Note 6 –Common and Preferred Stock

Sale of Series D convertible preferred stock:

On February 14, 2011, we entered into a securities purchase agreement with Barron Partners LP in which Barron Partners LP purchased 454,546 shares of par value $0.01 Series D Convertible Preferred Stock (“Series D Preferred”) for proceeds of $1,000,000.

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 a component of paid-in capital, was calculated by multiplying the linked common shares (9,090,909 common shares) times the spread between the trading market price of $0.20 and the conversion price of $0.11, or $818,182. ASC 480 provides for redeemable 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, the financial instrument was accreted to its redemption amount at inception.

The following table illustrates (i) how the proceeds arising from the Series D Preferred financing were allocated on the financing inception:

Classification
Series D preferred stock (equity)	$	181,818
Beneficial conversion feature		818,182
Derivative liabilities		--
Gross proceeds	$	1,000,000

The following table illustrates the activity with respect to the Series D Preferred from the inception dates to June 30, 2011:


Initial allocation of Series D Preferred (equity)	$	181,818
Accretion to redemption value		818,182
Series D preferred stock	$	1,000,000

The Company incurred approximately $48,000 in cost associated with the sale of the preferred stock for net proceeds of approximately $952,000.

On March 28, 2011, the Company entered into a securities purchase agreement with Barron Partners LP pursuant to which Barron purchased an additional 90,910 shares of Series D Convertible Preferred Stock for $200,000. Each Series D Share is convertible into 20 common shares of Company’s common stock at $0.11 per share, subject to adjustment and limitations. Since these shares were not designated until April 12, 2011, the $200,000 was classified as other current liability in the Balance Sheet at March 31, 2011 and has been reclassified to equity in the quarter ended June 30, 2011.

On May 16, 2011, the Company entered into a securities purchase agreement with Barron Partners LP pursuant to which Barron purchased an additional 45,455 shares of Series D Convertible Preferred Stock for $100,000. Each Series D Share is convertible into 20 common shares of company’s common stock at $0.11 per share, subject to adjustment and limitations. $100,000 was classified as equity.

Sale of Common Stock:

During March and April 2011, the Company entered into several stock purchase agreements with investors for private placements of 4,632,727 shares of restricted common stock. These private placements raised $509,600 from thirteen accredited investors for issuances of restricted common shares at $.11 per share,.

Warrants

During March 2011 Laurus exercised 200,000 cashless warrants for 123.077 shares of the Company’s common stock. These warrants were previously carried as a derivative liability.