Senior Secured Notes | 3 Months Ended |
Sep. 30, 2013 |
Debt Disclosure [Abstract] | ' |
Senior Secured Notes | ' |
8 | Senior Secured Notes | | | | | | | |
On March 9, 2012 and September 24, 2012, the company entered into securities purchase agreements with certain accredited investors pursuant to which we sold an aggregate principal amount of $7,350,000 of senior secured promissory notes and warrants to purchase a total of 5,580,527 shares of common stock for gross proceeds of $7,350,000. The secured notes are senior secured promissory notes and are not convertible into equity securities. The secured notes, as amended, are due and payable on the first to occur of October 31, 2013 or a subsequent financing, as defined. No interest shall accrue on the secured notes and they contain covenants and events of default customary for similar transactions. The secured notes are collateralized by a first priority lien on all of the company’s assets in accordance with, and subject to, a security agreement. The warrants are exercisable for a period of 54 months commencing on the six month anniversary of the issue date of such warrants at an initial exercise price of $1.34 per share, which is 101% of the consolidated closing bid price reported by the Nasdaq Stock Market on March 9, 2012. The closing of these financings occurred on March 14, 2012 and September 28, 2012 and the net proceeds to us from these transactions, after deducting offering expenses, were approximately $7,260,000. The following investors that participated in these financings are related parties to us. J. David Luce, a member of our board of directors, and his spouse purchased an aggregate principal amount of $2,650,000 of secured notes and 2,010,876 warrants through affiliated entities, John J. Waters, who was a member of our boards of directors through May 12, 2013, purchased an aggregate principal amount of $150,000 of secured notes and 119,940 warrants. In addition, our chief executive officer and a member of our board of directors, O’Connell Benjamin, and our chief financial officer, William Marshall, each purchased an aggregate principal amount of $100,000 of secured notes and 76,073 warrants. Further, Lazarus Investment Partners LLLP, which was the beneficial owner of approximately 16.2% and 23.8% of our outstanding shares of common stock immediately prior to these offerings, respectively purchased an aggregate principal amount of $2,000,000 of secured notes and 1,521,463 warrants. The manager of the general partner of Lazarus Investment Partners, LLLP is the brother of Dr. Todd A. Borus, a member of our board of directors. The participation by these investors was on the same terms as the other investors in these transactions. |
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On September 24, 2012, we also entered into a transaction with the holders of the $4,050,000 senior secured promissory notes issued in March 2012, to extend the maturity date of such notes to October 31, 2013 and grant pari passu rights to the new notes issued on September 28, 2012. In connection with and in consideration of this extension, we issued the holders of the notes issued in March 2012 warrants to purchase an aggregate of 2,197,674 shares of common stock with the same terms as the warrants issued to the new note holders. Due to their ownership of secured notes issued in March 2012, extension warrants were issued to the following related parties: entities affiliated with Mr. Luce were issued a total of 813,953 extension warrants; John Waters, a director through May 12, 2013, was issued 81,395 extension warrants, each of the company’s chief executive officer and chief financial officer were issued 27,131 extension warrants and Lazarus Investment Partners was issued 542,636 extension warrants. |
The company allocated the proceeds from the secured note transactions to the secured notes and the warrants based on the relative fair values of such instruments using the present value of the secured notes at a market rate of interest and the value of the warrants based on the Black-Scholes option pricing model and the applicable assumptions set forth in Note 3 of Notes to Condensed Consolidated Financial Statements. This allocation resulted in an effective interest rate for the secured notes from March 2012 through September 2012 of approximately 54% per annum. Following the extension of the secured notes issued in March 2012 the effective interest rate for the remaining term of such notes was approximately 47% per annum. The effective interest rate for the secured notes issued in September 2012 was approximately 41% per annum. However, since the subjective nature of the inputs for the option pricing models can materially affect fair value estimates, in management’s opinion, such models may not provide a reliable single measure of the fair value of the warrants and the resulting effective interest rates. In connection with the secured note transactions the company recorded senior secured promissory notes of $7,350,000, debt discount of $4,726,000 and additional paid-in-capital of $4,676,000 related to the fair value of the warrants. The non-cash amortization of the debt discount and deferred financing costs of $95,000 and $549,000 is included in the other (expense) income for the three months ended September 30, 2013 and 2012, respectively. The aggregate principal amount of $850,000 of senior notes outstanding, were repaid on their stated maturity date. |
In connection with the sale of Series D convertible preferred stock discussed in Note 9 of Notes to Condensed Consolidated Financial Statements, holders of $6,500,000 of secured notes agreed to cancel their notes in exchange for the Series D shares and warrants issued in the sale. The company completed this transaction on June 20, 2013 and recorded the reduction in secured notes and the related unamortized debt discount and deferred financing costs on such date. The early extinguishment of the secured notes resulted in a non-cash loss on extinguishment of approximately $1,060,000 which is equal to the remaining unamortized debt discount and deferred financing costs related to the cancelled notes as of the extinguishment date. The loss on extinguishment was included in other (expense) income for the quarter ended June 30, 2013. |
The following table sets forth the secured notes and unamortized debt discount (in thousands): |
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| | | | | | | | |
| | September 30, | | | June 30, | |
2013 | 2013 |
| | |
Senior secured notes | | $ | 850 | | | $ | 850 | |
Unamortized debt discount | | | (31 | ) | | | (126 | ) |
| | | | | | | | |
Senior secured notes, net | | $ | 819 | | | $ | 724 | |
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