4. DEBT AND EQUITY FINANCINGS

Equity Financing – On January 30, 2015, the Company entered into a Securities Purchase Agreement (the “Rudd Purchase Agreement”) with the Leslie G. Rudd Living Trust (the “Trust”), pursuant to which the Company (i) agreed to issue to the Trust (a) 769,231 shares (the “Initial Shares”) of its Common Stock, and (b) warrants (the “Initial Warrants”) to purchase up to an additional 1,538,462 shares of Common Stock at an exercise price of $0.72 per share (the “Exercise Price”) for an aggregate purchase price of $500 (the “Initial Offering”) and (ii) granted the Trust an option, which expires on January 30, 2025, to purchase in one or more transactions up to an additional (a) 6,923,077 shares (the “Option Shares”) of Common Stock and (b) warrants (the “Option Warrants”) to purchase up to an additional 6,923,077 shares of Common Stock at the Exercise Price for an aggregate purchase price of $4,500 in one or more transactions. The Initial Warrants are, and upon issuance the Option Warrants will be, exercisable immediately and expire ten years from the date of issuance.

On January 30, 2015, the Initial Offering closed and the Company issued and sold to Buyer the Initial Shares and the Initial Warrants and received $500.

On March 4, 2015, the Company entered into a Securities Purchase Agreement with certain purchasers (“Buyers”), pursuant to which the Company agreed to issue to Buyers, in the aggregate, (i) 342,467 shares (the “March 2015 Shares”) of its Common Stock, and (ii) warrants (the “March 2015 Warrants”) to purchase up to an additional 684,934 shares of Common Stock, at an exercise price of $0.82 per share, for an aggregate purchase price of $250. The March 2015 Warrants are exercisable immediately and expire 10 years from the date of issuance.

On March 4, 2015, the offering closed and the Company sold and issued to Buyers the March 2015 Shares and the March 2015 Warrants and received $250.

Due to an adjustment clause affecting the exercise price of both the Initial Warrants and the March 2015 Warrants (together the “Liability Warrants”), which would be reduced upon issuance of Common Stock or deemed Common Stock at a lower price than their then exercise price, the Liability Warrants were determined not to be indexed to the Company’s own Common Stock and were recorded upon issuance as a liability at their fair value. The Warrants and the March 2015 Warrants were valued at approximately $970 and $620 using a Monte Carlo simulation at January 30, 2015 and March 4, 2015, respectively. The fair value of the warrants was recorded as stock issuance cost in the consolidated statement of equity (deficit) and the excess portion of the costs over the actual proceeds was recorded as stock issuance cost in earnings.

At June 30, 2015, the Liability Warrants were re-measured at their fair value, using a Monte Carlo simulation, resulting in a fair value of $974. The decrease in fair value was recorded in earnings and amounted to $886 and $616 during the three and six months ended June 30, 2015.

The following assumptions were used in a Monte Carlo simulation to value the Liability Warrants at the time of issuance and the reporting date:

Initial Warrants	Fair Value Measurements
	Using Inputs
	January 30, 2015			June 30, 2015

Stock price	$	0.70			$	0.50
Exercise price	$	0.72			$	0.72
Term (years)		10				9.59
Dividend yield		—	%			—	%
Expected volatility		100	%			100	%
Risk-free interest rate		1.67	%			2.32	%

March 2015 Warrants	Fair Value Measurements
	Using Inputs
	March 4, 2015			June 30, 2015

Stock price	$	1.00		$	0.50
Exercise price	$	0.82		$	0.82
Term (years)		10			9.68
Dividend yield		—	%		—	%
Expected volatility		100	%		100	%
Risk-free interest rate		2.10	%		2.32	%

Promissory Notes, Related Parties – On March 25, 2014, the Company entered into a Securities Purchase Agreement with Cleveland Capital, L.P. (“Cleveland Capital”) and Prescott Group Aggressive Small Cap Masterfund, GP (“Prescott Group”, and together with Cleveland Capital, the “Purchasers”), and the guarantors party thereto, each of which is a wholly-owned subsidiary of the Company (each a “Guarantor” and collectively, the “Guarantors”), pursuant to which the Company agreed to issue to the Purchasers (i) an aggregate principal amount of $1,650 of promissory notes (each a “Note” and collectively, the “Notes”), to be guaranteed by the Guarantors, and (ii) warrants (each a “Warrant” and collectively, the “Warrants”) to purchase up to an aggregate of 1,683,673 shares (the “Warrant Shares”) of the Company’s Common Stock, for an aggregate purchase price of approximately $1,650 (the “Offering”).

On March 25, 2014, the Offering closed and the Company (i) issued and sold to Cleveland Capital a Note in the principal amount of $150 and a Warrant to purchase up to 153,061 Warrant Shares and received $150, and (ii) issued and sold to Prescott Group a Note in the principal amount of $1,500 and a Warrant to purchase up to 1,530,612 Warrant Shares and received $1,500.

The 1,683,673 Warrants issued with the Notes were valued at approximately $1.43 per warrant using the Black-Scholes model at March 25, 2014. The relative fair value of the Warrants of $979 was recorded as a component of stockholders’ equity with the offset recorded as a discount on the Notes and included as a component of long-term debt in the accompanying consolidated balance sheet as of December 31, 2014. The fair value of the Warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 2.75%, volatility – 100.00%, expected term – 10 years, expected dividends – 0%. The debt discount related to the Warrants is being amortized over a two-year period (through maturity) using the effective interest method. Interest expense related to the amortization of the debt discount for the three and six months ended June 30, 2015 and 2014 was approximately $134 and $248, and $78 and $79, respectively.

The Notes accrue interest at a rate of 5.0% per year from and after the date of issuance of such Note, payable quarterly. The interest paid to related parties was $0 and $20 for the three and six months ended June 30, 2015, respectively. The Notes provide for customary events of default, including nonpayment, certain events of bankruptcy or failure to comply with covenants or other agreements. The Notes will mature on March 25, 2016. The Warrants have an initial exercise price of $0.98 per Warrant Share. The Warrants are exercisable immediately and expire ten years from the date of issuance.

Under the terms of the Notes, the Company was required to use any proceeds received in connection with the general unsecured creditor claim against Lehman Brothers, Inc. to repay principal and accrued but unpaid interest outstanding under the Notes. In May 2014, the Company sold the claim against Lehman Brothers, Inc. to a third party for $1,607. The Purchasers have waived the obligation to repay principal outstanding under the Notes with the proceeds that were received in connection with the claim.

As long as the Notes are outstanding, the Company may be required to issue additional warrants if certain events were to occur. The number and term of the new warrants that would then be issuable would only be known upon such an occurrence.

As a result of the Securities Purchase Agreements entered into in January and March 2015, the Company issued additional warrants to purchase an aggregate of 1,431,389 shares of Common Stock to Cleveland Capital and Prescott Group, in accordance with its obligations under the Purchase Agreement with the Purchasers with no consideration.

The fair value of these warrants amounted to $1,101 and was recorded as additional interest expense during the six months ended June 30, 2015. The fair value of these warrants was determined using the Black-Scholes model with the following weighted assumptions: risk free interest rate – 1.86%, volatility – 100.24%, expected term – 9 years, expected dividends – 0%.

Wade Massad, one of the Company’s former directors, is the Co-Founder and Co-Managing Member of Cleveland Capital Management, L.L.C., which is the General Partner of Cleveland Capital. Cleveland Capital beneficially owns more than 5% of the Common Stock of the Company. Duminda DeSilva, one of the Company’s directors, was previously the Managing Director at Prescott Group Capital Management, L.L.C., an affiliate of Prescott Group, which beneficially owns more than 5% of the Common Stock of the Company. Effective November 10, 2014, Mr. DeSilva is no longer employed with the Prescott Group.

Warrants outstanding – The following table summarizes warrants to purchase common stock that are outstanding as of June 30, 2015:

	Warrants		Weighted average exercise price		Aggregate intrinsic value		Weighted average remaining contractual life (years)

Outstanding at December 31, 2014		1,683,673	$	0.98	$	—		8.75
Issued		3,654,785		0.72		—		9.27
Outstanding at June 30, 2015		5,338,458	$	0.80	$	—		9.11

Warrants exercisable at June 30, 2015 are:

Exercise prices		Number of shares		Remaining life (years)
$	0.98		1,683,673		8.75
	0.72		1,538,462		9.58
	0.65		854,789		8.75
	0.82		684,934		9.67
	0.73		576,600		8.75
			5,338,458