reclassification

Reclassification

 

Prior period amounts are reclassified, when necessary, to conform to the current period presentation. These reclassifications had no effect on previously reported net loss.

 

Income Taxes

Income Taxes

 

The Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed annually for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

 

The Company examined the provisions of ASC 740 related to the accountig for uncertainity in income taxes recognized in an enterprise's financials statements. ASC 740 “Income Taxes.” ASC 740 clarifies the accounting and reporting for uncertainties in income tax law. ASC Topic 740 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.

 

The benefit of tax positions taken or expected to be taken in the Company's income tax returns are recognized in the financial statements if such positions are more likely than not of being sustained. As of December 31, 2012 and December 31, 2011, no liability for unrecognized tax benefits was required to be reported. The guidance also provides direction on derecognition, classification, interest and penalties, accounting in the interim periods, disclosure and transition. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling, general and administrative expenses. No interest or penalties were recorded during the years ended December 31, 2012 and December 31, 2011. The Company does not expect any significant changes in its unrecognized tax benefits in the next year. The Company's tax returns beginning with the year ended December 31, 2009 remain subject to examination for federal, state, and local income tax purposes by various taxing authorities.

Common stock purchase warrants

Common stock purchase warrants

 

The Company assesses classification of common stock purchase warrants at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.  The Company’s free standing derivatives consist of warrants to purchase common stock that were issued pursuant to a Securities Purchase Agreement on November 8, 2012.  The Company evaluated the common stock purchase warrants to assess their proper classification in the consolidated balance sheet and determined that the common stock purchase warrants contain exercise reset provisions.  Accordingly, these instruments have been classified as warrant liabilities in the accompanying sheet as of December 31, 2012.  The Company re-measures warrant liabilities at each reporting date, with changes in fair value recognized in earnings for each reporting period.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

 

The carrying amounts reported in the balance sheet for cash, lines of credit and other liabilities approximate fair value based on the short-term maturity of these instruments.

 

Effective January 1, 2008, the Company adopted ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies that fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: 

 

 

 

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2: Other inputs that are directly or indirectly observable in the marketplace.

 

Level 3: Unobservable inputs supported by little or no market activity.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The adoption of this pronouncement did not have any material impact on the Company’s financial position, results of operations and cash flows.

 

ASC 825, “Fair Value Option” permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings.

Stock-Based Compensation

Stock-Based Compensation

 

The Company accounts for equity instruments issued to employees in accordance with accounting guidance which requires that such equity instruments are recorded at their fair value on the date of grant, and are amortized over the vesting period of the award. The Company recognizes the compensation costs over the requisite period of the award, which is typically the date the services are performed. Stock based compensation is reflected within operating expenses.

Net Loss Per Common Share

Net Loss Per Common Share

 

Basic net loss per common share is computed based on the weighted average number of shares of common stock outstanding during the periods presented. Common stock equivalents, consisting of warrants and stock options, were not included in the calculation of the diluted loss per share because their inclusion would have been anti-dilutive.

 

The potentially dilutive securities are outlined in the table below.

 

The total common shares issuable upon the exercise of stock options and warrants are as follows:

 

    December 31,  
    2012     2011  
             
Stock Options     102,114,742       18,870,000  
Warrants     43,934,000       13,567,201  
Total     146,048,742       32,437,201  
Related Party Transactions

Related Party Transactions

 

A related party is generally defined as (i) any person who holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone who directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. (See Note 11).

Subsequent Events

Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued to determine if events or transactions require adjustment to or disclosure in the financial statements.

 

Recent Accounting Pronouncements

Recent Accounting Pronouncements

 

In July 2012, the FASB issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles—Goodwill and Other (Topic 350) — Testing Indefinite-Lived Intangible Assets for Impairment”. In accordance with the amendments in this Update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The standard was adopted and applied during the third quarter of 2012.

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet25.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)
12 Months Ended
Dec. 31, 2012
Note 3 - Summary Of Significant Accounting Policies Tables
Schedule of estimated useful life
Machinery and equipment 10 years
Office equipment 10 years
Furniture and fixtures 10 years
Schedule of common shares issuable
    December 31,  
    2012     2011  
             
Stock Options     102,114,742       18,870,000  
Warrants     43,934,000       13,567,201  
Total     146,048,742       32,437,201  
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet26.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 4 - INVENTORIES (Tables)
12 Months Ended
Dec. 31, 2012
Note 4 - Inventories Tables
INVENTORIES

 

    As of  
   

December 31,

2012

   

December 31,

2011

 
Raw materials   $ 209,820     $ 216,307  
Work in process     25,119       4,170  
Finished goods     102,037       9,813  
Less: Inventory reserve     (17,650 )     -  
Total   $ 319,326     $ 230,290  

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet27.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 5 - PROPERTY AND EQUIPMENT (Tables)
12 Months Ended
Dec. 31, 2012
Note 5 - Property And Equipment Tables
Schedule of property and equipment
    2012     2011  
Machinery and equipment   $ 2,869,453     $ 2,789,357  
Computer and office equipment     27,347       23,747  
Furniture and fixtures     12,777       12,777  
Leasehold improvements     108,139       105,649  
Total     3,017,716       2,931,530  
Less: accumulated depreciation     (1,102,537 )     (804,719 )
                 
    Property and Equipment, Net   $ 1,915,179     $ 2,126,811
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet28.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 6 - INTANGIBLE ASSETS (Tables)
12 Months Ended
Dec. 31, 2012
Note 6 - Intangible Assets Tables
Schedule of Technology and Customer Relationships

Technology and Customer Relationships

 

Technology and customer relationships consist of the following at December 31, 2012:

 

 

Estimated

Useful Lives

  Cost    

Accumulated

Amortization

    Net  
In process Research and Development -   $ 8,100,000     $ -     $ 8,100,000  
Technology 10 Years     3,000,000       (1,175,000 )     1,825,000  
Customer relationships 12 Years     600,000       (195,833 )     404,167  
                           
Total     $ 11,700,000     $ (1,370,833 )   $ 10,329,167  

 

Technology and customer relationships consist of the following at December 31, 2011:

 

 

Estimated

Useful Lives

  Cost    

Accumulated

Amortization

    Net  
In process Research and Development -   $ 8,100,000     $ -     $ 8,100,000  
Technology 10 Years     3,000,000       (875,000 )     2,125,000  
Customer relationships 12 Years     600,000       (145,833 )     454,167  
                           
Total     $ 11,700,000     $ (1,020,833 )   $ 10,679,167  
Schedule of estimated future amortization expense
For the Year Ending December 31,  

 

Technology

   

Customer

Relationships

   

 

Total

 
2013   $ 300,000     $ 50,000     $ 350,000  
2014     300,000       50,000       350,000  
2015     300,000       50,000       350,000  
2016     300,000       50,000       350,000  
2017     300,000       50,000       350,000  
Thereafter     325,000       154,167       479,167  
                         
Total   $ 1,825,000     $ 404,167     $ 2,229,167  
Schedule of changes in goodwill
    December 31, 2012     December 31, 2011  
Goodwill beginning of year   $ 425,969     $ 9,812,749  
Impairment of goodwill     -       (9,386,780)  
Goodwill end of year   $ 425,969     $ 425,969  
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet29.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 7 - OPERATING LEASES (Tables)
12 Months Ended
Dec. 31, 2012
Note 7 - Operating Leases Tables
Schedule of future minimum rental payments
For the Year Ending December 31,   Amount  
2013   $ 187,524  
2014     204,684  
2015     206,244  
2016     17,187  
Total   $ 615,639
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet30.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 9 - STOCKHOLDERS' EQUITY (Tables)
12 Months Ended
Dec. 31, 2012
Stockholders' Equity
Exercise of warrants

 

    Number of Shares Issuable     Weighted-Average Exercise Price  
                 
Balance January 1, 2011     13,239,773     $ 0.25  
Granted     6,562,500     $ 0.17  
Anti-Dilutive Adjustment     14,928     $ 1.17  
Exercised     (6,250,000 )   $ 0.17  
Cancelled     -          
Balance December 31, 2011     13,567,201     $ 0.25  
Granted     31,309,500     $ 0.06  
Anti-Dilutive Adjustment     23,581     $ 1.17  
Exercised     -          
Cancelled     (966,282 )   $ 1.17  
Balance December 31, 2012     43,934,000     $ 0.09  

Schedule of warrants granted
    Number of Shares Issuable     Weighted-Average Exercise Price  
                 
Issued in connection with February Securities Purchase Agreement     11,609,500     $ 0.069  
Issued in connection with August Securities Purchase Agreement     2,950,000     $ 0.050  
Issued in connection with November Securities Purchase Agreement     16,650,000     $ 0.050  
Issued to Consultant     100,000     $ 0.080  
Total     31,309,500     $ 0.057  
Schedule of warrant liability fair value
     2012     2011  
Beginning balance as of January 1     -       4,630  
                 
Aggregate value of warrants issued     605,737       -  
                 
Change in Fair Value of warrant liability   -       (4,630)  
                 
Ending balance as of December 31     605,737       -  

 

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet31.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 10 - STOCK OPTIONS (Tables)
12 Months Ended
Dec. 31, 2012
Note 10 - Stock Options Tables
Stock option activity

 

    Number of Shares Issuable     Weighted Average Exercise Price     Weighted Average Remaining Life in Years     Intrinsic Value  
                             
Balance Outstanding January 1, 2011     12,720,000       0.14     -     -  
Granted     6,250,000       0.20     -     -  
Exercised     -       -     -     -  
Cancelled     (100,000 )     0.32     -     -  
Balance Outstanding December 31, 2011     18,870,000       0.16       9.00       -  
Granted     86,606,408       0.14                  
Exercised     -       -                  
Cancelled     (3,371,666 )     0.11                  
Balance Outstanding December 31, 2012     102,104,742       0.15       8.75       -  
Balance Exercisable December 31, 2012     39,188,334       0.14       7.47       -  

Schedule of stock options
Options Outstanding     Options Exercisable  
      Outstanding
Number of Options
    Weighted
Average Remaining
Life in Years
    Exercisable
Number of Options
 
   
Exercise Price  
                     
  0.100       31,755,575       6.96       17,599,167  
  0.135       1,250,000       8.01       1,250,000  
  0.145       12,550,000       7.42       12,550,000  
  0.150       17,899,167       4.49       229,167  
  0.200       33,590,000       9.90       2,500,000  
  0.210       5,000,000       8.17       5,000,000  
  0.260       50,000       5.70       50,000  
  0.610       10,000       5.45       10,000  
          102,104,742       7.47       39,188,334  
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet32.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 11- INCOME TAXES (Tables)
12 Months Ended
Dec. 31, 2012
Note 11- Income Taxes Tables
Schedule of income tax provision
The income tax provision (benefit) consists of the following:   Years Ended:  
    2012     2011  
Federal            
Current   $ -     $ -  
Deferred     (1,614,000 )     (1,512,000 )
State and Local                
Current     -       -  
Deferred     (139,000 )     (242,000 )
Change in Valuation Allowance     1,798,000       1,765,000  
Income Tax Provision   $ 11,000     $ 11,000  
Schedule of statutory rate
    Years Ended:  
    2012     2011  
U.S. Federal Statutory Rate     (34.0 )%     (34.0 )%
State Income Tax, Net of Federal Benefit     (5.9 )     ( 5.9 )
Other Permanent Differences     3.4       0.1  
Goodwill impairment     -       27.1  
Additional Tax Loss     -       -  
Premerger Net Deferred Tax Assets     -       -  
Change in Valuation Allowance     36.7       12.8  
Effective Income Tax Rate     0.2 %     0.1 %
Schedule of deferred tax assets and liablitities
    Years Ended:  
    2012     2011  
Deferred Tax Assets:            
Net operating losses   $ 7,940,000     $ 6,892,000  
Stock Compensation Cost     1,469,000       902,000  
Intangible Assets     870,000       834,000  
Other     196,000       108,000  
Total Deferred Tax Assets     10,475,000       8,736,000  
Valuation Allowance     (9,930,000 )     (8,132,000 )
Deferred Tax Asset, Net of Valuation Allowance   $ 545,000     $ 604,000  

Deferred Tax Liabilities:            
Excess of book over tax basis of:            
Property and equipment   $ (545,000 )   $ (604,000 )
Goodwill     (44,000 )     (33,000 )
Total Deferred Tax Liabilities     (589,000 )     (637,000 )
                 
Deferred Tax Asset (Liability)   $ (44,000 )   $ (33,000 )

------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet33.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 16 - FAIR VALUE MEASUREMENT (Tables)
12 Months Ended
Dec. 31, 2012
Note 16 - Fair Value Measurement Tables
Schedule of changes in fair value
     2012     2011  
Beginning balance as of January 1     -       4,630  
                 
Aggregate value of warrants issued     605,737       -  
                 
Change in Fair Value of warrant liability   -       (4,630)  
                 
Ending balance as of December 31     605,737       -  

 

Schedule of Assets and liabilities measured at fair value on a recurring or nonrecurring basis
    Level     Level     Level  
    1     2     3  
Recurring:                        
Derivative liabilities     N/A       N/A     $ 605,737  
                         
Non Recurring:                        
Intangible assets     N/A       N/A     $ 8,100,000  
                         
Goodwill     N/A       N/A     $ 425,969
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet34.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details)
12 Months Ended
Dec. 31, 2012
Note 3 - Summary Of Significant Accounting Policies Details
Machinery and equipment 10 years
Office equipment 10 years
Furniture and fixtures 10 years
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet35.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 1)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total Common Shares Issuable 146,048,742 32,437,201
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total Common Shares Issuable 102,114,742 18,870,000
Warrants
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total Common Shares Issuable 43,934,000 13,567,201
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet36.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 4 - INVENTORIES (Details) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Notes to Financial Statements
Raw materials $ 209,820 $ 216,307
Work in process 25,119 4,170
Finished goods 102,037 9,813
Less: Inventory reserve (17,650) 0
Total $ 319,326 $ 230,290
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet37.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 5 - PROPERTY AND EQUIPMENT (Details) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Note 5 - Property And Equipment Details
Machinery and equipment $ 2,869,453 $ 2,789,357
Computer and office equipment 27,347 23,747
Furniture and fixtures 12,777 12,777
Leasehold improvements 108,139 105,649
Total 3,017,716 2,931,530
Less: accumulated depreciation (1,102,537) (804,719)
Property and Equipment, Net $ 1,915,179 $ 2,126,811
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet38.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 6 - INTANGIBLE ASSETS (Details) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Finite-Lived Intangible Assets [Line Items]
Cost $ 11,700,000 $ 11,700,000
Accumulted Amortization (1,370,833) (1,020,833)
Net 10,329,167 10,679,167
Research And Development [Member]
Finite-Lived Intangible Assets [Line Items]
Cost 8,100,000 8,100,000
Net 8,100,000 8,100,000
Technology [Member]
Finite-Lived Intangible Assets [Line Items]
Estimated Useful Lives 10 years 10 years
Cost 3,000,000 3,000,000
Accumulted Amortization (1,175,000) (875,000)
Net 1,825,000 2,125,000
Customer Relationships [Member]
Finite-Lived Intangible Assets [Line Items]
Estimated Useful Lives 12 years 12 years
Cost 600,000 600,000
Accumulted Amortization (195,833) (145,833)
Net $ 404,167 $ 454,167
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet39.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 6 - INTANGIBLE ASSETS (Details 1) (USD $)
Dec. 31, 2012
2013 $ 350,000
2014 350,000
2015 350,000
2016 350,000
2017 350,000
Thereafter 479,167
Total 2,229,167
Technology [Member]
2013 300,000
2014 300,000
2015 300,000
2016 300,000
2017 300,000
Thereafter 325,000
Total 1,825,000
Customer Relationships [Member]
2013 50,000
2014 50,000
2015 50,000
2016 50,000
2017 50,000
Thereafter 154,167
Total $ 404,167
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet40.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 6 - INTANGIBLE ASSETS (Details 2) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Note 6 - Intangible Assets Details 2
Goodwill beginning of year $ 425,969 $ 9,812,749
Impairment of goodwill    (9,386,780)
Goodwill end of year $ 425,969 $ 425,969
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet41.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 7 - OPERATING LEASES (Details) (USD $)
Dec. 31, 2012
Note 7 - Operating Leases Tables
2013 $ 187,524
2014 204,684
2015 206,244
2016 17,187
Total $ 615,639
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet42.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 9 - STOCKHOLDERS' EQUITY (Details) (WarrantActivityMember, USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
WarrantActivityMember
Balance beginning, share issuable 13,567,201 13,239,773
Balance beginning, Per Share $ 0.25 $ 0.25
Granted 31,309,500 6,562,500
Granted, Per Share $ 0.06 $ 0.17
Anti-Dilutive Adjustment 23,581 14,928
Anti-Dilutive Adjustment, Per Share $ 1.17 $ 1.17
Exercised    (6,250,000)
Exercised, Per Share $ 0.17
Cancelled (966,282)   
Cancelled, Per Share $ 1.17
Balance ending, shares issuable 43,934,000 13,567,201
Balance ending, Per Share $ 0.09 $ 0.25
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet43.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 9 - STOCKHOLDERS' EQUITY (Details 1) (USD $)
12 Months Ended
Dec. 31, 2012
February Securities Purchase Agreement
Number of Shares Issuable 11,609,500
Weighted-Average Exercise Price $ 0.069
August Securities Purchase Agreement
Number of Shares Issuable 2,950,000
Weighted-Average Exercise Price $ 0.05
November Securities Purchase Agreement
Number of Shares Issuable 16,650,000
Weighted-Average Exercise Price $ 0.05
Issued to Consultant
Number of Shares Issuable 100,000
Weighted-Average Exercise Price $ 0.08
Total Warrants
Number of Shares Issuable 31,309,500
Weighted-Average Exercise Price $ 0.057
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet44.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 9 - STOCKHOLDERS' EQUITY (Details 2) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Stockholders' Equity
Beginning balance as of January 1, 2012 $ 0 $ 4,630
Aggregate value of warrants issued 605,737 0
Change in Fair Value of warrant liability 0 (4,630)
Ending balance as of December 31, 2012 $ 605,737 $ 0
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet45.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 10 - STOCK OPTIONS (Details) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Note 10 - Stock Options Tables
Number of Shares Issuable Balance Options Outstanding Beginning of period 18,870,000 12,720,000
Weighted Average Exercise Price Options Outstanding at beginning of period $ 0.16 $ 0.14
Intrinsic Value Options Outstanding beginning of period      
Number of Shares Issuable Options Granted 86,606,408 6,250,000
Weighted Average Exercise Price Options Granted, Per Share $ 0.14 $ 0.2
Granted, Intrinsic Value   
Number of Shares Issuable Options Exercised      
Weighted Average Exercise Price Options Exercised, Per Share      
Exercised, Intrinsic Value   
Number of Shares Issuable Options Cancelled (3,371,666) (100,000)
Weighted Average Exercise Price Options Cancelled, Per Share $ 0.11 $ 0.32
Cancelled, Intrinsic Value   
Number of Shares Issuable Balance Options Outstanding End of period 102,104,742 18,870,000
Weighted Average Exercise Price Options Outstanding end of period $ 0.15 $ 0.16
Outstanding Intrinsic Value end of period      
Balance Exercisable December 31, 2012 39,188,334
Balance Exercisable December 31, 2012, Per Share $ 0.14
Balance Exercisable December 31, 2012 7 years 5 months 19 days
Balance Exercisable December 31, 2012, Value   
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet46.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 10 - STOCK OPTIONS (Details 1) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Number of Shares Issuable Balance Options Outstanding End of period 102,104,742 18,870,000 12,720,000
Weighted Average Remaining Life in Years 7 years 5 months 19 days
Exercisable Number of Options 39,188,334
Option 1
Exercise Price 0.1
Number of Shares Issuable Balance Options Outstanding End of period 31,755,575
Weighted Average Remaining Life in Years 6 years 11 months 24 days
Exercisable Number of Options 17,599,167
Option 2
Exercise Price 0.135
Number of Shares Issuable Balance Options Outstanding End of period 1,250,000
Weighted Average Remaining Life in Years 8 years 4 days
Exercisable Number of Options 1,250,000
Option 3
Exercise Price 0.145
Number of Shares Issuable Balance Options Outstanding End of period 12,550,000
Weighted Average Remaining Life in Years 7 years 5 months 1 day
Exercisable Number of Options 12,550,000
Option 4
Exercise Price 0.15
Number of Shares Issuable Balance Options Outstanding End of period 17,899,167
Weighted Average Remaining Life in Years 4 years 5 months 26 days
Exercisable Number of Options 229,167
Option 5
Exercise Price 0.2
Number of Shares Issuable Balance Options Outstanding End of period 33,590,000
Weighted Average Remaining Life in Years 9 years 11 months
Exercisable Number of Options 2,500,000
Option 6
Exercise Price 0.21
Number of Shares Issuable Balance Options Outstanding End of period 5,000,000
Weighted Average Remaining Life in Years 8 years 2 months 1 day
Exercisable Number of Options 5,000,000
Option 7
Exercise Price 0.26
Number of Shares Issuable Balance Options Outstanding End of period 50,000
Weighted Average Remaining Life in Years 5 years 8 months 17 days
Exercisable Number of Options 50,000
Option 8
Exercise Price 0.61
Number of Shares Issuable Balance Options Outstanding End of period 10,000
Weighted Average Remaining Life in Years 5 years 5 months 12 days
Exercisable Number of Options 10,000
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet47.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 11- INCOME TAXES (Details) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Federal
Current      
Deferred (1,648,000) (1,512,000)
State and Local
Current      
Deferred (139,000) (242,000)
Change in Valuation Allowance 1,798,000 1,765,000
Income Tax Provision $ 11,000 $ 11,000
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet48.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 11- INCOME TAXES (Details 1)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Note 11- Income Taxes Details 1
U.S. Federal Statutory Rate (34.00%) (34.00%)
State Income Tax, Net of Federal Benefit (5.90%) (5.90%)
Other Permanent Differences 0.34% 0.10%
Goodwill impairment 27.10%
Change in Valuation Allowance 36.70% 12.80%
Effective Income Tax Rate 0.20% 0.10%
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet49.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 11- INCOME TAXES (Details 2) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Deferred Tax Assets:
Net operating losses $ 7,940,000 $ 6,892,000
Stock Compensation Cost 1,469,000 902,000
Intangible Assets 870,000 834,000
Other 196,000 108,000
Total Deferred Tax Assets 10,475,000 8,736,000
Valuation Allowance (9,930,000) (8,132,000)
Deferred Tax Asset, Net of Valuation Allowance 545,000 604,000
Deferred Tax Liabilities:
Property and equipment (545,000) (604,000)
Goodwill (44,000) (33,000)
Total Deferred Tax Liabilities (589,000) (637,000)
Deferred Tax Asset (Liability) $ (44,000) $ (33,000)
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet50.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 16. FAIR VALUE MEASUREMENT (Details) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Note 16. Fair Value Measurement Details
Beginning Balance as of January 1, 2012    $ 4,630
Aggregate value of warrants issued 605,737 0
Change in Fair Value of warrant liability 0 (4,630)
Ending Balance as of December 31, 2012 $ 605,737   
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet51.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 16 - FAIR VALUE MEASUREMENT (Details 1) (USD $)
12 Months Ended
Dec. 31, 2012
Level 1
Recurring:
Derivative liabilities   
Non Recurring:
Intangible assets   
Goodwill   
Level 2
Recurring:
Derivative liabilities   
Non Recurring:
Intangible assets   
Goodwill   
Level 3
Recurring:
Derivative liabilities 605,737
Non Recurring:
Intangible assets 8,100,000
Goodwill $ 425,969
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet52.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Notes to Financial Statements
Cash and cash equivalents $ 260,357 $ 260,111
Issuance of common stock 2,002,525 990,000
Cash used in operating activities (1,966,093) (2,196,825)
Capital expenditures (86,186) 73,209
Non-cash goodwill impairment charge    $ 9,386,780
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet53.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 6 - INTANGIBLE ASSETS (Details Narrative) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Notes to Financial Statements
Amortization expense related to the acquired amortizable intangibles $ 350,000 $ 350,000
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet54.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 9 - STOCKHOLDERS' EQUITY (Details Narrative) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Notes to Financial Statements
Common stock, Authorized 500,000,000 500,000,000
Common stcok, Par value $ 0.001 $ 0.001
Common stock issued 259,202,434 209,073,863
Preferred Stock Authorized 1,000,000 1,000,000
Preferred stcok par value $ 0.001 $ 0.001
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/Sheet55.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
NOTE 13 - MAJOR CUSTOMERS (Details Narrative)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Revenue, Major Customer [Line Items]
Percent of revenue accounted 76.00% 87.00%
Customer One [Member]
Revenue, Major Customer [Line Items]
Percent of revenue accounted 60.00% 59.00%
Customer Two [Member]
Revenue, Major Customer [Line Items]
Percent of revenue accounted 16.00% 15.00%
Customer Three [Member]
Revenue, Major Customer [Line Items]
Percent of revenue accounted 13.00%
------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852 Content-Location: file:///C:/5ca8beb7_94b4_4011_ae0e_a83fd8d36852/Worksheets/filelist.xml Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii" ------=_NextPart_5ca8beb7_94b4_4011_ae0e_a83fd8d36852--