Note 6 - Preferred Stock and Common Stock Financings

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Note 6 - Preferred Stock and Common Stock Financings:

a) Series D Preferred Stock

During the year ended December 31, 2011, the Company entered into three securities purchase agreements with Barron Partners LP in which Barron Partners LP purchased shares of par value $.01 Series D Convertible Preferred Stock (“Series D Preferred”).

	Series D Preferred Shares Issued		Proceeds
February 14, 2011		454,546	$	1,000,000
March 28, 2011		90,910		200,000
May 16, 2011		45,455		100,000
Total		590,911	$	1,300,000

Each Series D Preferred share is convertible into 20 common shares of the Company’s common stock at a price of $0.11 per share. The conversion price is subject to anti-dilution protection for (i) traditional capital restructurings, such as splits, stock dividends and reorganizations and (ii) anti-dilution for sales of common shares and common linked contracts below the initial conversion price.

Holders of the Company’s Series D Preferred are not entitled to dividends and the Holder has no voting rights. However, so long as any shares of Series D Preferred Stock are outstanding, the Company is subject to limitations on certain actions unless pre-approved by holders of 75% of the shares of the Series D Preferred stock then outstanding. Upon liquidation, dissolution or windup, each share of Series D Preferred Stock shall entitle its holder to receive $2.20 out of the assets of the Company, prior to any distribution to any class of junior securities.

We evaluated the Series D Preferred for classification. The Preferred Stock is redeemable, at the holder’s option, upon a liquidation event. The redemption features do not rise to the level of “unconditionally” redeemable for purposes of liability classification.

In considering the application of ASC 815, we identified those specific terms and features embedded in the contract that possess the characteristics of derivative financial instruments. Those features included the conversion option, anti-dilution protection, and buy-in and non-delivery puts.  Generally, embedded terms and features that both (i) meet the definition of derivatives and (ii) are clearly and closely related to the host contract in terms of risks, do not require bifurcation and separate measurement. In order to develop these conclusions, we first evaluated the Preferred Stock to determine if the hybrid contract, with all features included, was more akin to an equity instrument or a debt instrument. Significant indicators of equity were the non-existence of a fixed and determinable redemption provision and the non-existence of any dividend feature. The preponderance and weight of these indicators led us to the conclusion that the hybrid contract was more akin to an equity instrument. Accordingly, the conversion option does not require bifurcation because its risks and the risks of the hybrid are clearly and closely related. The non-delivery and buy-in put, conversely, do require bifurcation because their risks and the risks of the host are not clearly and closely related. The value of these puts was deminimus at inception but will be re-evaluated each reporting period.

Further consideration of the classification of the Series D Preferred as either equity or mezzanine was required. Generally, redeemable instruments, where redemption is either stated or outside the control of management, require classification outside of stockholders’ equity. The Series D Preferred is classified as equity because it is redeemable only upon ordinary liquidation events and the occurrence of events that are solely within management’s control.

ASC 470-20-25 provides that embedded beneficial conversion features present in convertible securities (including preferred stock) should be valued separately at issuance. The conversion price of the Preferred Stock is $0.11 which gave rise to a beneficial conversion feature. The beneficial conversion feature, which is recorded as a component of paid-in capital, was calculated by multiplying the linked common shares (11,818,182 common shares) times the spread between the trading market price of $0.20 and the conversion price of $0.11, or $1,063,636.

ASC 470 provides for preferred stock to be accreted to its redemption value over the longer of the term to maturity, which is not present in the Series D Preferred, or the date of the first conversion. Since the Series D Preferred is convertible on the issuance date, a day-one deemed dividend of $1,063,636 was recorded as a deemed dividend in the consolidated statement of operations.

The Company incurred approximately $20,000 in cost associated with the sale of the preferred stock for net proceeds of approximately $1,280,000.

b) Series A Preferred Stock:

On October 15, 2012, Barron Partners L.P. converted 262,202 shares of Series A Preferred Stock into 940,000 Common Shares. Subsequent to this conversion event, Barron Partners owned 5,443,866 shares of Series A Preferred Stock and 1,569,147 Common Shares.

On July 5, 2012, Barron Partners L.P. converted 371,003 shares of Series A Preferred Stock into 1,325,000 Common Shares. Subsequent to this conversion event, Barrons Partners owned 5,707,068 shares of Series A Preferred Stock and 1,478,753 Common Shares.

c) Sale of Common Stock:

On September 17, 2012, the Company issued 500,000 shares of section 144 common stock to a vendor for services rendered and to be rendered. The issuance was valued at market price per share of $0.08 for a total compensation of $40,000 which has been and will be amortized to expense ratably over a six month vesting period.

During March and April 2011, the Company entered into several stock purchase agreements with investors for private placements of 3,955,454 shares of restricted common stock.   These private placements raised $336,361 net of legal expenses of $48,740 from thirteen accredited investors for issuances of restricted common shares at $.11 per share.

In July 2011, the Company received $1,600 in cash and issued 20,000 shares of restricted common stock for an exercise of employee options.

During October 2011, we entered into a stock purchase agreements with an accredited investor for the private placements of 454,545 shares of restricted common stock at $0.22 per share for $100,000.  

d) Warrants:

     During March, April and May  2011 Laurus and/or its affiliated funds exercised 700,000 cashless warrants for 433,618 shares of the Company’s common stock. For the year ended December 31, 2011.