EQUITY

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

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”. 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 Stock (“Series B Preferred”) outstanding as of December 31, 2016 and 2015. At December 31, 2016 and 2015, the Company had cumulative undeclared dividends of approximately $8,000 ($0.03 per share). There were no conversions of Series B Preferred into Common Stock during the years ended December 31, 2016, 2015 and 2014. The Company paid dividends of approximately $51,000 to the holders of our Series B Preferred in 2016,2015 and 2014.

Series E Convertible Redeemable Preferred Stock

On January 29, 2015, the Company filed the Certificate of Designations of the Series E Preferred Stock 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 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. The Series E Preferred shall be subordinate to and rank junior to the Company's Series B Preferred and all indebtedness of the Company. Each holder of the Series E Preferred is entitled to vote on all matters, together with the holders of Common Stock, on an as converted basis.

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 day’s 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.

On December 29, 2016, the Company filed Amendment No. 1 to the Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock (the “Series E Amendment”) with the Delaware Division of Corporations. The Series E Amendment made the following changes to the Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock: (i) the Company may only make dividend payments in cash received from positive cash flow from operations; (ii) beginning on July 1, 2017, in the event the Company pays accrued dividend payments in shares of Common Stock for more than four consecutive quarterly periods, holders of shares of Series E Preferred will have the right to immediately appoint two designees to the Company’s Board of Directors (the “ Director Appointment Provision ”); (iii) dividend payments incurred on December 31, 2016 and March 31, 2017 may be paid in shares of Common Stock, without triggering the Director Appointment Provision; and (iv) the term Permitted Indebtedness (as defined in the Series E Certificate of Designations) was revised to cover permitted borrowings of up to $6.0 million.

The Company had 12,000 shares of Series E Preferred outstanding as of December 31, 2016 and 2015, respectively.  At December 31, 2016 and 2015, the Company had cumulative undeclared dividends of approximately $0 and $240,000, respectively.  There were no conversions of Series E Preferred into Common Stock during the twelve months ended December 31, 2016. For the twelve-month period ended December 31, 2016, the Company issued the holders of Series E Preferred 950,362 shares of Common Stock as payment of dividends due, on a quarterly basis, for the twelve months ended December 31, 2016. For the twelve months ended December 31, 2015, the Company paid the holders of our Series E Preferred cash dividends of $240,000 and issued the holders of our Series E Preferred 478,664 shares of common stock as payment of quarterly dividends for the period of January 1, 2015 through September 30, 2016.

Series F Convertible Redeemable Preferred Stock

In September 2016, we filed the Certificate of Designations, Preferences, and Rights of the Series F Convertible Preferred Stock (the “Certificate of Designations”) with the Delaware Division of Corporations, designating 2,000 shares of our preferred stock as Series F Convertible Redeemable Preferred Stock (“Series F Preferred”). Shares of Series F Preferred rank junior to shares of Series B Preferred and Series E Preferred, as well as our existing indebtedness, and accrue dividends at a rate of 10% per annum, payable on a quarterly basis in shares of Common Stock.

Each share of Series F Preferred has a liquidation preference of $1,000 per share (“Liquidation Preference”), and is convertible, at the option of the holder, into that number of shares of the Company’s Common Stock equal to the Series F Liquidation Preference, divided by $1.50 (the “Series F Conversion Shares”).

Any time after the six-month period following the issuance date, in the event the arithmetic average of the closing sales price of the Company’s Common Stock is or was at least $2.50 for twenty (20) consecutive trading days, the Company may redeem all or a portion of the Series F Preferred outstanding upon thirty (30) calendar days prior written notice in cash at a price per share of Series F Preferred equal to 110% of the Series F Liquidation Preference, plus all accrued and unpaid dividends.  Also, simultaneous with the occurrence of a Change of Control transaction (as defined in the Certificate of Designations), the Company, at its option, shall have the right to redeem all or a portion of the outstanding Series F Preferred in cash at a price per share of Series F Preferred equal to 110% of the Liquidation Preference Amount plus all accrued and unpaid dividends.

In September 2016, the Company offered and sold 2,000 shares of Series F Preferred for $1,000 per share (the “Series F Financing”), resulting in gross proceeds to the Company of $2,000,000 net of issuance costs of approximately $21,000.

The Company had 2,000 shares of Series F Preferred outstanding as of December 31, 2016 and no shares outstanding at December 31, 2015.  At December 31, 2016, the Company had cumulative undeclared dividends of $0.  There were no conversions of Series F Preferred into Common Stock during the year ended December 31, 2016. The Company issued the holders of Series F Preferred 48,513 shares of Common Stock as payment of dividends due, on a quarterly basis, for the twelve months ended December 31, 2016.

Series G Convertible Redeemable Preferred Stock

In December, 2016, the Company filed the Certificate of Designations, Preferences, and Rights of the Series G Convertible Preferred Stock with the Delaware Division of Corporations, designating 6,120 shares of the Company’s preferred stock, par value $0.01 per share, as Series G Convertible Preferred Stock (“Series G Preferred”). Shares of Series G Preferred rank junior to the Company’s Series B Preferred, Series E Preferred, Series F Preferred as well as the Company’s existing indebtedness, and accrue dividends at a rate of 10% per annum, payable on a quarterly basis in shares of the Company’s common stock, par value $0.01 per share. Each share of Series G Preferred has a liquidation preference of $1,000 per share (“Series G Liquidation Preference”), and is convertible, at the option of the holder, into that number of shares of the Company’s Common Stock equal to the Series G Liquidation Preference, divided by $1.50.

On December 29, 2016, the Company accepted subscription forms from certain accredited investors to purchase a total of 1,625 shares of Series G Preferred for $1,000 per share (the “Series G Financing”), resulting in gross proceeds to the Company of $1,625,000, net of issuance cost of approximately $11,000. In addition, the Company also received executed exchange agreements from the Investors pursuant to which the Company exchanged an aggregate total of 3,383,830 shares of common stock held by the Investors for an aggregate total of 4,396 shares of Series G Preferred.

The Company had 6,021 shares of Series G Preferred outstanding as of December 31, 2016 and no shares outstanding at December 31, 2015.  At December 31, 2016, the Company had cumulative undeclared dividends of $0.  There were no conversions of Series G Preferred into Common Stock during the year ended December 31, 2016. The Company issued the holders of Series G Preferred 3,770 shares of Common Stock as payment of dividends due, on a quarterly basis, for the twelve months ended December 31, 2016.

Common Stock

The following table summarizes outstanding Common Stock activity for the following periods:

	Common Stock
Shares outstanding at December 31, 2013		87,548,613
Shares issued pursuant to warrants exercised for cash		4,742,632
Shares issued pursuant to cashless warrants exercised		868,565
Conversion of related-party notes payable into Common Stock		154,607
Shares issued as compensation in lieu of cash		94,116
Shares issued pursuant to option exercises		98,617
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 cashless warrants exercised		45,376
Shares issued pursuant to option exercises		39,705
Shares outstanding at December 31, 2015		94,070,895
Shares issued pursuant to payment of stock dividend on Series E Preferred		950,362
Shares issued pursuant to payment of stock dividend on Series F Preferred		48,513
Shares issued pursuant to payment of stock dividend on Series G Preferred		3,770
Shares issued pursuant to cashless warrants exercised		144,459
Shares issued pursuant to option exercises		12,626
Exchange of common shares for Series G Preferred		(3,383,830	)
Shares outstanding at December 31, 2016		91,846,795

Warrants

As of December 31, 2016, warrants to purchase 175,000shares of Common Stock at prices ranging from $0.80 to $1.10 were outstanding. All warrants are exercisable as of December 31, 2016 and expire as of September 1, 2017, with the exception of an aggregate of 150,000 warrants, which become exercisable only upon the attainment of specified events.

The following table summarizes warrant activity for the following periods:

	Warrants			Weighted-  Average  Exercise Price
Balance at December 31, 2013		6,598,416		$	0.63
Granted		302,778		$	2.02
Expired / Canceled		(55,000	)	$	1.10
Exercised		(5,868,416	)	$	0.58
Balance at December 31, 2014		977,778		$	1.22
Granted		—		$	0.00
Expired / Canceled		(419,444	)	$	1.86
Exercised		(108,334	)	$	1.01
Balance at December 31, 2015		450,000		$	0.67
Exercised		(275,000	)
Balance at December 31, 2016		175,000

During the year ended December 31, 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 year ended December 31, 2015. The Company used the following assumptions in the application of the Black-Scholes option valuation modes: 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 consolidated statement of operations as a component of sales and marketing expense. There were no warrant modifications during the year ended December 31, 2016.

During the year ended December 31, 2016, there were 275,000 warrants exercised pursuant to cashless transactions resulting in the issuance of 144,459 shares of Common Stock. The intrinsic value of warrants outstanding as of December 31, 2016 was approximately $85,000.