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CAPITAL STOCK

9 Months Ended

Sep. 30, 2014

Note 12: Capital Stock

Share Capital

On January 6, 2014, the Company designated 1,200,000 series A preferred shares (“Series A Convertible Preferred Stock”). Each share of Series A Convertible Preferred Stock that is outstanding at the time that the Company enacts a 100 to 1 reverse stock split, the Series A Convertible Preferred Stock shall automatically convert into five (5) shares of the Company’s common stock on a post-split basis.

On January 10, 2014, the Company completed a reverse stock split thereby issuing 1 new share for each 100 outstanding shares of the Company’s common stock and amending the Company’s Articles of Incorporation to increase the authorized shares of common stock from 150,000,000 shares of common stock to 500,000,000 shares.

On February 18, 2014, the Company’s board of directors approved the creation of a class of up to 1,500,000 preferred stock, par value $0.001, called series B convertible preferred stock (“Series B Convertible Preferred Stock”). The terms of the Series B Convertible Preferred Stock are:

rank pari passu to the common stock with respect to rights on liquidation, winding up and dissolution;

· have no dividend rights except as may be declared by the Board in its sole and absolute discretion;

shall have the right to cast one thousand (1,000) votes for each share held of record on all matters submitted to a vote of holders of the Corporation’s common stock; and

shall automatically convert into shares of common stock upon the occurrence of a reverse stock split of the Corporation’s common stock in which every 100 shares of the Corporation’s common stock outstanding at the time that this certificate of designation was filed with the Secretary of State of Nevada is exchanged for one share of the Corporation’s common stock, with each share of Series B Convertible Preferred Stock converting into seven (7) shares of the Corporation’s common stock (such number to be after the 100:1 reverse stock split).

All prior period share transactions included in the Company’s stock transactions and balances have been retroactively restated for the reverse stock split described above.

2014 Share Transactions

Convertible notes

During the nine months ended September 30, 2014, the Company converted convertible notes and relevant accrued interest into approximately 14,386,000 shares of common stock. The fair value of the common stock recognized was $32,250,000.

Accounts payable

During the nine months ended September 30, 2014, the Company converted accounts payable into approximately 1,279,000 shares of common stock. The fair value of the common stock recognized was $2,893,000.

Consulting services

During the nine months ended September 30, 2014, the Company issued in aggregate 316,000 shares of common stock in exchange for consulting services for which performance was complete. The fair value of the common stock recognized was approximately $714,000.

Private placements

During the period ended September 30, 2014, the Company entered into a Securities Purchase Agreement with a single institutional investor for the sale of 1,886,792 units at a purchase price of $1.06 per unit, for a total purchase price of $1,832,500, net of finders’ fee. Each unit consists of one common share and one share purchase warrant exercisable at $1.17 for a period of 5 years.

During the period ended September 30, 2014, the Company received subscription proceeds of $265,000 for 265,000 units. Each unit consists of one share of common stock and one share purchase warrant exercisable at $2.50 for a period of 3 years. The Company also issued 5,250 shares of common stock as finders’ fee relating to the subscription proceeds.

Shares to be issued

The Company has entered into consulting agreements and debt settlements for which it is obligated to issue shares as of the nine months ended September 30, 2014.

Nature of Transaction	Amount	Obligation to Issue Number of Shares
Consulting agreements	$348,367	61,167
Debt settlement	$120,000	120,000

Share Purchase Warrants

In August, 2014, the Company issued 265,000 share purchase warrants to acquire an equivalent number of common shares of the Company, at an exercise price of $2.50 per share for an exercise period of up to three years from the issuance date. The warrants were issued pursuant to private placements and included within equity. The fair value of these warrants was determined to be $258,000, using the Black-Scholes Option Pricing Model with an expected life of 3 years, a risk free interest rate of 0.93%, a dividend yield of 0%, and an expected volatility of 153.8%.

In August, 2014, the Company issued 1,986,792 share purchase warrants to acquire an equivalent number of common shares of the Company, at an exercise price of $1.17 per share for an exercise period of up to five years from the issuance date. The warrants were issued pursuant to a private placement and included within equity. The fair value of these warrants was determined to be $2,269,000, using the Black-Scholes Option Pricing Model with an expected life of 5 years, a risk free interest rate of 1.58%, a dividend yield of 0%, and an expected volatility of 150.3%.

In September, 2014, the Company issued 100,000 share purchase warrants to acquire an equivalent number of common shares of the Company, at an exercise price of $1.15 per share for an exercise period of up to five years from the issuance date. The warrants were issued pursuant to a service agreement. The fair value of these warrants was determined to be $105,000, using the Black-Scholes Option Pricing Model with an expected life of 5 years, a risk free interest rate of 1.63%, a dividend yield of 0%, and an expected volatility of 150.18%.

In March, 2014, the Company issued 100,000 share purchase warrants to acquire an equivalent number of common shares of the Company, at an exercise price of $4.00 per share for an exercise period of up to four years from the issuance date. The warrants were issued pursuant to a technology option agreement. The fair value of these warrants was determined to be $303,000. The weighted average assumptions used for the Black-Scholes option-pricing model to value these warrants were: expected volatility of 156.6%, risk free rate of 1.4%, expected life of 4 years and expected dividend rate of 0%. The Company used the Black-Scholes option-pricing model as the resultant fair value is not significantly different than the Monte Carlo option pricing model. In August 2014, the Company repriced the 100,000 warrants by reducing the exercise price from $4.00 to $1.06. As a result, the Company recorded incremental fair value of $14,000 during the period ended September 30, 2014. The warrants contain “down round protection” and the Company classifies these warrant instruments as derivative liabilities measured at fair value and remeasures these instruments at fair value each reporting period.

A summary of the Company’s share purchase warrants as of September 30, 2014 and changes during the period is presented below:

	Number of Warrants	Weighted Average Exercise Price	Weighted Average Remaining Life

Balance, December 31, 2013	149,452	25.85	2.76
Issued	2,451,792	1.31	4.64
Exercised	-	-	-
Extinguished or expired	(15,167)	40.00	-
Balance, September 30, 2014	2,586,077	$ 2.50	4.52