NOTE 12 – SHAREHOLDERS’ EQUITY

Preferred Shares

Series H Preferred Stock

On June 30, 2015, the Company entered into Amendment, Waiver and Exchange Agreements (the “Exchange Agreements”) with certain of its promissory note holders, who held $1,299,000 in principal amount of unsecured promissory notes of the Company. Pursuant to the terms of the Exchange Agreements, the Holders agreed to exchange all of the existing indebtedness for, and the Company agreed to issue to the Holders, an aggregate of 8,435 shares of the Company’s newly designated Series H Convertible Preferred Stock, par value $0.0001 per share (“Series H Preferred Stock”). Each share of Series H is convertible into 100 shares of common stock.

Accounting at issuance

The fair value of the Series H Preferred Stock approximated the carrying value of the promissory note based on the fair market value of the common stock at $1.54 at the date of the transaction and therefore not gain or loss was recorded upon extinguishment of debt.

Conversions of Series H Preferred Stock

For the period from July 2, 2015 to April 30, 2016, holders of Series H preferred stock have converted 5,797 shares of Series H preferred into 579,700 shares of common stock.

Series H-1 Preferred Stock

Between July 14 and July 20, 2015, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with four Investors pursuant to which the Company issued to the Investors an aggregate of 8,532 shares of Series H-1 Preferred Convertible Stock of the Company, par value $0.0001 per share (“Series H-1 Shares”), and warrants to purchase 1,279,759 shares of common stock of the Company , with an exercise price of between $1.63 and $1.66 per share (the “Warrants”). The purchase price for each Series H-1 Share was between $163 and $166 and the purchase price for each warrant was $0.1250 per share of common stock, for an aggregate purchase price for the Series H-1 Shares and Warrants of $1,575,000.

The Company has determined that the Warrants qualify for accounting as equity classification. On the issuance date, the Company estimated the fair value of the Warrants at $1,649,000 under the Black-Scholes option pricing model using the following primary assumptions: contractual term of 5.0 years, volatility rate of 103%, risk-free interest rate of 2% and expected dividend rate of 0%. Based on the Warrant’s relative fair value to the fair value of the Series H-1 Preferred Convertible Stock, approximately $841,000 of the $1,575,000 of proceeds was allocated to the Warrants, creating a corresponding preferred stock discount in the same amount.

Due to the reduction of allocated proceeds to Series H-1 Shares the effective conversion price was approximately $0.80 per share or $704,000 in aggregate. Since the conversion option of the preferred stock was immediately exercisable, the amount allocated to the Beneficial Conversion Feature was immediately accreted to preferred dividends, resulting in an increase in the carrying value of the preferred stock.

Each share of Series H-1 Preferred Stock is convertible into 100 shares of common stock.

For the period from July 20, 2015 to April 30, 2016, holders of Series H-1 preferred stock have converted 413 shares of Series H-1 preferred into 41,300 shares of common stock. The conversion of these shares resulted in a deemed dividend of $41,000.

Conversion of Preferred Shares

For the year ended April 30, 2016 the Company issued approximately 1,408,000 common stock conversion shares, 205,000 common stock make-whole shares and 46,000 common stock dividend shares upon the conversion of series F, F-1, G, G-1, H and H-1 preferred shares. As a result of these conversions, the Company has no remaining Series F, F-1, G or G-1 preferred shares remaining.

Stock-Based Compensation Plans

2014 Equity Incentive Plan

In January 2014, the Company adopted the 2014 Equity Incentive Plan, under which officers, directors, key employees or consultants may be granted options. In September 2015, the Company amended and restated the 2014 Equity Incentive Plan. Under the 2014 Equity Incentive Plan, 3,659,091 shares of common stock were reserved for issuance upon the exercise of stock options, stock awards or restricted stock. Under the terms of the 2014 Equity Incentive Plan, stock options are granted at exercise prices equal to the fair market value of the common stock at the date of grant, and become exercisable and expire in accordance with the terms of the stock option agreement between the optionee and the Company at the date of grant. These options generally vest from immediately to three years of continuous service and have five-year contractual terms. At April 30, 2016, options to purchase 3,289,130 shares were outstanding at an exercise price of $1.19 to $26.40. At April 30, 2016, there were 369,961 options available for grant under the 2014 Equity Incentive Plan.

2007 Incentive Stock Plan

In September 2006, the Company adopted the 2007 Incentive Stock Plan, under which officers, directors, key employees or consultants may be granted options. Under the 2007 Incentive Stock Plan, 2,597 shares of common stock were reserved for issuance upon the exercise of stock options, stock awards or restricted stock. These shares were registered under Form S-8. Under the terms of the 2007 Incentive Stock Plan, stock options are granted at exercise prices equal to the fair market value of the common stock at the date of grant, and become exercisable and expire in accordance with the terms of the stock option agreement between the optionee and the Company at the date of grant. These options generally vest based on between one to three years of continuous service and have five-year contractual terms. At April 30, 2016, options to purchase 910 shares were outstanding at exercise prices ranging from $8.58 to $13.20. At April 30, 2016, there were 1,687 options available for grant under the 2007 Incentive Stock Plan.

2006 Incentive Stock Plan

In September 2005, the Company adopted the 2006 Incentive Stock Plan, under which officers, directors, key employees or consultants may be granted options. Under the 2006 Incentive Stock Plan, 2,597 shares of common stock were reserved for issuance upon the exercise of stock options, stock awards or restricted stock. These shares were registered under Form S-8. Under the terms of the 2006 Incentive Stock Plan, stock options are granted at exercise prices equal to the fair market value of the common stock at the date of grant, and become exercisable and expire in accordance with the terms of the stock option agreement between the optionee and the Company at the date of grant. These options generally vest based on between one to three years of continuous service and have five-year contractual terms. At April 30, 2016, there were no options outstanding under this plan. At April 30, 2016, there were 2,597 options available for grant under the 2006 Incentive Stock Plan.

2002 Plan

In March 2003, the Company established a stock option plan pursuant to which options to acquire a maximum of 2,706 shares of the Company's common stock were reserved for grant (the "2002 Plan"). These shares were registered under Form S-8. Under the terms of the 2002 Plan, the options are exercisable at prices equal to the fair market value of the stock at the date of the grant and become exercisable in accordance with terms established at the time of the grant. These options generally vest based on between one to three years of continuous service and have five-year contractual terms. At April 30, 2016, options to purchase 233 shares were outstanding at exercise prices ranging from $13.20 to $61.82. At April 30, 2016, there were no further shares available for grant under the 2002 Plan as the ten-year term of the 2002 Plan had been reached.

The following table summarizes stock option activities for the Company’s option plans for the years ended April 30, 2016 and 2015:

	Number of Shares		Weighted Average Exercise Price		Total Intrinsic Value		Weighted Average Remaining Contractual Life (in years)
Outstanding as of April 30, 2014		1,917	$	14.76	$	-		3.3
Employee options granted		46,363		20.06		-		5.1
Forfeited/expired		(7,592)		25.52		-		-
Outstanding as of April 30, 2015		40,688		18.79		-		5.9
Employee options granted		4,054,250		1.32		-		7.6
Forfeited/expired		(804,665)		1.37		-		-
Outstanding as of April 30, 2016		3,290,273	$	1.52	$	-		9.4
Options vested and exercisable		2,475,386	$	1.58	$	-		9.4

The Company recorded stock based compensation expense of $2,506,234 and $170,562, which is included as part of selling, general and administrative expenses for the years ended April 30, 2016 and 2015, respectively. The expense of $2,506,234 for the year ended April 30, 2016 is comprised of $2,438,734 for the issuance of stock options and $67,500 for the issuance of restricted common shares under a consulting agreement.

The following assumptions were used to compute the fair value of stock options granted during the years ended April 30, 2016 and 2015:

	For the years ended
	April 30,
	2016		2015
Exercise price		$1.19 - $1.53		$4.84 - $26.40
Expected stock price volatility		101.7% - 104.1%		103.0% - 131.5%
Risk-free rate of interest		1.3%-1.6%		1.1% - 1.3%
Expected term (years)		5.0		5.0

The risk-free rate is based on the rate of U.S Treasury zero-coupon issues with a remaining term equal to the expected term of the option grants. Expected volatility is based on the historical volatility of the Company’s common stock using the weekly closing price of the Company’s common stock. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was calculated using the simplified method.

Modification of performance targets

On September 29, 2015 and November 2, 2015 the Company issued 801,250 options to purchase common stock to five employees. These options vested subject to the employees achieving performance targets of either: (i) The Company records $30 million in sales revenue by April 30, 2016, or: (ii) The Company closes a change in control merger transaction by September 1, 2016. The total compensation expense related to the options was calculated to be approximately $822,000 using the inputs in the table above and the Company recognized that expense in its statement of operations for the period from September 29, 2015 to April 30, 2016.

On April 25, 2015, the Company determined that the revenue target of $30 million and the September 1, 2016 merger transaction date were not achievable during the measurement period. Subsequently, the Compensation Committee of the Board of Directors modified the performance targets to allow vesting of the 801,250 stock options if the Company completes a merger or acquisition transaction by December 31, 2016 and removed the revenue target and September 1, 2016 merger target date. The Company recalculated the compensation expense associated with this amendment on April 25, 2016, to be approximately $776,000.

On April 25, 2016, the Company reversed the $822,000 of compensation expense associated with the September and November 2015 issuances and plans to record the $776,000 of compensation expense calculated on the April 25, 2016 amendment date, if and when the December 31, 2016 performance target is achieved.

Common Stock Warrants

The following is a summary of the common stock warrant activity for the years ended April 30, 2016 and 2015:

	Number of Warrants		Weighted Average Exercise Price		Weighted Average Remaining Life in years

Outstanding, April 30, 2014		171,582		72.27		3.0
Warrants exchanged in connection with the Amendment		(156,072)		47.39		-
Outstanding as of April 30, 2015		15,510		7.25		3.3
Warrants issued in connection with Series H-1 preferred stock for cash		1,279,759		1.66		4.3
Outstanding, April 30, 2016		1,295,269		1.73		4.2