Quarterly report pursuant to Section 13 or 15(d)

Sale of Common Stock

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Sale of Common Stock
6 Months Ended
Jun. 30, 2013
Sale of Common Stock  
Sale of Common Stock

9.                                      Sale of Common Stock

 

On February 22, 2013, the Company entered into a Securities Purchase Agreement (the “SPA”) with a number of accredited investors, whereby the Company sold an aggregate of 26,933,333 shares of common stock at $0.15 per share (the “Purchase Price”) and issued warrants to purchase an additional 26,933,333 shares of common stock (the “Investor Warrants”) with gross proceeds to the Company of $4,040,000. After payment of the placement agent fees and other expenses, the Company received net proceeds of approximately $3,504,000.  As part of the fee for its placement agent services, the Company also issued Palladium Capital Advisors a warrant to purchase 1,885,333 shares of common stock (together with the Investor Warrant, the “2013 Warrants”) on the same terms and conditions as the investors under the SPA.  The shares of common stock sold in the offering are subject to certain piggyback registration rights as well as certain other protections, including price protection, as discussed below.

 

The SPA provides that for a period of 24 months after the later of (i) February 22, 2013, or (ii) the public announcement of FDA approval for RenalGuard for sale in the United States, and so long as the 2013 Investors hold the shares purchased pursuant to the SPA; in the event that the Company issues or sells any shares of common stock or any common stock equivalent at a price less than the Purchase Price (a “Share Dilutive Issuance”), the Company shall issue additional shares of common stock so that total amount paid by the investor to acquire the shares, divided by the number of shares held by the investor pursuant to the SPA, plus the additional shares issued as a result of a Share Dilutive Issuance, equals the price per share paid in the Share Dilutive Issuance.  This provision also extends to any common shares that are issued pursuant to an exercise of the 2013 Warrants.

 

In conjunction with the SPA, the Company entered into a Right To Shares Agreement with one of the investors.  Pursuant to this agreement, in lieu of issuing 7,000,000 of the common shares purchased by the investor, the Company shall be obligated to issue, and the investor has the right to up to 7,000,000 shares of the Company’s common stock.  No additional consideration will be paid upon the issuance of the shares and the subscription amount has been paid in full by the investor and is non-refundable.  The Company is obligated to deliver the shares to the investor within 3 days of the investor’s request for the share issuance.  If the Company fails to deliver the shares within 3 days of the request, under certain circumstances defined in the Right To Shares Agreement, the Company may be obligated to reimburse the investor in cash for losses that the investor incurs as a result of not having access to the shares (the “Buy-In Shares”).  As of June 30, 2013, the Company has reserved, but not issued 7,000,000 shares of common stock pursuant to the Right To Shares Agreement.

 

The SPA also provides the investors with the option, for a period through November 21, 2013, to purchase on the same terms and with the same rights as the February 2013 initial closing an equal number of shares of common stock and 2013 Warrants equal to up to one-half of the shares of common stock and 2013 Warrants purchased by the purchaser at the initial closing (“2013 SPA Option”). The following is a summary of the 2013 SPA Option for the six months ending June 30, 2013:

 

2013 SPA Option

 

Shares and
Warrants

 

Exercise
Price

 

Beginning balance at February 22, 2013

 

13,466,667

 

$

0.15

 

Add: Adjustments

 

 

n/a

 

Ending balance at June 30, 2013

 

13,466,667

 

$

0.15

 

 

The 2013 Warrants have a term of five-years and are immediately exercisable for an aggregate 28,818,666 shares of common stock purchased at an exercise price of $0.20 per share.  The exercise price of the 2013 Warrants shall be adjusted in the event of (a) stock splits, stock dividends, combinations, reclassifications, mergers, consolidations, distributions of assets or evidence of indebtedness, sales or transfers of substantially all assets, share exchanges or similar events, and (b) dilutive issuances of (i) common stock or (ii) common stock equivalents at an effective price per share that is lower than the then exercise price. The 2013 Warrants may be exercised on a cashless basis if at any time there is no effective registration statement within 180 days after the closing date of the private placement covering the resale of the shares of common stock underlying the 2013 Warrants. The 2013 Warrants contain limitations on the holder’s ability to exercise the 2013 Warrant in the event such exercise causes the holder to beneficially own in excess of 4.99% of the Company’s issued and outstanding common stock, subject to a discretionary increase in such limitation by the holder to 9.99% upon 61 days’ notice.  The following is a summary of the 2013 Warrants for the six months ending June 30, 2013:

 

The 2013 Warrants

 

Warrants

 

Exercise
Price

 

Beginning balance at February 22, 2013

 

28,818,666

 

$

0.20

 

Add: Adjustments

 

 

n/a

 

Ending balance at June 30, 2013

 

28,818,666

 

$

0.20

 

 

In June 2008, the FASB issued ASC 815-40-15 (formerly EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock), which was effective for the Company in 2009. This issued guidance requires that derivative instruments be evaluated for certain contingencies and anti-dilution provisions that would affect their equity classification as a derivative under ASC 815, Derivatives and Hedging (ASC 815) and requires the instruments to be classified as liabilities and reported at fair value.

 

Upon issuance, the 2013 Warrants and 2013 SPA Option were not considered indexed to the Company’s own stock and therefore are required to be accounted for as freestanding derivative instruments and classified as a liability.  A Monte Carlo simulation was used to estimate the fair value of the 2013 Warrants and 2013 SPA Option resulting in grant date fair values of $2,759,000 and $1,211,000, respectively (see Note 11 — Fair Value Measures). As of June 30, 2013, the 2013 Warrants have been marked to fair value resulting in a derivative liability of $2,017,000. The impact to other income for the change in fair value of the 2013 Warrants for the three and six months ended June 30, 2013 was a gain of $1,626,000 and $742,000, respectively. As of June 30, 2013, the 2013 SPA Options have been marked to fair value resulting in a derivative liability of $404,000. The impact to other income for the change in fair value of the 2013 SPA Option for the three and six months ended June 30, 2013 was a gain of $1,390,000 and $807,000, respectively.

 

The Company also assessed the provisions of the Buy-In Share feature of the Rights To Shares Agreement as an embedded derivative pursuant to ASC 815-15, Embedded Derivatives, and has concluded that the feature meets the definition of a derivative and is not clearly and closely related to the Rights To Shares equity host agreement.  The Buy-In Shares feature has been bifurcated from the Rights To Shares agreement and accounted for separately. The value of this feature was nominal as of the issuance date and June 30, 2013.

 

Allocation of SPA Proceeds

 

The Company first allocated the proceeds of the SPA to the fair value of the 2013 Warrants and 2013 SPA Option.  When the issuance costs were considered, the aggregate fair value of the 2013 Warrants and 2013 SPA Option exceeded exceeded the net proceeds of the SPA.  The Company recorded the difference as a reduction of additional paid in capital.

 

The SPA requires the Company to use $1,000,000 of the proceeds received from the SPA for investor relations.  The Company engaged an investor relations firm and made an initial payment of $500,000 on the date of the SPA closing.  The remaining $500,000 is held in escrow account and will be released to the investor relations firm on the six month anniversary of the closing.  The Company has recorded the cash held in an escrow as restricted cash on the balance sheet. The Company is amortizing the investor relations payments over the one-year estimated period of performance for the investor relations services.