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Note 9 - 2012 Financing
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Dec. 31, 2012
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| 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:
As
of December 31, 2012, the Company’s Notes and
interest payable to related-party stockholders, net,
consists of the following:
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:
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