The original fair value of the embedded conversion feature of $1,579,000, the original fair value of the
warrants of $7,087,000 and the original issue discount of $67,000 were recorded as discounts to the convertible preferred stock. As a result, the value of the convertible preferred stock liability was reduced to zero. Discounts exceeding the fair
value of the convertible preferred stock of $7,066,000 were recorded as interest expense. The discounts to the convertible preferred stock are accreted to interest expense as the convertible preferred stock is converted into common shares. The
discount accreted to interest expense for the three month and nine month periods ended September 30, 2011 was $0 and $1,667,000, respectively.
In addition, the Company incurred $415,000 of direct costs including warrants issued to our placement agent as part of their compensation for the transaction. The warrants allow for the purchase of up to
333,400 shares of our common stock at an exercise price of $0.15 per share, are only exercisable after June 8, 2012, and expire on June 8, 2017. The fair value of placement agent warrants were computed using the Black-Scholes model under
the following assumptions: (1) expected life of 5 years; (2) volatility of 116%, (3) risk free interest of 2.26%, and (4) dividend rate of 0%. The fair value of the warrants was $52,000. The placement agent warrants do not
contain provisions that would require liability classification in accordance with ASC 815 – Derivatives and Hedging. The direct costs are recorded as convertible preferred stock issuance costs in other assets. The convertible preferred
stock issuance costs are amortized to interest expense as the convertible preferred stock is converted into common stock. Total costs amortized to interest expense for the three month and nine month periods ended September 30, 2011 were $0 and
$415,000, respectively.
Between February 2011 and June 2011, the 1,667 shares of the convertible preferred stock were converted into
30,987,052 shares of common stock. As of September 30, 2011, no shares of convertible preferred stock were outstanding.
Note 6 – Derivative Liability
ASC 815 – Derivatives and Hedging provides guidance to determine what types of instruments, or embedded features in an
instrument, are to be considered derivatives. This guidance can affect the accounting for warrants and other convertible instruments that contain provisions to protect holders from a decline in the stock price, or down-round provisions. Down-round
provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments, or issues new warrants or convertible instruments that have
a lower exercise price. We have determined that the following warrants contain such provisions and should be treated as derivative liabilities.
|
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|
|
|
|
| Warrant |
|
Exercise
Price |
|
|
Number of
Warrants |
|
|
Expiration Date |
|
|
Fair Value
September 30, 2011 |
|
| Series A |
|
$ |
0.04 |
|
|
|
26,859,369 |
|
|
|
March, 31, 2015 |
|
|
$ |
810,000 |
|
| Series PA |
|
$ |
0.15 |
|
|
|
16,670,000 |
|
|
|
June 8, 2017 |
|
|
|
447,000 |
|
| Series PB |
|
$ |
0.10 |
|
|
|
16,670,000 |
|
|
|
Feb 14, 2012 |
|
|
|
40,000 |
|
| Series PC |
|
$ |
0.15 |
|
|
|
16,670,000 |
|
|
|
June 8, 2017 |
|
|
|
447,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,744,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of the Series PA, PB and PC Warrants on the grant date of February 14, 2011 to
be $7,087,000. As discussed in Note 5, the Company immediately recognized the value of the warrants that exceeded the fair value of the convertible preferred stock as interest expense and recorded a corresponding derivative liability. As of
September 30, 2011, the fair value of the warrants deemed to be derivatives was $1,744,000, as compared to the December 31, 2010 fair value of $611,000, resulting in a reduction in the derivative liability and a corresponding recognition
of $5,663,000 in gain in the change in derivative liability for the nine months ended September 30, 2011. In addition, the derivative liability was reduced related to warrant exercises by $292,000 with a corresponding increase in additional
paid-in capital.
9
F 888.329.6696