XML 19 R8.htm IDEA: XBRL DOCUMENT v2.4.1.9
Note 4 - Convertible Notes to Related Parties
 3 Months Ended
Mar. 31, 2015
Notes to Financial Statements  
Debt Disclosure [Text Block]
4.     Convertible Notes to Related Parties
 
In April 2011, we entered into a Securities Purchase Agreement for a private placement of up to $4.5 million in Convertible Notes. We received a total of $4.3 million, net of issuance costs, from the issuance of these Convertible Notes.
 
The Convertible Notes are secured by substantially all of our assets, including placing our bank accounts under a control agreement. The Convertible Notes bear interest at 6% per annum, payable quarterly in cash or in additional principal amount of Convertible Notes, at the election of the purchasers. The Convertible Notes mature on May 2, 2021, however, the holders of the Convertible Notes may require prepayment of the Convertible Notes at any time, at each holder’s option.
 
The Convertible Notes are convertible into shares of our common stock at a rate of 1,250 shares for every $1,000 of principal and accrued interest due under the Convertible Notes. There is no right to convert the Convertible Notes to the extent that, after giving effect to such conversion, the holder would beneficially own in excess of 9.99% of our outstanding common stock. Each holder of the Convertible Notes can increase or decrease this beneficial ownership conversion limit by written notice to us, which will not be effective until 61 days after delivery of the notice.
 
As of March 31, 2015, we were in compliance with all covenants under the Convertible Notes. Upon the occurrence of an event of default under the Convertible Notes, the holders of the Convertible Notes have the right to require us to redeem all or a portion of their Convertible Notes.
 
We filed a registration statement with the SEC to register for resale 3.5 million shares underlying the Convertible Notes. The registration statement was declared effective on July 29, 2011. The Note holders have agreed to waive their right to require us to maintain the effectiveness of the registration statement and to register the additional shares underlying the Convertible Notes until they provide notice otherwise.
 
The Convertible Notes contain an embedded conversion feature that was in-the-money on the issuance dates. Based on an effective fixed conversion rate of 1,250 shares for every $1,000 of principal and accrued interest due under the Convertible Notes, the total conversion benefit at issuance exceeded the loan proceeds. Therefore, a debt discount was recorded in an amount equal to the face value of the Convertible Notes on the issuance dates and we began amortizing the resultant debt discount over the respective 10-year term of the Convertible Notes. During the three months ended March 31, 2015, accrued interest of approximately $80,000 was paid-in-kind and rolled into the Convertible Note principal balance, which resulted in an additional debt discount of approximately $80,000. For the three months ended March 31, 2015 and 2014, interest expense relating to the stated rate was approximately $81,000 and $77,000, respectively, and interest expense relating to the amortization of the debt discount was approximately $151,000 and $139,000, respectively.
 
As of March 31, 2015, the carrying value of the Convertible Notes was approximately $1,749,000, which is comprised of the $5,421,000 principal amount of the Convertible Notes outstanding, less debt discount of $3,672,000. If the $5,421,000 principal amount of Convertible Notes is converted, we would issue 6,776,998 shares of our common stock.