Note 5—Stockholders’ Equity

Preferred Stock

Pursuant to our Certificate of Incorporation, the Board of Directors is authorized to issue up to 2,000,000 shares of preferred stock (par value $.001 per share) in one or more series and to fix the rights, preferences, privileges, and restrictions, including the dividend rights, conversion rights, voting rights, redemption price or prices, liquidation preferences, and the number of shares constituting any series or the designation of such series.

In February 2008, we issued to Hunchun BaoLi Communication Co. Ltd. (“BAOLI”) and two related purchasers a total of (a) 3,101,361 shares of our common stock and (b) 611,523 shares of our Series A Preferred Stock (convertible into 6,115,230 shares of our common stock) in exchange for net proceeds of $14.9 million in cash after offering costs of $89,000, of which $4.0 million was received in 2007. Subject to the terms and conditions of our Series A Preferred Stock and to customary adjustments to the conversion rate, each share of our Series A Preferred Stock is convertible into ten shares of our common stock so long as the number of shares of our common stock beneficially owned by BAOLI and affiliates following such conversion does not exceed 9.9% of our outstanding common stock. In 2013, 235,717 of these preferred shares were converted into 196,422 shares of our common stock. There was no conversion of these preferred shares into common stock in 2015 or 2014. At December 31, 2015, the 328,925 preferred shares issued and outstanding could be converted into 274,104 shares of common stock. Except for a preference on liquidation of $.01 per share, each share of Series A Preferred Stock is the economic equivalent of the ten shares of common stock into which it is convertible. There is no beneficial conversion feature related to the conversion of the preferred shares, as the value of the common shares into which the preferred shares convert does not exceed the recorded amount of the preferred shares at the date of issuance. Except as required by law, the Series A Preferred Stock does not have any voting rights.

October 2015 Public Offering

In October 2015, in a registered direct offering, we sold 13,531,994 Class A Units (consisting of one share of our common stock, a six-month Series A warrant to purchase one share of our common stock at an exercise price equal to $0.35 (“Series A warrant”), and a five-year Series B warrant to purchase 0.75 of a share of our common stock at an exercise price equal to $0.40 per share (“Series B warrant”)). The shares of common stock, Series A warrants and Series B warrants which are part of a Class A Unit were immediately separable and were issued separately in this offering.

We also sold to purchasers, whose purchase of Class A Units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding common stock immediately following the consummation of this offering, 4,750.0005 Class B Units. Each Class B Unit consisted of one share of our Class B Convertible Preferred Stock, or the Series B Preferred, with a stated value of $1,000 and convertible into 13,571,430 shares of our common stock at $0.35 per share, the public offering price of the Class A Units, together with the equivalent number of Series A warrants and Series B warrants as would have been issued to such purchaser if they had purchased Class A Units based on the public offering price. The Series B Preferred do not generally have any voting rights but are convertible into shares of common stock. The shares of Series B Preferred, Series A warrants and Series B warrants part of a Class B Unit were immediately separable and were issued separately in this offering.

At the closing of the October 2015 offering, we raised aggregate net proceeds of $8.6 million.

As of December 31, 2015, 2,802 of the 4,750.0005 Series B Preferred shares had been converted to 8,006,429 shares of our common stock and 1,948.0005 Series B preferred (convertible into 5,565,001 common shares) remained issued and outstanding.

Common Stock

On October 14, 2015 we completed a registered direct offering including shares of our common stock (see “—Preferred Stock—October 2015 Public Offering).

On March 25, 2015, in a registered direct offering, we sold 3,062,790 shares of our common stock, and 1,531,395 warrants to purchase additional shares over the next 5.5 years, at a price of $1.6325 per share, providing us with aggregate net proceeds of $4.6 million.

On February 14, 2015, we entered into warrant exercise agreements with certain holders of our outstanding warrants to purchase an aggregate of 916,858 shares of our common stock. The warrants were originally issued as part of an underwritten public offering that we closed on August 9, 2013. Pursuant to the terms of the agreements, the exercise price of the warrants being exercised was adjusted, immediately prior to their exercise, to $2.00 per share down from the previously agreed $2.57, providing us with aggregate net proceeds from such exercises of $1.7 million.

At various times during 2014, a total of 1,589,471 of the below mentioned warrants were exercised at $2.57 each, providing us with net proceeds of $4.1 million.

On August 9, 2013, we consummated an underwritten public offering (Registration No. 333-189006) of units of our common stock and warrants for gross proceeds of $12 million, and net proceeds to us of approximately $10.9 million after deducting underwriting discounts and commissions and offering expenses. In the offering, a total of 5,721,675 shares of common stock were issued, plus an additional 954,001 shares subject to pre-funded warrants with an exercise price of $0.01 per pre-funded warrant. In addition, a total of 6,675,676 five year warrants and 3,337,838 two year warrants were issued, each with an exercise price of $2.57. The units consisted of either (at the option of the investors): (i) one share of common stock, one five year warrant and one two year warrant sold at a price to the public of $1.799, or (ii) (for those investors whose acquisition of our common stock through purchase of new units would cause them to own more than 9.9% of our outstanding common stock), a unit which consisted of one pre-funded warrant (in lieu of the share of common stock), one five year warrant and one two year warrant. Because the pre-funded warrants had an exercise price of $0.01 per share, the price for a unit having a pre-funded warrant was one penny less, or $1.789 per unit. At September 28, 2013 all of the pre-funded warrants had been exercised. Additionally, the underwriter of this offering received 117,670 warrants, each with an exercise price of $2.25, and exercisable for a period of three years commencing August 5, 2013. These warrants to our underwriter may not be exercised for a period of 180 days following August 5, 2013.

In a registered direct offering completed April 26, 2013 we raised proceeds of $1.95 million, net of offering costs of $236,000, from the sale of 513,827 shares of common stock and an equal number of warrants.

Equity Awards

At December 31, 2015, we had two equity award option plans, the 2003 Equity Incentive Plan and the 2013 Equity Incentive Plan (collectively, the “Stock Option Plans”) although we can only grant new options under the 2013 Equity Incentive Plan. Under the Stock Option Plans, stock awards may be made to our directors, key employees, consultants, and non-employee directors and may consist of stock options, stock appreciation rights, restricted stock awards, performance awards, and performance share awards. Stock options must be granted at prices no less than the market value on the date of grant.

There were no stock option exercises in the last three years.

We granted stock options in each of the last three years. The weighted average fair value of options has been estimated at the date of the grant using the Black-Scholes option-pricing model. The following are the significant weighted average assumptions used for estimating the fair value under our stock option plans:


	2015			2014			2013
Per share fair value at grant date	$	0.15		$	1.97		$	1.46
Risk free interest rate		1.4	%		1.1	%		1.04	%
Expected volatility		98.8	%		100.2	%		99.4	%
Dividend yield		0	%		0	%		0	%
Expected life in years		4.0			4.0			4.0

The expected life was based on the contractual term of the options and the expected employee exercise behavior. Typically, options to our employees and Board Members have a 2 year vesting term and a 10 year contractual term and vest at 50% after one year and 50% after two years. The risk-free interest rate is based on the U. S. Treasury zero-coupon issues with a remaining term equal to the expected option life assumed at the grant date. The future volatility is based on our 4 year historical volatility. We used an expected dividend yield of 0% because we have never paid a dividend and do not anticipate paying dividends. We assumed aggregate forfeiture rates of 10% to 20% based on historical stock option cancellation rates over the last 4 years.

At December 31, 2015, 1,442,880 shares of common stock were available for future grants and options covering 1,973,606 shares were outstanding but not yet exercised. Option activity during the three years ended December 31, 2015 was as follows:


	Number of Shares			Weighted Average Exercise Price
Outstanding at December 31, 2012		105,383		$	46.08
Granted		1,053,333			2.13
Canceled		(6,642	)		100.84
Exercised		—			—

Outstanding at December 31, 2013		1,152,074			5.58
Granted		50,000			2.85
Canceled		(1,126	)		158.13
Exercised		—			—

Outstanding at December 31, 2014		1,200,948			5.32
Granted		870,000			0.22
Canceled		(97,342	)		16.22
Exercised		—			—

Outstanding at December 31, 2015		1,973,606		$	2.54

The following table summarizes information concerning currently outstanding and exercisable stock options at December 31, 2015:


								Exercisable
Range of Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
	$0.22 - $0.22		870,000		9.9	$	0.22		—	$	—
	2.12 - 2.12		947,500		7.9		2.12		947,500		2.12
	2.52 - 2.85		81,073		7.8		2.72		47,741		2.64
	8.14 - 18.96		35,816		5.4		17.93		35,816		17.93
	$19.32 - $62.40		39,217		2.4		49.52		39,217		49.52

			1,973,606		8.6	$	2.54		1,070,274	$	4.41

Our outstanding options expire on various dates through November 2025. The weighted-average contractual term of outstanding options was 8.6 years and the weighted-average contractual term of currently exercisable stock options was 7.6 years. There were no exercisable options at December 31, 2015 with a price less than the then market value. At December 31, 2014, outstanding options covering 1,053,334 shares, with an intrinsic value of $672,000, had an exercise price less than the current market value and 526,667 of these options were exercisable, with an intrinsic value of $336,000. There were no exercisable options at December 31, 2013 with a price less than the then market value.

The grant date fair value of each share of our restricted stock awards is equal to the fair value of our common stock at the grant date. Shares of restricted stock under awards all have service conditions and vest over one to four years. Some of our grants also have performance conditions. The following is a summary of our restricted stock award transactions for the year ended December 31, 2015:


	Number of Shares			Weighted Average Grant Date Fair Value
Balance nonvested at December 31, 2014		1,057,535		$	2.80
Granted		15,000			1.08
Vested		(505,226	)		2.81
Forfeited		(55,000	)		2.81

Balance nonvested at December 31, 2015		512,309		$	2.77

The weighted-average grant date fair value of our restricted stock awards, their total fair value and the fair value of all shares that have vested during each of the past three years is as follows:


	Year ended December 31
	2015		2014		2013
Weighted-average grant date fair value	$	1.08	$	2.81	$	2.30
Fair value of restricted stock awards granted	$	16,000	$	2,990,000	$	148,000
Fair value of restricted stock awards vested	$	1,420,000	$	143,000	$	535,000

For the majority of restricted stock awards granted, the number of shares issued on the date the restricted stock awards vest may be net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. For the year ended December 31, 2015 we withheld 133,894 shares to satisfy $26,000 of employees’ tax obligations. There was no such withholding for the years ended December 31, 2014 or December 31, 2013.

No stock compensation cost was capitalized during the periods. At December 31, 2015, the total compensation cost related to non-vested option awards not yet recognized was $738,000 and the weighted-average period over which the cost is expected to be recognized is 1.2 years. The total compensation cost related to non-vested stock awards not yet recognized was $0.6 million, and the weighted-average period over which the cost is expected to be recognized is 0.6 years.

Warrants

The following is a summary of outstanding warrants at December 31, 2015:


		Common Shares
		Total		Currently Exercisable		Price per Share		Expiration Date
(1)	Warrants related to February 2012 financing		419,451		419,451	$	16.20		February 22, 2017
(2)	Warrants related to November 2012 financing		8,333		8,333		4.50		November 26, 2016
(3)	Warrants related to December 2012 financing		15,625		15,625		4.50		December 18, 2016
(4)	Warrants related to April 2013 financing		256,913		256913		5.45		April 26, 2019
(5)	Warrants related to August 2013 financing		117,670		117,670		2.25		August 5, 2016
(6)	Warrants related to August 2013 financing		6,117,383		6,117,383		0.35		August 9, 2018
(7)	Warrants related to February 2015 agreement		45,843		45,843		3.00		February 13, 2020
(8)	Warrants related to March 2015 financing		1,531,395		1,531,395		1.63		September 24, 2020
(9)	Warrants related to March 2015 financing		153,140		0		2.04		March 20, 2020
(10)	Warrants related to October 2015 financing		27,103,424		27,103,424		0.35		April 14, 2016
(11)	Warrants related to October 2015 financing		20,327,567		20,327,567		0.40		October 14, 2020
(12)	Warrants related to October 2015 financing		1,355,171		0		0.4375		October 14, 2020

On October 14, 2015, in a registered direct offering, we sold 13,531,994 Class A Units (consisting of one share of our common stock, a six-month Series A warrant to purchase one share of our common stock at an exercise price equal to $0.35, (“Series A warrant”), and a five-year Series B warrant to purchase 0.75 of a share of our common stock at an exercise price equal to $0.40 per share, (“Series B warrant”)). We also sold to purchasers, whose purchase of Class A Units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding common stock immediately following the consummation of this offering, 4,750.0005 Class B Units. Each Class B Unit consisted of one share of our Class B Convertible Preferred Stock, or the Series B Preferred, with a stated value of $1,000 and convertible into shares of our common stock at $0.35 per share, the public offering price of the Class A Units, together with the equivalent number of Series A warrants and Series B warrants as would have been issued to such purchaser if they had purchased Class A Units based on the public offering price. As a result, Series A warrants to purchase 27,103,424 shares of our common stock and Series B warrants to purchase 20,327,567 shares of our common stock were issued with the sale of these Class A and Class B Units. In addition, we granted the placement agent 1,355,171 five-year warrants to purchase our common shares at $0.4375. The shares of common stock, Series B Preferred, Series A warrants and Series B warrants were immediately separable and were issued separately in this offering.

On March 25, 2015, in a registered direct offering, we sold 3,062,790 shares of our common stock, and 1,531,395 warrants to purchase additional shares over the next 5.5 years, at a price of $1.6325 per share. The sale of these shares reset the exercise price of warrants (6) to $1.6325. The placement agent received 153,140 five-year warrants at an exercise price of $2.0406.

On February 14, 2015, we entered into Warrant Exercise Agreements with certain holders of our outstanding warrants to purchase an aggregate of 916,858 shares of our common stock. The warrants were originally issued as part of an underwritten public offering that we closed on August 9, 2013. Pursuant to the terms of the Warrant Exercise Agreements, the exercise price of the warrants being exercised was adjusted, immediately prior to their exercise, to $2.00 per share down from the previously agreed $2.57. In connection with the adjustment to the warrant exercise price, we charged to expense $0.4 million under the following fair value assumptions: expected life of six months; risk free interest rates of 0.07%; expected volatility of 33.6% and; dividend yield of 0%. In connection with the warrants exercised, we reclassified $669,000 relating to the fair value of the warrant derivative liability to capital in excess of par. Additionally, the underwriter received a five-year warrant to purchase 45,843 shares at a per share exercise price of $3.003.

Warrants (1)-(5) and (7)-(12) are exercisable by paying cash or, solely in the absence of an effective registration statement or prospectus, by cashless exercise for unregistered shares of common stock. The exercise price of the warrants is subject to standard antidilutive provision adjustment in the case of stock dividends or other distributions on shares of common stock or any other equity or equity equivalent securities payable in shares of common stock, stock splits, stock combinations, reclassifications or similar events affecting our common stock, and also, subject to limitations, upon any distribution of assets, including cash, stock or other property to our stockholders. The exercise price of the warrants is not subject to “price-based” anti-dilution adjustment. We have determined that these warrants related to issuance of common stock are subject to equity treatment because the warrant holder has no right to demand cash settlement and there are no unusual anti-dilution rights.

We have determined that warrants (6) are not considered indexed to our common shares under ASC 815-40, and require separate accounting as derivative instruments with changes in fair value recognized in earnings each period. The warrants contain a provision whereby the warrant exercise price would be decreased in the event that future common stock issuances are made at a price less than the then exercise price. Due to the potential variability of their exercise price, these warrants do not qualify for equity treatment, and therefore are recognized as a liability. The warrant liability is adjusted to fair value each reporting period, and any change in value is recognized in the statement of operations. Their initial August 9, 2013 valuation was determined using the binomial lattice valuation model, including an equal probabilities tree and early exercise factor of 30%, the significant weighted average assumptions for estimating the fair value of these warrants were, respectively, as follows: expected life of five years and two years (these two year warrants expired on August 9, 2015 and are no longer listed in the table of outstanding warrants above); risk free interest rates of 1.36% and 0.32%; expected volatility of 111% and 116% and; dividend yield of 0% and 0%. The initial fair value at August 9, 2013 was estimated to be approximately $4.2 million.

Using the binomial lattice valuation model, including an equal probabilities tree and early exercise factor of 30%, the fair value of these warrant liabilities at December 31, 2013 and December 31, 2014 were, respectively, were $5.7 million and $5.2 million.

Using the binomial lattice valuation model, including an equal probabilities tree and early exercise factor of 30%, the significant weighted average assumptions for estimating the fair value of these warrant liabilities at December 31, 2015 as follows: expected life of 2.6; risk free interest rates of 1.24%; expected volatility of 88% and; dividend yield of 0%. The December 31, 2015 fair value of these warrants was estimated to be $245,000. These warrants were also subject to a price adjustment as the result of our October 14, 2015, which increased their value by $170,000 in the quarter ended December 31, 2015. The fair value of these warrants was reduced by $966,000 during the quarter ended December 31, 2015 and the fair value was reduced by $4.8 million from December 31, 2014 to December 31, 2015 principally due to our reduced market stock price and expiration of unvested warrants.