10. STOCKHOLDERS’ EQUITY

Stock To Be Issued

On September 29, 2016, the Company closed on its second round of an equity raise thru its investment banker. The transaction, which resulted in proceeds to the Company of $848,138 (gross proceeds of $969,475 less transaction fees of $121,337) called for the issuance of 2,423,687 shares of common stock on the closing date. Since the transfer agent did not issue the shares until October 12, 2016, these shares, as of September 30, 2016, were classified as common shares to be issued in stockholder’s equity. As of December 31, 2015, there were no shares classified as common shares to be issued.

Dividends

Dividend charges recorded during the three months and nine months ended September 30, 2016 and 2015 are as follows:

Accrued dividends payable at September 30, 2016 and December 31, 2015 are comprised of the following:

 Warrants and Derivative Warrant Liability

The Company accounts for common stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement. Stock warrants are accounted for as derivative liabilities if the warrants allow for cash settlement or provide for modification of the warrant exercise price in the event subsequent sales of common stock by the Company are at a lower price per share than the then-current warrant exercise price. We classify derivative warrant liabilities on the balance sheet at fair value, and changes in fair value during the periods presented in the statement of operations, which is revalued at each balance sheet date subsequent to the initial issuance of the stock warrant. As of September 30, 2016, the following warrants are outstanding:

A summary of the warrant activity during the nine months ended September 30, 2016 is presented below:

The Company has assessed its outstanding equity-linked financial instruments issued with the term loan cited in Footnote 8 and has concluded that the warrants are subject to derivative accounting as a result of certain anti-dilution provisions contained in the warrants. The fair value of these warrants is classified as a liability in the financial statements, with the change in fair value during the future periods being recorded in the statement of operations.

The following table summarizes the calculated aggregate fair values for the warrant derivative liability using the Lattice Model method based on the following assumptions:

These warrants are Level 3 valuation which were issued and measured on September 30, 2016.

Subscription Receivable

During the nine months ended September 30, 2016 the Company issued 2,229,000 shares of common stock to employees that were subject to certain vesting requirements. As of September 30, 2016, 2,100,000 shares of such shares that with a grant date value of $1,357,800 remain unvested. Because these common shares are subject to forfeiture if the employees are no longer employed with the Company at the end of their employment agreements, their unvested value is carried in subscriptions receivable within stockholder’s equity.

Equity Transactions 

During the nine months ended September 30, 2016, the Company issued 285,664 shares of its of its Preferred Series F stock with a grant date value of $35,186 to one of its investors as an incentive to continue raising equity proceeds.

During the nine months ended September 30, 2016, the Company issued 231,041 shares of its of its Preferred Series F stock to its independent directors and two officers with a grant date value of $152,487 for compensation.

During the nine months ended September 30, 2016, the Company issued 1,559,389 shares of its common stock with a grant date value of $898,438 to settle debt, with a $100,913 expense recorded in other income/expense.

During the nine months ended September 30, 2016, the Company issued 465,000 shares of its common stock with a grant date value of $291,200 to consultants for services performed for the Company.

During the nine months ended September 30, 2016, the Company issued 2,507,000 shares of its common stock to individual investors for an equity raise totaling $853,424. 

Temporary Equity

In conjunction with the Lateral senior credit agreement dated October 28, 2015, the Company also entered into a Redemption Rights Agreement (“agreement”). Contained in this agreement is a put provision related to the preferred shares of stock issued as a condition of the transaction. The Redemption Rights may be exercised at any time on or after October 28, 2017, provided the following conditions are met:

(i) The Company’s market capitalization on such date is equal to greater than $25,000,000, or (ii) the last twelve months earnings before interest, taxes depreciation, and amortization ending on the last day of the month preceding such date is greater than $3,000,000.

Further, the Redemption Rights are barred from being exercised if the exercise of such Redemption Rights would, in good faith, prevent the Company from continuing as a going concern.

The Redeemable Shares are redeemable at the per share price implied by 10 multiplied by the Company’s LTM EBITDA, multiplied by the Ownership Percentage, divided by the number of Redeemable shares then held.

An analysis was performed, under ASC 480-10-25-7 to determine if the redeemable shares should be classified as debt or equity. The results of this analysis determined the redeemable shares did not fall under the definition of mandatorily redeemable financial instruments and therefore should not be classified as debt.

Pursuant to ASC 480-10-S99, preferred stock redeemable for cash or other assets are to be classified outside of permanent equity if it is redeemable with any one of the following characteristics:

The Redeemable Shares are redeemable upon the occurrence of certain events that are not solely within the control of the reporting entity. In the natural course of pursuing the fulfillment of its required fiduciary duties, the Company may meet the conditions upon which the shares would become redeemable (i.e. market capitalization and/or EBITDA, along with going concern status), and would be thus unable to control the events leading to redemption. As a result of the evaluation, the Company has concluded that the Redeemable Shares are appropriately classified outside of permanent equity as temporary equity.

The Redeemable Shares originally issued with the transaction, 163,441 of Series D Preferred Convertible shares and 391,903 of Series F Preferred Convertible shares, were converted to 11,106,880 shares of the Company’s Common Stock on or around May 26, 2016. The conversion was completed due to the mandatory conversion feature of the preferred shares due to the reverse split of the Company’s Common Stock on May 26, 2016.

Reverse Split

On December 23, 2015, the Board unanimously authorized and approved an amendment to our Articles of Incorporation to effect a reverse stock split of our Common Stock at a 1-for-20 ratio (the “Reverse Split”) and increase our common shares authorized to 200,000,000. On December 30, 2015, stockholders holding a majority of our voting power approved by written consent the amendment to our Articles of Incorporation, which would affect the Reverse Split. The Reverse Split will reduce the number of outstanding shares of our Common Stock by reclassifying and converting all outstanding shares of our Common Stock into a proportionately fewer number of shares of Common Stock. The reverse stock was approved by the Financial Industry Regulatory Authority (“FINRA”) on May 25, 2016 and effectuated on May 26, 2016. In conjunction with the Reverse Split approval, all of the Series D and Series F preferred convertible shares mandatorily converted to common shares at a 1-for-20 ratio.