2. Stockholders’ Equity — Common and Preferred Shares

Private Placements of Preferred Shares and Warrants

April Private Placement

On April 16, 2013, the Company closed on an offering pursuant to the terms of a private placement agreement, in which the Company raised $5,000,000 in gross proceeds, before deducting placement agents’ fees and other offering expenses, in a private placement of 5,000 shares of the Company’s Series A Preferred Stock. Subject to certain ownership limitations, shares of Series A Preferred Stock were convertible, at the option of the holder thereof, into an aggregate of up to 1,377,412 shares of the Company’s common stock. The Series A Preferred Stock was not redeemable or contingently redeemable, did not have a preferential dividend right, nor did it have any preferences over the common stock, including liquidation rights.

During the nine months ended September 30, 2013, the investor in the private placement converted 2,198 shares of Series A Preferred Stock into 605,422 shares of the Company’s common stock.

On September 23, 2013, the Company agreed to redeem the 2,802 shares of Series A Preferred Stock that remained outstanding as of that date, which had a redemption value of approximately $2,802,000. See below under September Private Placement.

Also included in the April 16, 2013 offering were warrants to purchase common stock, as follows:

(A) Series A Warrants to purchase 1,377,412 shares of the Company’s common stock, which are exercisable immediately after issuance, have a five-year term and a per share exercise price of $3.40; and

(B) Series B Warrants to purchase 1,377,412 shares of the Company’s common stock, which are exercisable immediately after issuance, have a two-year term and a per share exercise price of $3.40.

At the closing on April 16, 2013, the Company also issued to its placement agent and related persons Series A Warrants to purchase 82,645 shares of the Company’s common stock.

The warrants contain limitations that prevent the holders of the warrants from acquiring shares upon exercise of the warrants that would result in the number of shares beneficially owned by it and its affiliates exceeding 9.99% of the total number of shares of the Company’s common stock then issued and outstanding.

During the nine months ended September 30, 2013, the investor in the private placement exercised 135,390 Series B Warrants into 135,390 shares of the Company’s common stock for proceeds of $460,326. In October 2013, the investor in the private placement exercised 135,000 Series B Warrants into 135,000 shares of the Company’s common stock for proceeds of $459,000.

The Series A Preferred Stock issued in the offering had a beneficial conversion feature and, as a result, the Company recognized approximately $2.48 million as a non-cash deemed dividend. In order to calculate the amount of the deemed dividend, the Company estimated the relative fair value of the Series A Preferred Stock, the Series A Warrants and the Series B Warrants issued in order to determine the amount of the beneficial conversion feature present in the Series A Preferred Stock. The Series A Preferred Stock was valued using Level 2 inputs by reference to the market value of the Company’s common stock into which the Series A Preferred Stock is convertible. The Series A Warrants and Series B Warrants granted were valued using the Black-Scholes valuation model and the following Level 3 input assumptions:


Weighted Average Assumptions	Private Placement Series A Warrants			Private Placement Series B Warrants
Risk-free interest rate		0.24	%		0.24	%
Expected life (years)		2.3			1.9
Expected volatility		87	%		87	%
Dividend yield		0.00	%		0.00	%

September Private Placement

On September 23, 2013, the Company closed on an offering pursuant to the terms of a private placement agreement, in which the Company raised $5,800,000 in gross proceeds, before deducting placement agents’ fees and other offering expenses, in a private placement of 5,800 shares of the Company’s Series B Preferred Stock. The Series B Preferred Stock is not redeemable or contingently redeemable, does not have a preferential dividend right, nor does it have any preferences over the common stock, including liquidation rights. Subject to certain ownership limitations, shares of Series B Preferred Stock are convertible, at the option of the holder thereof, into an aggregate of up to 2,452,431 shares of the Company’s common stock. Also included in the offering were warrants to purchase 2,452,431 shares of the Company’s common stock, which are exercisable immediately after issuance, have a five-year term and a per share exercise price of $2.24.

At the closing, the Company also issued to its placement agent and related persons warrants to purchase 147,145 shares of the Company’s common stock, which are exercisable immediately after issuance, have a five-year term and a per share exercise price of $2.80.

The Series B Preferred Stock and warrants contain limitations that prevent the holders of the preferred stock and warrants from acquiring shares upon conversion of preferred stock or exercise of warrants that would result in the number of shares beneficially owned by a holder and its affiliates exceeding 9.99% of the total number of shares of the Company’s common stock then issued and outstanding.

The Company used the proceeds of this offering in part to redeem the outstanding shares of Series A Preferred Stock issued in April 2013. On September 23, 2013, the Company agreed to redeem the remaining outstanding balance of the Series A Preferred Stock of 2,802 shares for $2,802,000.

As a result of the redemption, the excess of the fair value of the consideration transferred to the holders of the Series B Preferred Stock over the carrying amount of the Series A Preferred Stock in the Company’s balance sheet (net of issuance costs) was treated as a non-cash deemed dividend to the shareholders of the Series B Preferred Stock. The Company recognized approximately $2.31 million as a non-cash deemed dividend. In order to calculate the amount of the deemed dividend, the Company first calculated the amount of the consideration transferred to the holders of the Series B Preferred Stock which included the cash used to redeem the Series A Preferred Stock, and the estimated value of the Series B Preferred Stock and warrants. The Series B Preferred Stock was valued using Level 2 inputs by reference to the market value of the Company’s common stock into which the Series B Preferred Stock is convertible. The warrants granted were valued using the Black-Scholes valuation model and the following Level 3 input assumptions:


Weighted Average Assumptions	Private Placement Warrants
Risk-free interest rate		0.24	%
Expected life (years)		1.9
Expected volatility		79	%
Dividend yield		0.00	%

In October 2013, the investor converted 135,000 shares of Series B Preferred Stock into 135,000 shares of the Company’s common stock.

Common Stock

At the 2013 Annual Meeting of Stockholders in July 2013, the stockholders approved a decrease in the Company’s authorized common stock from 100,000,000 to 70,000,000.

On July 21, 2010, the Company entered into an “at the market” equity offering sales agreement (the ATM Agreement) with MLV & Co. LLC, or MLV, pursuant to which the Company may issue and sell shares of its common stock from time to time through MLV acting as sales agent and underwriter. The Company is limited as to how many shares it can sell under the ATM Agreement due to SEC limitations on the number of shares issuable pursuant to a Form S-3 registration statement in a primary offering by smaller reporting companies such as the Company. As of October 31, 2013 the total dollar amount of common stock that the Company could sell under the ATM Agreement during the next twelve months is approximately $264,000 under the current registration statement. The Company may be able to sell more shares under this agreement over the next twelve months depending on several factors including the Company’s stock price, number of shares outstanding, and when the sales occur.

In connection with the ATM Agreement, the Company issued 422,206 shares of common stock for proceeds of approximately $1,936,000 net of issuance costs, during the nine months ended September 30, 2013. Additionally, the Company issued 152,020 shares of common stock for proceeds of approximately $1,146,000 net of issuance costs under this agreement, during the nine months ended September 30, 2012.

In November 2011, the Company entered into a purchase agreement, or the LPC Purchase Agreement, for the sale, from time to time, of up to $20,000,000 of its common stock to Lincoln Park Capital Fund, LLC, or LPC, over a 36 month term. The Company can only sell shares under this arrangement if it maintains a minimum stock price of $6.00 and maintains the effectiveness of a registration statement filed with the Securities and Exchange Commission. Subject to this restriction, if the Company’s stock price rises above $6.00 and the other conditions of the arrangement are met, the Company can generally control the timing and amount of any sales to LPC in accordance with the purchase agreement. LPC has no right to require the Company to sell any shares to LPC, but LPC is obligated to make purchases as the Company directs, subject to certain conditions including the minimum stock price of $6.00 and the continuing effectiveness of a registration statement filed with the Securities and Exchange Commission covering the resale of the shares that may be issued to LPC. There are no upper limits to the price LPC may pay to purchase the Company’s common stock and the purchase price of the shares related to any future sales will be based on the prevailing market prices of the Company’s shares immediately preceding the notice of sale to LPC without any fixed discount. The agreement may be terminated by the Company at any time, at its sole discretion, without any cost or penalty. Assuming that the purchase price per share is $6.00 or greater, the total dollar amount of common stock that the Company could sell under the LPC Purchase Agreement during the next twelve months is approximately $17,400,000, provided that the Company would be required to file and have declared effective an additional registration statement in order to sell more than an additional 66,862 shares of its common stock under the LPC Purchase Agreement.

In connection with the LPC Purchase Agreement, the Company issued 227,539 shares of common stock for proceeds of approximately $2,123,000, net of issuance costs, during the nine months ended September 30, 2012, including 5,495 shares issued as a commitment fee. No shares were issued under this agreement during the nine months ended September 30, 2013.

Warrants

Warrant Summary Information

The following is a summary of the Company’s outstanding common stock warrants as of September 30, 2013 and December 31, 2012:


Warrants Issued in Connection with:	Date of Issuance		Exercise Price		Number of Warrants outstanding as of: (In thousands)
Warrants Issued in Connection with:	Date of Issuance		Exercise Price		September 30, 2013		December 31, 2012
Committed Equity Financing Facility		02/19/08	$	657.60		—		1
Direct Registration Series I Warrants		07/20/09	$	504.00		12		12
Private Placement Series A Warrants		04/16/13	$	3.40		1,460		—
Private Placement Series B Warrants		04/16/13	$	3.40		1,242		—
Private Placement Warrants		09/23/13	$	2.24		2,452		—
Private Placement Warrants		09/23/13	$	2.80		147		—

Total Warrants Outstanding						5,313		13

The Direct Registration Series I warrants, issued by the Company on July 20, 2009, were recorded as a liability at their fair value as of the date of their issuance in July 2009 and are revalued at each subsequent reporting date. The value of these warrants recorded on the Company’s balance sheet was approximately $0 at both September 30, 2013 and December 31, 2012. These warrants have a five-year term.

The Private Placement Series A Warrants include warrants to purchase 1,377,412 shares of the Company’s common stock and warrants issued to the Company’s placement agent and related persons to purchase 82,645 shares of the Company’s common stock. The Series A Warrants became exercisable immediately after issuance, have a five-year term and a per share exercise price of $3.40.

The Private Placement Series B Warrants to purchase 1,242,022 shares of the Company’s common stock became exercisable immediately after issuance, have a two-year term and a per share exercise price of $3.40.

The Private Placement Warrants issued to purchase 2,452,431 shares of the Company’s common stock became exercisable immediately after issuance, have a five-year term and a per share exercise price of $2.24.

The Private Placement Warrants issued to purchase 147,145 shares of the Company’s common stock became exercisable immediately after issuance, have a five-year term and a per share exercise price of $2.80.

Options and restricted stock

The Company’s 2005 Stock Plan, as amended at the 2013 Annual Meeting of Stockholders in July 2013 (the “2005 Plan”) provides for the award of options, restricted stock and stock appreciation rights to acquire up to 833,333 shares of the Company’s common stock in the aggregate. Currently, the 2005 Plan allows for awards of up to 200,000 shares that may be granted to any one participant in any fiscal year. For options subject to graded vesting, the Company elected the straight-line method of expensing these awards over the service period.

The following is a summary of the Company’s stock option activity under its 2005 Plan for the nine months ended September 30, 2013:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
	(In thousands)					(Years)		(In thousands)
Options outstanding at December 31, 2012		143		$	19.73		8.64	$	—
Granted		107		$	3.90			$	—
Forfeited and expired		(45	)	$	16.48			$	—

Options outstanding at September 30, 2013		205		$	12.19		7.38	$	—

Options exercisable at September 30, 2013		119		$	15.18		6.17	$	—
Options vested or expected to vest at September 30, 2013		169		$	13.09		7.03	$	—

As of September 30, 2013 there was approximately $116,988 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over a weighted average period of approximately 2.57 years.

The fair values for the stock options granted were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the nine months ended September 30, 2013:


Weighted Average Assumptions
Risk-free interest rate	0.95	%
Expected life (years)	4
Expected volatility	100	%
Dividend yield	0.00	%

The Company recorded an expense of $199,913 during the three-month period ended September 30, 2013, related to the grant of a restricted stock award of 72,993 shares to an officer from the Company’s 2005 Stock Plan. The restricted stock award was valued based on the closing price of the Company’s common stock on the grant date and the shares were fully vested upon grant.