Note 5: Stockholders’ Equity

Series A preferred shares

On November 12, 2014 and February 2, 2015, the Company completed a private placement of an aggregate of 626,600 shares of its Series A Preferred Stock (“Series A Stock”) together with warrants to purchase shares of its common stock (“Preferred Warrant”) at a price of $5.00 per share, in accordance with the Series A Preferred Stock Purchase Agreement dated October 20, 2014 (the “Purchase Agreement”). The aggregate net proceeds to the Company from the sale of the Series A Stock and Preferred Warrant, after deducting the estimated offering expenses incurred by the Company were approximately $2,833,000. From the date of respective closings and prior to October 20, 2019 (the “Put/Call Exercise Period”), the investors may exercise a right to purchase and require the Company to sell up to an additional 673,400 shares of Series A Stock. If the investors have not exercised this right during the Put/Call Exercise Period, the Company may exercise a right to cause and require the investors to purchase up to an additional 673,400 shares of Series A Stock, for an aggregate purchase price of $3,367,000. In September 2015, all the residual call options were removed from the Preferred Series A Stock Purchase Agreements. Holders of the Series A Stock shall initially have the right to convert such shares of Series A Stock into the number of authorized but previously unissued shares of the Company’s common stock obtained by dividing the stated value of each share of Series A ($5.00) by $2.00. For each share of Series A Stock, the investors will receive 2.5 Preferred Warrants to purchase the Company’s common stock at an exercise price of $2.50 per share. The Preferred Warrants are exercisable immediately for a period of five years from the date of closing. The exercise price of the Preferred Warrants is subject to adjustments in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The exercisability of the Preferred Warrants may be limited if upon exercise, the warrant holder or any of its affiliates would beneficially own more than 4.99% of the Company’s Common Stock. The Holders of the Series A Stock will receive preferential cumulative dividends at the rate of 8% per annum (equivalent to a fixed annual payment of $0.40 per share). The dividends are payable in shares of common stock and shall be valued at the volume weighted average price of the Company’s common stock over the ten (10) consecutive trading days ended on the second trading day immediately before the dividend payment date.

In September 2015, as a condition of the sale of the approximately 400,000 remaining shares of Series A Stock held by Isaac Capital Group to a group of independent accredited investors, all the residual call options were removed from the Preferred Series A Stock Purchase Agreements.

In accordance with the Preferred Series A Stock Purchase Agreement, on October 30, 2015, investors in the Series A Preferred Stock exercise a right to purchase 20,000 shares of Series A Preferred Stock and warrants, gross proceeds of the transaction was $100,000.

During the six months ended October 31, 2015, holders of Preferred Series A Stock converted 102,000 Preferred Series A shares into 510,000 of Common Stock. The converted value for each Preferred Series A Share is approximately $2.96 which resulted in approximately $302,000 reduction to Preferred Stock and approximately $208,000 reduction to Additional Paid in Capital in the October 31, 2015 condensed consolidated balance sheet.

Dividends recorded in the three and six months ended October 31, 2015 were approximately $59,000 and $122,000, respectively. The Board of Directors authorized accumulated dividends from the date of Preferred Series A Stock issuance to July 31, 2015 be paid in the form of Common Stock. This resulted in the issuance of 92,456 Common Shares and a reduction of accumulated dividends of approximately $174,000 and offsetting increase of approximately $82,000 in Additional Paid in Capital in the accompanying condensed balance sheet.

Common Stock

On July 29, 2015, the Company entered into separate securities purchase agreements with five (5) accredited investors for the issuance and sale of an aggregate of 500,000 shares of its common stock, par value $1.00 per share at a per share price of $1.00 or an aggregate purchase price of $500,000.

On August 12, 2015 the Company received notification from NASDAQ that the financing completed in January 2015 in which the Company’s Chairman and Chief Executive Officer participated resulted in the purchase of the Company’s common stock at a discount to market price, which represented equity compensation and therefore requires shareholder approval. On August 19, 2015 the Company’s Chairman and Chief Executive Officer surrendered 7,265 common shares such that the investment would have been made at the then-market value.

During the three and six months ended October 31, 2015, the Company granted 25,000 and 54,667 restricted shares of its common stock with a fair value of approximately $38,000 and $88,000, respectively to certain executive officers. The fair value of these restricted shares is estimated on the date of grant using the closing market price as listed on the NASDAQ.

Stock-based compensation – Options

During three and six months ended October 31, 2015, the Company granted stock option to purchase 72,000 and 238,667 shares of common stock to certain employees, officers and board of directors of the Company. The Company’s condensed consolidated statements of operations for the three and six month periods ended October 31, 2015 includes approximately $22,000 and $185,000 of stock-based compensation expense, respectively. The three and six month periods ended October 31, 2014 includes approximately $5,000 and $9,000 of stock-based compensation expense, respectively. As of October 31, 2015, there was approximately $34,000 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of approximately twenty-two months.

The fair value of each stock option granted during the six months ended October 31, 2015 is estimated on the date of grant using the Black-Scholes option pricing model using the following assumptions:

The Company calculated stock-based compensation expense using a 5% forfeiture rate. There were no stock options granted during the three and six months ended October 31, 2014.

A summary of option activity for the six months ended October 31, 2015 is as follows:

b. Other Stock Options

On June 30, 2008, the Company granted options to purchase 8,333 shares of the Company’s common stock to a privately held company in exchange for certain patents and other intellectual property. The options granted are exercisable at a price of $15.60 per share, which was the fair value at the date of grant, were 100% exercisable on the date of grant and expire ten years after the date of grant.

Warrants

At October 31, 2015 the Company had 3,358,275 warrants outstanding with exercise prices between $2.00 and $13.56. A summary of warrant activity for the six months ended October 31, 2015 is as follows: