Series D and Series E Preferred Stock Financing and Convertible Note | 6 Months Ended |
Jun. 30, 2014 |
Series D and Series E Preferred Stock Financing and Convertible Note [Text Block] | ' |
11 | Series D and Series E Preferred Stock Financing and Convertible Note |
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| Series D and Series E Preferred Stock |
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| On July 5, 2013, we entered into a Series D Preferred Stock Purchase Agreement (the “Series D Purchase Agreement”) with C Media Limited (the “Investor” or “C Media”), pursuant to which we sold to the Investor 2,285,714 shares of Series D 4% Convertible Redeemable Preferred Stock of the Company (the “Series D Preferred Stock”) for $1.75 per share, or a total purchase price of $4,000,000. |
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| The Series D Preferred Stock and any dividends thereon could be converted into shares of our common stock at any time by the Investor at a conversion price of $1.75 per share. The dividends on the Series D Preferred Stock were payable, at our option, in cash, if permissible, or in additional shares of common stock. In the event the Series E Preferred Stock financing transaction (discussed below) was not consummated on or prior to October 31, 2013, the Series D Preferred Stock would become immediately redeemable at the option of the Investor. The redemption would be exercised in whole or in part at $1.75 dollars per share, plus all unpaid and accrued dividends. The Investor would have the right to vote with our stockholders in any matter. The Investor would be entitled to one vote per common stock on an as-converted basis, based on the conversion price of $1.75 per share. Upon any liquidation, dissolution or winding-up of the Company, the Investor would be entitled to receive an amount equal to the then-outstanding Series D Preferred Stock at $1.75 per share, plus any accrued and unpaid dividends, prior to and in preference of holders of common stock or Series A, B or C preferred stock. |
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The Series D Preferred Stock when issued was a hybrid instrument comprised of a (i) a preferred stock and (ii) an option to convert the preferred stock into shares of our common stock (the “Conversion Option”). The Conversion Option derived its value based on the underlying fair value of the shares of our common stock as did the Series D Preferred Stock, and therefore it was clearly and closely related to the underlying preferred stock. Since the Series D Preferred Stock could have been ultimately redeemed at the option of the holder, the carrying value of the shares, net of unamortized discount and accumulated dividends, was classified as temporary equity. |
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The Company paid issuance costs of approximately $849,000 in cash and issued warrants to the placement agent to purchase 228,571 shares of our common stock at $1.75 per share. The fair value of the warrants was calculated using the Black-Scholes Merton model with the following assumptions: expected life of 5 years, expected dividend rate of 0%, volatility of 70% and an interest rate of 1.60% . The exercise price of the warrants was $1.75. The warrants were valued at $247,995 at the date of issuance. The Series D Preferred Stock was recorded net of issuance costs of $1,097,041 at the issuance date, as a charge to additional paid-in capital, due to our deficit in retained earnings during the period ended December 31, 2013. |
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The Company recognized a beneficial conversion feature discount on the Series D Preferred Stock at its intrinsic value, which was the fair value of the common stock at the commitment date for the Series D Preferred Stock investment, less the effective conversion price. As such, the Company recognized approximately $183,000 of beneficial conversion feature as a deemed dividend and increase in Series D Preferred Stock on the date of issuance since these shares were convertible at the issuance date. Subsequently, the Company converted the Series D Convertible Preferred Stock to Series E Preferred Stock which was binding and legally enforceable by both parties on January 31, 2014 which established a new “commitment date” pursuant to ASC 470-20. As such the previously recognized beneficial conversion feature of $183,000 related to our Series D Preferred Stock was reversed and the Company recognized $2,651,429 of beneficial conversion feature as a deemed dividend related to the exchange of Series D Preferred Stock to Series E Preferred Stock. Further, the Company was obligated to pay cumulative dividends of 4% per annum. In the first quarter of 2014, we paid in full the total cumulative dividends due of $92,054. |
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$2.0 Million Convertible Note |
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On November 4, 2013, the Company issued a convertible note to C Media in $2,000,000 principal amount (the “Bridge Note”). The Bridge Note had an annual interest rate of 4% and a maturity date of January 5, 2015. Upon the closing of a financing pursuant to the terms of the Series D Purchase Agreement by and between the Company and C Media, dated as of July 5, 2013, as amended as of November 4, 2013 (as discussed below) in which C Media would invest funds in the Company in exchange for shares of the Series E Preferred Stock, the principal amount and all unpaid interest of the Bridge Note would be automatically converted into shares of Series E Preferred Stock at a conversion price equal to the per share purchase price paid for the Series E Preferred Stock by C Media. If the Bridge Note was not converted into shares of Series E Preferred Stock within 30 days following the issuance of the Bridge Note (or, in the event that all of the conditions to the Series E Financing contained in the Series E Purchase Agreement (defined below) would have been satisfied except the condition set forth in Section 6.1(i)(ii) of the Series E Purchase Agreement, then, at C Media’s option, by January 31, 2014 (the “Optional Extension Date”)), the principal amount and all accrued and unpaid interest under the Bridge Note would, at C Media’s option, be converted into shares of the Company’s Series D Preferred Stock at a conversion price of $1.75 per share. In connection with the issuance of the Bridge Note, we recorded debt issuance costs of $370,008 to current assets to be amortized over the period of the earliest possible conversion date which was January 31, 2014. As such we recorded interest expense of $128,879 and $241,129 during 2014 and 2013, respectively. The issuance costs included cash paid of $241,936 and the issuance of warrants to the placement agent to purchase 114,285 shares of common stock at $1.75 per share. The fair value of the warrants was calculated using the Black-Scholes model with the following assumptions: expected life of 5 years, expected dividend rate of 0%, volatility of 70% and an interest rate of 1.36% . The exercise price of the warrants was $1.75. The warrants were valued at $128,072 at the date of issuance. |
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| Amendment to Series D Stock Purchase Agreement |
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| On November 4, 2013, in connection with the issuance of the Bridge Note, the Company and C Media entered into Amendment No. 1 to the Series D Purchase Agreement (the “Series D Amendment”). Pursuant to the original Series D Purchase Agreement, dated July 5, 2013, the Company and C Media agreed, among other things, that each party would act in good faith and with fair dealing to finalize an agreement for the purchase and sale of shares of Series E Preferred Stock pursuant to the terms of a Series E Purchase Agreement on or before October 31, 2013. Pursuant to the Series D Amendment, the parties agreed that each party would act in good faith and with fair dealing to finalize the Series E Purchase Agreement on or before the 30 th day following the issuance of the Bridge Note. |
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| Also in connection with the Series D Amendment, C Media executed a waiver and consent with the Company as of October 31, 2013 agreeing, among other things, to waive its right to redeem its Series D Preferred Stock as of October 31, 2013 until the 30 th day following the issuance of the Bridge Note or the Optional Extension Date. |
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| On December 4, 2013, C Media exercised its Optional Extension Option which extended the date to January 31, 2014. |
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| Conversion to Series E Preferred Stock and Conversion of $2 M Convertible Note |
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| On January 31, 2014, the Company entered into a Series E Preferred Stock Purchase Agreement (the “Series E Purchase Agreement”) with C Media and certain other purchasers (collectively, the “Investors”), pursuant to which the Company issued to the Investors an aggregate of 14,285,714 shares of Series E Preferred Stock of the Company for $1.75 per share, or a total purchase price of $25.0 million. Among the 14,285,714 shares of Series E Preferred Stock issued to the Investors, (i) 1,142,857 shares were issued upon the conversion of the Bridge Note issued to C Media in principal amount of $2,000,000, (ii) 10,857,143 shares were issued for an aggregate purchase price of $19 million, and (iii) 2,285,714 shares were issued upon the conversion of 2,285,714 shares of Series D Preferred Stock held by C Media, which constitute all of the issued and outstanding shares of Series D Preferred Stock, into the Series E Preferred Stock pursuant to the Series E Purchase Agreement. In connection with the issuance of the Series E Preferred Stock, we recorded issuance costs of $4,552,347 to additional paid in capital. The issuance costs included cash paid of $2,386,051 and the issuance of warrants to the placement agent to purchase 1,085,714 shares of common stock at $1.75 per share. The fair value of the warrants was calculated using the Black-Scholes model with the following assumptions: expected life of 5 years, expected dividend rate of 0%, volatility of 70% and an interest rate of 1.49% . The exercise price of the warrants was $1.75. The warrants were valued at $2,166,296 at the date of issuance. |
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| In connection with the Series E financing, a total beneficial conversion feature of $16,571,429 was recognized in Additional Paid-in Capital. |