Quarterly report pursuant to Section 13 or 15(d)

Capital Stock

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Capital Stock
3 Months Ended
Jun. 30, 2012
Notes to Financial Statements  
NOTE 9 - Capital Stock

Warrants and Stock Grants

 

In April 2012, the Company entered into a contract for investor relations services pursuant to which it granted three-year warrants to purchase 50,000 shares of the Company’s common stock at an exercise price of $2.80 per share. The Company valued the warrant at $69,200 using the Black Scholes Option Pricing Model and the following assumptions: market price per share: $2.74; exercise price per share: $2.80; risk-free interest rate: 0.50%; contractual term: 3 years; volatility: 79.09%; expected dividend rate: 0%. The fair value of the warrant was recorded as a prepaid expense and is being expensed over one year in accordance with the terms of the contract.

 

In June 2012, the Company entered into a contract for investor relations and public company services through the end of the calendar year pursuant to which it granted 280,000 shares of its common stock valued at $238,000 based on the grant date quoted market price of $0.85 per share and warrants to purchase 100,000 shares of its common stock at an exercise price of $3.00 per share through December 31, 2015. The Company valued the warrant at $25,800 using the Black Scholes Option Pricing Model and the following assumptions: market price per share: $0.85; exercise price per share: $3.00; risk-free interest rate: 0.46%; contractual term: 3.53 years; volatility: 84.279%; expected dividend rate: 0%. The fair value of the stock and the warrant was recorded as a prepaid expense and is being expensed over the approximately six month term of the contract.

 

In June 2012, the Company entered into a contract for additional investor relations services pursuant to which it granted 120,000 shares of its common stock valued at $102,000 based on the grant date quoted market price of $0.85 per share. The fair value of the stock was recorded as a prepaid expense and is being expensed over the approximately six month term of the contract.

 

Warrant Modifications

 

Between mid-May and June 30, 2012, the Company offered certain warrant holders the opportunity to exercise their warrants to purchase shares of the Company’s common stock at reduced exercise prices. Warrant holders exercised warrants to purchase an aggregate of 514,554 shares of the Company’s common stock and the Company received cash proceeds of $257,300. In addition, certain warrant holders exercised warrants to purchase 25,000 shares of the Company’s common stock in lieu of payment by the Company in satisfaction of amounts due for services in the aggregate amount of $12,500. For every three discounted warrant shares exercised by the warrant holders, the Company granted a three-year warrant to purchase one share of its common stock at an exercise price of $3.00 per share.

The Company calculated the fair value of the warrants exercised immediately before and after the May 18, 2012 Board of Directors approval of the modification offer and determined that the increase in the fair value of the warrants exercised was $436,400, which is reflected in general and administrative expense for the quarter ended June 30, 2012 in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss. The warrants subject to the exercise price modifications were valued at the inception of the discount offer period using the Black-Scholes Option Pricing Model and using the following assumptions:

 

Assumption:   Pre-modification   Post-modification
Market price per share   $ 1.96     $ 1.96  
Exercise price per share (weighted average)     $2.76     $ 0.50  
Risk-free interest rate     0.16% - 0.41%       0.06 %
Expected term (years)     0.62 – 2.85       0.12  
Volatility     74.5% - 85.7%       85.7 %
Dividend rate     0.0 %     0.0 %
                 
Weighted Average Fair Value per share   $ 0.65     $ 1.46  

 

The market price per share is based on the quoted market price of the Company’s common stock on the Over-the-Counter Bulletin Board on the date of the modification. Because of its short history as a public company, the Company has estimated volatility based on the historical volatilities of a peer group of public companies over the expected term of the option. The risk-free rate of interest is based on the quoted constant maturity rate for U.S Treasury Bills on the date of the modification for the term corresponding with the expected term of the warrant. The expected dividend rate is zero as the Company has not paid and does not expect to pay dividends in the near future.

 

In connection with the foregoing exercises, the Company issued three-year warrants to purchase 179,857 shares of the Company’s common stock at an exercise price of $3.00 per share. The Company valued these warrants at $34,800 using the Black Scholes Option Pricing Model and the following assumptions: weighted average market price per share: $0.89; exercise price per share: $3.00; risk-free interest rate: 0.42%; contractual term: 3.0 years; volatility: 78.04%; expected dividend rate: 0%. The fair value of the warrants was charged to interest expense in the quarter ended June 30, 2012.

 

Following the warrant exercises and grants described above, at June 30, 2012, the Company had outstanding warrants to purchase shares of its common stock at a weighted average exercise price of $2.24 per share as follows:

 

  Exercise       Expiration       June 30,  
  Price       Date       2012  
                     
$ 0.88       5/17/2012 to 5/11/2014       15,428  
$ 1.125       12/28/2012       97,679  
$ 1.25       5/11/2014 to 12/31/2014       120,280  
$ 1.50       12/31/2012       325,000  
$ 1.75       12/31/2013       577,784  
$ 2.00       8/3/2013 to 12/31/2014       609,000  
$ 2.50       5/11/2014       493,650  
$ 2.625       12/31/2013       482,990  
$ 2.75       2/28/2017       272,724  
$ 3.00       1/4/2015 to 2/13/2016       609,857  
                     
                  3,604,392  

 

2012 Exchange Agreement with Platinum

 

On June 29, 2012, the Company and Platinum Long Term Growth Fund VII, LLC (“Platinum”) entered into an Exchange Agreement (the “2012 Exchange Agreement”) pursuant to which the Company has agreed to issue Platinum 62,945 shares of its Series A Preferred stock in exchange for 629,450 shares of common stock owned by Platinum, in consideration for Platinum’s agreement to purchase from the Company a secured 10% convertible promissory note in the principal amount of $500,000 (the “July 2012 Platinum Note”).  The July 2012 Platinum Note was issued on July 2, 2012, and accordingly, the Company has not reflected either the issuance of the July 2012 Platinum Note or the exchange for the Series A Preferred Stock in its Condensed Consolidated Financial Statements at June 30, 2012. Under the terms of the 2012 Exchange Agreement and the July 2012 Platinum Note, in the event the Company consummates an equity or equity-based financing, or series of financing transactions resulting in gross proceeds to the Company of at least $3.0 million (“Qualified Financing”), the principal and accrued interest due under the terms of the July 2012 Platinum Note shall automatically convert into such securities issued in connection with the Qualified Financing. Repayment of all amounts due under the July 2012 Platinum Note is secured by the Company’s assets, including its tangible and intangible personal property, licenses, patent licenses, trademarks and trademark licenses, pursuant to the terms of a Security Agreement.  In connection with the 2012 Exchange Agreement, Platinum has also agreed to invest at least $500,000 in the Qualified Financing, provided that the Company secures binding commitments from other investors in the Qualified Financing aggregating at least $3.0 million within 90 days following the date of the 2012 Exchange Agreement.  In addition, Platinum, at its option, may exchange all or a portion of its Series A Preferred stock for the securities issued in connection with the Qualified Financing based on the stated value of $15.00 per share of Series A Preferred. Upon issuance of the Series A Preferred stock to be issued pursuant to the 2012 Exchange Agreement, Platinum will own all 500,000 authorized and outstanding shares of the Company’s Series A Preferred stock, each share of which is convertible into ten shares of the Company’s common stock.