Note 4 - Shareholders' Equity | 9 Months Ended |
Sep. 30, 2013 |
Stockholders' Equity Note [Abstract] | ' |
Stockholders' Equity Note Disclosure [Text Block] | ' |
4. STOCKHOLDERS’ EQUITY |
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Series A Convertible Preferred Stock Financing |
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On September 28, 2012 (the “Commitment Date”), we entered into a securities purchase agreement with certain accredited investors (the “Series A Investors”), pursuant to which we sold and issued 1,050.70039 shares of newly created Series A 6% Convertible Preferred Stock (the “Series A Stock”) to the Series A Investors at a purchase price of $1,000 per share in an initial closing that occurred on October 1, 2012 (the “Series A First Closing”) and sold and issued 1,449.29961 additional shares of Series A Stock on December 6, 2012 to the Series A Investors at a purchase price of $1,000 per share after stockholder approval was obtained on November 29, 2012 (the “Series A Second Closing”) (combined, the “Series A Financing”). After certain offering-related costs were incurred, the net proceeds received by us from the Series A Financing were $2.0 million. As a result of the Series A Second Closing, the conversion price for the Series A Stock was set to $1.9995 per share, or the equivalent of 1.25 million shares of common stock issuable upon conversion of all Series A Stock. We filed resale registration statements on Form S-3 related to the Series A financing, which have been declared effective by the SEC. Until all Series A Investors no longer hold Series A warrants to purchase common stock: (i) we may not sell any variable rate securities or dilutive securities except for certain exempt issuances; (ii) if we enter into a subsequent financing on more favorable terms than the Series A Stock financing, then the agreements between us and the Series A Investors will be amended to include such more favorable terms; and (iii) we may not sell securities at an effective price per share less than $4.91 except for certain exempt issuances, unless waivers from the Series A Investors are obtained. For a period of twelve months following the Series A First Closing, we have granted the Series A Investors a right of first offer on certain future issuances of securities. |
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Holders of the Series A Stock were entitled to receive accruing dividends at the annual rate of 6%, payable semi-annually. Upon conversion of Series A Stock into common stock, we paid to each holder of Series A Stock converting to common stock, as a “make-whole” payment in common stock, an amount equal to $118 per $1,000 of stated value of Series A Stock so converted, less the aggregate amount of dividends previously paid on such converting Series A Stock. During December 2012, the Series A Investors converted 855.54814 shares of Series A Stock into 427,878 shares of common stock. In addition, 12,871 shares of common stock were issued to the Series A Investors in payment of the make-whole dividends related to the Series A Stock conversions. On January 4, 2013, accrued Series A dividends of $22,000 were paid by issuing 4,164 shares of common stock to the Series A Investors. During the first quarter of 2013, the Series A Investors converted all of the remaining 1,644.45186 shares of Series A Stock into 822,421 shares of common stock. In addition, 50,307 shares of common stock were issued to the Series A Investors in payment of the make-whole and accrued dividends related to the Series A Stock conversions. The combination of make-whole and accrued dividends paid in shares of common stock for the first quarter ended March 31, 2013 and for the nine months ended September 30, 2013, was $246,000. |
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In addition to the issuance of the Series A Stock, at the Series A First Closing, we issued warrants to purchase 213,945 shares of common stock to the Series A Investors. These warrants have a term of 5.5 years and initially were to become exercisable six months from the Series A First Closing, with an initial exercise price of $9.50 per share. At the Series A Second Closing, we issued warrants to purchase 724,825 shares of common stock to the Series A Investors. These warrants have a term of 5½ years and initially were to become exercisable six months from the Series A Second Closing, with an initial exercise price of $2.364 per share (collectively, the “Series A Warrants”). The exercise price of the Series A Warrants and the number of shares of common stock underlying the Series A Warrants are subject to full-ratchet anti-dilution adjustments in the event we issue securities, other than certain excepted issuances, at a price below the then current exercise price of the Series A Warrants. On February 26, 2013, we entered into an agreement with the Series A Investors to modify the Series A Warrants such that they would become immediately exercisable as of February 22, 2013 (the “Modification Date”). Since the Modification Date through September 30, 2013, 949,634 shares of common stock have been issued from exercise of the Series A Warrants, resulting in proceeds to the Company of $2.4 million. See discussion below regarding further adjustments to the Series A Warrants as a result of the Series B and C financings executed during 2013. |
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We account for stock purchase warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreements. Under applicable accounting guidance, stock warrants must be accounted for as derivative financial instruments if the warrants contain full-ratchet anti-dilution provisions, which preclude the warrants from being considered indexed to our own stock. The Series A Warrants issued to Series A Investors contain such provisions, thus requiring us to treat them as derivative financial instruments, to be recorded at fair value at issuance and subsequently adjusted to fair value at each reporting date, with the corresponding adjustment reflected as a non-operating credit / charge in the consolidated statement of operations. We valued the Series A Warrants using the Monte-Carlo simulation method using the following assumptions at September 30, 2013: (i) closing stock price and Series A Warrant contractual exercise price; (ii) term to expiration commensurate with the remaining Series A Warrant terms of 4.5 years; (iii) historical volatilities commensurate with the term of the remaining Series A Warrants of 121.3%; (iv) risk-free interest rates commensurate with the term of the remaining Series A Warrants of 1.2%; and (v) simulated anti-dilution impact assuming various probabilities that we will raise additional capital by issuing equity securities at prices above or below the current contractual Series A Warrant exercise price during the Series A Warrant terms. The result of these valuation simulations was to value the remaining Series A Warrants at $1.1 million, which was $119,000 below their carrying value as of June 30, 2013. As a result, we recognized a $119,000 non-operating, warrant derivative gain in our consolidated statement of operations for the three months ended September 30, 2013. As a result of similar valuation analyses performed during the first and second quarters of 2013, the combined warrant derivative gains recognized in our consolidated statement of operations for the nine months ended September 30, 2013 was $3.4 million. |
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Amortization of the deferred offering-related costs allocated to the Series A Warrants was $280,000 during the first quarter of 2013 and was recognized as a component of interest expense in the nine months ended September 30, 2013 consolidated statement of operations. |
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Series B Convertible Preferred Stock Financing |
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On March 19, 2013, we entered into a securities purchase agreement (the “Series B Purchase Agreement”) with an existing institutional investor (the “Series B Investor”) to purchase 130,000 shares of common stock at a price of $3.05 per share and approximately 1,610.4 units consisting of, in the aggregate, Series B 6% convertible preferred stock (the “Series B Stock”) and warrants to purchase up to 275,000 shares of common stock at an exercise price of $3.49 per share (the “Series B Warrants”) in a registered direct offering (the “Series B Financing”) of securities sold off of our existing shelf registration statement on Form S-3 (File No. 333-176372). The Series B Financing closed on March 20, 2013 (the “Series B Closing”). The Series B Stock and Series B Warrants were sold in multiples of fixed combinations, with each fixed combination consisting of one share of Series B Stock and a Series B Warrant to purchase approximately 171 shares of common stock. Each fixed combination of Series B Stock and Series B Warrants was sold at a price of $1,000. The Series B Stock was initially convertible into an aggregate of 528,000 shares of common stock at an initial conversion price of $3.05 per share. The Series B Warrants are not exercisable for six months from the Series B Closing, and the Series B Stock will accrue dividends at an annual rate of 6% beginning six months after the Series B Closing, assuming the Series B Stock has not been converted by that time. Upon the Series B Closing, we received proceeds of $1.8 million, net of placement agent fees and other related paid and accrued costs. Given that the effective conversion price of the Series B Stock was below the closing market price of our common stock at the time of the Series B Closing, we recognized a beneficial conversion feature in the amount of $417,000. Since the Series B Stock was immediately convertible into common stock, the beneficial conversion feature was treated as a deemed dividend charged to retained earnings. Also, as a result of the Series B Financing, the exercise price of the Series A Warrants issued in the Series A First Closing automatically ratcheted down by their terms from their original exercise price of $9.50 per share to an adjusted exercise price of $3.05 per share, and the underlying shares exercisable as of the Series B Closing were automatically increased from 213,935 shares to 666,375 shares at that time. |
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Pursuant to the Certificate of Designation of Preferences, Rights and Limitations of Series B 6% Convertible Preferred Stock filed by the Company with the Delaware Secretary of State on March 19, 2013, the Series B Stock is non-voting (except to the extent required by law and except for certain consent rights relating to amending the certificate of incorporation or bylaws, and the like), but ranks senior to the common stock with respect to dividends and with respect to distributions upon a deemed dissolution, liquidation or winding-up of the Company. Each share of Series B Stock carries a 6% per annum dividend that will begin accruing six months after the Series B Closing and will be payable only in cash. Subject to certain exceptions, the conversion price of the Series B Stock is subject to full ratchet anti-dilution adjustment in the event we issue any convertible debt or equity below the then-current conversion price (subject to the limits imposed by General Instruction I.B.6. of Form S-3). In the event we commit material and intentional fraud, we may be required to redeem the Series B Stock in exchange for the issuance of common stock valued at 130% of the stated value divided by 75% of the average of the preceding 10-day volume-weighted average price of the common stock, subject to limits imposed by General Instruction I.B.6. of Form S-3. |
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The Series B Warrants have a 5.5 year term as well as a cashless exercise provision in the event there is no effective registration statement covering the common stock issuable upon exercise of the Series B Warrants, and are not exercisable for the first six months following issuance. The Series B Warrants are not subject to price anti-dilution protection. |
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Pursuant to the terms of the Series B Purchase Agreement, we have also agreed with the Series B Investor that while such Series B Investor holds Series B Preferred Stock or Series B Warrants, we will not effect or enter into an agreement to effect a “Variable Rate Transaction,” which means a transaction in which we: (i) issue or sell any convertible securities either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of, or quotations for, the shares of the common stock at any time after the initial issuance of such convertible securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such convertible securities or upon the occurrence of specified or contingent events directly or indirectly related to our business; or (ii) enter into any agreement (including, without limitation, an equity line of credit) whereby we may sell securities at a future determined price. |
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We also agreed with the Series B Investor pursuant to the Series B Purchase Agreement that, except under certain permitted circumstances: (i) until the later of the date that is six months from the Series B Closing or 30 days following the date on which the Series B Stock is no longer outstanding we will not issue, or enter into any agreement to issue, any shares of common stock or equivalents thereof; (ii) until the time that less than 7.5% of the Series B Warrants remain outstanding, neither we nor our subsidiaries shall issue, or enter into any agreement to issue, common stock or equivalents thereof at a price below the exercise price of the Series B Warrants; (iii) so long as any shares of Series B Stock are outstanding, neither we nor our subsidiaries shall issue, or enter into any agreement to issue, common stock or equivalents at a price below the conversion price of the Series B Stock unless all shares of common stock underlying the Series B Stock (taking into consideration the effect of the full adjustment of the anti-dilution provisions from such dilutive issuance) are permitted by General Instruction I.B.6. of Form S-3 to be issued under the registration statement; (iv) if we issue securities within the nine months following the Series B Closing under the Series B Purchase Agreement, and subject to the preexisting rights of other security holders, the Series B Investor shall have the right to purchase all of the securities on the same terms, conditions and price provided for in the proposed issuance of securities; and (v) we will indemnify the Series B Investor against certain losses resulting from our breach of any of our representations, warranties, or covenants under agreements with the Series B Investor, as well as under certain other circumstances described in the Series B Purchase Agreement. |
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The Series B Investor has agreed to be subject to a blocker that (i) would prevent its common stock ownership at any given time from exceeding 4.99% (which may be increased, but not above 9.99%) of our outstanding common stock; or (ii) would prevent us from issuing any shares of common stock to the Series B Investor upon the conversion by such Series B Investor of Series B Stock if the issuance of such shares to the Series B Investor, when aggregated with all other shares of common stock sold to the Series B Investor under the Series B Purchase Agreement together with all shares of common stock issued upon the conversion of Series B Stock, would result in the total issuance of common stock to exceed 19.99% of our outstanding common stock, without first obtaining the approval of our stockholders. We obtained stockholder approval at our June 27, 2013 Annual Stockholders’ Meeting for the terms of the Series B Stock and the issuance and delivery in the aggregate of that number of shares of common stock exceeding 19.99% of the outstanding shares of common stock upon conversion of the Series B Stock. Since the Series B Closing through September 30, 2013, the Series B Investor has converted 1,589.274133 shares of Series B stock into 528,000 shares of common stock. See discussion below regarding additional adjustments to the Series B Stock as a result of the Series C Financing. |
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Series C Convertible Preferred Stock Financing |
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On May 3, 2013, we entered into a securities purchase agreement (the “Series C Purchase Agreement”) with certain accredited investors (the “Series C Investors”), pursuant to which we sold and issued 1,200 shares of our newly created Series C 6% convertible preferred stock (the “Series C Stock”) to the Series C Investors at a purchase price of $1,000 per share in an initial closing that occurred on May 6, 2013 (the “Series C First Closing”) and sold and issued 1,200 additional shares of Series C Stock to the Series C Investors on June 28, 2013 at a purchase price of $1,000 per share after stockholder approval was obtained on June 27, 2013 (the “Series C Second Closing”) (combined, the “Series C Financing”). After certain offering-related costs, the net proceeds from the Series C Financing were $2.15 million. |
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As a result of the Series C Second Closing, the conversion price for the Series C Stock was set to $2.85759 per share, or the equivalent of 839,870 shares of common stock issuable upon conversion of all Series C Stock. The conversion price of the Series C Stock also is subject to proportional adjustment for stock splits, stock dividends, recapitalizations and the like. The Series C Stock is entitled to 6% annual dividends, which rate shall increase by 1% per year for as long as the Series C Stock is outstanding, up to a maximum rate of 10%. Accrued dividends are payable semi-annually, and also on the date of conversion of any Series C Stock, in cash or, subject to certain conditions and at our election, in shares of common stock. If the dividends are paid in shares of common stock, the number of shares of common stock comprising the dividend on each share of Series C Stock will be valued at a 20% discount to the average of the daily volume weighted average price for the five-day trading period immediately prior to the dividend payment date. Given that the effective conversion price of the Series C Stock was below the closing market price of our common stock at the time of both of the Series C closings, we recognized beneficial conversion features in the amount of $1.2 million, which were limited to and reduced the net proceeds allocated to the Series C Stock. Since the Series C Stock was immediately convertible into common stock, the beneficial conversion feature was treated as a deemed dividend charged to retained earnings. Accrued dividends relating to the first semi-annual payment for the Series C Stock were $10,400 as of June 30, 2013, and were paid in July of 2013 by issuing 3,604 shares of common stock to the Series C Investors. For the three month period ended September 30, 2013, we have accrued $4,000 in Series C Stock dividends related to the next semi-annual dividends payment due at the end of 2013. |
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Also as a result of the Series C Second Closing, the exercise price of the Series A Warrants issued in the Series A First Closing automatically ratcheted down by their terms from their most recent exercise price of $3.05 per share to an adjusted exercise price of $2.86 per share, and the underlying shares exercisable as of the Series C Second Closing were automatically increased from 441,566 shares to 470,907 shares. In addition, the conversion price of the Series B Stock automatically ratcheted down by their terms from $3.05 per share to an adjusted conversion price of $2.85759 per share, and the underlying shares issuable from conversion of Series B Stock as of the Series C Second Closing were automatically increased from 109,837 shares to 117,231 shares. |
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In addition to the issuance of the Series C Stock, we issued warrants at the Series C First Closing to purchase 491,803 shares of our common stock with an exercise price of $3.77 per share and at the Series C Second Closing, we issued additional warrants to purchase 491,803 shares of our common stock with an exercise price of $3.55 per share (collectively, the “Series C Warrants”). The exercise price of the Series C Warrants issued equaled 110% of the market value (as defined by Nasdaq rules) of one share of common stock on each closing date. The Series C Warrants have a 5.5 year term, are not exercisable for the first six months following issuance and include a cash-less exercise provision which is only applicable if the common stock underlying the Series C Warrants is not subject to an effective registration statement or otherwise cannot be sold without restriction pursuant to Rule 144. |
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Until the date that is six months following the Series C Second Closing, we have granted the Series C Investors a right of first offer on certain future issuances of securities. We have also agreed to certain standstill provisions, pursuant to which we may not issue any equity securities (or securities convertible into equity) until the later of: (i) September 20, 2013 and (ii) the date that is 30 days following the date on which no Series C Stock remains outstanding (except for certain exempt issuances). Until all Series C Investors no longer hold Series C Stock or Series C Warrants: (i) we may not sell any variable rate securities except for certain exempt issuances; and (ii) if we enter into a subsequent financing on more favorable terms than the Series C Financing, then the agreements between us and the Series C Investors will be amended to include such more favorable terms. In addition, until 7.5% or less of the Series C Warrants remain unexercised, we may not sell any dilutive securities, except for certain exempt issuances. |
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The Series C Stock is non-voting (except to the extent required by law and except for certain consent rights relating to amending the certificate of incorporation or bylaws, and the like), but ranks senior to the common stock and junior to the Series A Stock and Series B Stock with respect to dividends and with respect to distributions upon a deemed dissolution, liquidation or winding-up of the Company. The Series C Investors have agreed to be subject to a blocker that would prevent their common stock ownership at any given time from exceeding 4.99% (which may be increased, but not above 9.99%) of our outstanding common stock. |
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The common stock underlying the Series C Stock and Series C Warrants were initially unregistered under the Securities Act of 1933. In connection with the Series C Financing, however, we entered into a registration rights agreement with the Series C Investors (the “Registration Rights Agreement”). The Registration Rights Agreement required us to file registration statements with the SEC registering for resale: (i) the shares of common stock issuable upon conversion of the Series C Stock; (ii) the shares of common stock issuable as dividends on the Series C Stock; (iii) the shares of common stock issuable upon exercise of the Series C Warrants; and (iv) any additional shares of common stock issuable in connection with any anti-dilution provisions associated with the Series C Stock. We filed registration statements relating to both of the Series C closings, and both registration statements have been declared effective by the SEC. Under the terms of the Registration Rights Agreement, we are obligated to maintain the effectiveness of the resale registration statements until all securities registered thereunder are sold or otherwise can be sold without restriction pursuant to Rule 144. The Registration Rights Agreement includes liquidated damages provisions in the event we fail to file or maintain the effectiveness of the registration statements. We do not plan, nor are we obligated, to register the Series C Stock or the Series C Warrants. |
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During the three months ended September 30, 2013 and through the date of this report, the Series C Investors have converted 2,100 shares of Series C stock into 734,881 shares of common stock, excluding 3,663 of additional shares of common stock issued as consideration for the 6% Series C dividends accrued as of the conversion dates. |
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Warrants |
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Outstanding warrants to purchase common stock are as follows: |
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| | Shares of Common Stock | | | | | | | |
Issuable from Warrants |
Outstanding as of |
| | September 30, | | | December 31, | | | Exercise | | Expiration |
2013 | 2012 | Price |
Liability-classified warrants: | | | | | | | | | | | | | | |
Oct-12 | | | 470,907 | | | | 213,945 | | | | $2.86(1) | | | Mar-18 |
Dec-12 | | | - | | | | 724,825 | | | | $2.36 | | | Jun-18 |
| | | 470,907 | | | | 938,770 | | | | | | | |
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Equity-classified warrants: | | | | | | | | | | | | | | |
Jun-13 | | | 491,803 | | | | - | | | | $3.55 | | | Dec-18 |
May-13 | | | 491,803 | | | | - | | | | $3.77 | | | Nov-18 |
Mar-13 | | | 275,000 | | | | - | | | | $3.49 | | | Sep-18 |
Apr-11 | | | 131,047 | | | | 131,047 | | | | $21.40 | | | Apr-16 |
Oct-09 | | | 3,000 | | | | 3,000 | | | | $77.80 | | | Oct-14 |
May-09 | | | 2,967 | | | | 2,967 | | | $75.00 | - | $90.00 | | May 2014 - June 2014 |
May-09 | | | 109,997 | | | | 109,997 | | | | $90.00 | | | May-14 |
Jul-08 | | | - | | | | 33,698 | | | $118.70 | - | $136.50 | | Jul-13 |
Total | | | 1,505,617 | | | | 280,709 | | | | | | | |
Total - all warrants | | | 1,976,524 | | | | 1,219,479 | | | | | | | |
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-1 | Prior to the anti-dilution adjustments which occurred on March 20, 2013 and June 28, 2013, these warrants had an initial exercise price of $9.50 per share. | | | | | | | | | | | | | |
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