Common Stock

In May 2013, we issued: 750,000 shares of common stock as part of the purchase price in the Sequence acquisition which were valued at $183,750 based on the closing market price on the acquisition date, see Note 3; 7,000,000 shares of common stock as part of the purchase price in the FDI acquisition which were valued at $1,112,310 based on the closing market price on the acquisition date, see Note 3; and 1,483,669 shares of common stock in satisfaction of the Boomtext earn-out payment, see Equity Payable below.

In June 2013, we issued 36,780,000 shares of common stock at $0.20 per share to accredited investors for net proceeds of $6,789,686. Transaction costs netted against the proceeds totaled $566,315. This transaction constituted a qualified financing, pursuant to which the Bridge Notes were converted into 26,772,532 shares of common stock, see Note 6.

In June 2013, we also issued 75,000 shares of common stock for services and recorded general and administrative expense of $18,375.

In July 2013, we issued: 527,679 shares of common stock in satisfaction of the allonges granted under the Bridge Notes valued at $131,248; and 32,825 common shares for the cashless exercise of warrants and recorded a reduction to our derivative liabilities of $18,731.

In August 2013, we issued 720,000 shares of common stock at $0.20 per share to accredited investors for net proceeds of $107,492. Transaction costs netted against the proceeds totaled $36,508.

In August 2013, we also issued: 90,252 shares of common stock for services and recorded general and administrative expense of $51,444; 236,292 shares of common stock in satisfaction of our additional share issuance obligation under the Bridge Notes and reduced our equity payable by $96,960; 78,125 shares of common stock in satisfaction of the accrued bonus to our CEO of $25,000; 37,500 shares of common stock in satisfaction of the accrued bonus to our CFO of $12,000; and 9,986 shares of common stock for the cashless exercise of warrants and recorded a reduction of our derivative liabilities of $5,173.

At September 30, 2013, we had 97,811,977 shares of common stock outstanding.

Equity Payable

We had an earn-out commitment associated with the acquisition of Boomtext from Digimark, LLC. The earn-out payment (payable March 31, 2013) consisted of a number of shares of our common stock equal to (a) 1.5, multiplied by our net revenue from acquired customers and customer prospects for the twelve-month period beginning six months after the closing date, divided by (b) the average of the volume-weighted average trading prices of our common stock for the 25 trading days immediately preceding the earn-out payment (subject to a collar of $1.49 and $2.01 per share).

In June 2013, the final value of the earn-out payment of $2,210,667 was satisfied through the issuance of 1,483,669 shares of common stock. As of December 31, 2012, the estimated value of the earn-out payment of $2,032,881 was recorded as a current liability.

In June 2013, we recorded equity payable of $218,446 related to the additional share issuance obligations under the Bridge Notes. As discussed above under Common Stock and below under Warrants Issued to Note Holders and Placement Agent, we satisfied a portion of these obligations during the three months ended September 30, 2013 through the issuance of shares of common stock or warrants to purchase common stock.

Stock-based Plans

Stock Option Activity

The following table summarizes stock option activity for the nine months ended September 30, 2013:

The weighted average exercise price of stock options granted during the period was $0.33 and the related weighted average grant date fair value was $0.29 per share.

The exercise of 32,317,129 options granted under our 2013 Plan was subject to our increasing the number of shares of common stock authorized for issuance, which took place on November 12, 2013 as a result of the one for six reverse stock split and accompanying decrease in our authorized common stock to 50,000,000 shares. See Note 11.

Stock-Based Compensation Expense

The impact on our results of operations of recording stock-based compensation expense for the three and nine months ended September 30, 2013 and 2012 was as follows:

Valuation Assumptions

An independent valuation expert calculated the fair value of each stock option award on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the three months and nine months ended September 30, 2013 and 2012.

The risk-free interest rate assumption is based upon published interest rates appropriate for the expected life of our employee stock options.

The expected life of the stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

The dividend yield assumption is based on our history of not paying dividends and no future expectations of dividend payouts.

The expected volatility in 2013 is based on the historical publicly traded price of our common stock. The expected volatility prior to 2013 is based on the weighted average of the historical volatility of publicly traded surrogates in our peer group.

Warrants Issued to Non-Employees

We issued warrants to purchase 905,000 shares of common stock to non-employees in 2010 and 2011. Prior to June 17, 2013, the warrants were accounted for as derivative liabilities because the equity environment was tainted as discussed in Note 5. The equity environment was no longer tainted as of June 17, 2013, and our independent valuation expert began calculating the stock-based compensation for these warrants using the Black-Scholes valuation model. The valuation assumptions used are consistent with the valuation information for options above.

We recorded stock-based compensation expense of $26,214 in general and administrative expense for the three months ended September 30, 2013, and we recorded a gain of $133,120 in change in fair value of derivative liabilities for the three months ended September 30, 2013.

We recorded stock-based compensation expense of $26,214 in general and administrative expense for the nine months ended September 30, 2013, and we recorded a loss of $91,720 in change in fair value of derivative liabilities for the nine months ended September 30, 2013.

A summary of non-employee warrant activity under the 2010 Plan from December 31, 2012 to September 30, 2013 is presented below:

Warrants

During 2011, we issued warrants for the purchase of 688,669 shares of common stock at $2.00 per share in connection with a private placement. During 2012, we issued warrants for the purchase of 153,515 shares of common stock at $2.00 per share in connection with the conversion of a portion of our Bridge Notes. These warrants are exercisable for four years from the date of issuance, and contain anti-dilution, or down round, price protection as long as the warrants remain outstanding. The current exercise price of these warrants is $0.20 per share as a result of the price protection guarantee contained in the warrant agreements.

In June 2013, we issued warrants for the purchase of 27,249,549 shares of common stock at $0.20 per share in connection with the conversion of the Bridge Notes into equity. The warrants are exercisable for five years from the date of issuance.

In June 2013, we issued warrants for the purchase of 3,602,558 shares of common stock at $0.20 per share to a placement agent connected with the Bridge Note conversions and equity placements. The warrants are exercisable for five years from the date of issuance.

In July 2013, we issued warrants for the purchase of 35,000 shares of common stock at $0.20 per share to a placement agent connected with the equity placements. The warrants are exercisable for five years from the date of issuance.

In July 2013, we issued warrants for the purchase of 152,300 shares of common stock at $0.20 per share to previous note holders in satisfaction of the ASID. The warrants are exercisable for three years from the date of issuance.

In July 2013, we issued warrants for the purchase of 53,069 shares of common stock at $0.20 per share to an individual for services rendered.

In July 2013, we recorded the cashless exercise of warrants for 51,167 shares of common stock, and issued 32,825 shares of common stock.

In August 2013, we issued warrants for the purchase of 32,900 shares of common stock at $0.20 per share to a placement agent connected with the Bridge Note conversions and equity placements. The warrants are exercisable for five years from the date of issuance.

In August 2013, we recorded the cashless exercise of warrants for 14,076 shares of common stock, and issued 9,986 shares of common stock.

At September 30, 2013, we have warrants to purchase 31,901,917 shares of common stock at $0.20 per share that are outstanding. Of this amount, warrants to purchase 776,541 shares expire in 2015, warrants to purchase 205,369 shares expire in 2016, and warrants to purchase 30,920,007 shares expire in 2018.