CONVERTIBLE PREFERRED STOCK

3 Months Ended

Mar. 31, 2013

Features Of Convertible Preferred Stock [Abstract]

CONVERTIBLE PREFERRED STOCK

NOTE 8 – CONVERTIBLE PREFERRED STOCK

Subscription Agreement

The Company entered into a Subscription Agreement with VerifyMe, Inc. (“VerifyMe”) on January 31, 2013 (the “Subscription Agreement”). Under the terms of the Subscription Agreement VerifyMe subscribed to purchase 33,333,333 shares of the Company’s preferred stock and a warrant to purchase 33,333,333 shares of the Company’s common stock for $1 million at an exercise price of $0.12.

At any time within two years after January 31, 2013, the subscriber has the right, but not the obligation to require the Company to repurchase all, but not less than all, of the capital stock of the Company and warrants exercisable for capital stock of the Company held by subscriber in exchange for the price originally paid by the subscriber therefor upon the occurrence of any of the following events:(i) the consummation of any bona fide business acquisition, (ii) the incurring of any indebtedness by the Company in an amount in excess of $2 million, (iii) the issuance or sale of any security having a preference on liquidation senior to common stock, or (iv) the sale by the Company of capital stock or warrants exercisable for its capital stock at a price below $0.03 per share. 

In accordance with ASC 480 and 815, the Preferred Stock has been classified as permanent equity and has been valued at $1 million.

The conversion feature of the Preferred Stock is an embedded derivative, which is classified as a liability in accordance with ASC 815 and was valued in accordance with ASC 470 as a beneficial conversion feature at a fair market value of $1 million at January 31, 2013. This was classified as an embedded derivative liability and a discount to Preferred Stock. Because the Preferred Stock can be converted at any time, the full amount was accreted and classified as a reduction to the discount on Preferred Stock and a deemed dividend distribution in the full amount of $1 million.

The warrants associated with the Preferred Stock were also classified as a liability and valued at a fair market of $2,995,791 at January 31, 2013. Because this amount was in entirely in excess of the transaction price, this amount was recorded as a charge to expenses of $2,995,791. In addition, the warrants must be valued every reporting period and adjusted to market with the increase or decrease being adjusted through earnings. For the three months ended March 31, 2013, the value of the warrants increased to $6,660,286 resulting in a charge to expenses of $3,664,495.

The Convertible Preferred Stock have a preference in liquidation that the holders of the Convertible Preferred Stock are to be paid out of assets available for distribution prior to holders of common stock. The Convertible Preferred Stockholders may cast the number of votes equal to the number of whole shares of common stock into which the shares of Convertible Preferred Stock can be converted. In addition, the Convertible Preferred Stockholders are to be paid dividends, based on the number of Convertible Preferred shares as if the shares had been converted to common shares, prior to the common stockholders receiving a dividend.

The conversion price of the Preferred A shares is currently $0.03 per share. There are no arrearages on cumulative dividends.