Notes to Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
Note 1
–
General
Business –
NeoMedia Technologies, Inc., a Delaware corporation (“NeoMedia”, and also referred to herein as “us”, “we” and “our”), was founded in 1989 and is headquartered in Boulder, Colorado. We have pioneered 2D mobile barcode technology and infrastructure solutions that enable the mobile barcode ecosystem world-wide. NeoMedia strives to harness the power of mobile devices in innovative ways with state-of-the-art mobile barcode services and technology. With this technology, mobile phones with cameras become barcode scanners, which enable a range of practical applications including mobile marketing, mobile commerce and advertising.
We also offer barcode management services, reader solutions as well as licensing of our Intellectual Property (“IP”) portfolio.
Going Concern
– We have historically incurred operating losses, and we may continue to generate negative cash flows as we implement our business plan. There can be no assurance that our continuing efforts to execute our business plan will be successful and that we will be able to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), which contemplates our continuation as a going concern. Our net loss for the nine months ended September 30, 2013 and 2012 was $
47.5
million and $
21.9
million, respectively, including $
48.2
million and $
23.0
million, respectively, of net losses related to our financing instruments. Our operating income was $
0.6
million for the nine months ended September 30, 2013, and our operating loss was $
2.3
million for the nine months ended September 30, 2012.
Net cash used by operations during the nine months ended September 30, 2013 and 2012 was $
0.5
million and $
1.4
million, respectively. As of September 30, 2013, we have an accumulated deficit of $
312.9
million. We also have a working capital deficit of $
117.4
million, including $
114.1
million in current liabilities for our derivative and debenture financing instruments.
As of September 30, 2013, we do not have sufficient authorized shares of common stock available for issuance to satisfy the conversion rights under certain outstanding convertible debenture and series of preferred stock.
If the holders of such debentures and preferred stock request the conversion of such holdings to common stock, we would be unable to respond to the request which would result in an event of default under such instruments.
Although we are making best efforts to pursue options to be able to honor the conversion rights of the debenture holders and preferred stock, we can provide no assurance that we will be successful with these efforts.
The items discussed above raise doubt about our ability to continue as a going concern.
We currently do not have sufficient cash or commitments for financing to sustain our operations for the next twelve months if we are unable to generate sufficient cash flows from operations. Our plan is to develop new client and customer relationships and substantially increase our revenue derived from our products/services and IP licensing. If our revenues do not reach the level anticipated in our plan, we may require additional financing in order to execute our operating plan; however, we believe that our revenues will reach such level and such additional financing will not be necessary. If additional financing is required, we cannot predict whether this additional financing will be in the form of equity, debt, or another form, and we may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that we are unsuccessful in increasing our revenues and profits, we may be unable to implement our current plans for expansion, repay our debt obligations or respond to competitive pressures, any of which would have a material adverse effect on our business, prospects, financial condition and results of operations.
The convertible debentures and preferred stock used to finance the Company, which may be converted into common stock at the sole option of the holders, have a highly dilutive impact when they are converted, greatly increasing the number of common shares outstanding. During the three and nine months ended September 30, 2013, there were
75
million and
2,879
million shares of common stock issued for these conversions, respectively. We cannot predict if or when each holder may or may not elect to convert into common shares.
Our financial statements do not include any adjustments relating to the recoverability and reclassification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Note 2
–
Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).
Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. We believe these statements include all adjustments, which are of a normal and recurring nature, considered necessary for a fair presentation of the financial statements. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K filed with the SEC on April 1, 2013. The results of operations for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year.
Basis of Presentation
– The condensed consolidated financial statements include the accounts of NeoMedia Technologies, Inc. and its wholly-owned subsidiary. We operate as one reportable segment. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
– The preparation of the condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known.
Foreign Currency –
Historically, the functional currency of NeoMedia Europe GmbH was the Euro, its local currency, and we recorded translation gains and losses associated with the conversion of the subsidiary financial statements to U.S. dollars in accumulated other comprehensive loss as a component of shareholders’ deficit. During the third quarter of 2013, we determined that changes in economic facts and circumstances indicated that the functional currency of NeoMedia Europe GmbH had changed from the Euro to the U.S. dollar.
The changes included, among other things, the termination of the hardware business and related sales activities that would allow the subsidiary to generate revenue independently in the local market or otherwise, and the completion of a repositioning of the subsidiary from a self-contained, revenue generating operation to a cost center focused primarily on research and development.
As a result of the change in functional currency, translation gains and losses associated with the conversion of the NeoMedia Europe GmbH financial statements will be prospectively recorded in our results from operations effective July 1, 2013.
Revenue Recognition –
We derive revenues from the following primary sources: (1) license fees relating to intellectual property, and (2) software and service revenues related to mobile marketing barcode infrastructure management and development, barcode readers and internally developed software.
We recognized revenue when: (a) persuasive evidence of the sales arrangement exists, (b) the arrangement fee is fixed or determinable, (c) service delivery or performance has occurred, (d) customer acceptance has been received, if contractually required, and (e) collectability of the arrangement fee is probable. Revenue associated with licensing agreements primarily consists of non-refundable upfront license fees. Non-refundable upfront license fees received under license agreements, whereby continued performance or future obligations are considered inconsequential to the relevant license technology, are recognized as revenue upon delivery of the technology. We typically use signed contractual agreements as persuasive evidence of a sales arrangement.
If at the inception of an arrangement the fee is not fixed or determinable, we defer revenue until the arrangement fee becomes due and payable. If we determine collectability is not probable, we defer revenue until we receive payment or collection becomes probable, whichever is earlier. The determination of whether fees are collectible requires judgment of our management, and the amount and timing of revenue recognition may change if different assessments are made.
Revisions to 2013 Interim Reporting –
In connection with the completion of our third quarter 2013 reporting, we identified certain errors associated with our first and second quarter 2013 interim reporting. We assessed the impact of these errors and concluded that the errors did not result in a material misstatement.
To correct the errors, we have revised our nine months ended September 30, 2013 reporting as discussed below. Our assessment considered the guidance provided by Accounting Standards Codification (ASC) Topic 250,
Accounting Changes and Error Corrections
and ASC Topic 250-10-S99-1,
Assessing Materiality
. Based on our conclusion that the errors were not material individually or in aggregate to any of the prior reporting periods, we determined amendments to previously filed financial statement reports were not required in accordance with the applicable ASC guidance. We also concluded that the revisions applicable to prior periods should be reflected herein and will be reflected in future filings containing such information.
The condensed consolidated statements of operations for the six months ended June 30, 2013 included a clerical error resulting in an understatement of general and administrative expenses of approximately $
51
,000.
The revised net loss for the six months ended June 30, 2013 was $
21,335
,000, and there was no material effect on the basic and fully diluted net loss per share of $
0.007
.
The previously reported condensed consolidated statements of operations for the three months ended March 31, 2013 and June 30, 2013 were properly stated.
As discussed in Note 4 – Financing, we are limited to issuing shares of common stock in connection with preferred stock and debenture conversions at no less than par value.
The methodology used to determine the number of common stock shares issued for debentures and preferred stock is based upon the market value received for the shares issued, and any short-fall between the par value of the shares issued and the market value of the shares is recorded as a deemed dividend.
During the three and six months ended June 30, 2013, the conversion of debentures and Series C Preferred Stock resulted in deemed dividends of $
681
,000 and $
16
,000, respectively, and the deemed dividend amounts were not reflected in the net loss available to common shareholders.
The revised net loss available to common shareholders reflecting the inclusion of the deemed dividends was $
31,069
,000 and $
22,032
,000 for the three and six months ended June 30, 2013, respectively. The revised net loss available to common shareholders for the six months ended June 30, 2013 includes the impact of the correction to the general and administrative expenses noted in the above paragraph.
The condensed consolidated balance sheet as of June 30, 2013 included certain errors in connection with our consolidation of NeoMedia Europe GmbH.
As a result of the errors, accounts payable and accrued expenses were understated by $
163
,000 and $
38
,000, respectively, as of June 30, 2013.
Additionally, the accumulated other comprehensive income (loss) reported within shareholders’ deficit reflected income of $
99
,000 but should have reflected a loss of $
102
,000.
The condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2013 reflected other comprehensive losses of $
223
,000 and $
334
,000, respectively, but should have reflected other comprehensive gains of $
22
,000 and $
133
,000, respectively.
The revised comprehensive losses for the three and six months ended June 30, 2013 were $
30,350
,000 and $
21,202
,000, respectively.
The revised comprehensive loss for the six months ended June 30, 2013 includes the impact of the correction to the general and administrative expenses noted in the above paragraph.
The condensed consolidated statements of cash flows for the three months ended March 31, 2013 overstated net cash used in operating activities and effect of exchange rate changes on cash by approximately $
113
,000.
The revised net cash used in operating activities was approximately $
547
,000 and the effect of exchange rate changes on cash was negative $
2,000
. The condensed consolidated statements of cash flows for the six months ended June 30, 2013 overstated net cash used in operating activities and effect of exchange rate changes on cash by approximately $
334
,000.
The revised net cash used in operating activities was approximately $
541
,000 and the effect of exchange rate changes on cash was $
0
.
Basic and Diluted Net Income (Loss) Per Common Share
– The components of basic and diluted income (loss) per share attributable to NeoMedia Technologies, Inc. common stock shareholders were as follows (in thousands, except share and per share data):
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
(26,245)
|
|
$
|
19,470
|
|
$
|
(48,276)
|
|
$
|
(21,945)
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liability
Series C and D preferred stock and
debentures
|
|
|
-
|
|
|
1,036
|
|
|
-
|
|
|
-
|
|
|
Change in fair value of derivative liability -
warrants
|
|
|
-
|
|
|
4,897
|
|
|
-
|
|
|
-
|
|
|
Change in fair value of hybrid financial
instruments
|
|
|
-
|
|
|
6,353
|
|
|
-
|
|
|
-
|
|
|
Interest expense on convertible debt
|
|
|
-
|
|
|
(10)
|
|
|
-
|
|
|
-
|
|
|
Numerator for diluted income (loss) per
common share
|
|
$
|
(26,245)
|
|
$
|
31,746
|
|
$
|
(48,276)
|
|
$
|
(21,945)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic
income (loss) per common share
|
|
|
4,984,827,279
|
|
|
1,510,797,881
|
|
|
3,823,483,604
|
|
|
1,075,605,167
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrants
|
|
|
-
|
|
|
1,091,953,786
|
|
|
-
|
|
|
-
|
|
|
Convertible debentures
|
|
|
-
|
|
|
5,129,818,595
|
|
|
-
|
|
|
-
|
|
|
Convertible preferred stock
|
|
|
-
|
|
|
742,807,130
|
|
|
-
|
|
|
-
|
|
|
Denominator for diluted Income (loss) per
common share
|
|
|
4,984,827,279
|
|
|
8,475,377,392
|
|
|
3,823,483,604
|
|
|
1,075,605,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share
|
|
$
|
(0.005)
|
|
$
|
0.013
|
|
$
|
(0.013)
|
|
$
|
(0.020)
|
|
|
Diluted income (loss) per common share
|
|
$
|
(0.005)
|
|
$
|
0.004
|
|
$
|
(0.013)
|
|
$
|
(0.020)
|
|
We excluded
513,342,555
dilutive securities from the calculation of diluted income (loss) per common share for the three months and nine months ended September 30, 2013 because inclusion of these securities would be antidilutive.
Recent Accounting Pronouncements
In February 2013, the
Financial Accounting Standards Board (“
FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02,
Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income
. The update improves the reporting of reclassifications out of accumulated other comprehensive income for certain transactions and is applied prospectively for periods beginning January 1, 2013. We do not anticipate that the accounting pronouncement will have a material impact on our consolidated financial statements in future periods.
In March 2013, the FASB issued ASU No. 2013-05,
Liabilities (Topic 830): Parent’s Accounting for Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.
The ASU is effective beginning after December 15, 2013 and requires the release of any cumulative translation adjustment into net income upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in foreign entity.
We do not anticipate that the accounting pronouncement will have a material impact on our consolidated financial statements in future periods.
In July 2013, the FASB issued ASU No. 2013-11,
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.
The ASU is effective for periods beginning after December 15, 2013 and standardizes the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. We do not anticipate that the accounting pronouncement will have a material impact on our consolidated financial statements in future periods.
From time to time, various other new accounting pronouncements are issued that we adopt as of the specified effective date. We believe that the impact of any other recently issued standards that are not yet effective will not have a material impact on our results of operations and financial position.
Note 3 – Accrued Liabilities
Accrued liabilities consist of the following as of September 30, 2013 and December 31, 2012:
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
|
|
|
(in thousands)
|
|
|
Accrued operating expenses
|
|
$
|
223
|
|
$
|
347
|
|
|
Accrued payroll related expenses
|
|
|
51
|
|
|
6
|
|
|
Accrued interest
|
|
|
-
|
|
|
19
|
|
|
Accrued legal fees
|
|
|
260
|
|
|
27
|
|
|
Total
|
|
$
|
534
|
|
$
|
399
|
|
Note 4 – Financing
At September 30, 2013, financial instruments arising from our financing transactions with YA Global Investments, L.P. (“
YA Global
”), an accredited investor, included shares of our Series C preferred stock issued in February 2006, Series D preferred stock issued in January 2010, a series of six consolidated secured convertible debentures (the “Consolidated Debentures”) issued July 1, 2013 and various warrants to purchase shares of our common stock. All of our assets are pledged to secure our obligations under the debt securities. At various times, YA Global has assigned or distributed portions of its holdings of these securities to other holders, including persons who are officers of YA Global and its related entities, as well as to other holders who are investors in YA Global’s funds.
Secured Debentures –
We had originally entered into financing transactions with YA Global, which included a series of twenty-seven secured convertible debentures issued between August 2006 and July 2012. Effective July 1, 2013, the terms of the debentures held by YA Global were modified to consolidate the principal and interest amounts outstanding under all of the outstanding secured convertible debentures previously issued by us to YA Global, such that, upon the
issuance of the Consolidated Debentures and cancellation of the prior debentures, the amount of outstanding debentures issued to YA Global decreased from twenty-seven to six debentures. The maturity dates of these secured convertible debentures were also extended from August 1, 2014 to August 1, 2015.
The underlying agreements for each of the Consolidated Debentures are very similar in form. The Consolidated Debentures are convertible into our common stock, at the option of the holder, at the lower of a fixed conversion price per share or a percentage of the lowest volume-weighted average price (“VWAP”) for a specified number of days prior to the conversion (the “look-back period”). The conversion is limited such that the holder cannot exceed
9.99
% ownership of the outstanding common stock, unless the holder waives their right to such limitation. All of the debentures are secured according to the terms of a Security Pledge Agreement dated August 23, 2006, which was entered into in connection with the first convertible debenture issued to YA Global and which provides YA Global with a security interest in substantially all of our assets. The debentures are also secured by a Patent Security Agreement dated
July 29, 2008
. On August 13, 2010, our wholly owned subsidiary, NeoMedia Europe GmbH, became a guarantor of all outstanding financing transactions between us and YA Global, through pledges of their intellectual property and other movable assets. As security for our obligations to YA Global, all of our Pledged Property, Patent Collateral and other collateral is affirmed through the several successive Ratification Agreements executed in connection with each of the 2010, 2011 and 2012 financings. The 2013 modification and consolidation of the outstanding secured convertible debentures as well as the execution of an Amended and Restated Patent Security Agreement in October 2013 reaffirmed the Pledged Property, Patent Collateral and other collateral pledged as security for our obligations to YA Global.
We evaluated the financing transactions in accordance with ASC 815,
Derivatives and Hedging
, and determined that the conversion features of the Series C and Series D preferred stock and the Consolidated Debentures were not afforded the exemption for conventional convertible instruments due to their variable conversion rates. The contracts have no explicit limit on the number of shares issuable, so they did not meet the conditions set forth in current accounting standards for equity classification. Accordingly, either the embedded derivative instruments, including the conversion option, must be bifurcated and accounted for as derivative instrument liabilities or, as permitted by ASC 815-15-25-4,
Recognition of Embedded Derivatives
, the instruments may be carried in their entirety at fair value.
At inception, we elected to bifurcate the embedded derivatives related to the Series C and Series D preferred stock, while electing the fair value option for the Consolidated Debentures. ASC 825,
Financial Instruments
, allows us to elect the fair value option for recording financial instruments when they are initially recognized or if there is an event that requires re-measurement of the instruments at fair value, such as a significant modification of the debt.
The terms of the debentures held by YA Global prior to the consolidation were modified on May 25, 2012 to extend the stated maturity dates to
August 1, 2013
and reduce the interest rates to
9.5
% per year, with interest being payable on the maturity date in cash or, provided certain equity conditions are satisfied, in shares of our common stock at the applicable conversion price. Because the effect of the modifications exceeded a significance threshold relative to cash flows prescribed by ASC 470-50,
Debt Modifications and Extinguishments
, the modifications of the amounts due under these arrangements were accounted for as extinguishments, whereby the existing debentures are considered to be retired and new debentures issued. The existing instruments were first adjusted to fair value as of May 25, 2012 using the interest rate and maturity date prior to the amendment. The fair value of the new instruments was then calculated using the modified interest rate and maturity date to determine the fair value of the instrument subsequent to the amendment. The differences in the fair values before and after the amendment were recorded as an extinguishment loss of approximately $
27.5
million in the accompanying statements of operations for the nine months ended September 30, 2012.
On February 4, 2013, we entered into a Debenture Extension Agreement with YA Global to extend the maturity dates of the secured convertible debentures to August 1, 2014.
Because the effect of the extension did not exceed a significance threshold relative to cash flows prescribed by ASC 470-50,
Debt Modifications
and Extinguishments
, extinguishment accounting was not applicable.
On
July 1, 2013, in addition to consolidating the secured debentures into six Consolidated Debentures, the maturity date was extended to August 1, 2015. Four of the Consolidated Debentures are non-interest bearing while the remaining two Consolidated Debentures accrue interest at
9.5
%
as outlined in further detail below.
We evaluated the impact of the modification on the accounting for the Consolidated Debentures in accordance with ASC 470-50-40-6 through 12 to determine whether extinguishment accounting was appropriate. Because the effect of the extension did not exceed a significance threshold relative to cash flows prescribed by ASC 470-50,
Debt Modifications and Extinguishments
, extinguishment accounting was not applicable.
Debentures assigned to other investors by YA Global were also modified effective July 1, 2013 to extend the maturity date to
August 1, 2015
and revise the conversion price to the lower of $
2.00
or 90% of the lowest volume-weighted average price for 125 days prior to the conversion.
The follwoing table summarizes the significant terms of each of the debentures for which the entire hybrid instrument is recorded at fair value as of September 30, 2013:
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|
|
|
|
|
|
|
|
|
Conversion Price – Lower of Fixed
Price or Percentage of VWAP for
Look-back period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-
Dilution
|
|
|
|
|
|
|
|
Debenture
|
|
Face
|
|
Interest
|
|
|
|
Fixed
|
|
Adjusted
|
|
|
|
|
Look-back
|
|
|
Issuance Year
|
|
Amount
|
|
Rate
|
|
|
|
Price
|
|
Price
|
|
%
|
|
|
Period
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
2,263
|
|
9.5
|
%
|
|
$
|
2.00
|
|
$
|
0.00018
|
|
90
|
%
|
|
125 Days
|
|
|
2007
|
|
|
1,150
|
|
9.5
|
%
|
|
$
|
2.00
|
|
$
|
0.00018
|
|
90
|
%
|
|
125 Days
|
|
|
2008
|
|
|
1,216
|
|
9.5
|
%
|
|
$
|
2.00
|
|
$
|
0.00018
|
|
90
|
%
|
|
125 Days
|
|
|
2009
|
|
|
172
|
|
9.5
|
%
|
|
$
|
2.00
|
|
$
|
0.00018
|
|
90
|
%
|
|
125 Days
|
|
|
2011
|
|
|
864
|
|
9.5
|
%
|
|
$
|
2.00
|
|
$
|
0.00018
|
|
90
|
%
|
|
125 Days
|
|
|
2012
|
|
|
612
|
|
9.5
|
%
|
|
$
|
2.00
|
|
$
|
0.00018
|
|
90
|
%
|
|
125 Days
|
|
|
2013
|
|
|
22,344
|
|
9.5
|
%
|
|
$
|
2.00
|
|
$
|
0.00018
|
|
90
|
%
|
|
125 Days
|
|
|
2013
|
|
|
12,299
|
|
-
|
|
|
$
|
2.00
|
|
$
|
0.00019
|
|
95
|
%
|
|
125 Days
|
|
|
Total
|
|
$
|
40,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continue to bifurcate the compound embedded derivatives related to the Series C and Series D preferred stock and carry these financial instruments as liabilities in the accompanying balance sheet.
Election to carry the instruments at fair value in their entirety is not available since their terms have not been modified. Significant components of the compound embedded derivative include (i) the embedded conversion feature, (ii) down-round anti-dilution protection features and (iii) default, non-delivery and buy-in puts, all of which were combined into one compound instrument that is carried at fair value as a derivative liability. Changes in the fair value of the compound derivative liability are charged or credited to income each period.
Conversions and Repayments
– Our preferred stock and convertible debentures are convertible into shares of our common stock. Upon conversion of any of the convertible financial instruments in which the compound embedded derivative is bifurcated, the carrying amount of the debt, including any unamortized premium or discount, and the related derivative instrument liability are credited to the capital accounts upon conversion to reflect the stock issued and no gain or loss is recognized. For instruments that are recorded in their entirety at the fair value of the hybrid instrument, the fair value of the hybrid instrument converted is credited to the capital accounts upon conversion to reflect the stock issued and no gain or loss is recognized. Beginning in April 2013, the trading market price of our common stock (and the conversion price) was less than its par value. We are limited to issuing shares of common stock at no less than the par value, and all shares of our common stock issued in those conversions were issued at par value. However, the methodology used to estimate the number of shares of convertible debentures and preferred stock converted during this time are based upon the value received for the shares issued, with the difference between that value and the par value recorded as a deemed dividend.
The following table provides a summary of the preferred stock conversions that have occurred since inception and the number of common shares issued upon conversion.
|
|
|
Preferred
shares
|
|
Preferred
shares
|
|
Preferred
shares
|
|
Common
shares
|
|
|
|
|
issued
|
|
converted
|
|
remaining
|
|
issued
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred Stock
|
|
22
|
|
17
|
|
5
|
|
314,619
|
|
|
Series D Preferred Stock
|
|
25
|
|
22
|
|
3
|
|
245,162
|
|
The outstanding principal and accrued interest for the debentures as of September 30, 2013 is reflected in the following table in addition to the principal and interest converted since inception and the number of common shares issued upon conversion.
|
|
|
Outstanding
principal and
accrued interest
at September
30, 2013
|
|
Principal and
accrued interest
converted since
inception
|
|
Common
Shares
issued
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures
|
|
$
|
43,665
|
|
$
|
11,747
|
|
4,403,415
|
|
As of September 30, 2013, we do not have sufficient authorized shares of common stock available for issuance to satisfy the conversion rights under certain outstanding convertible debenture and series of preferred stock.
If the holders of such debentures and preferred stock request the conversion of such holdings to common stock, we would be unable to respond to the request which would request in an event of default under such instruments.
Although we will pursue other options to increase the number of shares authorized for issuance in order to honor the conversion rights of the debentures and preferred stock, we can provide no assurance that we will be successful with these efforts.
Warrants
– YA Global holds warrants to purchase shares of our common stock that were issued in connection with the convertible debentures and the Series C and Series D preferred stock. The warrants are exercisable at a fixed exercise price which, from time to time, has been reduced due to anti-dilution provisions when we have entered into subsequent financing arrangements with a lower price. The exercise prices may be reset again in the future if we subsequently issue stock or enter into a financing arrangement with a lower price. In addition, upon each adjustment in the exercise price, the number of warrant shares issuable is adjusted to the number of shares determined by multiplying the warrant exercise price in effect prior to the adjustment by the number of warrant shares issuable prior to the adjustment divided by the warrant exercise price resulting from the adjustment.
The warrants issued to YA Global do not meet all of the established criteria for equity classification in ASC 815-40,
Derivatives and Hedging – Contracts in Entity’s Own Equity,
and accordingly, are recorded as derivative liabilities at fair value. Changes in the fair value of the warrants are charged or credited to income each period.
Effective February 1, 2013,
1.4
billion of the
1.9
billion warrants held by YA Global were cancelled and the remaining
500
million had their exercise price reduced to $
0.0001
per share. These changes resulted in a decrease in fair value of the warrants of approximately $
1.6
million during the first quarter of 2013 as reflected in the gain (loss) from change in fair value of derivative liabilities-warrants.
Fair value disclosures for Series C and D
Bifurcated Embedded Derivative Instruments
– For financings in which the embedded derivative instruments are bifurcated and recorded separately, the compound embedded derivative instruments are valued using a Monte Carlo Simulation methodology because that model embodies certain relevant assumptions (including, but not limited to, interest rate risk, credit risk, and conversion/redemption privileges) that are necessary to value these complex derivatives.
The conversion price in each of the convertible debentures is subject to adjustment for down-round, anti-dilution protection. Accordingly, if we sell common stock or common share indexed financial instruments below the stated or variable conversion price of the debenture, the conversion price adjusts to that lower amount.
The assumptions included in the calculations are highly subjective and subject to interpretation. Assumptions used as of
September 30, 2013 included exercise estimates/behaviors and the following other significant estimates: (i) Preferred Stock: remaining term of
1.84
years, equivalent volatility of
165
%, equivalent interest rate of
8
%, equivalent credit-risk adjusted rate of
6.31
% and conversion price of $
0.000194
. Equivalent amounts reflect the net results of multiple modeling simulations that the Monte Carlo Simulation methodology applies to underlying assumptions.
Due to the variability of the conversion prices, fluctuations in the trading market price of our common stock may result in significant variations to the calculated conversion price. For each debenture, we analyze the ratio of the conversion price (as calculated based on the percentage of VWAP for the appropriate look-back period) to the trading market price for a period of time equal to the term of the debenture to determine the average ratio for the term of the note. Each quarter, the ratio in effect on the date of the valuation is compared with the average ratio over the term of the debenture to determine if the calculated conversion price is representative of past trends or if it is considered unrepresentative due to a large fluctuation in the common stock price over a short period of time. If the calculated conversion price results in a ratio that deviates significantly from the average ratio over the term of the agreement, the average ratio of the conversion price to the trading market price is then multiplied by the current trading market price to determine the variable conversion price for use in the fair value calculations. This variable conversion price is then compared with the fixed conversion price and, as required by the terms of the debentures, the lower of the two amounts is used as the conversion price in the Monte Carlo Simulation model used for valuation purposes. On September 30, 2013, the fixed conversion price for each of the debentures was equal to or higher than the calculated variable conversion price. Accordingly, the variable conversion price was used in the Monte Carlo Simulation model. This analysis is performed each quarter to determine if the calculated conversion price is reasonable for purposes of determining the fair value of the embedded conversion features (for instruments recorded under ASC 815-15-25-1) or the fair value of the hybrid instrument (for instruments recorded under ASC 815-15-25-4).
The following table reflects the face value of the instruments, their amortized carrying value and the fair value of the separately-recognized compound embedded derivative, as well the number of common shares into which the instruments are convertible as of September 30, 2013 and December 31, 2012.
|
September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face
|
|
Carrying
|
|
Embedded
Conversion
|
|
Common
Stock
|
|
|
|
|
Value
|
|
Value
|
|
Feature
|
|
Shares
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred Stock
|
|
$
|
4,816
|
|
$
|
4,816
|
|
$
|
6,440
|
|
24,823,015
|
|
|
Series D Preferred Stock
|
|
|
348
|
|
|
348
|
|
|
465
|
|
1,794,330
|
|
|
Total
|
|
$
|
5,164
|
|
$
|
5,164
|
|
$
|
6,905
|
|
26,617,345
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Embedded
|
|
Common
|
|
|
|
|
Face
|
|
Carrying
|
|
Accrued
|
|
Conversion
|
|
Stock
|
|
|
|
|
Value
|
|
Value
|
|
Interest
|
|
Feature
|
|
Shares
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred Stock
|
|
$
|
4,840
|
|
$
|
4,840
|
|
$
|
-
|
|
$
|
1,988
|
|
923,953
|
|
|
Series D Preferred Stock
|
|
|
348
|
|
|
348
|
|
|
-
|
|
|
143
|
|
66,457
|
|
|
Total
|
|
$
|
5,188
|
|
$
|
5,188
|
|
$
|
-
|
|
$
|
2,131
|
|
990,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
53
|
|
$
|
53
|
|
$
|
7
|
|
|
16
|
|
11,871
|
|
The terms of the embedded conversion features in the convertible instruments presented above provide for variable conversion rates that are indexed to our quoted common stock price. As a result, the number of indexed shares is subject to continuous fluctuation. For presentation purposes, the number of shares of common stock into which the embedded conversion feature of the Series C and Series D preferred stock was convertible as of September 30, 2013 and December 31, 2012 was calculated as face value plus assumed dividends (if declared), divided by the lesser of the fixed rate or the calculated variable conversion price using the 125 day look-back period.
Changes in the fair value of derivative instrument liabilities related to the bifurcated embedded derivative features of convertible instruments not carried at fair value are reported as Gain (loss) from change in fair value of derivative liability – Series C and Series D preferred stock and debentures in the accompanying consolidated statements of operations.
Gain (loss) from change in fair value of derivative liability – Series C and D Preferred Stock and debentures
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
Series C Preferred Stock
|
|
$
|
(2,473)
|
|
$
|
918
|
|
$
|
(4,462)
|
|
$
|
(2,284)
|
|
|
Series D Preferred Stock
|
|
|
(178)
|
|
|
44
|
|
|
(322)
|
|
|
(1,302)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
31
|
|
|
74
|
|
|
15
|
|
|
(2,996)
|
|
|
2008
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,350)
|
|
|
2009
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(486)
|
|
|
2010
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(34)
|
|
|
2011
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,825)
|
|
|
2012
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15
|
|
|
Gain (loss) from change in fair value of derivative liability
|
|
$
|
(2,620)
|
|
$
|
1,036
|
|
$
|
(4,769)
|
|
$
|
(13,262)
|
|
Hybrid Financial Instruments Carried at Fair Value
–
At inception, the March 2007, August 2007, April 2008, May 2008 and April 2012 convertible debentures were recorded in their entirety at fair value as hybrid instruments in accordance with ASC 815-15-25-4 with subsequent changes in fair value charged or credited to income each period. As of May 25, 2012, we elected the fair value option for all other convertible debentures held by YA Global upon a re-measurement date that was triggered by significant modifications of the financial instruments.
The convertible debentures continued to be recorded in their entirety at fair value upon their consolidation into six Consolidated Debentures effective July 1, 2013.
Because these debentures are carried in their entirety at fair value, the value of the embedded conversion feature is embodied in those fair values.
We
estimate the fair value of the hybrid instrument as the present value of the cash flows of the instrument, using a risk-adjusted interest rate, enhanced by the value of the conversion option, valued using a Monte Carlo model. This method was considered by our management to be the most appropriate method of encompassing the credit risk and exercise behavior that a market participant would consider when valuing the hybrid financial instrument. Inputs used to value the hybrid instruments as of September 30, 2013 included: (i) present value of future cash flows for the debentures using a risk adjusted interest rate of
9.50% or zero if the instrument is non-interest bearing, (ii) remaining term of 1.84 years, (iii) equivalent volatility of 165%, equivalent interest rate of 9.5% or zero for non-interest bearing debt, equivalent credit-risk adjusted rate of 6.31% and anti-dilution adjusted conversion prices ranging from $
0.00018
- $
0.00019
.
The following table reflects the face value of the financial instruments, the fair value of the hybrid financial instrument and the number of common shares into which the instruments are convertible as of September 30, 2013 and December 31, 2012.
|
September 30, 2013
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
Face
|
|
Fair
|
|
Stock
|
|
|
|
|
Value
|
|
Value
|
|
Shares
|
|
|
|
|
(in thousands)
|
|
|
Debentures:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
2,263
|
|
$
|
7,858
|
|
17,386,106
|
|
|
2007
|
|
|
1,150
|
|
|
3,001
|
|
6,707,442
|
|
|
2008
|
|
|
1,216
|
|
|
5,234
|
|
11,511,771
|
|
|
2009
|
|
|
172
|
|
|
876
|
|
1,919,461
|
|
|
2011
|
|
|
864
|
|
|
2,557
|
|
5,687,898
|
|
|
2012
|
|
|
612
|
|
|
1,786
|
|
3,974,950
|
|
|
2013
|
|
|
34,643
|
|
|
85,706
|
|
191,799,671
|
|
|
Total
|
|
$
|
40,920
|
|
$
|
107,018
|
|
238,987,299
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
Face
|
|
Fair
|
|
Stock
|
|
|
|
|
Value
|
|
Value
|
|
Shares
|
|
|
|
|
(in thousands)
|
|
|
Debentures:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
6,180
|
|
$
|
14,758
|
|
5,196,283
|
|
|
2007
|
|
|
6,856
|
|
|
17,172
|
|
6,098,480
|
|
|
2008
|
|
|
6,468
|
|
|
15,492
|
|
5,487,497
|
|
|
2009
|
|
|
1,644
|
|
|
3,565
|
|
1,243,390
|
|
|
2010
|
|
|
3,806
|
|
|
7,178
|
|
2,512,724
|
|
|
2011
|
|
|
1,954
|
|
|
3,080
|
|
1,084,237
|
|
|
2012
|
|
|
1,979
|
|
|
3,047
|
|
1,073,527
|
|
|
Total
|
|
$
|
28,887
|
|
$
|
64,292
|
|
22,696,138
|
|
Changes in the fair value of convertible instruments that are carried in their entirety at fair value are reported as Gain (loss) from change in fair value of hybrid financial instruments in the accompanying consolidated statements of operations. The changes in fair value of these hybrid financial instruments were as follows:
Gain (loss) from change in fair value of hybrid financial instruments
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
11,069
|
|
$
|
902
|
|
$
|
5,754
|
|
$
|
2,637
|
|
|
2007
|
|
|
19,420
|
|
|
1,994
|
|
|
13,929
|
|
|
1,005
|
|
|
2008
|
|
|
16,569
|
|
|
1,914
|
|
|
9,930
|
|
|
5,465
|
|
|
2009
|
|
|
2,672
|
|
|
477
|
|
|
1,391
|
|
|
912
|
|
|
2010
|
|
|
9,693
|
|
|
799
|
|
|
7,178
|
|
|
1,695
|
|
|
2011
|
|
|
635
|
|
|
155
|
|
|
42
|
|
|
666
|
|
|
2012
|
|
|
1,483
|
|
|
427
|
|
|
523
|
|
|
740
|
|
|
2013
|
|
|
(85,706)
|
|
|
-
|
|
|
(85,706)
|
|
|
-
|
|
|
|
|
|
(24,165)
|
|
|
6,668
|
|
|
(46,959)
|
|
|
13,120
|
|
|
Less: Day-one loss from debenture financings
|
|
|
-
|
|
|
(315)
|
|
|
-
|
|
|
(1,162)
|
|
|
Gain (loss) from changes in fair value of hybrid instruments
|
|
$
|
(24,165 )
|
|
$
|
6,353
|
|
$
|
(46,959 )
|
|
$
|
11,958
|
|
Warrants –
The following table summarizes the warrants outstanding, their fair value and their exercise price after adjustment for anti-dilution provisions:
|
|
|
|
|
September 30, 2013
|
|
December 31, 2012
|
|
|
|
|
|
|
Anti-
Dilution
|
|
|
|
|
|
|
Anti-
Dilution
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
Expiration
|
|
Exercise
|
|
|
|
|
Fair
|
|
Exercise
|
|
|
|
|
Fair
|
|
|
|
|
Year
|
|
Price
|
|
Warrants
|
|
|
Value
|
|
Price
|
|
Warrants
|
|
|
Value
|
|
|
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
Warrants issued with preferred stock:
|
|
|
|
|
|
|
|
|
Series D Preferred Stock
|
|
2017
|
|
0.000100
|
|
87,368
|
|
$
|
33
|
|
0.00684
|
|
328,947
|
|
$
|
709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued with debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2015
|
|
0.000100
|
|
238,079
|
|
|
86
|
|
0.00684
|
|
896,382
|
|
|
1,691
|
|
|
2010
|
|
2015
|
|
0.000100
|
|
81,350
|
|
|
30
|
|
0.00684
|
|
306,287
|
|
|
571
|
|
|
2011
|
|
2016
|
|
0.000100
|
|
58,246
|
|
|
23
|
|
0.00684
|
|
219,298
|
|
|
453
|
|
|
2012
|
|
2017
|
|
0.000100
|
|
34,947
|
|
|
12
|
|
0.00684
|
|
131,579
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
499,990
|
|
$
|
184
|
|
|
|
1,882,493
|
|
$
|
3,687
|
|
The warrants are valued using a binomial lattice option valuation methodology because that model embodies all of the significant relevant assumptions that address the features underlying these instruments. Significant assumptions used in this model as of September 30, 2013 included an expected life equal to the remaining term of the warrants, an expected dividend yield of zero, estimated volatility ranging from
175
% to
188
%, and risk-free rates of return ranging from
0.02
% to
0.63
%. For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the warrants and volatility is based upon our expected common stock price volatility over the remaining term of the warrants. As a result of the repricing on February 1, 2013, the exercise price of the warrants is currently $.0001.
The anti-dilution provisions are still applicable so in the future the fixed exercise price of the warrants may be reset to equal to the lowest price of any subsequently issued common share indexed instruments with a conversion price below the current exercise price of the warrant.
Changes in the fair value of the warrants are reported as (Gain) loss from change in fair value of derivative liability - warrants in the accompanying consolidated statement of operations. The changes in the fair value of the warrants were as follows:
Gain (loss) from change in fair value of derivative liability- warrants
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
Warrants issued with preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D Preferred Stock
|
|
$
|
16
|
|
$
|
847
|
|
$
|
675
|
|
$
|
795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued with debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
-
|
|
|
492
|
|
|
-
|
|
|
1,511
|
|
|
2008
|
|
|
44
|
|
|
2,107
|
|
|
1,605
|
|
|
2,657
|
|
|
2010
|
|
|
15
|
|
|
718
|
|
|
543
|
|
|
901
|
|
|
2011
|
|
|
11
|
|
|
565
|
|
|
431
|
|
|
566
|
|
|
2012
|
|
|
6
|
|
|
168
|
|
|
249
|
|
|
(612)
|
|
|
Total
|
|
$
|
92
|
|
$
|
4,897
|
|
$
|
3,503
|
|
$
|
5,818
|
|
Reconciliation of changes in fair value –
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments that are measured at fair value on a recurring basis are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value using Level 3 inputs and changes in the fair value of hybrid instruments carried at fair value during the nine months ended September 30, 2013:
|
|
|
Compound
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
|
|
Warrant
|
|
Hybrid
|
|
|
|
|
|
|
|
Derivatives
|
|
Derivatives
|
|
Instruments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, December 31, 2012:
|
|
$
|
2,147
|
|
$
|
3,687
|
|
$
|
64,292
|
|
$
|
70,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound embedded derivatives
|
|
|
4,768
|
|
|
-
|
|
|
-
|
|
|
4,768
|
|
|
Warrant derivatives
|
|
|
-
|
|
|
(3,503)
|
|
|
-
|
|
|
(3,503)
|
|
|
Hybrid instruments
|
|
|
-
|
|
|
-
|
|
|
46,959
|
|
|
46,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred Stock
|
|
|
(10)
|
|
|
-
|
|
|
-
|
|
|
(10)
|
|
|
August 24, 2006 financing
|
|
|
-
|
|
|
-
|
|
|
(644)
|
|
|
(644)
|
|
|
December 29, 2006 financing
|
|
|
-
|
|
|
-
|
|
|
(503)
|
|
|
(503)
|
|
|
March 27, 2007 financing
|
|
|
-
|
|
|
-
|
|
|
(242)
|
|
|
(242)
|
|
|
April 11, 2008 financing
|
|
|
-
|
|
|
-
|
|
|
(71)
|
|
|
(71)
|
|
|
July 29, 2008 financing
|
|
|
-
|
|
|
-
|
|
|
(234)
|
|
|
(234)
|
|
|
October 18, 2008 financing
|
|
|
-
|
|
|
-
|
|
|
(23)
|
|
|
(23)
|
|
|
July 15, 2009 financing
|
|
|
-
|
|
|
-
|
|
|
(823)
|
|
|
(823)
|
|
|
August 14, 2009 financing
|
|
|
-
|
|
|
-
|
|
|
(475)
|
|
|
(475)
|
|
|
February 8, 2011 financing
|
|
|
-
|
|
|
-
|
|
|
(28)
|
|
|
(28)
|
|
|
April 13, 2011 financing
|
|
|
-
|
|
|
-
|
|
|
(199)
|
|
|
(199)
|
|
|
October 25, 2011 financing
|
|
|
-
|
|
|
-
|
|
|
(37)
|
|
|
(37)
|
|
|
December 8, 2011 financing
|
|
|
-
|
|
|
-
|
|
|
(217)
|
|
|
(217)
|
|
|
February 6, 2012 financing
|
|
|
-
|
|
|
-
|
|
|
(29)
|
|
|
(29)
|
|
|
March 26, 2012 financing
|
|
|
-
|
|
|
-
|
|
|
(141)
|
|
|
(141)
|
|
|
June 1, 2012 financing
|
|
|
-
|
|
|
-
|
|
|
(567)
|
|
|
(567)
|
|
|
Ending balance, September 30, 2013
|
|
$
|
6,905
|
|
$
|
184
|
|
$
|
107,018
|
|
$
|
114,107
|
|
Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, valuation techniques are sensitive to changes in the trading market price of our common stock, which has a high estimated historical volatility. Because derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.
Note 5 – Contingencies
From time to time, we are involved in various legal actions arising in the normal course of business, both as claimant and defendant. Although it is not possible to determine with certainty the outcome of these matters, we believe the eventual resolution of any ongoing legal actions is unlikely to have a material effect on our financial position or operating results.
Note 6 – Stock-Based Compensation
Total stock-based compensation expense recorded in the statement of operations was $
206
and $
1,000
for the three months ended September 30, 2013 and 2012, respectively, and $
992
and $
15,000
for the nine months ended September 30, 2013 and 2012, respectively.
A summary of the transactions and status of our granted, vested and exercisable options during the nine months ended September 30, 2013 follows:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Contractual
|
|
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
Life
|
|
|
|
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Remaining
|
|
|
|
|
Shares
|
|
Price
|
|
Value
|
|
in Years
|
|
|
|
|
(in
thousands)
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
1,340
|
|
$
|
0.017
|
|
$
|
-
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(167)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
Outstanding at September 30, 2013
|
|
|
1,173
|
|
$
|
0.017
|
|
$
|
-
|
|
|
7.9
|
|
|
Exercisable at September 30, 2013
|
|
|
903
|
|
$
|
0.018
|
|
$
|
-
|
|
|
7.8
|
|
The following table summarizes information about our stock options outstanding at September 30, 2013:
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted-
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Remaining
|
|
Average Exercise
|
|
|
|
|
Average
|
|
|
Exercise Prices
|
|
Number of Shares
|
|
Life
|
|
Price
|
|
Number of Shares
|
|
Exercise Price
|
|
|
|
|
(in thousands)
|
|
(in years)
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.008
|
|
|
200
|
|
|
9.0
|
|
$
|
0.008
|
|
|
40
|
|
$
|
0.008
|
|
|
$0.014 - $0.017
|
|
|
884
|
|
|
7.8
|
|
|
0.015
|
|
|
774
|
|
|
0.016
|
|
|
$0.050
|
|
|
89
|
|
|
7.4
|
|
|
0.047
|
|
|
89
|
|
|
0.047
|
|
|
|
|
|
1,173
|
|
|
7.9
|
|
|
0.017
|
|
|
903
|
|
|
0.018
|
|
Note 7 – Geographic Information
Revenue, classified by geographic location from which the revenue was originated, was as follows (in thousands):
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
United States
|
|
$
|
1,602
|
|
$
|
598
|
|
$
|
3,806
|
|
$
|
1,759
|
|
|
Germany
|
|
|
-
|
|
|
82
|
|
|
65
|
|
|
108
|
|
|
Total revenue
|
|
$
|
1,602
|
|
$
|
680
|
|
$
|
3,871
|
|
$
|
1,867
|
|
Approximately $
78
,000 and $
137
,000 of total assets were located in Germany as of September 30, 2013 and December 31, 2012, respectively. All other assets were located in the U.S.
Note 8 – Subsequent Events
On October 11, 2013, we entered into a Debenture Redemption Agreement with YA Global. Under the agreement, we have the option to redeem outstanding amounts under the six secured convertible debentures issued by us and currently held by YA Global at a purchase price equal to 75% of the value of the amount being redeemed. The agreement may be terminated by either party upon 90 days’ written notice.
On October 25, 2013, we entered into an Amended and Restated Patent Security Agreement with YA Global.
Under the agreement, a security interest in our IP Collateral as defined in the agreement was granted to YA Global in connection with our obligations to YA Global.