8. Shareholders Equity (Deficit)

3 Months Ended

Mar. 31, 2013

Shareholders' equity:

Shareholders Equity (Deficit)

In March 2013, we entered into a securities purchase agreement with accredited investors pursuant to which we sold an aggregate of 9,000 shares of newly created Series A1 Convertible Preferred Stock ("Series A1 Preferred Stock") at a purchase price of $100 per share.

The following is a summary of the terms of the Series A1 Preferred Stock:

Stated Value : The stated value per share of preferred stock is $100, subject to increase for accreted dividends.

Voting Rights :  The holders of the preferred stock vote on an as-converted basis together with the holders of our common stock as a single class, except with respect to any increase or decrease in the authorized shares of our common stock, as to which the holders of the preferred stock have no right to vote.

Negative Covenants :  As long as any preferred stock is outstanding, we are prohibited from taking any of the following actions without the consent of a majority of the then outstanding preferred stock voting as a single class with the holders of the Series A Convertible Preferred Stock:

· change adversely the rights given to the preferred stock;

· authorize or create any security ranking senior to or otherwise pari passu with the preferred stock;

· amend our charter documents in any manner that adversely affects any rights of the preferred stock;

· increase the number of authorized shares of preferred stock’

· declare or pay any cash dividend or distribution on or purchase or redeem any junior securities; and

· purchase or redeem any shares of preferred stock other than in accordance with the certificate of designation.

Dividends : The holders of the preferred stock are entitled to cumulative dividends at the rate per share (as a percentage of the stated value per share) of 6.0% per annum. Dividends accrete to, and increase the outstanding stated value of the preferred stock and compound (i) quarterly on March 31, June 30, September 30 and December 31 and (ii) when and to the extent shares of the preferred stock are converted into common stock.

Voluntary Conversion :  A holder of preferred stock can elect to convert its preferred stock into shares of our common stock at any time. Each share of preferred stock is convertible into that number of shares of our common stock determined by dividing the stated value of such share of preferred stock (as increased for accreted dividends) by the conversion price.

Conversion Price : The conversion price is $0.20 per share.

Liquidation Preference : The holders of preferred stock are entitled to receive out of our assets, whether capital or surplus, before any distribution or payment shall be made to the holders of our common stock or other junior securities, an amount per share of preferred stock equal to the sum of (i) the stated value of the preferred stock (as increased for accreted dividends), plus (ii) any accrued dividends thereon that have not accreted to the stated value through the date of liquidation, plus (iii) such amount necessary to make the aggregate of all amounts paid with respect to such share of preferred stock equal to an internal rate of return of 30% per annum.

Redemption :  We can redeem the preferred stock at any time after September 23, 2015 by paying cash in an amount equal to the sum of (i) the stated value of the preferred stock, plus (ii) any accrued dividends thereon that have not accreted to the stated value through the date of redemption, plus (iii) such amount necessary to make the aggregate of all amounts paid with respect to such share of preferred stock equal to an internal rate of return of 30% per annum. We must give the holders of the preferred stock at least 30 days advance notice of our intent to redeem the preferred stock and we must honor any conversion of the preferred stock before the redemption date.

In January 2013, we entered into a securities purchase agreement with accredited investors pursuant to which we sold 1,744 shares of Series A Convertible Preferred Stock at a purchase price of $115 per share, raising aggregate gross proceeds of approximately $0.2 million.