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Note 9 - 2012 Financing | 12 Months Ended
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Dec. 31, 2012
Debt Disclosure [Text Block] | NOTE 9 – 2012 FINANCING On August 13, 2012 (the “Closing Date”), the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with Rho Ventures VI, L.P. (“Rho”) and Prentice Consumer Partners, LP (“Prentice”, and together with Rho, the “Purchasers”) pursuant to which the Company issued (i) $1,500,000 aggregate principal amount of collateralized subordinated convertible promissory notes to Rho (the “Rho Notes”) and (ii) $1,500,000 aggregate principal amount of collateralized subordinated promissory notes to Prentice (the “Prentice Notes” and, collective with the Rho Notes, the “Notes”). The Rho Notes bear interest at 12% per annum, compounded annually, and interest is payable upon maturity or conversion. The Prentice Notes bear interest at 15% per annum, compounded annually, and interest is payable quarterly. Prentice received an origination fee on the Closing Date equal to two percent of the Prentice Notes. The Rho Notes are convertible, at the holder's option, (a) into equity securities that the Company might issue in any subsequent round of financing that results in proceeds to the Company of at least $7,500,000 (a “Qualified Financing”) at a price equal to the lowest price per share paid by any investor in such Qualified Financing, or (b) into shares of the Company’s Common Stock at a price per share equal to $1.05, which approximates the fair market value on the Closing Date (the “Rho Conversion Feature”). The Notes have a one-year term, but may become due prior to the end of such term in the event of a change of control or a Qualified Financing. The Notes were collateralized by second priority liens on all assets of the Company, however, in connection with the new Credit Facility with Salus Capital Partners LLC (as described further in Note 10 – Revolving Credit Facility Financing Agreement) on November 13, 2012, the Notes were amended to reflect the subordination terms negotiated between the Purchasers and Salus Capital Partners LLC. In connection with the issuance of the Notes, the Company also issued warrants, with a seven year term, to purchase 476,190 shares of the Company’s Common Stock (the “Warrants”) to each of Rho and Prentice at a price equal to $1.05 per share, which approximates the fair market value of the Common Stock on the Closing Date. The Notes contain a financial covenant in which the Company is to maintain current assets in excess of $20,000,000 including cash and cash equivalents, restricted cash, accounts receivable, inventories (which includes prepaid inventory), prepaid expenses and other current assets (the “Financial Covenant”). In the event that the Company does not maintain this Financial Covenant, the outstanding principal and accrued interest expense of the Notes shall be accelerated and automatically become due and payable. In connection with the issuance of the Notes, the Company incurred approximately $127,000 of debt issuance costs (“Deferred Financing Costs”), which consisted primarily of legal and other professional fees incurred by the Company. These Deferred Financing Costs were deferred and are being amortized to interest expense to related-party stockholders over the term of the Notes. The Deferred Financing Costs are recorded within Other Current Assets in the Company’s Consolidated Balance Sheet. As the Notes were issued with detachable Warrants, the Company has initially allocated the proceeds received from the issuance between the Notes and Warrants on a relative fair value basis. With respect to the Rho Notes, the Company then has evaluated the Rho Conversion Feature to determine whether this feature qualifies as a beneficial conversion feature or derivative instrument. The Company noted that the Rho Conversion Feature contains both a fixed conversion price and a contingently adjustable conversion price based on a future event. Based on the terms of the Rho Notes and authoritative guidance, the Company has concluded that the entire Rho Conversion Feature is an embedded derivative liability (the “Embedded Derivative”), which requires bifurcation, and must be separately accounted for as a derivative instrument. The Company measured the fair value of the Embedded Derivative using the Black-Scholes valuation model as of the Closing Date. Expected volatility is based on the historical volatility of the price of the Company’s Common Stock, measured over the same period of time as the remaining maturity life of the Rho Notes. The risk free interest rate is based on the interest rate for U.S. Treasury Notes having a maturity period equal to the remaining maturity life of the Rho Notes. As a result of the bifurcation, the Company recognized an Embedded Derivative of approximately $274,000 with a corresponding discount on the Rho Notes, which reduced the carrying value of the Rho Notes on the date of issuance. This discount represents additional non-cash interest expense that is to be amortized over the remaining life of the Rho Notes. The Company also re-measures the fair value of the Embedded Derivative at each interim date. Any change in fair value is recorded as part of Interest expense to related-party stockholders in the Company’s Consolidated Statement of Operations for the year ended December 31, 2012. The assumptions used are as follows:
| August 13, 2012 | December 31, 2012
Risk-free interest rate | 0.19% | 0.11%
Expected life (in years) | 1.00% | 0.62%
Dividend yield | 0.00% | 0.00%
Expected volatility | 78.44% | 109.02%
As of December 31, 2012, the Company’s Notes and interest payable to related-party stockholders, net, consists of the following:
Notes payable to related-party stockholders |  | $ | 3,000,000 |
Unamortized discount on notes payable to related-party stockholders |  |  | (531,000 | )
Total notes payable to related-party stockholders, net |  |  | 2,469,000 |
Interest payable to related-party stockholders |  |  | 130,000 |
Total notes and interest payable to related-party stockholders, net |  | $ | 2,599,000 |
For the year ended December 31, 2012, the Company recognized interest expense in connection with the Notes, including changes in fair value of the Embedded Derivative and amortization of the debt discount, which were all included in Interest expense to related-party stockholders in the Consolidated Statement of Operations, as follows:
|  | 2012
Amortization of discount on notes payable to related-party stockholders |  | $ | 318,000 |
Interest expense to related-party stockholders |  |  | 160,000 |
Appreciation in fair value of embedded derivative financial liability to related-party stockholders |  |  | 105,000 |
Amortization expense of deferred financing costs |  |  | 48,000 |
Total interest expense to related-party stockholders |  | $ | 631,000 |

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- Definition The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 210 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.5-02.19,20,22) -URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21475-112644 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 19, 20, 22 -Article 5 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 129 -Paragraph 2, 4 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. + Details
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