Stockholders' Deficiency

9 Months Ended

Sep. 30, 2014

Stockholders Deficiency

6 - Stockholders' Deficiency

Common Stock

On January 15, 2014, the Company issued 21,289 shares of Common Stock to an employee in accordance with an employment agreement.  The fair value of the shares was $10,646 based on the closing price on the date of issuance which was recorded as stock based compensation expense during the nine months ended September 30, 2014.

During the three and nine months ended September 30, 2014, pursuant to a private placement offering of units that commenced on July 25, 2014 (the “Private Placement”), the Company received an aggregate of $1,303,000 of gross proceeds (net of expenses of $94,241) related to the sale of 8,686,670 units at a price of $0.15 per unit.  Each unit consists of (i) one share of the Company’s common stock and (ii) a five-year warrant to purchase one-half share of the Company’s common stock at an exercise price of $0.30 per share, such that warrants to purchase an aggregate of 4,343,332 shares of common stock were issued.  The aggregate fair value of the warrants as of the issuance date was $961,133.  The Company evaluated these warrants to assess their proper classification using the applicable criteria enumerated by U.S. GAAP and determined that such warrants met the criteria for equity classification.  Proceeds from the sale of the units are to be used to fund the Company’s initiatives in the areas of marketing, and website improvement and development, inventory and for general working capital purposes.

During the three months ended September 30, 2014, the Company granted certain options and warrants which, upon settlement, may have exceeded the limit on the authorized number of shares of common stock.  The Company follows a sequencing policy for which in the event partial reclassification of contracts subject to ASC 815-40-25 is necessary, due to the Company’s inability to demonstrate it has sufficient authorized shares, shares will be allocated on the basis of earliest issuance date of potentially dilutive instruments with the earliest grants receiving first allocation of shares.  The Company evaluated such instruments as of September 30, 2014 and determined that the fair value of such instruments at the date of issuance and the change in fair value as of September 30, 2014 was determined to have a de minimus impact on the Company’s condensed consolidated financial statements.  Subsequent to September 30, 2014, the Company obtained stockholder approval to increase the number of authorized shares of common stock of the Company from 50,000,000 to 100,000,000.  See Note 10.

Preferred Stock

As of September 30, 2014 and December 31, 2013, the Company had accrued contractual dividends of $224,189 and $279,380, respectively, related to the Series B convertible preferred stock. On January 1, 2014 and 2013, the Company issued 29,564 and 27,630 shares of Series B convertible preferred stock valued at $279,380 and $261,084, respectively, representing approximately $0.66 in value per share of Series B Preferred Stock outstanding on each date, to the Series B convertible preferred stock owners as payment in kind for dividends.

As of December 31, 2013 and August 25, 2014, Series B holders were entitled to convert into 8.22 and 10.72 shares, respectively, of the Company’s common stock for each share of Series B Preferred Stock due to the anti-dilution provision. The anti-dilution provision represents a contingent beneficial conversion feature.  As of September 30, 2014, an incremental 2,584,748 shares of common stock are issuable at conversion of the Series B Convertible Preferred Stock as compared to the original terms.   Using the commitment date common stock price in effect, the commitment date value of the incremental shares is $6,524,652. However, recognition of beneficial conversion features is limited to the aggregate gross proceeds allocated to the preferred stock of $3,479,068 (451,879 shares of Series B Convertible Preferred Stock times $9.45 per share less the proceeds allocated to the warrants of $791,188) less the $3,199,689 beneficial conversion feature previously recognized. Due to these limitations, no beneficial conversion feature related to the incremental shares was recognized during the three and nine months ended September 30, 2014.

Stock Options

Valuation

In applying the Black-Scholes option pricing model to stock options, the Company used the following weighted average assumptions:

	For The Three Months Ended		For The Nine Months Ended
	September 30,		September 30,
	2014	2013	2014	2013
Risk free interest rate	0.97% to 1.75%	n/a	0.97% to 1.75%	1.13% to 1.50%
Dividend yield	0.00%	n/a	0.00%	0.00%
Expected volatility	190.0%	n/a	190.0%	166.0% to 175.0%
Expected life in years	3.0 to 5.5	n/a	3.0 to 5.5	6.0

Grants

The weighted average fair value of the stock options granted during the nine months ended September 30, 2014 and 2013 was $0.17 and $1.17 per share, respectively.  The weighted average fair value of the stock options granted during the three months ended September 30, 2014 was $0.17 per share.  There were no stock options granted during the three months ended September 30, 2013.

On August 27, 2014, the Company granted options to directors of the Company to purchase an aggregate of 345,000 shares of common stock under the 2009 Plan at an exercise price of $0.16 per share for an aggregate grant date value of $53,838.  The options vest on November 30, 2014 and have a term of ten years.

On August 27, 2014, the Company also granted options to an Officer of the Company to purchase an aggregate of 250,000 shares of common stock under the 2009 Plan at an exercise price of $0.18 per share for an aggregate grant date value of $35,825.  The options vest over a one year period and have a term of five years.

Stock-based compensation expense related to stock options was recorded in the condensed consolidated statements of operations as a component of selling, general and administrative expenses and totaled $99,940 and $358,144 for the three and nine months ended September 30, 2014, respectively, and $143,113 and $469,356 for the three and nine months ended September 30, 2013, respectively.

As of September 30, 2014, stock-based compensation expense related to stock options of $1,259,673 remains unamortized, including $368,104 which is being amortized over the weighted average remaining period of 1.1 years.  The remaining $891,569 is related to a performance based option where vesting is currently deemed to be improbable and no amount is being amortized.

Summary

A summary of the stock option activity during the nine months ended September 30, 2014 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Life		Intrinsic
	Options			Price		In Years		Value
Outstanding, January 1, 2014		2,543,150		$	2.37
Granted		595,000			0.17
Exercised		-			-
Forfeited		(536,450	)		2.37
Outstanding, September 30, 2014		2,601,700		$	1.86		6.5	$	-
Exercisable, September 30, 2014		1,002,689		$	3.07		5.1	$	-

The following table presents information related to stock options at September 30, 2014:

		Options Outstanding				Options Exercisable
		Weighted				Weighted		Weighted
Range of		Average		Outstanding		Average		Average		Exercisable
Exercise		Exercise		Number of		Exercise		Remaining Life		Number of
Price		Price		Options		Price		In Years		Options
$	0.16 - $2.20	$	0.56		1,527,950	$	1.18		6.6		212,939
$	2.21 - $3.80		3.23		757,750		2.95		3.3		507,750
$	3.81 - $6.99		4.88		316,000		4.72		7.2		282,000
		$	1.86		2,601,700	$	3.07		5.1		1,002,689

Warrants

Valuation

In applying the Black-Scholes option pricing model to stock warrants, the Company used the following weighted average assumptions:

	For The Three Months Ended		For The Nine Months Ended
	September 30,		September 30,
	2014	2013	2014	2013
Risk free interest rate	1.69% to 2.32%	n/a	1.69% to 2.52%	0.87%
Dividend yield	0.00%	n/a	0.00%	0.00%
Expected volatility	189% to 190%	n/a	171.0% to 190.0%	164.3%
Expected life in years	5.0	n/a	5.0	5.0

Grants

The weighted average fair value of the stock warrants granted during the nine months ended September 30, 2014 and 2013, was $0.23 and $1.36 per share, respectively.  The weighted average fair value of the stock warrants granted during the three months ended September 30, 2014 was $0.22.

On August 25, 2014, the Company granted vested five-year warrants to purchase an aggregate of 521,200 shares of common stock at an exercise price of $0.15 per share to a consultant related to the completion of the Private Placement.  The warrants had an issuance date fair value of $116,681 which was charged to Additional Paid in Capital since they were directly related to the Private Placement.

On August 25, 2014, the Company granted vested five-year warrants to purchase an aggregate of 600,000 shares of common stock at an exercise price of $0.25 per share to a consultant.  The warrants had an issuance date fair value of $133,225 which was expensed immediately.

Aggregate stock-based compensation expense related to warrants for the three and nine months ended September 30, 2014 was recorded in the condensed consolidated statements of operations as a component of selling, general and administrative expenses and totaled $134,205 and $133,618, respectively, and $20,424 and $493,940 for the three and nine months ended September 30, 2013, respectively.  As of September 30, 2014, stock-based compensation expense related to warrants of $578,762 remains unamortized, including $1,922 which is being amortized over the weighted average remaining period of 1.0 years.  The remaining grant date value of $576,840 is related to a performance based warrant where vesting is currently deemed to be improbable and no amount is being amortized.

A summary of the stock warrant activity during the nine months ended September 30, 2014 is presented below:

					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
	Number of		Exercise		Life		Intrinsic
	Warrants		Price		In Years		Value
Outstanding, January 1, 2014		2,342,846	$	0.96
Granted		5,689,532		0.28
Exercised		-		-
Forfeited		-		-
Outstanding, September 30, 2014		8,032,378	$	0.48		4.5	$	20,848
Exercisable, September 30, 2014		7,782,378	$	0.40		4.5	$	20,848

The following table presents information related to stock warrants at September 30, 2014:

		Warrants Outstanding				Warrants Exercisable
		Weighted				Weighted		Weighted
Range of		Average		Outstanding		Average		Average		Exercisable
Exercise		Exercise		Number of		Exercise		Remaining Life		Number of
Price		Price		Warrants		Price		In Years		Warrants
$	0.15 - $0.35	$	0.28		7,439,532	$	0.28		4.7		7,439,532
$	0.36 - $3.00		2.91		562,846		2.91		2.0		312,846
$	3.01 - $4.95		4.95		30,000		4.95		3.1		30,000
$	0.15 - $4.95	$	0.48		8,032,378	$	0.40		4.5		7,782,378

Services Contributed

Effective January 1, 2013 through April 30, 2014, an executive officer of the Company waived payment for services contributed.  As a result, the Company imputed the value of the services contributed based on a compensation rate previously approved by the Compensation Committee and recorded salary expense of $116,667 for the nine months ended September 30, 2014, with a corresponding credit to stockholders’ deficiency.  On April 28, 2014, the Compensation Committee approved the payment of an annual salary of $150,000 to the Company’s Chief Executive Officer, effective May 1, 2014.