Annual report pursuant to section 13 and 15(d)

Note 8 - Stockholders' Equity

v2.4.0.8
Note 8 - Stockholders' Equity
 12 Months Ended
Dec. 31, 2012
Stockholders' Equity Note [Abstract]  
Stockholders' Equity Note Disclosure [Text Block]

8.   Stockholders’ Equity


July 2012 Private Placement


In July 2012, the Company entered into securities purchase agreements for the private placement of shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock, at a purchase price of $1.10 per unit (the “July PIPE Financing”).  Each unit consisted of one share of common stock and a warrant to purchase one-half share of common stock.  The pricing for the July PIPE Financing was set by the Company on June 25, 2012.


In the July PIPE Financing, the Company sold to the investors 5,454,523 shares of common stock, together with warrants to purchase 2,727,274 shares of common stock, for aggregate gross proceeds of $6,000,000.  Each warrant is exercisable for five years from the date of issuance and has an exercise price of $1.45 per share, subject to adjustment from time to time for stock splits or combinations, stock dividends, stock distributions, recapitalizations and other similar transactions.  In addition, the exercise price of the warrants will be subject to weighted average anti‐dilution protection, such that the exercise price will be adjusted downward (commonly referred to as a “down round” provision) on a weighted average basis to the extent the Company issues common stock or common stock equivalents in a financing transaction at a price below the then prevailing warrant exercise price (see Note 11).  Non-employee directors of the Company invested a total of $269,980 in the July PIPE Financing. The Company’s placement agent for the July PIPE Financing, and its sub-placement agents, earned cash commissions of $480,000 as well as warrants to purchase 409,093 shares of the Company’s common stock. The placement agent warrants have the same terms and conditions as the investor warrants, except that the placement agent warrants have an exercise price of $1.10 per share.


In connection with the July PIPE Financing, the Company entered into registration rights agreements with the investors pursuant to which the Company agreed to prepare and file a registration statement with the SEC covering the resale of the shares of common stock and the shares of common stock underlying the warrants issued in the transaction. The Company filed that registration statement on August 13, 2012, and the registration statement became effective on September 21, 2012.  In the event the Company fails to continuously maintain the effectiveness of the registration statement (with certain permitted exceptions), the Company will incur certain liquidated damages to investors in the July PIPE Financing, up to a maximum amount of 6% of the investors’ investment in that transaction, or $360,000.  The Company must bear the costs, including legal and accounting fees, associated with the registration statement. Management believes the Company will be able to maintain continuous effectiveness of the registration statement and, as such, no liability has been recorded related to this liquidated damages provision.


Under guidance in ASC 815-40, “Contracts in Entity's Own Equity,” the down round provision contained in the warrants issued in the July PIPE Financing requires derivative liability accounting treatment for the warrants. At December 31, 2012, the fair value of the warrants was $2,128,302. The fair value of the warrants was calculated using the Monte Carlo simulation valuation method.


Assumptions used in calculating the fair value of these warrants were as noted below:


 

 

 

December 31,

2012

 

 

Transaction Date

Dividend yield

 

 

 

 

 

 

0%

 

 

 

 

 

 

 

 

 

 

 

0%

 

 

 

 

Expected volatility

 

 

   

 

 

47.08%

 

 

 

   

 

 

   

 

 

47.64%

 

 

   

Risk free interest rate

 

 

   

 

 

0.65%

 

 

 

   

 

 

 

 

 

 

0.75%

 

 

 

 

Expected remaining term (in years)

 

 

 

 

 

 

4.51

 

 

 

 

 

 

 

 

 

 

 

5.00

 

 

 

 


In addition to the assumptions above, the Company also takes into consideration whether or not it would participate in another round of equity financing and, if so, what that stock price would be for such a financing at that time.


The change in the fair value of the warrants accounted for as a derivative liability is reflected below:


Derivative liability at transaction date related to warrants

  $ 1,957,720  

Loss on change in fair value of derivative liability related to warrants

    170,582

 

Derivative liability at December 31, 2012 related to warrants

  $ 2,128,302  

Preferred Stock


In 2006, the Company issued 7,965,000 shares of Series A Convertible Preferred Stock. The holders of Series A Convertible Preferred Stock had the right to convert such shares, at any time, into shares of common stock at the then applicable conversion rate. In addition, the terms of the Series A Convertible Preferred Stock provided for automatic conversion into common stock at the then applicable conversion rate upon the closing of an initial public offering or the consent of holders of a majority of the outstanding shares of the Series A Convertible Preferred Stock. In connection with any of the foregoing conversion events, every four shares of Series A Convertible Preferred Stock would convert into one share of common stock, subject to adjustment for certain corporate events, including stock splits, stock dividends and recapitalizations. However, on December 15, 2011, the Company’s Board of Directors approved an amendment to the terms of the Series A Convertible Preferred Stock providing for the automatic conversion of all outstanding shares of Series A Convertible Preferred Stock into shares of common stock, on a 1-for-1 basis, upon the effectiveness of a Form 10 registration statement filed by the Company with the SEC under the Exchange Act. That amendment was approved by the stockholders of the Company on February 10, 2012, and a Certificate of Amendment effecting the change to the terms of the Series A Convertible Preferred Stock was filed with the State of Delaware on that same day. Accordingly, upon the effectiveness of the Company’s Form 10 on February 27, 2012, the outstanding shares of Series A Convertible Preferred Stock converted into 7,965,000 shares of the Company’s common stock.


On February 10, 2012, the stockholders of the Company also approved an Amended and Restated Certificate of Incorporation to be filed in connection with the effectiveness of the Company’s Form 10 registration statement.  The Company filed the Amended and Restated Certificate of Incorporation with the state of Delaware on February 27, 2012, and it became effective upon filing.  Under such Amended and Restated Certificate of Incorporation, the Company has the authority to issue up to 25,000,000 shares of preferred stock, and the Board of Directors has the authority, without further action by the stockholders, to issue up to that number of shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series, but not below the number of shares of such series then outstanding.  In June 2012, the Board of Directors established the terms of a series of preferred stock known as “Series A Convertible Preferred Stock”.  The Board of Directors designated the Series A Convertible Preferred Stock solely to provide BSC a series of the Company’s preferred stock into which BSC could elect to convert the BSC Notes other than in connection with a qualified financing (see Note 6).  The Company has not issued any shares of the Series A Convertible Preferred Stock.  Likewise, the Company has not filed a Certificate of Designations with the Secretary of State of the State of Delaware to create the Series A Convertible Preferred Stock.  The Company does not intend to file such Certificate of Designations unless and until BSC elects to convert its BSC Notes into shares of the Series A Convertible Preferred Stock.


Summary of Conversions to Common Stock Upon Effectiveness of the Form 10


The table below summarizes the impact on the Company’s balance sheet and shares outstanding of the conversions to common stock that occurred upon the effectiveness of the Company’s Form 10 registration statement on February 27, 2012:


 

 

Impact to Balance Sheet

 

 

Increase in

 

 

 

Before

Conversions

 

 

Impact of

Conversions

 

 

After

Conversions

 

 

Common Shares

Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact on assets

 

 

 

 

 

 

 

 

 

 

 

 

Deferred costs

 

$

799,123

 

 

$

(799,123

)

 

$

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact on liabilities and equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued interest on converted notes

 

$

974,311

 

 

$

(974,311

)

 

$

-

 

 

 

1,092,559

 

Summer 2011 Notes, net

 

 

904,397

 

 

 

(904,397

)

 

 

-

 

 

 

2,183,334

 

March 2010 Notes, net

 

 

4,057,500

 

 

 

(4,057,500

)

 

 

-

 

 

 

4,071,000

 

2011 Unit Offering Notes, net

 

 

4,367,482

 

 

 

(4,367,482

)

 

 

-

 

 

 

9,050,834

 

Total impact on liabilities

 

 

10,303,690

 

 

 

(10,303,690

)

 

 

-

 

 

 

16,397,727

 

Series A convertible preferred stock

 

 

7,965,000

 

 

 

(7,965,000

)

 

 

-

 

 

 

7,965,000

 

Additional paid-in capital and common stock

 

 

-

 

 

 

19,345,209

 

 

 

19,345,209

 

 

 

-

 

Accumulated deficit

 

 

-

 

 

 

(1,875,642

)

 

 

(1,875,642

)

 

 

-

 

Total impact on equity

 

 

7,965,000

 

 

 

9,504,567

 

 

 

17,469,567

 

 

 

7,965,000

 

Total impact on liabilities and equity

 

$

18,268,690

 

 

$

(799,123

)

 

$

17,469,567

 

 

 

24,362,727

 


The impact to accumulated deficit relates to the write-off of unamortized debt discounts and deferred financing costs.


Stock Incentive Plans


At December 31, 2011, the Company had four share-based compensation plans (a “1998 Plan”, a “2007 Plan”, and two “2010 Plans”, and referred to collectively herein as the “Plans”). The Plans provide for the granting of share-based awards, such as incentive and non-qualified stock options, to employees, directors, consultants and advisors. One of the 2010 Plans also provides for cash-based awards. Awards may be subject to a vesting schedule as set forth in each individual award agreement. The Company terminated the 1998 Plan, effective June 24, 2008, with respect to future grants such that no new options may be awarded under the 1998 Plan on or after June 24, 2008. Upon adoption of the 2010 Plans, the Company also ceased making awards under its 2007 Plan. A total of 3,815,675 shares of the Company’s common stock were reserved for issuance under the 2010 Plans, and awards with respect to a total of 3,246,450 shares have been made under the 2010 Plans.  In February 2012, the stockholders of the Company approved the creation of a new share-based incentive plan (the “2012 Plan”). With the adoption of the 2012 Plan, no additional grants under the 2010 Plans will be made. A total of 3,000,000 shares of the Company’s common stock were reserved for issuance under the 2012 Plan, of which awards as to 2,947,400 shares had been made as of December 31, 2012, thus, 52,600 shares remained available for award grants as of December 31, 2012 under the 2012 Plan.


Activity with respect to stock options issued by the Company is summarized as follows:


 

 

Options

Outstanding

 

 

Options

Exercisable

 

 

Range of

Exercise Prices

 

 

Weighted-
average

Exercise

price per

share

 

 

Intrinsic

Value (1)

 

Balance at January 1, 2010

 

 

669,777

 

 

 

 

 

 

$0.88

-

24.00

 

 

$

4.28

 

 

$

3,694,400

 

Exercisable at January 1, 2010

 

 

 

 

 

 

483,364

 

 

 

0.88

-

24.00

 

 

 

2.78

 

 

 

3,424,333

 

Granted (2)

 

 

3,246,450

 

 

 

 

 

 

 

 

1.80

 

 

 

 

1.80

 

 

 

 

 

Cancelled or forfeited

 

 

(153,750

)

 

 

 

 

 

 

3.20

-

24.00

 

 

 

5.06

 

 

 

 

 

Outstanding at December 31, 2010

 

 

3,762,477

 

 

 

 

 

 

 

0.88

-

24.00

 

 

 

2.11

 

 

 

262,500

 

Exercisable at December 31, 2010

 

 

 

 

 

 

433,746

 

 

 

0.88

-

24.00

 

 

 

3.03

 

 

 

262,500

 

Cancelled or forfeited

 

 

(82,500

)

 

 

 

 

 

 

1.80

-

24.00

 

 

 

4.93

 

 

 

 

 

Outstanding at December 31, 2011

 

 

3,679,977

 

 

 

 

 

 

 

0.88

-

9.64

 

 

 

2.05

 

 

 

-

 

Exercisable at December 31, 2011

 

 

 

 

 

 

1,501,659

 

 

 

0.88

-

9.64

 

 

 

2.15

 

 

 

-

 

Granted (2)

 

 

3,097,400

 

 

 

 

 

 

 

1.00

 

2.13

 

 

 

1.08

 

 

 

 

 

Exercised

 

 

(14,000

)

 

 

 

 

 

 

1.80

-

9.64

 

 

 

1.80

 

 

 

 

 

Cancelled or forfeited

 

 

(331,250

)

 

 

 

 

 

 

1.80

-

9.64

 

 

 

2.14

 

 

 

 

 

Outstanding at December 31, 2012

 

 

6,432,127

 

 

 

 

 

 

 

0.88

-

9.64

 

 

 

1.58

 

 

 

1,846,040

 

Exercisable at December 31, 2012

 

 

 

 

 

 

2,386,909

 

 

 

0.88

-

9.64

 

 

 

2.13

 

 

 

205,000

 


(1)

Intrinsic value is calculated as the estimated fair value of the Company’s stock at the end of the related period less the option exercise price of in-the-money options.

(2)

All options granted during the years ended December 31, 2010 and 2012 were granted with exercise prices which were deemed to be the fair market value of the Company’s stock on the date of grant.


The following table summarizes information about stock options at December 31, 2012:


 

 

 

Options Outstanding

 

 

 

 

 

Options Exercisable

 

Range of

Exercise Prices

 

 

Number

Outstanding

 

 

Weighted -

Average

Remaining

Contractual

Life

 

 

Weighted -

Average

Exercise 

Price

 

 

Number

Exercisable

 

 

Weighted -

Average

Exercise

Price

 

 

$0.88

-

1.17

 

 

 

3,033,900

 

 

 

8.53

 

 

$

0.99

 

 

 

287,500

 

 

$

0.89

 

 

1.63

-

2.13

 

 

 

3,216,700

 

 

 

8.16

 

 

 

1.79

 

 

 

1,917,882

 

 

 

1.80

 

 

3.20

-

9.64

 

 

 

181,527

 

 

 

3.55

 

 

 

7.61

 

 

 

181,527

 

 

 

7.61

 

 

 

 

 

 

 

 

6,432,127

 

 

 

8.20

 

 

 

1.58

 

 

 

2,386,909

 

 

 

2.13

 


The weighted average grant date fair value of options granted during the years ended December 31, 2010 and 2012 was $0.83 and $0.48, respectively, and no options were granted in 2011.  A summary of the status of the Company’s nonvested stock options during the years ended December 31, 2010, 2011 and 2012 is presented below:


Nonvested Stock Options

 

Shares

 

 

Weighted -

Average

Grant Date

Fair Value

 

Nonvested January 1, 2010

 

 

186,413

 

 

$

2.41

 

Granted

 

 

3,246,450

 

 

 

0.83

 

Forfeited

 

 

(41,667

)

 

 

1.92

 

Vested

 

 

(62,465

)

 

 

2.31

 

Nonvested December 31, 2010

 

 

3,328,731

 

 

 

0.88

 

Forfeited

 

 

(51,833

)

 

 

0.88

 

Vested

 

 

(1,098,580

)

 

 

0.89

 

Nonvested December 31, 2011

 

 

2,178,318

 

 

 

0.87

 

Granted

 

 

3,097,400

 

 

 

0.48

 

Forfeited

 

 

(258,517

)

 

 

0.85

 

Vested

 

 

(971,984

)

 

 

1.04

 

Nonvested December 31, 2012

 

 

4,045,218

 

 

 

0.56

 


As of December 31, 2012 there was a total of approximately $1,948,000 of unrecognized compensation cost related to share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of approximately 1.8 years.


The assumptions used in calculating the fair value using the Black-Scholes option-pricing model are set forth in the following table for options issued by the Company in 2012 and 2010 (no options were issued in 2011):


 

 

Years Ended December 31,

 

 

 

 

2012

 

 

2010

 

 

Dividend yield

 

 

0%

 

 

 

 

0%

 

 

Expected Volatility

 

45.17%

to

45.32%

 

 

 

44.81%

 

 

Risk free Interest rates

 

0.83%

to

1.13%

 

 

 

2.36%

 

 

Expected lives (years)

 

 

6.0

 

 

 

 

6.0

 

 


Warrants


In May 2012, the Company issued an aggregate of 1,250,000 common stock warrants to two non-employee directors in recognition of their long-standing support of the Company.  The warrants were immediately vested and exercisable upon issuance, have an exercise price of $1.00 per share, and have a term of five years.  The fair value of the 1,250,000 warrants issued was $514,250, which was calculated using the Black-Scholes valuation model. In addition, during year ended December 31, 2012, the Company issued 421,666 warrants to third parties with an exercise price of $1.00 and having a fair value of $349,003. The aggregate fair value of the aforementioned warrants of $863,253 was recorded as a selling, general and administrative expense during year ended December 31, 2012.


Warrants have been issued for terms of up to five years. Common stock warrants issued, expired, and outstanding during the years ended December 31, 2010, 2011 and 2012 are as follows:


 

 

Shares

 

 

Weighted -

Average

Exercise

Price

 

Outstanding at January 1, 2010

 

 

410,542

 

 

$

0.42

 

Issued

 

 

25,444

 

 

 

8.00

 

Outstanding at December 31, 2010

 

 

435,986

 

 

 

3.74

 

Expired

 

 

(410,542

)

 

 

3.48

 

Issued

 

 

2,122,500

 

 

 

0.29

 

Exercised

 

 

(225,000

)

 

 

0.01

 

Outstanding at December 31, 2011

 

 

1,922,944

 

 

 

0.43

 

Issued

 

 

7,652,071

 

 

 

1.05

 

Shares withheld on net settled exercises

 

 

(186,347

)

 

 

0.70

 

Exercised

 

 

(624,832

)

 

 

0.67

 

Outstanding at December 31, 2012

 

 

8,763,836

 

 

 

0.95

 


The assumptions used in calculating the fair value of warrants utilizing the Black-Scholes pricing model are as follows:


 

 

Year Ended December 31,

 

 

 

2012

 

 

2011

 

2010

 

Dividend yield

 

 

0%

 

 

 

 

0%

 

 

 

0%

 

Expected Volatility

 

40.96%

to

46.88%

 

 

48.67%

to

49.36%

 

 

44.81%

 

Risk free Interest rates

 

0.19%

to

0.77%

 

 

0.81%

to

1.13%

 

 

2.36%

 

Expected lives (years)

 

1.6

to

5.0

 

 

 

5.0

 

 

 

5.0