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8. SHAREHOLDERS' EQUITY (DEFICIENCY)
 9 Months Ended
Sep. 30, 2013
Notes to Financial Statements  
NOTE 8. SHAREHOLDERS' EQUITY (DEFICIENCY)

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 such 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 our 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 our common stock.

 

Convertible Series A Preferred Stock

 

The Company has authorized 1,000,000 shares of Convertible Series A Preferred Stock, $0.01 par value. At September 30, 2013 and December 31, 2012, there were 510,000 shares issued and outstanding, respectively. 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 Stock.

 

Common Stock

 

During the nine months ended September 30, 2013, the Company issued 717,443 shares of common stock valued at $317,306 for services rendered and issued an aggregate of 3,052,104 shares of common stock for gross proceeds of $866,099.

 

Stock Options

 

The Company issued 20,000 options valued at $3,000 to a director in January 2013. The options have an exercise price of $0.15 per share. The options expire in January 2023. The options were valued using the Black-Scholes model using the following assumptions: volatility: 343%; dividend yield: 0%; zero coupon rate: 0.25%; and a life of 10 years.  The following table summarizes stock options outstanding as of September 30, 2013:

 

    September 30, 2013  
             
    Number of Options     Weighted Average Exercise Price  
Outstanding, January 1, 2013     60,000     $ 1.42  
Granted     20,000       .15  
Outstanding, September 30, 2013     80,000     $ 1.10  

 

Options outstanding and exercisable by price range as of September 30, 2013 were as follows:

 

Outstanding Options    

Average

Weighted

     Exercisable Options  
Range     Number    

Remaining

Contractual

Life in Years

     Number    

Weighted

Average

Exercise Price

  
                                     
$ 0.05       20,000       7.27       20,000     $ 0.05  
$ 0.15       20,000       9.26       20,000     $ 0.15  
$ 2.10       40,000       6.27       40,000     $ 2.10  

 

Stock Warrants

 

The Company issued 250,000 warrants valued at $37,495 to a consultant in January 2013.  The warrants have an exercise price of $0.15 and expire in January 2018.  The warrants were valued using the Black-Scholes model with the following assumptions: volatility: 343%; dividend yield: 0%; zero coupon rate: 0.25%; and a life of 5 years.

 

During the nine months ended September 30, 2013, the Company issued 7,611,000 warrants in connection with convertible debt units and 1,014,800 warrants to the placement agent (see Note 6).  These warrants have an initial exercise price of $0.30 per share and expire July 31, 2018.

 

In June 2013, the Company issued 100,000 warrants with an exercise price of $.261 per share to a consultant for services.  The warrants were valued at $54,767 using the Black-Scholes model with the following assumptions: volatility, 245%; dividend yield, 0%; zero coupon rate, 0.25%; and a life of 5 years.

 

On September 26, 2013, the Company’s Chief Financial Officer, Christopher Chipman, was granted 300,000 warrants. The warrants have a term of five years and vest 100,000 upon the grant date, 100,000 on September 26, 2014 and 100,000 on September 26, 2015. The exercise price of the warrant is $0.77 per share based on the volume weighted average price of the Company’s common stock for the five days prior to the grant date.  If employment is terminated, the terms of any then outstanding warrant held by the holder shall extend for a period ending on the earlier of the date on which such warrant would otherwise expire or three months after such termination of employment and the warrant shall be exercisable to the extent it was exercisable as of the date of termination of employment. Any unvested warrants shall be deemed null and void. The Company utilized the Black-Scholes method to fair value the 300,000 warrants received by this individual totaling $200,476 with the following assumptions: volatility, 179%; expected dividend yield, 0%; risk free interest rate, 1.43%; and a life of 5 years..  For the nine months ended September 30, 2013, the Company recorded $66,825 in stock based compensation expense on the vested portion of these warrants. The grant date fair value of each warrant was $0.67.

 

The following table summarizes the outstanding common stock warrants as of September 30, 2013:

 

    September 30, 2013  
          Weighted Average  
    Number of Warrants     Exercise Price  
Outstanding, January 1, 2013     10,050,000     $        0.12  
Granted     9,275,800       0.31  
Exercised     -       -  
Outstanding, September 30, 2013     19,325,800     $ 0.21  

 

Warrants outstanding and exercisable by price range as of September 30, 2013 were as follows:

 

Outstanding Warrants           Exercisable Warrants  
Range     Number    

Average

Weighted

Remaining

Contractual

Life in Years

     Number    

Weighted

Average

Exercise Price

  
$ 0.01       1,575,000       3.78       1,575,000     $ 0.01  
$ 0.05       975,000       3.87       975,000     $ 0.05  
$ 0.15       7,750,000       4.05       7,750,000     $ 0.15  
$ 0.261       100,000       4.74       100,000     $ 0.261  
$ 0.30       8,625,800       4.84       8,625,800     $ 0.30  
$ 0.77       300,000       4.99       100,000     $ 0.77  

 

Unvested warrants outstanding as of September 30, 2013 were as follows:

 

Unvested Warrants        

Weighted

Average

Exercise Price

     Number    

Average

Weighted

Remaining

Contractual

Life in Years

  
$ 0.77       200,000       4.99