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6. SHAREHOLDERS' EQUITY
 12 Months Ended
Dec. 31, 2012
Notes to Financial Statements  
NOTE 6. SHAREHOLDERS' EQUITY

NOTE 6. STOCKHOLDERS’ EQUITY

 

The Company’s Board of Directors may, without further action by the Company’s stockholders, from time to time, direct the issuance of any authorized but unissued or unreserved shares of preferred stock in series and at the time of issuance, determine the rights, preferences and limitations of each series. The holders of preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of the common stock. Furthermore, the board of directors could issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of the common stock.

 

Convertible Series A Preferred Stock

 

The Company has authorized 1,000,000 shares of Convertible Series A Preferred Stock, $0.001 par value. At December 31, 2012 and 2011, there were 510,000 shares issued and outstanding. The Convertible Series A Preferred Stock is convertible at the rate of one share of common stock for one share of Convertible Series A Preferred.

 

Convertible Series B Preferred Stock

 

The Company has authorized 4,000 shares of Convertible Series B Preferred Stock, with a 7.5% cumulative dividend and a stated value of $1,000. At December 31, 2012 and 2011 there were no Convertible Series B Preferred outstanding.

Common Stock

 

The Company has authorized 200,000,000 shares of common stock, par value $0.01. At December 31, 2012 and 2011, there were 75,455,585 and 64,629,033 shares issued and outstanding, respectively.

 

In February 2011, the Company issued 572,115 common shares with a fair market value of $22,975 for payment of accrued legal fees in the amount of $14,875; the excess fair market value of the common shares of $8,100 was recorded as legal expenses.

 

In February 2011, the Company issued 14,076,923 shares of common stock with a fair market value of $563,077 to the CEO as consideration for payment of $366,000 accrued compensation; the excess fair market value of $197,077 has been recorded as share-based compensation during the three months ended March 31, 2011. Further, the CEO forgave accrued compensation due him amounting to $700,269. The compensation forgiven by the CEO has been treated as a capital contribution to the Company and therefore has been recorded as additional paid-in capital in February 2011.

 

In February 2011, the Company sold 750,000 shares of common stock for $63,750.

 

In February 2011, 20,000 stock options were exercised at a value of $0.05 per common stock.

 

In April 2011, the Company sold 750,000 common shares valued at $63,750.

 

In September 2011, the Company issued 171,500 shares of common stock to Harold Paul valued at $8,575 as consideration for payment of accrued legal services amounting to $6,000. The company recorded additional share-based compensation expense of $2,575 in connection with this transaction. The Company also issued 5,626 shares valued at $1,650 to a vendor for services rendered.

 

During the year ended December 31, 2012, the Company issued an aggregate of 6,043,269 shares of common stock for gross proceeds of $445,000.

 

During the year ended December 31, 2012, the Company issued 374,750 shares of common stock valued at $17,438 to Harold Paul as payment for legal services rendered and 500,000 shares of common stock valued at $15,000 to another attorney as payment for legal services rendered. During the year ended December 31, 2012, the Company issued 432,586 shares of common stock valued at $25,015 to outside consultants and vendors as payment for professional and other services rendered.

 

During the year ended December 31, 2012, the Company issued 100,000 shares of common stock valued at $3,000 to a former director in connection with payment of accrued liabilities.

 

In October 2012, the Company issued 1,440,000 shares of common stock valued at $216,000 to the Company’s CEO as consideration for payment of loans payable to the CEO in the amount of $144,000. In connection with this transaction, the Company recognized finance charges of $72,000. At December 31, 2012 the balance owed was $3,988

 

In October 2012, the Company issued 350,000 shares of common stock valued at $52,500 to the Company’s CEO as consideration for payment of accrued compensation in the amount of $35,000. In connection with this transaction, the Company recognized compensation expense of $17,500.

 

During the year ended December 31, 2012 the Company issued 1,500,000 shares of common stock upon conversion of $75,000 principal convertible debentures (see Note 5). The Company also issued 65,947 shares of common stock as payment of interest.

 

On October 15, 2012 the Company issued 3,500,000 common stock purchase warrants to the Company’s CEO for services. The warrants have an exercise price of $.15 per share and have a 5 year term. They were valued at $524,957 using the Black Scholes model using the following assumptions: volatility – 352%; divided yield – 0%; discount rate - .26% and a life of 5 years. In connection with the issuance of these warrants, the Company recorded compensation expense of $524,957 in the year ended December 31, 2012.

 

On October 15, 2012 the Company issued 4,000,000 common stock purchase warrants to two consultants for services. The warrants have an exercise price of $.15 per share and have a 5 year term. They were valued at $599,952 using the Black Scholes model using the following assumptions: volatility – 352%; divided yield – 0%; discount rate - .26% and a life of 5 years. In connection with the issuance of these warrants, the Company recorded compensation expense of $599,952 in the year ended December 31, 2012.

 

Stock Options

 

The Company issued a total of 40,000 options valued at $2,000 to two directors in January 2011. The options have an exercise price of $0.05 and a fair market value of $0.05 per option. The options expire on January 2021. The options were valued using the Black-Scholes model using the following assumptions: volatility - 348%; dividend yield - 0%; zero coupon rate 3.50% and a life of 10 years.

 

The Company issued a total of 20,000 options valued at $600 to one director in January 2012. The options have an exercise price of $0.03. The options expire on January 2022. The options were valued using the Black-Scholes model using the following assumptions: volatility: 322%; dividend yield: 0%; zero coupon rate: 0.25%; and a life of 10 years.

 

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models may not necessarily provide a reliable single measure of the fair value of its options.

 

A summary of the status of the Company’s options is presented below.

 

    December 31, 2012  

December 31, 2011

 

    Number of   Weighted Average   Number of   Weighted Average
    Options   Exercise Price   Options   Exercise Price
Outstanding, beginning of year    60,000   $                     1.42               40,000   $                      2.10
Granted    20,000   .03               40,000   .05                    
Exercised   (20,000)   (.03)             (20,000)      (.05)
Outstanding, end of year    60,000   $                     1.42               60,000   $                      1.42
           

 

 

    

 

Options outstanding and exercisable by price range as of December 31, 2012 were as follows:

 

Outstanding Options   Exercisable Options
Range Number

Average

Weighted

Remaining Contractual

Life in Years

 Number

Weighted

Average

Exercise Price

$2.10 40,000 7 40,000 $2.10
$0.05 20,000 8 20,000 $0.05

 

 

In connection with the issuance of 10% Convertible Notes (see Note 5) on November 21, 2011 and February 20, 2012 the Company issued a total of 975,000 warrants to purchase its common stock. In addition, on October 15, 2012 the Company issued 3,500,000 warrants to the Company’s CEO and 4,000,000 warrants to two consultants for services (see Note 6). The following table summarizes the outstanding common stock warrants as of December 31, 2012:

 

    Number of   Weighted Average  
    Warrants   Exercise Price  
Outstanding, January 1, 2012               375,000   $                      0.05  
Granted               600,000   0.05  
Granted            7,500,000   0.15  
Outstanding, December 31, 2012            8,475,000   $                      0.14  
           

Warrants outstanding and exercisable by price range as of December 31, 2012 were as follows:

 

Outstanding Warrants   Exercisable Warrants
Range    Number  

Average

Weighted

Remaining

Contractual

Life in Years

    Number  

Weighted

Average

Exercise Price

$0.05      975,000 5.0     975,000 $0.05
$0.15 7,500,000 4.8 7,500,000 $0.15