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Stockholder's Equity

6 Months Ended

Jun. 30, 2016

11.

Stockholder’s Equity

	Convertible Series A Preferred Stock				Common Stock				Paid-in		Accumulated			Total Stockholders'
	Shares		Amount		Shares		Amount		Capital		Deficit			(Deficit) Equity
Balance, December 31, 2015		-	$	-		46,195,000	$	4,620	$	6,493,518	$	(7,561,751	)	$	(1,063,613	)
Issuance of common stock with detachable warrants		-		-		40,000,000		4,000		1,996,000		-			2,000,000
Issuance of common stock for services rendered		-		-		330,000		33		89,068		-			89,101
Issuance of Series A convertible Preferred stock, net of issuance cost of $35,920 with detachable warrants		972		756,835		-		-		179,145		-			935,980
Stock-based compensation		-		-		201,000		20		157,388		-			157,408
Issuance of common stock for note payable		-		-		6,877,452		688		195,642		-			196,330
Issuance of detachable warrants on notes payable		-		-		-		-		65,772		-			65,772
Issuance of common stock for Series A preferred dividend		-		-		256,038		26		17,733		(17,759	)
Beneficial conversion feature of convertible debt		-		-		-		-		228,550		-			228,550
Net loss		-		-		-		-		-		(2,324,179	)		(2,324,179	)
Balance, June 30, 2016		972	$	756,835		93,859,490	$	9,386	$	9,422,816	$	(9,903,689	)	$	285,348

Issuance of Common Stock

In January 2016, the Company issued 330,000 shares of common stock to two third-party consultants in exchange for services rendered.

In January 2016, the Company issued 201,000 shares of common stock to employees for stock-based compensation of $54,270. Additionally, the Company had $103,138 of stock based compensation expense related to stock options granted to employees and vested during the period.

From April 20, 2016 to June 3, 2016, the Company issued 6,877,452 shares of its common stock upon conversion of a 14% convertible promissory note. The aggregate principal amount of this note that was converted was $196,330.

From June 4, 2016 to June 22, 2016, the Company issued 40,000,000 shares of its common stock for $2,000,000.

On July 7, 2016, the Company issued 256,038 shares of its common stock in consideration of $17,759 in accrued and unpaid dividends due at June 30, 2016 for its outstanding Series A Preferred.

All shares were fully vested upon issuance.

Issuance of Convertible Preferred Stock

From April 4, 2016 to June 17, 2016, the Company sold 972 shares of its series A convertible preferred stock (“Series A Preferred”) for an aggregate purchase price of $972,000, of which (i) 499 Units were purchased for $499,000 in cash (ii) 423 Units were purchased by certain of our officers in consideration of $423,000 accrued and unpaid salary and (iii) 50 Units were purchased in consideration of cancellation of $50,000 of outstanding indebtedness net of issuance costs of $35,920.

Each share of Series A Convertible Preferred has a stated value of $1,000, which is convertible into shares of the Company’s common stock (the “Common Stock”) at a fixed conversion price equal to $0.075 per share. The Series A Convertible Preferred accrue dividends at a rate of 8% per annum, cumulative. Dividends are payable quarterly in arrears at the Company’s option either in cash or “in kind” in shares of Common Stock; provided, however that dividends may only be paid in cash following the fiscal year in which the Company has net income (as shown in its audited financial statements contained in its Annual Report on Form 10-K for such year) of at least $500,000, to the extent permitted under applicable law out of funds legally available therefor. For ‘in-kind” dividends, holders will receive that number of shares of Common Stock equal to (i) the amount of the dividend payment due such stockholder divided by (ii) 90% of the average of the per share market values during the twenty (20) trading days immediately preceding a dividend date.

In the event of any voluntary or involuntary liquidation, dissolution or winding up, or sale of the Company, each holder of Series A Preferred shall be entitled to receive its pro rata portion of an aggregate payment equal to: (i) $1,000 multiplied by (ii) the total number of shares of Series A Preferred Stock issued under the Series A Certificate of Designation multiplied by (iii) 2.5.

For all matters submitted to a vote of the Company’s stockholders, the holders of the Series A Preferred as a class shall have an aggregate number of votes equal to the product of (x) the number of shares of Common Stock (rounded to the nearest whole number) into which the total shares of Series A Preferred Stock issued under the Series A Certificate of Designation on such date of determination are convertible multiplied by (y) 2.5 (the “Total Series A Votes”), with each holder of Series A Preferred entitled to vote its pro rata portion of the Total Series A Votes. Holders of Common Stock do not have cumulative voting rights. In addition, the holders of Series A Preferred shall vote separately a class to change any of the rights, preferences and privileges of the Series A Preferred.

Number of shares

Issued and

Net

Conversion

of common stock

Liquidation

Authorized

Outstanding

Proceeds

Price/Share

Equivalents

Preference

Value/Share

Series A

3,000

972

935,980

0.075

12,960,000

2,430,000

2,500

Beneficial conversion feature

The Company evaluated the convertible note and determined that a portion of the note should be allocated to additional paid-in capital as a beneficial conversion feature, since the conversion price on the note as of March 10, 2016 was now set at a discount to the fair market value of the underlying stock. As a result, a discount of $228,550 was attributed to the beneficial conversion feature of the note, which amount was then amortized fully during the six months ended June 30, 2016.

Stock-Based Compensation

On January 29, 2015, the Company adopted the 2015 Stock Incentive Plan (the Plan). The total number of shares available for the grant of either stock options or compensation stock under the Plan is 3,000,000 shares, subject to adjustment. The exercise price per share of each stock option shall not be less than 20 percent of the fair market value of the Company's common stock on the date of grant. At June 30, 2016, there were 1,075,000 options issued under the Plan outstanding, which options vest at the rate of at least 25 percent in the first year, starting 6-months after the grant date, and 75% in year two.

The Company also issues, from time to time, options which are not registered under a formal option plan. At June 30, 2016, there were 1,000,000 options outstanding that were not issued under the Plan.

A summary of all stock option activity at and for the six months ended June 30, 2016 is presented below:

	# of Options			Weighted- Average Exercise Price
Outstanding at December 31, 2015		2,200,000	(1)	$	0.64
Options granted		-			-
Options exercised		-			-
Options canceled		(125,000	)		1.75
Outstanding at June 30, 2016		2,075,000		$	0.58

Exercisable at June 30, 2016		1,109,375		$	0.54

(1) 1,200,000 options granted under 2015 Stock Incentive Plan (of which 125,000 options were cancelled in the six months ended June 30, 2016); 1,000,000 non-plan options were granted.

The aggregate intrinsic value of options outstanding at June 30, 2016 was $0.

At June 30, 2016, there were 965,625 unvested options with an aggregate grant date fair value of $308,113. The unvested options will vest in accordance with the vesting schedule in each respective option agreement, which is generally over a period of 6 to 24 months. The aggregate intrinsic value of unvested options at June 30, 2016 was $0. During the six months ended June 30, 2016, 106,250 options became vested.

The Company uses the Black-Scholes valuation model to measure the grant-date fair value of stock options. The grant-date fair value of stock options issued to employees is recognized on a straight-line basis over the requisite service period. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments as the underlying stock-based awards vest. To determine the fair value of stock options using the Black-Scholes valuation model, the calculation takes into consideration the effect of the following:

•

Exercise price of the option

•

Fair value of the Company's common stock on the date of grant

•

Expected term of the option

•

Expected volatility over the expected term of the option

•

Risk-free interest rate for the expected term of the option

The calculation includes several assumptions that require management's judgment. The expected term of the options is calculated using the simplified method described in GAAP. The simplified method defines the expected term as the average of the contractual term and the vesting period. Estimated volatility is derived from volatility calculated using historical closing prices of common shares of similar entities whose share prices are publicly available for the expected term of the options. The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant for the expected term of the options.

The following weighted-average assumptions were used in the Black-Scholes valuation model for options granted during the year ended December 31, 2015:

Risk-free interest rate	0.84	%
Expected term (in years)	2.46
Dividend yield	-
Expected volatility	74	%

The weighted-average grant-date fair value per share of stock options granted during the six months ended June 30, 2015 was $0.71. No options were granted during the six months ended June 30, 2016.

For the six months ended June 30, 2016 and 2015, total stock option expense related to stock options was $157,408 and $83,375 respectively. At June 30, 2016, the total compensation cost related to stock options not yet recognized is approximately $149,531, which is expected to be recognized over a weighted-average period of approximately 1.50 years.

Warrants

During the quarter ended June 30, 2016, the Company issued detachable warrants in connection to common stock, Series A preferred stock, and convertible notes payable to purchase 55,138,304 shares of common stock. The Company has determined the Warrants are classified as equity on the condensed consolidated balance sheet as of June 30, 2016. No warrants were exercised during the quarter ended June 30, 2016. The estimated fair value of the warrants at issuance was $1,914,916, based on the Black-Scholes option-pricing model using the weighted-average assumptions below:

Volatility		75	%
Risk-free interest rate		93.00	%
Expected term (in years)		3
Expected dividend yield		-	%
Fair value of common stock	$	5,513,830

A summary of activity in options and warrants is as follows:

	Warrants		Weighted Average Remaining Life		Weighted Average Exercise Price		Aggregate Intrinsic Value

Outstanding at December 31, 2015		—		—	$	—	$	—

Three months ended June 30, 2016:
Granted		55,138,304		3 years	$	0.10	$	0
Exercised		-
Forfeited and cancelled		-		-		-		-

Outstanding at June 30, 2016		55,138,304		3 years	$	0.10	$	0