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CONVERTIBLE DEBT
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9 Months Ended | |
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Sep. 30, 2014
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| Convertible Debt [Abstract] | ||
| Debt Disclosure [Text Block] |
3. CONVERTIBLE DEBT
On February 5, 2014, the Company entered into a securities purchase agreement with certain accredited investors to sell $4,000,000 in principal amount of convertible debentures and warrants to purchase 400,000 shares of its common stock for an aggregate purchase price of $4,000,000. On February 6, 2014, the Company completed the sale of the debentures and warrants (the “February 2014 Private Placement”). The debentures accrued interest at an annual rate of 8%, payable upon redemption or conversion, in cash or shares of the Company’s common stock.
The agreement provided that in the event of any sale of securities by the Company resulting in aggregate gross proceeds of at least $2,000,000 (a “Subsequent Financing”), the holder could require the Company to redeem some or all of the then outstanding principal amount of the debenture, plus all accrued but unpaid interest and other amounts due in respect of the debenture, in an amount equal to the amount of the holder’s investment in the Subsequent Financing, by delivering notice to the Company on or before the consummation date of the Subsequent Financing. The agreement further provided that if, within 21 months after the issuance of the debentures, the Company raised gross proceeds of at least $8,000,000, in the aggregate, in one or more subsequent financings (the “Minimum Proceeds”), the Company could, by notice given within three trading days after the receipt of the Minimum Proceeds, compel holders to convert (at a conversion price of $10.00 per share) all or part of the then outstanding principal amount of the debentures and accrued but unpaid interest and other amounts.
The Company determined that the warrants associated with the convertible debentures meet the requirements for classification as equity. Therefore, the relative fair value of the warrants at the date of issuance of $254,000 was included as a component of stockholders’ equity. In order to estimate the value of the these warrants the Company used a probability weighted valuation model together with assumptions that considered, among other variables, the fair value of the underlying stock, a risk-free interest rate of 1.52%, a volatility of 110%, a 0% dividend rate, a contractual term of 5 years, and an estimate of the probability that the warrants will become exercisable upon conversion of the associated debt.
Following the allocation of the relative fair value of the warrants to equity, the remaining value of approximately $3,746,000, at the date of issuance, was allocated to the convertible debentures. The resulting discount on the debentures of $254,000 was fully accreted to interest expense during the nine months ended September 30, 2014 as a result of the tender of the debentures in exchange for common stock and warrants in August 2014. The Company accrued approximately $172,000 in interest expense through the date of exchange. See Note 4 for further discussion of the debenture exchange.
Common Stock Purchase Warrants
The warrants had an exercise price of $20.00 and, if unexercised, would have expired on February 6, 2019. The warrants were exercisable only following the full or partial conversion of the associated debentures, and in the event of a partial conversion the warrant would have become exercisable only for a proportionate number of the total shares subject to the warrant. In the event any debentures ceased to be outstanding prior to the associated warrants becoming exercisable, whether by reason of repayment, prepayment, redemption or otherwise, the associated warrants would automatically terminate. At the time of the exchange of common stock and warrants for the debentures as described in Note 4, the debentures ceased to be outstanding and the associated warrants were unexercised and therefore terminated.
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