Annual report pursuant to Section 13 and 15(d)

Stockholders Deficit

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Stockholders Deficit
 12 Months Ended
Dec. 31, 2011
Stockholders Deficit [Text Block]
7.
Stockholders’ Equity (Deficit)
 
  Common Stock
 
In 2010, the Company issued 2,732,028 shares in satisfaction of: (i) accounts payable totaling $893,469; (ii) notes payable and accrued interest totaling $385,592; and (iii) accrued compensation totaling $224,537.  As of December 31, 2010, the Company has 17,700,000 common shares outstanding, of which 6,000,000 shares are free trading and 11,700,000 shares are restricted pursuant Rule 144 promulgated under the Securities Act of 1933.  This restriction is expected to be lifted in November 2011 which will result in a significant number of additional shares becoming freely tradable.
 
The Company commenced a private placement in March 2011 that continued through September 2011.  The private placement structure consisted of a series of identical subscription agreements for the sale of units comprised of shares of the Company’s common stock at a price of $1.50 per share and an equivalent number of warrants at an exercise price of $2.00.  During 2011, the Company issued 688,669 shares of common stock at $1.50 per share for cash and issued four-year warrants to purchase 688,669 shares of common stock at $2.00 per share to several accredited investors raising gross proceeds of $1,033,000.  Both the common shares and the warrants contain anti-dilutive, or down round, price protection.  The down round protection for the common shares terminates on the earlier of the date on which an effective registration statement is filed with the SEC covering the shares, or the shares become freely tradable pursuant to Rule 144 promulgated under the Securities Act of 1933.  The down round protection was extended to August 15, 2012.  The down round protection for the warrant terminates when the warrant expires or is exercised.  The Company determined that the down round price protection on the common stock represents a derivative.  See Note 5 for further discussion.  Additionally, the Company recorded a derivative liability for the warrant as discussed in Note 5. 
The Company also issued 3,944,540 shares for the acquisition of: (i) Txtstation which was issued 2,425,000 shares of common stock at a price of $3.04 per share with a common stock purchase price of $7,372,000; (ii) Mobivity which was  issued 1,000,000 shares of common stock at a price of  $3.12 per share with a common stock purchase price of $3,120,000; and (iii) Boomtext was issued 259,770 shares of common stock (with a six month lock-up period) at a price of $1.63 per share with a common stock purchase price of $423,425 and an additional 259,770 shares of common stock (with a eighteen month lock-up period) at a price of $1.55 per share with a common stock purchase price of $402,644, which represents a total common stock acquisition price of $11,318,069.  The shares were recorded at a price per share based on the fair market value on the date of acquisition.  See Note 3 for a more detailed discussion regarding the total acquisition costs for the previously mentioned acquisitions.
 
In March 2011 the Company acquired US Patent number 6788769 B1 for $85,000, which consisted of a $35,000 cash payment and the issuance of 14,286 shares of common stock at a price of $3.50 per share with a common stock purchase price of $50,000.  The shares were valued at the fair market value on the date of grant.
 
In 2011, the Company issued 253,298 common stock shares for various services which include: (i) an issuance of 13,298 shares at a price of $1.88 totaling $25,000 for a registered broker-dealer to act as the Company’s placement agent with respect of finding investors; (ii) a second issuance of 200,000 shares at a price of  $1.75 totaling $350,000 for investor relations consulting services; and (iii) a final issuance of 40,000 shares at a price of $1.35 totaling $54,000 for additional investor relations consulting services.  The shares were valued at the fair market value on the date of grant.
 
In October and November of 2011, five Bridge Note, holders of the 10% Senior Secured Convertible Bridge Notes due November 2, 2011 agreed to convert their entire principal amount, or $210,000, plus all accrued and unpaid interest, of $20,271, into units each of which consist of one share of common stock of the Company and a four year warrant to purchase one share of common stock at $2.00 per share.  The conversion took place at a price of $1.50 per unit.  Accordingly, the Company issued an aggregate of 153,515 shares of common stock and 153,515 warrants.  The conversion occurred within the terms of the convertible notes and no gain or loss was recorded.
 
Stock-based Compensation
 
CTel Canada Plan
 
Certain employees and directors and consultants of the Company (the “Optionees”) received stock options exercisable for the common stock of (and issued by) our former parent company, CTel Canada.  Effective with the Merger, all of the unvested options became fully vested and the related stock-based compensation was recognized in 2010.   The Company recorded stock-based compensation of $114,775 in operating expenses for the year end December 31, 2010, related to stock option grants made to the Optionees.
 
For purposes of accounting for stock-based compensation, the fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing formula, and the expense is recognized on a straight-line basis over the service period or the amount vested, whichever is greater.  The Company granted one option during the year ended December 31, 2010 and used the following valuation assumptions to determine the fair value of the option at the grant date: expected volatility of 111%; risk free interest rate of 0.78%; forfeiture rate of 24.6%; expected dividend rate of 0.0%; and expected term of three years.
 
2010 Incentive Stock Option Plan
 
On December 24, 2010, the Company adopted the 2010 Incentive Stock Option Plan (“the 2010 Plan”), subject to shareholder approval within one year. Shareholder approval was not obtained within one year, therefore incentive stock options granted under the 2010 Plan converted to non-qualified stock options. The 2010 Plan permits the Company to grant up to 3,124,000 shares of common stock and options to purchase shares of common stock. The 2010 Plan is designed to retain directors, executives and selected employees and consultants and reward them for making major contributions to the success of the Company. These objectives are accomplished by making long-term incentive awards under the 2010 Plan thereby providing participants with a proprietary interest in the growth and performance of the Company.
 
The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price that equals the fair market value of the Company\'s stock at the date of grant. These option awards generally vest based on four years of continuous service and have five-year or 10-year contractual terms.
A summary of option activity under the 2010 Plan as of December 31, 2011 and changes during the year then ended is presented below:
 
               
Weighted -
 
         
Weighted -
   
Average
 
         
Average
   
Remaining
 
   
Number
   
Exercise Price
   
Contractual
 
   
Outstanding
   
Per Share
   
Life (Years)
 
Outstanding at January 1, 2011
    1,015,000     $ 0.32       4.73  
Granted
    645,000       1.50       7.35  
Exercised
    -       -       -  
Canceled/forfeited/expired
    (50,000 )     1.60       4.04  
Outstanding at December 31, 2011
    1,610,000     $ 0.64       5.12  
                         
Options vested and exercisable at December 31, 2011
    253,750     $ 0.32       3.98  
 
Expense Information
 
The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors and non-employees based upon estimated fair values.  The Company recorded stock-based compensation in operating expenses for non-employees of $416,012 for the year ended December 31, 2011.  The Company recorded stock-based compensation in operating expenses for employees of $792 for the year ended December 31, 2010.
 
Valuation Assumptions
 
The Company uses the Black-Scholes option pricing model in determining its option expense.  The weighted-average estimated fair value of employee stock options and non-employee stock options granted during the year ended December 31, 2011 was $0.94 per share.  There were 645,000 options granted during the year ended December 31, 2011.  The Company periodically revalues non-employee stock options as they vest.  The ranges of assumptions used during the year ended December 31, 2011 are as follows:
 
   
December 31, 2011
   
Employee
 
   
Options
 
Expected volatility
 
60% to 65%
 
Risk-free interest rate
 
0.62% to 2.31%
 
Forfeiture rate
    0.0 %
Expected dividend rate
    0.0 %
Expected life(yrs)
 
3.00 to 6.00
 
 
The expected volatility is based on the weighted average of the historical volatility of publicly traded surrogates in the Company’s peer group.
 
 
The risk-free interest rate assumption is based upon published interest rates appropriate for the expected life of the Company’s employee stock options.
 
 
The dividend yield assumption is based on the Company’s history of not paying dividends and no future expectations of dividend payouts.
 
 
The expected life of the stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.
Warrants
 
During the year ended December 31, 2010 and 2011, the Company issued warrants totaling 793,750 and 205,000, respectively to non-employee consultants that include graded vesting terms.  As of December 31, 2011, 349,997 warrants were vested pursuant to these agreements.  These warrants were valued using a Black Scholes Model and the greater of the amount vested or the amount recorded over the service period on a straight line basis was recorded in Stock Based Compensation.
 
Expense Information
 
The Company measures and recognizes compensation expense for all stock-based payment awards made to non-employees based upon estimated fair values.  The Company recorded stock-based compensation in operating expenses for non-employees of $560,244 for the year ended December 31, 2011.  The Company recorded stock-based compensation in operating expenses for non-employees of $41,218, for the year ended December 31, 2010.
 
Valuation Assumptions
 
The Company uses the Black-Scholes option pricing model in determining its warrants expense issued to non-employees.   There were 205,000 warrants granted during the year ended December 31, 2011.  The Company periodically revalues these warrants as they vest.  The ranges of assumptions used during the year ended December 31, 2011 are as follows:
 
   
Warrants
 
Expected volatility
 
60% to 61.6%
 
Risk-free interest rate
 
0.96% to 2.42%
 
Forfeiture rate
    0.0 %
Expected dividend rate
    0.0 %
Expected life(yrs)
 
3.00 to 6.00
 
         
 
A summary of warrant activity during the year ended December 31, 2011 and changes during the year then ended is presented below:
 
               
Weighted -
 
         
Weighted -
   
Average
 
         
Average
   
Remaining
 
   
Number
   
Exercise Price
   
Contractual
 
   
Outstanding
   
Per Share
   
Life (Years)
 
Outstanding at January 1, 2011
    793,750     $ 0.32       4.73  
Granted
    205,000       1.50       7.35  
Exercised
    -       -       -  
Canceled/forfeited/expired
    (93,750 )     1.60       4.04  
Outstanding at December 31, 2011
    905,000     $ 0.64       5.12  
                         
Warrants vested and exercisable at December 31, 2011
    349,997     $ 0.32       3.98  
 
As of December 31, 2011, total compensation cost related to non-vested employee stock options not yet recognized was $1,290,022, which is expected to be recognized over the next 1.44 years on a weighted-average basis.
 
As discussed in Note 6, the Company is obligated to issue warrants or shares pursuant to its Bridge Financing.  The number of warrants / shares issuable pursuant to the agreements is not known as of December 31, 2011.
 
During the year ended December 31, 2011, the Company issued warrants for the purchase of 688,669 shares of common stock at $2.00 per share in connection with its private placement discussed above under Common Stock.  The warrants are exercisable for four years from the date of issuance, and contain anti-dilution, or down round, price protection as long as the warrant remains outstanding.  In addition, the Company issued warrants for the purchase of 153,515 shares of common stock at $2.00 per share in connection with the conversion of its outstanding Notes with a principal amount of $210,000 discussed above in Note 6 under Bridge Financing.  The warrants are exercisable for four years from the date of issuance.  These warrants are shown below.  These warrants are included in the derivative value as of December 31, 2010 and 2011.
 
12/31/2010
 
Balance
    -  
   
Warrants issued
    842,184  
   
Warrants exercised
    -  
   
Warrants expired
    -  
12/31/2011
 
Balance
    842,184