Quarterly report pursuant to Section 13 or 15(d)

Capital Stock

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Capital Stock
9 Months Ended
Dec. 31, 2013
Notes to Financial Statements  
NOTE 9 - Capital Stock

Autilion AG Securities Purchase Agreement

 

On April 8, 2013, the Company entered into a Securities Purchase Agreement (as amended, the “Securities Purchase Agreement”) with Autilion AG, a company organized and existing under the laws of Switzerland (“Autilion”).  On April 12, 2013, Autilion assigned the Purchase Agreement to its affiliate, Bergamo Acquisition Corp. PTE LTD, a corporation organized and existing under the laws of Singapore (“Bergamo Singapore”). On April 30, 2013, the Company and Bergamo Singapore amended the Securities Purchase Agreement to modify the investment dates.  On June 27, 2013, the Company, Autilion and Bergamo Singapore further amended the Securities Purchase Agreement to vacate Autilion’s April 2013 assignment of the Securities Purchase Agreement to Bergamo Singapore, provide for an initial closing under the Securities Purchase Agreement, and amend certain of the investment dates under the Securities Purchase Agreement. Under the terms of the Securities Purchase Agreement, Autilion is contractually obligated to purchase an aggregate of 72.0 million restricted shares of the Company’s common stock at a purchase price of $0.50 per share for aggregate cash consideration of $36.0 million, in a series of closings scheduled to have occurred by September 30, 2013 (the “Autilion Financing”). At December 31, 2013, the Company had completed a nominal initial closing of the Autilion Financing in the amount of $25,000 and issued 50,000 restricted shares of common stock. Although there can be no assurance that an additional closing of the Autilion Financing will occur, in early January 2014, Autilion informed the Company of its expectation that the Company will receive the full $36.0 million committed under the terms of the Securities Purchase Agreement by mid-February 2014. As of the date of this report, there has not been a subsequent closing of the Autilion Financing. The Securities Purchase Agreement also provides for the election to the Company’s Board of Directors of a designee of Autilion upon completion of the Autilion Financing.

 

The Company and Autilion also entered into a Voting Agreement, pursuant to which Autilion has agreed to vote all shares of capital stock of the Company held by Autilion consistent with the recommendation of a majority of the members of the Company’s Board of Directors.  In addition, in the event of a Change in Control of the Company, as defined in the Voting Agreement, or an extraordinary transaction outside of the ordinary course of the Company’s business, in each case approved by a majority of the Company’s Board of Directors, including Autilion’s designee, as well as by the holders of a majority of the outstanding shares of Common Stock held by stockholders unaffiliated with Autilion (an “Approved Transaction”), Autilion is required to vote all shares of capital stock of the Company held by it for such Approved Transaction.

 

2013 Unit Private Placement

 

Between August and December 2013, the Company entered into securities purchase agreements with accredited investors pursuant to which it sold to such investors 116 Units, each Unit consisting of (i) a 10% convertible note in the face amount of $5,000 maturing on July 30, 2014 (the “Unit Note”); (ii) 10,000 shares of the Company’s restricted common stock (the “Unit Stock”); and (iii) a warrant exercisable through July 30, 2016 to purchase 10,000 restricted shares of the Company’s common stock at an exercise price of $1.00 per share (the “Unit Warrant”).  Accordingly, the Company issued Unit Notes in the aggregate face amount of $580,000; an aggregate of 1,160,000 shares of Unit Stock, and warrants to purchase an aggregate of 1,160,000 shares of the Company’s restricted common stock pursuant to the Unit Warrants, and received cash proceeds of $580,000, including $50,000 in lieu of repayment of previous advances to the Company made by one of its executive officers. The Unit Notes and related accrued interest are convertible into shares of the Company’s common stock at a conversion price of $0.50 per share at or prior to maturity, at the option of each investor. The Units also represent the Exchange Securities into which Platinum may convert the July 2013 Note.

 

The Company allocated the proceeds from the sale of the Units to the various securities based on their relative fair values on the dates of the sales. As described in Note 7, Convertible Promissory Notes and Other Notes Payable, based on the short-term nature of the Unit Notes, the Company determined that fair value of the Unit Notes was equal to their face value. The Company determined the fair value of the Unit Stock based on the quoted market price of its stock on the date of the Unit sale. The Company calculated the fair value of the Unit Warrants using the Black Scholes Option Pricing Model and the weighted average assumptions indicated in the table below. The table below also presents the aggregate allocation of the Unit sales proceeds based on the relative fair values of the Unit Stock, Unit Warrants and Unit Notes at the Unit sales date.

 

Unit Warrants        
  Weighted Average Issuance Date Valuation Assumptions Per Share Aggregate Aggregate Aggregate Allocation of Proceeds
Warrant       Risk free     Fair Fair Value Proceeds Based on Relative Fair Value of:
Shares Market Exercise Term Interest   Dividend Value of of Unit of Unit   Unit  
Issued Price Price (Years) Rate Volatility Rate Warrant Warrants Sales Unit Stock Warrant Unit Note
                         
 1,160,000  $0.47  $1.00  2.80 0.57% 76.85% 0.0%  $0.14  $166,400  $580,000  $238,200  $69,300  $272,500

 

Modification of Warrants held by Platinum

 

Effective on May 24, 2013, the Company and Platinum entered into an Amendment and Waiver Agreement (the “Amendment and Waiver”) pursuant to which the Company agreed to reduce the exercise price of the Exchange Warrant and the Investment Warrants issued to Platinum in October 2012 and February 2013 and March 2013 (collectively, the “Warrants”) from $1.50 per share to $0.50 per share in consideration for Platinum’s agreement to waive its rights for any increase in the number of shares of common stock issuable under the adjustment provisions of the Exchange Warrant and the Investment Warrants that would otherwise occur from (i) the Company’s sale of shares of its common stock at a price of $0.50 per share in connection with the Autilion Financing; (ii) the March 2013 grant of warrants to certain of the Company’s officers and independent directors to purchase an aggregate of 3.0 million restricted shares of common stock at an exercise price of $0.64 per share; and (iii) the Company’s issuance of restricted shares of its common stock resulting in gross proceeds not to exceed $1.5 million in connection with the exercise by warrant holders, by no later than June 30, 2013, subsequently extended to July 30, 2013, of previously outstanding warrants for which the Company may reduce the exercise price to not less than $0.50 per share. (See “Other Warrant Modifications and Exercises” below.)

 

As described in Note 4, Fair Value Measurements and in Note 7, Convertible Promissory Notes and Other Notes Payable, the Company re-measures the fair value of the Exchange Warrant, the Investment Warrants and the July 2013 Warrant at the end of each quarterly reporting period.  The fair value re-measurement at June 30, 2013 incorporated the modification of the exercise price resulting from the Amendment and Waiver and the corresponding adjustment was reflected as a component of the Warrant Liability at that date.  At December 31, 2013, the Company determined the fair values of the Exchange Warrant, the Investment Warrants and the July 2013 Warrant to be a weighted average of $0.22 per share, or an aggregate of $780,400, recorded as a component of Warrant Liability in the accompanying Condensed Consolidated Balance Sheet at December 31, 2013, using the Black Scholes Option Pricing Model and the following assumptions: market price per share: $0..42; exercise price per share: $0.50; risk-free interest rate: 1.16% to 1.54%; remaining contractual term: 3.78 years to 4.56 years; volatility: 76.1% to 81.5%; and expected dividend rate: 0%. At December 31, 2013, the Company also re-measured the fair value of the Series A Exchange Warrant which is contingently issuable to Platinum upon the exchange of its shares of the Company’s Series A Preferred Stock into shares of the Company’s restricted common stock.  The Company determined the fair value of the Series A Exchange Warrant, also recorded as a component of Warrant Liability in the accompanying Condensed Consolidated Balance Sheets at December 31, 2013, to be $0.27 per share, or $1,936,700, using the Black Scholes Option Pricing Model and the following assumptions: market price per share: $0.42; exercise price per share: $0.50; risk-free interest rate: 1.75%; contractual term: 5.00 years; volatility: 85.7%; expected dividend rate: 0%; and assumed probability of issuance of 95%.

 

Other Warrant Modifications and Exercises

 

During the months of June and July 2013, the Company offered certain long-term warrant holders the opportunity to exercise warrants having an exercise price of $1.50 per share to purchase shares of the Company’s restricted common stock at a reduced exercise price of $0.50 per share through July 30, 2013.  Warrant holders exercised warrants to purchase an aggregate of 528,370 restricted shares of the Company’s common stock and the Company received cash proceeds of $264,200.  In addition, certain warrant holders exercised modified warrants to purchase 16,646 shares of the Company’s restricted common stock in lieu of payment by the Company in satisfaction of amounts due for professional services in the aggregate amount of $8,300.

 

The Company calculated the fair value of the warrants exercised immediately before and after the modifications and determined that the fair value of the warrants exercised decreased by $32,900, which is reflected in general and administrative expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.  The warrants subject to the exercise price modifications were valued using the Black-Scholes Option Pricing Model and the following assumptions:

 

Assumption:   Pre-modification     Post-modification  
Market price per share (weighted average)   $ 0.74     $ 0.74  
Exercise price per share (weighted average)   $ 1.50     $ 0.50  
Risk-free interest rate (weighted average)     0.82%       0.03%  
Contractual term in years (weighted average)     3.47       0.06  
Volatility (weighted average)     84.6%       73.3%  
Dividend rate     0.0%       0.0%  
                 
Weighted Average Fair Value per share   $ 0.30     $ 0.24  

 

In October 2013 the Company modified certain outstanding warrants held by its long-term investors and consultants to purchase an aggregate of 1,292,778 shares of the Company’s restricted common stock to reduce the exercise price of the warrants to $0.50 per share and, for warrants scheduled to expire on December 31, 2013, extend the exercise term of the warrants until January 31, 2015, generally without modifying the exercise price.  The Company calculated the fair value of the warrants immediately before and after the modifications and determined that the fair value of the warrants increased by $77,800, which is reflected in general and administrative expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.  The warrants subject to the exercise price modifications and term extensions were valued using the Black-Scholes Option Pricing Model and the following assumptions:

 

Assumption:   Pre-modification     Post-modification  
Market price per share at modification date   $ 0.50     $ 0.50  
Exercise price per share (weighted average)   $ 1.50     $ 1.23  
Risk-free interest rate (weighted average)     0.33%       0.44%  
Contractual term in years (weighted average)     1.40       2.10  
Volatility (weighted average)     74.4%       75.8%  
Dividend rate     0.0%       0.0%  
                 
Weighted Average Fair Value per share   $ 0.05     $ 0.11  

 

Additionally, in October 2013, the Company issued new warrants to purchase an aggregate of 237,500 shares of its restricted common stock to certain former warrant holders whose warrants to purchase an equivalent number of shares of the Company’s restricted common stock at an exercise price of $1.50 per share had recently expired.  The Company calculated the fair value of the new warrants as $0.03 per share, using the Black-Scholes Option Pricing Model and the following assumptions. market price per share: $0.50; exercise price per share: $1.50; risk-free interest rate: 0.20%; contractual term: 1.32 years; volatility: 73.5%; and expected dividend rate: 0%.  The Company recorded the aggregate fair value of $7,400 for the new warrants in general and administrative expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss, with a corresponding credit to additional paid-in capital, an equity account.

 

In December 2013, the Company modified additional outstanding warrants held by certain of its long-term investors, consultants, and members of management and its Board of Directors to purchase an aggregate of 1,260,251 shares of its restricted common stock to reduce the exercise price of the warrants to $0.50 per share and, in limited cases, extend the exercise term of the warrants.  The Company calculated the fair value of the warrants immediately before and after the modifications and determined that the fair value of the warrants increased by $344,000, which is reflected in general and administrative expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.  The warrants subject to the exercise price modifications and term extensions were valued using the Black-Scholes Option Pricing Model and the following assumptions:

 

Assumption:   Pre-modification     Post-modification  
Market price per share at modification date   $ 0.40     $ 0.40  
Exercise price per share (weighted average)   $ 1.67     $ 0.50  
Risk-free interest rate (weighted average)     0.51%       0.57%  
Contractual term in years (weighted average)     2.06       2.34  
Volatility (weighted average)     73.6%       74.4%  
Dividend rate     0.0%       0.0%  
                 
Weighted Average Fair Value per share   $ 0.05     $ 0.14  

 

In making its fair value determinations for both warrant modifications and new grants using the Black Scholes Option Pricing Model, the Company utilizes the following principles in selecting its input assumptions. The market price per share is based on the quoted market price of the Company’s common stock on the Over-the-Counter Bulletin Board on the date of the modification or grant.  Because of its short history as a public company, the Company estimates volatility based on the historical volatilities of a peer group of public companies over the contractual or remaining contractual term of the warrant.  The contractual term of the warrant is determined based on the grant or modification date and the latest date on which the warrant can be exercised under its terms or under the terms of the discounted exercise price offer. The risk-free rate of interest is based on the quoted constant maturity rate for U.S Treasury Bills on the date of the modification for the term corresponding with the contractual term of the warrant.  The dividend rate is zero as the Company has not paid and does not expect to pay dividends in the near future.

 

On June 27, 2013, the Company’s Chief Executive Officer exercised an outstanding warrant to purchase 50,000 restricted shares of the Company’s common stock at an exercise price of $0.64 per share and the Company received cash proceeds of $32,000 from his exercise.

 

Following the warrant issuances, modifications and exercises described above, at December 31, 2013, the Company had outstanding warrants to purchase shares of its restricted common stock at a weighted average exercise price of $0.89 per share as follows:

 

       

Shares

Subject to

 
Exercise       Purchase at  
Price   Expiration   December 31,  
per Share   Date   2013  
$ 0.50   5/11/2014 to 7/26/2018     5,254,019  
$ 0.64   3/3/2023     2,940,000  
$ 0.88   5/11/2014     15,428  
$ 1.00   7/30/2016 to 9/30/2017     4,406,281  
$ 1.25   5/11/2014 to 12/31/2014     50,280  
$ 1.50   5/11/2014 to 3/14/2018     2,491,016  
$ 2.00   9/15/2017     425,000  
$ 2.50   5/11/2014     42,443  
$ 2.625   1/31/2015     61,418  
$ 3.00   2/13/2016     25,000  
            15,710,885  

 

Deemed Dividend

 

Pursuant to the October 2012 Agreement described in Note 7, Convertible Promissory Notes and Other Notes Payable, Platinum’s exchange rights in the Company’s Series A Preferred were modified such that Platinum currently has the right and option to exchange 500,000 restricted shares of the Company’s Series A Preferred that it holds for (i) a total of 15,000,000 restricted shares of the Company’s common stock (increased from 5,000,000 shares), and (ii) a five-year warrant to purchase 7,500,000 restricted shares of the Company’s common stock at an initial exercise price of $1.50 per share (the “Series A Exchange Warrant”). The modification of the exchange ratio and the contingent grant of the Series A Exchange Warrant pursuant to the October 2012 Agreement resulted in a deemed dividend on the Series A Preferred in the aggregate amount of $10,193,200 for accounting purposes, which has been reflected in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss for the three and nine month periods ended December 31, 2012. The aggregate amount of the deemed dividend was determined based on (i) the fair value of the 10 million incremental shares to which Platinum is entitled pursuant to the October 2012 Agreement valued at the $0.75 per share quoted market price for the Company’s common stock on the date of the agreement, an aggregate of $7.5 million, adjusted for an expected 95% probability of exercise of the exchange rights by Platinum, or $7,125,000, plus (ii) the fair value of the Series A Exchange Warrant, determined to be $0.43 per share, on the date of the agreement using the Black Scholes Option Pricing Model and the following assumptions: market price per share: $0.75; exercise price per share: $1.50; risk-free interest rate: 0.67%; contractual term: 5 years; volatility: 89.9%; expected dividend rate: 0%; further adjusted for an expected 95% probability of exercise of the exchange rights by Platinum, for a fair value of $3,068,200.  The fair value of the Series A Exchange Warrant was also recognized as a liability at the date of the October 2012 Agreement, with a corresponding charge to additional paid-in capital, an equity account.