6.  STOCKHOLDERS’ EQUITY

Common Stock - The Company has authorized 20,000,000 common shares with a $0.0001 par value. As of September 30, 2013 there were 8,046,978 common shares outstanding.

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 September 30, 2013 there were 1,040,670 preferred shares outstanding.

Series A Preferred Stock - As of September 30, 2013 there were no shares of Series A Preferred Stock outstanding.

During the nine months ended September 30, 2013; 600,000 Series A preferred shares were converted to common shares at a ratio of 7:1.  The Series A Preferred Stock ranks senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series A Preferred Stock accrue dividends at the rate per annum of $0.066664. The conversion of Series A preferred shares to common shares resulted in a release of accumulated dividends as of September 30, 2013.

Series B Preferred Stock - As of September 30, 2013 there were 212,022 shares of Series B Preferred Stock outstanding.

During the nine months ended September 30, 2013; 1,287,978 Series B preferred shares were converted to common shares.  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. The conversion of Series B preferred shares to common shares resulted in a release of $279,875 in accumulated dividends during the nine months ended September 30, 2013. At September 30, 2013, Series B Preferred Stock had dividends accumulated of $65,988.  No dividends have been declared, therefore there are no amounts accrued on the balance sheet.

The holders of the Series B 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 B original issue price of $2.00 by the then applicable conversion price. The conversion ratio is subject to customary 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 holders of Series B 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 B Preferred Stock plus any accrued and unpaid dividends, whether or not declared, on the Series B 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 B Preferred Stock in stockholders’ equity.

The holders of Series B 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 B 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 B Preferred Stock are convertible into as of the record date for determining stockholders entitled to vote on such matter.

Series C Preferred Stock - As of September 30, 2013 there were 101,000 shares of Series C Preferred Stock outstanding.

During the nine months ended September 30, 2013; 659,000 Series C preferred shares were converted to common shares. 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 $87,127 were paid upon the conversion of Series C preferred shares to common shares.  At September 30, 2013, Series C Preferred Stock had dividends accumulated of $27,068.  As dividends are accrued and payable quarterly on the Series C Preferred Stock, the Company has dividends payable of $27,068 included in accounts payable as of September 30, 2013.

The holders of the Series C 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 C original issue price of $2.00 by the then applicable conversion price. The conversion ratio is subject to customary 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 holders of Series C 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 C Preferred Stock plus any accrued and unpaid dividends, whether or not declared, on the Series C 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 C Preferred Stock in stockholders’ equity.

The holders of Series C 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 C 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 C Preferred Stock are convertible into as of the record date for determining stockholders entitled to vote on such matter.

Series D Preferred Stock - As of September 30, 2013 there were 727,648 shares of Series D Preferred Stock outstanding.

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.

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 has accrued $24,407 for dividends payable in accrued expenses as of September 30, 2013.

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. We have 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. This amount was recorded as a charge against our accumulated deficit in our accompanying balance sheet.

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.

Each unit includes one-half warrant.  Each full warrant grants the right to purchase a share of the Company’s common stock and, as of September 30, 2013, there were warrants to purchase 363,824 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 and including October 1, 2014.

Treasury Stock Transaction

Effective January 26, 2012 two of our founders, including our former Chief Executive Officer, Mr. Larry Griffin, severed their ties with the Company upon execution of a settlement agreement with us.  At the time of their departure from the Company, each of them returned 525,000 shares (1,050,000 total) of common stock to the Company for cancellation to assist the Company and provide for a better capitalization to all the investors, and sold their remaining shares to other private individuals with no proceeds going to the Company.  The settlement agreement did not provide for payment by us or the founders. 

Stock Options

On June 20, 2013, the Board of Directors approved the grant of 10,000 options to the Company’s Secretary, 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. 

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:

The Company recorded stock-based compensation expense of $17,526 and $67,219 during the three and nine months ended September 30, 2013, respectively. The Company recorded stock-based compensation expense of $75,201 and $430,448 during the three and nine months ended September 30, 2012, respectively.

As of September 30, 2013 there was $125,255 of unrecognized compensation expense related to the issuance of the stock options.

Performance Stock Options

There were no performance Stock options granted during the three and six months ended September 30, 2013.

See Note 4 for further discussion of the performance options.