EQUITY

9 Months Ended

Sep. 30, 2014

Notes to Financial Statements

Note 6 - EQUITY

The Company’s Certificate of Incorporation, as amended, authorized the issuance of two classes of stock to be designated “common stock” and “preferred stock”. The preferred stock may be divided into such number of series and with the rights, preferences, privileges and restrictions as the Board of Directors may determine.

Series B Convertible Redeemable Preferred Stock

 The Company had 239,400 shares of Series B Convertible Redeemable Preferred (“Series B Preferred”) outstanding as of September 30, 2014 and December 31, 2013.  At September 30, 2014 and December 31, 2013, the Company had cumulative undeclared dividends of approximately $21,000, respectively.  There were no conversions of Series B Preferred into common stock during the nine months ended September 30, 2014 or 2013.

Common Stock

 The following table summarizes common stock activity for the nine months ended September 30, 2014:

	Common Stock
Shares outstanding at December 31, 2013		87,548,613
Shares issued pursuant to options exercised for cash		88,491
Shares issued pursuant to Related-Party note payable conversion		154,607
Shares issued pursuant to cashless warrants exercised		868,565
Shares issued pursuant to warrants exercised for cash		4,642,632
Shares outstanding at September 30, 2014		93,302,908

 During the nine months ended September 30, 2014, the Company issued 88,491 shares of common stock pursuant to the exercise of 88,491 options for cash proceeds of approximately $59,000.  During the nine months ended September 30, 2014, the Company issued 4,642,632 shares of common stock pursuant to the exercise of 4,642,632 warrants for cash proceeds of approximately $2,798,000. During the nine months ended September 30, 2014, the Company issued 868,565 shares of common stock pursuant to the cashless exercise of 1,125,784 warrants.

Warrants

 The following table summarizes warrant activity for the following periods:

	Warrants			Weighted- Average Exercise  Price
Balance at December 31, 2013		6,598,416		$	0.52
Granted		277,778		$	2.10
Expired / Canceled		(50,000	)	$	1.08
Exercised		(5,768,416	)	$	0.58
Balance at September 30, 2014		1,057,778		$	1.15

During the nine months ended September 30, 2014, the Company issued to certain consultants warrants to purchase an aggregate of 100,000 shares of the Company’s common stock. Such warrants have an exercise prices ranging of $1.83 per share and vest only upon the attainment of specified events. No such events were obtained during the nine months ended September 30, 2014.

During the nine months ended September 30, 2014, the Company issued to existing shareholders and members of our Board of Directors warrants to purchase an aggregate of 177,778 shares of the Company’s common stock. Such warrants have an exercise price of $2.25 per share and expire on March 27, 2015.

During the nine months ended September 30, 2014, there were 4,642,632 warrants exercised for cash resulting in the issuance of 4,642,632 shares of common stock and proceeds to the Company of approximately $2,798,000 and 50,000 warrants that expired. Also during the nine months ended September 30, 2014, there were 1,125,784 warrants exercised on a cashless basis resulting in the issuance of 868,565 shares of the Company’s common stock.

As of September 30, 2014, warrants to purchase 1,057,778 shares of common stock at prices ranging from $0.50 to $2.40 were outstanding. All warrants are exercisable as of September 30, 2014, and expire at various dates through December 2016, with the exception of an aggregate of 380,000 warrants, which become exercisable only upon the attainment of specified events.

During September 2014, warrants to purchase 25,000 shares of the Company’s common stock at an exercise price of $1.10 per share became issuable upon the attainment of certain specified performance criteria.   The Company determined the fair value of the warrants to be approximately $53,000 using the Black-Scholes option-pricing model and has recorded the fair value as a component of general and administrative expense for the three and nine months ended September 30, 2014 in the accompanying condensed consolidated statement of operations.

 Stock-Based Compensation

 As of September 30, 2014, the Company had two active stock-based compensation plans for employees and nonemployee directors, which authorize the granting of various equity-based incentives including stock options and restricted stock. On July 1, 2014, the Company began soliciting written consents from its shareholders to approve an amendment to the Company’s 1999 Stock Option Plan to increase the number of shares authorized for issuance thereunder from approximately 4.0 million to approximately 7.0 million (the “Amendment”).  As of July 21, 2014, the Company had received written consents approving the Amendment from over 50% of the Company’s stockholders. As such, the Amendment was approved.

 The Company estimates the fair value of its stock options using a Black-Scholes option-pricing model, consistent with the provisions of ASC No. 718, Compensation – Stock Compensation. The fair value of stock options granted is recognized to expense over the requisite service period. Stock-based compensation expense is reported in general and administrative, sales and marketing, engineering and customer service expenses based upon the departments to which substantially all of the associated employees report and credited to additional paid-in capital.  Stock-based compensation expense related to equity options was approximately $150,000 and $456,000 for the three and nine months ended September 30, 2014, respectively. Stock-based compensation expense related to equity options was approximately $142,000 and $411,000 for the three and nine months ended September 30, 2013, respectively.

 718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The Company is required to make various assumptions in the application of the Black-Scholes option-pricing model. The Company has determined that the best measure of expected volatility is based on the historical weekly volatility of the Company’s common stock. Historical volatility factors utilized in the Company’s Black-Scholes computations for the nine months ended September 30, 2014 and 2013 ranged from 78% to 135%. The Company has elected to estimate the expected life of an award based upon the SEC approved “simplified method” noted under the provisions of Staff Accounting Bulletin No. 110. The expected term used by the Company during the nine months ended September 30, 2014 and 2013 was 5.9 years. The difference between the actual historical expected life and the simplified method was immaterial.  The interest rate used is the risk free interest rate and is based upon U.S. Treasury rates appropriate for the expected term. Interest rates used in the Company’s Black-Scholes calculations for the nine months ended September 30, 2014 and 2013 was 2.6%. Dividend yield is zero, as the Company does not expect to declare any dividends on the Company’s common stock in the foreseeable future.

 In addition to the key assumptions used in the Black-Scholes model, the estimated forfeiture rate at the time of valuation is a critical assumption.  The Company has estimated an annualized forfeiture rate of approximately 0% for corporate officers, 4.1% for members of the Board of Directors and 6.0% for all other employees.  The Company reviews the expected forfeiture rate annually to determine if that percent is still reasonable based on historical experience.

 A summary of the activity under the Company’s stock option plans is as follows:

	Options			Weighted- Average Exercise Price
Balance at December 31, 2013		3,783,411		$	0.94
Granted		15,000		$	2.31
Expired/Cancelled		(46,250	)	$	1.85
Exercised		(88,491	)	$	0.78
Balance at September 30, 2014		3,663,670		$	0.95

 In December 2013, the Company issued 144,000 shares of its common stock to certain members of the Company’s Board of Directors as compensation for services to be rendered through December 2014. Such shares are forfeitable should the Board members’ service be terminated.  For the three and nine months ended September 30, 2014, the Company recorded $60,000 and $179,000, respectively, as compensation expense.