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Note 8 - Preferred Stock

12 Months Ended

Dec. 31, 2013

Disclosure Text Block Supplement [Abstract]

8. Preferred Stock

Series A Convertible Preferred Stock

The Company has authorized 2,200 shares of Series A Convertible Preferred Stock, $1,000 stated value (“Series A Preferred Shares”). Pursuant to a securities purchase agreement dated March 16, 2012, we sold an aggregate of 2,200 Series A Preferred Shares, as well as accompanying warrants to purchase 8,799,999 shares of common stock, for gross proceeds of $2.2 million. Net proceeds to the Company, after deduction of placement agent fees and other expenses, were approximately $2.0 million.

The Series A Preferred Shares have a liquidation preference equal to the initial purchase price, have no voting rights, and are not entitled to a dividend. The Series A Preferred Shares may be converted at any time at the option of the holders into shares of our common stock. The initial conversion price was $0.75 and during 2012, 1,412 of the Series A Preferred Shares were converted at this price into an aggregate of 1,882,667 shares of our common stock. Effective December 11, 2013, the designation of the Series A Preferred Shares was amended in connection with the issuance of our Series B Convertible Preferred Stock (see discussion below). The amendment had the effect of reducing the conversion price of the then-outstanding Series A Preferred Shares to $0.35 and during the remainder of 2013, 717 shares of the Series A Preferred Shares were converted at this price into an aggregate of 2,048,570 shares of our common stock. As of December 31, 2013, there were 71 shares of Series A Preferred Shares outstanding, convertible into 202,859 shares of our common stock. All of the remaining Series A Preferred Shares were converted into shares of our common stock during January 2014.

Accounting Treatment and Allocation of Proceeds. We assessed the Series A Preferred Shares and the related warrants under ASC Topic 480, “Distinguishing Liabilities from Equity” (“ASC 480”), ASC Topic 815, “Derivatives and Hedging” (“ASC 815”), and ASC Topic 470, “Debt” (“ASC 470”). The preferred stock contains an embedded feature allowing an optional conversion by the holder into common stock which meets the definition of a derivative. However, we determined that the preferred stock is an “equity host” (as described by ASC 815) for purposes of assessing the embedded derivative for potential bifurcation and that the optional conversion feature is clearly and closely associated to the preferred stock host; therefore the embedded derivative does not require bifurcation and separate recognition under ASC 815. We determined there to be a beneficial conversion feature (“BCF”) requiring recognition at its intrinsic value. Since the conversion option of the preferred stock was immediately exercisable, the amount allocated to the BCF was immediately accreted to preferred dividends, resulting in an increase in the carrying value of the preferred stock. We also assessed the warrants issued in connection with the financing under ASC 815 and determined that they did not initially meet the definition of a derivative, but will require evaluation on an on-going basis. As of December 31, 2013, we determined that the warrants still did not meet the definition of a derivative.

The following is a summary of the allocation of net proceeds and reconciliation to the carrying value of the Series A Preferred Shares at December 31, 2013:

Net proceeds	1,999,032
Fair value of warrants (recorded to Additional Paid-in Capital)	(1,127,418	)
Beneficial conversion feature (recorded to Additional Paid-in Capital)	(762,667	)
Net proceeds allocated to preferred stock	108,947
Accretion of beneficial conversion feature (deemed dividend)	762,667
Initial carrying value of preferred stock	871,614
Accretion of beneficial conversion feature (deemed dividend) related to issuance of Series B Convertible Preferred Stock	360,229
Conversions to common stock	(1,171,257	)
Carrying value at December 31, 2013	60,586

Series B Convertible Preferred Stock

The Company has authorized 1,650 shares of Series B Convertible Preferred Stock, $1,000 stated value (“Series B Preferred Shares”). Pursuant to a securities purchase agreement dated December 11, 2013, we sold an aggregate of 1,650 Series B Preferred Shares, for gross proceeds of $1.65 million. Net proceeds to the Company, after deduction of transaction expenses, were approximately $1.6 million. No warrants were issued in connection with the transaction.

The Series B Preferred Shares have a liquidation preference equal to the initial purchase price, have no voting rights, and are not entitled to a dividend. The Series B Preferred Shares may be converted at any time at the option of the holders into shares of our common stock at a conversion price of $0.35. As of December 31, 2013, there were 1,650 shares of Series B Preferred Shares outstanding, convertible into 4,714,286 shares of our common stock. In January 2014, 350 Series B Preferred Shares were converted into 1,000,000 shares of our common stock.

In conjunction with the sale of the Series B Preferred Shares, we entered into an agreement with the holders of the Series A Preferred Shares to amend the designation of the Series A Preferred Shares. The amendment had the effect of reducing the conversion price of the then-outstanding 788 Series A Preferred Shares from $0.75 to $0.35.

Accounting Treatment and Allocation of Proceeds. We assessed the Series B Preferred Shares under ASC Topic 480, “Distinguishing Liabilities from Equity” (“ASC 480”), ASC Topic 815, “Derivatives and Hedging” (“ASC 815”), and ASC Topic 470, “Debt” (“ASC 470”). The preferred stock contains an embedded feature allowing an optional conversion by the holder into common stock which meets the definition of a derivative. However, we determined that the preferred stock is an “equity host” (as described by ASC 815) for purposes of assessing the embedded derivative for potential bifurcation and that the optional conversion feature is clearly and closely associated to the preferred stock host; therefore the embedded derivative does not require bifurcation and separate recognition under ASC 815. We determined there to be a beneficial conversion feature (“BCF”) for both the Series A Preferred Shares and the Series B Preferred Shares requiring recognition at its intrinsic value. Since the conversion option of both series of preferred stock was immediately exercisable, the amount allocated to each BCF was immediately accreted to preferred dividends, resulting in an increase in the carrying value of both the Series A Preferred Shares and the Series B Preferred Shares.

The following is a summary of the allocation of net proceeds and reconciliation to the carrying value of the Series B Preferred Shares at December 31, 2013:

Net proceeds	1,615,798
Beneficial conversion feature – Series A Preferred Shares (recorded to Additional Paid-in Capital)	(360,229	)
Beneficial conversion feature – Series B Preferred Shares (recorded to Additional Paid-in Capital)	(754,286	)
Net proceeds allocated to preferred stock	501,283
Accretion of beneficial conversion feature (deemed dividend)	754,286
Carrying value at December 31, 2013	1,255,569