Stockholders' Deficiency

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

6. Stockholders' Deficiency

Common Stock

On July 28, 2016, the Company entered an Exchange Agreement with Dellave Holdings LLC ("Dellave") whereby the Company issued an aggregate of 2,253,528 shares of Common Stock in exchange for the extinguishment of accounts payable balances totaling $698,594 held by Dellave.  The exchange was based on the prior day's closing price of $0.31.   The $698,594 aggregate fair value of the common stock issued was credited to equity at conversion. Mr. Timothy Reilly is the managing member of Dellave.  Mr. Reilly is also the managing member of Melrose Capital Advisors, LLC, the Company's senior lender at the time of the transaction.

Preferred Stock

As of September 30, 2016 and December 31, 2015, the Company had accrued contractual dividends of $256,675 and $319,853, respectively, related to the Series B Preferred Stock.  On January 1, 2016 and 2015, the Company issued 33,847 and 31,633 shares of Series B convertible preferred stock valued at approximately $320,000 and $299,000, 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 holders 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:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2016	2015	2016	2015
Risk free interest rate	1.00%	1.74% to 2.28%	1.00% to 2.12%	1.35% to 2.28%
Dividend yield	0.00%	0.00%	0.00%	0.00%
Expected volatility	199.0%	196.0% to 197.0%	199.0% to 200.0%	195.0% to 197.0%
Expected life in years	5.5	5.5 to 10.0	5.5 to 10.0	5.5 to 10.0

The Company estimated forfeitures at a weighted average annual rate of 3% to 4% for the three and nine months ended September 30, 2016 and 2015.

Grants

The weighted average fair value of the stock options granted during the three and nine months ended September 30, 2016 was $0.35 and $0.29 per share, respectively.  The weighted average fair value of the stock options granted during the three and nine months ended September 30, 2015 was $0.12 and $0.10 per share, respectively.

During the nine months ended September 30, 2016, the Company granted options to consultants and directors of the Company to purchase an aggregate of 428,906 shares of common stock under a previously approved plan at exercise price ranging between $0.24 and $0.35 per share for an aggregate grant date value of $123,931.  The options vested on the grant date and have a term of ten 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 $101,421 and $213,860 for the three and nine months ended September 30, 2016, respectively, and $59,546 and $258,114 for the three and nine months ended September 30, 2015, respectively.

As of September 30, 2016, stock-based compensation expense related to stock options of $63,721 remains unamortized, which is being amortized over the weighted average remaining period of 1.7 years.

Exercise

During the nine months ended September 30, 2016, the Company issued an aggregate of 1,492,078 shares of Common Stock to holders of options who elected to exercise options to purchase 3,108,141 shares of Common Stock on a "cashless" basis under the terms of the options.  The options had exercise prices ranging from $0.09 and $0.30 per share.

During the nine months ended September 30, 2016, the Company received proceeds of $1,817 from the exercise of options to purchase 16,666 shares of Common Stock.

The aggregate intrinsic value of the options exercised was $480,041 for the three and nine months ended September 30, 2016.

Summary

A summary of the stock option activity during the nine months ended September 30, 2016 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Life		Intrinsic
	Options			Price		In Years		Value
Outstanding, January 1, 2016		5,341,284		$	0.70
Granted		428,906			0.29
Exercised		(3,108,141	)		0.16
Forfeited		(797,333	)		2.21
Outstanding, September 30, 2016		1,864,716		$	0.85		7.6	$	224,059
Exercisable, September 30, 2016		1,167,449		$	1.28		6.9	$	96,992

The following table presents information related to stock options at September 30, 2016:

		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
$	0.09 - $2.20	$	0.31		1,582,716	$	0.45	7.8		885,449
$	2.21 - $3.80		2.50		150,000		2.50	3.1		150,000
$	3.81 - $6.99		5.49		132,000		5.49	5.0		132,000
		$	0.85		1,864,716	$	1.28	6.9		1,167,449

Warrants

Valuation

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

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2016	2015	2016	2015
Risk free interest rate	n/a	1.75%	1.58%	1.26% to 1.75%
Dividend yield	n/a	0.00%	0.00%	0.00%
Expected volatility	n/a	196.0%	200.0%	195.0% to 197.0%
Contractual term in years	n/a	7.10	5.0	5.0 to 7.5

Grants

The weighted average fair value of the stock warrants granted during the nine months ended September 30, 2016 and 2015 was $0.36 and $0.08 per share, respectively.  There were no stock warrants granted during the three months ended September 30, 2016 and 2015.

Exercise

During the nine months ended September 30, 2016, the Company issued an aggregate of 1,155,361 shares of Common Stock to holders of warrants who elected to exercise warrants to purchase 1,795,080 shares of Common Stock on a cashless basis under the terms of the warrants.  The warrants had exercise prices ranging from $0.10 and $0.25 per share.

The aggregate intrinsic value of the warrants exercised was $414,176 and $425,501 for the three and nine months ended September 30, 2016, respectively.

There was no stock-based compensation expense related to warrants recorded in the three and nine months ended September 30, 2016.  Stock-based compensation expense related to warrants for the three and nine months ended September 30, 2015 was recorded in the condensed consolidated statements of operations as a component of selling, general and administrative expenses totaled $21 and $12,300, respectively.  As of September 30, 2016, there was no stock-based compensation expense related to warrants that remained unamortized.

A summary of the stock warrant activity during the nine months ended September 30, 2016 is presented below:

				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Life		Intrinsic
	Warrants			Price		In Years		Value
Outstanding, January 1, 2016		10,046,198		$	0.41
Granted		75,000			0.25
Exercised		(1,795,080	)		0.13
Forfeited		(250,000	)		2.90
Outstanding, September 30, 2016		8,076,118		$	0.39		2.6	$	188,679
Exercisable, September 30, 2016		8,076,118		$	0.39		2.6	$	188,679

The following table presents information related to stock warrants at September 30, 2016:

		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
$	0.10 - $0.35	$	0.29		7,776,118	$	0.29	2.7		7,776,118
$	0.36 - $3.00		2.90		270,000		2.90	0.1		270,000
$	3.01 - $4.95		4.95		30,000		4.95	1.0		30,000
$	0.10 - $4.95	$	0.39		8,076,118	$	0.39	2.6		8,076,118