Stockholders’ Equity

12 Months Ended

Dec. 31, 2015

Fair estimated value of warrants

Stockholders' Equity

The Company’s Articles of Incorporation, as amended, authorize the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock”.

Convertible Preferred Stock

The Company had 161,135 shares of Series A Convertible Preferred Stock ("Series A Preferred") outstanding as of December 31, 2015 and December 31, 2014, and accrued dividends of approximately $98,000 and $86,000, respectively. The holders of the Series A Preferred Stock are entitled to receive a cumulative dividend at a rate of 8.0% per year, payable annually either in cash or shares of the Company's Common Stock at the Company's election.  Shares of Common Stock paid as accrued dividends are valued at $0.50 per share.  Each share of Series A Preferred is convertible into two shares of the Company's Common Stock. The holders of Series A Preferred are entitled to receive payments upon liquidation, dissolution or winding up of the Company before any amount is paid to the holders of Common Stock. The holders of Series A Preferred shall have no voting rights, except as required by law.  

During 2014, there were 50,000 shares of Series A Preferred outstanding and accrued dividends of approximately $25,000 converted into 300,164 shares of common stock.

Common Stock

The Company had 392,583,015 common shares outstanding as of December 31, 2015. The holders of Common Stock are entitled to one vote per share on matters brought before the shareholders.

Warrant Modification Agreements

In December 2015, the Company modified the terms of certain investor warrants that were classified as derivative liabilities by removing the down-round pricing protection provision in the event of a dilutive issuance, resulting in 3,215,837 of these warrants being reclassified from a liability instrument to equity instruments, removing the warrant liability and reclassifying it to additional paid in capital. The Company revalued the warrants as of the date of modification and reduced the derivate liability by approximately $526,000. The warrants were revalued as of December 31, 2015 using the Black-Scholes valuation method and using a risk-free rate of 1.5%, stock price of $0.30, exercise prices ranging from $0.23 to $0.35, expected life of 3.6 to 3.7 years and stock price volatility of 70.0%.

In July 2015, the Company entered into agreements which extended the life of 2,418,750 warrants by two years after certain conditions were met. The Company recorded a warrant modification expense, as a result of the extension of the expiration dates of approximately $253,000, which is included in general and administrative expense in the Company’s consolidated statements of operations. The expense was calculated using the Black-Scholes valuation method and using a risk-free rate of 0.67%, stock price of $0.31, exercise prices ranging from $0.30 to $0.40, expected life of 2.0 years and stock price volatility of 67.8%.

The warrants are exercisable into the Company’s common stock.

There were no warrant modification expense adjustments during 2014.

Repurchase of Common Stock

On December 11, 2012, the Company authorized a share repurchase program to repurchase up to 15 million of the Company's issued and outstanding common shares from time to time on the open market or via private transactions through block trades.  Under this program, for the year ended December 31, 2015, the Company repurchased a total of 1,344,222 shares at a weighted-average cost of $0.31.  A total of 3,806,172 shares have been repurchased to-date at a weighted-average cost of $0.26. The remaining number of shares authorized for repurchase under the plan as of December 31, 2015 is 11,193,828.

Warrants to Purchase Preferred Stock and Common Stock

As of December 31, 2015, warrants to purchase 41,674,796 shares of the Company's common stock at prices ranging from $0.10 to $0.50 were outstanding. All warrants are exercisable as of December 31, 2015 and expire at various dates through December 2020 and have a weighted average remaining term of approximately 3.47 years and are included in the table below as of December 31, 2015.

During the fourth quarter of fiscal year ended December 31, 2015, the Company issued warrants through a Private Placement, to purchase 10,541,666 and 2,053,571 shares of its common stock, exercisable at $0.45 and $0.35 per share, respectively, and expire in October 2020 and October 2018, respectively. (See Note 5, above.)

During the third quarter of fiscal year ended December 31, 2014, the Company issued warrants through a Private Placement, to purchase 20,445,650 and 1,357,143 shares of its common stock, exercisable at $0.23 and $0.35 per share, respectively and expire in August 2019. (See Note 5, above.)

The following table summarizes warrant activity for the following periods:

Balance at December 31, 2013	17,226,146
Granted	21,802,793
Expired / cancelled	(1,057,309	)
Exercised	(2,750,000	)
Balance at December 31, 2014	35,221,630
Granted	12,595,237
Expired / cancelled	(5,335,821	)
Exercised	(806,250	)
Balance at December 31, 2015	41,674,796

Advisory agreements

PCG Advisory Group. On September 1, 2015, the Company entered into an agreement with PCG Advisory Group (“PCG”), pursuant to which PCG agreed to provide investor relations services for six (6) months in exchange for fees paid in cash of $6,000 per month and 100,000 shares of restricted common stock issued in accordance with the agreement. In connection with this agreement, the Company has accrued for the estimated per share value of issuance at $0.32 per share, the price of Company’s common stock at September 1, 2015 for a total of $32,000 due to PCG. The fair values of the shares was recorded as prepaid advisory fees and are included in prepaid expenses and other current assets on the Company’s balance sheet and will be amortized on a pro-rate basis over the term of the contract.

During the year ended December 31, 2015, we recorded expense of approximately $20,000, in connection with amortization of the stock issuance. As of December 31, 2015, the total remaining balance of the prepaid investor relation services is approximately $12,000.

Shares Issued in Private Placement

On January 29, 2015, we completed our January 2015 Private Placement pursuant to which we entered into Notes Payable Agreements (see Note 5, above) and issued 2,450,000 shares of our common stock. The shares of common stock issued under the January 2015 Private Placement were offered and issued without registration under the Securities Act of 1933, as amended, (the “1933 Act”). The securities may not be sold, transferred or assigned in the absence of an effective registration statement for the securities under the 1933 Act, or an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transaction, that registration in required under the 1933 Act or unless sold pursuant to Rule 144 under the 1933 Act.

Stock Options

On May 16, 2012, the Company established the 2012 Stock Option Plan (“Plan”) authorizing the granting of options for up to 40,000,000 shares of Common Stock. The purpose of the Plan is to promote the long-term growth and profitability of the Company by (i) providing key people and consultants with incentives to improve stockholder value and to contribute to the growth and financial success of the Company and (ii) enabling the Company to attract, retain and reward the best available persons for positions of substantial responsibility. The Plan permits the granting of stock options, including non-qualified stock options and incentive stock options qualifying under Section 422 of the Code, in any combination (collectively, “Options”). At December 31, 2015, the Company had 16,111,725 shares of Common Stock available for issuance under the Plan. 

A summary of the Plan Options for the year ended December 31, 2015 is presented in the following table: 

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Outstanding December 31, 2013		17,572,500		$	0.22	$	478
Issued		11,517,250			0.22
Canceled/expired		(161,000	)		0.19
Exercised		(10,250	)		0.23		-
Outstanding December 31, 2014		28,918,500			0.21		786
Issued		1,124,250			0.31
Canceled / expired		(6,151,475	)		0.22
Exercised		(369,675	)		0.21		-
Outstanding December 31, 2015		23,521,600		$	0.22	$	2,044
Exercisable December 31, 2015		18,469,600		$	0.22	$	1,463

The weighted-average fair value per share of the granted options for the years ended December 31, 2015 and 2014 was approximately $0.15.

The following table sets forth the exercise price range, number of shares, weighted-average exercise price and remaining contractual lives at December 31, 2015:

Weighted				Weighted		Weighted
Average				Average		Average
Exercise Price		Options		Exercise Price		Remaining Life
Outstanding:
$	0.16 - $0.21		7,755,650	$	0.19		7.81
$	0.21 - $0.23		11,849,250	$	0.22		6.29
$	0.23 - $0.35		3,701,950	$	0.26		2.98
$	0.35 - $0.40		214,750	$	0.38		2.44
Exercisable:
$	0.16 - $0.21		2,703,650	$	0.18		6.45
$	0.21 - $0.23		11,849,250	$	0.22		6.29
$	0.23 - $0.33		3,701,950	$	0.26		2.98
$	0.23 - $0.33		214,750	$	0.38		2.44

Total stock based compensation expense included in the consolidated statements of operations was charged as follows in thousands:

	Years ended December 31,
	2015		2014
Cost of revenues	$	17	$	14
Distributor compensation		158		195
Sales and marketing		28		21
General and administrative		252		304
	$	455	$	534

As of December 31, 2015, there was approximately $668,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Plan. The expense is expected to be recognized over a weighted-average period of 3.54 years.

The Company uses the Black-Scholes option-pricing model (“Black-Scholes model”) to estimate the fair value of stock option grants. The use of a valuation model requires the Company to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on the historical volatility of the Company’s stock price over the expected term of the option. The expected life is based on the contractual life of the option and expected employee exercise and post-vesting employment termination behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant. The following were the factors used in the Black Scholes model to calculate the compensation cost:

	Years ended December 31,
	2015			2014
Dividend yield		-		-
Stock price volatility		66% - 77	%	75% - 98%
Risk-free interest rate		0.56% - 1.06	%	0.33% - 2.12%
Expected life of options	1.5 - 5.0 years			3.0 -7.0 years