STOCKHOLDERS' DEFICIT

12 Months Ended

Dec. 31, 2014

STOCKHOLDERS' DEFICIT

STOCKHOLDERS' DEFICIT

12 STOCKHOLDERS’ DEFICIT

a) Common Stock

The Company has authorized 500,000,000 common shares with a par value of $0.001 each, and issued and outstanding 260,169,499 shares of common stock as of December 31, 2014.

The following common shares were issued by the Company during the year ended December 31, 2014:

i) an aggregate of 29,095,289 shares of Common Stock to convertible note holders upon conversion of an aggregate of $1,597,005 of short and long-term convertible notes, inclusive of certain interest and, mark-to-market derivative adjustments thereon, at an average share price of $0.05 per share;

ii) an aggregate of 1,523,167 Common shares issued to consultants and advisors for services at an average issue price of $0.23 per share, the market value of our common stock when the shares were issued.

iii) In terms of a private placement agreement entered into on April 15, 2014 between the Company and a placement agent (“the Placement Agent”), the Placement Agent agreed to assist the Company in raising financing. The financing could be in the form of debt or equity funding offered to qualified investors only and was in the form of equity. The Placement Agent received a fee of 10% of the gross proceeds raised together with a 3% expense recovery fee. In addition to this the Placement Agent was issued warrants equal to 15% of the total number of shares issued to the investors , on the same terms and conditions of those warrants issued to investors. After the completion of the last funding the Company was obligated to file an S-1 registration statement on Form S-1 registering the common stock issue in the offering and the common stock underlying the warrants. The S-1 registration statement was filed on October 14, 2014.

During the period June 2014 to August 2014, pursuant to the private placement agreement and individual Securities Purchase Agreements entered into, new, qualified investors, acquired 7,353,329 common units of the Company at a price of $0.15 per unit, each unit consisting of one share of Common Stock and a five year warrant exercisable for one half of a share of common stock at an exercise price of $0.25 per share, for net proceeds of $946,110 after deducting placement agent fees and other share issue expenses of $146,890. A further $10,000 was paid to the Placement Agent as fees in terms of the agreement. The placement agent was also issued five year warrants to purchase 1,102,999 units to purchase shares of common stock at an exercise price of $0.15 per unit, each unit consisting of one common share and a further warrant to purchase half a share of common stock at an exercise price of $0.25 per share, resulting in a net additional 551,500 warrants to purchase common stock at an exercise price of $0.25 per share.

iv) An aggregate of 150,000 shares of Common stock were issued to three of our non-executive directors effective December 5, 2014, in terms of agreements entered into with these directors for services rendered as directors of the Company.

v) an aggregate of 3,750,000 shares of Common Stock were issued upon the conversion of 375,000 shares of Series A-1 Preferred stock in terms of a conversion notice received from a Series A-1 stockholder effective December 16, 2014 at a conversion factor of 10 Common shares for one Series A-1Preferred share.

vi) Restricted stock awards

(a) An aggregate of 10,000,000 shares of restricted common stock were issued to our Chief Executive Officer in terms of an employment agreement entered into with him. These shares are restricted and vest as to 1,250,000 shares on January 1, 2015 and a further 1,250,000 shares per quarter thereafter, these shares will be fully vested on September 1, 2016. These restricted shares were valued at the closing price of the common stock on February 4, 2015, the date of approval of the amended and restated employment agreement with our Chief Executive officer. Refer related party disclosure in note 18 below.

(b) An aggregate of 3,000,000 shares of restricted common stock were issued to our Director, John Zotos, in terms of a consulting agreement entered into with him. These shares are restricted and vest as to 1,000,000 shares on March 31, 2015, a further 1,000,000 vest on September 30, 2015 with the remaining 1,000,000 vesting on March 31, 2016. These restricted shares were valued at the closing price of the common stock on December 5, 2014, the date of approval of the consulting agreement with John Zotos. Refer related party disclosure in note 18 below.

The restricted stock outstanding and exercisable at December 31, 2014 are as follows: 

		Restricted Stock Outstanding				Restricted Stock Exercisable
Grant date Price		NumberOutstanding		WeightedAverageGrantDatePrice		NumberVested		WeightedAverageGrant DatePrice
$	0.15		10,000,000	$			-	$
$	0.18		3,000,000	$			-	$
			13,000,000	$	0.16		-	$	-

The Company has recorded an expense of $620,429 for the year ended December 31, 2014 relating to the restricted stock awards and a further $1,644,571 will be expensed over the vesting period of the stock which takes place over the next twenty four months.

b) Preferred Stock

The Company has 10,000,000 authorized preferred shares with a par value of $0.001 each with 5,000,000 preferred shares designated as Series A-1 Convertible Preferred Stock (“Series A-1 Shares”) and 500,000 preferred shares designated as Series B Preferred Stock.

On March 14, 2014, the Company amended its articles of incorporation by designating 500,000 of the remaining 5,000,000 undesignated preferred shares as Series B Convertible Redeemable Preferred Stock (“Series B Shares”), with 75,000 Series B Shares issued and outstanding, which are convertible into 7,500,000 shares of common stock.

Subsequent to year end, on February 19, 2015, the Company amended its articles of incorporation by designating the remaining 4,500,000 preferred shares as Series C preferred shares. Which are convertible into 120,000,000 shares of common stock. Refer to Subsequent events disclosure in note 20 below.

i)      Series A-1 Convertible Preferred Stock 

The Company has designated 5,000,000 preferred shares as Series A-1 Convertible Preferred Stock (“Series A-1 Shares”), with 3,512,500 Series A-1 Shares issued and outstanding which are convertible into 35,125,000 shares of common stock.

During the year ended December 31, 2014, holders of 375,000 Series A-1 shares converted their holdings into 3,750,000 shares of the Company’s Common Stock at a conversion ratio of 10 common shares to 1 Series A-1 Share.

The rights, privileges and preferences of the Series A-1 Shares are summarized as follows;

Conversion

Each Series A-1 Share has the following conversion rights:

(a) Each share of the Series A-1Shares is convertible into ten shares of Common Stock.

(b) There shall be no adjustment made to the conversion ratio of the Series A-1 Shares for any stock split, stock dividend, combination, reclassification or other similar event.

Company Redemption

The Series A-1Shares are non-redeemable by the Company.

Voting Rights

Each holder of Series A-1 Shares is entitled to vote on all matters submitted to a vote of the stockholders of the Company and shall be entitled to that number of votes equal to the number of shares of Common Stock into which such holder’s shares of Series A-1 Shares could then be converted.

Dividends

Until such time that any dividend is paid to the holders of Common Stock, the holders of Series A-1 Shares shall be entitled to a dividend in an amount per share equal to that which such holders would have been entitled to receive had they converted all of the shares of Series A-1 Shares into Common Stock immediately prior to the payment of such dividend

Liquidation Preference

Each share of Series A-1 Shares is entitled to a liquidation preference of $0.08 per share

No Circumvention

The approval of the holders of at least 2/3 (66.6%) of the outstanding shares of the Series A-1 Shares, voting together separately as a class, is required for:

(a) the merger, sale of all, or substantially all of the assets or intellectual property, recapitalization, or reorganization of the Company;

(b) the authorization or issuance of any equity security having any right, preference or priority superior to or on a parity with the Series A-1 Shares;

(c) the redemption, repurchase or acquisition of any of the Company’s equity securities or the payment of any dividends or distributions thereon;

(d) any amendment or repeal of the Company’s Articles of Incorporation or Bylaws that would have an adverse affect on the rights, preferences or privileges of the Series A-1 Shares; and

(e) the making of any loan or advance to any person except in the ordinary course of business.

b) Preferred Stock

ii) Series B Convertible Preferred Stock

The Company has designated 500,000 preferred shares as Series B Convertible Preferred Stock (“Series B Shares”), with 75,000 Series B Shares issued and outstanding which are convertible into 7,500,000 shares of common stock.

On March 27, 2014, we entered into a Securities Purchase Agreement with an individual, pursuant to which the individual agreed to purchase and we agreed to sell 75,000 Series B Shares at an issue price of $10 per share for net proceeds of $750,000.

The proceeds received above, were primarily used to settle the following convertible notes outstanding (Refer note 9 above):

a) On February 7, 2014, the unsecured promissory note issued to Asher Enterprises on July 29, 2013 with a face value of $53,000, was repaid for $73,687, inclusive of interest, fees and an early settlement penalty accrued thereon.

b) On February 10, 2014, the unsecured promissory note issued to Gel Properties on July 30, 2013 with a face value of $52,500, was repaid for $72,538, inclusive of interest, fees and an early settlement penalty accrued thereon.

c) On February 21, 2014, the unsecured promissory note issued to Asher Enterprises on September 4, 2013 with a face value of $42,500 was repaid for $58,884, inclusive of interest, fees and an early settlement penalty accrued thereon.

d) On March 6, 2014, the funds of $50,000 borrowed from JMJ Financial on December 9, 2013, including interest, original issue discount and fees, amounting to $64,960, was repaid for $58,000 before the once-off interest charge of $6,960 came into effect.

e) On March 11, 2014, one of the two $50,000 “back end” promissory notes issued to GEL Properties and exercised on January 16, 2014, was repaid for $62,950, inclusive of interest and an early settlement penalty accrued thereon.

f) On March 28, 2014, the unsecured promissory note issued to Asher Enterprises on October 3, 2013 with a face value of $32,500 was repaid for $45,086, inclusive of interest, fees and an early settlement penalty accrued thereon.

g) On March 31, 2014, the unsecured promissory note issued to LG Capital Funding, LLC, with a face value of $51,500 was repaid for $95,172, inclusive of interest, original issue discounts and early settlement penalty accrued thereon.

h) On April 11, 2014, the second $50,000 “back end” promissory note issued to GEL Properties was repaid for $65,708, inclusive of interest and an early settlement penalty accrued thereon.

ii) Series B Convertible Preferred Stock (continued)

The rights, privileges and preferences of the Series B Shares are summarized as follows:

Conversion

The holders of the Series B Preferred Shares shall have conversion rights as follows:

(a) Each share of the Series B Shares shall be convertible at any time prior to the issuance of a redemption notice by the Company into such number of shares of Common Stock by dividing the Stated value ($10) of the Series B Share by $0.10 and shall be subject to adjustment for dividends or distributions made in common stock, the issue of securities convertible into common stock, stock splits, reverse stock splits, or reclassifications of common stock. No adjustments will be made to the conversion rights or conversion price for any reorganization other than to be entitled to receive the same benefits as if the shares were converted immediately prior to such reorganization. No conversion will take place if the holder of the Series B Shares will beneficially own in excess of 4.99% of the shares of Common Stock outstanding immediately after conversion. As of the date hereof, each Series B Share converts into 100 shares of common stock.

(b) The conversion right of the holders of Series B Shares shall be exercised by the surrender of the certificates representing shares to be converted to the Company, accompanied by written notice electing conversion.

(c) No fractional shares of Common Stock or script shall be issued upon conversion of Series B Shares. The Company shall pay a cash adjustment in respect to such fractional interest based upon the fair value of a share of Common Stock, as determined in good faith by the Company’s Board of Directors.

(d) All shares of Common Stock issued upon conversion of Series B Shares will upon issuance be validly issued, fully paid and non-assessable. All certificates representing Series B Shares surrendered for conversion shall be appropriately canceled on the books of the Company and the shares so converted represented by such certificates shall be restored to the status of authorized but unissued shares of preferred stock of the Company.

Company Redemption

The Company shall have the right, at any time after the date the Series B Shares have been issued, to redeem all or a portion of any Holder's Series B Shares at a price per Series B Share equal to the issue price per Series B Share multiplied by 120%

Voting Rights

Each holder of Series B Shares shall be entitled to vote on all matters submitted to a vote of the stockholders of the Company and shall be entitled to votes equal to the number of shares of Common Stock into which Series B Shares could be converted, and the holders of shares of Series B Shares and Common Stock shall vote together as a single class on all matters submitted to the stockholders of the Company. 

Dividends

(a) The holders of the Series B Shares shall be entitled to receive cumulative dividends at the rate of eight percent per annum of the issue price per share, accrued daily and payable annually in arrears on December 31st of each year (“Dividend Date”). Such dividends shall accrue on any given share from the day of original issuance of such share. Such dividends shall be cumulative, whether or not declared by the Board of Directors, but shall be non-compounding.

(b) Any dividend payable on a dividend payment date may be paid, at the option of the Company, either (i) in cash or (ii) in shares of common stock at an issue price of $0.10 per common share.

(c) Nothing contained herein shall be deemed to establish or require any payment or other charges in excess of the maximum permitted by applicable law.

(d) In the event that pursuant to applicable law or contract the Company shall be prohibited or restricted from paying in cash the full dividends to which the holders of the Series B Shares shall be entitled, the cash amount available pursuant to applicable law or contract shall be distributed among the holders of the Series B Shares ratably in proportion to the full amounts to which they would otherwise be entitled and any remaining amount due to holders of the Series B Shares shall be payable in cash.

ii) Series B Convertible Preferred Stock (continued)

Liquidation Preference

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of the Series B Shares shall be entitled to receive, prior and in preference to any distribution of any assets of the Company to the holders of any other preferred stock of the Company and subordinate to any distribution to the Series A-1 Shares, and prior and in preference to any distribution of any assets of the Company to the holders of the Common Stock, the amount of 120% of the issue price per share.

No Circumvention

The Company shall not amend its certificate of incorporation, or participate in any reorganization, sale or transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed by the Company.

We have undeclared dividends on the Series B Preferred stock amounting to $45,863 as of December 31, 2014. If the dividends are paid in stock, the beneficial conversion feature of these undeclared dividends will be recorded upon the declaration of these dividends.

c) Stock Options

i) Plan options

The Company’s Board of Directors approved the Company’s 2008 Stock Option Plan (the “Stock Plan”) for the issuance of up to 5,000,000 shares of common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors and consultants of the Company and its subsidiaries. After the reverse stock split in August 2012, a total of 100,000 shares were available for grant. Subsequent to the reverse split the Board of Directors approved an increase in the number of awards available for grant to 2,100,000 shares. The exercise price of stock options under the Stock Plan is determined by the Board of Directors, and may be equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. Options become exercisable over various periods from the date of grant, and generally expire ten years after the grant date.

At December 31, 2014 and 2013, there were 380,950 and 452,960 Plan options issued and outstanding, respectively, under the Stock Option Plan.

The vesting provisions for these stock options are determined by the board of directors at the time of grant, there are no unvested options outstanding as of December 31, 2014. 

No options were issued during the year ended December 31, 2014..

ii) Non-Plan Stock Options

In March of 2013, the Company granted to its Chief Executive Officer Non-Plan options (that are not covered by the Company’s Stock Option Plan) to purchase 10,000,000 shares of the Company’s common stock with an exercise price equal to $0.25 per share. Vesting was immediate as to 2,500,012 of the options and the balance of the options vested, pro rata, on a monthly basis, over 36 months.

In March of 2013, the Company granted to one of its directors Non-Plan options (that are not covered by the Company’s Stock Option Plan) to purchase 1,000,000 shares of the Company’s common stock with an exercise price equal to $0.25 per share. Vesting was immediate as to 250,012 of the options and the balance of the options vest pro rata, on a monthly basis, over 36 months.

In the event of the employees’ termination, the Company will cease to recognize compensation expense.

A summary of all of our option activity during the period January 1, 2013 to December 31, 2014 is as follows: 

	Shares			Exerciseprice pershare		Weightedaverageexerciseprice
Outstanding January 1, 2013	55,280		$	5.00 to 25.00	$	8.49
Granted – plan options	397,680			0.51 to 0.65		0.54
Granted – non plan options	11,000,000			0.25		0.25
Forfeited/Cancelled	-			-		-
Exercised	-			-		-
Outstanding December 31, 2013	11,452,960		$	0.25 to 25.00	$	0.30
Granted – plan options	-			-		-
Granted – non plan options	-			-		-
Forfeited/Cancelled	(11,072,010	)		0.25 to 25.00$		0.28
Exercised	-			-		-
Outstanding December 31, 2014	380,950			0.51 to 13.50		0.90

Stock options outstanding as of December 31, 2014 and 2013 as disclosed in the above table, have an intrinsic value of $0 and $0, respectively.

The options outstanding and exercisable at December 31, 2014 are as follows:

		Options Outstanding						Options Exercisable
ExercisePrice		NumberOutstanding		WeightedAverageRemainingContractuallife in years		WeightedAverageExercisePrice		NumberExercisable		WeightedAverageExercisePrice		WeightedAverageRemainingContractuallife in years
$	13.50		3,480		4.46	$			3,480	$			4.46
$	12.50		2,000		5.78	$			2,000	$			5.78
$	8.50		500		6.50	$			500	$			6.50
$	5.00		14,800		6.79	$			14,800	$			6.79
$	0.65		36,924		8.25	$			36,924	$			8.25
$	0.63		38,096		3.50	$			38,096	$			3.50
$	0.51		285,150		5.29	$			285,150	$			5.29
			380,950		5.45	$	0.90		380,950	$	0.90		5.45

No options were granted for the year ended December 31, 2014.

Options over 72,010 shares were cancelled during the current year due to the termination of the employment of the optionees in prior periods and the expiry of those options 90 days after their effective termination dates.

The 10,000,000 and the 1,000,000 Non Plan options granted to our Chief Executive Officer, John Huemoeller (“Huemoeller”) and our director, John Zotos (“Zotos”) on March 6, 2013 were cancelled in terms of agreements entered into on December 5, 2014, whereby the options granted to Huemoeller and Zotos were cancelled and replaced with restricted stock awards of 10,000,000 and 3,000,000 shares, respectively, of common stock of the company, refer note 12 a) above. 

The Company has applied fair value accounting for all share based payment awards since inception. The fair value of each option or warrant granted is estimated on the date of grant using the Black-Scholes option-pricing model. There is no deferred compensation recorded upon initial grant date, instead, for employees, the fair value of the share-based payment is recognized ratably over the stated vesting period. For consultants, the fair value is recognized as expense immediately.

The Company has recorded an expense of $1,769,170 and $1,657,273 for the year ended December 31, 2014 and 2013 relating to options issued.

(d) Warrants

In terms of the recent private placement which took place between June 27, 2014 and August 8, 2014, as disclosed under (a) above, the new investors were entitled to a half warrant exercisable for one share of common stock per unit issued. The new, qualified, investors subscribed for a total of 7,353,329 units, each unit consisting of one share of common stock and one half warrant per share, resulting in the issue of 3,676,665 full warrants which are exercisable for shares of common stock at an exercise price of $0.25 per share. In addition to this, the placement agent is entitled to warrant units equal to 15% of the total shares issued under the Placement Agent Agreement. Each warrant unit consists of one warrant (“First Warrant”) and one half warrant upon exercise of the First Warrant, which are exercisable for shares of common stock at an exercise price of $0.25 per share. This resulted in the issue of 1,654,499 warrants to the Placement Agent.

The warrants outstanding and exercisable at December 31, 2014 are as follows:

		Warrants Outstanding						Warrants Exercisable
ExercisePrice		NumberOutstanding		WeightedAverageRemainingContractuallife in years		WeightedAverageExercisePrice		NumberExercisable		WeightedAverageExercisePrice		WeightedAverageRemainingContractuallife in years
$	0.30		375,000		3.83	$	0.30		375,000	$	0.30		3.83
$	0.25		1,751,667		4.49	$	0.25		1,751,667	$	0.25		4.49
$	0.15		525,500		4.49	$	0.15		525,500	$	0.15		4.49
$	0.25		1,508,333		4.59	$	0.25		1,508,333	$	0.25		4.59
$	0.15		577,499		4.60	$	0.15		577,499	$	0.15		4.60
$	0.25		968,166		4.60	$	0.25		968,166	$	0.25		4.60
$	0.25		633,333		4.65	$	0.25		633,333	$	0.25		4.65
			6,339,498		4.52	$	0.24		6,339,498	$	0.24		4.52

The warrants outstanding have an intrinsic value of $22,060 and $0 as of December 31, 2014 and 2013, respectively.