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7. STOCKHOLDERS' EQUITY
 9 Months Ended
Sep. 30, 2017
Statement of Stockholders' Equity [Abstract]  
NOTE 7. STOCKHOLDERS' EQUITY

NOTE 7. SHAREHOLDERS’ EQUITY

 

Our board of directors may, without further action by our shareholders, 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

 

Our authorized Convertible Series A Preferred Stock, $0.01 par value, consists of 1,000,000 shares. At September 30, 2017 and December 31, 2016, 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

 

Our authorized Convertible Series B Preferred Stock, $1,000 stated value, 7.5% Cumulative dividend, consists of 4,000 shares. At September 30, 2017 and December 31, 2016, there were no shares issued and outstanding, respectively. Each share of Convertible Series B Preferred Stock may be converted (at the holder’s election) into two hundred shares of our common stock.

 

Common Stock

 

During the nine months ended September 30, 2016, the Company issued 761,954 shares of common stock valued at $369,654 for professional services rendered.

 

During the nine months ended September 30, 2017, the Company issued 249,824 shares of common stock valued at $38,100 for professional services rendered, of which the Company issued 200,000 shares that were valued at $32,000 and issued to our board of directors (See Note 10).

 

In August 2017, warrants to purchase 375,000 and 600,000 shares of common stock were exercised, which resulted in gross proceeds to the Company of $18,750 and $30,000, respectively.

 

Stock Options

 

In February 2016, we issued options to purchase an aggregate of 100,000 shares of common stock to four directors, valued at $54,980 in total. The options have an exercise price of $0.55 per share and expire in February 2026. The options were valued using the Black-Scholes model using the following assumptions: volatility: 224%; dividend yield: 0%; zero coupon rate: 1.47%; and a life of 10 years.

 

The following table summarizes stock options outstanding as of September 30, 2017 and December 31, 2016:

 

   

September 30, 2017

(Unaudited)

     December 31, 2016  
     Number of Options      Weighted Average Exercise Price      Number of Options      Weighted Average Exercise Price  
Outstanding, beginning of period     200,000     $ 0.76       100,000     $ 0.96  
Granted     —       —       100,000       0.55  
Exercised     —       —       —       —  
Outstanding, end of period     200,000     $ 0.76       200,000     $ 0.76  

 

Options outstanding and exercisable by price range as of September 30, 2017 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       2.26       40,000     $ 2.10  
  $ 0.05       20,000       3.27       20,000     $ 0.05  
  $ 0.27       40,000       7.26       40,000     $ 0.27  
  $ 0.55       100,000       8.35       100,000     $ 0.55  
            200,000       6.41       200,000     $ 0.76  

 

Stock Warrants

 

For the nine months ended September 30, 2016, the Company recognized total equity based compensation of approximately $333,000 on warrants issued to the CEO in connection with his current and previous employment agreements. For the nine months ended September 30, 2016, the Company recognized $39,000 in stock compensation expense for the warrants issued to the CEO in February 2014 that vested in February 2016. In addition, on March 31, 2016, the Company issued a warrant to purchase up to 250,000 shares of common stock to the CEO with a term of five years that vested upon issuance and has an exercise price of $0.50 per share. The Company utilized the Black-Scholes method to fair value the warrant to purchase up to 250,000 shares of common stock received by the CEO as approximately $129,000 with the following assumptions: volatility, 162%; expected dividend yield, 0%; risk free interest rate, 1.47%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $0.51. On June 30, 2016, the Company issued a warrant to purchase up to 250,000 shares of common stock to the CEO with a term of five years that vested upon issuance and has an exercise price of $0.42 per share. The Company utilized the Black-Scholes method to fair value the warrants to purchase up to 250,000 shares of common stock received by the CEO as approximately $99,000 with the following assumptions: volatility, 157%; expected dividend yield, 0%; risk free interest rate, 1.17%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $0.40. On September 30, 2016, , the Company issued a warrant to purchase up to 250,000 shares of common stock to the CEO with a term of five years that vested upon issuance and has an exercise price of $0.32 per share. The Company utilized the Black-Scholes method to fair value the warrant to purchase up to 250,000 shares of common stock received by the CEO as approximately $66,000 with the following assumptions: volatility, 155%; expected dividend yield, 0%; risk free interest rate, 1.27%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $0.27.

 

For the nine months ended September 30, 2016, the Company recognized total equity based compensation of approximately $73,000 on warrants issued to the CFO in connection with his current and previous employment agreements. For the nine months ended September 30, 2016, the Company recognized $22,000 in stock compensation expense for the accrued but unvested portion of the warrants issued to the CFO under his previous agreement with the Company. In addition, on January 26, 2016, the Company issued a warrant to purchase up to 100,000 shares of common stock to the CFO with a term of five years that vested upon issuance and has an exercise price of $0.55 per share. The Company utilized the Black-Scholes method to fair value the warrants to purchase up to 100,000 shares of common stock received by the CFO as approximately $51,000 with the following assumptions: volatility, 164%; expected dividend yield, 0%; risk free interest rate, 1.47%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $0.51.

 

For the nine months ended September 30, 2016, the Company recognized equity compensation expense of approximately $81,000 related to the vested and accrual of the unvested portion of a warrant issued in April 2016 to a former employee pursuant to his employment agreement with the Company. The Company utilized the Black-Scholes method to fair value the warrant to purchase 300,000 shares of common stock received by the employee as approximately $139,000 with the following assumptions: volatility, 159%; expected dividend yield, 0%; risk free interest rate, 1.47%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $0.46.

 

In March and May of 2017, in connection with the issuance of the Notes, we issued three-year warrants to purchase up to an aggregate of 999,998 shares of common stock at an exercise price of $0.69 per share (see Note 6).

 

On June 30, 2017, we issued warrants to purchase up to 15,000 shares of common stock at an exercise price of $0.10 per share to the members of the Scientific Advisory Board with a term of five years, which vested upon issuance. The Company utilized the Black-Scholes method to fair value the warrants received by the members of the Scientific Advisory Board at $1,400 with the following assumptions: volatility, 150%; expected dividend yield, 0%; risk free interest rate, 1.83%; and a life of 5 years. The grant date fair value of each share underlying the warrant was $0.09.

 

During the first and second quarter of 2017, we recognized approximately $23,000 in equity compensation expense for the vested and unvested portion of a warrant issued to a former employee pursuant to his agreement with the Company. In September 2017, the employee resigned from his position with the Company and the unvested portion of his warrant was terminated. For the three months ended September 30, 2017, we reversed the equity compensation expense for the accrued but unvested portion of his warrant of $22,000.

 

In June 2017, we modified the terms of outstanding warrants to purchase 4,000,000 shares of common stock.  Pursuant to a settlement agreement, the term of the warrants was increased by 2 years and the exercise price was modified to $0.12 per share (decrease of $0.03 per share).  Pursuant to ASC 718, the modified terms of the warrants resulted in approximately $196,000 in incremental equity compensation expense for the nine months ended September 30, 2017.  We utilized the Black-Scholes method to fair value the warrants under the original and modified terms with the following range of assumptions: volatility, 81%-97%; expected dividend yield, 0%; risk free interest rate, 1.28%; and a life of 0.33 - 2.33 years, respectively. The grant date fair value of each share of common stock underlying the warrant was $0.01 and $0.06, respectively.

 

               In July 2017 we issued a warrant to purchase 250,000 shares of common stock to the CEO at an exercise price of $0.10 per share pursuant to his employment agreement with the Company. The warrant was valued at approximately $23,000 and has a term of 5 years. We utilized the Black-Scholes method to fair value the warrant received by the CEO with the following assumptions: volatility, 153%; expected dividend yield, 0%; risk free interest rate, 1.90%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $0.09.

 

The following table summarizes the outstanding common stock warrants as of September 30, 2017 and December 31, 2016:

 

    September 30, 2017 (Unaudited)     December 31, 2016  
     Number of Warrants      Weighted Average Exercise Price      Number of Warrants      Weighted Average Exercise Price  
Outstanding, beginning of period     37,076,413     $ 0.31       35,676,413     $ 0.30  
Granted     1,264,998       0.57       1,400,000       0.42  
Exercised     (975,000 )     0.05       —       —  
Expired     (1,675,000 )     0.04       —       —  
Outstanding, end of period     35,691,411     $ 0.33       37,076,413     $ 0.31  

 

Warrants outstanding and exercisable by price range as of September 30, 2017 were as follows: 

 

  Outstanding Warrants           Exercisable Warrants  
  Range     Number    

Average

Weighted

Remaining

Contractual

Life in Years

     Number    

Weighted

Average

Exercise Price

  
  $ 0.10       265,000       4.79       265,000     $ 0.10  
  $ 0.12       4,000,000       2.04       4,000,000     $ 0.12  
  $ 0.15       3,750,000       0.05       3,750,000     $ 0.15  
  $ 0.26       100,000       0.74       100,000     $ 0.26  
  $ 0.27       250,000       4.25       250,000     $ 0.27  
  $ 0.29       10,125,613       3.06       10,125,613     $ 0.29  
  $ 0.30       11,925,800       1.00       11,925,800     $ 0.30  
  $ 0.32       250,000       4.00       250,000     $ 0.32  
  $ 0.33       75,000       1.00       75,000     $ 0.33  
  $ 0.42       250,000       3.75       250,000     $ 0.42  
  $ 0.50       525,000       1.83       525,000     $ 0.50  
  $ 0.55       100,000       3.33       100,000     $ 0.55  
  $ 0.62       75,000       0.80       75,000     $ 0.62  
  $ 0.69       999,998       2.46       999,998     $ 0.69  
  $ 1.00       3,000,000       2.59       3,000,000     $ 1.00  
            35,691,411       1.88       35,691,411     $ 0.33  

 

There were no unvested warrants outstanding as of September 30, 2017.