Quarterly report pursuant to Section 13 or 15(d)

STOCKHOLDERS' EQUITY

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STOCKHOLDERS' EQUITY
 3 Months Ended
Sep. 30, 2013
Stockholders' Equity Note [Abstract]  
STOCKHOLDERS' EQUITY
NOTE 6 - STOCKHOLDERS’ EQUITY
 
At September 30, 2013, the Company had 145,000,000 shares of common stock, par value of $0.001 authorized for issuance.
 
In addition, at September 30, 2013 the Company is authorized to issue up to 5,000,000 shares of preferred stock, par value of $0.001 in one or more classes or series within a class pursuant to our Articles of Incorporation. There are currently no shares of preferred stock issued and outstanding.
 
Holders of common stock are entitled to receive dividends, when, as, and if declared by the Board of Directors, out of any assets legally available to the Company. Dividends are declared and paid in an equal per-share amount on the outstanding shares of each series of common stock. To date the Board of Directors has neither declared nor paid common stock dividends to shareholders.
   
Common Stock and Warrants
 
(a)
Private Placement – July 2012
 
In July 2012, the Company issued 1,690,063 shares of common stock and 338,013 5-year warrants to purchase shares of our common stock at an exercise price of $0.41 per share, resulting in net proceeds of approximately $672,000, pursuant to a private placement initiated in June 2012.
   
(b)
Private Placement– August and October 2012
 
In August 2012, the Company commenced a private placement of its common stock and warrants to accredited investors to purchase up to 8 Units for a purchase price of $250,000 per Unit, with each Unit consisting of 603,594 shares of our common stock and 120,719 five (5) year warrants to purchase one share of common stock at an exercise price of $0.41 per share. In connection with this private placement, on August 31, 2012, we sold an aggregate of 603,594 shares of common stock and issued 120,719 warrants raising net proceeds of approximately $231,000.
 
In October 2012, the Company continued the private placement of its common stock and warrants to an accredited investor to purchase up to 8 Units for a purchase price of $250,000 per Unit, with each Unit consisting of 603,592 shares of our common stock and 120,718 five (5) year warrants to purchase one share of common stock at an exercise price of $0.41 per share. In connection with this private placement, on October 30, 2012, we sold an aggregate of 241,436 shares of common stock and issued 48,287 warrants raising net proceeds of approximately $77,000. The October private placement closed out the round of financing which began in June 2012.
 
The common stock purchased in the private placements and the common stock issuable upon exercise of warrants have piggyback registration rights. The securities offered and sold in the private placement have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act.  
  
Advisory Agreements
 
Baytree Capital - Related Party. On June 14, 2012, the Company entered into an Advisory Agreement (“Advisory Agreement”) with Baytree Capital, a significant shareholder of the Company, pursuant to which Baytree Capital agreed to provide business and advisory services for 24 months in exchange for 100,000 restricted shares of our newly issued common stock at the commencement of each six (6) month period in return for its services, and a warrant to purchase 1,837,777 restricted shares of our common stock for a period of five (5) years at an exercise price of $0.41 per share (“Advisory Agreement Warrants”). In connection with this agreement, the estimated fair value of the warrants issued in the approximate amount of $3,258,000 was recorded as prepaid advisory fees, which is expected to be amortized on a pro-rata basis over the term of the agreement. During each of the three months ended September 30, 2013 and 2012, we recorded expense of approximately $407,000 as a result of the prepaid advisory fees amortization. As of September 30, 2013 the total remaining balance of the prepaid advisory fees was approximately $1,154,000.
 
In accordance with the Advisory Agreement, on December 14, 2012, which was the beginning of the second six-month period, a liability was recorded based on that day’s stock price for the anticipated issuance of 100,000 shares of common stock.
 
In accordance with the Advisory Agreement, on June 14, 2013, which was the beginning of the third six-month period, a liability was recorded based on that day’s stock price for the anticipated issuance of 100,000 shares of common stock. These shares were valued at $0.60 per share, based on the price per share of the Company’s common stock on June 14, 2013, for the total of $60,000 due to Baytree Capital. On July 9, 2013, we issued Baytree Capital 100,000 restricted shares of our newly issued common stock at $0.12 per share. The prepaid advisory fees were adjusted for amortization already recognized from the original due date.
 
Caro Capital, LLC. On April 4, 2013, the Company entered into an Advisory Agreement (“Agreement”) with Caro Capital, LLC (“Caro Capital”), pursuant to which Caro Capital agreed to provide business and advisory services, management consulting, shareholder information and public relations for six (6) months in exchange for 500,000 restricted shares of our newly issued common stock. Upon execution of the Agreement, Caro Capital was issued 100,000 shares of restricted stock per the contract terms, which were valued at $44,000 based on the closing price of our common stock on the issuance date. The contract calls for subsequent issuance of 100,000 shares at 30-day increments to the first tranche. Per the terms of the Agreement, Caro Capital is entitled to the second and third tranche issuance of 100,000 shares of restricted stock each.
 
The second tranche shares were valued at $0.50 per share, based on the price per share of the Company’s common stock on May 4, 2013, when the second tranche shares were due to be issued, for the total of $50,000. The costs associated with the 100,000 shares to be issued of approximately $50,000 were recorded as consulting expense during the fourth quarter ended June 30, 2013. On August 13, 2013, the Company issued 100,000 restricted shares of our newly issued common stock at $0.08 per share.
 
The third tranche shares were valued at $0.32 per share, based on the price per share of the Company’s common stock on June 4, 2013, when the third tranche shares were due to be issued, for the total of $32,000. The costs associated with the 100,000 shares to be issued of approximately $32,000 was recorded as consulting expense during the fourth quarter ended June 30, 2013 and is included in accrued expenses as of September 30, 2013 on the Company’s balance sheet until these shares are issued.
 
On June 3, 2013, the Company terminated the Agreement with Caro Capital effective July 3, 2013.
 
Warrant Activity
 
Warrant activity during the three months ended September 30, 2013 and related balances outstanding as of such dates are reflected below:
 
 
 
Number
 
Weighted
Average
Exercise
Price Per
Share
 
Remaining
Contract
Term (#
years)
 
Shares purchasable under outstanding warrants at June 30, 2013
 
 
2,907,347
 
$
0.41
 
 
 
 
Stock purchase warrants issued
 
 
—
 
 
—
 
 
 
 
Stock purchase warrants exercised
 
 
—
 
 
—
 
 
 
 
Shares purchasable under outstanding warrants at September 30, 2013
 
 
2,907,347
 
$
0.41
 
 
3.71 - 4.09
 
 
Warrant activity during the three months ended September 30, 2012 and related balances outstanding as of such dates are reflected below:
 
 
 
Number
 
Weighted
Average
Exercise
Price Per
Share
 
Remaining
Contract
Term (#
years)
 
Shares purchasable under outstanding warrants at June 30, 2012
 
 
2,400,328
 
$
0.41
 
 
 
 
Stock purchase warrants issued
 
 
458,732
 
 
—
 
 
 
 
Stock purchase warrants exercised
 
 
—
 
 
—
 
 
 
 
Shares purchasable under outstanding warrants at September 30, 2012
 
 
2,859,060
 
$
0.41
 
 
4.74
 
 
Stock-based Compensation
 
During the three months ended September 30, 2013, the Company granted 3,010,973 non-qualified stock options of the Company’s common stock.  The Company has not registered the shares of common stock underlying stock options outstanding as of September 30, 2013. 
 
Activity in options during the three months ended September 30, 2013 and related balances outstanding as of that date are reflected below:
 
 
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contract
Term (# years)
 
Outstanding at June 30, 2013
 
 
2,527,389
 
$
0.15
 
 
 
 
Granted
 
 
3,010,973
 
 
 
 
 
 
 
Exercised
 
 
—
 
 
 
 
 
 
 
Forfeited and cancelled
 
 
—
 
 
 
 
 
 
 
Outstanding at September 30, 2013
 
 
5,538,362
 
$
0.12
 
 
8.23
 
Exercisable at September 30, 2013
 
 
3,635,462
 
$
0.19
 
 
7.49
 
 
Activity in options during the three months ended September 30, 2012 and related balances outstanding as of that date are reflected below:
 
 
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contract
Term (# years)
 
Outstanding at June 30, 2012
 
 
4,536,949
 
$
0.17
 
 
 
 
Granted
 
 
—
 
 
 
 
 
 
 
Exercised
 
 
(549,552)
 
 
 
 
 
 
 
Forfeited and cancelled
 
 
(1,460,009)
 
 
 
 
 
 
 
Outstanding at September 30, 2012
 
 
2,527,388
 
$
0.17
 
 
7.35
 
Exercisable at September 30, 2012
 
 
1,997,279
 
$
0.17
 
 
5.58
 
 
Stock-based compensation expense recognized in our condensed consolidated statements of operations for the three months ended September 30, 2013 and 2012 includes compensation expense for stock-based options and awards granted, based on the grant date fair value. For options and awards granted, expenses are amortized under the straight-line method over the expected vesting period. Stock-based compensation expense recognized in the condensed consolidated statements of operations has been reduced for estimated forfeitures of options that are subject to vesting. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods based on changes in the estimated forfeiture rate. During the three months ended September 30, 2013, the Company revised its forfeiture rate based on prior year actual forfeitures. The change in forfeiture rate from 5% to 13% resulted in a reduction of approximately $21,000 to previously recognized stock based compensation expense, which was recorded during the three months ended September 30, 2013.
 
The closing price of our stock at September 30, 2013 was $0.04, as a result the intrinsic value of the exercisable options at September 30, 2013 is $0.
 
We allocated stock-based compensation expense included in the condensed consolidated statements of operations for employee option grants and non-employee option grants as follows:
 
Three months ended September 30,
 
2013
 
2012
 
Research and development
 
$
(1,000)
 
$
5,000
 
General and administration
 
 
24,000
 
 
40,000
 
Total stock-based compensation expense
 
$
23,000
 
$
45,000
 
 
 The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. The fair value of stock options was measured at the grant date using the assumptions (annualized percentages) in the table below:
 
Three months ended September 30,
 
2013
 
2012
 
Expected volatility
 
 
218%
 
 
100%
 
Risk free interest rate
 
 
1.4% to 1.7%
 
 
0.8% to 3.0%
 
Forfeiture rate
 
 
13%
 
 
5%
 
Dividend yield
 
 
0%
 
 
0%
 
Expected term
 
 
3-5 years
 
 
5-10 years
 
 
The remaining amount of unrecognized stock-based compensation expense at September 30, 2013 is approximately $320,000, which is expected to be recognized over the weighted average period of 7.09 years.