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8. STOCKHOLDERS' EQUITY (DEFICIENCY)
 3 Months Ended
Mar. 31, 2015
Notes to Financial Statements  
NOTE 8. STOCKHOLDERS' 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 March 31, 2015 and December 31, 2014, 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.

 

Convertible Series B Preferred Stock

 

The Company has authorized 4,000 shares of Convertible Series B Preferred Stock, $1,000 stated value, 7.5% Cumulative dividend.  At March 31, 2015 and December 31, 2014, there were no shares issued and outstanding, respectively.

 

Common Stock

 

During the three months ended March 31, 2014, the Company issued 19,758 shares of common stock valued at approximately $9,000 for professional services rendered. In addition, the Company issued 6,420 shares of common stock valued at $3,000 to Harold Paul, Director, as payment for legal services rendered. The Company also issued 230,000 shares to the Rolyn Companies, Inc. (“Rolyn”) for labor and services support.

 

During the three months ended March 31, 2014, the Company issued 78,125 shares as consideration for payment of accrued compensation to the CEO amounting to $25,000.

 

During the three months ended March 31, 2015, the Company issued 100,000 shares of common stock valued at approximately $25,000 for professional services rendered (Note 11).

 

During the three Months ended March 31, 2015, the Company issued 20,245 shares of common stock valued at $6,000 to Nick Jennings, CFO, as part of his annual compensation from the Company.

 

During the three months ended March 31, 2015, the Company sold, through its confidential private offering, 1,500,002 equity units.  Each unit consisted of 1 share of common stock and 2.5 warrants.  The warrants have an exercise price of $.29 per share and a term of seven  years. Gross proceeds to the Company amounted to $434,826.  In connection with the sale, the Company incurred a cash finder’s fee in the amount of $43,500 in addition to a finder’s fee to be paid in common stock of 45,000 shares valued at $13,050.

 

During the three months ended March 31, 2015, the Company directly sold, 260,000 equity units.  Each unit consisted of 1 share of common stock and 2.5 warrants.  The warrants have an exercise price of $.29 per share and a term of seven years. Gross proceeds to the Company amounted to $75,387.  In connection with the sale, the Company incurred a cash finder’s fee in the amount of $7,500 in addition to a finder’s fee to be paid in common stock of 7,800 shares valued at $2,262.

 

Stock Options

 

The Company issued 20,000 options valued at $8,723 to a director in January 2014. The options have an exercise price of $0.44 per share. The options expire in January 2024. The options were valued using the Black-Scholes model using the following assumptions: volatility: 233%; dividend yield: 0%; zero coupon rate: 1.72%; and a life of 10 years.

 

The Company issued 40,000 options valued at $10,798 to two directors in January 2015. The options have an exercise price of $0.27 per share. The options expire in January 2025. The options were valued using the Black-Scholes model using the following assumptions: volatility: 237%; dividend yield: 0%; zero coupon rate: 1.61%; and a life of 10 years.

 

The following table summarizes stock options outstanding as of March 31, 2015 and December 31, 2014:

 

    March 31, 2015 (Unaudited)     December 31, 2014  
    Number of Options     Weighted Average Exercise Price     Number of Options     Weighted Average Exercise Price  
Outstanding, beginning of period     60,000     $ 1.42       60,000     $ 1.42  
Granted     40,000       0.27       20,000       0.44  
Exercised     -       -       (20,000 )     0.44  
Outstanding, end of period     100,000     $ 0.96       60,000     $ 1.42  

 

Options outstanding and exercisable by price range as of March 31, 2015 were as follows:

 

Outstanding Options    

Average

Weighted

     Exercisable Options  
Range     Number    

Remaining

Contractual

Life in Years

     Number    

Weighted

Average

Exercise Price

  
                           
$ 2.10       40,000       4.76       40,000     $ 2.10  
$ 0.05       20,000       5.77       20,000     $ 0.05  
$ 0.27       40,000       9.77       40,000     $ 0.27  
          100,000               100,000          

 

Stock Warrants

 

On February 11, 2014, as part of the employment agreements entered into with its three executive officers (CEO, President and COO), the Board of Directors approved the grant of 3,000,000 stock warrants to each of them as executive compensation. The warrants have a term of five years and vest as follows: 1,000,000 warrants will vest upon issuance; 1,000,000 warrants will vest as of February 11, 2015, and 1,000,000 warrants will vest as of February 11, 2016. The exercise price of the warrants is $0.30 per share based on the closing price of the Company’s common stock on the grant date of $0.32.  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 immediately vest on termination. The Company utilized the Black-Scholes method to fair value the 3,000,000 warrants received by these individuals totaling approximately $952,000 for each executive with the following assumptions: volatility, 233%; expected dividend yield, 0%; risk free interest rate, 1.54%; and a life of 5 years. The grant date fair value of each warrant was $0.32.  Effective September 25, 2014, the President and COO resigned from their positions with the Company and accordingly, the remaining unvested warrants immediately vested.  As of December 31, 2014, their warrants expired. 

 

On February 11, 2014, the Company’s Board of Directors approved the granting of 300,000 stock warrants to its CFO Chris Chipman as incentive compensation.  Effective July 18, 2014, Chris Chipman resigned from his position of Chief Financial Officer of the Company and accordingly, his unvested share of warrants were deemed to be null and void.

 

For the three months ended March 31, 2014, the Company recognized equity based compensation of approximately $1,133,000 on the warrants issued to the executives.  In addition, the Company recognized approximately $9,000 for director options (See Note 8-Stock Options).

 

For the three months ended March 31, 2015, the Company recognized equity based compensation of approximately $79,000 on the warrants issued to the CEO in connection with the employment agreement.  In addition, the Company recognized approximately $10,800 for director options (See Note 8-Stock Options), $28,000 to a consultant (Note 11), and $7,400 on the vesting of warrants issued to the CFO on October 1, 2014 (Note 9).

 

During the quarter ended March 31, 2015, the Company issued 4,400,005 warrants in connection with the equity units sold to investors.  See note 8 (common stock) for additional details.

 

The following table summarizes the outstanding common stock warrants as of March 31, 2015 and December 31, 2014:

 

    March 31, 2015 (Unaudited)     December 31, 2014  
    Number of Warrants     Weighted Average Exercise Price     Number of Warrants     Weighted Average Exercise Price  
Outstanding, beginning of period     28,051,408     $ 0.23       19,325,800     $ 0.21  
Granted     4,400,005       0.29       15,325,608       0.30  
Expired     -       -       (300,000 )     0.77  
Expired     -       -       (6,300,000 )     0.30  
Outstanding, end of period     32,451,413     $ 0.24       28,051,408     $ 0.23  

 

Warrants outstanding and exercisable by price range as of March 31, 2015 were as follows:

 

Outstanding Warrants    

 

Average

Weighted

     Exercisable Warrants  
Range     Number    

Remaining

Contractual

Life in Years

     Number    

Weighted

Average

Exercise Price

  
$ 0.01       1,575,000       2.28       1,575,000     $ 0.01  
$ 0.05       975,000       2.37       975,000     $ 0.05  
$ 0.15       7,750,000       2.55       7,750,000     $ 0.15  
$ 0.261       100,000       3.24       100,000     $ 0.26  
$ 0.29       10,125,613       5.55       10,125,613     $ 0.29  
$ 0.30       11,925,800       3.50       10,725,800     $ 0.30  
          32,451,413               31,251,413          

 

Unvested warrants outstanding as of March 31, 2015 were as follows:

 

Unvested Warrants    

Average

Weighted

  

Weighted

Average

Exercise Price

     Number    

Remaining

Contractual

Life in Years

  
$ 0.30       1,200,000       3.98