All common shares, warrants and stock option amounts and per share amounts for all periods reported below has been retroactively adjusted to reflect the Company’s 1-for-5 reverse stock split, which was effective July 20, 2016.

At September 30, 2017, there were 11,426,754 common shares, 1,210,905 common stock warrants, 2,175,335 stock options outstanding and 1,020,000 shares of convertible preferred stock outstanding plus accrued dividends of $227,578, totaling 1,102,903 equivalent common shares, all totaling 15,915,897 of total common stock and common stock equivalents outstanding at September 30, 2017. At December 31, 2016, there were 9,911,864 common shares, 1,713,172 common stock warrants, 2,172,581 stock options outstanding and 1,020,000 shares of convertible preferred stock outstanding plus accrued dividends of $80,578 totaling 1,049,354 equivalent common shares, all totaling 12,047,250 of total stock and stock equivalents outstanding at December 31, 2016.

ATM Offering

On June 11, 2015, the Company entered into an at-the-market issuance (“ATM”) sales agreement with MLV & Co. LLC (“MLV”), pursuant to which the Company may issue and sell shares of its common stock from time to time through MLV as the Company’s sales agent. On September 1, 2015, MLV was acquired by FBR & Co. The issuance and sale of shares by the Company under the sales agreement are registered shares under the Company’s shelf registration statement on Form S-3, as filed with the Securities and Exchange Commission on June 11, 2015 and declared effective by the Securities and Exchange Commission. The Company registered the sale of up to $5.8 million of common stock under the ATM sales agreement and sold all these registered shares. There have been approximately 3.8 million shares sold for total gross proceeds of approximately $4.7 million through the ATM for the nine month period ended September 30, 2017. There have been approximately 1.9 million shares sold for total gross proceeds of approximately $2.6 million through the ATM for the twelve month period ended December 31, 2016.

On July 12, 2017, the Company filed a prospectus supplement to register an additional approximate $1.6 million under a new ATM agreement with FBR Capital Markets & Co. and MLV, signed on July 12, 2017. For the period from July 12, 2017 to September 30, 2017, the Company sold approximately 1.2 million shares for total net proceeds of approximately $1.5 million.

Due to limitations under the rules of Form S-3, the Company may issue up to one-third of the aggregate market value of the common equity held by non-affiliates in primary offerings under its effective shelf registration statement on Form S-3, including any sales made pursuant to the ATM Offering, during any twelve calendar month period, unless and until it is no longer subject to such limitations.

Securities Purchase Agreement – General International Holdings, Inc.

On August 2, 2016, we issued 1,020,000 shares of the Company’s newly created Non-Voting Series A Convertible Preferred Stock (the “Series A Preferred Stock”) to General International Holdings, Inc. (“GIH”) for $2.8 million or approximately $2.75 per share. Dividends accrue on the Series A Preferred Stock at the rate of 7% per year and will be paid in-kind. The accumulated dividend (unpaid) at September 30, 2017 was approximately $0.2 million dollars. At closing, Mr. Xingping Hou, the president of GIH, joined the Board of Directors as co-chairman.

Series A Preferred Stock

On July 29, 2016, in anticipation of the closing of the GIH offering discussed above, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Non-Voting Series A Convertible Preferred Stock (the “Certificate of Designation”) with the Secretary of State of the State of Nevada. Pursuant to the Certificate of Designation, the Company’s Board of Directors designated a new series of the Company’s preferred stock, the Non-Voting Series A Convertible Preferred Stock, par value $0.001 per share. The Certificate of Designation authorized the Company to issue 1,020,000 shares of Series A Preferred Stock. Each share of Series A Preferred Stock has a conversion right to convert to one share of common stock and a liquidation preference of $2.75 per share. The holders of the Series A Preferred Stock have no voting rights. In addition, as long as 255,000 shares of Series A Preferred Stock are outstanding, the Company may not take certain actions without first having obtained the affirmative vote or waiver of the holders of a majority of the outstanding shares of Series A Preferred Stock. The Company has the option at any time after August 2, 2019 to redeem some or all of the outstanding Series A Preferred Stock for an amount in cash equal to the liquidation preference plus the amount of any accrued but unpaid dividends of the Series A Preferred Stock being redeemed. The holders of the Series A Preferred Stock do not have the ability to require the Company to redeem the Series A Preferred Stock.

Aspire Capital Option Agreement

On August 10, 2016 the Company entered into an option agreement with Aspire Capital whereby the Company has the right, at any time prior to December 31, 2019, to require Aspire Capital to enter into with the Company, up to two common stock purchase agreements each with a three year term, with an aggregate amount under both purchase agreements combined not to exceed $20,000,000. A notice to Aspire Capital exercising the option may be revoked by the Company at any time prior to the parties entering into a purchase agreement without effecting or limiting the Company’s future rights to give a subsequent option notice to Aspire Capital, under the terms and conditions of the option agreement.

The Company issued 500,000 common stock purchase warrants with a strike price of $0.01 per share to Aspire Capital as the commitment fee for entering into this option agreement. The commitment fee, valued at approximately $1.7 million, was recorded as deferred financing costs and additional paid-in capital and this asset will be amortized over the life of the option agreement. The amortized amount of $0.1 and $0.4 million was expensed to financing costs during the three and nine months ended September 30, 2017, respectively. The total short-term and long-term unamortized portion is carried on the balance sheet as deferred financing costs. The short-term portion was approximately $0.5 million and the long-term portion was approximately $0.6 million, at September 30, 2017. The short-term portion was approximately $0.5 million and long-term portion was approximately $1.0 million, at December 31, 2016.

The future amortization of deferred financing costs is as follows (in millions):

Equity Purchase Agreement – Equity Line

On September 4, 2015, we entered into a common stock purchase agreement with Aspire Capital, which provides that Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of our common stock over a two-year term, subject to certain limitations. There were no sales made for the nine months ended September 30, 2017. We have a Form S-1 registration statement on file with the Securities and Exchange Commission, effective August 23, 2017 registering 1,853,960 shares of our common stock to sell under this equity purchase agreement.

For the three months and nine months ended September 30, 2016 we sold 0.4 million and 1.1 million common shares, respectively, for total gross proceeds of approximately $0.6 and $2.7 million through the equity line financing arrangement with Aspire Capital that we have in place.

Outstanding Warrants

On July 12, 2017, Aspire Capital exercised warrants that were issued on June 28, 2016, in a cashless exercise transaction. 295,267 warrants were exercised in exchange for 286,584 shares of the Company’s common stock.

These outstanding warrants were reported in the equity section of our balance sheet.

Stock-based Compensation – Stock Options and Restricted Stock

2015 Stock Plan

On March 25, 2015, the Compensation Committee and the Board of Directors approved the 2015 Equity Incentive Plan (the “Plan”) to authorize grants of (a) Incentive Stock Options, (b) Non-qualified Stock Options, (c) Stock Appreciation Rights, (d) Restricted Awards, (e) Performance Share Awards, and (f) Performance Compensation Awards to the employees, consultants, and directors of the Company. A total of 2,900,000 shares are available for grant under the Plan. The Plan became effective upon ratification by the shareholders of the Company at the shareholders’ annual meeting on July 14, 2015.

The Company held its 2016 Annual Meeting on May 12, 2016 and the stockholders approved an amendment to the Plan to increase the number of shares authorized for issuance thereunder by 800,000 shares to 1,400,000 shares. At the 2017 Annual Meeting of Stockholders on May 19, 2017, the Company’s stockholders approved an amendment to the Plan to increase the number of shares authorized for issuance thereunder by 1,500,000 shares to 2,900,000 shares.

Total stock options outstanding at September 30, 2017 and December 31, 2016, under the 2006 Stock Plan and 2015 Equity Incentive Plan were 2,175,335 and 2,172,581 of which 1,762,385 and 1,722,105 of these options were vested at September 30, 2017 and December 31, 2016, respectively. Stock based compensation was approximately $0.2 million and $0.4 million for the three months ended September 30, 2017 and 2016, respectively, and $0.6 million and $0.9 million for the nine months ended September 30, 2017 and 2016, respectively.

2016 Non-Qualified Option Grants

On November 9, 2016, the Board of Directors granted non-qualified stock options relating to approximately 670,000 shares under the 2015 Equity Incentive Plan to employees and consultants of the Company. These stock options were granted by the Board of Directors upon recommendation by the Compensation Committee and vested immediately, with a strike price of $1.54, which was the closing price of the Company’s stock on November 9, 2016. These options have a 10 year contractual term, with a fair value of $1.05 per option and an expected term of 5 years.

Stock option transactions to the employees, directors and consultants are summarized as follows for the nine months ended September 30, 2017:

A summary of the status of the Company’s non-vested shares as of September 30, 2017 and December 31, 2016, and changes during the nine months ended September 30, 2017 and the year ended December 31, 2016, is presented below:

As of September 30, 2017, there was approximately $0.7 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity incentive plans. That cost is expected to be recognized over a weighted-average period of 1.1 years. There was substantially no intrinsic value for the stock options outstanding at September 30, 2017 and December 31, 2016.

The above tables include options issued and outstanding as of September 30, 2017, as follows:

Weighted average assumptions used in the Black Scholes option-pricing model for the nine months ended September 30, 2017, were as follows:

Stock-based compensation expense includes the expense related to (1) grants of stock options, (2) grants of restricted stock, (3) stock issued as consideration for some of the services provided by our directors and strategic advisory council members, and (4) stock issued in lieu of cash to pay bonuses to our employees and contractors. Grants of stock options and restricted stock are awarded to our employees, directors, consultants, and board members and we recognize the fair value of these awards ratably as they are earned. The expense related to payments in stock for services is recognized as the services are provided.

Stock-based compensation expense is recorded under the financial statement captions cost of services provided, general and administrative expenses and research and development expenses in the accompanying condensed consolidated statements of operations. Related income tax benefits were not recognized, as we incurred a tax loss for both periods.