Quarterly report pursuant to Section 13 or 15(d)

Stockholders' Equity

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Stockholders' Equity
6 Months Ended
Jun. 30, 2016
Equity [Abstract]  
Stockholders' Equity

5. Stockholders’ Equity

 

Preferred Stock

 

The Company has authorized a total of 10,000,000 shares of preferred stock, par value $0.001 per share. On March 17, 2015, the Company filed a Certificate of Designations, Preferences, Rights and Limitations (the “Certificate of Designations”) of its Series A Convertible Preferred Stock with the Delaware Secretary of State to amend the Company’s certificate of incorporation. The number of shares designated as Series A Convertible Preferred Stock was 175,000 (which are not subject to increase without the written consent of a majority of the holders of the Series A Convertible Preferred Stock or as otherwise set forth in the Certificate of Designations). Effective January 28, 2016, the Series A Convertible Preferred Stock Certificate of Designations was amended to increase the number of authorized shares of Series A Convertible Preferred Stock from 175,000 to 350,000. Accordingly, as of June 30, 2016, 9,650,000 shares of preferred stock were undesignated and may be issued with such rights and powers as the Board of Directors may designate

 

Effective March 17, 2015, the Company entered into a Securities Purchase Agreement with a current stockholder of the Company who owned 10.6% of the Company’s issued and outstanding shares of common stock immediately prior to the financing transaction, pursuant to which such stockholder purchased 175,000 shares of the Company’s non-voting Series A Convertible Preferred Stock (the “Preferred Stock”) at a price per share of $10.00, representing an aggregate purchase price of $1,750,000.

 

Effective January 28, 2016, the Company entered into a Securities Purchase Agreement with the holder of the Preferred Stock sold on March 17, 2015, pursuant to which the Company sold an additional 175,000 shares of Preferred Stock at a price per share of $10.00, representing an aggregate purchase price of $1,750,000, payable $583,333 on closing, $583,333 on or before March 4, 2016, and $583,334 on or before June 3, 2016. All such installments had been received at June 30, 2016.

 

This class of Preferred Stock has a dividend per share equal to 1% of the annual net revenue of the Company divided by 175,000, until converted or redeemed. Based on the Company’s net revenues for the year ended December 31, 2015 of $200,000, the Company recorded a dividend of $2,000 on the shares of Preferred Stock issued and outstanding at that time. The dividend has been presented as a current liability in the Company’s condensed consolidated balance sheets as of December 31, 2015. The dividend was paid in cash on May 1, 2016.

 

Each share of Preferred Stock may be converted, at the option of the holder, into 12.5 shares of common stock (subject to customary anti-dilution provisions) and the Preferred Stock is subject to mandatory conversion at the conversion rate in the event of a merger or sale transaction resulting in gross proceeds to the Company of at least $21,875,000. The Preferred Stock has a liquidation preference based on its assumed conversion into shares of common stock.

 

If fully converted, the Preferred Stock sold in the March 17, 2015 closing would convert into 2,187,500 shares of common stock, representing an effective price per share of common stock of $0.80. On March 17, 2015, the closing price of the Company’s common stock was $0.25 per share. If fully converted, the Preferred Stock sold in the January 21, 2016 closing would also convert into 2,187,500 shares of common stock, representing an effective price per share of common stock of $0.80. On January 21, 2016, the closing price of the Company’s common stock was $0.22 per share. The Company has the right to redeem the Preferred Stock up to the fifth anniversary of the respective closing dates at a price per share equal to $50.00. The Preferred Stock has no right to cash, except for the payment of the aforementioned dividend when the Company generates revenues, and does not have any registration rights.

 

Based on the attributes of the Preferred Stock described above, the Company has determined to account for the Preferred Stock as a permanent component of stockholders’ equity. Legal costs of $12,608 incurred with respect to the issuance of the Preferred Stock on March 17, 2015 were charged directly to additional paid-in capital. No costs were incurred with respect to the issuance of the Preferred Stock on January 21, 2016.

 

Common Stock

 

Effective March 17, 2015, the Company’s Chairman and major stockholder converted advances due to him aggregating $92,717 into 92,717 shares of the Company’s common stock, reflecting an effective price of $1.00 per share. On the effective date of the transaction, the closing price of the Company’s common stock was $0.25 per share. The Company accounted for this transaction as a capital transaction.

 

Information with respect to the issuance of common stock in connection with various stock-based compensation arrangements is provided at Note 8.

 

Common Stock Warrants

 

On March 6, 2015, the Company’s Board of Directors extended to April 15, 2015 the outstanding warrants to acquire 2,928,800 shares of the Company’s common stock, which were then currently scheduled to expire on March 31, 2015, and discounted the cash exercise prices of the warrants by 50%. Warrants so extended and discounted consisted of 1,075,000 warrants currently exercisable at $0.75 per share and 1,853,800 warrants currently exercisable at $0.50 per share. The difference in the fair value of the warrants immediately before and after the grant of the extensions, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $34,016 (average of $0.01 per share), and such amount was charged to operations on March 6, 2015. The fair value of the warrant extensions was calculated using the following input variables: stock price - $0.30 per share; exercise price - $0.50 and $0.75 per share; expected life – 25 to 40 days; expected volatility – 199%; expected dividend yield - 0%; risk-free interest rate – 0.01%. The difference in the fair value of the warrants immediately before and after the grant of the discount, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $171,757 (an average of $0.06 per share), and such amount was charged to operations on March 6, 2015. The fair value of the warrant discount was calculated using the following input variables: stock price - $0.30 per share; exercise price - $0.50 and $0.75 per share to $0.25 and $0.375 per share, respectively; expected life – 15 days (the period during which the discount was available); expected volatility – 199%; expected dividend yield - 0%; risk-free interest rate – 0.01%.

 

As a result of the March 6, 2015 warrant extension and discount offers, warrants to acquire 1,050,000 shares of the Company’s common stock were exercised in April 2015 (including warrants to acquire 500,000 shares of common stock by Dr. Debbie Schwartzberg, an affiliate of the Company, and 300,000 shares of common stock by Philip F. Palmedo, a director of the Company) at exercise prices ranging from $0.25 to $0.375 per share. The exercise of the warrants generated aggregate net proceeds to the Company of $315,000 (average exercise price of $0.30 per share).

 

As of June 30, 2016 and December 31, 2015, there were no warrants outstanding to purchase common stock.