PART III
ITEM 10.
DIRECTO
R
S, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
The
Board of Directors and executive officers consist of the persons
named in the table below. Each director serves for a one-year term,
until his or her successor is elected and qualified, or until
earlier resignation or removal. Our bylaws provide that the
number of directors shall not be less than four, but no more than
eight. The directors and executive officers are as
follows:
|
Name
|
|
Age
|
|
Principal Occupation/Position Held With the Company
|
|
Mr. S. James Miller, Jr.
|
|
63
|
|
Chief Executive Officer and Chairman of the Board of
Directors
|
|
Mr. Wayne Wetherell
|
|
64
|
|
Sr. Vice President, Chief Financial Officer, Secretary and
Treasurer
|
|
Mr. David Harding
|
|
47
|
|
Vice President, Chief Technical Officer
|
|
Mr. Robert Brown
|
|
55
|
|
Vice President, Sales and Business Development
|
|
Mr. David Carey
|
|
72
|
|
Director
|
|
Mr. Guy Steve Hamm
|
|
69
|
|
Director
|
|
Mr. David Loesch
|
|
72
|
|
Director
|
|
Mr. John Cronin
|
|
62
|
|
Director
|
|
Mr. Neal Goldman
|
|
72
|
|
Director
|
|
Mr. Charles Crocker
|
|
78
|
|
Director
|
|
Mr. Dana W. Kammersgard
|
|
61
|
|
Director
|
S. James
Miller, Jr.
has
served as our Chief Executive Officer since 1990 and Chairman of
the Board since 1996. He also served as our President from 1990
until 2003. From 1980 to 1990, Mr. Miller was an executive
with Oak Industries, Inc., a manufacturer of components for
the telecommunications industry. While at Oak Industries,
Mr. Miller served as a director and as Senior Vice President,
General Counsel, Corporate Secretary and Chairman/President of Oak
Industries’ Pacific Rim subsidiaries. He has a J.D. from the
University of San Diego School of Law and a B.A. from the
University of California, San Diego.
The
Nominating and Corporate Governance Committee believes that Mr.
Miller possesses substantial managerial expertise leading the
Company through its various stages of development and growth,
beginning in 1990 when Mr. Miller joined the Company as President
and Chief Executive Officer, and that such expertise is extremely
valuable to the Board of Directors and the Company as it executes
its business plan. In addition, the Board of Directors values
the input provided by Mr. Miller given his legal
experience.
Wayne
Wetherell
has served as
our Senior Vice President, Administration and Chief Financial
Officer since May 2001 and additionally as our Secretary and
Treasurer since October 2005. From 1996 to May 2001, he
served as Vice President of Finance and Chief Financial Officer.
From 1991 to 1996, Mr. Wetherell was the Vice President and
Chief Financial Officer of Bilstein Corporation of America, a
manufacturer and distributor of automotive parts. From 1980 to 1990
Mr. Wetherell served in various financial roles culminating as
Director of Financial Planning and Analysis for Oak Industries,
Inc., a manufacturer of components for the telecommunications
industry traded on the NYSE. Mr. Wetherell holds a
B.S. degree in Management and a M.S. degree in Finance from San
Diego State University.
David Harding.
Mr. Harding has
served as our Vice President and Chief Technology Officer since
January 2006. Before joining us, Mr. Harding was the
Chief Technology Officer at IC Solutions, Inc., where he was
responsible for all technology departments including the
development and management of software development, IT and quality
assurance, as well as their respective hardware, software and human
resource budgets from 2001 to 2003. He was the Chief Technology
Officer at Thirsty.com from 1999 to 2000, the Chief Technology
Officer at Fulcrum Point Technologies, Inc., from 1996 to
1999, and consultant to Access360, which is now part of IBM/Tivoli,
from 1995 to 1996.
Robert
Brown.
Mr. Brown has
served as our Vice President – Sales and Business Development
since June 2015. Prior to joining the Company, Mr. Brown served
since February 2010 as the principal of Black Diamond Group, a
global consultancy agency representing new technology companies in
connection with their relationship with Microsoft. Prior
to Black Diamond Group, Mr. Brown served as the Director of
Business Development of Ascend Communications. Mr. Brown
is a graduate of Eastern Washington University with a B.S. in
Computer Technology.
David
Carey
was appointed to the
Board in February 2006. Mr. Carey is a former Executive
Director of the Central Intelligence Agency. Mr. Carey briefly
served on the Board of Cyberby, Inc., a public company, resigning
in October 2015 and currently is the Chairman of Proxy Boards for
DRS Technologies, and OnPoint Consulting, and Qinetiq North America
and a member of the Proxy Board for Informatica Federal Operations,
Inc. as well as the Board of Trimpan, Inc. Mr. Carey
also serves on a number of Advisory Boards, including the Advisory
Board of Raytheon TCS (Trusted Computer Solutions). Mr. Carey also
consults with companies both independently and as an affiliate of
the Command Consulting Group. From April 2005 to
August of 2008, Mr. Carey served as Executive Director for
Blackbird Technologies, which provides state-of-the-art IT security
expertise, where he assists the company with business development
and strategic planning. Prior to joining Blackbird Technologies,
Mr. Carey was Vice President, Information Assurance for Oracle
Corporation from September 2001 to April 2005. In
addition, Mr. Carey worked for the CIA for 32 years until
2001. During his career at the CIA, Mr. Carey held several
senior positions including that of Executive Director, often
referred to as the Chief Operating Officer, or No. 3 person in
the agency, from 1997 to 2001. Before assuming that position,
Mr. Carey was Director of the DCI Crime and Narcotics Center,
the Director of the Office of Near Eastern and South Asian
Analysis, and Deputy Director of the Office of Global Issues.
Mr. Carey is a graduate of Cornell University and the
University of Delaware.
The
Nominating and Corporate Governance Committee believes that Mr.
Carey’s experience as a former Executive Director of the CIA,
his experience dealing with IT security matters, and the extensive
contacts gained over his career working within the intelligence and
security community, provide the Board with specialized expertise
that assists the Company in the specific industries in which it
operates.
Guy Steve
Hamm
was appointed to the
Board in October 2004. Mr. Hamm served as CFO of Aspen
Holding, a privately held insurance provider, from
December 2005 to February 2007. In 2003, Mr. Hamm retired
from PricewaterhouseCoopers, where he was a national
partner-in-charge of middle market. Mr. Hamm was instrumental
in growing the Audit Business Advisory Services ("
ABAS
") Middle Market practice at
PricewaterhouseCoopers, where he was responsible for $300 million
in revenue and more than 100 partners. Mr. Hamm is a
graduate of San Diego State University.
The
Nominating and Corporate Governance Committee believes that Mr.
Hamm’s experience in public accounting, together with his
management experience as a Chief Financial Officer, provide the
Audit Committee of the Board with the expertise needed to oversee
the Company’s finance and accounting professionals, and the
Company’s independent public accountants.
David
Loesch
was appointed to
the Board in September 2001 after 29 years of service as
a Special Agent with the Federal Bureau of Investigations
(“
FBI
”). At the time of his retirement from the
FBI, Mr. Loesch was the Assistant Director in Charge of the
Criminal Justice Information Services Division of the FBI.
Mr. Loesch was awarded the Presidential Rank Award for
Meritorious Executive in 1998 and has served on the board of
directors of the Special Agents Mutual Benefit Association since
1996. He is also a member of the International Association of
Chiefs of Police and the Society of Former Special Agents of the
FBI, Inc. In 1999, Mr. Loesch was appointed by
former Attorney General Janet Reno to serve as one of 15 original
members of the Compact Council, an organization charged with
promulgating rules and procedures governing the use of and exchange
of criminal history records for non-criminal justice use.
Mr. Loesch served in the United States Army as an Officer with
the 101st Airborne Division in Vietnam. He holds a Bachelor’s
degree from Canisius College and a Master’s degree in
Criminal Justice from George Washington University. Mr. Loesch
continues to work as a private consultant on criminal justice
information sharing and the use of biometrics to help identify
criminals and individuals of special concern.
The
Nominating and Corporate Governance Committee believes that Mr.
Loesch’s extensive service as a Special Agent with the FBI,
together with his knowledge of security issues relevant to the
Company’s products and markets, provides the Company and the
Board of Directors with relevant input regarding the industries in
which the Company competes, and the markets served by the
Company.
John
Cronin
was appointed to
the Board in February 2012. Mr. Cronin is currently Managing
Director and Chairman of ipCapital Group, Inc.
("
ipCG
"),
an intellectual property consulting firm Mr. Cronin founded in
1998. During his time with ipCG, Mr. Cronin created both
a unique ipCapital System(R) Methodology for consulting, as well as
a world-class licensing and transaction process, and worked with
over 700 companies, including more than 10% of the Fortune 500.
Prior to forming ipCG, Mr. Cronin spent over 17 years at IBM and
became its top inventor with over 100 patents and 150 patent
publications. He created and ran the IBM Patent Factory, which was
essential in helping IBM become number one in US patents, and the
team that contributed to the startup and success of IBM's licensing
program. Additionally, Mr. Cronin serves as a member of the Board
of Directors at Vermont Electric Power Company
(“
VELCO
”), Armor Designs, Inc., Document Security
Systems, and Primal Fusion, Inc., and GraphOn and as a member of
the advisory board for innoPad, Inc. He holds a B.S. and a M.S.in
electrical engineering, and a B.A. degree in Psychology from the
University of Vermont.
The
Nominating and Corporate Governance Committee believes that Mr.
Cronin’s experience developing and extracting the value from
intellectual property, and his experience serving on, and advising,
boards of directors, will contribute to deliberations of our Board
of Directors, and assist the Company as it capitalizes on the
opportunities presented by its portfolio of intellectual property
assets.
Neal
Goldman
was appointed to the Board in August 2012. Mr.
Goldman is currently president, chief compliance officer and a
director of Goldman Capital Management, Inc., an employee owned
investment advisor that he founded in 1985. Additionally, Mr.
Goldman is a member of the CFA institute and is Executive Chairman
of Charles and Colvard, LTD, a specialty jewelry company. Mr.
Goldman also served as a member of the Board of Directors and
Compensation Committee for Blyth, Inc., a New York Stock
Exchange-listed designer and marketer of home decorative and
fragrance products.
Mr.
Goldman is the Company’s largest shareholder and has
significant investment experience. As a result, the
Nominating and Corporate Governance Committee believes that Mr.
Goldman can provide valuable guidance to the Board of Directors as
it seeks to build shareholder value.
Charles
Crocker
was appointed to
the Board in September 2012. Mr. Crocker currently serves as
Chairman and CEO of Crocker Capital, a private investment company.
Mr. Crocker also serves as a director of Teledyne Technologies,
Inc., Bailard, Inc. and Mercator MedSystems. Teledyne Technologies,
Inc. is a publically traded company. Beyond his corporate duties,
Mr. Crocker serves as a Trustee of the Mary A. Crocker Trust, the
Cypress Lawn Cemetery Association and the Fine Arts Museums
Foundation of San Francisco. Mr. Crocker received his B.S. degree
from Stanford University and M.B.A. from the University of
California, Berkley.
The
Nominating and Corporate Governance Committee believes that Mr.
Crocker’s significant experience serving on boards of
directors, together with his investment experience, assists the
Company’s Board of Directors in its deliberations and
contributes to the governance of the Board.
Dana
Kammersgard
was appointed
to the Board in May of 2016. Mr. Kammersgard
is currently the Executive Vice President, Cloud
Systems and Solutions for Seagate Technology, where he is
responsible for all storage systems related products and
strategies. Prior to joining Seagate Systems in 2015, he served as
the President, CEO and a director of Dot Hill System Corp.
("
Dot
Hill
") since March 2006. He
served as President of Dot Hill from August 2004 to March 2006.
From August 1999 to August 2004, Mr. Kammersgard served as Dot
Hill's 's Chief Technical Officer. Mr. Kammersgard was a founder of
Artecon and served as a director from its inception in 1984 until
the company's merger with Box Hill Systems Corp. in August 1999. At
Artecon, Mr. Kammersgard served in various positions since 1984,
including Secretary and Senior Vice President of Engineering from
March 1998 until August 1999, and as Vice President of Sales and
Marketing from March 1997 until March 1998. Prior to cofounding
Artecon, Mr. Kammersgard was the Director of Software Development
at Calma, a division of General Electric Company. Mr. Kammersgard
holds a B.A. in chemistry from the University of California, San
Diego.
The
Nominating and Corporate Governance Committee believes that Mr.
Kammersgard’s engineering and technical experience, coupled
with his senior executive management experience with technology
companies, is valuable to the Company’s Board of Directors
and senior management given the technical issues and marketing
challenges facing the Company.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a)
of the Exchange Act requires our directors and executive officers,
and persons who beneficially own more than 10% of a registered
class of our equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of our
common stock and other equity securities. Such persons are required
by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. To our knowledge, based solely
on a review of the copies of such reports furnished to us and
written representations that no other reports were required, during
the fiscal year ended December 31, 2016, all Section 16(a)
filing requirements were complied with in a timely
manner.
Code of Ethics
The Company has adopted a
Code of Business Conduct
and Ethics
policy that
applies to our directors and employees (including the
Company’s principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions). The Company intends to
promptly disclose (i) the nature of any amendment tothis code of
ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions and (ii) the nature of any
waiver, including an implicit waiver, from a provision of this code
of ethics that is granted to one of these specified individuals,
the name of such person who is granted the waiver and the date of
the waiver on our website in the future. A copy of our
Code of Business Conduct and Ethics can be obtained from our
website at
http://www.iwsinc.com
.
Board Leadership Structure
Our
Board of Directors has discretion to determine whether to separate
or combine the roles of Chief Executive Officer and Chairman of the
Board. S. James Miller has served in both roles since 1996, and our
Board continues to believe that his combined role is most
advantageous to the Company and our stockholders, as Mr. Miller
possesses in-depth knowledge of the issues, opportunities and risks
facing us, our business and our industry and is best positioned to
fulfill the responsibilities of our Chief Executive Officer, as
well as the Chairman’s responsibility to develop meeting
agendas that focus the Board’s time and attention on the most
critical matters and to facilitate constructive dialogue among
Board members on strategic issues.
In
addition to Mr. Miller’s leadership, the Board maintains
effective independent oversight through a number of governance
practices, including open and direct communication with management,
input on meeting agendas, and regular executive
sessions.
Board Role in Risk Assessment
Management,
in consultation with outside professionals, as applicable,
identifies risks associated with the Company’s operations,
strategies and financial statements. Risk assessment is also
performed through periodic reports received by the Audit Committee
from management, counsel and the Company’s independent
registered public accountants relating to risk assessment and
management. Audit Committee members meet privately in executive
sessions with representatives of the Company’s independent
registered public accountants. The Board also provides risk
oversight through its periodic reviews of the financial and
operational performance of the Company.
Director Independence
Our
Board of Directors has determined that all of its members, other
than Mr. Miller, who serves as the Company’s Chief Executive
Officer, and Mr. Goldman, who beneficially owns
approximately 37% of the Company’s common stock, are
“independent” within the meaning of the NASDAQ Stock
Market Rules and SEC rules regarding
independence.
Committees of the Board of Directors
Our
Board of Directors has an Audit Committee, a Compensation Committee
and a Nominating and Corporate Governance Committee, each of which
has the composition and responsibilities described
below.
Audit Committee
The
Audit Committee provides assistance to the Board of Directors in
fulfilling its legal and fiduciary obligations in matters involving
our accounting, auditing, financial reporting, internal control and
legal compliance functions by approving the services performed by
our independent accountants and reviewing their reports regarding
our accounting practices and systems of internal accounting
controls. The Audit Committee also oversees the audit efforts of
our independent accountants and takes those actions as it deems
necessary to satisfy it that the accountants are independent of
management. The Audit Committee currently consists of Messrs. Hamm
(Chairman), Carey and Loesch, each of whom is a non-management
member of our Board of Directors. Mr. Hamm is also our Audit
Committee financial expert, as currently defined under current SEC
rules. The Audit Committee met four times during the
year ended December 31, 2016. We believe that the
composition of our Audit Committee meets the criteria for
independence under, and the functioning of our Audit Committee
complies with the applicable NASDAQ Stock Market Rules and SEC
rules and regulations.
Compensation Committee
The
Compensation Committee determines our general compensation policies
and the compensation provided to our directors and officers. The
Compensation Committee also reviews and determines bonuses for our
officers and other employees. In addition, the Compensation
Committee reviews and determines equity-based compensation for our
directors, officers, employees and consultants and administers our
stock option plans. The Compensation Committee
currently consists of Messrs. Carey (Chairman), Cronin and Goldman,
each of whom is a non-management member of our Board of Directors.
The Compensation Committee met three times during the year
ended December 31, 2016. Although Messrs. Carey and Cronin meet the
criteria for independence under the applicable NASDAQ Stock Market
Rules and SEC rules and regulations, Mr. Goldman is not considered
independent under such requirements.
Nominating and
Corporate Governance Committee
The
Nominating and Corporate Governance Committee is responsible for
making recommendations to the Board of Directors regarding
candidates for directorships and the size and composition of the
Board. In addition, the Nominating and Corporate Governance
Committee is responsible for overseeing our corporate governance
guidelines and reporting and making recommendations to the Board
concerning corporate governance matters. The Nominating and
Corporate Governance Committee currently consists of all the
nonemployee members of the Board. The
Nominating and Corporate Governance Committee met four times
during the year ended December 31, 2016. We believe that the
composition of our Nominating and Corporate Governance Committee
meets the criteria for independence under, and the functioning of
our Nominating and Corporate Governance Committee complies with the
applicable NASDAQ Stock Market Rules and SEC rules and
regulations.
Indemnification of Officers and Directors
As
permitted by Delaware law, the Company will indemnify its
directors and officers against expenses and liabilities they
incur to defend, settle, or satisfy any civil or
criminal action brought against them on account of
their being or having been Company directors or officers
unless, in any such action, they are adjudged to have acted
with gross negligence or willful
misconduct.
Executive Compensation Discussion and Analysis
Overview of Compensation Program
The
Compensation Committee of our Board of Directors has responsibility
for establishing, implementing and monitoring adherence to our
compensation philosophy. The Board of Directors has delegated to
the Compensation Committee the responsibility for determining our
compensation policies and procedures for senior management,
including the named executive officers, periodically reviewing
these policies and procedures, and making recommendations
concerning executive compensation to be considered by the full
board of directors, when such approval is required under any of our
plans or policies or by applicable laws. The Compensation Committee
also has the principal responsibility for the administration of our
stock plans, including the approval of stock option grants to the
named executive officers.
The
compensation received by our named executive officers in fiscal
year 2016 is set forth in the Summary Compensation Table, below.
For 2016, the named executive officers included: (i) S. James
Miller, Jr., Chairman of the Board of Directors and Chief Executive
Officer; (ii) Wayne Wetherell, Senior Vice President, Chief
Financial Officer, Secretary and Treasurer; and (iii) David
Harding, Vice-President and Chief Technical Officer.
Compensation Philosophy
In
general, our executive compensation policies are designed to
recruit, retain and motivate qualified executives by providing them
with a competitive total compensation package based in large part
on the executive's contribution to our financial and operational
success, the executive's personal performance and increases in
stockholder value as measured by the price of our common stock. We
believe that the total compensation paid to our executives should
be fair, reasonable and competitive.
We
seek to have a balanced approach to executive compensation with
each primary element of compensation (base salary, variable
compensation and equity incentives) designed to play a specific
role. Overall, we design our compensation programs to allow for the
recruitment, retention and motivation of the key executives and
high-level talent required in order for us to:
|
●
|
achieve or exceed our annual financial plan and achieve
profitability;
|
|
●
|
make continuous progression towards achieving our long-term
strategic objectives to be a high-growth company with growing
profitability; and
|
|
●
|
increase our share price to provide greater value to our
stockholders.
|
Role of Executive Officers in Compensation Decisions
The Compensation
Committee considers action on executive
compensation annually. They discuss their proposed actions
with the Chief Executive Officer and make recommendations for any
changes to the Company's Board of
Directors.
Only the
Compensation Committee and the Board of Directors are authorized to
approve the compensation for any named executive officer. Since our
CEO is also a member of our Board of Directors, he does not
participate in any conversation or approvals related to his
compensation. Compensation of new executives is based on hiring
negotiations between the individuals and our CEO and/or
Compensation Committee.
Elements of Compensation
Consistent
with our compensation philosophy and objectives, we offer executive
compensation packages consisting of the following three
components:
|
●
|
annual incentive compensation (in the form of bonuses or
otherwise); and
|
|
●
|
equity awards pursuant to the terms and conditions of our 1999
Stock Award Plan (the "
1999
Plan
").
|
In
each fiscal year, the Compensation Committee determines the amount
and relative weighting of each component for all executives,
including the named executive officers. Base salaries are paid in
fixed amounts and thus do not encourage risk taking. For 2016, we
had no incentive bonus programs.
We
also have issued stock options focusing the recipients on the
achievement of certain short- and longer-term goals and objectives.
For example, certain stock options were granted to our executives
in 2016 will not begin vesting until their one year anniversary in
2017, and will vest in increments over the following two years
until the options are fully vested in 2019. The Compensation
Committee believes that these awards do not encourage unnecessary
or excessive risk taking because the ultimate value of the awards
is tied to our stock price, and the vesting schedules align our
employees' interests even more closely with those of our
investors.
Base Salary
Because
our compensation philosophy stresses performance-based awards, base
salary is intended to be a smaller portion of total executive
compensation relative to long-term equity. Therefore, we target
executive base salary at the median level of the compensation
guidelines that have been approved by the Compensation Committee.
In addition, the Compensation Committee takes into account the
executive's scope of responsibility and significance to the
execution of our long-term strategy, past accomplishments,
experience and personal performance and compares each executive's
base salary with those of the other members of senior management.
The Compensation Committee may give different weighting to each of
these factors for each executive, as it deems appropriate. The
Compensation Committee did not retain a compensation consultant or
determine a compensation peer group for 2016. In 2016, there were
no changes to the base salaries paid to our named executive
officers other than an annual cost of living increase for Mr.
Miller per his employment agreement.
Annual Incentive Compensation
The
Compensation Committee has not adopted an executive bonus plan for
2017.
Equity Awards
Although
we do not have a mandated policy regarding the ownership of shares
of common stock by officers and directors, we believe that granting
equity awards to executives and other key employees on an ongoing
basis gives them a strong incentive to maximize stockholder value
and aligns their interests with those of our other stockholders on
a long-term basis. Our 1999 Plan enables us to grant equity awards,
as well as other types of stock-based compensation, to our
executive officers and other employees. Under authority delegated
to it by the board of directors, the Compensation Committee reviews
and approves all equity awards granted to named executive officers
under the 1999 Plan. Typically, the options granted upon the
executive's hire vest over three years with a third vesting on the
one-year anniversary, and the remainder vesting quarterly over the
next eight quarters. The options granted to executives in
connection with an annual performance review typically begin
vesting on the one-year anniversary of the grant date, and vest
ratably over the following eight quarters. Our general policy is to
grant the options with an exercise price equal to fair market
value, which currently is the closing price of our Common Stock, as
reported by the OTCQB, on the grant date.
We
intend to grant equity awards to achieve retention and
motivation:
●
upon the hiring of key executives and other personnel;
●
annually, when we review progress against corporate and personal
goals; and
●
when we believe that competitive forces or economic conditions
threaten to cause our key executives to lose their motivation
and/or where retention of these key executives is in
jeopardy.
With
the Compensation Committee's approval, we grant options to purchase
shares of Common Stock when we initially hire executives and other
employees, as a long-term performance incentive. The Compensation
Committee has determined the size of the initial option grants to
newly hired executives with reference to existing guidelines and
hiring negotiations with the individual, in addition to other
relevant information regarding the size and type of compensation
package considered necessary to enable us to recruit, retain and
motivate the executive.
Historically,
no employee was eligible for an annual performance grant until the
employee had worked for us for at least sixty days. The
Compensation Committee reviews the CEO's and other
executives’ performance and determines whether they should be
granted an option to purchase additional shares. Aside from stock
award grants in connection with annual performance reviews, we do
not have a policy of granting additional awards to executives and,
consequently, the board of directors and the Compensation Committee
has not adopted a policy with respect to granting awards in
coordination with the release of material non-public
information.
In
determining the size of equity awards the Compensation Committee
takes into account the executive's current position with and
responsibilities to us. In September 2016, the Compensation
Committee approved an option grant for 300,000 shares to
Mr. Miller vesting over three years. This grants
was a result of the review by our board of directors (absent Mr.
Miller’s participation) of Mr. Miller's annual
performance and its annual review of compensation of our other
executives. The amount of the grant was determined by considering
Mr. Miller's previous option grants and current options
outstanding, as well as the size of grants made to other
executives. The grants to Mr. Miller was equal to or larger
than any grant to other executives because of his responsibilities
as CEO.
In
September 2016, the Compensation Committee approved an option grant
of 300,000 shares to Mr. Harding and option grants of 75,000 shares
each to Mr. Wetherell and Mr. Brown vesting over three
years.
Only
the Board of Directors or the Compensation Committee may approve
options or other equity-based compensation to our executives.
However, the Board of Directors has authorized the CEO to approve
option grants to non-executive employees. All such grants must be
consistent with equity incentive guidelines approved by the
Compensation Committee. The exercise price for such grants must be
equal to the closing price of a share of the Common Stock as
reported by the OTCQB on the date of grant.
Going
forward, we intend to continue to evaluate and consider equity
grants to our executives on an annual basis. We expect to consider
potential equity awards for executives at the same time as we
annually review our employees' performance and determine whether to
award grants for all employees.
Accounting and Tax Considerations
Our Compensation Committee has reviewed the
impact of tax and accounting treatment on the various components of
our executive compensation program. Section 162(m) of the
Internal Revenue Code (the “
Code
”) generally disallows a tax
deduction to publicly held companies for compensation paid to
"covered" executive officers, to the extent that compensation paid
to such an officer exceeds $1.0 million during the taxable
year. We endeavor to award compensation that will be deductible for
income tax purposes, though other factors will also be considered.
Our Compensation Committee may authorize compensation payments that
do not comply with the exemptions to Section 162(m) when we
believe that such payments are appropriate to attract and retain
executive talent.
Say-on-Pay
Our
stockholders have not yet had the opportunity to provide feedback
on our executive compensation through an advisory vote, as we have
not held an annual meeting stockholders since 2011, at which time
we were not required to hold a ‘Say-on-Pay’ vote as we
followed the disclosure guidelines of a Smaller Reporting
Company.
COMPENSATION COMMITTEE REPORT
The
Compensation Committee has reviewed and discussed with management
the Compensation Discussion and Analysis provisions to be included
in this Annual Report on Form 10-K for the year ended
December 31, 2016. Based on this review and discussion, the
Compensation Committee has recommended to the board of directors
that the Compensation Discussion and Analysis be included in this
in our Annual Report on Form 10-K for the year ended
December 31, 2016.
|
The Compensation Committee of the Board of Directors:
|
|
David Carey (Chairman)
John Cronin
Neal Goldman
|
Summary Compensation Table
The following table sets forth certain information
about the compensation paid or accrued during the years ended
December 31, 2016, 2015 and 2014 to our Chief Executive Officer and
each of our four most highly compensated executive officers who
were serving as executive officers at December 31, 2016, 2015 and
2014, and whose annual compensation exceeded $100,000 during such
year or would have exceeded $100,000 during such year if the
executive officer were employed by the Company for the entire
fiscal year (collectively the “
Named Executive
Officers
”).
|
Name and Principal Position
|
Year
|
|
Salary
|
|
|
Stock Awards
|
|
|
Option Awards
(1)(2)
|
|
All Other
Compensation
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S. James Miller, Jr.
|
2016
|
|
$
|
368,938
|
|
|
$
|
-
|
|
|
$
|
174,185
|
|
$
|
19,816
|
(3)
|
|
$
|
562,939
|
|
Chairman of the Board and
Chief Executive Officer
|
2015
|
|
$
|
370,284
|
|
|
$
|
-
|
|
|
$
|
184,850
|
|
$
|
21,551
|
|
|
$
|
576,685
|
|
|
2014
|
|
$
|
356,699
|
|
|
$
|
-
|
|
|
$
|
91,935
|
|
$
|
21,310
|
|
|
$
|
469,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wayne G. Wetherell
|
2016
|
|
$
|
207,333
|
|
|
$
|
|
|
|
$
|
48,676
|
|
$
|
11,787
|
(4)
|
|
$
|
267,796
|
|
Senior Vice President
Chief Financial Officer,
|
2015
|
|
$
|
211,320
|
|
|
$
|
-
|
|
|
$
|
92,425
|
|
$
|
13,714
|
|
|
$
|
317,459
|
|
Secretary, and Treasurer
|
2014
|
|
$
|
207,333
|
|
|
$
|
-
|
|
|
$
|
18,387
|
|
$
|
13,534
|
|
|
$
|
239,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Harding
|
2016
|
|
$
|
242,955
|
|
|
$
|
|
|
|
$
|
150,807
|
|
$
|
4,105
|
(5)
|
|
$
|
397,867
|
|
Vice President and
Chief Technical Officer
|
2015
|
|
$
|
234,400
|
|
|
$
|
-
|
|
|
$
|
154,041
|
|
$
|
3,768
|
|
|
$
|
392,209
|
|
|
2014
|
|
$
|
230,000
|
|
|
$
|
-
|
|
|
$
|
91,935
|
|
$
|
3,757
|
|
|
$
|
325,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Brown
(7)
|
2016
|
|
$
|
187,292
|
|
|
$
|
|
|
|
$
|
161,843
|
|
$
|
1,301
|
(6)
|
|
$
|
350,436
|
|
Vice President Sales and
Business Development
|
2015
|
|
$
|
97,500
|
|
|
$
|
-
|
|
|
$
|
466,042
|
|
$
|
253
|
|
|
$
|
563,795
|
|
|
2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
|
All option awards were granted under the
1999 Plan
.
|
|
|
|
|
|
(2)
|
|
The amounts presented in this column do not reflect the cash value
or realizable value of option grants to the named executive
officers during the year ended December 31, 2016. During the
year ended December 31, 2016, no named executive officer exercised
an option and therefore no value was realized during the reporting
period. The amounts reflect the grant date fair value of
the options awarded in the fiscal year ended December 31,
2016, 2015 and 2014 respectively, in accordance with the provisions
of ASC 718. We have elected to use the Black-Scholes
option-pricing model, which incorporates various assumptions
including volatility, expected life, and interest rates. We are
required to make various assumptions in the application of the
Black-Scholes option-pricing model and have determined that the
best measure of expected volatility is based on the historical
weekly volatility of our common stock. Historical volatility
factors utilized in our Black-Scholes computations range from 74%
to 121%. We have elected to estimate the expected life of an award
based upon the SEC approved “simplified method” noted
under the provisions of Staff Accounting Bulletin No. 110. The
expected term used by the Company during the years ended December
31, 2016, 2015 and 2014 was 5.9 years. The difference between the
actual historical expected life and the simplified method was
immaterial. The interest rate used is the risk free interest
rate and is based upon U.S. Treasury rates appropriate for the
expected term. Interest rates used in the Company’s
Black-Scholes calculations for the years ended December 31, 2016,
2015 and 2014 was 2.6%. Dividend yield is zero, as we do not expect
to declare any dividends on our common shares in the foreseeable
future. In addition to the key assumptions used in the
Black-Scholes model, the estimated forfeiture rate at the time of
valuation is a critical assumption. We have estimated an annualized
forfeiture rate of 0% for corporate officers, 4.1% for members of
the Board of Directors and 6.0% for all other employees. We review
the expected forfeiture rate annually to determine if that percent
is still reasonable based on historical experience.
|
|
(3)
|
|
This amount includes premiums on life insurance and disability
insurance of $9,216 and matching 401(k) contributions of
$10,600.
|
|
|
|
|
|
(4)
|
|
This amount includes premiums on life insurance and disability
insurance of $3,377 and matching 401(k) contributions of
$8,408.
|
|
|
|
|
|
(5)
|
|
This amount includes premiums in life insurance and disability
insurance of $2,905 and matching 401(k) contributions of
$1,200.
|
|
|
|
|
|
(6)
|
|
This amount includes premiums on life insurance and disability
insurance of $1,301.
|
|
|
|
|
|
(7)
|
|
Mr. Brown joined the Company in June 2015.
|
Grants of Plan Based Awards
The
following table provides information on plan-based awards granted
in 2016 to each of the Named Executive Officers:
|
|
|
All Other Option Awards: Number of Securities Underlying
Options
(#)
|
Exercise or Base Price of Option Awards
($/Share)
(1)
|
Grant Date Fair Value of Stock and Option Awards
($)
(2)
|
|
S.
James Miller, Jr.
|
09/20/2016
|
300,000
|
$
1.37
|
$
249,424
|
|
Wayne G.
Wetherell
|
09/20/2016
|
75,000
|
$
1.37
|
$
62,356
|
|
David
Harding
|
09/20/2016
|
300,000
|
$
1.37
|
$
249,424
|
|
Robert
Brown
|
09/20/2016
|
75,000
|
$
1.37
|
$
62,356
|
|
(1)
|
|
Each option was granted at an exercise price equal to the fair
market value of our Common Stock on the grant date which was equal
to the closing price of a share of our common stock, as reported by
the OTCQB, on the date of grant.
|
|
(2)
|
|
The amounts reflect the grant date fair value, in accordance with
the provisions of ASC 718. Assumptions used in the calculation of
these amounts are included in Note 2 of the Consolidated Financial
Statements included in our Annual Report on Form 10-K for the year
ended December 31, 2016.
|
Outstanding Equity Awards at Fiscal Year-End
The
following table sets forth information regarding unexercised
options, stock that has not vested and equity incentive awards held
by each of the Named Executive Officers outstanding as of
December 31, 2016:
|
|
Option Awards
|
|
Stock Awards
|
|
Name
|
Number of
Securities
Underlying
Unexercised
Options:
Exercisable (#)
|
|
Number of
Securities
Underlying
Unexercised
Options:
Unexercisable (#)
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
|
Number of Shares That Have Not
Vested (#)
|
|
Market
Value of Shares That Have Not Vested ($)
|
|
S. James Miller, Jr.
|
100,000
|
|
—
|
|
$
|
0.20
|
|
1/27/2019
|
|
—
|
|
$
|
—
|
|
|
183,000
|
|
—
|
|
$
|
0.73
|
|
1/29/2020
|
|
—
|
|
$
|
—
|
|
|
225,000
|
|
—
|
|
$
|
1.11
|
|
3/10/2021
|
|
—
|
|
$
|
—
|
|
|
450,000
|
|
—
|
|
$
|
0.92
|
|
2/2/2022
|
|
—
|
|
$
|
—
|
|
|
100,000
|
|
—
|
|
$
|
0.93
|
|
2/8/2023
|
|
—
|
|
$
|
—
|
|
|
100,000
|
|
—
|
|
$
|
1.93
|
|
10/29/2023
|
|
—
|
|
$
|
—
|
|
|
33,336
|
|
16,664
|
|
$
|
2.29
|
|
12/15/2024
|
|
—
|
|
$
|
—
|
|
|
62,500
|
|
87,500
|
|
$
|
1.73
|
|
9/14/2025
|
|
—
|
|
$
|
—
|
|
|
—
|
|
300,000
|
|
|
1.37
|
|
9/20/2026
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wayne G. Wetherell
|
60,000
|
|
—
|
|
$
|
0.20
|
|
1/27/2019
|
|
—
|
|
$
|
—
|
|
|
60,000
|
|
—
|
|
$
|
0.73
|
|
1/29/2020
|
|
—
|
|
$
|
—
|
|
|
100,000
|
|
—
|
|
$
|
0.92
|
|
2/2/2022
|
|
—
|
|
$
|
—
|
|
|
10,000
|
|
—
|
|
$
|
1.93
|
|
10/29/2023
|
|
—
|
|
$
|
—
|
|
|
6,668
|
|
3,332
|
|
$
|
2.29
|
|
12/15/2024
|
|
—
|
|
$
|
—
|
|
|
31,250
|
|
43,750
|
|
$
|
1.73
|
|
9/14/2025
|
|
—
|
|
$
|
—
|
|
|
—
|
|
75,000
|
|
|
1.37
|
|
9/20/2026
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Harding
|
50,000
|
|
—
|
|
$
|
0.20
|
|
1/27/2019
|
|
—
|
|
$
|
—
|
|
|
80,000
|
|
—
|
|
$
|
0.73
|
|
1/29/2020
|
|
—
|
|
$
|
—
|
|
|
325,000
|
|
—
|
|
$
|
0.92
|
|
2/2/2022
|
|
—
|
|
$
|
—
|
|
|
100,000
|
|
—
|
|
$
|
.93
|
|
2/8/2023
|
|
—
|
|
$
|
—
|
|
|
75,000
|
|
—
|
|
$
|
1.93
|
|
10/29/2023
|
|
—
|
|
$
|
—
|
|
|
33,336
|
|
16,664
|
|
$
|
2.29
|
|
12/15/2024
|
|
—
|
|
$
|
—
|
|
|
52,088
|
|
72,912
|
|
$
|
1.73
|
|
9/14/2025
|
|
—
|
|
$
|
—
|
|
|
—
|
|
300,000
|
|
|
1.37
|
|
9/20/2026
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Brown
|
125,000
|
|
175,000
|
|
$
|
1.70
|
|
7/16/2025
|
|
—
|
|
$
|
—
|
|
|
31,250
|
|
43,750
|
|
$
|
1.73
|
|
9/14/2025
|
|
—
|
|
$
|
—
|
|
|
—
|
|
75,000
|
|
|
1.37
|
|
9/20/2026
|
|
—
|
|
$
|
—
|
Employment Agreements
S. James
Miller, Jr.
On October 1, 2005, we entered into an
employment agreement with Mr. Miller pursuant to which
Mr. Miller serves as President and Chief Executive Officer,
which agreement is currently set to expire on December 31, 2017.
H
istorically, Mr.
Miller’s employment agreement has been amended annually to
extend the expiration date. The agreement provides for annual base
compensation in the amount of $291,048, which amount, as a result
of cost-of-living adjustments, has increased to $376,456. Under
this agreement, we will reimburse Mr. Miller for reasonable
expenses incurred in connection with our business. Under the terms
of the agreement, Mr. Miller will be entitled to the following
severance benefits if we terminate his employment without cause or
in the event of an involuntary termination: (i) a lump sum
cash payment equal to twenty-four months base salary;
(ii) continuation of Mr. Miller’s fringe benefits
and medical insurance for a period of three years; and
(iii) immediate vesting of 50% of Mr. Miller’s
outstanding stock options and restricted stock awards. In the event
that Mr. Miller’s employment is terminated within six
months prior to or thirteen months following a change of control
(defined below), Mr. Miller is entitled to the severance
benefits described above, except that 100% of
Mr. Miller’s outstanding stock options and restricted
stock awards will immediately vest.
Wayne
Wetherell.
On October 1, 2005, we entered into an
amended employment agreement with Mr. Wetherell pursuant to
which Mr. Wetherell will serve as our Chief Financial Officer.
This agreement was originally for a three-year term ending
September 30, 2008; however, the agreement was amended to
extend the expiration date to December 31, 2012. Upon
termination, the agreement was replaced with an employment
agreement, dated January 1, 2013, pursuant to which Mr. Wetherell
will serve as our Chief Financial Officer through December 31,
2017, as amended, for a semi-monthly base salary of
$8,639. Under the terms of the agreement,
Mr. Wetherell will be entitled to the following severance
benefits if we terminate his employment without cause or in the
event of an involuntary termination: (i) a lump sum cash
payment equal to six months base salary; (ii) continuation of
Mr. Wetherell’s medical and disability insurance for a
period of six months; and (iii) immediate vesting of 50% of
Mr. Wetherell’s outstanding unvested stock options and
restricted stock awards. In the event that
Mr. Wetherell’s employment is terminated within six
months prior to or thirteen months following a change of control
(defined below), Mr. Wetherell is entitled to the severance
benefits described above, except that 100% of
Mr. Wetherell’s outstanding stock options and restricted
stock awards will immediately vest.
David
Harding.
On May 21,
2007, we entered into a Change of Control and Severance Benefits
Agreement with Mr. David Harding, our Vice President and Chief
Technical Officer. This agreement was originally for a
two-year term, ending on May 21, 2009; however, the agreement
was amended to extend the expiration date to December 31, 2012.
Upon termination, the agreement was replaced with an employment
agreement, dated January 1, 2013, pursuant to which Mr. Harding
will serve as our Vice President and Chief Technical Officer
through December 31, 2017, as amended, for a semi-monthly base
salary of
$11,458. Under the terms of the agreement,
Mr. Harding will be entitled to the following severance
benefits if we terminate his employment without cause or in the
event of an involuntary termination: (i) a lump sum cash
payment equal to six months base salary; and continuation of
Mr. Harding’s medical and disability insurance for a
period of six months. In the event that
Mr. Harding’s employment is terminated within six months
prior to or thirteen months following a change of control (defined
below), Mr. Harding is entitled to the severance benefits
described above, except that 100% of Mr. Harding’s
outstanding stock options and restricted stock awards will
immediately vest.
For purposes of the above-referenced agreements,
termination for “cause” means the executive’s
commission of a criminal act or an act of fraud, embezzlement,
breach of trust or other act of gross misconduct; violations of
policies or rules of the Company; refusal to follow the direction
given by the Company from time to time or breach of any covenant or
obligation under the above-referenced agreements or other
agreements with the Company; neglect of duty; misappropriation,
concealment, or conversion of any money or property of the Company;
intentional damage or destruction of property of the Company;
reckless conduct which endangers the safety of other persons or
property during the course of employment or while on premises
leased or owned by the Company; or a breach of any obligation or
requirement set forth in the above-referenced
agreements. A “change in control” as used in
these agreements generally means the occurrence of any of the
following events: (i) the acquisition by any person or group
of 50% or more of our outstanding voting stock, (ii) the
consummation of a merger, consolidation, reorganization, or similar
transaction other than a transaction: (1) in which
substantially all of the holders of our voting stock hold or
receive directly or indirectly 50% or more of the voting stock of
the resulting entity or a parent company thereof, in substantially
the same proportions as their ownership of the Company immediately
prior to the transaction; or (2) in which the holders of our
capital stock immediately before such transaction will, immediately
after such transaction, hold as a group on a fully diluted basis
the ability to elect at least a majority of the directors of the
surviving corporation (or a parent company); (iii) there is
consummated a sale, lease, exclusive license, or other disposition
of all or substantially all of the consolidated assets of us and
our Subsidiaries, other than a sale, lease, license, or other
disposition of all or substantially all of the consolidated assets
of us and our Subsidiaries to an entity, 50% or more of the
combined voting power of the voting securities of which are owned
by our stockholders in substantially the same proportions as their
ownership of the Company immediately prior to such sale, lease,
license, or other disposition; or (iv) individuals who,
on the date the applicable agreement was adopted by the Board, are
Directors (the “
Incumbent
Board
”) cease for any
reason to constitute at least a majority of the Directors;
provided, however, that if the appointment or election (or
nomination for election) of any new Director was approved or
recommended by a majority vote of the members of the Incumbent
Board then still in office, such new member shall, for purposes of
the applicable agreement, be considered as a member of the
Incumbent Board.
Securities Authorized For Issuance Under Equity Compensation
Plans
The
following table provides information as of December 31, 2016
regarding equity compensation plans approved by our security
holders and equity compensation plans that have not been approved
by our security holders:
|
Plan Category
|
Number of securities to be issued
upon exercise of outstanding options, warrants
and rights
|
Weighted-
Average exercise price of outstanding options, warrants
and rights
|
Number of securities remaining available
for future issuance under equity compensation plans
(excluding securities reflected in
column) (a)
|
|
|
|
|
|
|
Equity compensation plans approved by security
holders:
|
|
|
|
|
1999
Stock Award Plan, as amended and restated
|
6,506,843
|
$
1.21
|
55,938
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
6,506,843
|
$
1.21
|
55,938
|
Description of Equity Compensation Plans
1999 Stock Option Plan
The 1999 Stock Option Plan
was adopted by the Company’s Board of
Directors on December 17, 1999. Under the terms of the 1999 Plan,
the Company could, originally, issue up to 350,000 non-qualified or
incentive stock options to purchase Common Stock of the Company.
Since then a majority of the Company’s shareholders
subsequently approved an amendment to and restatement of the 1999
Plan to increase the share reserve for issuance to approximately
7.0 million shares of the Company’s Common
Stock. The 1999 Plan prohibits the grant of stock option
or stock appreciation right awards with an exercise price less than
fair market value of Common Stock on the date of grant. The 1999
Plan also generally prohibits the “re-pricing” of stock
options or stock appreciation rights, although awards may be
bought-out for a payment in cash or the Company’s stock. The
1999 Plan permits the grant of stock based awards other than stock
options, including the grant of “full value” awards
such as restricted stock, stock units and performance shares. The
1999 Plan permits the qualification of awards under the plan
(payable in either stock or cash) as “performance-based
compensation” within the meaning of
Section 162(m) of the Internal Revenue
Code.
Director Compensation
Each
of our non-employee directors receives a monthly retainer of $3,000
for serving on the Board of Directors, which fee may be paid either
in cash, options or shares of Common Stock. Board members who also
serve on the Audit Committee receive additional monthly
compensation of $458 for the Chairman and $208 for the remaining
members of the Audit Committee. Board members who
also serve on the Compensation Committee receive additional monthly
compensation of $417 for the Chairman and $208 for the remaining
members of the Compensation Committee. The members
of the Board of Directors are also eligible for reimbursement for
their expenses incurred in attending Board meetings in accordance
with our policies. For the fiscal year ended December 31, 2016 the
total amounts paid to non-employee directors as compensation
(excluding reimbursable expenses) was approximately $311,467, which
amount was paid $20,500 in cash with the remainder paid in Stock
Options of the Company.
Each
of our non-employee directors is also eligible to receive stock
option grants under the 1999 Plan. Options granted under the 1999
Plan are intended by us not to qualify as incentive stock options
under the Code.
The
term of options granted under the 1999 Plan is ten years. In
the event of a merger of us with or into another corporation or a
consolidation, acquisition of assets or other change-in-control
transaction involving us, an equivalent option will be substituted
by the successor corporation, provided, however, that we may cancel
outstanding options upon consummation of the transaction by giving
at least thirty (30) days’ notice.
The
following table sets forth the compensation awarded to, earned by,
or paid to each person who served as a director during the year
ended December 31, 2016, other than a director who also served as
an executive officer:
|
|
Fees Earned or
Paid in Cash ($)
|
|
|
All Other Compensation ($)
|
|
|
Guy
Steve Hamm
|
$
5,500
|
$
—
|
$
44,758
|
$
—
|
$
50,258
|
|
|
|
|
|
|
|
|
David
Carey
|
$
7,500
|
$
—
|
$
44,758
|
$
—
|
$
52,258
|
|
|
|
|
|
|
|
|
David
Loesch
|
$
2,500
|
$
—
|
$
44,758
|
$
—
|
$
47,258
|
|
|
|
|
|
|
|
|
John
Cronin
|
$
2,500
|
$
—
|
$
44,758
|
$
—
|
$
47,258
|
|
|
|
|
|
|
|
|
Neal
Goldman
|
$
2,500
|
$
—
|
$
44,758
|
$
—
|
$
47,258
|
|
|
|
|
|
|
|
|
Charles
Crocker
|
$
—
|
$
—
|
$
45,811
|
$
—
|
$
45,811
|
|
|
|
|
|
|
|
|
Dana
Kammersgard
|
$
—
|
$
—
|
$
21,366
|
$
—
|
$
21,366
|
|
(1)
|
The
amounts reflect the grant date fair value of options recognized as
compensation in 2016, in accordance with the provisions of ASC 718
and thus may include amounts from awards granted prior to 2016.
Assumptions used in the calculation of these amounts are included
in Notes to the Consolidated Financial
Statements.
|
|
ITEM 12.
|
SE
C
URITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS
MATTERS
|
As of April 12, 2017, we had four
classes of voting stock outstanding: (i) Common Stock; (ii) our
Series B Convertible Redeemable Preferred Stock
(“
Series B
Preferred
”); (iii) our
Series E Convertible Redeemable Preferred Stock
(“
Series E
Preferred
”); (iv) our
Series F Convertible Redeemable Preferred Stock
(“
Series F
Preferred
”); and (v) our
Series G Redeemable Convertible Preferred Stock ("
Series G Preferred
"). The following
tables sets forth information regarding shares of Series B
Preferred, Series E Preferred, Series F Preferred and Common Stock
beneficially owned as of April 12, 2017
by:
|
(i)
|
Each of our officers and directors;
|
|
(ii)
|
All officer and directors as a group; and
|
|
(iii)
|
Each person known by us to beneficially own five percent or more of
the outstanding shares of our Common Stock, Series B Preferred,
Series E Preferred and Series F Preferred. Percent
ownership is calculated based on
239,400
shares of Series B Preferred,
12,000
shares of Series E Preferred, 2,000 shares of
Series F Preferred, 6,021 shares of Series G Preferred
and 92,326,286 shares Common Stock outstanding at April 12,
2017.
|
Unless
otherwise noted, the addresses of the individuals listed below are
10815 Rancho Bernardo Road, Suite 310, San Diego, California
92127.
Beneficial Ownership of Series B Preferred
|
Name, Address and Title (if applicable)
|
Series B Convertible Redeemable
Preferred Stock
(1)
|
|
|
Darrelyn
Carpenter
|
28,000
|
12
%
|
|
|
|
|
|
Frederick
C. Orton
|
20,000
|
8
%
|
|
|
|
|
|
Howard
Harrison
|
20,000
|
8
%
|
|
|
|
|
|
Wesley
Hampton
|
16,000
|
7
%
|
|
(1)
|
Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes voting or investment power with
respect to securities.
|
Beneficial Ownership of Series E Preferred
|
Name, Address and Title (if applicable)
|
Series E Convertible Redeemable Preferred Stock
(1)
|
|
|
Charles
L. Frischer
|
2,636
|
22
%
|
|
|
|
|
|
Neal
Goldman
|
2,278
|
19
%
|
|
|
|
|
|
CF Special Situation Fund I LP
(2)
|
2,286
|
19
%
|
|
|
|
|
|
Wynnefield Partners Small Cap Value, LP
I
(3)
|
1,500
|
12.5
%
|
|
(1)
|
Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes voting or investment power with
respect to securities.
|
|
|
|
|
(2)
|
Includes 120 shares held in the name of CF Special Situation Fund
II, LP, and 286 shares held by Robert T.
Clutterbuck. Mr. Clutterbuck has shared voting and
dispositive power of these shares.
|
|
(3)
|
Includes 450 shares held in the name of Wynnefield Partners Small
Cap Value, LP and 300 shares held by Wynnefield Small Cap Value
Offshore Fund Ltd.
|
Beneficial Ownership of Series F Preferred
|
Name, Address and Title (if applicable)
|
Series F Convertible Redeemable Preferred Stock
(1)
|
|
|
CAP
1, LLC
|
2,000
|
100
%
|
|
(1)
|
Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes voting or investment power with
respect to securities.
|
|
|
|
Beneficial Ownership of Series G Preferred
|
Name, Address and Title (if applicable)
|
Series G Convertible Redeemable Preferred Stock
(1)
|
|
|
CF
Special Situations Fund
(2)
|
5,215
|
87
%
|
|
|
|
|
|
Charles
L. Frischer
|
469
|
8
%
|
|
(1)
|
Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes voting or investment power with
respect to securities.
|
|
(2)
|
Includes
3,380 shares held in the name of CF Special Situation Fund I, LP,
223 shares held in the name of CF Special Situation Fund I, LP,
1,612 shares held by Robert T. Clutterbuck. Mr.
Clutterbuck has shared voting and dispositive power of these
shares.
|
Beneficial Ownership of Common Stock
|
Name and Address
|
|
|
|
|
|
|
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
S. James Miller, Jr.
(3)
|
2,114,189
|
2.3
%
|
|
Chairman,
Chief Executive Officer
|
|
|
|
|
|
|
|
David Carey
(4)
|
195,689
|
*
|
|
Director
|
|
|
|
|
|
|
|
G. Steve Hamm
(5)
|
195,775
|
*
|
|
Director
|
|
|
|
|
|
|
|
David Loesch
(6)
|
223,897
|
*
|
|
Director
|
|
|
|
|
|
|
|
Neal I. Goldman
(7)
|
34,115,915
|
36.5
%
|
|
Director
|
|
|
|
|
|
|
|
John Cronin
(8)
|
156,189
|
*
|
|
Director
|
|
|
|
|
|
|
|
Charles Crocker
(9)
|
631,189
|
*
|
|
Director
|
|
|
|
|
|
|
|
Wayne Wetherell
(10)
|
586,201
|
*
|
|
SVP
of Administration, Chief Financial Officer, Secretary
|
|
|
|
|
|
|
|
David Harding
(11)
|
835,006
|
*
|
|
Chief
Technical Officer
|
|
|
|
|
|
|
|
Robert
Brown
(12)
|
175,000
|
*
|
|
Vice
President, Sales and Business Development
|
|
|
|
|
|
|
|
Total
beneficial ownership of directors and officers as a group (10
persons):
|
39,281,550
|
42.0
%
|
|
(1)
|
All entries exclude beneficial ownership of shares issuable
pursuant to options that have not vested or that are not otherwise
exercisable as of the date hereof or which will not become vested
or exercisable within 60 days of April 12,
2017.
|
|
(2)
|
Percentages are rounded to nearest one-tenth of one percent.
Percentages are based on 92,326,286 shares of Common Stock
outstanding as of April 12, 2017. Options that are presently
exercisable or exercisable within 60 days of April 12, 2017 are
deemed to be beneficially owned by the stockholder holding the
options for the purpose of computing the percentage ownership of
that stockholder, but are not treated as outstanding for the
purpose of computing the percentage of any other
stockholder.
|
|
|
|
|
(3)
|
Includes 75,201 shares held jointly with spouse,
1,270,502 shares issuable upon exercise of stock options, each
exercisable within 60 days of April 12, 2017.
|
|
|
|
|
(4)
|
Includes 94,003 shares issuable upon exercise of stock options
exercisable within 60 days of April 12, 2017.
|
|
|
|
|
(5)
|
Includes 96,503 shares issuable upon exercise of stock options
exercisable within 60 days of April 12, 2017.
|
|
|
|
|
(6)
|
Includes 94,003 shares issuable upon exercise of stock options,
each exercisable within 60 days of April 12, 2017.
|
|
|
|
|
(7)
|
Includes 1,198,947 shares issuable upon the conversion of Series E
Preferred Stock and 66,503 shares issuable upon exercise of stock
options, each exercisable within 60 days of April 12, 2017. Mr.
Goldman exercises sole voting and dispositive power over 30,968,215
shares, and shared voting and dispositive power over 3,147,700
reported shares, of which 3,000,000 shares are owned by the Goldman
Family 2012 GST Trust and 147,700 shares are owed by The Neal and
Marlene Goldman Foundation.
|
|
|
|
|
(8)
|
Includes 116,503 shares issuable upon exercise of stock options
exercisable within 60 days of April 12, 2017.
|
|
|
|
|
(9)
|
Includes 116,503 shares issuable upon exercise of stock
options exercisable within 60 days of April 12, 2017.
|
|
|
|
|
(10)
|
Includes 275,001 shares issuable upon exercise of stock
options exercisable within 60 days of April 12, 2017.
|
|
|
|
|
(11)
|
Includes 730,006
shares issuable upon exercise of stock options exercisable within
60 days of April 12, 2017
.
|
|
|
|
|
(12)
|
Includes
175,000 shares issuable upon exercise of stock options exercisable
within 60 days of April 12, 2017.
|
|
|
|
|
* less than 1%
|
ITEM 13.
CERTAIN RELATIONSHI
P
S AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Convertible Notes
On November 14, 2008, the Company entered into a
series of convertible promissory notes (the
“
Related-Party Convertible
Notes
”), aggregating
$110,000 with certain officers and members of the Company’s
Board of Directors, including S. James Miller, the Company’s
Chief Executive Officer and Chairman. The Related-Party Convertible
Notes bear interest at 7.0% per annum and were originally due
February 14, 2009. In conjunction with the original issuance of the
Related-Party Convertible Notes in 2008, the Company issued an
aggregate of 149,996 warrants to the note holders to purchase
shares of Common Stock of the Company. The warrants have an
exercise price $0.50 per share and may be exercised at any time
from November 14, 2008 until November 14, 2013. No warrants to
purchase shares of Common Stock were outstanding and exercisable as
of December 31, 2016, and no warrants were issued and outstanding
as of December 31, 2016.
The
Company did not repay the Related-Party Convertible Notes on the
due date. In August 2009, the Company received from the
Related-Party Convertible Note holders a waiver of default and
extension to January 31, 2010 of the maturity date of the
Related-Party Convertible Notes. As consideration for the waiver
and note extension, the Company issued to the Related-Party
Convertible Note holders an aggregate of 150,000 warrants to
purchase shares of the Company’s Common Stock. The warrants
have an exercise price of $0.50 per share and expire on August 25,
2014, of which no warrants to purchase shares of Common Stock were
outstanding and exercisable as of December 31, 2016.
On
January 21, 2013, the holders of the Related-Party Convertible
Notes agreed to extend the due date on their respective convertible
notes to be due and payable not later than June 30, 2015, however,
the Related-Party Convertible Notes will be callable at any time,
at the option of the note holder, prior to June 30, 2015. During
the year ended December 31, 2014, holders of Related-Party
Convertible Notes in the principal amount of $85,034 elected to
convert their respective Related-Party Convertible Notes into
154,607 shares of Common Stock.
Lines of Credit
In March 2013, the Company and Holder entered into
the Goldman Line of Credit with available borrowings of up to $2.5
million. In March 2014, the Goldman Line of Credit’s
borrowing was increased to an aggregate total of $3.5 million (the
“
Amendment
”). Pursuant to the terms and conditions of
the Amendment, the Holder had the right to convert up to $2.5
million of the outstanding balance of the Goldman Line of Credit
into shares of the Company's Common Stock for $0.95 per share. Any
remaining outstanding balance was convertible into shares of
the Company's Common Stock for $2.25 per share.
As consideration for the initial Goldman Line of
Credit, the Company issued a warrant to the Holder, exercisable for
1,052,632 shares of the Company’s Common Stock (the
"
Line of
Credit Warrant
"). The Goldman
Line of Credit Warrant had a term of two years from the date of
issuance and an exercise price of $0.95 per share. As
consideration for entering into the Amendment, the Company issued
to the Holder a second warrant, exercisable for 177,778 shares of
the Company’s Common Stock (the “
Amendment
Warrant
”). The Amendment
Warrant expired on March 27, 2015 and had an exercise price of
$2.25 per share.
The
Company estimated the fair value of the Line of Credit Warrant
using the Black-Scholes option pricing model using the following
assumptions: term of two years, a risk free interest rate of 2.58%,
a dividend yield of 0%, and volatility of 79%. The Company recorded
the fair value of the Line of Credit Warrant as a deferred
financing fee of approximately $580,000 to be amortized over the
life of the Goldman Line of Credit. The Company estimated the fair
value of the Amendment Warrant using the Black-Scholes option
pricing model using the following assumptions: term on one year, a
risk free interest rate of 2.58%, a dividend yield of 0% and
volatility of 74%. The Company recorded the fair value of the
Amendment Warrant as an additional deferred financing fee of
approximately $127,000 to be amortized over the life of the Goldman
Line of Credit.
During
the years ended December 31, 2016 and 2015, the Company recorded an
aggregate of approximately $48,000 and $53,000, respectively in
deferred financing fee amortization expense which is recorded as a
component of interest expense in the Company’s consolidated
statements of operations.
In April 2014, the Company and the Holder entered
into a further amendment to the Goldman Line of Credit to decrease
the available borrowings to $3.0 million (the
“
Second
Amendment
”). Contemporaneous with the
execution of the Second Amendment, the Company entered into a new
unsecured line of credit with the Second Holder with available
borrowings of up to $500,000 (the “
$500K Line of
Credit
”), which
amount was convertible into shares of the Company’s
Common Stock for $2.25 per share. As a result of these amendments,
total available borrowings under the Lines of Credit available to
the Company remained unchanged at a total of $3.5 million. In
connection with the Second Amendment, the Holder assigned and
transferred to the Second Holder one-half of the Amendment
Warrant.
In December 2014, the Company and the Holder
entered into a further amendment to the Goldman Line of Credit to
increase the available borrowing to $5.0 million and extend the
maturity date of the Goldman Line of Credit to March 27, 2017 (the
“
Third
Amendment
”). Also, as a
result of the Third Amendment, the Holder had the right to convert
up to $2.5 million outstanding principal, plus any accrued but
unpaid interest (“
Outstanding
Balance
”) into shares of
the Company’s Common Stock for $0.95 per share, the next
$500,000 Outstanding Balance into shares of Common Stock for $2.25
per share and any remaining outstanding balance thereafter into
shares of Common Stock for $2.30 per share. The Third Amendment
also modified the definition of a “Qualified Financing”
to mean a debt or equity financing resulting in gross proceeds to
the Company of at least $5.0 million.
In
February 2015, as a result of the Series E Financing, the Company
issued 1,978 shares of Series E Preferred to the Holder to satisfy
$1,950,000 in principal borrowings under the Goldman Line of Credit
plus approximately $28,000 in accrued interest. As a result of the
Series E Financing, the Company’s borrowing capacity under
the Goldman Line of Credit was reduced to $3,050,000 with the
maturity date unchanged and the $500K Line of Credit was terminated
in accordance with its terms.
In March 2016, the Company and the Holder entered
into a fourth amendment to the Goldman Line of Credit (the
“
Fourth
Amendment
”) solely to (i)
increase available borrowings to $5.0 million; (ii) extend the
maturity date to June 30, 2017, and (iii) provide for the
conversion of the outstanding balance due under the terms of the
Goldman Line of Credit into that number of fully paid and
non-assessable shares of the Company’s Common Stock as is
equal to the quotient obtained by dividing the outstanding balance
by $1.25.
Contemporaneous
with the execution of the Fourth Amendment, the Company entered
into a new $500K Line of Credit with available borrowings of up to
$500,000 with the Second Holder, which replaced the original $500K
Line of Credit that terminated as a result of the consummation of
the Series E Financing. Similar to the Fourth Amendment,
the new $500K Line of Credit with the Second Holder matures
on June 30, 2017, and provides for the conversion of the
outstanding balance due under the terms of the $500K Line of Credit
into that number of fully paid and non-assessable shares of the
Company’s Common Stock as is equal to the quotient obtained
by dividing the outstanding balance by $1.25.
On
December 27, 2016, in connection with the consummation of the
Series G Financing, the Company and Holder agreed to enter
into the
Fifth Amendment (the “
Line
of Credit Amendment
”) to the Goldman
Line of Credit to provide the Company with the ability to borrow up
to $5.5 million under the terms of the Goldman Line of Credit. In
addition, the Maturity Date, as defined in the Goldman Line of
Credit was amended to be December 31, 2017. The Line of Credit
Amendment was executed on January 23, 2017.
In addition, on January 23, 2017, the Company and the Second Holder
amended the $500K Line of Credit to extend the maturity date
thereof to December 31, 2017. No other amendments were made to the
$500K Line of Credit.
The
following table sets forth the Company’s activity under its
Lines of Credit for the periods indicated:
|
Balance
outstanding under Lines of Credit as of December 31,
2014
|
$
1,550
|
|
Borrowing
under Lines of Credit
|
750
|
|
Repayments
|
(350
|
|
Exchange
of Indebtedness for Series E Preferred Stock
|
(1,950
)
|
|
Balance
outstanding under Lines of Credit as of December 31,
2015
|
$
—
|
|
Borrowings
under Lines of Credit
|
2,650
|
|
Repayments
|
—
|
|
Balance
outstanding under Lines of Credit as of December 31,
2016
|
$
2,650
|
Review, Approval or Ratification of Transactions with Related
Persons
As
provided in the charter of our Audit Committee, it is our policy
that we will not enter into any transactions required to be
disclosed under Item 404 of the SEC’s Regulation S-K unless
the Audit Committee or another independent body of our Board of
Directors first reviews and approves the
transactions.
In
addition, pursuant to our Code of Ethical Conduct and Business
Practices, all employees, officers and directors of ours and our
subsidiaries are prohibited from engaging in any relationship or
financial interest that is an actual or potential conflict of
interest with us without approval. Employees, officers and
directors are required to provide written disclosure to the Chief
Executive Officer as soon as they have any knowledge of a
transaction or proposed transaction with an outside individual,
business or other organization that would create a conflict of
interest or the appearance of one.