EQUITY

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

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”), redeemable at the option of the Company, outstanding as of September 30, 2015 and December 31, 2014.  At September 30, 2015 and December 31, 2014, the Company had cumulative undeclared dividends of approximately $21,000 and $8,000, respectively.  There were no conversions of Series B Preferred into Common Stock during the nine months ended September 30, 2015 or 2014.

Series E Convertible Preferred Stock

 On January 29, 2015, the Company filed the Certificate of Designations, Preferences, and Rights of the Series E Convertible Preferred Stock (“Certificate of Designations”) with the Delaware Secretary of State, designating 12,000 shares of the Company’s preferred stock, par value $0.01 per share, as Series E Convertible Preferred Stock (“Series E Preferred”). Shares of Series E Preferred accrue dividends at a rate of 8% per annum if the Company chooses to pay accrued dividends in cash, and 10% per annum if the Company chooses to pay accrued dividends in shares of Common Stock. Each share of Series E Preferred has a liquidation preference of $1,000 per share and is convertible, at the option of the holder, into that number of shares of the Company’s Common Stock equal to the Liquidation Preference, divided by $1.90.

Any time after the six-month period following the Issuance Date, the Company may redeem all or a portion of the Series E Preferred outstanding upon thirty (30) calendar days prior written notice (the “Company's Redemption Notice”) in cash at a price per share of Series E Preferred equal to 110% of the Liquidation Preference Amount plus all accrued and unpaid dividends.  Also, simultaneous with the occurrence of a Change of Control transaction, the Company, at its option, shall have the right to redeem all or a portion of the outstanding Series E Preferred in cash at a price per share of Series E Preferred equal to 110% of the Liquidation Preference Amount plus all accrued and unpaid dividends.

In February 2015 the Company consummated a registered direct offering conducted without an underwriter or placement agent. In connection therewith, the Company issued 12,000 shares of Series E Preferred to certain investors at a price of $1,000 per share, with each share convertible into 526.32 shares of the Company’s Common Stock at $1.90 per share (the “Series E Financing”).

The Company had 12,000 and 0 shares of Series E Preferred outstanding as of September 30, 2015 and December 31, 2014, respectively.  At September 30, 2015 and December 31, 2014, the Company had cumulative undeclared dividends of approximately $0.  There were no conversions of Series E Preferred into Common Stock during the three and nine months ended September 30, 2015. The Company issued the holders of Series E Preferred 195,577 shares of Common Stock on September 30, 2015 as payment of dividends due on this date. For the nine month period ended September 30, 2015, the Company has issued the holders of Series E Preferred 478,664 shares of Common Stock as payment of dividends due.

Common Stock

 The following table summarizes Common Stock activity for the nine months ended September 30, 2015:

	Common Stock
Shares outstanding at December 31, 2014		93,507,150
Shares issued pursuant to payment of stock dividend on Series E Preferred		478,664
Shares issued pursuant to options exercised for cash		39,705
Shares issued pursuant to cashless warrants exercised		45,376
Shares outstanding at September 30, 2015		94,070,895

 During the nine months ended September 30, 2015, the Company issued 39,705 shares of Common Stock pursuant to the exercise of 39,705 options for cash proceeds of approximately $34,000 and issued 45,376  shares of Common Stock pursuant to the cashless exercise of 108,334 warrants. Also during the nine months ended September 30, 2015, the Company issued 478,664 shares of Common Stock in payment of the accumulated Series E Preferred dividends due and payable as of September 30, 2015.

Warrants

 The following table summarizes warrant activity for the following periods:

	Warrants			Weighted- Average Exercise Price
Balance at December 31, 2014		977,778		$	1.22
Granted		—		$	—
Expired / Canceled		(402,778	)	$	1.90
Exercised		(108,334	)	$	1.01
Balance at September 30, 2015		466,666		$	0.68

During the nine months ended September 30, 2015, there were 108,334 warrants exercised on a cashless basis resulting in the issuance of 45,376 shares of the Company’s Common Stock. Also during the nine months ended September 30, 2015, 402,778 warrants expired.

During the nine months ended September 30, 2015, the Company modified 200,000 warrants previously issued to a consultant by eliminating certain performance condition requirements resulting in such warrants vesting pursuant to the passage of time. The Company determined the modification date fair value of the vested warrants using the Black-Scholes option valuation model and recorded approximately $80,000 in expense for the nine months ended September 30, 2015. The Company used the following assumptions in the application of the Black-Scholes option valuation model: an exercise price of $1.72, a term of 0.77 years, a risk free interest rate of 2.58%, a dividend yield of 0%, and volatility of 64%. Such expense is recorded in the Company’s Condensed Consolidated Statement of Operations as a component of sales and marketing expense.

As of September 30, 2015, warrants to purchase 466,666 shares of Common Stock at prices ranging from $0.50 to $1.10 were outstanding. All warrants are exercisable as of September 30, 2015, and expire at various dates through September 2017, with the exception of an aggregate of 150,000 warrants, which become exercisable only upon the attainment of specified events. The intrinsic value of warrants outstanding at September 30, 2015 was approximately $384,000.

 Stock-Based Compensation

 As of September 30, 2015, the Company had one active stock-based compensation plan for employees and nonemployee directors, which authorizes 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-valuation 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 $234,000 and $503,000 for the three and nine months ended September 30, 2015, respectively. 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.

ASC No. 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-valuation 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-valuation 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, 2015 and 2014 ranged from 77% to 121%. 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, 2015 and 2014 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, 2015 and 2014 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, 2014		4,057,296		$	1.06
Granted		1,670,000		$	1.74
Expired/Cancelled		(325,622	)	$	2.03
Exercised		(39,705	)	$	0.87
Balance at September 30, 2015		5,361,969		$	1.21

 The intrinsic value of options exercised during the nine months ended at September 30, 2015 was approximately $25,000. The intrinsic value of options exercisable at September 30, 2015 was approximately $2,181,000.  The aggregate intrinsic value for all options outstanding as of September 30, 2015 was $2,222,000. The weighted-average grant-date per share fair value of options granted during the nine months ended September 30, 2015 was $1.29. At September 30, 2015, the total remaining unrecognized compensation cost related to unvested stock options amounted to approximately $1,765,000 which will be recognized over a weighted-average period of 2.5 years.

In September 2015, the Company issued an aggregate of 425,000 stock options to purchase shares of the Company’s common stock to certain members of the Company’s management team.  Such options contain certain performance conditions affecting the vesting of these options.  The Company evaluated the options using the guidance in ASC No. 718, Compensation – Stock Compensation, which requires accruals of compensation cost for awards with performance conditions based on the probable outcome of the performance condition.  Accordingly the Company has not accrued any compensation cost for the three and nine months ended September 30, 2015 based on its assessment of the achievement of the performance condition.

 In December 2014, the Company issued 94,116 shares of its Common Stock to certain members of the Company’s Board of Directors as compensation to be rendered through December 2015. Such shares are forfeitable should the Board members’ services be terminated. 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 to be rendered through December 2014. Pursuant to these issuances, the Company recorded approximately $54,000 and $162,000 as compensation expense for the three and nine months ended September 30, 2015, respectively, and $60,000 and $179,000 as compensation expense for the three and nine months ended September 30, 2014, respectively.

 In September 2015, the Company issued an aggregate of 144,000 options to purchase shares of the Company’s stock to certain members of the Company’s Board of Directors in return for their service from January 1, 2016 through December 31, 2016.  Such options will vest at the rate of 12,000 per month on the last day of each month during the 2016 year.  The options have an exercise price of $1.73 per share and a term of 10 years. The Company will begin recognition of compensation based on the grant-date fair value ratably over the 2016 requisite service period.

 Stock-based compensation related to equity options and restricted stock grants has been classified as follows in the accompanying condensed consolidated statements of operations (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Cost of revenues	$	5	$	3	$	10	$	9
General and administrative		180		140		433		425
Sales and marketing		54		34		116		105
Research and development		49		32		106		95
Total	$	288	$	209	$	665	$	634