NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
NOTE 1. – DESCRIPTION OF OUR BUSINESS.
AnythingIT, Inc. (the “Company”) is a provider of green technology solutions, managing the equipment disposition needs of our government and commercial clients by buying, reselling, or recycling, in an environmentally and regulatory compliant manner, computers and other technology hardware. By delivering cost effective asset management solutions and capitalizing on our knowledge and relationships in the industry, we believe that we are able to maximize the technology dollars of our clients.
Our focus is on executing and managing secure, compliant end-of-life information technology (“IT”) asset management and disposition services. As part of our services, we provide a comprehensive asset management system or integrate with our clients existing asset management systems with the goal of providing clear audit trail of the asset and enabling our clients the ability to assess shipping or disposal status, take inventory and generate settlement reports for every returned asset.
Additionally, we are focused on partnering with veterans either through providing employment opportunities directly or through our continuing support of Work Vessels For Veterans.
The Company maintains its principal office in Fair Lawn, New Jersey.
NOTE 2. – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Basis of Presentation
The unaudited financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation. These financial statements have not been audited.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and notes thereto for the year ended June 30, 2012 on the Company’s Annual Report on Form 10-K. The financial data for the three month period presented may not necessarily reflect the results to be anticipated for the complete year ending June 30, 2013.
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Significant estimates for the periods reported include the allowance for doubtful accounts which is based on an evaluation of our outstanding accounts receivable including the age of amounts due, the financial condition of our specific customers, knowledge of our industry segment and historical bad debt experience. This evaluation methodology has proved to provide a reasonable estimate of bad debt expense in the past and the Company intends to continue to employ this approach in our analysis of collectability.
Assumptions and estimates employed in these areas are material to our reported financial condition and results of operations. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The credit risk associated with cash equivalents is considered low due to the credit quality of the issuers of the financial instruments.
Concentration of Credit Risk
The Company maintains cash in financial institutions insured by the Federal Deposit Insurance Corporation (“FDIC”), including non-interest bearing transaction account deposits protected in full by the Dodd-Frank Wall Street and Consumer Protection Act (the “Dodd-Frank Act”). As of September 30, 2012 and June 30, 2012, the Company had approximately $200,000 and $400,000 that exceeds the protected limits under FDIC and the Dodd-Frank Act. The Company had not experienced any losses in such accounts.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based on the expected collectability of its accounts receivable. The Company performs credit evaluations of significant customers and establishes an allowance for doubtful accounts based on the aging of receivables, payment performance factors, historical trends and other information. In general, the Company reserves 2% of the receivables outstanding 31 to 60 days, 5% of the receivables outstanding 61 to 90 days and 20% of the receivables outstanding more than 90 days. The Company evaluates and revises the reserve on a quarterly basis based on a review of specific accounts outstanding and our history of uncollectible accounts. As of September 30, 2012 and June 30, 2012, the Company recorded $57,612 and $64,065, respectively of allowance for doubtful accounts.
Inventories
Inventories, consisting of used computer equipment, is stated at the lower of cost or market. The Company reviews inventory for excess or obsolete inventory and writes-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. No allowance is necessary at September 30, 2012 and June 30, 2012.
Unprocessed inventory is shipped to the Company’s facilities and is considered to be end-of-life. The Company does not place a valuation on unprocessed inventory until it is received into the processing queue whereby it is tested and inventoried. Only after this process occurs can the Company provide final valuation in the form of purchase orders for equipment acquisitions and issue a Certificate of Indemnification confirming transfer of ownership and liability. This process can take between 30 to 60 days from the time of receipt to the Company’s warehouse.
Property and equipment
The Company records property, equipment and leasehold improvements at historical cost. Expenditures for maintenance and repairs are recorded to expense; additions and improvements are capitalized. The Company generally provides for depreciation using the straight-line method at rates that approximate the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over remaining term of the lease of twelve years.
|
Asset Classification
|
|
Estimated
Useful Life (years)
|
|
|
Computers and software
|
|
|
3
|
|
|
Equipment
|
|
|
5
|
|
|
Furniture and fixtures
|
|
5 to 7
|
|
|
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
|
Software
|
|
$
|
193,023
|
|
|
$
|
185,081
|
|
|
Furniture and Fixtures
|
|
|
96,549
|
|
|
|
89,779
|
|
|
Equipment
|
|
|
87,386
|
|
|
|
85,365
|
|
|
Capital Leased Equipment
|
|
|
139,737
|
|
|
|
139,737
|
|
|
Leasehold improvements
|
|
|
82,290
|
|
|
|
79,251
|
|
|
Less: Accumulated depreciation
|
|
|
(404,782
|
)
|
|
|
(389,852
|
)
|
|
Property and Equipment, net
|
|
$
|
194,203
|
|
|
$
|
189,361
|
|
Depreciation for the three month periods ended September 30, 2012 and 2011 was $14,930 and $13,852, respectively.
Revenue Recognition
For product sales, the Company recognizes revenue at the time products are shipped and title is transferred, which is in accordance with the stated shipping terms. Revenue is recognized in accordance with these shipping terms so long as a purchase order, electronic, written or phone commitment has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is deemed probable. If uncertainties exist regarding customer acceptance or collectability, revenue is recognized when those uncertainties have been resolved. The Company provides a limited as-is warranty on some of its products. The Company analyzes its estimated warranty costs and provides an allowance as necessary, based on experience. At September 30, 2012 and June 30, 2012, a warranty reserve was not considered necessary.
The Company is party to brokered transactions whereby an upstream customer provides product to the Company if the parameters of the transactions can be satisfied. Based upon the upstream customer parameters and the nature of the risk and control of the transaction by the Company these sales may be recorded on a gross or net basis.
Asset management fees are recognized once the services have been performed and the results reported to the client. In those circumstances where the Company disposes of the client’s product, or purchases the product from the client for resale, revenue is recognized as a product sale.
Shipping and Handling Costs
Shipping costs are included in cost of sales, offset by amounts charged to customers for shipping.
Cost of Sales
Cost of sales includes cost of equipment, testing, freight, warehouse salaries, and technicians.
Earnings Per Share
The Company adopted
FASB ASC 260
,
Earnings Per Share
. Basic earnings (loss) per share is based on the weighted effect of all common shares issued and outstanding and is calculated by dividing net income (loss) available to common stockholders by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares, if any, that would be issued assuming conversion of all potentially dilutive securities outstanding
Shares potentially issuable were as follows:
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
Stock Option
|
|
|
3,500,005
|
|
|
|
-
|
|
|
Warrants
|
|
|
5,110,876
|
|
|
|
5,110,876
|
|
|
Convertible Notes
|
|
|
1,816,259
|
|
|
|
1,870,703
|
|
|
|
|
|
10,427,140
|
|
|
|
6,981,579
|
|
For the three months ended September 30, 2012 the Company had a net loss. The impact of additional shares would be anti-dilutive, and, as such, the basic and diluted shares are the same for that period.
Income Taxes
Under the asset and liability method prescribed under ASC 740,
Income Taxes
, the Company uses the liability method of accounting for income taxes. The liability method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts on the financial statements. The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.
The Company recognizes the financial statement benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in an examination. For tax positions meeting a "more-likely-than-not" threshold, the amount recognized in the financial statements is the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the threshold, no financial statement benefit is recognized. As of September 30, 2012 and 2011, the Company has had no uncertain tax positions. The Company recognizes interest and penalties, if any, related to uncertain tax positions as general and administrative expenses. The Company currently has no federal or state tax examinations nor has it had any federal or state examinations since its inception. All of the Company's tax years are subject to federal and state tax examination.
Share-Based Payments
The Company recognizes share-based compensation expense in connection with our share-based awards, net of an estimated forfeiture rate and therefore only recognizes compensation cost for those awards expected to vest over the service period of the award. The Company accounts for the grant of stock and warrants awards in accordance with ASC Topic 718, Compensation – Stock Compensation (ASC 718). ASC 718 requires companies to recognize in the statement of operations the grant-date fair value of warrants and stock options and other equity based compensation. The Company utilizes a Black-Scholes option pricing model to estimate the fair value of our stock options. Calculating share-based compensation expense requires the input of highly subjective judgment and assumptions, including estimates of expected life of the award, stock price volatility, forfeiture rates and risk-free interest rates. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company use different assumptions, our share-based compensation expense could be materially different in the future.
For the three months ending September 30, 2012 and 2011, total stock-based compensation was $80,802 and $0, respectively. The Company granted stock options to purchase 2,893,338 shares of common stock and issued 333,334 restricted shares of common stock in December 2011. The Company granted stock options to purchase 666,667 shares of common stock in March 2012 and 666,667 restricted shares of common stock in January 2012.
Financial Instruments
In January 2010, the FASB issued (ASU) No. 2010-06
, Fair Value Measurements and Disclosures
(Topic 820), “
Improving Disclosures about Fair Value Measurements
” (“ASU No. 2010-06”). ASU No. 2010-06 requires new disclosures about significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for such transfers and in the reconciliation for Level 3 fair value measurements, the requirement to disclose separately information about purchases, sales, issuances and settlements. The Company adopted the provisions of ASU No. 2010-06 on January 1, 2010, except for disclosures about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements. Those disclosures were effective for financial statements issued for fiscal years beginning after December 15, 2010. The impact of its adoption on the Company’s financial statements was not material.
Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, and customer deposits are reflected in the balance sheets at cost, which approximates fair value because of the short-term maturity of these instruments.
Advertising
Advertising costs are charged to operations when incurred. During the three month periods ended September 30, 2012 and 2011, the Company incurred approximately $3,000 and $8,000, respectively in advertising expense.
Reclassifications
Certain prior period balances have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on previously reported results of operations or stockholders’ equity. In addition to standard balance sheet and income statement reclassifications, the Company had reclassifications to capital leases of equipment leased previously categorized as operating leases, with consistent application in all periods. Additionally, the Company has determined a few of its sales contracts should be treated as agency sales and as such reported on a net revenue versus gross revenues basis, consistently applied. The Company did not deem any of these reclassifications to be material.
New Accounting Standards
The Company has adopted all recently issued accounting pronouncements. The adoption of the accounting pronouncements, including those not yet effective, is not anticipated to have a material effect on the financial position or results of operations of the Company.
NOTE 3. - ACCOUNTS RECEIVABLE.
Accounts receivable consisted of the following at September 30, 2012 and June 30, 2012:
|
|
|
September 30,
2012
|
|
|
June 30,
2012
|
|
|
Accounts Receivable
|
|
$
|
558,620
|
|
|
$
|
738,671
|
|
|
Less: Allowance for doubtful accounts
|
|
|
(57,612
|
)
|
|
|
(64,065
|
)
|
|
Accounts receivable, net
|
|
$
|
501,008
|
|
|
$
|
674,606
|
|
NOTE 4. - INVENTORIES.
Inventories consisted of finished goods at September 30, 2012 and June 30, 2012. At September 30, 2012 and June 30, 2012, the balance is $27,100 and $141,087, respectively.
NOTE 5. – CAPITAL LEASE OBLIGATIONS.
The Company has entered into several capital lease obligations to purchase equipment for operations. The Company has the option to purchase the equipment at the end of the lease agreement for one dollar. The underlying assets and related depreciation were included in the appropriate fixed asset category and related depreciation account.
Property and equipment includes the following amounts for leases that have been capitalized as of September 30, 2012 and June 30, 2012:
|
|
|
Useful Life (Years)
|
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
|
Equipment
|
|
|
5
|
|
|
$
|
60,523
|
|
|
$
|
60,523
|
|
|
Software
|
|
|
5
|
|
|
|
79,214
|
|
|
|
79,214
|
|
|
|
|
|
|
|
|
|
139,737
|
|
|
|
139,737
|
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
|
(132,044
|
)
|
|
|
(125,058
|
)
|
|
Capital Leased Equipment, net
|
|
|
|
|
|
$
|
7,693
|
|
|
$
|
14,679
|
|
Future minimum payments required under capital leases at September 30, 2012, are as follows:
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
FY 2013
|
|
$
|
10,165
|
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
Total future payments
|
|
|
10,165
|
|
|
Less: Amount representing interest
|
|
|
285
|
|
|
|
|
|
|
|
|
Present value of future minimum payments
|
|
|
9,880
|
|
|
Less: Current portion
|
|
|
9,880
|
|
|
|
|
|
|
|
|
Long term portion
|
|
$
|
-
|
|
NOTE 6. – RELATED PARTY TRANSACTIONS.
Amounts outstanding under a loan and line of credit from a bank (Note 8) are personally guaranteed by officers of the Company.
NOTE 7. – ACCRUED EXPENSES.
Accrued expenses represent obligations that apply to the reported period and have not been billed by the provider or paid by the Company.
At September 30, 2012 and June 30, 2012, accrued expenses consisted of the following:
|
|
|
September 30,
2012
|
|
|
June 30,
2012
|
|
|
Accrued interest
|
|
$
|
44,877
|
|
|
$
|
29,753
|
|
|
Wages and vacation
|
|
|
33,256
|
|
|
|
66,914
|
|
|
Commission
|
|
|
-
|
|
|
|
11,945
|
|
|
Professional fees
|
|
|
24,000
|
|
|
|
40,000
|
|
|
Other
|
|
|
3,282
|
|
|
|
340
|
|
|
|
|
$
|
105,415
|
|
|
$
|
148,952
|
|
NOTE 8. – LONG TERM DEBT.
Loan Payable – TD Banknorth
On July 2, 2001 the Company entered into a loan agreement for the principal amount of $100,000, maturing in October 2028 payable with varying monthly installments including interest at approximately 5.25% per annum, secured by all assets of the Company. At September 30, 2012 and June 30, 2012, the balance is $32,667 and $33,498, respectively.
Line of Credit Payable – American Express
The Company obtained a Business Capital line from American Express in the amount of $63,200. The line is payable in varying monthly installments including interest at approximately 9.49% per annum. The line is secured by all assets of the Company. At September 30, 2012 and June 30, 2012, the balance is $33,799 and $35,177, respectively.
12% Convertible Promissory Notes
In January and February 2011 the Company issued and sold $550,000 principal amount 12% convertible promissory notes in a private offering resulting in gross proceeds of $495,000. The notes are unsecured and pay interest at 12% per annum, in arrears, in shares of our common stock valued at $0.30 per share. The notes mature on December 31, 2013,
provided, however
, that in our sole option we may extend the maturity date until December 31, 2014 if the note is not converted by December 31, 2013. The notes are convertible at any time at the option of the holder into shares of our common stock at a conversion price of $0.30 per share. At any time that the closing price of our common stock on any exchange on which it might be listed or in the over the counter market equals or exceeds $0.60 per share for 20 consecutive trading days, we have the right to convert the notes into shares of our common stock at a conversion price of $0.30 per share. The conversion price of the notes is subject to proportional adjustment in the event of stock splits, dividends, recapitalizations and similar corporate events. Presently, these notes are convertible into an aggregate of 1,666,668 shares of our common stock. At September 30, 2012 and June 30, 2012, the Company had $44,877 and $29,753, respectively in accrued interest on the notes. On December 31, 2011 $60,937 of accrued interest was converted to 203,125 shares of common stock at $0.30. On January 17, 2012, one of the noteholders of the 12% convertible promissory notes converted $50,000 plus accrued interest of $263 into 167,544 shares of common stock.
Debt Discount
In connection with the 12% convertible promissory notes offering, we issued the purchasers Series C Warrants to purchase an aggregate of 733,335 shares of our common stock at an exercise price of $0.45 per share. The exercise price of the Series C warrant is subject to adjustment in the event of stock splits, dividends, recapitalizations and similar corporate events.
In accordance with ASC 470, the Company has analyzed the beneficial nature of the conversion terms and determined that a beneficial conversion feature (BCF) existed as of February 10, 2011. The Company calculated the value of the BCF using the intrinsic method as stipulated in ASC 470. Based on the stock price on the day of commitment, the discount as agreed to in the note, and the number of convertible shares, and the value of the warrants included in the units, the BCF was valued at $165,579.
The Company used the Black-Scholes option pricing model to value the warrants included in the convertible units. Included in the assumptions of this calculation, the Company used a risk-free rate of 0.85% (based on the US Treasury note yield), three year maturity, volatility of 84.0% (based on the daily historical performance of a comparable Company’s stock over two years from the commitment date), and a strike price of $0.45.
In accordance with ASC 470, the Company is amortizing the BCF over the two year term of the note. The notes have a prepayment option for the Company, after January 1, 2013, with a 20 day notice to the holders. As such, the Company is amortizing the BCF over the two year period. For the three months ended September 30, 2012 and 2011 the Company recognized $20,698 and $20,697, respectively of amortization expense. As of September 30, 2012 and June 30, 2012 the BCF had a carrying value of $27,596 and $48,294, respectively.
|
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
Loan payable to TD Banknorth maturing in October 2028 payable with varing monthly installments including interest at approximately 5.25% per annum, secured by all assets of the Company
|
|
$
|
32,667
|
|
|
$
|
33,498
|
|
|
|
|
|
|
|
|
|
|
|
|
Line payable to American Express payable with varying monthly installments including interest at approximately 9.49% per annum, secured by all assets of the Company
|
|
|
33,799
|
|
|
|
35,177
|
|
|
|
|
|
|
|
|
|
|
|
|
12% Convertible Promisory note $500,000 principal net of debt discount of $27,596 and $48,294 at September 30, 2012 and June 30, 2012, respectively
|
|
|
472,404
|
|
|
|
451,706
|
|
|
|
|
|
538,870
|
|
|
|
520,381
|
|
|
Less : Current portion
|
|
|
37,225
|
|
|
|
40,031
|
|
|
|
|
$
|
501,645
|
|
|
$
|
480,350
|
|
NOTE 9. – STOCKHOLDERS’ EQUITY.
Our authorized capital stock consists of 200,000,000 shares of common stock, $0.01 par value per share, and 5,000,000 shares of preferred stock, par value $0.01 per share. As of September 30, 2012 and June 30, 2012, there are 36,190,238 shares of common stock issued and outstanding. There are no shares of preferred stock issued and outstanding.
Common stock
Holders of common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of common stock do not have cumulative voting rights. Holders of common stock are entitled to share in all dividends that the Board of Directors, in its discretion, declares from legally available funds. In the event of our liquidation, dissolution or winding up, subject to the preferences of any shares of our preferred stock which may then be outstanding, each outstanding share entitles its holder to participate in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions for the common stock. The rights of the holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is authorized and issued. All outstanding shares of common stock are duly authorized, validly issued, fully paid and non-assessable.
In March 2011 the Company sold 125,000 units of our securities to an accredited investor in a private placement which resulted in gross proceeds to us of $12,500. The securities included 41,667 shares of our common stock and Series D Warrants and Series E Warrants. Forge Financial Group, Inc., a broker-dealer and member of FINRA (“Forge”) acted as placement agent for us in this offering. As compensation for its services, we paid Forge a cash commission of $1,250 and issued its designees five year warrants to purchase 4,169 shares of our common stock with an exercise price of $0.30 share, which are exercisable on a cashless basis. We used the net proceeds for general working capital.
On December 22, 2011, the Company entered into an employment agreement with its Chief Financial Officer. As part of the agreement the Company issued 333,334 shares of the Company’s restricted common stock, granted under the 2010 Equity Compensation Plan. The shares were valued at $120,000, the fair market value at the date of grant for the Company’s common stock as reported on the OTC Bulletin Board. As of September 30, 2012, 250,000 of the shares vested and the Company recognized $30,000 in compensation expense related to these shares during the three months ended September 30, 2012.
On December 31, 2011, the Company issued 203,125 shares of our common stock to satisfy accrued interest of $60,937 to the three noteholders of the 12% convertible promissory notes (Note 7).
On January 3, 2012 the Company entered into a consulting agreement with Wall Street Grand, LLC (“WSG”) to provide financial marketing consulting services for a period of three months starting January 15, 2012. The Company paid WSG $50,000 and issued 666,667 shares of our common stock valued at $260,000, the fair market value on the date of issuance.
On January 17, 2012, one of the noteholders of the 12% convertible promissory notes converted $50,000 plus accrued interest of $263 into 167,544 shares of common stock (Note 8).
Preferred stock
Our Board of Directors, without further stockholder approval, may issue preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series. The rights, preferences, limitations and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. Our Board of Directors may authorize the issuance of preferred stock, which ranks senior to our common stock for the payment of dividends and the distribution of assets on liquidation. In addition, our Board of Directors can fix limitations and restrictions, if any, upon the payment of dividends on our common stock to be effective while any shares of preferred stock are outstanding. The rights granted to the holders of any series of preferred stock could adversely affect the voting power of the holders of common stock and issuance of preferred stock may delay, defer or prevent a change in our control.
Common Stock Purchase Warrants
Warrants Included in the 2010 Unit Offering
In October 2010, we closed the sale of 5,250,000 units of our securities which resulted in gross proceeds to us of $525,000. The securities issued in this 2010 unit offering included Series A Warrants to purchase 1,750,010 shares of our common stock and Series B Warrants to purchase 1,750,010 shares of our common stock. Each Series A Warrant is exercisable into one share of common stock for three years from issuance at an exercise price of $0.45 per share. Each Series B Warrant is exercisable into one share of common stock for three years from issuance at an exercise price of $0.75 per share. The Series B Warrant is not exercisable by the holder unless the Series A Warrant has previously been exercised. Upon 30 days’ notice, we have the right to call any series of warrants at $0.01 per warrant at any time that the average 20-day last sale price exceeds 200% of the respective warrant exercise price. Other than the exercise price and call provisions of each series of warrant, and the restriction on the exercisability of the Series B Warrant, all other terms and conditions of the warrants are the same. As partial compensation for the placement agent services in this offering, we issued to the designees of Forge 175,003 Series A Warrants and 175,003 Series B Warrants to purchase shares of our common stock at an exercise price of $0.45 and $0.75 per share, respectively, exercisable on a cashless basis. The exercise price of the warrants and the number of shares of our common stock issuable upon the exercise of the warrants, sold to investor or provided to designees of Forge, are subject to proportional adjustment for stock splits, dividends and similar corporate events.
Warrants Included in the 2011 Note Offering
In connection with the 12% convertible promissory notes offering, we issued the purchasers Series C Warrants to purchase an aggregate of 733,335 shares of our common stock at an exercise price of $0.45 per share for three years from the date of issuance. The exercise price of the Series C warrant is subject to adjustment in the event of stock splits, dividends, recapitalizations and similar corporate events. As partial compensation for the placement agent services, we issued its designees of Forge Series C warrants exercisable at $0.45 per share into 73,335 shares of our common stock, exercisable on a cashless basis. The exercise price of the warrants and the number of shares of our common stock issuable upon the exercise of the warrants, sold to investor or provided to designees of Forge, are subject to proportional adjustment for stock splits, dividends and similar corporate events.
The Company used the Black-Scholes option pricing model to value the warrants included in the note offering. Included in the assumptions of this calculation, the Company used a risk-free rate of 0.85% (based on the US Treasury note yield), five year maturity, volatility of 84.0% (based on the daily historical performance of a comparable Company’s stock over two years from the commitment date), and a strike price of $0.30 and $0.45, respectively.
Warrants Included in 2011 Unit Offering
In March 2011, we closed the sale of 125,000 units of our securities which resulted in gross proceeds to us of $12,500. The securities issued in this 2011 unit offering included Series D Warrants to purchase 41,667 shares of our common stock and Series E Warrants to purchase 41,667 shares of our common stock. Each Series D Warrant is exercisable into one share of common stock for three years from issuance at an exercise price of $0.45 per share. Each Series E Warrant is exercisable into one share of common stock for three years from issuance at an exercise price of $0.75 per share. The Series E Warrant is not exercisable by the holder unless the Series D Warrant has previously been exercised. Upon 30 days’ notice, we have the right to call any series of warrants at $0.01 per warrant at any time that the average 20-day last sale price exceeds 200% of the respective warrant exercise price. Other than the exercise price and call provisions of each series of warrant, and the restriction on the exercisability of the Series E Warrant, all other terms and conditions of the warrants are the same. As partial compensation for the placement agent services in this offering, we issued to the designees of Forge 4,169 Series D Warrants with an exercise price of $0.45 per share and 4,169 Series E Warrants with an exercise price of $0.75 per share, which are exercisable on a cashless basis. The exercise price of the warrants and the number of shares of our common stock issuable upon the exercise of the warrants, sold to investor or provided to designees of Forge, are subject to proportional adjustment for stock splits, dividends and similar corporate events.
The Company currently has 5,110,876 warrants that can be exercised for shares of our common stock outstanding.
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Range of
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Weighted Average
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Warrants
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Exercise Price
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Exercise Price
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Outstanding at June 30, 2012
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5,110,876
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$
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.30 to $.75
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$
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0.56
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|
|
Granted
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|
-
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|
|
|
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Expired
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-
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|
|
|
|
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Outstanding at September 30, 2012
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|
|
5,110,876
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$
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.30 to $.75
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$
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0.56
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In accordance with ASC 470, the Company is amortizing the deferred financing costs over the two year term of the note. As of September 30, 2012 and 2011, the Company had recognized $13,027 and $13,028 of interest expense, respectively, resulting in a carrying value of $14,959 and $27,986 at September 30, 2012 and June 30, 2012, respectively.
NOTE 10. STOCK OPTIONS AND WARRANTS.
Stock Option Plans
2010 Equity Compensation Plan
On June 28, 2010, our Board of Directors authorized our 2010 Equity Compensation Plan covering 12,000,000 shares of common stock. The plan was approved by our stockholders on June 28, 2010. The purpose of the plan is to enable us to offer to our employees, officers, directors and consultants whose past, present and/or potential contributions to our company have been or will be important to our success, an opportunity to acquire a proprietary interest in our company. The 2010 Equity Compensation Plan is administered by our Board of Directors. Plan options may either be (i) incentive stock options (ISOs), (ii) non-qualified options (NSOs), (iii) awards of our common stock or (iv) rights to make direct purchases of our common stock which may be subject to certain restrictions. Any option granted under the 2010 Equity Compensation Plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, but the exercise price of any ISO granted to an eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The plan further provides that with respect to ISOs the aggregate fair market value of the common stock underlying the options which are exercisable by any option holder during any calendar year cannot exceed $100,000. The term of each plan option and the manner in which it
may be exercised is determined by the Board of Directors or the compensation committee, provided that no option may be exercisable more than 10 years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five years after the date of the grant. In the event of any stock split of our outstanding common stock, the Board of Directors in its discretion may elect to maintain the stated amount of shares reserved under the plan without giving effect to such stock split. Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted.
On December 20, 2011, the Company issued 1,941,670 non-qualified five year options, and 401,668 five year incentive stock options under the 2010 equity compensation plan. The options were issued at $0.30 the fair market value at the date of grant. The Company used the Black-Scholes option pricing model to value the stock options. Included in the assumptions of this calculation, the Company used a risk-free rate of 0.88% (based on the US Treasury note yield), five year maturity, volatility of 84.0% (based on the daily historical performance of a comparable Company’s stock), and a strike price of $0.30.
On December 22, 2011, the Company hired its Chief Financial Officer. As part of the agreement the Company granted to her under its 2010 Equity Compensation Plan incentive stock options to purchase an aggregate of 550,000 shares of the Company’s common stock at an exercise price of $0.36, vesting as follows: options to purchase 183,334 shares vested on December 22, 2011, options to purchase an additional 183,333 shares vest on December 22, 2012; and options to purchase the remaining 183,333 shares vest on December 22, 2013. The Company used the Black-Scholes option pricing model to value the stock options. Included in the assumptions of this calculation, the Company used a risk-free rate of 0.91%, (based on the US Treasury note yield), five year maturity, volatility of 84.0% (based on the daily historical performance of a comparable Company’s stock), and a strike price of $0.36.
On March 7, 2012, the Company entered into an employment agreement with its Chief Financial Officer. As part of the agreement the Company granted to her under its 2010 Equity Compensation Plan incentive stock options to purchase an aggregate of 666,667 shares of the Company’s common stock at an exercise price of $0.15 , vesting as follows: options to purchase 166,667 shares vested on March 7, 2013, options to purchase an additional 166,667 shares vest on March 7, 2014; options to purchase an additional 166,667 shares vest on March 7, 2015; and options to purchase the remaining 166,666 shares vest on March 7, 2016.
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Range of
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Weighted Average
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Options
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Exercise Price
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Exercise Price
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|
Outstanding at June 30, 2012
|
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3,503,339
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$
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.15 to $.36
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$
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0.19
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Granted
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-
|
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-
|
|
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$
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-
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Expired
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(3,334
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)
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|
-
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|
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$
|
-
|
|
|
Outstanding at September 30, 2012
|
|
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3,500,005
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|
|
$
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.15 to $.36
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|
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$
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0.19
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|
For the three months ending September 30, 2012 and 2011, total stock-based compensation was 80,802 and $0, respectively.