11. STOCKHOLDERS’ EQUITY

Private Placement

On December 17, 2014, pursuant to subscription agreements entered into with certain accredited investors (the “Subscription Agreements”) the Company completed a private placement of $6,000 of units (the “Units”) at a purchase price of $0.68 per Unit, with each Unit consisting of one share of the Company’s 0% Series A Convertible Preferred Stock (the “Preferred Shares”) and a five year warrant (the “Warrants”) to purchase one share of the Company’s common stock at an initial exercise price of $0.68 per share.

The Preferred Shares are convertible into shares of Common Stock based on a conversion calculation equal to the stated value of the of such Preferred Share, plus all accrued and unpaid dividends, if any, on such Preferred Share, as of such date of determination, divided by the conversion price. The stated value of each Preferred Share is $0.68 and the initial conversion price is $0.68 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of Common Stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series A Convertible Preferred Stock (the “Certificate of Designations”), the Company is prohibited from incurring debt or liens, or entering into new financing transactions without the consent of the lead investor (as defined in the Subscription Agreements) as long as any of the Series A Convertible Preferred Stock is outstanding. The Preferred Shares bear no interest.

The holders of Preferred Shares shall vote together with the holders of Common Stock on all matters on an as if converted basis, subject to certain limitations described in the Certificate of designations preferences and rights of the series A Convertible Preferred Stock, and shall not vote as a separate class. At no time may all or a portion of the Series A Preferred Stock be converted if the number of shares of Common Stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of Common Stock owned by the Holder at such time, the number of shares of Common Stock which would result in the Holder beneficially owning (as determined in accordance with Section 13(d) of the 1934 Act and the rules thereunder) more than 4.99% of all of the Common Stock outstanding at such time; provided, however, that upon the holder may waive the 4.99% limitation at which time he may not own more than 9.99% beneficial ownership. If the Company has not obtained the approval of its shareholders in accordance with NASDAQ Listing Rule 5635(d), then the Company may not issue upon conversion of the Preferred Shares a number of shares of Common Stock, which, when aggregated with any shares of Common Stock (i) issued pursuant to the Subscription Agreement, (ii) underlying the Preferred Shares issued pursuant to the Subscription Agreement; (iii) issuable upon prior exercise of any Warrants issued pursuant to the Subscription Agreement and (iv) issuable pursuant to any warrants issued to any registered broker-dealer as a fee in connection with the issuance of Securities pursuant to the Subscription Agreement, would exceed 19.99% of the shares of Common Stock issued and outstanding as of the Subscription Date, subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the Common Stock that occur after the date of the Subscription Agreement. The Company’s shareholders will vote at the annual shareholders meeting scheduled for March 30, 2015 regarding the allowable conversion in excess of 19.99% of the outstanding common stock of the Company.

The Warrants are exercisable, at any time, following the date the Warrants are issued, at a price of $0.68 per share, subject to adjustment, and expire five years from the date of issuance. The holders may exercise the Warrants for shares of common stock on a cashless basis if there is no effective registration statement, or no current prospectus is available for resale of the warrant shares. The Warrants are subject to certain adjustments upon certain actions by the Company as outlined in the Warrants, including, for twenty-four months following the initial issuance date, the issuance or sale, or deemed issuance or sale, by the Company of shares of its Common Stock at a per share price that is less than the exercise price then in effect, as a result of which the exercise price shall be reduced to such lower price, subject to certain exceptions. The exercise price is also adjustable down to $0.34 per share if costs related to outstanding litigation exceed certain thresholds outlined in the agreement.

The proceeds of the offering and certificates representing the Preferred Shares and Warrants underlying the Units issued in the offering were deposited into an escrow account (the “Escrow Amount”) with Signature Bank as the escrow agent (the “Escrow Agent”) pursuant to an escrow agreement (the “Escrow Agreement”) dated December 17, 2014, by and between the Company, the lead investor in the unit financing. Upon the closing of the Private Placement on December 17, 2014 (such date, the “Closing Date”), $1,000 of the Escrow Amount was released by the Escrow Agent to the Company in exchange for the release of $1,000 of Units by the Securities Escrow Agent. Following the Closing Date, provided that the approval of NASDAQ and the Company’s stockholders has been obtained, in one or multiple tranches, the remaining $5,000 may be released (a “Subsequent Release”) by the Escrow Agent to the Investors in exchange for the release of $5,000 of Units by the Securities Escrow Agent, if either, (i) the lead investor has approved the release, (ii) the approval of the requisite number of Investors has been obtained, (iii) the Company has executed definitive binding documents for certain transactions, as described in the Subscription Agreements, and such transaction(s) are to close contemporaneously with the release, following approval by the Company’s stockholders or (iv) the following conditions are present: (a) nine months has elapsed from the Closing Date and release is approved by each of the directors appointed at closing (being the non-continuing directors); (b) no subsequent release of the Escrow Amount has been consummated; and (c) no more than $1,000 is released (the “Release Conditions”). The holders of the preferred shares issued and held in escrow can vote the shares subject to the limitations described below. The price of the securities issued in the offering were below the book value per share of the Company’s stock prior to the offering. Therefore, the Company is seeking shareholder approval for the conversion of the full amount of preferred stock and exercise of warrant shares issued in the offering to comply with NASDAQ listing rule 5635(d) rules that require shareholder approval of stock issuances representing more than 19.99% of the Company’s outstanding shares at a price below the fair market value per share or book value per share. In the event that on and as of the twelve month anniversary of the Closing Date none of the Release Conditions have been satisfied, the Escrow Agent shall return $5,000 to the Investors, without interest or deduction, and the Securities Escrow Agent shall return the Units to the Company for cancellation.

The Company received net proceeds of $801 for the units released by the Escrow Agent, net of offering costs, and has accounted for each of the preferred shares released by the Escrow Agent, the warrants released by the Escrow Agent and the Units remaining in escrow as freestanding instruments.

The Company has evaluated the guidance ASC 480-10 Distinguishing Liabilities from Equity and ASC 815-40 Contracts in an Entity’s Own Equity to determine the appropriate classification of the instruments. The exercise price of the released warrants can be adjusted downward if the Company issues securities at a price below the initial exercise price and in certain other circumstances outside the control of the Company and therefore contain contingent settlement terms not indexed solely to the Company’s own shares. Accordingly, $603 of net proceeds were recorded as a derivative liability representing the fair value of the warrants at issuance as described in Note 3 and $120 of offering costs allocated to the warrants and were expensed. The Company will re-measure the fair value of the warrants at each reporting date and record related gains or losses in its statement of operations. In the three months ended January 31, 2015, the Company recorded a change in fair value of $779 related to the increase in the fair value of the warrants during the period.

The remaining net proceeds of $318 were allocated to the preferred shares. The Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares as they are convertible only at the option of the holder, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the convertible preferred shares are considered equity hosts and recorded in stockholder’s equity. As of January 31, 2015, the preferred shares are convertible into 1,470,588 shares of common stock based on the current conversion rate, limited to 1,413,595 shares, based on the limitations on conversion currently imposed by NASDAQ rules prior to the receipt of stockholder approval to allow for the full conversion of the preferred shares and warrants.

As a result of the allocations, described above, the preferred shares are deemed to have a beneficial conversion feature at issuance amounting to $397, which was recorded in stockholders equity and immediately charged as a dividend in determining net loss attributable to common shareholders.

Approval of the Company shareholders and obtaining NASDAQ approval to allow for the full conversion of the Units pursuant to NASDAQ rules, are events that are beyond the Company’s control, therefore the remaining Units and cash held in escrow are recorded as offsetting amounts in temporary equity at the original purchase price and maximum refundable amount if approval of the Company’s shareholders and NASDAQ is not obtained of $5,000, net of cash proceeds of $5,000 held in escrow. Not taking into account the limitations on conversion currently imposed by the NASDAQ rules, the preferred shares under the escrowed units would be convertible into 7,352,939 shares of common stock based on the current conversion rate and the warrants under the escrowed units are exercisable for 7,352,939 shares of common stock based on the current exercise price. As of January 31, 2015, the aggregate intrinsic value of the convertible preferred shares and warrants held in escrow, based on the price of the Company’s common shares on that date, was approximately $7,647.

In connection with the private placement, the Company also entered into a Registration Rights Agreement, with the investors pursuant to which the Company agreed to use its best efforts to file by March 31, 2015 a registration statement covering the resale of the shares of common stock issuable upon exercise or conversion of the securities and to maintain its effectiveness until all such securities have been sold or may be sold without restriction. In the event a registration statement covering such shares of common stock is not effective, the Company is required to pay to the investors on a monthly basis an amount equal to 1% of the investors’ investment.