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 had the right to purchase and require the Company to sell up to an additional 673,400 shares of Series A Stock. If the investors did not exercised this right during the Put/Call Exercise Period, the Company had the 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. Holders of the Series A Stock had 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 received 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 were entitled to receive preferential cumulative dividends at the rate of 8% per annum (equivalent to a fixed annual payment of $0.40 per share). The dividends were payable in shares of Common Stock and were 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 Preferred Stock held by Isaac Capital Group to a group of independent accredited investors, all the residual call options were removed from the Series A Preferred Stock Purchase Agreement.

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

During the nine months ended January 31, 2016, holders of Series A Preferred Stock converted 123,300 Series A Preferred shares into 616,500 of Common Stock. The converted value for each Series A Preferred Share is approximately $2.96 which resulted in approximately $365,000 reduction to the Series A Preferred Stock and a $365,000 offsetting increase to Additional Paid in Capital in the January 31, 2016 condensed consolidated balance sheet.

On January 21, 2016, the holders of Series B Preferred Stock converted 1,125 Series B Preferred shares into 22,500 shares of Common Stock. The converted value for each Series B Preferred Share is approximately $12.20 or $13,725 and resulted in an offsetting increase to Additional Paid in Capital.

Dividends recorded in the nine months ended January 31, 2016 were approximately $122,000. The Board of Directors authorized accumulated dividends from the date of Series A Preferred Stock issuance to October 31, 2015 be paid in the form of Common Stock. This resulted in the issuance of 139,240 Common Shares and a reduction of accumulated dividends of approximately $233,000 and offsetting increase of approximately $233,000 in Additional Paid in Capital in the accompanying condensed balance sheet. . The preferential cumulative dividends accrued at the rate of 8% per annum. The dividends payable were paid in shares of common stock and were 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.

Equity Exchange transactions

On January 15, 2016, Dataram Corporation entered into separate exchange agreements with holders of:

Pursuant to the Exchange Agreements, the Holders exchanged the Exchange Securities for an aggregate of 335,684 shares of the Company’s newly designated Series B Convertible Preferred Stock (the “Preferred Stock”).

As noted in (i) above the Company entered into an agreement with investors who held Preferred Series A Stock and warrants issued with the series A preferred stock. The 523,300 outstanding Preferred Series A shares were exchanged for 214,465 Preferred Series B shares. The exchange was accounted for as an equity-for-equity exchange, with no gain or loss recorded. The issuance date value of the exchanged Preferred Series A Stock of approximately, $1,572,000 was reallocated to Series B Preferred Stock and Additional Paid in Capital. Additionally, the 1,616,500 outstanding Preferred Series A warrants were exchanged for 40,413 shares of Series B Preferred Stock. The exchange was accounted for as an equity-for-equity exchange, with no gain or loss recorded. The issuance date value of the exchanged warrants of $493,060 was reallocated to Series B Preferred Stock and Additional Paid in Capital.

As noted in (ii) above the Company entered into an agreement with the institutional bridge note holders and certain members of management who held warrants issued with the above Convertible Notes Payable whereby the warrants would be exchanged for shares of Series B Preferred Stock. 765,000 of the outstanding warrants were exchanged for 19,125 shares of Series B Preferred Stock. The exchange was accounted for as an equity-for-equity exchange, with no gain or loss recorded. The issuance date value of the exchanged warrants of $233,300 was reallocated to Series B Preferred Stock and Additional Paid in Capital.

As noted in (iii) above the Company entered into an agreement with investors who held warrants issued with the above Common Stock issue dated September 18, 2013. The 263,900 outstanding warrants were exchanged for 6,598 shares of Series B Preferred Stock. The exchange was accounted for as an equity-for-equity exchange, with no gain or loss recorded. The issuance date value of the exchanged warrants of $80,500 was reallocated to Series B Preferred Stock and Additional Paid in Capital.

As contemplated by the Exchange Agreements and as approved by the Company’s Board of Directors on January 21, 2016, the Company filed with the Secretary of State of the State of Nevada, a Certificate of Designation of Preferences, Rights and Limitations of 0% Series B Convertible Preferred Stock (the “Series B Certificate of Designations”). Pursuant to the Series B Certificate of Designations, the Company designated 400,000 shares of its blank check preferred stock as Series B Preferred Stock. Each share of Series B Preferred Stock has a stated value of $12.20 per share. In the event of a liquidation, dissolution or winding up of the Company, each share of Series B Preferred Stock will be entitled to a per share preferential payment equal to the par value. All shares of capital stock of the Company will be junior in rank to Series B Preferred Stock with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding-up of the Company. The Holders will be entitled to receive dividends if and when declared by the Company’s Board of Directors. In addition, the Series B Preferred Stock shall participate on an “as converted” basis, with all dividends declared on the common stock.

Subject to certain limitations as set forth below, each holder may convert the shares of Series B Preferred Stock into such number of shares of common stock based on a conversion ratio, the numerator of which shall be the Base Amount (defined hereafter) and denominator of which shall be the Conversion Price (defined hereafter). “Base Amount” is defined, as of the applicable date of determination, the sum of (1) the aggregate stated value of the Series B Preferred Stock to be converted, plus (2) the accrued and unpaid dividends on Series B Preferred Stock. The “Conversion Price” of the Series B Preferred Stock is initially $0.61.

The Company is prohibited from effecting the conversion of Series B Preferred Stock to the extent that, as a result of such conversion, the holder would beneficially own more than 4.99%, in the aggregate, of the issued and outstanding shares of the Company’s common stock calculated immediately after giving effect to the issuance of shares of Common Stock upon the conversion of the Series B Preferred Stock (the “Maximum Percentage”). A holder may increase or decrease the Maximum Percentage by providing written notice to the Company; provided, that in no event shall the Maximum Percentage exceed 9.99%. If and until it is determined that the Company is required to obtain the approval of its shareholders for the issuance of the Series B Preferred Stock in accordance with NASDAQ Capital Market Rules (“Shareholder Approval”, then the Company, until it has obtained Shareholder Approval, may not issue upon conversion of the Series B Preferred Stock, such number of shares of Common Stock, which, when aggregated with all other shares of Common Stock issued upon conversion of all Series B Preferred Stock, would exceed 19.99% of the shares of Common Stock issued and outstanding as of the initial issuance date of the Series B Preferred Stock.

After giving effect to the transactions of the Exchange Agreements on January 31, 2016, the Company has 4,774,860 shares of common stock issued and outstanding and 334,559 shares of Series B Preferred Stock outstanding convertible into an aggregate of 6,691,170 shares of Common Stock, without giving effect to any Beneficial Ownership Limitation or Exchange Blocker.

Common Stock

On July 31, 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 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. The Company also cancelled the 50,000 warrants associated with the transaction.

On November 5, 2015 the Company issue 40,000 restricted common shares with a fair value of $46,000 to an investor relations firm.

During the three and nine months ended January 31, 2016, the Company granted 370,000 and 424,667 restricted shares of its common stock with a fair value of approximately $222,000 and $310,000, respectively to certain executive officers and directors. The fair value of these restricted shares is estimated on the date of grant using the closing market price as listed on the NASDAQ.

On January 6, 2016 the Company reincorporated in the state of Nevada, the par value of Common Stock was changed from $1.00 to $0.001 per share.

On January 21, 2016, the holders of Series B Preferred Stock converted 1,125 Series B Preferred shares into 22,500 shares of Common Stock. The converted value for each Series B Preferred Share is approximately $12.20 or $13,725.

Stock-based compensation – Options

During three and nine months ended January 31, 2016, the Company granted stock option to purchase nil and 238,667 shares of common stock respectively, to certain employees, officers and board of directors of the Company. The Company’s condensed consolidated statements of operations for the three and nine month periods ended January 31, 2016 includes approximately $3,000 and $188,000 of stock-based compensation expense, respectively. The three and nine month periods ended January 31, 2015 includes approximately $5,000 and $14,000 of stock-based compensation expense, respectively.

On January 19, 2016, the Company entered into exchange agreements (the “Option Exchange Agreements”) with certain of its employees pursuant to which such employees agreed to return options to purchase an aggregate of up to 327,080 shares of common stock in consideration for restricted stock grants (the “Restricted Stock Grants”) in the aggregate amount of 263,206 shares of Common Stock pursuant to the Company’s 2011 Equity Incentive Plan and 2014 Equity Incentive Plan, as amended. The Restricted Stock Grants are vested in full upon issuance.

The Company recorded an additional one time stock based compensation expense of approximately $122,000 as a result of the stock option exchange agreements. As of January 31, 2016, there was no unearned compensation costs related to stock options remaining.

The fair value of each stock option granted during the nine months ended January 31, 2016 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% forefiture rate. There were no stock options granted during the three and nine months ended January 31, 2016.

A summary of option activity for the nine months ended January 31, 2016 is as follows:

b. Other Stock Options

On June 30, 2008, the Company granted options (outside of the plan) 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

On January 15, 2016, the Company entered into separate exchange agreements with various warrant holders, refer to (“Note 5”) Equity Exchange transactions.

At January 31, 2016 the Company had 712,875 warrants outstanding with exercise prices between $2.50 and $13.56. A summary of warrant activity for the nine months ended January 31, 2016 is as follows: