At March 31, 2014 and December 31, 2013, accrued interest due for the convertible notes was $827,545 and $794,395, respectively, and is included in accrued expenses in the balance sheets. Interest expense for the convertible notes payable for the interim period ended March 31, 2014 and 2013 was $33,150 and $30,794, respectively.
The long term portion of convertible notes is due as follows: 2015-$40,000; 2016-$150,000.
At March 31, 2014 and December 31, 2013, accrued interest due for the convertible notes related parties was $303,791 and $292,449, respectively, and is included in accrued expenses in the accompanying balance sheets. Interest expense for convertible notes payable related parties for the interim period ended March 31, 2014 and 2013 was $11,342 and $10,499, respectively.
Note 7 - Notes Payable
Notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
|
|
Seventy (70) units, with each unit consisting of a 10% promissory note of $25,000, matured from January 22, 2011 through December 18, 2011 with a 10% discount rate, and 55 non-dilutable (for one (1) year) restricted shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, and at market price. Pursuant to the terms and condition of a debt purchase agreement among certain note holders, the Company and the Consultant formalized in September 2011, the certain note holders transferred certain notes with the principal amount of $50,000 and $25,000, including accrued interest, in July 2011 and August 2011, respectively, to the consultant. Pursuant to the terms and conditions of a settlement agreement that the Company executed with the estate of a deceased note holder in November 2011, the Company settled a $25,000 note for restricted shares of its common stock, in December 2011, issued to two (2) beneficiaries of the estate (see Notes 5 and 11). Pursuant to the terms and conditions of debt purchase agreements formalized among the Company, the note holder and two unrelated parties in September 2013, October 2013 and December 2013, the Company settled and transferred $100,000 of the note balance to the unrelated parties in the form of four (4) convertible notes for $25,000 each. Pursuant to the terms and conditions of debt purchase agreements formalized among the Company, the note holder and an unrelated party in January 2014 and March 2014, the Company settled and transferred $25,000 of the note balance and $25,000 of accrued interest to the unrelated party in the form of two (2) convertible notes for $25,000 each. The Company is currently pursuing extensions on the remaining notes.
|
|
$
|
1,525,000
|
|
|
$
|
1,550,000
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory notes of $225,000 bearing interest at 10% per annum, matured on January 23, 2012, with a total of 492 shares of common stock, as adjusted by the Companys 1:1,500 reverse stock split Pursuant to the terms and conditions of debt purchase agreements formalized among the Company, the note holder and an unrelated party in July 2013 and October 2013, the Company transferred $60,000 and $70,000, respectively, of the note balance to the unrelated party in the form of a convertible notes for $60,000 and $70,000 (see Notes 5 and 11). The Company is currently pursuing an extension. Promissory note of $50,000, bearing interest at 8% per annum, maturing on July 22, 2015.
|
|
|
145,000
|
|
|
|
95,000
|
|
|
|
|
|
|
|
|
|
|
Two (2) units with each unit consisting of a 10% promissory note of $25,000, matured on April 20, 2012, and 34 restricted shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, and at market price. The 67 shares, as adjusted by the Companys 1:1,500 reverse stock split, were issued in June 2009. The Company is currently pursuing extensions.
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One (1) unit consisting of a 10% promissory note of $25,000, matured on June 8, 2012, and 34 restricted shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, and at market price. The shares were issued in June 2009. The Company is currently pursuing an extension.
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
Three (3) units with each unit consisting of a 10% promissory note of $25,000, matured on June 25, 2012, and 34 restricted shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, and at market price, for a total of 100 shares of common stock, as adjusted by the Companys 1:1,500 reverse stock split. The shares were issued in August 2009. The Company is currently pursuing extensions.
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
1.4 units with each unit consisting of a 10% promissory note of $25,000, matured on July 14, 2012 and 34 restricted shares of the Companys common stock as adjusted by the Companys 1:1,500 reverse stock split, and at market price, for a total of 47 shares of common stock, as adjusted by the Companys 1:1,500 reverse stock split. The shares were issued in August 2009. The Company is currently pursuing an extension.
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
One (1) unit consisting of a 10% promissory note of $25,000, matured on August 18, 2012 and 50 restricted shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, and at market price. The Company is currently pursuing an extension.
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
Promissory notes executed in July 2011 bearing interest at 10% per annum, matured on December 31, 2011. The Company issued 667 warrants with an exercise price of $750 per share, as adjusted by the Companys 1:1,500 reverse stock split, expiring July 15, 2014. The fair value of the warrants issued was $26,200, all of which was expensed in 2011 as interest expense. The Company is currently pursuing extensions.
|
|
|
87,500
|
|
|
|
87,500
|
|
|
|
|
|
|
|
|
|
|
A promissory note executed in August 2011 bearing interest at 10% per annum, matured on December 31, 2011. The Company is currently pursuing an extension.
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,017,500
|
|
|
|
1,992,500
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
|
(50,000)
|
|
|
|
(-)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,967,500
|
|
|
|
1,992,500
|
|
|
|
|
|
|
|
|
|
|
Discount on convertible notes payable
|
|
|
(-)
|
|
|
|
(-)
|
|
|
|
|
|
|
|
|
|
|
Current maturities, net of discount
|
|
$
|
1,967,500
|
|
|
$
|
1,992,500
|
|
|
|
|
|
|
|
|
29
At March 31, 2014 and December 31, 2013, accrued interest due for the notes was $1,379,159 and $1,329,835, respectively, and is included in accrued expenses in the accompanying balance sheets. Interest expense for notes payable for the interim period ended March 31, 2014 and 2013 was $49,324 and $58,103, respectively.
The long term portion of promissory notes is due as follows: 2015-$50,000
Note 8 - Notes Payable Related Parties
Notes payable - related party consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
|
|
Promissory notes executed with the CEO bearing interest at an amended rate of 8% per annum originally matured on April 30, 2011. In January 2014, the notes were extended to December 31, 2014.
|
|
$
|
504,000
|
|
|
$
|
504,000
|
|
|
|
|
|
|
|
|
|
|
A promissory note executed with the CEO bearing interest at 9% per annum originally matured on April 30, 2011. The Company issued 14 warrants with an exercise price of $1,950 per share, as adjusted by the Companys 1:1,500 reverse stock split, originally matured on May 25, 2011. The fair value of the warrants issued was $24,300. In January 2014, the note was extended to December 31, 2014.
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
A promissory note with the CEO bearing interest at 8% per annum originally matured on April 30, 2011. The Company issued 6 warrants with an exercise price of $750 per share, as adjusted by the Companys 1:1,500 reverse stock split, which originally matured on February 21, 2012. The fair value of the warrants issued was $3,758. In January 2014, the note was extended to December 31, 2014.
|
|
|
22,000
|
|
|
|
22,000
|
|
|
|
|
|
|
|
|
|
|
Two (2) 10% promissory notes, with the CEO, of $25,000 and 34 restricted shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, and at market price, for a total of 67 shares, as adjusted by the Companys 1:1,500 reverse stock split, originally matured on April 30, 2011. In January 2014, the note was extended to December 31, 2014.
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Promissory notes with the CEO, non-interest bearing, originally matured on April 30, 2011. Partial payments of $6,580 were made towards the notes in August and September 2010 and $2,700 in February 2011. In January 2014, the notes were extended to December 31, 2014.
|
|
|
31,420
|
|
|
|
31,420
|
|
|
|
|
|
|
|
|
|
|
In October 2010, the Company assigned the proceeds of six (6) open accounts receivable invoices, totaling $20,761, to its CEO. The assignment was non-interest bearing and fee free with a due date of November 20, 2010. Partial repayments were made in October 2010 for $4,218 and November 2010 for $4,125. In January 2014, the note was extended to December 31, 2014 (see Note 11).
|
|
|
12,418
|
|
|
|
12,418
|
|
|
|
|
|
|
|
|
|
|
A promissory note executed in March 2011 with the CEO, non-interest bearing, originally matured on April 1, 2011. In January 2014, the note was extended to December 31, 2014.
|
|
|
2,800
|
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
722,638
|
|
|
$
|
722,638
|
|
|
|
|
|
|
|
|
At March 31, 2014 and December 31, 2013, accrued interest due for the notes related parties was $450,321 and $436,493, respectively, and is included in accrued expenses in the accompanying balance sheets. Interest expense for notes payable - related parties for the interim period ended March 31, 2014 and 2013 was $13,828 and $13,828, respectively.
30
Note 9 - Convertible Secured Notes Payable
Convertible secured notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
|
|
DART Limited (custodian for Citco Global and as assigned from YA Global/Highgate) (DART)
|
|
$
|
542,588
|
|
|
$
|
542,588
|
|
|
|
|
|
|
|
|
|
|
Current maturities, net of discount
|
|
$
|
542,588
|
|
|
$
|
542,588
|
|
|
|
|
|
|
|
|
At March 31, 2014, the Company's outstanding convertible secured notes payable are secured through the note holder's claim on the Company's intellectual property.
The DART secured convertible debentures are matured. The Company has been in contact with the note holder who has indicated that it has no present intention of exercising its right to convert the debentures into restricted shares of the Company's common stock.
Conversions to Common Stock
For the interim period ended March 31, 2014 and 2013, DART and Citco Global had no conversions.
Note 10 Derivative Financial Instruments
As of March 31, 2014, the Companys derivative financial instruments are embedded derivatives associated with the Companys secured and certain unsecured convertible notes, certain warrant agreements and Series B preferred shares.
The Companys secured convertible debentures issued to YA Global and Highgate in 2005, further assigned to Citco Global (Citco Global Notes), and unsecured convertible debentures issued to ten (10) unrelated investors firms: International Capital Group (ICG), Asher Enterprises, Inc. (Asher), Auctus Private Equity Fund (Auctus), Herbert Klei (Klei), Iconic Holdings, LLC (Iconic), Southridge Partners II, LP ("Southridge"), Tonaquint, Inc. ("Tonaquint"), WHC Capital, LLC ("WHC"), James Solakian ("Solakian"), Tarpon Bay Partners ("Tarpon"), LG Capital Funding, LLC ("LG Capital"), JMJ Financial and Adar Bays, LLC ("Adar Bays") are hybrid instruments, which individually warrant separate accounting as a derivative instrument. In July 2012, the Company was notified by Citco Global that the custodian for the Citco Global Notes is D.A.R.T. Limited (DART). The Citco Global Notes are hereinafter referred to as the DART Notes (see Notes 5 and 9).
In October 2013, the Company entered into a purchase agreement with Tonaquint which included five year warrants for 61,111 shares of the Company's common stock, as adjusted by the Company's 1:1,500 reverse stock split, at an exercise price of $0.40, subject to adjustments (see Note 12). The terms of the warrants are as follows:
·
The warrants have an expiration date five years from issuance on October 13, 2018;
·
The exercise price resets to a floor which may be adjusted in the initial six months after issuance;
·
As of March 31, 2014, no warrants have been exercised.
Because the warrants have reset features (full reset feature and certain anti-dilution rights) based upon the issuance of equity securities by the Company in the future (the exercise price reset floor is adjusted in the initial 6 months from issuance), they are subject to derivative liability treatment.
For the interim period ended March 31, 2014, the Company sold subscriptions to three individuals for the purchase of shares of its Series B preferred stock at $1.50 per share. The Company sold a total of 42,002 shares, for $63,000, that are convertible into shares of its common stock at a 40% discount to current market value, defined as the average of the immediately prior five trading day's closing prices upon receipt of a conversion notice, and with a minimum price level set by the Company's Board of Directors at $0.005. The Series B preferred shares can be converted at any time after six months from the subscription agreements, but only once every 30 days (see Note 12). Because of the conversion feature of the Series B preferred shares, they are subject to derivative liability treatment.
31
The embedded derivative feature has been bifurcated from the debt host contract, referred to as the "Compound Embedded Derivative Liability", which resulted in a reduction of the initial carrying amount (as unamortized discount) of the notes. The unamortized discount is amortized to interest expense using the effective interest method over the life of the notes, or 12 months. The embedded derivative feature includes the conversion feature within the notes and an early redemption option. The compound embedded derivatives within the convertible notes have been recorded at fair value at the date of issuance; and are marked-to-market each reporting period with changes in fair value recorded to the Companys statement of operations as Change in fair value of derivative liabilities.
Valuation of Derivative Financial Instruments
(1)
Valuation Methodology
The Company has utilized a third party valuation consultant to assist the Company to fair value the compound embedded derivatives using a multinomial lattice models that values the derivative liabilities within the convertible notes based on a probability weighted discount cash flow model.
(2)
Valuation Assumptions - Change in Fair Value of Derivative Liability Related to DART Notes
The following assumptions were used for the valuation of the derivative liability related to the Notes at March 31, 2014:
·
The principal balance of the DART Notes of $532,395;
·
The stock price of $0.000095 based on market data;
·
An event of default (in default as of 3/31/14) would occur 50% of the time, increasing 0.10% per month to a maximum of 95% with the Company most likely to negotiate an extension;
·
Alternative financing would be initially available to redeem the note 10% of the time and increase monthly by 0.1% to a maximum of 20%:
·
The monthly trading volume would average $564,345 over a year and would increase at 1% per period;
·
The projected volatility curve for each valuation period was based on the Companys historical volatility:
1 year
12/31/13
299%
3/31/14
381%
·
The Holder would automatically convert the notes at a stock price of the higher of $0.13 (2 times the conversion price or 1.5 times the stock price) if the registration was effective and the company was not in default.
As of March 31, 2014, the estimated fair value of derivative liabilities on secured convertible notes of DART was $36,369.
(3)
Valuation Assumptions - Change in Fair Value of Derivative Liabilities Related to ICG, Asher, Auctus, Klei, Iconic, Southridge, Tonaquint, WHC, Solakian, Tarpon, LG Capital, JMJ Financial and Adar Bays Notes and the Series B preferred stock.
The following assumptions were used for the valuation of the derivative liability related to the ICG, Asher, Auctus, Klei, Iconic, Southridge, Tonaquint, WHC, Solakian, Tarpon, LG Capital, JMJ Financial and Adar Bays Notes at issuance, conversion and period ended March 31, 2014:
·
The notes convert with an initial conversion price of 40%-60% of the average or low of the 1-3 lowest bid out of the 10-20
previous days (the effective rates are typically lower);
·
The projected volatility curve for each valuation period was based on the historical volatility of the company in the range of 210% to 299%;
32
·
An event of default would occur 1% of the time, increasing 1.00% per month to a maximum of 10%;
·
The company would redeem the notes (at 130% on average in the first 90 days and 145% on average from 91 to 180 days or 150%) projected initially at 0% of the time and increase monthly by 2.0% to a maximum of 10.0% (from alternative financing being available for a redemption event to occur); and
·
The Holder would automatically convert the note at the maximum of 2 times the conversion price if the company was not in default. With the target exercise price dropping as maturity approaches.
As of March 31, 2014, the estimated fair value of derivative liabilities on the unsecured convertible notes from ICG, Asher, Auctus, Klei, Iconic, Southridge, Tonaquint, WHC, Solakian, Tarpon, LG Capital, JMJ Financial and Adar Bays was $661,931.
As of March 31, 2014, the estimated fair value of derivative liabilities related to the Tonaquint warrants was $1,591.
Summary of the Changes in Fair Value of Level 3 Financial Liabilities
The table below provides a summary of the changes in the fair value of the derivative financial instruments and the changes in the fair value of the derivative financial instruments, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using Level 3 Inputs
|
|
|
|
|
|
|
|
Derivative warrants Assets (Liability)
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(375,634)
|
|
|
|
|
|
|
|
$
|
(375,634)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances and settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
(456,794)
|
|
|
|
|
|
|
|
|
(456,794)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses (realized/unrealized) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
312,995
|
|
|
|
|
|
|
|
|
312,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(519,433)
|
|
|
|
|
|
|
|
$
|
(519,433)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances and settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
(111,698)
|
|
|
|
|
|
|
|
|
(111,698)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses (realized/unrealized) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,760)
|
|
|
|
|
|
|
|
|
(68,760)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(699,891)
|
|
|
|
|
|
|
|
$
|
(699,891)
|
|
|
33
Note 11 - Commitments and Contingencies
Payroll Taxes
At March 31, 2014, the Company recorded $53,901 of payroll taxes, of which approximately $45,000 were delinquent from the year ended December 31, 2003. The Company had also recorded $32,462 of related estimated penalties and interest on the delinquent payroll taxes. In March 2014, the Company determined to re-examine the nature and amounts of this accrued liability.
Section 105 HRA Plan
In September 2011, the Company enacted a Section 105 HRA Plan, effective with the 2011, with an outside plan administrator. Pursuant to the terms and conditions of the plan, the Company will contribute plan dollars of $1,500 per plan year for employees with single health plan coverage and $3,000 per plan year for employees with family health plan coverage into the plan. The plan dollars will be reimbursed to the employees to offset the cost of health care expenses.
Lease Agreement
The Company operates from a leased office in New Jersey. Per the terms of the lease agreement with the landlord, the Company pays a monthly base rent of $3,807 commencing on July 1, 2009 through the lease termination date of January 31, 2016. The landlord holds the sum of $8,684 as the Companys security deposit.
Future minimum payments required under this non-cancelable operating lease were as follows:
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
2014 (remainder)
|
|
|
34,263
|
|
|
|
|
|
|
2015
|
|
|
45,684
|
|
|
|
|
|
|
2016
|
|
|
3,807
|
|
|
|
|
|
|
|
|
$
|
83,754
|
|
Consulting Agreements
In December 2009, the Company entered into a retainer agreement with an attorney, whereby the attorney will act as in-house counsel for the Company with respect to all general corporate matters. The agreement is at will and required a payment of 67 shares of common stock, valued at $75 per share, as adjusted by the Companys 1:1,500 reverse stock split, upon execution. Commencing on January 1, 2010, the fee structure also includes a monthly cash fee of $1,000 and the monthly issuance of 2,500 shares of common stock, valued at market (see Note 12). The common shares to be issued are not affected by the Company's 1:1,500 reverse stock split.
In January 2012, the Company entered into a consulting agreement with a firm whereby the consultant will assist the Company in obtaining clients and investors. The consultant will receive a fee of $5,000 per month and warrants to purchase 100 shares of the Companys common stock, exercisable at $45 per share as adjusted by the Companys 1:1,500 reverse stock split. The consultant also received warrants to purchase 100 shares of the Companys common stock, exercisable at $45 per share, as adjusted by the Companys 1:1,500 reverse stock split, upon execution of the agreement. The warrants have a three year term. The term of the agreement was one month. The agreement was amended and extended for February, March, April, July, August and September 2012. The February 2012 amendment reduced the exercise price of the warrants to $30 per share, as adjusted by the Companys 1:1,500 reverse stock split. In July 2012, the agreement was amended for an additional one month extension and the monthly fee was increased to $5,500 and the issuance of warrants to purchase 110 shares of the Companys common stock, exercisable at $30 per share, as adjusted by the Companys 1:1,500 reverse stock split, expiring three (3) year from the date of issuance. In May 2013, the agreement was amended to provide for a two-week fee of $2,500 and the issuance of warrants to purchase 50 shares of the Companys common stock, exercisable at $6.00 per share, as adjusted by the Companys 1:1,500 reverse stock split, expiring three (3) year from the date of issuance.
34
In January 2012, the Company entered into a consulting agreement with a firm whereby the consultant will assist the Company in obtaining investors. The consultant will receive a commission of 5% of all financing raised as a result of the consultants efforts. The consultant will also receive, as a commission, 10% of all financing raised as a result of the consultants efforts in the form of warrants to purchase shares of the Companys common stock, exercisable at $30 per share expiring, as adjusted by the Companys 1:1,500 reverse stock split, three (3) years from the date of issuance (see Note 12). The term of the agreement was two (2) years. As of March 31, 2014, no financing was raised relating to the agreement.
In February 2012, the Company entered into a consulting agreement with a firm whereby the consultant will assist the Company in obtaining clients. The consultant will receive a commission of 50% of all contracted revenues and the first renewal of all contracted revenues for new clients and 25% of all contracted revenues for existing clients, recorded as a result of the consultants efforts. In March 2012, the agreement was amended to increase the 25% commission rate for existing clients to 35%. The parties may elect to remit commissions in the form of restricted shares of the Companys common stock, with a maximum amount of shares issued in one (1) year not to exceed 3,333 shares, as adjusted by the Companys 1:1,500 reverse stock split,. The agreement also includes performance incentives whereby the consultant will receive bonus restricted shares of the Companys common stock at the end of the agreement term as follows: one million shares if contracted revenues exceed $1,000,000, two million shares if contracted revenues exceed $2,000,000, three million shares if contracted revenues exceed $3,000,000 and four million shares if contracted revenues exceed $4,000,000. At the end of the first year of the agreement, the consultant will also have the option to purchase restricted shares of the Companys common stock directly from the Company at a 25% discount of the then current market price on the last day of the contract, up to a maximum of 3,333 shares, as adjusted by the Companys 1:1,500 reverse stock split. The term of the agreement is one (1) year with automatic renewals. In July 2012, the parties extended the term of the agreement to October 31, 2013. As of March 31, 2014, no revenues were recorded relating to the agreement.
In April 2012, the Company entered into a consulting agreement with a firm whereby the consultant will provide public relations services to the Company. The consultant will receive a fee of $7,000 per month and $500 per month in the form of restricted shares of the Company's common stock valued on the closing market price of the first day of each month that the agreement is in effect. The agreement term was from May 1, 2012 to October 31, 2012 and may be renewed upon mutual agreement. In October 2012, the agreement was extended to April 30, 2013. In April 2013, a new agreement was executed with the consultant with the same terms and conditions with an expiration date of October 31, 2013 (see Note 12).
In January 2013, the Company entered into a consulting agreement with a firm whereby the consultant will assist the Company in obtaining investors. The consultant will receive a commission of 10% cash plus 10% warrant coverage, to be negotiated per deal, of all financing raised as a result of the consultants efforts. The warrants to purchase shares of the Companys common stock, exercisable at a per share price of the dollars invested divided by the strike price of the investment, with a 20% exercise price premium, expiring four (4) years from the date of issuance and vesting over six (6) months. The term of the agreement was one (1) year. As of March 31, 2014, no financing was raised relating to the agreement.
In February 2013 the Company executed a retainer agreement with its patent attorneys to enforce its patent rights as Out-of-Band Authentication is becoming the standard for authenticating consumers in the financial market.
In May 2013, the Company entered into a consulting agreement with a firm whereby the consultant will provide advertising and public relations services to the Company. The consultant will receive a fee of $1,000 per month. The term of the agreement was three (3) months.
In June 2013, the Company entered into a consulting agreement with a firm whereby the consultant will assist the Company in obtaining clients. The consultant will receive a commission of 10% of all directly contracted revenues and 5% of revenues contracted through a third party, recorded as a result of the consultants efforts. The parties may elect to remit commissions in the form cash or restricted shares of the Companys common stock (at a share price to be determined), or a combination of both. The term of the agreement is one (1) year with automatic renewals. As of March 31, 2014, no revenues were recorded relating to the agreement.
In June 2013, the Company entered into a consulting agreement with a firm whereby the consultant will assist the Company in obtaining investors. The consultant will receive a commission of $5,000, per deal, of all financing raised as a result of the consultants efforts. The term of the agreement was six (6) months. In 2013, the consultant received $5,000 as a result of financing raised relating to the agreement.
In July 2013, the Company entered into a consulting agreement with a firm whereby the consultant will assist the Company in obtaining lending sources. The consultant will receive a commission of 10%, per deal, of net funding received by the Company as a result of the consultants efforts. The term of the agreement is twelve (12) months. As of March 31, 2014, no lending has resulted from the agreement.
35
In August 2013 the Company executed a retainer agreement with its an attorney to enforce its patent rights, in the State of Washington, as Out-of-Band Authentication is becoming the standard for authenticating consumers in the financial market.
In December 2013, the Company entered into a revenue share agreement with a firm whereby the consultant will assist the Company is obtaining new clients. The consultant will receive a commission of 5% on any revenues resulting from new clients obtained relating to the agreement. Either party may terminate the agreement by notifying the other party in writing. As of March 31, 2014, no revenues were recorded as a result the consultant's efforts relating to the agreement. In December 2013, the Company executed an advertising contract with the consultant for various marketing services to be provided from December 2013 to March 2014, at a cost of $975 per month. In March 2014, the Company executed an extension to the advertising contract with the consultant for various marketing services to be provided from April 2014 to July 2014, at a cost of $875 per month.
In December 2013, the Company entered into a consulting agreement with a firm whereby the firm will serve as a testifying expert as the Company enforces its patent rights through litigation. The Company shall compensate the consultant at a rate of $650 per hour for consultant services and $750 per hour for services relating to court testimony. As of March 31, 2014, no fees have been remitted to the consultant relating to this agreement.
In March 2014, the Company entered into a consulting agreement with a firm whereby the consultant will assist the Company in obtaining investors. The consultant will receive a commission of 10% cash per deal, plus warrants to purchase shares of the Company's common stock, to be negotiated per deal, of all financing raised as a result of the consultants efforts. In March 2014, the consultant received cash commissions of $28,500 as a result of financing raised relating to the agreement. In March 2014, the Company issued warrants to purchase 4,000 shares of its common stock, exercisable at $0.21 per share price for 3,000 shares and $0.32 per share for 1,000 shares to the consultant per the terms of the agreement. The warrant shares have a 50% exercise price premium and expire three (3) years from the date of issuance. The warrants were not be affected by the Company's reverse stock split. The term of the agreement is per deal.
In March 2014, the Company executed a retainer agreement, for $5,000, with an attorney to assist the Company in responding to a February 2014 Depository Trust and Clearing Corporation ("DTCC") inquiry, including the issuance of a legal opinion letter. The DTCC inquiry was resolved in April 2014.
Term Sheets
In November 2011, the Company executed a term sheet with an investor firm whereby the firm would invest in the Company up to $450,000, in tranches of $75,000 per month, for six (6) months, in the form of convertible promissory notes bearing interest at 4% per annum maturing 12 months from the date of issuance (see Note 5). A broker fee of 12% was deducted from each tranche and the notes will include a 15% prepayment penalty. The investor firm may process conversions after six months from the date of each closing. Conversions will include a 40% discount to the lower of (i) the average closing bid price of the Companys common stock for the previous ten (10) days of a conversion notice or (ii) the closing bid price on the date of the conversion notice. In December 2011, the Company received the first tranche of $66,000, net of $9,000 broker fee, and executed a convertible promissory note and securities purchase agreement per the term sheet (see Note 5). Additional closings, for the same amounts, were held in January (two closings) and March (one closing) 2012. The debentures contain an embedded derivative feature (see Note 10). In March 2012, the investor firm notified the Company that it terminated the term sheet.
36
In March 2012, the Company executed a term sheet with an investor firm whereby the firm would invest in the Company $53,000 in the form of a convertible promissory note, bearing interest at 8% per annum maturing nine (9) months from the date of issuance. A closing fee of $3,000 would be deducted from the tranche and the note would include a tiered prepayment penalty. The investor firm may process conversions after six months from the date of the closing. Conversions would include a 42% discount to the average closing bid price of the Companys common stock for the previous ten (10) days of a conversion notice, using the average of the three (3) lowest trading prices. In April 2012, the Company received the tranche of $50,000, net of $3,000 closing fee, and executed a convertible promissory note and securities purchase agreement per the terms of the term sheet. In May 2012, the investor firm invested an additional $32,500 in the Company governed by the term sheet and in the form of a convertible promissory note for $32,500. The Company received the second tranche of $30,000, net of a $2,500 closing fee, in May 2012. In July 2012, the investor firm invested an additional $42,500 in the Company governed by the terms of a July 2012 term sheet and in the form of a convertible promissory note for $42,500. The Company received the third tranche of $40,000, net of a $2,500 closing fee, in July 2012. In November 2012, the Company executed a new term sheet with the investor firm and received $30,000, net of a $2,500 closing fee, and executed a convertible promissory note and securities purchase agreement per the term sheet. In December 2012, the Company executed a new term sheet with the investor firm and received $40,000, net of a $2,500 closing fee, and executed a convertible promissory note and securities purchase agreement per the term sheet. In February 2013, the Company executed a new term sheet with the investor firm and received $40,000, net of a $2,500 closing fee, and executed a convertible promissory note and securities purchase agreement per the term sheet. In April 2013, the Company executed a new term sheet with the investor firm and received $40,000, net of a $2,500 legal fee, and executed a convertible promissory note and securities purchase agreement per the term sheet. In June 2013, the Company executed a new term sheet with the investor firm and received $40,000, net of a $2,500 legal fee, and executed a convertible promissory note and securities purchase agreement per the term sheet. In July 2013, the Company executed a new term sheet with the investor firm and received $37,500, net of a $2,500 closing fee, and executed a convertible promissory note and securities purchase agreement per the term sheet. In August 2013, the Company executed a new term sheet with the investor firm and received $37,500, net of a $2,500 closing fee, and executed a convertible promissory note and securities purchase agreement per the term sheet (see Note 5). The Company recorded all of the closing fees of $13,000 in 2012 and $2,500, from the February 2013 term sheet, for the year ended December 31, 2013, as deferred financing costs. The fees of $10,000, from the April, June, July and August 2013 term sheets, were expensed as legal fees for the year ended December 31, 2013. In February 2014, the Company executed a new term sheet with the investor firm and, in March 2014, received $50,000, net of a $3,000 legal fee, and executed a convertible promissory note and securities purchase agreement per the term sheet (see Note 5). The debentures contain an embedded derivative feature (see Note 10). For the interim period ended March 31, 2014 and 2013, the Company expensed $0 and $366, respectively, of financing expenses related to the deferred financing costs.
In November 2012, the Company executed a term sheet with an investor firm whereby the firm would invest in the Company $27,750 in the form of a convertible promissory note, bearing interest at 8% per annum maturing nine (9) months from the date of issuance. A legal fee of $2,750 would be deducted from the tranche and the note would include a tiered prepayment penalty. Conversions would include a 40% discount to the average closing bid price of the Companys common stock for the previous ten (10) days of a conversion notice, using the average of the two (2) lowest trading prices. In December 2012, the Company received the tranche of $25,000, net of the $2,750 legal fee, and executed a convertible promissory note and securities purchase agreement per the term sheet. In February 2013, the Company executed a new term sheet with the investor firm and received $25,000, net of $2,750 in legal fees, and executed a convertible promissory note and securities purchase agreement per the term sheet. In May 2013, the Company executed a new term sheet with the investor firm and received $30,000, net of $2,750 in legal fees, and executed a convertible promissory note and securities purchase agreement per the term sheet. In October 2013, the Company executed a new term sheet with the investor firm and received $29,980, net of $2,770 in legal fees, and executed a convertible promissory note and securities purchase agreement per the term sheet (see Note 5). The debentures contain an embedded derivative feature (see Note 10).
Debt Purchase Agreements
In June 2013, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a convertible note holder and an unrelated party, the Company settled and transferred $33,255 of the note balance, plus accrued interest of $36,920, to the unrelated party in the form of a convertible note for $50,000. Accrued interest of $21,175 was forgiven (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
In June 2013, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a promissory note holder and an unrelated party, the Company transferred $31,814 of the note balance, plus accrued interest of $18,526, to the unrelated party in the form of a convertible note for $50,340 (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
In June 2013, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a promissory note holder and an unrelated party, the Company settled and transferred the $50,000 note balance, plus accrued interest of $15,152, to the unrelated party in the form of a convertible note for $55,152. Accrued interest of $10,000 was forgiven (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
37
In July 2013, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a promissory note holder and an unrelated party, the Company transferred $50,000 of the note balance to the unrelated party in the form of a convertible note for $50,000 (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
In July 2013, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a promissory note holder and an unrelated party, the Company transferred $60,000 of the note balance to the unrelated party in the form of a convertible note for $60,000 (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
In September 2013, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a convertible note holder and an unrelated party, the Company transferred $50,000 of the note balance to the unrelated party in the form of a convertible note for $50,000 (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
In September 2013, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a promissory note holder and an unrelated party, the Company transferred $25,000 of the note balance to the unrelated party in the form of a convertible note for $25,000 (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
In October 2013, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a promissory note holder and an unrelated party, the Company transferred $70,000 of the note balance to the unrelated party in the form of a convertible note for $70,000 (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
In October 2013, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a promissory note holder and an unrelated party, the Company transferred $25,000 of the note balance to the unrelated party in the form of a convertible note for $25,000 (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
In October 2013, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a promissory note holder and an unrelated party, the Company transferred $25,000 of the note balance to the unrelated party in the form of a convertible note for $25,000 (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
In November 2013, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a convertible promissory note holder and an unrelated party, the Company transferred $70,000 of the note balance to the unrelated party in the form of a convertible note for $70,000 (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
In December 2013, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a promissory note holder and an unrelated party, the Company transferred $25,000 of the note balance to the unrelated party in the form of a convertible note for $25,000 (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
In January 2014, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a promissory note holder and an unrelated party, the Company transferred $25,000 of the note balance to the unrelated party in the form of a convertible note for $25,000 (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
In March 2014, pursuant to the terms and conditions of a debt purchase agreement formalized among the Company, a promissory note holder and an unrelated party, the Company transferred $25,000 of the accrued interest balance to the unrelated party in the form of a convertible note for $25,000 (see Notes 5 and 7). The new debenture contains an embedded derivative feature (see Note 10).
Loan Repayment Agreement
In April 2009, the Company signed an agreement whereby two promissory notes executed with a distributor of its products were to be repaid from the proceeds of sales of the Companys products sold by the distributor for the Company. In September 2009, the Company executed an additional promissory note with the distributor that is included in the loan repayment agreement. In May 2010, the Company executed an additional promissory note with the distributor that is included in the loan repayment agreement. In September 2012, the Company and the distributor executed an amendment to the March and April 2009 promissory notes whereby the Company would remit the accrued interest due on the notes, in the amount of $10,388, to the distributor by November 1, 2012. The payment was made in October 2012. For the year ended December 31, 2013 and 2012, sales proceeds of $1,275 and $12,426, respectively, were applied to the balance of the notes. In June 2013, pursuant to the terms and conditions of debt purchase agreements formalized among the Company, the note holder and two unrelated parties, the Company settled and transferred the note balances, plus accrued interest, to the unrelated parties in the form of two convertible notes (see Notes 5 and 7).
38
Forbearance Agreement
In December 2012, the Company executed a forbearance agreement with a note holder whereby the Company agreed to pay down an October 2009 promissory note in the amount of $18,750 plus accrued interest of $5,650, for a total amount of $24,400. The Company made the initial payment of $12,200 to the note holder in December 2012. The remaining payments of $6,100 and $450 each were made in January and February 2013 (see Note 7).
Assignment
In October 2010, the Company assigned the proceeds of six of the Companys open receivables invoices, in the total amount of $20,761, to its CEO. The assignment was non-interest bearing and fee free with a due date for repayment of November 20, 2010. Partial repayments of the assignment were made in October 2010 for $4,218 and November 2010 for $4,125. The due date of the assignment has been extended to December 31, 2014 (see Note 8).
Due to Factor
In March 2007, the Company entered into a sale and subordination agreement with a factoring firm whereby the Company sold its rights to two invoices, from February 2007 and March 2007, totaling $470,200 to the factor. Upon signing the agreement and providing the required disclosures, the factor remitted 65%, or $144,440, of the February 2007 invoice and a certain percentage of $53,010 of the March 2007 invoice to the Company. The Company paid a $500 credit review fee to the factor relating to the agreement. Per the terms of the agreement, once the Companys client remits the invoice amount to the factor, the factor deducts a discount fee from the remaining balance of the factored invoices and forwards the net proceeds to the Company. The discount fee is computed as a percentage of the face amount of the invoice as follows: 2.25% fee for invoices paid within 30 days of the down payment date with an additional 1.125% for each 15 day period thereafter. In September 2007, the February 2007 factored invoice was deemed uncollectible and was written off as bad debt expense. In December 2007, the March 2007 factored invoice was deemed uncollectible and was written off as bad debt expense. In February 2008, the Company and the factor agreed to a total settlement amount of $75,000, which was scheduled to be paid by the Company to the factor in September 2008 unless both parties mutually agreed to extend the due date. In September 2008, the Company and the factor reached a verbal agreement to extend the due date to December 31, 2008. The Company is pursuing a further extension. As of March 31, 2014, the balance due to the factor by the Company was $209,192 including interest.
Litigation
On March 25, 2013, the Company filed a complaint In The United States District Court For The District Of New Jersey (case no: 13-cv-01895 (SRC)(CLW)) vs. WhiteSky, Inc (an existing channel partner). The Company filed claims that WhiteSky effectuated multiple contract breaches, misappropriation of trade secrets, breach of Intellectual Property, and disclosure of confidential information in commencing attempts to replace the Company's GuardedID® Customized Desktop Product with a third party's product since November 2012, even though the contractual agreement expires in May 2014. In July 2013, the Company filed an amended complaint based on the Courts rulings on the motions, which required some minor adjustments and strengthening based on what it learned through early admissible discovery. The Company is aggressively litigating this matter and anticipates a successful outcome. To date, all of WhiteSkys arguments against the Company's complaints have been denied by the Court. As of mid-November 2013 the case is in Discovery, which is actively progressing and limited to a certain number of months. If the Company is unsuccessful, the costs and results associated with these legal proceedings could be significant and could negatively affect the results of future operations. As of early 2014 settlement discussions are in progress, with no certainty they will succeed. However, the Company has already executed agreements which present new opportunities that could minimally replace the potential loss of revenues (or award) resulting from these proceedings in 2014.
Note 12 - Stockholders Deficit
Preferred Stock
On October 21, 2010, the Company amended its Articles of Incorporation in New Jersey to authorize 10,000,000 shares of preferred stock, par value $0.10. The designations, rights, and preferences of such preferred stock are to be determined by the Board of Directors. On November 15, 2010, the Company changed its domicile from the State of New Jersey to the State of Wyoming.
In addition to the 10,000,000 shares of preferred stock authorized on October 21, 2010, on January 10, 2011, 100 shares of preferred stock were designated as Series A Preferred Stock and 100,000,000 shares were designated as Series B Preferred Stock. The bylaws under the Wyoming Incorporation were amended to reflect the rights and preferences of each additional new designation.
39
The Series A Preferred Stock collectively has voting rights equal to eighty percent of the total current issued and outstanding shares of common stock. If at least one share of Series A Preferred Stock is outstanding, the aggregate shares of Series A Preferred Stock shall have voting rights equal to the number of shares of common stock equal to four times the sum of the total number of shares of common stock issued and outstanding, plus the number of shares of Series B Preferred Stock (or other designated preferred stock) which are issued and outstanding.
The Series B Preferred Stock shall have preferential liquidation rights in the event of any liquidation, dissolution or winding up of the Company, such liquidation rights to be paid from the assets of the Company not delegated to parties with greater priority at $1.00 per share or, in the event an aggregate subscription by a single subscriber of the Series B Preferred Stock is greater than $100,000,000, $0.997 per share. The Series B Preferred Stock shall be convertible to a number of shares of common stock equal to the price of the Series B Preferred Stock divided by the par value of the Series B Preferred Stock. The option to convert the shares of Series B Preferred Stock may not be exercised until three months following the issuance of the Series B Preferred Stock to the recipient shareholder. The Series B Preferred Stock shall have ten votes on matters presented to the shareholders of the Company for one share of Series B Preferred Stock held. The initial price of the Series B Preferred Stock shall be $2.50, (subject to adjustment by the Companys Board of Directors) until such time, if ever, the Series B Preferred Stock are listed on a secondary and/or public exchange. As of December 31, 2013, no shares of Series B Preferred Stock have been issued.
In February 2014, the Company's Board of Directors amended the initial price for the Series B Preferred Stock from $2.50 to $1.50 per share. The Company's Board of Directors also amended the conversion feature of the Series B Preferred Stock, to be convertible to common shares $0.0001 par value, at a 40% discount to current market value (current market value) at the time the Company receives a conversion request. Current Market Value is defined as the average of the immediately prior five trading day's closing prices. Additionally, when Series B Preferred Stock shares convert to the Company's common stock, the minimum price discount floor level is set at $0.005, as decided by the Company's Board of Directors.
Issuance of Series A Preferred Stock
In February 2011, the Company issued three (3) shares of non-convertible Series A preferred stock valued at $329,000 per share, or $987,000 in aggregate, for voting purposes only, to the three members of the management team at one share each. The issued and outstanding shares of the Series A preferred stock have voting rights equal to eighty percent of the total issued and outstanding shares of the Company's common stock. This effectively provided them, upon retention of their Series A Preferred Stock, voting control on matters presented to the shareholders of the Company. They have each irrevocably waived their conversion rights relating to the Series A preferred shares issued. The Company expensed $987,000 in stock based compensation expense related to the issuance of the shares in 2011.
Sales of Shares of Series B Preferred Stock
In February 2014, the Company sold subscriptions to three individuals for the purchase of shares of its Series B preferred stock at $1.50 per share. The Company sold a total of 25,335 shares, for $38,000, that are convertible into shares of its common stock at a 40% discount to current market value, defined as the average of the immediately prior five trading day's closing prices upon receipt of a conversion notice, and with a minimum price level set by the Company's Board of Directors at $0.005. The Series B preferred shares can be converted at any time after six months from the subscription agreements, but only once every 30 days. The conversion feature of the subscription agreement contains an embedded derivative (see Note 10).
In March 2014, the Company sold subscriptions to one individual for the purchase of shares of its Series B preferred stock at $1.50 per share. The Company sold a total of 16,667 shares, for $25,000, that are convertible into shares of its common stock at a 40% discount to current market value, defined as the average of the immediately prior five trading day's closing prices upon receipt of a conversion notice, and with a minimum price level set by the Company's Board of Directors at $0.005. The Series B preferred shares can be converted at any time after six months from the subscription agreements, but only once every 30 days. The conversion feature of the subscription agreement contains an embedded derivative (see Note 10).
Common Stock
In December 2012, an increase of the authorized shares of the Companys common stock from five hundred million (500,000,000) to seven hundred fifty million (750,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to the Companys Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in February 2013.
In May 2013, an increase of the authorized shares of the Companys common stock from seven hundred fifty million (750,000,000) to one billion, five hundred million (1,500,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to the Companys Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in May 2013.
40
In July 2013, an increase of the authorized shares of the Companys common stock from one billion, five hundred million (1,500,000,000) to three billion (3,000,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to the Companys Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in July 2013.
In August 2013, an increase of the authorized shares of the Companys common stock from three billion (3,000,000,000) to five billion (5,000,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to the Companys Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in September 2013.
In December 2013, an increase of the authorized shares of the Company's common stock from five billion (5,000,000,000) to six billion seven hundred fifty million (6,750,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to the Company's Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in January 2014.
In February 2014, a 1:1,500 reverse stock split of the Company's issued and outstanding shares of common stock was ratified, effective upon the filing of an amendment to the Company's Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in March 2014.
All shares and per share amounts in the financial statements have been adjusted to give retroactive effect to the 1:1500 Reverse Stock Split.
In February 2014, a decrease of the authorized shares of the Company's common stock from six billion seven hundred fifty million (6,750,000,000) to one billion, five hundred million (1,500,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to the Company's Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in March 2014.
In March 2014, the Company's transfer agent issued 1,633 shares of the Company's common stock, valued at $302, as rounding shares relating to the Company's 1:1,500 reverse stock split of the Company's issued and outstanding shares of common stock that was adopted in March 2014.
Issuance of Common Stock for Services
In December 2009, the Company entered into a retainer agreement with an attorney, whereas the attorney acts as house counsel for the Company with respect to all general corporate matters. The agreement is at will and required a payment of 67 shares of common stock, valued at $75 per share, as adjusted by the Companys 1:1,500 reverse stock split, due upon execution. Commencing on January 1, 2010, the fee structure also includes a monthly cash fee of $1,000 and the monthly issuance of 2,500 shares of common stock, valued at market, and the total of which remains 2,500 shares post to the Company's reverse stock split. In December 2012, the Company recorded $19 in legal fees related to the agreement, as common stock to be issued. The 5 shares of restricted common stock, as adjusted by the Companys 1:1,500 reverse stock split, were issued in February 2013. For the interim period ended March 31, 2014 and 2013, the Company issued a total of 15,000 shares of restricted common stock, 7,500 shares were from 2013, valued at $2,655 and 5 shares of restricted common stock, as adjusted by the Companys 1:1,500 reverse stock split, valued at $71, respectively, all of which have been expensed as legal fees, related to the agreement.
In May 2012, the Company entered into a consulting agreement with a firm whereby the consultant will provide public relations services to the Company. The consultant will receive a fee of $7,000 per month and $500 per month in the form of restricted shares of the Company's common stock valued on the closing market price of the first day of each month that the agreement is in effect. In May 2012, the consultant received 23 shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, valued at $500. In June 2012, the consultant received 38 shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, valued at $500. In July 2012, the consultant received 42 shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, valued at $500. In August 2012, the consultant received 39 shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, valued at $500. In September 2012, the consultant received 36 shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, valued at $500. In October 2012, the consultant received 36 shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, valued at $500. In December 2012, the consultant received 58 shares of the Companys common stock, as adjusted by the Companys 1:1,500 reverse stock split, valued at $500. In March 2013, the consultant received 369 shares of the Company's common stock, as adjusted by the Companys 1:1,500 reverse stock split, valued at $1,500, for payment of three months of services. In June 2013, the consultant received 159 shares of the Company's common stock, as adjusted by the Companys 1:1,500 reverse stock split, valued at $1,500, for payment of three months of services. In October 2013, the consultant received 389 shares of the Company's common stock, as adjusted by the Companys 1:1,500 reverse stock split, valued at $750, for payment of one and one-half months of services. The value of all of the shares issued has been expensed as consulting fees (see Note 11).
41
Issuance of Common Stock for Financing
In March 2010, the Company executed a promissory note for $50,000 with its CEO, bearing interest at 10% per annum, maturing on April 30, 2011. Per the terms of the promissory note, the note holder purchased two units with each unit consisting of a 10% promissory note of $25,000 and 34 restricted shares of the Companys common stock, valued at $37.50 per share and expensed in 2010, for a total of 68 shares of common stock, as adjusted by the Companys 1:1,500 reverse stock split. In January 2014, the note was extended to December 31, 2014 (see Note 8).
In April 2010, the Company executed a promissory note for $80,000, bearing interest at 10% per annum, maturing on July 23, 2010. As consideration for executing the note, the Company issued 334 shares of restricted common stock, valued at $31.50 per share, as adjusted by the Companys 1:1,500 reverse stock split, and expensed in 2010, to the note holder. On May 2, 2011, the Company repaid $10,000 of the note balance to the note holder. Per the terms of a settlement agreement that the Company executed with the note holder in January 2012, the Company issued 3,373 restricted shares of its common stock, valued at $24.75 per share, as adjusted by the Companys 1:1,500 reverse stock split, to the note holder as settlement of the remaining note balance of $70,000 plus accrued interest (see Note 7).
In May 2010, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on May 21, 2013. As consideration for executing the note, the Company issued 134 shares of restricted common stock, valued at $13.50 per share, as adjusted by the Companys 1:1,500 reverse stock split, to the note holder. For the interim period ended March 31, 2014 and 2013, the Company expensed $0 and $150, respectively, of financing expenses related to the shares (see Note 7).
Conversions to Common Stock
For the interim period ended March 31, 2014, the Company received conversion notices from Asher to convert $95,100 of notes dated June 4, 2013 and July 17, 2013, and $4,700 of accrued interest, into 1,029,483 unrestricted shares of our common stock, at conversion prices ranging from $0.09 per share to $0.1112 per share, as adjusted by our 1:1,500 reverse stock split (see Note 5).
For the interim period ended March 31, 2014, the Company received conversion notices from Auctus to convert $17,000 of a note dated May 28, 2013, and accrued interest of $1,579, into 206,438 unrestricted shares of the Company's common stock, at a conversion price of $0.09 per share, as adjusted by the Companys 1:1,500 reverse stock split (see Note 5).
For the interim period ended March 31, 2014, the Company received conversion notices from Iconic to convert $45,002 of notes dated June 4, 2013 and July 23, 2013, and accrued interest of $4,852, into 553,937 unrestricted shares of the Company's common stock, at a conversion price of $0.09 per share, as adjusted by the Companys 1:1,500 reverse stock split (see Note 5).
For the interim period ended March 31, 2014, the Company received conversion notices from WHC to convert $24,553 of a note originally issued to a non-related third party on June 6, 2006, and sold to the investor firm with no additional consideration to the Company, into 282,223 unrestricted shares of the Company's common stock, at a conversion price of $0.087 per share, as adjusted by the Companys 1:1,500 reverse stock split (see Note 5).
For the interim period ended March 31, 2014, the Company received conversion notices from Tarpon to convert $33,250 of a note originally issued to a non-related third party on February 29, 2008, and sold to the investor firm with no additional consideration to the Company, and $15,000 of accrued interest, into 574,073 unrestricted shares of the Company's common stock, at conversion prices ranging from $0.077056 to $0.10175 per share, as adjusted by the Companys 1:1,500 reverse stock split (see Note 5). A total of 97,333 of the shares, at a conversion price of $0.077056, were issued in April 2014.
For the interim period ended March 31, 2013, the Company received conversion notices from Asher to convert the balance of the note due on February 8, 2013 of $8,500, and accrued interest of $1,300, and the balance of the note due on April 30, 2013 of $42,500, and accrued interest of $1,700, into 34,852 unrestricted shares of the Company's common stock, at conversion prices from $1.425 to $2.10 per share, as adjusted by the Companys 1:1,500 reverse stock split (see Note 5).
For the interim period ended March 31, 2013, the Company received a conversion notice from ICG to convert $11,280 of the January 3, 2012 note into 6,667 unrestricted shares of the Company's common stock, as adjusted by the Companys 1:1,500 reverse stock split. The conversion was processed on January 24, 2013 at a conversion price of $1.692 per share, as adjusted by the Companys 1:1,500 reverse stock split (see Note 5).
For the interim period ended March 31, 2013, Auctus had no conversions.
42
Issuance of Warrants and Options for Financing and Acquiring Services
In connection with consulting agreements, the Company issued warrants for 14,044 shares to consultants, as adjusted by the Companys 1:1,500 reverse stock split, all of which were deemed earned upon issuance, as of March 31, 2014 (see Note 11). The fair value of these warrants granted, estimated on the date of grant using the Black-Scholes option-pricing model, was $1,005,321, which has been recorded as consulting expenses.
In October 2013, the Company entered into a purchase agreement with Tonaquint which included five year warrants for 61,111 shares of the Company's common stock, as adjusted by the Company's 1:1,500 reverse stock split, at an exercise price of $0.40, subject to adjustments. The terms of the warrants are as follows:
·
The warrants have an expiration date five years from issuance on October 13, 2018;
·
The exercise price resets to a floor which may be adjusted in the initial six months after issuance;
·
As of March 31, 2014, no warrants have been exercised.
The Tonaquint warrants contain an embedded derivative (see Note 10).
The table below summarizes the Companys non-derivative warrant activities through March 31, 2014, as adjusted by the Companys 1:1,500 reverse stock split:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrant Shares
|
|
Exercise Price Range
Per Share
|
|
Weighted Average Exercise Price
|
|
Fair Value at Date of Issuance
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
175,336
|
|
|
|
$
|
2.25-15,000.00
|
|
|
|
$
|
73.50
|
|
|
$
|
1,525,791
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
61,162
|
|
|
|
|
6.00-600.00
|
|
|
|
|
600.00
|
|
|
|
61,636
|
|
|
|
|
-
|
|
|
Canceled for cashless exercise
|
|
|
(-)
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised (Cashless)
|
|
|
(-)
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Exercised
|
|
|
(-)
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Expired
|
|
|
(24,253)
|
|
|
|
|
22.50-15,000.00
|
|
|
|
|
49.50
|
|
|
|
(482,177)
|
|
|
|
|
-
|
|
|
Balance, December 31, 2013
|
|
|
212,245
|
|
|
|
$
|
2.25-15,000.00
|
|
|
|
$
|
238.50
|
|
|
$
|
1,105,250
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,000
|
|
|
|
|
0.21-0.32
|
|
|
|
|
0.238
|
|
|
|
918
|
|
|
|
|
-
|
|
|
Canceled for cashless exercise
|
|
|
(-)
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised (Cashless)
|
|
|
(-)
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Exercised
|
|
|
(-)
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Expired
|
|
|
(1)
|
|
|
|
|
15,000.00
|
|
|
|
|
15,000.00
|
|
|
|
(1,709)
|
|
|
|
|
-
|
|
|
Balance, March 31, 2014
|
|
|
216,244
|
|
|
|
$
|
2.25-15,000.00
|
|
|
|
$
|
234.01
|
|
|
$
|
1,104,459
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable, March 31, 2014
|
|
|
216,244
|
|
|
|
$
|
2.25-15,000.00
|
|
|
|
$
|
234.01
|
|
|
$
|
1,104,459
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, March 31, 2014
|
|
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
43
The following table summarizes information concerning outstanding and exercisable warrants as of March 31, 2014, as adjusted by the Companys 1:1,500 reverse stock split:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding
|
|
Warrants Exercisable
|
|
Range of Exercise Prices
|
|
Number Outstanding
|
|
Average Remaining Contractual Life (in years)
|
|
Weighted Average Exercise Price
|
|
Number Exercisable
|
|
Average Remaining Contractual Life (in years)
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$15,000.00
|
|
|
2
|
|
|
0.46
|
|
$
|
15,000.00
|
|
|
2
|
|
|
0.46
|
|
$
|
15,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$22.50-1,200.00
|
|
|
216,242
|
|
|
1.05
|
|
$
|
75.00
|
|
|
216,242
|
|
|
1.05
|
|
$
|
75.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$22.50 - $15,000.00
|
|
|
216,244
|
|
|
1.05
|
|
$
|
75.14
|
|
|
216,244
|
|
|
1.05
|
|
$
|
75.14
|
|
Issuance of Stock Options to Parties Other Than Employees for Acquiring Goods or Services
In January 2013, the Company granted an option to purchase 6,667 shares of its common stock, as adjusted by the Companys 1:1,500 reverse stock split, to NetLabs, Inc. in exchange for the assignment of the entire right, title and interest in and to the Out-of-Band Patent. The Options were valued at $2.7 per share, as adjusted by the Companys 1:1,500 reverse stock split, or $18,000, which was recorded as Patent.
The Company estimated the fair value of the options on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (year)
|
|
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
|
|
|
142.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
|
|
|
2.03
|
%
|
|
|
|
|
|
|
|
|
|
|
Expected annual rate of quarterly dividends
|
|
|
|
|
|
0.00
|
%
|
|
As of March 31, 2014, options to purchase an aggregate of 8,000 shares of its common stock, as adjusted by the Companys 1:1,500 reverse stock split, for non-employees were outstanding. The exercise price of the options to purchase 1,333 and 6,667 shares its common stock is $9.00 and $2.7, respectively, yielding a weighted average exercise price of $4.50, as adjusted by the Companys 1:1,500 reverse stock split. In January 2013, options to purchase an aggregate of 507 of the Company's common stock at $5,400 per share, as adjusted by the Companys 1:1,500 reverse stock split, were cancelled per an agreement executed with NetLabs, Inc. Also in January 2013, options to purchase an aggregate of 2 shares of the Company's common stock, at $13,500 per share, as adjusted by the Companys 1:1,500 reverse stock split, expired.
Note 13 - Stock Based Compensation
2004 Equity Incentive Plan
In September 2004, the stockholders approved the Equity Incentive Plan for the Companys employees (Incentive Plan), effective April 1, 2004. The number of shares authorized for issuance under the Incentive Plan was increased to 6,667 in September 2006, 10,000 in March 2007, 13,333 in June 2007, 66,667 in December 2007 and 133,333 in April 2011, as adjusted by the Companys 1:1,500 reverse stock split,by unanimous consent of the Board of Directors prior to 2011 and by majority consent of the Board of Directors in 2011.
2012 Stock Option Plan
In November 2012, the stockholders approved the 2012 Stock Option Plan (2012 Stock Incentive Plan) for the Companys employees, effective January 3, 2013. The number of shares authorized for issuance under the plan is 66,667, as adjusted by the Companys 1:1,500 reverse stock split.
44
Options granted in January 2013
On January 3, 2013, the Company granted options to purchase 3,333 shares of its common stock to the Companys management team and employees with an exercise price at $3.45 per share, as adjusted by the Companys 1:1,500 reverse stock split, expiring ten (10) years from the date of grant vesting over an eight month period.
The Company estimated the fair value of 2013 options on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2013
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (year)
|
|
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
|
|
|
154.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
|
|
|
1.92
|
%
|
|
|
|
|
|
|
|
|
|
|
Expected annual rate of quarterly dividends
|
|
|
|
|
|
0.00
|
%
|
|
The table below summarizes the Companys 2004 Incentive Plan and 2012 Stock Incentive Plan activities through March 31, 2014, as adjusted by the Companys 1:1,500 reverse stock split: