5. STOCKHOLDER'S EQUITY

9 Months Ended

Sep. 30, 2015

Equity [Abstract]

5. STOCKHOLDER'S EQUITY

At the Company’s Annual Meeting held on September 11, 2015, the shareholders approved the following proposals:

1.   An amendment to the Company’s Amended and Restated Certificate of Incorporation (“Charter”) to increase the number of authorized shares of common stock, par value $0.001 per share, from 215,000,000 to 600,000,000;

2.   An amendment to the Company’s Charter to allow stockholders to be able to act by written consent only while Privet Fund LP and its affiliates (a “Privet Stockholder”) own an aggregate of at least 30% of the Company’s outstanding voting stock;

3.   An amendment to the Company’s Charter to provide that only the Board of Directors may call a special meeting of stockholders of the Company;

4.   An amendment to the Company’s Charter to renounce the Company’s expectancy regarding certain corporate opportunities presented to a Privet Stockholder;

5.   An amendment to  the Company’s Charter to not be governed by the provisions of Section 203 of the Delaware General Corporation Law;

6.   An amendment to the Company’s Charter establishing the courts located within the State of Delaware as the exclusive forum for the adjudication of certain legal actions by the stockholders; and

7.   An amendment to the Company’s Charter to authorize 10,000,000 shares of “blank check” preferred stock, par value $0.001 per share.

Also at the Annual Meeting, the holders of the Company’s Series A-1 Convertible Preferred Stock approved an amendment to Article IV (Conversion) of the Series A-1 Convertible Preferred Stock Certificate of Designations to the effect that the Series A-1 Preferred Stock will automatically convert into common stock upon the Company consummating an equity financing for at least $1,000,000; and the holders of the Company’s Series B Convertible Preferred Stock approved an amendment to Section 6 (Automatic Conversion) of the Series B Convertible Preferred Stock Certificate of Designations to the effect that the Series B Preferred Stock will automatically convert into common stock upon the Company consummating an equity financing for at least $1,000,000.

On July 15, 2015, the Company entered into a Stock and Warrant Purchase Agreement (the “Purchase Agreement”) with investors named therein, including Privet Fund LP (“Privet”), five directors of the Company, including John L. Steffens, Donald Peppers, Bruce D. Miller, Mark Landis, and Thomas Avery, and three other persons (collectively the nine investors are referred to as the “Purchasers”), pursuant to which the Purchasers severally purchased, in the aggregate, 25,000,000 shares of the Company’s common stock and warrants to purchase up to an aggregate of 205,277,778 shares of the Company’s common stock (“Warrants”) for an aggregate consideration of $1,000,000.

The Warrants are exercisable for a period of three years beginning at any time after 60 days of issuance. The exercise prices of the Warrants are as follows: (i) Warrants to purchase up to 87,500,000 shares of the Company’s common stock are exercisable at a price of $0.04 per share (“Tranche I”); (ii) Warrants to purchase up to 77,777,778 shares of the Company’s common stock are exercisable at a price of $0.045 per share (“Tranche II”); and (iii) Warrants to purchase up to 40,000,000 shares of the Company’s common stock are exercisable at a price of $0.05 per share (“Tranche III”). The Warrants are exercisable only for cash, as the exercise price paid is intended to increase the funding of the Company. All the exercise prices and numbers of shares are subject to customary anti-dilution provisions. The Warrants contain an exercise limitation provision that prohibits exercise of the Warrants to the extent that the exercise would result in the issuance of shares of the Company’s common stock that would cause either (a) the Company to be deemed an investment company under the Investment Company Act of 1940, as amended, or (b) an ownership change within the meaning of Internal Revenue Code Section 382 (and applicable U.S. Treasury regulations pursuant to such section) limiting the use of the Company’s net operating losses, carryforwards and other tax attributes.  The Company is obligated to reserve a sufficient number of shares of the Company’s common stock to enable the exercise of the Warrants.

The use of proceeds from this transaction are for general corporate purposes, as approved from time to time by the Board of Directors (the “Board”), which approval must include approval by a majority of the directors that have been designated by Privet.

In connection with the execution of the Purchase Agreement, the Company entered into an Investor Rights Agreement with Privet and Mr. Steffens (the “Investors”), granting the Investors the right to require the Company to file with the Securities and Exchange Commission up to four requested registration statements to register for resale the Investors’ shares of common stock purchased under the Purchase Agreement and purchased upon exercise of any of the Warrants (the “Registrable Securities”). The Investors also are granted unlimited “piggy-back” registration rights with respect to the Registrable Securities. The obligation to register the Registrable Securities continues until those securities have been sold or transferred by the holders of the registration rights or may be sold without limitation under Rule 144 or otherwise may be sold without restriction.

As a result of the transaction, (i) Privet became the record holder of approximately 10.1% of the outstanding and issued shares of common stock, and has the right to purchase under the Warrants an additional 149,852,778 shares of common stock which would correspondingly increase its percentage of ownership and it has the right to appoint directors, and (ii) Mr. Steffens decreased his current 65.5% ownership of the common stock of the Company to 59.3%, while retaining his current control position in the common stock.  Together Privet and Mr. Steffens, excluding the exercise of the Warrants, have a majority of the voting control of the Company.