Note 7—Capital Stock

Authorized Preferred and Common Stock

As of September 30, 2014, the Company has 6,000,000 shares of preferred stock, par value $0.001 authorized and 300,000,000 shares of common stock, par value $0.001 authorized. As of September 30, 2014 the Company has 122,548,292 shares of common stock outstanding.

In addition, the company has the following shares of common stock reserved for issuance as of September 30, 2014:

	Reserved for issuance	Strike Price		Expiry

Shares reserved under outstanding stock options and options available for grant	10,765,500
Rights associated with Employee Stock Purchase Plan	539,302
Common stock additional purchase rights associated with May 2013 private placement	18,214,936
Warrants with common stock additional purchase rights associated with May 2013 private placement	13,661,202	$	0.2745
Outstanding warrants issued in October 2010	1,750,000	$	1.3000	March 5, 2015
Outstanding warrants issued in June 2012	437,158	$	0.2745	June 29, 2017
Outstanding warrants issued in May 2013	20,655,737	$	0.2745	May 17, 2020
Outstanding warrants issued in August 2013	14,426,230	$	0.2745	August 9, 2020
	80,450,065

On May 17, 2013, the Company entered into a Common Stock Purchase Agreement with various accredited investors (the “Purchasers”), pursuant to which the Company sold securities to the Purchasers in the May 2013 Private Placement. The Company sold an aggregate of 43,715,847 shares of its common stock, at a price of $0.2745 per share for gross proceeds of $12,000,000. The Purchasers also received warrants to purchase up to an aggregate of 32,786,885 shares of Common Stock at an exercise price of $0.2745 per share (the “Warrants”). The Warrants were exercisable as to 63% of the shares immediately and as to 37% of the shares following receipt of shareholder approval of a share authorization increase and have a term of seven years from the date they become exercisable. For Warrants that were exercisable upon shareholder approval of an increase in the Company’s authorized shares of common stock, the Company recorded a non-current liability at June 30, 2013 based on the allocation of the relative fair values of the common stock and Warrants issued in the May 2013 Private Placement. In addition, the Company recognized non-cash interest expense of $286,579 representing the increase in the fair value of the warrant liability from the date of issuance to June 30, 2013. On August 9, 2013, the Company’s shareholders’ approved an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of common stock from 150,000,000 to 300,000,000 shares. Following the shareholder approval of the increase in authorized shares on August 9, 2013, the Company filed a certificate of amendment with the Delaware Secretary of State, which provided for adequate authorized shares for all potential common stock equivalents issued pursuant to the financing on May 17, 2013. As a result, the warrant liability reflected as a non-current liability, in the June 30, 2013 balance sheet was reclassified to shareholders’ equity at its fair value as of August 9, 2013. The fair value of the warrant liability increased by approximately $11,000 from June 30, 2013 to August 9, 2013, and was recorded as an increase to interest expense in the statement of operations for the three months ended September 30, 2013.

For its services in this transaction, the placement agent received cash compensation in the amount of approximately $780,000 and the placement agent and an affiliate received warrants to purchase an aggregate of 2,295,082 shares of common stock, at an exercise price of $0.2745 per share (the “Placement Agent Warrants”). The Placement Agent Warrants became exercisable on August 9, 2013, following shareholder approval of an increase in the Company’s authorized shares of common stock and expire August 9, 2020. The cash compensation and the fair value of the warrants were recorded as issuance costs resulting in a reduction to shareholders’ equity.

For purposes of determining the fair value of the warrants exercisable upon shareholder approval of an increase in the Company’s authorized shares, the Black-Scholes pricing model was used with the following assumptions:

	May 17, 2013		June 30, 2013		August 9, 2013
Risk-free interest rate	1.35	%	1.58	%	2.53	%
Expected life	4 years		4 years		4 years
Expected volatility	144.63	%	145.62	%	146.19	%
Dividend Yield	0	%	0	%	0	%

Using these assumptions, the fair value of the warrants was $5,072,129 on May 17, 2013, $5,358,708 on June 30, 2013 and $5,369,676 on August 9, 2013.

In connection with the May 2013 Private Placement, all preferred stockholders converted their shares of Preferred Stock to common stock in accordance with the terms of such preferred stock, resulting in the issuance of 39,089,161 shares of common stock. Also in connection with the May 2013 Private Placement, approximately $14.3 million in convertible debt was converted to common stock in accordance with the terms of such debt, resulting in the issuance of 2,521,222 shares of common stock.

In addition, pursuant to the Common Stock Purchase Agreement, as amended on March 31, 2014 and May 30, 2014, each Purchaser has the right, at any time on or before December 31, 2014, to purchase at one or more subsequent closings its pro rata share of up to an aggregate of $5,000,000 of additional shares of common stock and warrants on the same terms and conditions as those set forth above. If, prior to December 31, 2014, investors have not purchased their entire pro rata share of such additional investment of $5,000,000, those who have purchased their entire pro rata share of the additional investment, will be entitled to purchase the unsold portion of the additional investment.

In September, 2014, we issued warrants to our financial consultant, Danforth Advisors, to purchase up to 100,000 shares of common stock at a price of $0.25 per share. The warrants vest on a monthly basis over two years, provided that, if the Company terminates the Agreement without cause before the one year anniversary, 50% of the warrants immediately vest, and if the Company terminates the Agreement without cause on extension after one year, the remaining 50% of the warrants immediately vest. The warrant will also become exercisable in full upon a change of control of the Company if the Agreement is still in effect. The fair value of the warrants at issuance was $23,800.

Registration Rights Agreement

In connection with the May 2013 Private Placement, on May 17, 2013, the Company also entered into a Registration Rights Agreement with the Purchasers, Pyxis, DDMI and the placement agent, pursuant to which the Company was required to file a registration statement on Form S-1 within 45 days to cover the resale of (i) the shares sold to the Purchasers and the shares of common stock underlying the Warrants, (ii) the shares of common stock issued to Pyxis upon conversion of the Series A-1 Preferred Stock and the convertible debt, (iii) the shares of common stock issued to DDMI upon the conversion of the Series B Preferred Stock, and (iv) the shares of common stock underlying the Placement Agent Warrants. The Company filed the registration statement on July 1, 2013, and it was declared effective on August 9, 2013.

In addition, pursuant to the Purchasers right to purchase up to $5,000,000 of additional shares of the Company’s common stock and warrants, as described above, the Company will be required to file a registration statement to cover the resale of (i) any shares of common stock sold to the Purchasers pursuant to the additional investment and the shares of common stock underlying any warrants issued to Purchasers pursuant to such additional investment, and (ii) shares of common stock underlying any additional warrants issued to the placement agent in connection with the additional investment within 45 days following December 31, 2014.