Preferred Stock

We are authorized to issue 1,000,000 shares of preferred stock with a par value of $0.01. Of the 1,000,000 shares of preferred stock:

As of September 30, 2018, there were no shares of Junior A, and Series A, B, C, and E issued and outstanding. See our Annual Report on Form 10-K for the year ended December 31, 2017 for the pertinent disclosures of preferred stock.

Series AA Convertible Preferred Stock and Warrants

On May 2, 2018, the Company entered into a Securities Purchase Agreement with an existing shareholder pursuant to which the Company sold an aggregate of 100 shares of Series AA Convertible Preferred Stock, each preferred share convertible into 1,000 shares of the Company’s common stock, par value $0.01 per share, for an aggregate Purchase Price of $250,000. Each share of Series AA Convertible Preferred Stock will receive a cumulative dividend at the annual rate of eight percent (8%) payable quarterly commencing on September 30, 2018 on those shares of Series AA Convertible Preferred Stock purchased from the Company.

We issued to the shareholder a new warrant to purchase 100,000 shares of common stock with an exercise price of $3.50 per share. The Warrant will expire on the fifth-year anniversary after issuance. The exercise price is also subject to adjustment in the event that we issue any shares of common stock or common stock equivalents at a per share price that is lower than the exercise price for the Series AA Warrants then in effect. Upon any such issuance, subject to certain exceptions, the exercise price will be reduced to the per share price at which such shares of common stock or common stock equivalents are issued.

On May 14, 2018, we entered into Letter Agreements with 22 Debenture Holders holding Debentures and Debenture Warrants whereby the Debenture Holders agreed to convert a total of $6,220,500 in principal and original issue discount due them under the Debentures into 2,448.20 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share. The Debenture Holders were also: (a) issued amended Debenture Warrants such that the exercise price will be $3.50 per share; and (b) issued a new warrant with an exercise price of $3.50 per share to purchase 2,448,200 shares of common stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible Preferred Stock shares received as a result of the Debenture conversions).

On June 1, 2018, the Company entered into a Securities Purchase Agreement with accredited investors pursuant to which the Company sold an aggregate of 20 shares of Series AA Convertible Preferred Stock, each preferred share convertible into 1,000 shares of the Company’s common stock, par value $0.01 per share, for an aggregate Purchase Price of $50,000. We issued to the shareholders a new warrant to purchase 20,000 shares of common stock with an exercise price of $3.50 per share.

On June 11, 2018, the Company entered into additional Letter Agreements with 15 Debenture Holders whereby the Debenture Holders agreed to convert a total of $742,134 in principal and original issue discount due them under the Debentures into 296.80 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share. The Debenture Holders were also: (a) issued amended Debenture Warrants such that the exercise price will be $3.50 per share; and (b) issued a new warrant with an exercise price of $3.50 per share to purchase 296,800 shares of common stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible Preferred Stock shares received as a result of the Debenture conversions).

During the quarter ended September 30, 2018, the Company entered into Securities Purchase Agreements with accredited investors pursuant to which the Company sold an aggregate of 460 shares of Series AA Convertible Preferred Stock, each preferred share convertible into 1,000 shares of the Company’s common stock, par value $0.01 per share, for an aggregate Purchase price of $1,150,000. We issued to the investors warrants to purchase an aggregate 460,000 shares of common stock with an exercise price of $3.50 per share.

The issuances of our convertible preferred stock and common stock purchase warrants are accounted for under the fair value and relative fair value method.

The warrant is first analyzed per its terms as to whether it has derivative features or not. If the warrant is determined to be a derivative, then it is measured at fair value using the Black Scholes Option Model and recorded as a liability on the balance sheet. The warrant is re-measured at its then current fair value at each subsequent reporting date (it is “marked-to-market”).

If the warrant is determined to not have derivative features, it is recorded into equity at its fair value using the Black Scholes option model, however, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the convertible preferred stock.

We analyzed these warrants and determined that they were not considered derivatives and therefore recorded the aggregate relative fair value of $7,877,396 into equity relating to the 5,655,454 warrants and 57,000 broker warrants issued.

The convertible preferred stock is recorded at its fair value, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the warrant. Further, the convertible preferred stock is examined for any intrinsic beneficial conversion feature (“BCF”) of which the convertible price of the preferred stock is less than the closing stock price on date of issuance. If the relative fair value method is used to value the convertible preferred stock and there is an intrinsic BCF, a further analysis is undertaken of the BCF using an effective conversion price which assumes the conversion price is the relative fair value divided by the number of shares of common stock the convertible preferred stock is converted into by its terms. The adjusted BCF value of $11,678,571 was accounted for as a deemed dividend within equity and was included in the earnings per share calculation.

Stock Options and Warrants

Our stockholders approved our amended 2005 Equity Incentive Plan (the “Plan”) pursuant to which an aggregate of 1,800,000 shares of our common stock were reserved for issuance upon exercise of stock options or other equity awards made under the Plan. Under the Plan, we may award stock options, shares of common stock, and other equity interests in the Company to employees, officers, directors, consultants, and advisors, and to any other persons the Board of Directors deems appropriate. The Plan has expired and on July 18, 2018, the outstanding options to acquire 32,605 shares were transferred as discussed below to one of the other plans.

At the Company’s December 12, 2013 Special Meeting, the shareholders approved the 2013 Equity Incentive Plan (the “2013 Plan”) pursuant to which 3,000,000 shares of our common stock were reserved for issuance upon exercise of stock options or other equity awards. Under the 2013 Plan, we may award stock options, shares of common stock, and other equity interests in the Company to employees, officers, directors, consultants, and advisors, and to any other persons the Board of Directors deems appropriate. As of September 30, 2018, options to acquire 138,056 shares were outstanding under the Plan with 2,861,944 shares available for future grant under the 2013 Plan.

On November 29, 2015 the Company’s Board of Directors adopted the 2015 Nonqualified Stock Option Plan (the “2015 Plan”) pursuant to which 5,000,000 shares of our common stock were reserved for issuance upon exercise of non-qualified stock options. Under the 2015 Plan, we may award non-qualified stock options in the Company to employees, officers, directors, consultants, and advisors, and to any other persons the Board of Directors deems appropriate. As of September 30, 2018, non-qualified options to acquire 203,734 shares were outstanding under the Plan.

All of the outstanding non-qualified options had an exercise price that was at or above the Company’s common stock share price at time of issuance.

On July 18, 2018, the Board of Directors approved the immediate termination of 244,467 outstanding stock options held by current officers, employees and board members (32,605 stock options under the Plan, 81,925 stock options under the 2013 Plan, and 129,937 stock options under the 2015 Plan) and the issuance of new stock options to the same holders with an exercise price of $3.40 per share equal to the closing market price on July 18, 2018 and an expiration date of July 18, 2028. The new stock options for board members will vest 1/12th per month for 12 months. The new stock options for officers and employees will vest 1/36th per month for 36 months. The Plan expired in 2015 so of the 32,605 terminated stock options, 16,641 stock options under the 2013 Plan and 15,964 stock options under the 2015 Plan were issued (in addition to the reissuance of 81,925 stock options under the 2013 Plan, and 129,937 stock options under the 2015 Plan). The Board of Directors also awarded 101,267 stock options to officers, employees and board members separately based on the annual compensation committee recommendation. Of the 101,267 stock options issued, 51,934 stock options were issued under the 2013 Plan and 49,333 stock options were issued under the 2015 Plan.

We evaluated this exchange and concluded that it was a modification under ASU 2017-09. Under ASU 2017-09, a cancelled equity award accompanied by the concurrent grant of (or offer to grant) a replacement award or other valuable consideration shall be accounted for as a modification of the terms of the cancelled award. Therefore, incremental compensation cost shall be measured as the excess of the fair value of the replacement award or other valuable consideration over the fair value of the cancelled award at the cancellation date in accordance with paragraph ASC 718-20-35-3. The total compensation cost measured at the date of a cancellation and replacement shall be the portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) at that date plus the incremental cost resulting from the cancellation and replacement. The compensation value created by the termination and issuance of new stock options, as determined under the Black Scholes method, was approximately $267,000 and under ASU 2017-09 results in a non-cash expense in current and future periods not to exceed the vesting periods of the stock options. The Board of Directors also awarded 101,267 to officers, employees and board members separately based on the annual compensation committee recommendation.

The following tables summarize information concerning options and warrants outstanding and exercisable:

As of September 30, 2018, total unrecognized compensation cost related to the unvested stock-based awards was $937,216, which is expected to be recognized over weighted average period of 1.85 years. The aggregate intrinsic value associated with the options outstanding and exercisable as of September 30, 2018 was $8,325. The aggregate intrinsic value associated with the warrants outstanding and exercisable as of September 30, 2018 was approximately $1.3 million.

The loans from November 13, 2017 and May 17, 2018 included Warrants that contains a price protection provision such that if we issue a warrant with any term more favorable to the holder of such warrant that was not similarly provided in these loans, then we shall notify the lender of such additional or more favorable term and such term, shall become a part of the loan agreements. The fair value of the reduction in exercise price was recorded as a deemed dividend of $5,113 in additional paid in capital.

The Company, pursuant to a price protection provision triggered on May 2, 2018 with the sale of Series AA units, amended the Debentures and Warrants to purchase Common Stock held by the Debenture Holders entered into between July 22, 2015 and March 31, 2016 as first disclosed in the Company’s Current Report on Form 8-K filed on July 28, 2015. The fair value of $207,899 relating to the reduction in exercise price was treated as a deemed dividend and recorded as a charge against additional paid-in capital within equity. The amended Debenture conversion price was exempt from revaluation because a beneficial conversion feature had already been recorded on the Debenture at issuance.

Common Stock Issuances

During the nine months ended September 30, 2018, we issued to Debenture holders 56,007 shares of common stock for quarterly interest of $211,047 issued in stock in lieu of cash. Of the 56,007 shares issued, 4,681 shares were issued to members of the Company’s Board of Directors, who are also Debenture holders.

On January 19, 2018, we received a six-month, convertible loan of $150,000 from an accredited investor. The loan earns a one-time interest of 10% and includes a 10% original issue discount. We also issued the investor 4,000 shares of restricted common stock with a relative fair value of $12,267 recorded as a debt discount to be amortized over the six-month term. The loan can be converted at any time into common stock at a conversion price of $7.50.

On February 12, 2018, we received a six-month, convertible loan of $100,000 from an accredited investor. The loan earns a one-time interest of 10%. $50,000 of the proceeds were used to pay off the outstanding balance of a previous loan from this lender. The loan can be converted at any time into common stock at a conversion price of $7.50. We issued the investor 5,000 shares of restricted common stock with a relative fair value of $18,274 of which $10,474 was recorded as a debt discount to be amortized over the six-month term while $7,800 was recorded to interest expense immediately because it related to the previous loan paid off.

On February 12, 2018, we issued 3,500 shares of restricted common stock to an accredited investor to extend the maturity date of our eight-month, non-convertible loan of $170,000 originated on March 21, 2017 to February 15, 2018. The accredited investor agreed to a further extension to March 31, 2018 in exchange for 3,500 shares of restricted common stock issued on March 27, 2018. The lender further extended the term to April 30, 2018 then to September 30, 2018 in exchange for an aggregate of 7,200 shares of company stock. We fully amortized $52,079 of the original debt discount in the year ended December 31, 2017. We recorded a loss of $20,400 relating to the fair value of common stock issued for the September 30 extension.

On March 12, 2018, we received a six-month, convertible loan of $253,000 from an accredited investor. The loan has an original issue discount of $53,000. The loan can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue the investor 6,750 shares of restricted common stock with a relative fair value of $28,722 recorded as a debt discount to be amortized over the six-month term.

On April 2, 2018, we issued 1,150 shares of restricted common stock with a fair value of $5,183 to the lender in connection with the March 12, 2018 5% one-year, convertible loan of $85,000. The fair value of the stock was recorded as a debt discount to be amortized over the one-year term.

On April 12, 2018, we received a 15% six-month, convertible loan of $100,000 from an accredited investor. The loan includes total costs of $24,000 representing guaranteed interest, an original issue discount and legal fees. The loan can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue the investor 2,000 shares of restricted common stock with a fair value of $7,218 recorded as a debt discount to be amortized over the six-month term.

On April 25, 2018, we received a 4% one-year, convertible loan of $105,000 from an accredited investor. The note is convertible on issuance date at $7.50 per share and after 180 days to be 60% of the lowest trading price for the common stock during the 20-trading day period prior to conversion. The loan includes $5,000 in fees. We agreed to issue the investor 1,200 shares of restricted common stock with a fair value of $4,590 recorded as a debt discount to be amortized over the one-year term.

On April 25, 2018, we received another 4% one-year, convertible loan of $105,000 from an accredited investor. The note is convertible on issuance date at $7.50 per share and after 180 days to be 60% of the lowest trading price for the common stock during the 20-trading day period prior to conversion. The loan includes $5,000 in fees. We agreed to issue the investor 1,200 shares of restricted common stock with a fair value of $4,590 recorded as a debt discount to be amortized over the one-year term.

On May 9, 2018, we received a 10% six-month, convertible loan of $250,000 from an accredited investor. The loan includes total costs of $62,500 representing guaranteed interest, an original issue discount and legal fees. The loan can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue the investor 8,000 shares of restricted common stock with a fair value of $26,466 recorded as a debt discount to be amortized over the six-month term.

On May 14, 2018, we received a 15% nine-month, convertible loan of $50,000 from an accredited investor. The loan includes total costs of $12,500 representing guaranteed interest, an original issue discount and legal fees. The loan can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue the investor 1,000 shares of restricted common stock with a fair value of $3,704 recorded as a debt discount to be amortized over the nine-month term.

On May 24, 2018, we received a 4% one-year, convertible loan of $50,000 from an accredited investor. The loan includes an original issue discount of $2,500. The note is convertible on issuance date at $7.50 per share and after 180 days to be 60% of the lowest trading price for the common stock during the 20-trading day period prior to conversion. We agreed to issue the investor 600 shares of restricted common stock with a fair value of $2,075 recorded as a debt discount to be amortized over the one-year term.

On May 25, 2018, we received a 4% one-year, convertible loan of $75,000 from an accredited investor. The loan includes legal fees of $3,750. The note is convertible on issuance date at $7.50 per share and after 180 days to be 60% of the lowest trading price for the common stock during the 20-trading day period prior to conversion. We agreed to issue the investor 900 shares of restricted common stock with a fair value of $3,112 recorded as a debt discount to be amortized over the one-year term.

On May 30, 2018, we received an 8% two-month, convertible loan of $150,000 from an accredited investor. The loan includes guaranteed interest of $12,000. The loan can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue the investor 2,000 shares of restricted common stock with a fair value of $6,870 recorded as a debt discount to be amortized over the two-month term.

On June 4, 2018, we received a 5% one-year, convertible loan of $75,000 from an accredited investor. The loan includes total costs of $9,500 representing an original issue discount and legal fees. The note is convertible after 180 days to be 60% of the lowest trading price for the common stock during the 20-trading day period prior to conversion. We agreed to issue the investor 1,360 shares of restricted common stock with a fair value of $3,869 recorded as a debt discount to be amortized over the one-year term.

On June 8, 2018, we received a 15% 6-month, convertible loan of $50,000 from an accredited investor. The loan includes total costs of $12,500 representing guaranteed interest, an original issue discount and legal fees. The loan can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue the investor 1,000 shares of restricted common stock with a fair value of $3,271 recorded as a debt discount to be amortized over the 6-month term.

On June 11, 2018, the Company entered into a Letter Agreement with an accredited investor in which we agreed to issue 110,833 additional shares of common stock at $2.50 per share to the investor. The fair value was recorded as other charge of $340,257. We also issued 110,833 additional warrants with an exercise price of $3.50 and an expiration period of five years from the original issue date. The fair value was recorded as other charges of $312,637. The Company also amended 29,167 Warrants held by the Investor. The Company lowered the Warrants’ exercise price from $15.00 per share to $3.50 per share. The fair value of $10,236 relating to the reduction in exercise price was treated as an equity modification and recorded as a charge to other expenses.

On June 14, 2018, we received a 10% nine-month, convertible loan of $250,000 from an accredited investor. The loan includes total costs of $30,000 representing an original issue discount and legal fees. The note is convertible after 180 days to be 65% of the average of the two lowest trading prices for the common stock during the 25-trading day period prior to conversion. We agreed to issue the investor 5,000 shares of restricted common stock with a fair value of $17,573 recorded as a debt discount to be amortized over the nine-month term.

On June 16, 2018, we refinanced the December 12, 2017 and December 17, 2017 5% one-year, convertible loans for a total of $240,000 with an accredited investor. The refinanced loans will now be due on December 17, 2018. We issued the investor 3,700 shares of restricted common stock with a fair value of $13,611 for both new loans. We recorded a loss of $50,662 for the interest and fees paid on the refinancing.

On June 26, 2018, we received a 5% 3-month, convertible loan of $150,000 from an accredited investor. The loan includes total costs of $7,500 representing guaranteed interest. The loan can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue the investor 6,000 shares of restricted common stock with a fair value of $20,242 recorded as a debt discount to be amortized over the 3-month term.

On June 28, 2018, we received a 5% 6-month, convertible loan of $50,000 from an accredited investor. The loan includes $2,500 monthly guaranteed interest. The loan can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue the investor 4,000 shares of restricted common stock with a fair value of $10,518 recorded as a debt discount to be amortized over the 6-month term.

On July 1, 2018, we signed a six-month agreement with a firm to provide consulting services. We issued 24,000 shares of restricted common stock at inception of contract. The stock’s fair value of $93,600 based on the trading stock price on contract date is amortized to expense over the service period of 6 months.

On July 2, 2018, we received a 4% one-year, convertible loan of $125,000 from an accredited investor. The note is convertible on issuance date at $7.50 per share and after 180 days to be 60% of the lowest trading price for the common stock during the 15-trading day period prior to conversion. The loan includes $6,250 in fees. We issued the investor 1,500 shares of restricted common stock with a fair value of $5,588 recorded as a debt discount to be amortized over the one-year term.

On July 5, 2018, we signed a six-month agreement with a firm to provide consulting services. We issued 24,000 shares of restricted common stock at inception of contract. The stock’s fair value of $79,920 based on the trading stock price on contract date is amortized to expense over the service period of 6 months.

On July 17, 2018, we received a 15% three-month, convertible loan for $100,000 from an accredited investor. The loan can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue the investor 2,000 shares monthly over three months for a total of 6,000 shares of restricted common stock with a fair value of $16,944 that was recorded as a debt discount to be amortized over the three-month term.

On July 18, 2018, our lender extended the term of our March 21, 2017 non-convertible loan of $170,000 to September 30, 2018 in exchange for 6,000 shares of company stock. The loan continues to earn an annual interest rate of 10%. We recorded a loss of $20,400 relating to the fair value of common stock issued for the September 30 extension.

On July 19, 2018, we refinanced the January 19, 2018 10% one-year, convertible loan of $150,000 with an accredited investor. The refinanced loan will now be due on January 19, 2019. We paid $36,000 in interest and fees on the January 19, 2018 loan in connection with the refinancing. We agreed to issue the investor 4,500 shares of restricted common stock. We recorded a loss of $18,346 relating to this refinancing. The loss was from the fair value of common stock of $17,100 issued and the write-down of $1,246 for the unamortized discount remaining on the original debt.

On July 31, 2018, we refinanced the May 30, 2018 8% two-month, convertible loan of $150,000 from an accredited investor. The loan will now be due on October 31, 2018 and includes guaranteed interest of $18,000. The loan can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue the investor 2,000 shares of restricted common stock with a relative fair value of $6,578 recorded as a debt discount to be amortized over the three-month term. We expect to refinance the July 31, 2018 loan.

On August 8, 2018, we refinanced the February 9, 2018 six-month, convertible loan of $100,000 with an accredited investor. The refinanced loan will now be due on February 8, 2019 and earns 5% monthly. We agreed to issue the investor 7,800 shares of restricted common stock. We recorded a loss of $32,171 relating to this refinancing. The loss was from the fair value of common stock of $27,534 issued and the write-down of $4,637 for the unamortized discount remaining on the original debt.

On August 15, 2018, we received a four-month, convertible loan for $100,000 from an accredited investor. The loan accrues interest at 5% monthly and can be converted at any time into common stock at a conversion price of $7.50. We agreed to issue the investor 1,500 shares monthly over four months for a total of 6,000 shares of restricted common stock. We recorded a loss of $23,700 relating to this refinancing for the fair value of common stock issued.

On August 27, 2018, we received a 4% one-year, convertible loan of $125,000 from an accredited investor. The loan includes legal fees of $6,250. The note is convertible on issuance date at $7.50 per share and after 180 days to be 60% of the lowest trading price for the common stock during the 20-trading day period prior to conversion. We issued the investor 1,428 shares of restricted common stock with a fair value of $4,443 recorded as a debt discount to be amortized over the one-year term.

On September 7, 2018, we refinanced the March 12, 2018 5% one-year, convertible loan of $85,000 with an accredited investor. The refinanced loan will now be due on March 12, 2019. We paid $17,361 in interest and fees on the March 12, 2018 loan in connection with the refinancing. We agreed to issue the investor 1,150 shares of restricted common stock with a fair value of $4,364 recorded as a debt discount to be amortized over the one-year term.