Stockholders' Deficiency

6 Months Ended

Jun. 30, 2015

Notes to Financial Statements

6. Stockholders' Deficiency

Preferred Stock

As of June 30, 2015 and December 31, 2014, the Company had accrued cumulative contractual dividends of $159,922 and $298,918, respectively, related to the Series B Preferred Stock. On January 1, 2015 and 2014, the Company issued 31,633 and 29,564 shares of Series B convertible preferred stock valued at approximately $299,000 and $279,000, 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.

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 Six Months Ended
	June 30,		June 30,
	2015	2014	2015	2014
Risk free interest rate	1.35% to 1.85%	n/a	1.35% to 1.85%	n/a
Dividend yield	0.00%	n/a	0.00%	n/a
Expected volatility	195.0%	n/a	195.0%	n/a
Expected life in years	5.5 to 10.0	n/a	5.5 to 10.0	n/a

Grants

The weighted average fair value of the stock options granted during the three and six months ended June 30, 2015 was $0.09 per share.  There were no stock options granted during the three and six months ended June 30, 2014.

On April 3, 2015, the Company granted options to employees of the Company to purchase an aggregate of 922,223 shares of common stock under the 2014 Equity Incentive Plan (the “2014 Plan”) at an exercise price of $0.09 per share for an aggregate grant date value of $81,419.  The options have a vesting period ranging from immediate to three years and have a term of ten years.

On April 3, 2015, the Company granted options to consultants of the Company to purchase an aggregate of 149,861 shares of common stock under the 2014 Plan at an exercise price of $0.09 per share for an aggregate grant date value of $13,462.  The options vested on the grant date and have a term of ten years.

On April 7, 2015, the Company granted options to directors of the Company to purchase an aggregate of 102,189 shares of common stock under the 2014 Plan at an exercise price of between $0.09 per share for an aggregate grant date value of $9,000.  The options vested on the grant date and have a term of ten years.  The options were granted as part of director compensation approved by the Compensation Committee.

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 $107,500 and $186,289 for the three and six months ended June 30, 2015, respectively, and $106,352 and $268,851 for the three and six months ended June 30, 2014, respectively.  Option forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period.  This estimate will be adjusted periodically based on the extent to which actual option forfeitures differ, or are expected to differ, from the previous estimate, when it is material.  The Company estimated forfeitures related to option grants at an annual rate of 6% for options granted during the six months ended June 30, 2015.

As of June 30, 2015, stock-based compensation expense related to stock options of $1,017,408 remains unamortized, including $125,839 which is being amortized over the weighted average remaining period of 1.2 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 six months ended June 30, 2015 is presented below:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Life In Years		Aggregate Intrinsic Value
Outstanding, January 1, 2015		3,944,557		$	1.27
Granted		1,174,273			0.09
Exercised		-			-
Forfeited		(110,000	)		0.51
Outstanding, June 30, 2015		5,008,830		$	1.01		7.5	$	106,542
Exercisable, June 30, 2015		4,017,995		$	0.96		7.9	$	85,542

The following table presents information related to stock options at June 30, 2015:

	Options Outstanding				Options Exercisable
Range of Exercise Price	Weighted Average Exercise Price		Outstanding Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Life In Years		Exercisable Number of Options
$0.09 - $2.20	$	0.27		3,936,080	$	0.26		8.9		3,201,245
$2.21 - $3.80		3.23		757,750		2.95		2.5		507,750
$3.81 - $6.99		4.88		315,000		4.88		6.6		309,000
	$	1.01		5,008,830	$	0.96		7.9		4,017,995

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 Six Months Ended
	June 30,		June 30,
	2015	2014	2015	2014
Risk free interest rate	1.26% to 1.68%	1.69% to 2.33%	1.26% to 1.75%	1.69% to 2.52%
Dividend yield	0.00%	0.00%	0.00%	0.00%
Expected volatility	195.0% to 197.0%	171.0% to 183.0%	195.0% to 197.0%	171.0% to 183.0%
Expected life in years	5.00 to 7.30	5.00 to 8.30	5.00 to 7.50	5.00 to 8.50

Grants

The weighted average fair value of the stock warrants granted during the three and six months ended June 30, 2015 was $0.09 and $0.08 per share, respectively.  The weighted average fair value of the stock warrants granted during the three and six months ended June 30, 2014, was $0.17 and $0.21 per share, respectively.

On April 3, 2015, the Company granted warrants to a former employee of the Company to purchase an aggregate of 137,430 shares of common stock at an exercise price of $0.09 per share for an aggregate grant date value of $12,018.  The warrants have a term of five years.  The warrants were issued as repayment for amounts previously accrued.

Stock-based compensation expense related to warrants for the three and six months ended June 30, 2015 was recorded in the condensed consolidated statements of operations as a component of selling, general and administrative expenses and totaled $12,063 and $12,279, respectively, and $(852) and $(588) for the three and six months ended June 30, 2014, respectively.  The remaining $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 six months ended June 30, 2015 is presented below:

	Number of Warrants		Weighted Average Exercise Price		Average Remaining Life In Years		Aggregate Intrinsic Value
Outstanding, January 1, 2015		9,339,044	$	0.45
Granted		637,430	$	0.10
Exercised		-	$	-
Forfeited		-		-
Outstanding, June 30, 2015		9,976,474	$	0.43		3.8	$	33,246
Exercisable, June 30, 2015		9,716,474	$	0.36		3.9	$	33,246

The following table presents information related to stock warrants at June 30, 2015:

	Warrants Outstanding				Warrants Exercisable
Range of Exercise Price	Weighted Average Exercise Price		Outstanding Number of Warrants		Weighted Average Exercise Price		Weighted Average Remaining Life In Years		Exercisable Number of Warrants
$0.09 - $0.35	$	0.27		9,383,628	$	0.27		3.9		9,383,628
$0.36 - $3.00		2.91		562,846		2.91		1.2		312,846
$3.01 - $4.95		4.95		30,000		4.95		2.3		20,000
$0.09 - $4.95	$	0.43		9,976,474	$	0.36		3.9		9,716,474