8.  STOCKHOLDERS’ EQUITY:

Common Stock - The Company has authorized 20,000,000 common shares with a $0.0001 par value. There were 9,495,045 shares issued and 10,952,356 outstanding at December 31, 2014 and 8,082,000 shares issued and outstanding at December 31, 2013.

On October 1, 2014, the Company commenced a non-public equity offering of up to 3,650,807 units at $1.75 per unit (the “Units”).  Each Unit consists of one common share and one-half warrant, with each whole warrant exercisable at $2.00 per share.  The purchase price for the Units is payable in either cash, conversion of outstanding Series D preferred shares or certain outstanding promissory notes.  As of December 31, 2014 the Company raised $366,324 and issued 209,324 shares of common stock and warrants to purchase 104,659 shares of common stock as part of the private equity offering.  The Company issued 1,207,491 shares of common stock and warrants to purchase 603,742 shares of common stock as part of the conversion of 704,379 Series D preferred shares.  The Company issued 1,100,876 shares of common stock and warrants to purchase 550,438 shares of common stock as part of the conversion of $1,926,537 principal and accrued interest in certain outstanding promissory notes.

Preferred Stock - The Company has authorized 4,500,000 shares of Preferred Stock with a $0.0001 par value.  As holders of any series of preferred stock convert into common shares the preferred shares are no longer outstanding and become available for reissuance.  As of December 31, 2014 and 2013, there were 178,924 and 1,005,648 preferred shares outstanding, respectively.

Series A Preferred Stock - As of December 31, 2014 and 2013 there were no shares of Series A preferred stock outstanding.

There was no activity during the year ended December 31, 2014 and 600,000 Series A preferred shares were converted to common shares at a ratio of seven to one during the year ended December 31, 2013.  The Series A preferred stock ranked senior in liquidation and dividend preferences to the Company’s common stock.  Holders of Series A preferred stock accrued dividends at the rate per annum of $0.066664.  Dividends on Series A preferred shares are paid only upon liquidation, therefore the conversion of Series A preferred shares to common shares resulted in a full release of the accumulated dividends as of December 31, 2013.

Series B Preferred Stock - As of December 31, 2014 there were no shares outstanding and 177,000 shares of Series B preferred stock outstanding as of December 31, 2013.

During the years ended December 31, 2014 and 2013; 177,000 and 1,323,000 Series B preferred shares were converted to common shares, respectively.  The Series B preferred stock ranks senior in liquidation and dividend preferences to the Company’s common stock.  Holders of Series B preferred stock accrue dividends at the rate per annum of $0.16 per share.  Dividends on Series B preferred shares are paid only upon liquidation, therefore the conversion of Series B preferred shares to common shares resulted in a release of $40,529 and $361,426 in accumulated dividends during the years ended December 31, 2014 and 2013, respectively.

Series C Preferred Stock - As of December 31, 2014 there were no shares outstanding and 101,000 shares of Series C preferred stock outstanding as of December 31, 2013.

During the years ended December 31, 2014 and 2013; 101,000 and 659,000 Series C preferred shares were converted to common shares, respectively. The Series C preferred stock ranks senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series C preferred stock accrue dividends at the rate per annum of $0.16 per share. Dividends of $24,869 and $95,600 were paid upon the conversion of Series C preferred shares to common shares during 2014 and 2013, respectively.

Series D Preferred Stock - As of December 31, 2014 and 2013 there were 178,924 and 727,648 shares of Series D preferred stock outstanding, respectively.

On June 21, 2013, the Company offered 1,500,000 units at $3.00 per unit for potential total proceeds of $4,500,000.  On August 30, 2013, the Company completed its offering with a total of 727,648 units sold at $3.00 per unit for gross proceeds of $2,182,944, which consisted of $1,432,962 in cash and $749,982 in a non-cash conversion of senior secured notes payable.  The Company paid share issuance costs in the amount of $84,232.  Each unit consisted of one share of Series D preferred Stock and one-half warrant, with each whole warrant exercisable at $3.00 per share. 

In October 2013, the Company initiated a follow-on Series D preferred stock offering to sell the remaining 772,352 units at $3.00 per unit for up to $2,317,056 gross proceeds. The offering includes an over-allotment of 1,000,000 units for an additional $3,000,000 in potential gross proceeds.  The offering term was extended and ended May 30, 2014.  The terms of the follow-on Series D preferred stock offering are the same as the original Series D preferred stock offering.

In January 2014, the Company issued 53,332 units sold at $3.00 per unit for gross proceeds of $159,996.  The Company paid share issuance costs in the amount of $6,000.  Each unit in this offering consists of one share of the Company’s Series D preferred stock and one-half warrant, with each whole warrant exercisable at $3.00 per share.  The Company issued warrants to purchase 26,666 shares of common stock outstanding. The warrants will be exercisable by the holders at any time on or after the issuance date of the warrants through October 1, 2015.

In May 2014, the Company issued 118,655 units sold at $3.00 per unit for gross proceeds of $355,967.  Each unit consisted of one share of the Company’s Series D preferred stock and one-half warrant, with each whole warrant exercisable at $3.00 per share.  The Company issued warrants to purchase 59,327 shares of common stock. The warrants will be exercisable by the holders at any time through October 1, 2015.

Holders of Series D preferred stock accrue dividends at the rate per annum of $0.24 per share, payable on a quarterly basis. As dividends are accrued and payable quarterly on the Series D preferred stock, the Company paid dividends of $177,846 and $24,407 during the years ended December 31, 2014 and 2013, respectively.  As of December 31, 2014 the Company has dividends payable in accrued expenses of $45,590.

The holders of the Series D preferred stock have conversion rights equivalent to such number of fully paid and non-assessable shares of common stock as is determined by dividing the Series D original issue price of $3.00 by the then applicable conversion price. Each Series D Share will convert into one share of our common stock at any time at the option of the holder of the Series D Shares or will be converted at the option of the Company at any time the trading price of our common stock is at least $4.50 per share for ten consecutive trading days. The conversion ratio is subject to anti-dilution adjustments, including in the event that the Company issues equity securities at a price equivalent to or less than the conversion price in effect immediately prior to such issue. The Company determined that there is a beneficial conversion feature (“BCF”).  The calculated value as of the commitment date of the BCF was $176,729, which represents the difference between the effective conversion price and the stated conversion price multiplied by the total number of shares which may be converted.  We have recorded this amount as a deemed dividend as of the date of issuance, August 30, 2013, as the Series D preferred stock is immediately convertible.  During 2014 the Company extended the warrant expiration date one year which created a modification to the original unit offering.  The Company calculated additional value to the BCF of $24,279 and recorded this amount as a deemed dividend as of the date of extension.  The above mentioned amounts were recorded as a charge against our accumulated deficit in our accompanying balance sheet.

During the year ended December 31, 2014, shareholders owning 16,332 shares of Series D preferred stock converted the preferred shares into 16,332 shares of common stock pursuant to the conversion provision in the Certificate of Designations of Series D preferred stock.

In October 2014 the Company induced conversion of the Series D preferred stock into the private equity offering dated October 1, 2014.  Each holder of the Series D preferred shares was offered common stock as determined by the dividing the original issue price of $3.00 by the private equity offering unit price of $1.75, times the number of Series D preferred shares being converted.  The holders of the Series D preferred shares received the calculated number of common shares and one-half warrant per common share.  The Company converted 704,379 Series D preferred shares into 1,207,491 common shares and 603,742 warrants exercisable at $2.00 per share, each warrant grants the right to purchase a share of the Company’s common stock.  The Company determined that there is an inducement premium associated with the conversion of the Series D preferred into the private equity offering dated October 1, 2014.  The calculated value of the inducement premium was $1,332,376, which represents the additional number of common shares issued as a result of the lower conversion price multiplied by the stock’s trading price on the day of conversion price plus the fair value of the warrants.  The Company recorded this amount as a deemed dividend as of December 31, 2014.

The holders of Series D preferred stock have a liquidation preference over the holders of the Company’s common stock equivalent to the purchase price per share of the Series D preferred stock plus any accrued and unpaid dividends, whether or not declared, on the Series D preferred stock. A liquidation would be deemed to occur upon the happening of customary events, including transfer of all or substantially all of the Company’s common stock or assets or a merger, or consolidation. The Company believes that such liquidation events are within its control and therefore the Company has classified the Series D preferred stock in stockholders’ equity.

The holders of Series D preferred stock vote together as a single class with the holders of the Company’s common stock on all action to be taken by the Company’s stockholders. Each share of Series D preferred stock entitles the holder to the number of votes equal to the number of shares of common stock into which the shares of the Series D preferred stock are convertible as of the record date for determining stockholders entitled to vote on such matter.

The Company agreed to use its best efforts to register the shares underlying the warrants issued in the Series D preferred stock offering and the Private equity offering dated October 1, 2014. 

Stock Options

On January 13, 2014, the Board of Directors approved the grant of 94,000 options to employees of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. One-third of the options vest immediately, with the remaining vesting over a 2 year period.  The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date. 

On January 16, 2014, the Board of Directors approved the grant of 40,000 options to the Company’s Directors for their 2013 service, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. The options vest immediately and have an exercise price of $3.00 per share, with an expiration date of five years from the grant date. 

On February 1, 2014, the Board of Directors approved the grant of 50,000 options to an employee of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. The options vest ratably over a four year period.  The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.

On April 4, 2014, the Board of Directors approved the grant of 4,000 options to employees of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. One-third of the options vest immediately, with the remaining vesting over a two year period.  The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.

On June 19, 2014, the Board of Directors approved the grant of 10,000 options to the new Secretary of the Board.  The options vest immediately. The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.

On June 19, 2014, the Board of Directors approved the grant of 100,000 options to an employee of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. The options vest ratably over a three-year period.  The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.

The fair value of each stock option granted was estimated on the date of grant using the Black Scholes option pricing model with the following assumptions:

Significant assumptions utilized in determining the fair value of our stock options included the volatility rate, estimated term of the options, risk-free interest rate and forfeiture rate.  In order to estimate the volatility rate at each issuance date, given that the Company has not established a historical volatility rate as it has minimal trading volume since we began trading in October 2013, management reviewed volatility rates for a number of companies with similar manufacturing operations to arrive at an estimated volatility rate for each option grant.  The term of the options was assumed to be five years, which is the contractual term of the options.  The risk-free interest rate was determined utilizing the treasury rate with a maturity equal to the estimated term of the option grant.  Finally, management assumed a zero forfeiture rate as the options granted were either fully-vested upon the date of grant or had relatively short vesting periods.  As such, management does not currently believe that any of the options granted will be forfeited.  We will monitor actual forfeiture rates, if any, and make any appropriate adjustments necessary to our forfeiture rate in the future. 

For the years ended December 31, 2014 and 2013, the Company recorded stock-based compensation expense of $231,524 and $216,083, respectively.

As of December 31, 2014 and 2013 there was $308,041 and $404,006, respectively, of unrecognized compensation expense related to the issuance of the stock options.

Performance Stock Options

There were no performance stock options granted during the year ended December 31, 2014.

See Note 4 for further discussion of the performance options.

Warrants

The Company issued 85,993 warrants during the year ended December 31, 2014 and 363,824 warrants during the year ended December 31, 2013 in connection with the Series D unit offering discussed above. Each unit consisted of one share of Series D preferred stock and one-half warrant, with each whole warrant exercisable at $3.00 per share and grants the right to purchase a share of the Company’s common stock. The warrants are exercisable by the holders through and including October 1, 2015.

The Company issued 283,329 warrants in connection with the non-public offering of notes and warrant up to $1,000,000.  The warrants expire three years from the date of issuance and are exercisable immediately at $3.00 per share.

The Company issued 432,995 warrants in connection with the non-public offering of notes and warrants up to $3,000,000.  The warrants expire three years from the date of issuance and are exercisable immediately at $3.00 per share.

The Company issued 104,659 warrants in connection with the private equity offering dated October 1, 2014 discussed above.  Each unit consisted of one share of Common stock and one-half warrant, with each whole warrant exercisable at $2.00 per share and grants the right to purchase a share of the Company’s common stock.  The warrants expire three years from the date of issuance and are exercisable immediately.

The Company issued 550,438 warrants in connection with the conversion of unsecured notes payable into the private equity offering dated October 1, 2014.  The unsecured notes payable converted into one share of common stock plus one-half warrant for each $1.75 of the outstanding principal and accrued interest.  The warrants expire three years from the date of issuance and are exercisable immediately at $2.00 per share.

The Company issued 603,742 warrants in connection with the conversion of Series D preferred shares into the private equity offering dated October 1, 2014.  The Series D preferred shares converted into one share of common stock plus one-half warrant for each $1.75 of the original purchase price.  The warrants expire three years from the date of issuance and are exercisable immediately at $2.00 per share.