Preferred Stock and Warrants

6 Months Ended

Jun. 30, 2016

Preferred Stock, Number of Shares, Par Value and Other Disclosures [Abstract]

Preferred Stock and Warrants

A summary of the Company’s preferred stock as of June 30, 2016 and December 31, 2015 is as follows.

	June 30, 2016 (unaudited)		December 31, 2015
	Shares Issued &		Shares Issued &
Offering	Outstanding		Outstanding
Series A convertible		47,250		47,250
Series B convertible, 10% cumulative dividend		93,750		93,750
Series C convertible, 10% cumulative dividend		38,333		38,333
Series E convertible, 10% cumulative dividend		19,022		19,022
Total Preferred Stock		198,355		198,355

As of June 30, 2016 and December 31, 2015, the Company had cumulative preferred undeclared and unpaid dividends. In accordance with the Financial Accounting Standard Board’s Accounting Standards Codification 260-10-45-11, “Earnings per Share”, these dividends were added to the net loss in the net loss per share calculation.

Summary of Preferred Stock Terms

Series A Convertible Preferred Stock

Liquidation Value:	$4.50 per share, $212,625
Conversion Price:	$10,303 per share
Conversion Rate:	0.00044—Liquidation Value divided by Conversion Price ($4.50/$10,303)
Voting Rights:	None
Dividends:	None
Conversion Period:	Any time

Series B Convertible Preferred Stock

Liquidation Value:	$4.00 per share, $375,000
Conversion Price:	$1,000 per share
Conversion Rate:	0.0040—Liquidation Value divided by Conversion Price ($4.00/$1,000)
Voting Rights:	None
Dividends:	10%—Quarterly—Commencing March 31, 2001
Conversion Period:	Any time
Cumulative dividends in arrears at June 30, 2016 were $576,913

Series C Convertible Preferred Stock

Liquidation Value:	$3.00 per share, $115,000
Conversion Price:	$600 per share
Conversion Rate:	0.0050—Liquidation Value divided by Conversion Price ($3.00/$600)
Voting Rights:	None
Dividends:	10%—Quarterly—Commencing March 31, 2002
Conversion Period:	Any time
Cumulative dividends in arrears at June 30, 2016 were $168,663

Series D Convertible Preferred Stock

Liquidation Value:	$10.00 per share, $525,000
Conversion Price:	$1,000 per share
Conversion Rate:	.01—Liquidation Value divided by Conversion Price ($10.00/$1,000)
Voting Rights:	None
Dividends:	10%—Quarterly—Commencing April 30, 2002
Conversion Period:	Any time
Cumulative dividends in arrears at June 30, 2016 were $0

Series E Convertible Preferred Stock

Liquidation Value:	$22.00 per share, $418,488
Conversion Price:	$800.00 per share
Conversion Rate:	.0275—Liquidation Value divided by Conversion Price ($22.00/$800)
Voting Rights:	Equal in all respects to holders of common shares
Dividends:	10%—Quarterly—Commencing May 31, 2002
Conversion Period:	Any time
Cumulative dividends in arrears at June 30, 2016 were $620,946

Warrants outstanding

							Weighted
			Weighted				Average
	Options and		Average		Aggregate		Remaining
			Exercise		Intrinsic		Contractual
	Warrants		Price		Value		Life (Years)
Outstanding at December 31, 2015		400,808	$	1.79		—		5.18
Granted		554,500	$	0.80		—		5.00
Exercised		—		—		—		—
Expired		—		—		—		—
Outstanding at June 30, 2016		955,308	$	1.22		—		4.78

In connection with the secured promissory notes issued on December 31, 2015, as discussed in Note 5, the Company issued an aggregate of 250,000 warrants to purchase shares of common stock with a par value of $0.001 for $1.60 per shares.  The exercise price and number of warrants were subject to a change as defined in the agreement.  The warrants are exercisable for a period of five (5) years.   On March 15, 2016, the Board of Directors agreed to renegotiated terms with the warrant holders to remove the anti-dilution and price protection features in the warrant agreement and fixed the exercise price at $.80. The warrants issued with the Notes were increased from 250,000 to 500,000.  

At March 15, 2016 and December 31, 2015, the Company determined the fair value of the warrants issued with the secured promissory notes and renegotiated terms using the Black Scholes pricing model and the following assumptions:  an interest free rate of 1.75%, volatility of 50% and a remaining term of 5 years. Based on information known at March 15, 2016 and December 31, 2015, the Company priced the warrants with an assumed stock and exercise price of $0.80.  The fair value of the warrants initially issued with the secured promissory notes and renegotiated terms were both determined to be approximately $90,000 or aggregate value of $180,000.  The aggregate fair value amount of $180,000 has been fully amortized into interest expense at June 30, 2016.

In connection with the secured promissory notes issued on May 25, 2016, as discussed in Note 5, the Company issued an aggregate of 150,000 warrants to purchase shares of common stock with a par value of $0.001 for $0.80 per shares.    The warrants are exercisable for a period of five (5) years. 

At June 30, 2016, the Company determined the fair value of the warrants issued with the secured promissory notes using the Black Scholes pricing model and the following assumptions:  an interest free rate of 1.75%, volatility of 50% and a remaining term of 5 years. Based on information known at May 25, 2016, the Company priced the warrants with an assumed stock and exercise price of $0.80.   At June 30, 2016, the fair value of the warrants of $50,850 was recorded as a discount on the related secured promissory notes and additional paid-in capital. During the three months ended June 30, 2016 $19,775 of the discount on debt has been amortized into interest expense.  The balance of $30,875 is considered a discount on the related secured promissory notes at June 30, 2016 and will be fully amortized through the end of the third quarter of 2016.   The aggregate fair value amount of $199,775 warrants for all the notes has been fully amortized into interest expense at June 30, 2016.

The secured promissory notes issued December 31, 2015 as discussed in Note 5 matured on March 31, 2016 and were not repaid.  Therefore, the secured promissory notes were in default as of the April 1, 2016.  The Company agreed to pay the Purchasers 10% of the $500,000 principal balance   in warrants for the months of April 2016, May 2016 and June 2016.  Therefore, for the months of April, May and June 2016, the Company issued an aggregate 150,000 warrants and recorded interest expense related to the issuance of these warrants, attributable to the secured promissory notes of approximately $50,850.   The Company continues to be in default and anticipates issuing additional warrants attributed to this default until such time as the Company can repay the debt or complete the contemplated offering (See Also Note 10).