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Equity

12 Months Ended

Dec. 31, 2014

Convertible Preferred Stock

Series A

On September 24, 2008 the Company issued 826,000 shares of Series-A Convertible Preferred Stock (“Series A Preferred Stock”) to its Chief Executive Officer at a price of $3.63 per share for a total of $3,000,000. Dividends accrue daily on the Series A Preferred at a rate of 10% and are payable only when, and if, declared by the Company’s Board of Directors, quarterly in arrears. The Company paid $225,000 and accrued $75,000 in Series-A preferred stock dividends for the year ended December 31, 2014 and paid $300,000 in Series-A preferred stock dividends for the year ended December 31, 2013.

The Series A Preferred Stock may be converted into common stock at the rate of one share of common for each share of Series A Preferred Stock. Since September 2010, the Company has had certain rights to cause conversion of all of the shares of Series A Preferred Stock outstanding. Since September 2012, the Company may redeem, subject to board approval, all of the shares of Series A Preferred Stock then outstanding at a price equal to the greater of (i) 130% of the purchase price plus all accrued and unpaid dividends and (ii) the fair market value of such number of shares of common stock which the holder of the Series A Preferred Stock would be entitled to receive had the redeemed Series A Preferred Stock been converted immediately prior to the redemption. In the event of a liquidation of the Company, the holder of the Series A and (Series B) preferred stock shall be entitled to receive in preference to the holders of the common stock, the original amount invested in the preferred stock plus any declared but unpaid dividends.

The Company reports the Series A Preferred Stock on the Company’s consolidated balance sheet within stockholders’ equity.

Series B

On June 20, 2014, as part of a plan to regain compliance with The Nasdaq Capital Market’s (“ Nasdaq ”) continued listing requirements that a listed company have not less than $2.5 million in shareholders’ equity, the Company issued 797,000 of Series-B Convertible Preferred Stock (“Series B Preferred Stock”) to its Chief Executive Officer at a price of $2.51 per share in exchange for the cancellation of $2,000,000 of outstanding principal owed to its Chief Executive Officer under a certain Revolving Promissory Note dated March 26, 2014. The Audit Committee of the Board of Directors of the Company negotiated and unanimously approved the transaction.

The per share price was determined as the greater of (i) the average closing bid price of a share of the Company’s common stock reported by Nasdaq for the 30 trading days ending two trading days prior to the date of the Series B Preferred Stock agreement and (ii) 10% above the closing bid price of the Company’s common stock on the date of the Series B Preferred Stock agreement. Accordingly, the per share price was set at $2.51 (“Purchase Price”), corresponding to 10% above the closing bid price on June 20, 2014. Pursuant to the terms of the Series B Preferred Stock agreement, the Company also granted its Chief Executive Officer certain registration rights in the event the Company elects to file a registration statement with the Securities and Exchange Commission relating to an offering of its equity securities under the Securities Act of 1933, as amended.

The Series B Preferred Stock may be converted into shares of common stock on a one-to-one ratio, subject to customary anti-dilution provisions. The Series B Preferred Stock will pay a quarterly dividend, which will accrue at an annual rate of 7%, subject to certain rate adjustments as provided for under the agreement, until June 20, 2016 and at an annual rate of 10% thereafter. The Company’s Chief Executive Officer may convert up to 50% of the Series B shares into shares of common stock at any time until June 20, 2015, and thereafter may convert 100% of his shares of the Series B Preferred Stock into shares of common stock. Following June 20, 2016, each and every then outstanding share of Series B Preferred Stock is subject to mandatory and automatic conversion into shares of common stock if the closing price of the common stock as reported by the principal exchange or quotation system on which such Common Stock is traded or reported exceeds 300% of the then current conversion price for 30 consecutive trading days. The Company may redeem up to 50% of the shares of the outstanding Series B Preferred Stock at any time on or prior to December 17, 2014 at a price equal to 110% of the Purchase Price, plus an amount equal to any unpaid and accrued dividends. At any time after December 17, 2014 and prior to June 20, 2015, the Company may redeem up to 50% of the shares of the outstanding Series B Preferred Stock minus the number of shares redeemed in any First Partial Redemption, at a price equal to 130% of the Purchase Price, plus an amount equal to any unpaid and accrued dividends. Additionally, after June 20, 2015, the Company may redeem all of the outstanding shares of the Series B Preferred Stock issued at a price per share equal to 300% of the purchase price. The Series B Preferred Stock ranks senior to the Common Stock and on parity with the Company’s Series A Convertible Preferred Stock. In the event of a liquidation of the Company, the holder of the Series B and (Series A) preferred stock shall be entitled to receive in preference to the holders of the common stock, the original amount invested in the preferred stock plus any declared but unpaid dividends.

The Company reports the Series B Preferred Stock on the Company’s consolidated balance sheet within stockholders’ equity at the amount of net proceeds received less an imputed dividend cost. The imputed dividend cost of $110,000 was the result of the preferred stock having a dividend rate during the first two years after its issuance (7%) that is lower than the rate that becomes fixed (10%) after the initial two year period. The imputed dividend cost of $110,000 will be amortized over the first two years from the date of issuance and is based upon the present value of the dividend discount using a 10% yield. The Company amortized $30,000 related to the imputed dividend cost. The Company paid $35,000 and accrued $35,000 in Series-B preferred stock dividends for the year ended December 31, 2014.

Shareholders' Equity and Share-based Payments

Equity Plans

Share-Based Awards

Compensation costs in 2014 and 2013 include compensation costs for all share-based payments granted to employees and directors based on the grant date fair value estimated.

As of December 31, 2014, the total unrecognized compensation cost related to non-vested options amounted to $186,000, which is expected to be recognized over the options’ remaining vesting periods of 2.34 years. No income tax benefit was realized by the Company in the year ended December 31, 2014 as the Company maintains a full valuation allowance on its net deferred tax asset.

The Company has Stock Option Plans (the “Plans”) under which incentive and non-qualified stock options may be granted to its employees, officers, directors and others. Generally, incentive stock options are granted at fair value, become exercisable over a four-year period, and are subject to the employee’s continued employment. Non-qualified options are granted at exercise prices determined by the Board of Directors and vest over varying periods. A summary of the status of the Company’s stock options as of December 31, 2014 and 2013 and changes during the years then ended are as follows:

	OPTIONS OUTSTANDING				OPTIONS EXERCISABLE
		Shares		Wtd. Avg. Exercise Price Per Share		Shares	Wtd. Avg. Exercise Price Per Share

Balance, December 31, 2012		708,000		$ 4.12		618,000	$ 4.23
Granted		80,000		2.69
Cancelled		(94,000	)	4.56
Exercised		-		-
Expired		(28,000	)	3.26

Balance, December 31, 2013		666,000		$ 3.92		482,000	$ 4.23
Granted		120,000		2.61
Cancelled		(91,000	)	3.05
Exercised		-		-
Expired		(6,000	)	8.00
Balance, December 31, 2014		689,000		$ 3.78		515,000	$ 4.10

Including other existing plans, there are 370,000 shares available for granting future options as of December 31, 2014. It is the Company’s policy to issue shares from authorized but unissued common stock when stock options are exercised.

The following table summarizes outstanding options that are vested and expected to vest under the Company’s stock option plans as of December 31, 2014:

	Number of Shares	Weighted Average Exercise Price Per Share	Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value

Outstanding Options	689,000	$3.78	5.22	$2,000

Vested and Expected to Vest	639,000	$3.86	4.95	$1,000
Options Exercisable	515,000	$4.10	4.12	-

The total fair value of shares vested for the years ended December 31, 2014 and 2013 was $139,000 and $181,000, respectively.

A summary of the status of the Company’s nonvested share options as of December 31, 2014 is presented below:

Non Vested Shares	Shares	Wtd. Avg. Grant Date Fair Value
Nonvested at December 31, 2013	184,000	$2.18
Granted	120,000	1.92
Vested	(67,000)	2.10
Forfeited or expired	(63,000)	2.00
Nonvested at December 31, 2014	174,000	$2.10

The following table shows total share-based compensation expense included in the consolidated statement of operations:

Year Ended	December 31, 2014	December 31, 2013
Cost of subscriptions, services and maintenance	$ 27,000	$ 25,000
Product development	3,000	3,000
Sales and marketing	-	4,000
General and administrative	126,000	150,000
Pre-tax share-based compensation	156,000	182,000
Income tax benefit	-	-
Stock-based compensation expense, net	$ 156,000	$ 182,000