Note 9 - Preferred Stock

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Preferred Stock [Text Block]

9

. Preferred Stock

5%

Preferred Stock

On

March 

25,

2004,

we completed a

$5.0

million private placement of our

5%

convertible preferred stock and warrants. In the private placement, we sold

1,000,000

shares of our

5%

preferred stock at a price of

$5.00

per share for gross proceeds of

$5.0

million, less

$275,000

of issuance costs. The

5%

preferred shares were initially convertible into

1,590,331

shares of common stock at a conversion price of

$3.144

per share. Holders of the

5%

convertible preferred stock include

140,000

shares purchased by our former CEO and

60,000

shares purchased by a director of the Company.

The

5%

dividends related to the

5%

preferred stock are paid semi-annually on the last business day in

March 

and

September 

of each year, beginning with

September 

2004.

Preferred stockholders vote together with common stockholders on an as converted to common stock basis. Based on the conversion rate of the preferred stock, holders of our

5%

preferred stock will receive

1.5903

votes per share rounded to the nearest whole number. The liquidation preference for the

5%

preferred stock is an amount equal to

$5.00

per share plus any accrued and unpaid dividends. Holders of our

5%

preferred stock have liquidation preference rights over common stockholders.

All warrants previously issued to

5%

convertible preferred stockholders have expired.

We have the right to redeem any or all of the outstanding

5%

preferred stock at a price of

$5.00

per share plus accrued dividends at any time if certain conditions are met.

At

December 

31,

2019,

there were

200,000

shares of the Series 

1

Preferred Stock outstanding, representing approximately

318,065

shares of common stock upon conversion.

Series 

2

5%

Preferred Stock

On

March 

28,

2005,

we completed a

$2.7

million private placement of Series 

2

5%

convertible preferred stock and warrants. In the private placement, we sold

1,065,200

shares of preferred stock at a price of

$2.50

per share for gross proceeds of

$2.7

million, less

$173,000

of issuance costs. The shares of Series 

2

5%

preferred stock are convertible into

1,065,200

shares of common stock at an initial conversion price of

$2.50

per share. Holders of the Series 

2

5%

preferred stock include

260,000

shares by our former CEO,

100,000

shares by our CFO and

60,000

shares by a director of the Company.

The

5%

dividends accruing on the Series 

2

5%

preferred stock are required to be paid quarterly on the

first

business day in

March,

June,

September 

and

December 

of each year, beginning with

June 

2005.

The liquidation preference for the preferred stock is an amount equal to

$2.50

per share plus any accrued and unpaid dividends. Holders of our Series 

2

5%

preferred stock have liquidation preference rights over our

5%

preferred stockholders as well as our common stockholders. The holders of the Series 

2

5%

preferred stock are

not

entitled to vote on any matter, except as otherwise required by law or with respect to certain limited matters specified in the certificate of designations.

All warrants previously issued to Series 

2

5%

convertible preferred stockholders have expired.

Holders of Series 

2

5%

preferred stock have the right to require us to redeem any or all of the their shares upon the occurrence of certain events within the Company’s control that are defined in Certificate of Designation at a price equal the sum of (

1

) the greater of

$3.25

and the product of the volume weighted average price of our common stock on the trading day immediately preceding the event multiplied by

$2.50

divided by the conversion price then in effect plus (

2

) any accrued but unpaid dividends on the Series 

2

5%

preferred stock plus (

3

) all liquidated damages or other amounts payable to the holders of Series 

2

5%

preferred stock.

At

December 

31,

2019

there were

460,000

shares of the Series 

2

Preferred Stock outstanding, representing

460,000

shares of common stock upon conversion.

Series 

3

5%

Preferred Stock

On

December 

2,

2005,

we completed a

$1.2

million private placement of Series 

3

5%

convertible preferred stock and warrants. In the private placement, we sold

564,607

shares of preferred stock at a price of

$2.18

per share for gross proceeds of

$1.2

million, less

$100,000

of issuance costs. The shares of Series 

3

5%

preferred stock are convertible into

564,607

shares of common stock at an initial conversion price of

$2.18

per share. Holders of the Series 

3

5%

preferred stock include

123,853

shares by our former CEO,

68,808

shares by our CFO and

27,523

shares purchased by a director of the Company.

The

5%

dividends accruing on the Series 

3

5%

preferred stock are required to be paid quarterly on the

first

business day in

March,

June,

September 

and

December 

of each year, beginning with

March 

1,

2006.

The liquidation preference for the preferred stock is an amount equal to

$2.18

per share plus any accrued and unpaid dividends. Holders of our Series 

3

5%

preferred stock have liquidation preference rights over holders of our

5%

preferred, Series 

2

5%

preferred stock and common stock. The holders of the Series 

3

5%

preferred stock are

not

entitled to vote on any matter, except as otherwise required by law or with respect to certain limited matters specified in the certificate of designations.

All warrants previously issued to Series 

3

5%

convertible preferred stockholders have expired.

Holders of Series 

3

5%

preferred stock have the right to require us to redeem any or all of their shares upon the occurrence of certain events within the Company’s control that are defined in the certificate of designation at a price equal the sum of (

1

) the greater of

$2.834

and the product of the volume weighted average price of our common stock on the trading day immediately preceding the event multiplied by

$2.18

divided by the conversion price then in effect plus (

2

) any accrued but unpaid dividends on the Series 

3

5%

preferred stock plus (

3

) all liquidated damages or other amounts payable to the holders of Series 

3

5%

preferred stock.

At

December 

31,

2019

there were

289,377

shares of Series 

3

Preferred Stock outstanding, representing

289,377

shares of common stock upon conversion.

Dividends Payable

During the year ended

December 

31,

2019,

we accrued

$50,000

in dividends to the holders of our

5%

Preferred Stock,

$57,000

in dividends to the holders of our Series 

2

5%

Preferred Stock and

$32,000

in dividends to the holders of our Series 

3

5%

Preferred Stock. As of

December 

31,

2019

and

2018,

we had

$20,000

and

$594,000

in accrued and unpaid dividends included in other current liabilities. Delaware law provides that we

may

only pay dividends out of our capital surplus or, if

no

surplus is available, out of our net profits for the fiscal year the dividend is declared and/or the preceding fiscal year. This has been in effect since

December 31, 2014.

However, in light of our net profits for the fiscal year ended

December 31, 2019

and

2018,

we are able to and have paid these past due dividends as of the date of this Annual Report. However, dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them, and we cannot assure you that our net assets will exceed our stated capital or that we will have sufficient net profits in order to pay these dividends as they continue to accrue in the future. If we are unable to pay dividends on our preferred stock, we will be required to accrue an additional late fee penalty of

18%

per annum on the unpaid dividends for the Series

2

Preferred Stock and Series

3

Preferred Stock.