On October 25, 2013, the Company closed on the sale of 3,500 shares of Series A Preferred Stock (“Series A Prefs”) in a private placement offering to 22 accredited investors for total gross proceeds of $3,500,000. Also, the Series A investors were issued 7,000,000 10-year warrants exercisable at $0.50 per share (the “Series A Warrants”).  The Series A Prefs: (i) have a stated value of $1,000, (ii) are convertible at $0.50 per share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations (the “Conversion Price”) or a total of 7,000,000 shares of common stock and (iii) provide for 10% dividends per annum payable quarterly on March 31, June 30, September 30, and December 31, beginning on June 30, 2014 and on each conversion date.  In lieu of a cash dividend payment, the Company may elect to pay all or part of a dividend in shares of common stock based on a conversion price equal to the lesser of: (i) the Conversion Price and (ii) the average of the volume weighted average prices for the 20 consecutive trading days ending on the trading day that is immediately prior to the dividend payment date.  The Company’s right to pay a dividend in common stock is subject to the Company meeting certain equity conditions.  The holders of Series A: (i) will vote together with the holders of common stock on an as converted basis and (ii) have a liquidation preference over the holders of the Company’s common stock.

The Company allocated the proceeds to the Preferred Stock and Warrant based on their relative fair values of $1,358,997 to the preferred stock and $2,141,003 to the warrants. The fair value used to allocate proceeds to the Series A convertible preferred stock was based upon a valuation that considered, among other things, the closing price of the common stock on the date of closing, the impact of the preferred stock on market capitalization on an as converted basis and liquidation preferences. The fair value of the warrants to purchase common stock was estimated using the Black-Scholes option pricing model using the following assumptions: exercise price of $.50; no dividends; term of approximately 10 years; risk free interest rate of .83%; and volatility of 183.9%.

The Company accounted for the difference between the fair value per share of its common stock and the conversion price, multiplied by the number of shares issuable upon conversion, as a “beneficial Conversion Feature” (BCF).  The BCF of $4,136,003 was recorded as additional paid-in-capital for common shares, per EITF 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”. The offsetting amount was amortizable over the period from the issue date to the first conversion date. We recorded a deemed dividend of $4,136,003 to the Series A Preferred Stock and amortized it immediately because the Series A Preferred Stock is immediately convertible. As the Company is in an accumulated deficit position, the deemed dividend was charged against additional paid-in-capital for common shares, there being no retained earnings from which to declare a dividend. The net loss attributable to common shareholders reflects both the net loss and the deemed dividend.

On December 17, 2013, the holders of the Series A Prefs converted all of such securities into an aggregate of 7,000,000 shares of the Company’s common stock pursuant to the conversion feature contained in the Certificate of Designation for the Series A Prefs. Accordingly, none of the Series A Prefs remain outstanding as of December 31, 2013.