NOTE 12: CONVERTIBLE PREFERRED STOCK AND WARRANTS

On December 21, 2015, a warrant holder surrendered 1,515,152 warrants with a fair value of $272 for 975,000 shares of the Company’s common stock in a noncash transaction.

On November 3, 2015, a preferred stockholder converted 77,174 shares of the Company’s Series A Convertible Preferred Stock at a conversion rate of $0.255 for 260,000 shares of common stock in a noncash transaction.

On October 15, 2015, directly related to the ConeXus merger, we issued 1,664,000 shares of Series A-I Convertible Preferred Stock at $1.00 per share. There were no warrants issued with the Preferred Stock.

In February 2015, we issued 265,000 shares Series A Convertible Preferred Stock at $1.00 per share with detachable five-year warrants to purchase 331,250 common shares at a price of $0.50, subject to adjustment, for $0.3 million. As stated in Note 10, these shares were issued to three purchasers, one of whom was a director of the Company, one of whom was then our Chief Executive Officer and a director of the Company, and one of which was Slipstream Communications, LLC. Net proceeds were $265; the transactions costs were negligible and the Company expensed them immediately. We have determined that the convertible preferred stock issued in February 2015 contained a beneficial conversion feature based on the conversion price per share of $0.29 per share compared to the price on the date of issuance of $0.34. The $0.03 million value of the beneficial conversion feature was recognized as a discount against the carrying value of the preferred stock and a credit to additional paid in capital. Since the preferred stock was convertible at issuance the discount was immediately amortized and preferred stock is credited to recognize the total amount as proceeds from their issuance.

Additionally, in 2015, we issued 87,204 shares of common stock to satisfy outstanding obligations of the Company to an investor.

On August 20, 2014, directly related to the CRI merger, we issued 5,190,000 shares of Series A Convertible Preferred Stock at $1.00 per share. In connection with this issuance, we also issued detachable five-year warrants to purchase 6,487,500 common shares at an as adjusted price of $0.37. Net proceeds were $4.6 million, after transaction costs.

The preferred stock entitles its holders to a 6% cumulative dividend, payable semi-annually in cash or in kind, and may be converted to our common stock at the option of a holder at an as adjusted conversion rate of 0.255 per share. Subject to certain conditions, we may call and redeem the preferred stock after three years. During such time as a majority of the preferred stock sold remains outstanding, holders will have the right to elect a member to our Board of Directors. The holders of the preferred stock will be entitled to vote their shares on an as-converted basis and they will be entitled to a liquidation preference equal to the stated value (i.e., purchase price) of their shares plus any accrued but unpaid dividends thereon.

Subject to certain customary exceptions, the preferred stock has full-ratchet conversion price protection in the event that we issue common stock or common stock equivalents below the conversion price, as adjusted. The warrants issued to purchasers of the preferred stock contain similar full-ratchet exercise price protection in the event that we issue common stock or common stock equivalents below the exercise price, as adjusted, again subject to certain customary exceptions. In the Securities Purchase Agreement, we granted purchaser of the preferred stock certain registration rights pertaining to the shares of our common stock they may receive upon conversion of their preferred stock and upon exercise of their warrants.

We have determined that the convertible preferred stock contained a beneficial conversion feature based on the conversion rate at issuance of 0.40 per share compared to the price at closing of $0.63 per share. The $1.1 million value of the beneficial conversion feature was recognized as a discount against the carrying value of the preferred stock and a credit to additional paid-in capital. The preferred stock became convertible on October 10, 2014 convertible, and accordingly the discount was amortized as an addition to additional paid-in capital over the period from the merger date to October 10, 2014. The preferred stock is classified as temporary equity of $1.5 million, net of the value of the warrants. The convertible preferred stock is redeemable at the option of the holder upon a change in control, as defined. Accordingly, there is no adjustment to the potential redemption price of the discount until it would be probable that a change in control would occur.

As mentioned above, we issued five-year warrants to purchase 6,487,500 common shares at an adjusted price of $0.37 as part of issuing the Series A Convertible Preferred Stock. We account for the warrants as a liability on the consolidated balance sheet, at their estimated fair value. The liability will be marked-to-market each reporting period with the change impacting the statement of operations. We determined the fair value of the warrants at the August 20, 2014 date of issuance was $3.0 million and was $1.9 million at December 31, 2014. The change in value during the period from August 20, 2014 through December 31, 2014 of $1.1 million and from January 1, 2015 to December 31, 2015 was $1.1 million is an increase to income on the statement of operations and was primarily due to the decrease in our share price from $0.63 at issuance to $0.25 and $0.40 at December 31, 2015 and December 31, 2014, respectively.

As addressed in Note 5, the Company issued additional warrant liabilities in 2015. The valuation of these liabilities is based on the Black-Scholes option pricing model (which approximates the binomial model due to probability factors used to determine the fair value), adjusted for the estimated value of the exercise price protection. The table below provides the range of inputs used for the probability weighted Black Scholes valuations when the warrants were issued and at December 31, 2015.

Date	Expected Term at December 31, 2015		Risk Free Interest Rate at Date of Issuance			Volatility at Date of Issuance			Stock Price at Date of Issuance
Issued 8/20/2014		5.00		1.50	%		96.00	%	$	0.63
Issued 2/13/2015		5.00		1.28	%		100.00	%	$	0.34
Issued 5/22/2015		5.00		1.28	%		107.58	%	$	0.29
Issued 10/15/2015		5.00		1.71	%		58.48	%	$	0.22
Issued 10/26/2015		5.00		1.71	%		60.47	%	$	0.21
Issued 12/21/2015		5.00		1.75	%		58.48	%	$	0.21
Issued 12/28/2015		5.00		1.75	%		58.48	%	$	0.16
Year End December 31, 2015		3.64-4.99		1.45%-1.75	%		58.48	%	$	0.25

A summary of outstanding debt and equity warrants is included below:

	Warrants (Equity)						Warrants (Liability)
	Amount		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Amount		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
Balance, January 1, 2014
Assumed as part of CRI merger		2,811,561		7.60		2.11		-		-		-
Warrants issued to Affiliate		1,779,015		0.36		4.64		-		-		-
Warrants issued with convertible preferred stock		-		-		-		6,487,500		0.37		4.64
Warrants issued to financial advisors		-		-		-		527,625		0.50
Balance, December 31, 2014		4,590,576		4.84		3.09		7,015,125		0.50		4.64
Issued with promissory note to CEO as part of ConeXus merger		-		-		-		267,857		0.28		4.79
Warrants issued to financial advisors		-		-		-		1,750,000		0.28		4.62
Warrants isued with Preferred Stock		-		-		-		331,250		0.37		4.13
Warrants issued with Promissory Notes		1,575,210		0.28		4.48		4,423,009		0.28		4.62
Balance, December 31, 2015		6,165,786		0.33		4.04		13,787,241		0.33		4.23