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DOCUMENT AND ENTITY INFORMATION (USD $)
12 Months Ended
Dec. 31, 2011
Mar. 20, 2012
Jun. 30, 2011
Entity Registrant Name rVue Holdings, Inc.
Entity Central Index Key 0001455206
Current Fiscal Year End Date --12-31
Entity Filer Category Smaller Reporting Company
Trading Symbol rvue
Entity Common Stock, Shares Outstanding 37,863,845
Document Type 10-K
Amendment Flag false
Document Period End Date Dec 31, 2011
Document Fiscal Period Focus FY
Document Fiscal Year Focus 2011
Entity Well-Known Seasoned Issuer No
Entity Voluntary Filers No
Entity Current Reporting Status Yes
Entity Public Float $ 7,640,046
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CONSOLIDATED BALANCE SHEETS (USD $)
Dec. 31, 2011
Dec. 31, 2010
Assets
Cash and cash equivalents $ 19,917 $ 2,334,121
Accounts receivable, net of allowance for doubtful accounts of $37,651 in 2010 105,203 24,867
Prepaid expenses 180,573 38,461
Due from Argo Digital Solutions, Inc. 0 172,012
Total current assets 305,693 2,569,461
Property and equipment, net 46,829 25,972
Software development costs 244,498 380,054
Deposits 17,388 13,510
Assets 614,408 2,988,997
Liabilities and Stockholders' Equity (Deficit)
Accounts payable 202,142 70,493
Accrued expenses 456,339 227,600
Convertible notes 185,248 0
Derivative liability 100,900 0
Deferred revenue 31,975 31,975
Total current liabilities 976,604 330,068
Commitments and contingencies (Notes 11 and 15)      
Stockholders' equity (deficit):
Preferred stock, $0.001 par value per share; 10,000,000 shares authorized; none issued or outstanding 0 0
Common stock, $0.001 par value per share; 140,000,000 shares authorized at December 31, 2011 and 2010 37,383,725 and 37,273,725 shares issued and outstanding at December 31, 2011 and 2010, respectively 37,384 37,274
Additional paid-in capital 5,378,005 4,782,267
Accumulated deficit (5,777,585) (2,160,612)
Total stockholders' equity (deficit) (362,196) 2,658,929
Liabilities and Stockholders' Equity $ 614,408 $ 2,988,997
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CONSOLIDATED BALANCE SHEETS [PARENTHETICAL] (USD $)
Dec. 31, 2011
Dec. 31, 2010
Allowance for doubtful accounts (in dollars) $ 0 $ 37,651
Preferred stock, par value (in dollars per share) $ 0.001 $ 0.001
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common stock, par value (in dollars per share) $ 0.001 $ 0.001
Common stock, shares authorized 140,000,000 140,000,000
Common stock, shares issued 37,383,725 37,273,725
Common stock, shares outstanding 37,383,725 37,273,725
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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Revenue
rVue fees $ 203,276 $ 3,275
Network 440,207 507,130
License 0 114,077
Sales Revenue 643,483 624,482
Costs and expenses
Cost of revenue 303,263 153,518
Selling, general and administrative expenses 3,339,359 2,389,017
Depreciation and amortization 620,339 127,097
Interest income (3,653) (10,617)
Interest expense 1,848 65,814
Change in fair value of derivative (700) 0
Operating Expenses 4,260,456 2,724,829
Loss before provision for income taxes (3,616,973) (2,100,347)
Provision for income taxes 0 0
Net loss $ (3,616,973) $ (2,100,347)
Net loss per common share - basic and diluted (in dollars per share) $ (0.1) $ (0.1)
Shares used in computing net loss per share:
Basic and diluted (in shares) 37,298,970 20,732,647
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (USD $)
Preferred Stock [Member]
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Total
Balance at Dec. 31, 2009 $ 0 $ 10,000 $ 242,464 $ (60,265) $ 192,199
Balance (in shares) at Dec. 31, 2009 0 10,000,000
Merger consideration and net liabilities assumed - rVue Holdings, Inc. 0 8,750 (80,949) 0 (72,199)
Merger consideration and net liabilities assumed - rVue Holdings, Inc. (in shares) 0 8,750,000
Common stock sold in Private Placement on May 13, 2010 0 4,000 796,000 0 800,000
Common stock sold in Private Placement on May 13, 2010 (in shares) 0 4,000,000
Bridge loans converted to common stock on May 13, 2010 0 1,025 203,975 0 205,000
Bridge loans converted to common stock on May 13, 2010 (in shares) 0 1,025,000
Bridge loan bonus shares and interest, May 13, 2010 0 324 64,422 0 64,746
Bridge loan bonus shares and interest, May 13, 2010 (in shares) 0 323,730
Common stock issued for investor relations services 0 800 159,200 0 160,000
Common stock issued for investor relations services (in shares) 0 800,000
Common stock sold on August 27, 2010 0 250 49,750 0 50,000
Common stock sold on August 27, 2010 (in shares) 0 250,000
Common stock sold on September 17, 2010 0 3,000 597,000 0 600,000
Common stock sold on September 17, 2010 (in shares) 0 3,000,000
Common stock and warrants sold on December 21, 2010 0 8,625 2,578,875 0 2,587,500
Common stock and warrants sold on December 21, 2010 (in shares) 0 8,624,995
Common stock issued for placement agent fees 0 500 99,500 0 100,000
Common stock issued for placement agent fees (in shares) 0 500,000
Stock issuance expenses 0 0 (160,057) 0 (160,057)
Stock-based compensation expense 0 0 232,087 0 232,087
Net loss 0 0 0 (2,100,347) (2,100,347)
Balance at Dec. 31, 2010 0 37,274 4,782,267 (2,160,612) 2,658,929
Balance (in shares) at Dec. 31, 2010 0 37,273,725
Common stock issued for services 0 110 24,590 0 24,700
Common stock issued for services (in shares) 0 110,000
Warrants issued for services 0 0 241,960 0 241,960
Stock-based compensation expense 0 0 329,188 0 329,188
Net loss 0 0 0 (3,616,973) (3,616,973)
Balance at Dec. 31, 2011 $ 0 $ 37,384 $ 5,378,005 $ (5,777,585) $ (362,196)
Balance (in shares) at Dec. 31, 2011 0 37,383,725
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CONSOLIDATED STATEMENT OF CASH FLOWS (USD $)
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Operating activities
Net loss $ (3,616,973) $ (2,100,347)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 620,339 127,097
Stock-based compensation expense 329,188 232,087
Common stock issued for services 24,700 0
Warrants issued for services 241,960 0
Accrued convertible note interest 1,848 0
Change in fair value of derivative liabilitiy (700) 0
Bridge loan interest settled with shares of common stock 0 64,746
Investor relations expenses settled with shares of common stock 0 160,000
Placement agent fees settled with shares of common stock 0 100,000
Provision for bad debts 0 37,651
Changes in operating assets and liabilities:
Accounts receivable (80,336) (62,518)
Prepaid expenses (142,112) (37,700)
Accounts payable 131,649 57,963
Accrued expenses 228,739 222,600
Deferred revenue 0 (57,306)
Cash used in operating activities (2,261,698) (1,255,727)
Investing activities
Payments for property, equipment and software development (505,640) (226,956)
Repayments by (advances to) Argo Digital Solutions, Inc. 172,012 (172,012)
Changes in deposits (3,878) (13,510)
Cash used in investing activities (337,506) (412,478)
Financing activities
Proceeds from common stock and warrants issued for cash, net of offering costs 0 4,007,993
Proceeds from convertible notes 285,000 0
Repayment of capital lease obligations 0 (5,784)
Cash provided by financing activities 285,000 4,002,209
Increase/(decrease) in cash and cash equivalents (2,314,204) 2,334,004
Cash and cash equivalents, beginning of year 2,334,121 117
Cash and cash equivalents, end of year 19,917 2,334,121
Supplemental disclosures of cash flow information
Interest paid 0 1,068
Income taxes paid 0 0
Supplements disclosure of non-cash investing and financing activities
Bridge loans converted to shares of common stock $ 0 $ 205,000
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Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2011
Accounting Policies [Abstract]
Significant Accounting Policies [Text Block]

Note 1 – Summary of Significant Accounting Policies

 

rVue Holdings, Inc., formerly known as Rivulet International, Inc. (“We”, “rVue” or the “Company”), was incorporated in the State of Nevada on November 12, 2008. We are an advertising technology company that has developed and operates an integrated advertising exchange and digital distribution platform for the Digital Out-of-Home (“DOOH”) industry. Prior to May 13, 2010, we were a shell company in the development stage, had no revenue, and our efforts were devoted to entering the automobile export business.

 

On March 29, 2010, we filed an Amended and Restated Articles of Incorporation to, among other things: (1) change our name from “Rivulet International, Inc.” to “rVue Holdings, Inc.”; and (2) increase the number of our authorized shares of capital stock from 75,000,000 shares to 150,000,000 shares, divided into two classes: 140,000,000 shares of common stock, par value $.001 per share, and 10,000,000 shares of preferred stock, par value $.001 per share.

 

On May 13, 2010, we acquired all of the issued and outstanding capital stock and the business of rVue, Inc., a Delaware corporation ("rVue, Inc.") from Argo Digital Solutions, Inc., a Delaware corporation ("Argo"), as well as any and all assets related to the rVue business held by Argo, pursuant to an asset purchase agreement, dated as of May 13, 2010. We disposed of our pre-transaction assets and liabilities and succeeded to the business of rVue as our sole line of business. rVue, Inc., which began operations on September 15, 2009, became the accounting acquirer of the Company for financial statement purposes.

 

Basis of Presentation and Preparation

 

The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, fair values of financial instruments, useful lives of capitalized software developments costs and property and equipment, fair values of stock-based awards, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

 

Cash and Cash Equivalents

 

We consider all highly liquid investments with original maturities of three months or less to be cash equivalents.

 

Accounts Receivable

 

We record accounts receivable at the invoiced amount and we do not charge interest. We maintain an allowance for doubtful accounts to reserve for potentially uncollectible receivables. We review the accounts receivable by amounts due by customers which are past due to identify specific customers with known disputes or collectability issues. In determining the amount of the reserve, we make judgments about the creditworthiness of significant customers based on ongoing credit evaluations.

 

Property and Equipment

 

We account for property and equipment at cost less accumulated depreciation and amortization. We compute depreciation using the straight-line method over the estimated useful lives of the assets, generally two to five years. Depreciation for equipment commences once it is placed in service and depreciation for leasehold improvements, if any, commences once they are ready for their intended use and are amortized over their estimated useful lives, or the term of the lease, whichever is shorter.  Maintenance and repair costs are expensed as incurred.

 

Software Development Costs

 

We capitalize costs incurred for the production of computer software that generates the functionality of our DSP. Capitalized software development costs typically include direct labor and related overhead for software which we produce, as well as the cost of software purchased from third parties. Costs incurred for a product prior to the determination that the product is technologically feasible (i.e., research and development costs), as well as maintenance costs for established products, are expensed as incurred. Once technological feasibility has been established, development costs are capitalized until the software has completed testing and is released for use by the public. We also capitalize eligible costs to acquire or develop internal-use software (such as billing and accounting) that are incurred subsequent to the preliminary project stage.

 

Derivative Instruments

 

In November 2011 we entered into a Promissory Note Purchase Agreement and issued notes which are convertible into shares of our common stock. We determined under Accounting Standards Codification Topic 815, Derivatives and Hedging, (“ASC 815”) that the conversion feature is an embedded derivative. Embedded derivatives that are not clearly and closely related to the host contract (the notes) are bifurcated and recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. We determined the fair value of the embedded derivative based on available market data using a binomial lattice valuation model, giving consideration to all of the rights and obligations of the instrument.

 

Revenue Recognition

 

Our revenues are derived from advertising campaigns placed through rVue, the maintenance of certain private networks, the production and distribution of network programming, and the licensing of proprietary software. Revenue is recognized as follows:

 

· Advertising revenue and transaction fee revenue is recognized in the period in which the advertising impressions occur, and when the following criteria have been met: (i) persuasive evidence of an arrangement exists, (ii) the fees are fixed or determinable, (iii) no significant Company obligations remain, and (iv) collection of the related receivable is reasonably assured.

 

· Revenue from the maintenance of private networks, and the production and distribution of network programming content, either under contract or on a piece by piece or monthly basis, is recognized ratably over the term of the related service period if the fees are fixed and determinable, delivery has occurred and collection is probable.

 

· Software license revenue is recognized when: (i) there is pervasive evidence of an arrangement, (ii) the fees are fixed and determinable, (iii) the software product has been delivered, and (iv) there are no uncertainties surrounding product acceptance and collection is considered probable. Initial site fees are recognized over the estimated period the sites will be in use.

 

We record deferred revenue when we receive payment in advance of the performance of services.

 

Stock Based Compensation

 

We have elected to use the Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair value of stock options on the grant dates. We recognize stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period. We will recognize a benefit from stock-based compensation in equity if an incremental tax benefit is realized by following the ordering provisions of the tax law. Further information regarding stock-based compensation can be found in Note 12, “Stockholders’ Equity and Stock-Based Compensation”.

 

Income Taxes

 

We recognize income taxes under the liability method. We recognize deferred income taxes for differences between the financial reporting and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which differences are expected to reverse. We recognize the effect on deferred taxes of a change in tax rates in income in the period that includes the enactment date. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured to determine the actual amount of benefit to recognize in our financial statements. See Note 13, “Income Taxes” for additional information.

 

Fair Value Measurements

 

The carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their generally short maturities. The carrying amounts of convertible notes approximates their fair value based on the recentness of the transaction. The embedded derivative liability is reported at fair value calculated using a binomial lattice model.

  

Advertising and Marketing Expenses

 

We expense advertising and marketing costs in the period in which they are incurred. For the years ended December 31, 2011 and 2010 advertising and marketing expenses totaled $161,538 and $12,088, respectively.

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Going Concern
12 Months Ended
Dec. 31, 2011
Going Concern [Abstract]
Going Concern [Text Block]

Note 2 – Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have sustained losses and experienced negative cash flows from operations since inception, and have an accumulated deficit of $5,777,585 at December 31, 2011. These factors raise substantial doubt about our ability to continue to operate in the normal course of business. We have funded our activities to date almost exclusively from equity and debt financings.

 

We will continue to require substantial funds to continue development of our core business. Management’s plans in order to meet our operating cash flow requirements include (i) financing activities such as private placements of common stock, and issuances of debt and convertible debt instruments, (ii) staff reductions, (iii) a hiring and expansion freeze, and (iv) the establishment of strategic relationships which we expect will lead to the generation of additional revenue opportunities. Subsequent to December 31, 2011, we completed a private placement of convertible debt. See Note 16 “Subsequent Events – Convertible Notes” for further information.

 

While we believe that we will be successful in obtaining the necessary financing to fund our operations, there are no assurances that such additional funding will be achieved or that we will succeed in our future operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

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Loss Per Common Share
12 Months Ended
Dec. 31, 2011
Earnings Per Share [Abstract]
Earnings Per Share [Text Block]

Note 3 - Loss Per Common Share

 

Basic and diluted loss per common share is computed by dividing the loss by the weighted average number of common shares outstanding for the period. Since we incurred losses attributable to common stockholders during the years ended December 31, 2011 and 2010, diluted loss per common share has not been computed by giving effect to all potentially dilutive common shares that were outstanding during the years ended December 31, 2011 and 2010. Dilutive common shares consist of incremental shares issuable upon the exercise of stock options and warrants to the extent that the average fair value of our common stock for each period is greater than the exercise price of the derivative securities.

 

The following table sets forth the computation of basic and diluted loss per common share:

    Year Ended December 31,  
    2011     2010  
Numerator:                
Net loss   $ (3,616,973 )   $ (2,100,347 )
Denominator:                
Weighted-average shares outstanding     37,298,970       20,732,647  
Effect of dilutive securities (1)     -       -  
Weighted-average diluted shares     37,298,970       20,732,647  
Basic and diluted loss per share   $ (0.10 )   $ (0.10 )

______

(1)     The following stock options and warrants outstanding as of December 31, 2011 and 2010 were not included in the computation of dilutive loss per share because the net effect would have been anti-dilutive:

    2011     2010  
Stock options     1,192,613       799,417  
Warrants     109,643       -  
Convertible notes     1,140,000       -  
      2,442,256       799,417  
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Asset Purchase Transaction and Reverse Recapitalization
12 Months Ended
Dec. 31, 2011
Asset Purchase Transaction And Reverse Recapitalization [Abstract]
Asset Purchase Transaction and Reverse Recapitalization [Text Block]

Note 4 – Asset Purchase Transaction and Reverse Recapitalization

 

On May 13, 2010, we acquired all of the issued and outstanding capital stock and the business of rVue, Inc. from Argo, as well as any and all assets related to the rVue, Inc. business held by Argo, pursuant to an asset purchase agreement, dated as of May 13, 2010 (the "Asset Purchase Agreement"), by and between Argo, rVue, Inc. and the Company (the “Transaction”), in exchange for 12,500,000 shares of our common stock, or approximately 67% of our then outstanding shares of common stock upon the close of the Transaction. The Transaction was completed on May 13, 2010, and rVue, Inc. became a wholly-owned subsidiary of the Company. The Transaction was treated as a reverse recapitalization of rVue, Inc. for accounting purposes and rVue, Inc. is the accounting acquiror of the Company for financial statement purposes. We succeeded to the business of rVue, Inc. and disposed of our pre-merger assets.

 

Private Placement

 

On May 13, 2010, we accepted subscriptions for a total of 32 units in a private placement, consisting of an aggregate 4,000,000 shares of our common stock, for a per unit purchase price of $25,000 (the “Private Placement”). We received gross proceeds of $800,000. In addition, on May 13, 2010, holders of $205,000 of bridge notes converted their loans to 1,348,730 shares of our common stock.  On August 27, 2010, we accepted subscriptions for a total of 2 units in the Private Placement, consisting of an aggregate 250,000 shares of our common stock, for a per unit purchase price of $25,000. We received gross proceeds of $50,000. On September 10, 2010, we accepted subscriptions for a total of 24 units in the Private Placement, consisting of an aggregate 3,000,000 shares of our common stock, for a per unit purchase price of $25,000. We received gross proceeds of $600,000. We terminated the Private Placement on September 17, 2010. We engaged one party to serve as placement agent in connection with the Private Placement. The placement agent received a cash fee of 8 percent of the gross proceeds of the units sold by them in the Private Placement.

 

Convertible Bridge Loan

 

In March 2010 and April 2010, in contemplation of the Transaction, rVue, Inc. entered into a series of note purchase agreements to receive loans up to $205,000 (the “Bridge Loans”). The Bridge Loans were evidenced by promissory notes that bore interest at the rate of 10% per annum, (“Bridge Notes”), and were secured by substantially all of rVue, Inc.’s assets. The Bridge Notes were issued to bridge rVue, Inc.’s funding requirements through the conclusion of the Transaction. All of the Bridge Notes were convertible, at the holder’s option, at the conclusion of the Transaction or completion of a similar financing transaction. The Bridge Notes were due and payable on the earlier of the completion of the Transaction or September 2, 2010. Principal and accrued but unpaid interest was convertible to securities of the same type issued in the Private Placement on the same terms and conditions of other investors. In addition, upon closing of the Private Placement related to the reverse merger, we were required to issue to each lender, without further consideration, shares of our common stock equal to 30% of the note principal plus accrued but unpaid interest (the “Bonus Shares”), whether or not the lender converted its principal and interest. For accounting purposes these Bonus Shares are considered additional interest expense. All of the Bridge Notes were converted and the Bonus Shares were issued into an aggregate 1,348,730 shares of our common stock as part of the merger on May 13, 2010.

 

Split-Off Transaction

 

Immediately following the closing of the Transaction and the Private Placement, under an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations, we transferred all of our pre-Transaction assets and liabilities to our then wholly-owned subsidiary, Rivulet International Holdings, Inc. (“SplitCo”), a Delaware corporation that was incorporated on May 4, 2010. Thereafter, pursuant to a Stock Purchase Agreement, we transferred all of the outstanding capital stock of SplitCo to one our stockholders in exchange for the cancellation of 36,764,706 shares of our common stock.

 

Common Stock Issued for Services

 

On May 13, 2010, we issued 800,000 shares of our common stock for Investor Relations services that were to be rendered in the future. We valued the shares at the contemporaneous Private Placement price of $.20 per share for a total of $160,000 which we recognized ratably from July 1, 2010 through December 31, 2010, the period during which the services were provided.

 

Approval of Equity Incentive Plan

 

On October 1, 2009, rVue, Inc. adopted the rVue, Inc. 2009 Stock Incentive Plan (“2009 Plan”) pursuant to which rVue, Inc.’s. Board of Directors could grant awards totaling up to 2,000,000 common shares to officers, employees and non-employees. As of May 13, 2010, no awards of any type were granted under the 2009 Plan and it was terminated on May 13, 2010 in connection with the Transaction.

 

On May 12, 2010, shareholders representing a majority of our voting shares approved the 2010 rVue Holdings Equity Incentive Plan (the “Plan”) and reserved 3,750,000 shares of our common stock for issuance pursuant to awards under the Plan. At our annual meeting on August 30, 2011, shareholders representing a majority of our voting shares approved increasing the number of shares available for issuance pursuant to the Plan to 8,000,000 shares of our common stock. The Plan is intended as an incentive to retain in the employ of and as directors, our officers, employees, consultants and advisors, and to attract new officers, employees, directors, consultants and advisors whose services are considered valuable, to encourage the sense of proprietorship and to stimulate the active interest of such persons in the development and financial success of the Company and its subsidiaries. See Note 12, “Stockholders’ Equity and Stock Based Compensation” for additional information.

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Financial Instruments
12 Months Ended
Dec. 31, 2011
Investments, All Other Investments [Abstract]
Financial Instruments Disclosure [Text Block]

Note 5 - Financial Instruments

 

Cash and Cash Equivalents

 

The following table summarizes the fair value of our cash and cash equivalents at December 31, 2011 and 2010:

 

    2011     2010  
Cash   $ 16,097     $ 17,210  
Cash equivalents - money market funds     3,820       2,316,911  
Total cash and cash equivalents   $ 19,917     $ 2,334,121  

 

Accounts Receivable

 

We sell our services directly to our customers. We generally do not require collateral from our customers; however, we will require collateral in certain instances to limit credit risk. Accounts receivable from two of our customers accounted for 72.8% and 19.0% of accounts receivable as of December 31, 2011, and 56.4% and 35.0% of accounts receivable as of December 31, 2010. We had no allowance for doubtful accounts at December 31, 2011. At December 31, 2010, we had recorded an allowance for doubtful accounts of $37,651 to provide for two receivables which we considered uncollectible and which were written off in 2011. Bad Debt expense was $0 and $37,651 for the years ended December 31, 2011 and 2010, respectively. See Note 15 “Concentrations” for additional information.

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Fair Value Measurements
12 Months Ended
Dec. 31, 2011
Fair Value Disclosures [Abstract]
Fair Value Disclosures [Text Block]

Note 6 – Fair Value Measurements

 

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:

 

Level 1 - Quoted prices for identical instruments in active markets.

 

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable directly or indirectly.

 

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

 

We are responsible for the valuation process and as part of this process we used data from an outside source to establish fair value. We performed due diligence to understand the inputs used or how the data was calculated or derived, and we corroborated the reasonableness of external inputs in the valuation process.

 

Assets and liabilities measured at fair value on a recurring basis at December 31, 2011 and 2010 were as follows:

    Quoted Prices in Active Markets for Identical Instruments
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Total  
December 31, 2011                        
Assets:                        
Cash equivalents - money market funds   $ 3,820     $ -     $ -     $ 3,820  
Liabilities:                                
Derivative liability   $ -     $ -     $ 100,900     $ 100,900  
December 31, 2010                                
Assets:                                
Cash equivalents - money market funds   $ 2,316,911     $ -     $ -     $ 2,316,911  

 

The fair value of the money market funds, classified as Level 1, utilized quoted prices in active markets.

 

The fair value of derivative liabilities, classified as Level 3, utilized a simulation analysis using a binomial lattice model and other unobservable inputs.

 

Rollforward of Level 3 Net Liability

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 assets for the year ended December 31, 2011:

 

Balance, January 1, 2011   $ -  
Purchases, issuances, sales and settlements     101,600  
Realized and unrealized (gains) losses included in earnings     (700 )
Transfers into or out of level 3     -  
Balance, December 31, 2011   $ 100,900  
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Property and Equipment
12 Months Ended
Dec. 31, 2011
Property, Plant and Equipment [Abstract]
Property, Plant and Equipment Disclosure [Text Block]

Note 7 – Property and Equipment

 

    Estimated Useful Lives (Years)   2011     2010  
                     
Computers and software    2-5   $ 89,757     $ 22,959  
Equipment   3     22,574       21,575  
          112,331       44,534  
Less accumulated depreciation and amortization         (65,502 )     (18,562 )
Property and equipment, net       $ 46,829     $ 25,972  

 

Depreciation expense was $46,940 and $14,533 for the years ended December 31, 2011 and 2010, respectively.

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Software Development Costs
12 Months Ended
Dec. 31, 2011
Research and Development [Abstract]
Research, Development, and Computer Software Disclosure [Text Block]

Note 8 – Software Development Costs

 

    Estimated Useful Lives (Months)   2011     2010  
Software development costs   18   $ 930,461     $ 492,618  
Less accumulated amortization         (685,963 )     (112,564 )
Software development costs, net       $ 244,498     $ 380,054  

 

Amortization expense was $573,399 and $112,564 for the years ended December 31, 2011 and 2010, respectively.

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Accrued Expenses
12 Months Ended
Dec. 31, 2011
Payables and Accruals [Abstract]
Accounts Payable and Accrued Liabilities Disclosure [Text Block]

Note 9 – Accrued Expenses

 

    2011     2010  
Investor relations fees   $ 150,000     $ 108,752  
Personnel costs     131,703       38,252  
Directors fees     57,000       -  
Professional fees     44,494       45,500  
Network costs     29,323       -  
Deferred rent     26,642       16,016  
Other     17,177       9,080  
Consulting fees     -       10,000  
    $ 456,339     $ 227,600  
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Convertible Notes
12 Months Ended
Dec. 31, 2011
Convertible Notes Payable [Abstract]
Convertible Notes [Text Block]

Note 10 – Convertible Notes

 

On November 30, 2011 and on December 21, 2011 we entered into certain Promissory Note Purchase Agreements (“PNPA’s”) in the aggregate principal amount of $285,000 with certain investors, including our Chief Executive Officer and our Chief Financial Officer (the “PNPA Investors”). We issued $285,000 of Secured Convertible Secured Promissory Notes (the “Notes”). The Notes are secured by all of our assets and bear interest at the rate of 6% per annum. Principal and accrued interest is due at maturity on November 30, 2012 (the “Maturity Date”). In the that event we enter into a strategic investment prior to the Maturity Date, the holder may, at their option, convert the unpaid principal and interest into shares of our common stock at 75% of the price paid by the strategic investor. At maturity, at the option of the holder, unpaid principal and interest may be converted into shares of our common stock at a conversion price of $.25.

 

We determined that the conversion feature in the Notes is an embedded derivative as defined in ASC 815. The key factors in this analysis included: (i) determining that the conversion feature met the definition of a derivative, and (ii) that a scope exception was not applicable to the Company, as the conversion feature was not considered indexed to the Company’s own stock, due to the various potential adjustments to the conversion price.

 

Derivative financial instruments are initially measured at their fair value and are then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. At November 30, 2011 we valued the derivative instrument at $101,600 and at December 31, 2011 we valued the derivative instrument at $100,900, recognizing a $700 change in fair value.

 

The initial fair value of the derivative was recorded as a reduction of the Notes. This original issue discount will be amortized as interest expense over the term of the Notes. At December 31, 2011, the Notes are carried at $185,248, which is net of unamortized original issue discount of $101,900.

 

On January 27, 2012, we entered into certain Secured Promissory Note Purchase Agreements (“New Agreements”). The PNPA Investors agreed to convert their Notes into new notes issued under the New Agreements and accordingly the debt was deemed replaced with new debt. See Note 16 “Subsequent Events” for additional information.

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Commitments and Contingencies
12 Months Ended
Dec. 31, 2011
Commitments and Contingencies Disclosure [Abstract]
Commitments and Contingencies Disclosure [Text Block]

Note 11 - Commitments and Contingencies

 

Lease Commitments

 

From January through July, 2010, we subleased our office space from Argo under a month to month arrangement. Effective July 1, 2011, we entered into a non-cancelable operating lease expiring in June 2013 for our office facilities in Ft. Lauderdale. The lease provides for one 3-year option to renew. In October 2011, we also entered into a one-year non-cancelable executive office lease in New York.

 

Future minimum lease payments under these non-cancellable leases at December 31, 2011 are as follows:

 

Year ending December 31,        
2012   $ 103,760  
2013     46,727  
Total future minimum payments   $ 150,487  

 

Rent expense was $79,974 and $89,948 for the years ended December 31, 2011 and 2010, respectively.

 

Contracts with Customers

 

In the normal course of business we enter into contracts with customers, which outline the terms of the relationship.  The terms include, among other things, the method of computing our revenue, the quantity, type and specifications of services, software and products to be provided and penalties we would incur in the case of not performing.  The period of the contracts is defined either by project or time.

 

Employment Agreements

 

From time to time, we enter into employment agreements with certain of our employees. These agreements typically include bonuses, some of which are performance-based in nature. In May 2010, we entered into an employment agreement with an employee under which we were obligated to pay a bonus of up to $240,000 based on the “net profits” of the business with three of our customers. At December 31, 2010, we had paid $227,000, and the balance, $4,885, was paid in January 2011. No additional amounts are due.

 

Retirement Plan

 

We have a 401(k) plan that covers all eligible employees. We are not required to contribute to the plan, and we did not make any employer contributions during the years ended December 31, 2011 or 2010.

 

Legal Matters

 

On or about March 8, 2011, Viewpoint Securities, Inc. commenced an action in the Circuit Court of the 17th Judicial District in Broward County, Florida, alleging that we owe them a placement agent fee of $210,000 and warrants to purchase 175,167 shares of our common stock for purported services rendered in connection with our December 2010 private placement. On July 29, 2011, we answered their Second Amended Complaint and asserted various defenses to the claims asserted therein. Additionally, we filed a Counterclaim for rescission of the Agreement. On January 9, 2012, Viewpoint filed an amended answer to our counterclaim. We believe the case is without merit and are vigorously defending ourselves in connection therewith. In the opinion of management, we do not believe that we have a probable liability related to this legal proceeding that would materially adversely affect our financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. If we fail to prevail in this legal matter, the operating results of a particular reporting period could be materially adversely affected.

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Stockholders' Equity and Stock Based Compensation
12 Months Ended
Dec. 31, 2011
Equity [Abstract]
Shareholders' Equity and Share-based Payments [Text Block]

Note 12 - Stockholders’ Equity and Stock Based Compensation

 

Preferred Stock

 

We have ten million shares of authorized preferred stock, $0.001 par value, none of which is issued or outstanding. Under the terms of our Restated Articles of Incorporation, our board of directors is authorized to determine or alter the rights, preferences, privileges and restrictions of our authorized but unissued shares of preferred stock.

 

Common Stock

 

We have one hundred forty million shares of authorized common stock, $0.001 par value, of which 37,383,725 and 37,273,725 shares were issued and outstanding at December 31, 2011 and 2010, respectively. All shares have equal voting rights, are non-assessable and have one vote per share. Voting rights are not cumulative and, therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all of our directors.

 

Post Transaction and Reverse Capitalization Issuances

 

On August 16, 2010, we entered into a one-year Investor Relations Consulting Agreement and agreed to issue 2 million shares of our common stock for investor relations services to be rendered. On October 15, 2010, we and the consultant agreed to reduce the number of shares to be issued to 1,450,000.  On April 21, 2011 we and the consultant agreed to further reduce the number of shares to be issued to 750,000. We valued the services and the shares to be issued at the contemporaneous Private Placement price of $.20 per share for a total of $150,000 to be recognized over the service period of twelve months. At December 31, 2011 the shares had not been issued as we are disputing the services rendered by the consultant. On or about February 22, 2012, the consultant filed suit against us for breach of contract. See Note 16 “Subsequent Events - Legal Matters” for further information.


On December 21, 2010, we accepted subscriptions for a total of 103.5 units in a confidential private offering for accredited investors and non-US persons only.
Each unit, priced at $25,000, comprised (i) 83,333 shares of the Company’s common stock, and (ii) warrants to purchase 83,333 shares of common stock at $1.00 per share. We received gross proceeds of $2,587,500 and in the aggregate issued 8,624,995 shares of common stock and warrants to purchase 8,624,995 shares of common stock at an exercise price of $1.00. See “Common Stock Warrants” below in this Note 12 for additional information. We terminated the offering on December 21, 2010. We engaged two parties to serve as placement agents in connection with this offering. One placement agent received a cash fee of 10 percent of the gross proceeds of the units sold by them in this offering. The other placement agent has claimed that it is owed fees for the total gross proceeds we received, which we have disputed, and this matter is now in litigation. See Note 11, “Commitments and Contingencies - Legal Matters” for additional information.

 

Common Stock Warrants

 

We have issued warrants, all of which are fully vested and available for exercise, as follows:

 

Class of
Warrant
Issued in connection with or for   Number     Exercise Price       Date of Issue     Date of
Expiration
Series A Private Placement   8,624,995   $ 1.00       December 2010     December 2022
Series B Investor Relations Services   50,000   $ 0.37       May 2011     May 2016
Series B Investment Banking Services   1,000,000   $ 0.35       June 2011     June 2016

 

The valuation of the warrants utilized the following assumptions in the BSM option-pricing model:

 

Class of
Warrant
Fair Value Dividend
Yield
Volatility Contractual
Lives (Yrs.)
Risk-Free
Rate
Date of the
Assumptions
Series A   $ 1,064,497     0.0%   73.0%   12.0   3.2%   December 21, 2010
Series B   $ 13,457     0.0%   95.1%   5.0   2.2%   May 21, 2011
Series B   $ 228,503     0.0%   97.0%   5.0   1.8%   June 30, 2011

 

The weighted average fair value of warrants issued during the years ended December 31, 2011 and 2010 were $0.23 and $0.21, respectively.

 

Our computation of expected volatility is based on the historical volatility of comparable companies’ average historical volatility. The interest rate is based on the U.S. Treasury Yield curve in effect at the time of grant. We do not expect to pay dividends.

 

Stock Incentive Plans

 

rVue 2009 Stock Incentive Plan

 

On October 1, 2009, rVue, Inc. adopted the rVue, Inc. 2009 Stock Incentive Plan (“2009 Plan”) pursuant to which rVue, Inc.’s. board of directors could grant awards totaling up to 2,000,000 common shares to officers, employees and non-employees. As of May 13, 2010, no awards of any type were granted under the 2009 Plan and it was terminated on May 13, 2010 in connection with the Transaction.

 

2010 rVue Holdings Equity Incentive Plan

 

On May 12, 2010, shareholders representing a majority of our voting shares approved the 2010 rVue Holdings Equity Incentive Plan (the “Plan”) and reserved 3,750,000 shares of our common stock for issuance pursuant to awards under the Plan. At our annual meeting on August 30, 2011, shareholders representing a majority of our voting shares approved increasing the number of shares available for issuance pursuant to the Plan to 8,000,000 shares of our common stock. The Plan is intended as an incentive, to retain in the employ of and as directors, our officers, employees, consultants and advisors, and to attract new officers, employees, directors, consultants and advisors whose services are considered valuable, to encourage the sense of proprietorship and to stimulate the active interest of such persons in the development and financial success of the Company and its subsidiaries.

 

The following table summarizes options granted in each of the years ended December 31, 2011 and 2010:

 

Grant Date   Number     Exercise Price   Fair Value     Period over which compensation expense is recognized
May 13, 2010     2,512,500 (1)   $.20 - $.22   $ 311,130     6 - 24 months
September 17, 2010     865,000     $.20 - $.22   $ 106,914     6 - 12 months
December 21, 2010     600,000     $0.30   $ 112,357     6 months
June 17, 2011     100,000     $0.30   $ 23,012     6 - 18 months
August 1, 2011     125,000     $0.34   $ 32,485     6 months

____________

(1)     480,000 were subsequently forfeited.

 

The following table presents the weighted-average assumptions used to estimate the fair value of stock options granted in the periods presented:

 

    Year Ended December 31,  
    2011     2010  
Expected life (years)     5.7       5.6  
Expected volatility     96.7 %     81.4 %
Risk-free interest rate     1.7 %     1.9 %
Dividend yield     0.0 %     0.0 %
Weighted-average estimated fair value of options granted during the year   $ 0.25     $ 0.15  

 

Our computation of expected life is determined based on the simplified method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to the limited period of time its equity shares have been publicly traded. Our computation of expected volatility is based on the historical volatility of comparable companies’ average historical volatility. The interest rate is based on the U.S. Treasury Yield curve in effect at the time of grant. We do not expect to pay dividends. While we believe these estimates are reasonable, the estimated compensation expense would increase if the expected life was increased or a higher expected volatility was used.

 

Stock-based compensation expense included in our Consolidated Statements of Operations is as follows:

 

    Year Ended December 31,  
    2011     2010  
Cost of revenue   $ 2,475     $ 2,002  
Selling, general and administrative expenses     326,713       230,085  
    $ 329,188     $ 232,087  

 

We expect to record stock-based compensation expense of $24,880 and $217 in the years ending December 31, 2012 and 2013, respectively.

 

Stock Option Activity

 

The following table summarizes the activities for our options for the year ended December 31, 2011:

 

    Number of Options     Weighted Average Exercise Price Per Share     Weighted Average Remaining Contractual Term     Aggregate Intrinsic Value  
Outstanding at December 31, 2010     3,502,500     $ 0.22                  
Granted     225,000     $ 0.32                  
Exercised                            
Forfeited     (5,000 )   $ 0.20                  
Expired                            
Outstanding on December 31, 2011     3,722,500     $ 0.23       8.62     $ 106,625  
Exercisable at December 31, 2011     3,430,319     $ 0.23       8.57     $ 85,516  
Expected to vest after December 31, 2011     292,181     $ 0.26       9.30     $ -  

 

The aggregate intrinsic is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $.25 of our common stock on December 30, 2011. The aggregate intrinsic value excludes the effect of stock options that have a zero or negative intrinsic value.

 

The following table summarizes additional information regarding outstanding and exercisable stock options at December 31, 2011:

 

  Outstanding Stock Options      Exercisable Stock Options  
Exercise
Prices
  Shares     Weighted-
Average
Remaining
Contractual
Life (years)
  Weighted-
Average
Exercise
Price Per
Share
   
Shares
    Weighted-
Average
Exercise
Price Per
Share
 
$0.20     1,597,500     8.55   $ 0.20       1,557,195     $ 0.20  
$0.22     1,300,000     8.55   $ 0.22       1,300,000     $ 0.22  
$0.30     700,000     9.55   $ 0.30       633,334     $ 0.30  
$0.34     125,000     8.84   $ 0.34       125,000     $ 0.34  
      3,722,500     8.62   $ 0.23       3,615,529     $ 0.23  
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Income Taxes
12 Months Ended
Dec. 31, 2011
Income Tax Disclosure [Abstract]
Income Tax Disclosure [Text Block]

Note 13 - Income Taxes

 

The provision for income taxes for the years ended December 31, 2011 and 2010 consisted of the following:

 

      2011       2010  
Current tax expense                
   Federal   $     $  
   State            
Total current taxes            
Deferred taxes:                
  Federal            
  State            
Total deferred taxes              
Provision for income taxes   $     $  

 

We recognize deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax loss carryforwards.  We have established a valuation allowance to reflect the likelihood of realization of deferred tax assets. There is no income tax benefit for the losses for the years ended December 31, 2011 and 2010, since management has determined that the realization of the net deferred tax asset is not more likely than not to be realized and has created a valuation allowance for the entire amount of such benefit.

 

At December 31, 2011 and 2010, the significant components of our deferred tax assets and liabilities were as follows:

 

    2011     2010  
Net operating loss   $ 1,665,792     $ 587,722  
Stock option expense     210,455       86,581  
Stock compensation     178,647       163,126  
Other     104,612       -  
Bad Debt Reserve     -       14,168  
Deferred revenue     12,032       12,032  
Capitalized software     (4,496 )     (55,506 )
Net deferred tax asset     2,167,042       808,123  
Less:  Valuation Allowance     (2,167,042 )     (808,123 )
Net deferred taxes   $ -     $ -  

 

A reconciliation of the provision for income taxes, with the amount computed by applying the federal statutory income tax rate to income before provision for income taxes for the years ended December 31, 2011 and 2010, is as follows: 

 

    2011     2010  
Federal tax benefit, at statutory rate of 34%   $ (1,229,771 )   $ (714,118 )
State income taxes     (131,296 )     (76,242 )
Meals and entertainment     2,148       1,622  
Change in valuation allowance     1,358,919       788,738  
Provision for income taxes   $ -     $ -  

 

At December 31, 2011, we had a federal net operating loss carryforwards of approximately $4,400,000 that will expire beginning in 2030. Current or future ownership changes may limit the future realization of these net operating losses.

 

Our policy is to record interest and penalties associated with unrecognized tax benefits as additional income taxes in the Consolidated Statements of Operations.  As of January 1, 2011, we had no unrecognized tax benefits, or any tax related interest of penalties.  There were no changes in our unrecognized tax benefits during the year ended December 31, 2011.  We did not recognize any interest or penalties during 2011 or 2010 related to unrecognized tax benefits.  Tax years from 2008 through 2010 remain subject to examination by major tax jurisdictions.

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Related Party Transactions
12 Months Ended
Dec. 31, 2011
Related Party Transactions [Abstract]
Related Party Transactions Disclosure [Text Block]

Note 14- Related Party Transactions

 

In September 2009 we and Argo entered into a Transition Services Agreement (the “Agreement”). Argo agreed to provide certain general and administrative services, including labor, technology, facilities and other services to us on an as needed basis in exchange for cash consideration. The Agreement was terminated on May 13, 2010 and, pursuant to the Asset Purchase Agreement, any and all advances and payments made by us to or on behalf of Argo and owing by Argo to us were to be repaid by Argo on or prior to May 13, 2011, with interest at ten (10%) percent per annum. At December 31, 2010, we had advanced a net of $172,012 to Argo, including accrued interest of $9,753. On January 17, 2011, Argo repaid the balance then outstanding in full.

 

We paid consulting fees of $10,000 and $30,000 during the years ended December 31, 2011 and 2010, respectively, to a consultant who was appointed to our board of directors in December 2010, and we reimbursed the director $9,920 and $10,461 in the years ended December 31, 2011 and 2010, respectively, for out-of pocket expenses incurred in connection with our business.

 

In March 2011, we entered into a Consulting/Services Agreement to facilitate the marketing and promotion of direct TV advertised products with an entity that is wholly owned by a stockholder who beneficially owns more than 5% of our common stock. For the year ended December 31, 2011 we did not receive any significant commissions under this agreement.

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Concentrations
12 Months Ended
Dec. 31, 2011
Risks and Uncertainties [Abstract]
Concentration Risk Disclosure [Text Block]

Note 15 - Concentrations

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and accounts receivable.

 

We maintain deposit balances at a financial institution that, from time to time, may exceed federally insured limits.  At December 31, 2011, we did not have any deposits in excess of federally insured limits.

 

Concentrations of Revenues

 

For the year ended December 31, 2011, four customers accounted for 39.8%, 22.7%, 19.3% and 11.9% of total revenues. For the year ended December 31, 2010, four customers accounted for 39.5%, 23.1%, 18.3% and 10.6% of total revenues.

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Subsequent Events
12 Months Ended
Dec. 31, 2011
Subsequent Events [Abstract]
Subsequent Events [Text Block]

Note 16 - Subsequent Events

 

In preparing these consolidated financial statements, we have evaluated events and transactions for potential recognition or disclosure through the date of filing.

  

Convertible Notes

 

On January 27, 2012, we entered into Secured Promissory Note Purchase Agreements (“New Agreements”) with investors (“New Investors”) for the purchase of promissory notes (“New Notes”) with an aggregate principal amount of $935,000. The PNPA Investors agreed to convert their Notes, totaling $288,067, into New Notes. We issued to the New Investors and the PNPA Investors New Notes with an aggregate principal amount of $1,223,067 and warrants to purchase 3,057,666 shares of our common stock at $.20 per share, exercisable for a period of five years (the “Series C Warrants”). The New Notes are secured by all of our assets and bear interest at the rate of 6% per annum. Principal and accrued interest is due at maturity on January 31, 2013 (the “Maturity Date”). If, prior to maturity, we consummate a financing or related financing of equity securities with aggregate gross proceeds of a least $500,000 (collectively, a “Subsequent Offering”) then all of the unpaid principal amount of the New Notes and any accrued but unpaid interest thereon shall automatically be deemed converted into fully paid and non-assessable securities of the Company sold in the Subsequent Offering (the “Subsequent Offering Securities”) on the same terms and conditions as the other investors in the Subsequent Offering; provided, however, that the number of Subsequent Offering Securities to be issued to the holders of the New Notes upon such conversion shall be equal to the quotient, rounded to the nearest whole number, obtained by dividing (x) the unpaid principal amount of the New Note plus any accrued but unpaid interest thereon by the lower of (y) 70% of the price per security issued in the Subsequent Offering or (z) $.20 (the “Conversion Price”). If no Subsequent Offering is closed by the Company by the Maturity Date, then all of the unpaid principal and interest due under the New Notes will be due and payable, and may, at the option of the New Investors, be converted into shares of our common stock at a conversion price of $0.20. In the event that we fail to raise $1.5 million in common equity by July 24, 2012, the Conversion Price shall be reduced from $.20 to $.10 and the exercise price of the Series C Warrants shall be reduced to $.10.

 

We determined that the conversion feature in the New Notes and the Series C warrants are embedded derivatives as defined in ASC 815. Derivative financial instruments are initially measured at their fair value and are then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. At January 27, 2012 we valued the embedded derivative conversion feature at $705,100 and the derivative warrants at $.134 per warrant. We determined the fair value of the embedded derivative conversion feature and the derivative warrants based on available data using a binomial lattice valuation model, giving consideration to all of the rights and obligations of the instruments.

 

Legal Matters

 

On or about February 22, 2012, Brooke Capital Investments LLC commenced an action in the Circuit Court of the 17th Judicial District in Broward County, Florida, alleging that we owe them 750,000 shares of our common stock for services rendered in connection with an amended Investor Relations Consulting Agreement that we entered into with Brooke. We believe the case is without merit and intend to vigorously defend ourselves in connection therewith. In the opinion of management, we do not believe that we have a probable liability related to this legal proceeding that would materially adversely affect our financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. If we fail to prevail in this legal matter, the operating results of a particular reporting period could be adversely affected.

 

Related Party Transactions

 

In connection with the sale of the New Notes, we agreed to reimburse an investor (the “Lead Investor”) $65,000 for costs and expenses incurred by it (including, without limitation, legal and administrative fees) payable in cash or shares of our common stock at our election. On February 8, 2012, we issued 325,000 shares of our common stock to the Lead Investor as payment. One of our directors, who is the sole shareholder of a company that beneficially controlled 12.3% of our outstanding shares of common stock on January 27, 2012, is the grantor of the trust that controls the majority member of the Lead Investor. His sister is the manager of both the Lead Investor and the majority member of the Lead Investor. In addition another one of our directors is a minority member of the Lead Investor.

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