Quarterly report pursuant to Section 13 or 15(d)

Subsequent Event

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Subsequent Event
6 Months Ended
Jun. 30, 2012
Subsequent Event  
Subsequent Event

13.                               Subsequent Event

 

Features of the 2012 Tranche 2 Amendment

 

On July 2, 2012, the Company entered into an Amendment and Waiver to Securities Purchase Agreement (the “Amendment and Waiver”) to amend our Securities Purchase Agreement with the Investors.  Under the Amendment and Waiver agreement the Company has agreed to issue and sell in a private placement to the Investors an aggregate principle amount of $1,000,000 (the “Second Tranche”) of 5% Senior Secured Convertible Debentures of the Company (the “Second Convertible Notes”), warrants to purchase up to 10,000,000 shares of common stock at an initial exercise price of $0.15 per share (the “$0.15 Warrants”) and warrants to purchase up to 10,000,000 shares of common stock at an initial exercise price of $0.25 per share (the “$0.25 Warrants” and together with the $0.15 Warrants, the “2012 Warrants”).

 

The Second Tranche Convertible Notes

 

The Second Tranche Convertible Notes require payment of interest at the rate of 5% per annum, payable quarterly and mature on July 2, 2015.  The Second Tranche Convertible Notes provide the Investors the option at any time prior to the repayment of the notes to convert any portion of the outstanding Second Tranche balance into fully-paid and non-assessable restricted shares of common stock of the Company at an initial conversion price of $0.10 per share (the “Conversion Price”).

 

The Convertible Notes include an adjustment close providing that if the Company issues additional shares of common stock prior to the repayment of the Second Tranche at a price per share less than the effective conversion price of the Second Tranche Convertible Notes, the conversion price will, subject to certain exceptions, be reduced to an amount equal to the price per share paid or payable for the common stock of the Company in such subsequent issuance or deemed subsequent issuance.  The Conversion price is subject to adjustments in the event of (a) stock splits, stock dividends, combinations, dividends, rights offerings and mergers of sales of assets 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 Conversion Price.

 

The Second Tranche Convertible Notes and the Purchase Agreement covering both are secured by a security interest in all assets of the Company and its subsidiaries and all such obligations are guaranteed jointly and severally by the Company’s Subsidiaries. The Second Tranche Convertible Notes also contain non-financial covenants which limit the Company and its subsidiaries from incurring subsequent indebtedness, incur liens, amend organizational documents, repurchasing or repaying other debt, paying cash dividends and entering into affiliate transactions.

 

The Second Tranche Convertible Notes may be redeemed at the option of the Company only in connection with a change of control or other fundamental transaction of the Company and subject to the satisfaction of other conditions including, without limitation, that the shares issuable upon conversion of the debentures are freely tradable and that there is no event of default.  The terms of the 2012 Convertible Notes are identical to those of the Convertible Notes, except that the 2012 Convertible Notes mature on July 2, 2015.

 

The 2012 Warrants

 

On July 2, 2012, the Company issued warrants for the purchase of up to 20,000,000 shares of common stock with five year terms.  The warrants were issued to allow the Investors to purchase up to 10,000,000 shares of common stock at an initial purchase price of $0.15 per share and the remaining 10,000,000 shares of common stock at an initial purchase price of $0.25 per share.

 

The 2012 Warrants are exercisable in cash to purchase shares of the Company’s common stock.  The exercise price may be paid pursuant to a cashless exercise provision if the 2012 Warrants have no effective registration statement registering the shares underlying the warrants by surrendering warrant shares having a value equal to the exercise price of the portion of the warrants being exercised.  The exercise price of the 2012 Warrants shall be adjusted in the event of (a) stock splits, stock dividends, combinations, rights offerings, mergers or sales of assets 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 exercise price.

 

The 2012 Warrants provide that the 2012 Warrants may be purchased at the option of the Company only in connection with a change in control of the Company that is an all-cash transaction.  The purchase price is 30% of the then effective exercise price of the warrants multiplied by the number of common shares for which the 2012 Warrants are then exercisable.  The terms of the 2012 Warrants are identical to those of the Warrants, except that the 2012 Warrants are exercisable for a period of five years from the date of issuance and contain different exercise prices.

 

Similar to the accounting treatment of the Convertible Notes and Warrants, the Company is required to book a liability to record the fair value of the 2012 Convertible Notes and the 2012 Warrants as of July 2, 2012 (see below for further discussion of accounting treatment).  Upon issuance of the 2012 Convertible Notes and the 2012 Warrants, the Company will allocate the proceeds received to such securities on a relative fair value basis.  As a result of such allocation, the Company determined the initial carrying value of the 2012 Convertible Notes to be $417,000.  The 2012 Convertible Notes were immediately marked to fair value, resulting in a derivative liability in the amount of $2,100,000, and will continue to be marked to fair value at each reporting period.

 

Upon issuance of the 2012 Warrants, the Company allocated $583,000 of the initial proceeds to the 2012 Warrants and immediately marked them to fair value resulting in a derivative liability of $2,900,000.  These 2012 Warrants will continue to be marked to fair value at each reporting.

 

The Company also incurred $85,000 of financing costs associated with this transaction which were expensed as incurred in July 2012.