Notes to Condensed Consolidated Financial
Statements
June 30, 2014
(Unaudited)
Note 1
–
General
NeoMedia Technologies, Inc. a Delaware
corporation (the “Company,” “NeoMedia,” “we,” “us,” “our,” and similar
terms), was founded in 1989 and is headquartered in Boulder, Colorado. We have positioned ourselves to lead the development of
mobile barcode technology and services solutions that enable the mobile barcode ecosystem world-wide. NeoMedia harnesses the power
of the mobile phone in innovative ways with state-of-the-art mobile barcode solutions. With this technology, mobile devices with
cameras become barcode scanners, enabling a range of practical applications including mobile marketing and mobile commerce. In
addition, we offer licensing of our extensive intellectual property portfolio.
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 March 17, 2014. The results of operations for
the six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year. In addition,
as we communicated in a Periodic Report on Form 8-K on July 29, 2014, we are going to be restating certain of our financial statements
by filing amendments to our previously filed Form 10-K for December 31, 2013 (and interim periodic reports on Form 10-Q within
2013) and the previously filed Form 10-Q for March 31, 2014. We and the SEC have concluded that certain modifications in
the Company’s valuation methodology, deemed as accounting estimates by the Company, contained errors with respect to the
valuation of convertible debentures issued by the Company, in that such methodology did not capture the debentures’ potentially
dilutive effect upon their conversion into common stock. Please see the disclosure immediately below entitled “Restatement
to 2013 Interim Reporting and of the December 31, 2013 Balance Sheet” for further information as these changes in valuation
methodology has affected our previously filed interim report on Form 10-Q for June 30, 2013.
Basis of Presentation
–
The condensed consolidated financial statements include the accounts of NeoMedia and its wholly owned subsidiaries. We operate
as one reportable segment. All intercompany accounts, transactions and profits have been eliminated in consolidation. Certain
prior period amounts in the condensed consolidated financial statements and notes thereto have been reclassified to conform to
the current year's presentation.
Use of Estimates
–
The preparation of 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. Changes in facts and circumstances
may result in revised estimates, which are recorded in the period in which they become known.
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 condensed consolidated financial statements have been prepared in conformity
with US GAAP, which contemplates our continuation as a going concern. Our net income for the six months ended June 30, 2014 was
$3.6 million as compared to net income of $30 million for the same period in 2013. The operating results for the six months ended
June 30, 2014 included $3.9 million of net gains related to financing instruments, and the operating results for the same period
in 2013 included $29.5 million of net gains related to financing instruments.
Net cash used in operations during the
six months ended June 30, 2014 was $197,000 as compared to net cash used in operations of $875,000 during the six months ended
June 30, 2013. As of June 30, 2014, we have an accumulated deficit of $233.3 million. We also have a working capital deficit of
$37.4 million, including $35 million in current liabilities for our derivative and debenture financing instruments.
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. 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 shares of common stock outstanding. During the first six months
of 2014, there were 155,729 million shares of common stock issued for these conversions. We cannot predict if or when each holder
may or may not elect to convert into shares of common stock.
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.
Restatement to 2013 Interim Reporting
–
As noted above and disclosed initially in our Periodic Report on Form
8-K on July 29, 2014, during the three month period ended March 31, 2014, for fair value accounting of the derivative financial
instruments and debentures payable, we reassessed the valuation techniques used to estimate the liability fair values. Based on
the assessment, including discussions with the third-party valuation firm assisting us with the calculation, we determined that
the valuation technique should be modified to consider the potentially dilutive impact on the stock price resulting from the issuance
of additional shares of common stock upon the conversion of the instruments as well as the resulting value in comparison to our
market capitalization.
We agree with the SEC’s assertion
that certain modifications in our valuation methodology contained errors with respect to the valuation of convertible debentures
issued by us. We are restating the June 30, 2013 three month and six month periods to reflect the change in valuation technique
and correction of the fair value accounting of the derivative financial instruments and debentures payable. In addition, we are
also restating our December 31, 2013 Balance Sheet as it pertains to the Fair Value of our Warrants, Preferred Series C & D
and Convertible Debentures to amounts as stated below from how they were reported as of December 31, 2013 in our 10-K:
|
|
December 31, 2013
(as previously reported)
|
|
|
Adjustments
|
|
|
December 31, 2013
(Restated)
|
|
Derivative Financial Instruments – warrants
|
|
$
|
684
|
|
|
$
|
64
|
|
|
$
|
620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments – Series C and D PS and DP
|
|
$
|
23,606
|
|
|
$
|
23,310
|
|
|
$
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures payable – carried at fair value
|
|
$
|
257,451
|
|
|
$
|
219,201
|
|
|
$
|
38,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
284,576
|
|
|
$
|
242,575
|
|
|
$
|
42,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(479,485
|
)
|
|
$
|
242,575
|
|
|
$
|
(236,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ deficit
|
|
$
|
(284,435
|
)
|
|
$
|
242,575
|
|
|
$
|
(41,860
|
)
|
The
tables below reflect the changes in restating the derivative liabilities for the three months and six months ended June 30, 2013:
Derivative
Liability Restatement for the 3 months ended June 30, 2013:
|
|
3 Mos. June 30, 2013
(as previously reported)
|
|
|
Adjustments
|
|
|
3 Mos. June 30, 2013
(as Restated)
|
|
Gain (loss) from change in fair value of hybrid financial instruments
|
|
$
|
(29,569
|
)
|
|
$
|
29,136
|
|
|
$
|
(433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from change in fair value of derivative liability – warrants
|
|
$
|
289
|
|
|
$
|
(31
|
)
|
|
$
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from change in fair value of derivative liability – Series C & D
|
|
$
|
(1,849
|
)
|
|
$
|
1,904
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(30,372
|
)
|
|
$
|
31,009
|
|
|
$
|
637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
(30,372
|
)
|
|
$
|
(30,312
|
)
|
|
$
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(30,595
|
)
|
|
$
|
31,254
|
|
|
$
|
659
|
|
Derivative
Liability Restatement for the 6 months ended June 30, 2013:
|
|
6 Mos. June 30, 2013
(as previously reported)
|
|
|
Adjustments
|
|
|
6 Mos. June 30, 2013
(as Restated)
|
|
Gain (loss) from change in fair value of hybrid financial instruments
|
|
$
|
(22,795
|
)
|
|
$
|
46,849
|
|
|
$
|
24,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from change in fair value of derivative liability – warrants
|
|
$
|
3,411
|
|
|
$
|
13
|
|
|
$
|
3,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from change in fair value of derivative liability – Series C & D
|
|
$
|
(2,149
|
)
|
|
$
|
4,147
|
|
|
$
|
1,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(21,284
|
)
|
|
$
|
50,958
|
|
|
$
|
29,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
(21,284
|
)
|
|
$
|
50,261
|
|
|
$
|
28,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(21,618
|
)
|
|
$
|
51,425
|
|
|
$
|
29,807
|
|
Statement of Cash Flows:
|
|
6 Mos. June 30, 2013
(as previously reported)
|
|
|
Adjustments
|
|
|
6 Mos. June 30, 2013
(as Restated)
|
|
Net income (loss)
|
|
$
|
(21,284
|
)
|
|
$
|
50,958
|
|
|
$
|
29,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from change in fair value of hybrid financial instruments
|
|
$
|
2,149
|
|
|
$
|
(26,203
|
)
|
|
$
|
(24,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from change in fair value of derivative liability – warrants
|
|
$
|
(3,411
|
)
|
|
$
|
(13
|
)
|
|
$
|
(3,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from change in fair value of derivative liability – Series C & D Preferred Shares
|
|
$
|
22,795
|
|
|
$
|
(24,793
|
)
|
|
$
|
(1,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(874
|
)
|
|
$
|
(1
|
)
|
|
$
|
(875
|
)
|
Merger and Reverse Stock Split
–
On May 11, 2014, the Company completed an Agreement and Plan of Merger (the “Merger
Agreement”) with Qode Services Corporation (“Qode”), a wholly owned subsidiary of the Company. Under the terms
of the Merger Agreement, Qode was merged into the Company and ceased to exist upon completion of the merger. The Company
continued as the surviving corporation. Under the terms of the Merger Agreement, the Company’s charter was amended to provide
for an increase in the amount of common stock authorized shares, and each share of the Company’s common stock issued and
outstanding immediately prior to the merger continued to remain outstanding and remain unchanged, except that (i) the par value
changed from $0.001 per share to no par value per share, and (ii) each fifteen shares of common stock issued and outstanding were
combined and converted into 1 share of common stock (the “Reverse-Split”). The amount of authorized shares of common
stock was also increased from 5 billion to 7.5 billion shares. Prior period amounts have been retroactively adjusted for the
Reverse-Split in order to be comparable and conform to the current period presentation.
Extinguishment of Debenture
- In
connection with the completion of the merger, the holder of the secured convertible debentures agreed to enter into amendments
to decrease the aggregate face amount of debt by $5.0 million. The forgiveness of debt on the secured convertible debentures exceeded
a significance threshold relative to cash flows prescribed by ASC Topic 470-50,
Debt Modifications and Extinguishments
.
Accordingly, the modifications of the amounts due under these arrangements were accounted for as extinguishments, whereby the existing
debentures were considered to be retired and new debentures issued. The fair value of the forgiven balance of $4.247 million was
determined as of May 11, 2014 and recorded as a gain on extinguishment of debt in the condensed consolidated statements of operations.
See Note 4 – Financings for additional discussion.
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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
(restated)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
3,573
|
|
|
$
|
(60
|
)
|
|
$
|
3,588
|
|
|
$
|
28,977
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid financial instruments
|
|
|
-
|
|
|
|
(433
|
)
|
|
|
(29,151
|
)
|
|
|
(24,054
|
)
|
Derivative liability - warrants
|
|
|
-
|
|
|
|
258
|
|
|
|
(40
|
)
|
|
|
(3,424
|
)
|
Derivative liability - Series C and D preferred stock and debentures
|
|
|
-
|
|
|
|
55
|
|
|
|
(1,992
|
)
|
|
|
(2,149
|
)
|
Numerator
for diluted income (loss) per common share
|
|
$
|
3,573
|
|
|
$
|
(180
|
)
|
|
$
|
(27,595
|
)
|
|
$
|
(650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic income (loss) per common share
|
|
|
359,568,430
|
|
|
|
270,512,776
|
|
|
|
351,339,588
|
|
|
|
215,354,974
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid financial instruments
|
|
|
32,949,714
|
|
|
|
32,949,714
|
|
|
|
32,949,714
|
|
|
|
32,949,714
|
|
Derivative liability - warrants
|
|
|
2,083,292
|
|
|
|
2,083,292
|
|
|
|
2,083,292
|
|
|
|
2,083,292
|
|
Derivative liability - Series C and D preferred stock and debentures
|
|
|
3,398,694
|
|
|
|
3,398,694
|
|
|
|
3,398,694
|
|
|
|
3,398,694
|
|
Denominator for diluted income (loss) per common share
|
|
|
398,000,130
|
|
|
|
308,944,476
|
|
|
|
389,771,288
|
|
|
|
253,786,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share
|
|
$
|
.010
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.14
|
|
Diluted income (loss) per common share
|
|
$
|
.009
|
|
|
$
|
0.00
|
|
|
$
|
0.09
|
|
|
$
|
0.11
|
|
Recent
Accounting Pronouncements –
From time to time, new accounting pronouncements are issued that we adopt as of the
specified effective date. ASU Update 2014-09 Revenue From Contracts With Customers (Topic 606)
issued May 28, 2014 by FASB and IASB converged guidance on recognizing revenue in contracts with customers with an effective date
after December 15, 2016 will be evaluated as to impact and implemented accordingly.
Note 3 – Accrued Liabilities
Accrued liabilities consist of the following as of June 30,
2014 and December 31, 2013:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Accrued operating expenses
|
|
$
|
237
|
|
|
$
|
112
|
|
Accrued payroll related expenses
|
|
|
43
|
|
|
|
65
|
|
Accrued legal fees
|
|
|
181
|
|
|
|
114
|
|
Total
|
|
$
|
461
|
|
|
$
|
291
|
|
Note 4 – Financing
At June 30, 2014, financial instruments
arising from our financing transactions with YA Global Investments, L.P. (“YA Global”), an accredited investor, included
shares of our Series C Convertible Preferred Stock issued in February 2006, Series D Convertible Preferred Stock issued in January
2010, a series of four 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.
On April 25, 2014,
the Company entered into a Reaffirmation and Ratification Agreement with YA Global. Under the terms of the agreement, YA Global
agreed to reduce the outstanding principal for certain of the Consolidated Debentures by $5.0 million. The reduction of principal
resulted in debt extinguishment income of $4.247 million for the quarter ended June 30, 2014. The agreement also summarizes and
affirms all principal amounts presently outstanding and owed by the Company to YA Global under all of the outstanding financing
documents and debentures issued by the Company to YA (the “Financing Documents”). Pursuant to the agreement, the Company
(i) ratified the terms of the Financing Documents and agreed that they remain in full force and effect, (ii) confirmed that the
collateral rights granted to YA Global under the Financing Documents secure the obligations created thereunder, (iii) confirmed
that the occurrence of an “event of default” under any of the Financing Documents would constitute an “event
of default” under all of the Financing Documents, and (iv) agreed to execute and deliver to YA Global all such additional
documents as reasonably required by YA Global to correct any document deficiencies, or to vest or perfect the Financing Documents
and the collateral granted therein, and authorized YA Global to file any financing statements and take any other actions necessary
to perfect YA Global’s security interests in any such collateral.
As part of the $5
million debt reduction, the Debentures were reduced from six to three.
In
addition, a secured debenture was issued on May 27, 2014 for $50,000 to YA Global. Interest is payable annually at 12%. The note
is due May 15, 2016. The funds are being used for working capital.
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.
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 following table summarizes the significant
terms of each of the debentures for which the entire hybrid instrument is recorded at fair value as of June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
1,962
|
|
|
|
9.5
|
%
|
|
$
|
2.00
|
|
|
$
|
0.001235
|
|
|
|
90
|
%
|
|
125 Days
|
2007
|
|
|
547
|
|
|
|
9.5
|
%
|
|
$
|
2.00
|
|
|
$
|
0.001235
|
|
|
|
90
|
%
|
|
125 Days
|
2007
|
|
|
272
|
|
|
|
-
|
|
|
$
|
2.00
|
|
|
$
|
0.001170
|
|
|
|
95
|
%
|
|
125 Days
|
2008
|
|
|
1,187
|
|
|
|
9.5
|
%
|
|
$
|
2.00
|
|
|
$
|
0.001235
|
|
|
|
90
|
%
|
|
125 Days
|
2008
|
|
|
830
|
|
|
|
-
|
|
|
$
|
2.00
|
|
|
$
|
0.001170
|
|
|
|
95
|
%
|
|
125 Days
|
2009
|
|
|
91
|
|
|
|
9.5
|
%
|
|
$
|
2.00
|
|
|
$
|
0.001235
|
|
|
|
90
|
%
|
|
125 Days
|
2011
|
|
|
1,614
|
|
|
|
9.5
|
%
|
|
$
|
2.00
|
|
|
$
|
0.001235
|
|
|
|
90
|
%
|
|
125 Days
|
2012
|
|
|
210
|
|
|
|
-
|
|
|
$
|
2.00
|
|
|
$
|
0.001170
|
|
|
|
95
|
%
|
|
125 Days
|
2013
|
|
|
22,084
|
|
|
|
9.5
|
%
|
|
$
|
2.00
|
|
|
$
|
0.001235
|
|
|
|
90
|
%
|
|
125 Days
|
2013
|
|
|
7,127
|
|
|
|
-
|
|
|
$
|
2.00
|
|
|
$
|
0.001170
|
|
|
|
95
|
%
|
|
125 Days
|
Total
|
|
$
|
35,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We bifurcate the compound embedded derivatives
related to the Series C and Series D Convertible 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 recorded within 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 instrument and the related derivative 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. The trading market price
of our common stock (and the conversion price) has been less than its par value from time to time. Until May 11, 2014 we
were 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 until May 11, 2014 are based upon the value received for the shares
issued, with the difference between that value and the par value being recorded as a deemed dividend.
Based upon the terms of the merger agreement
effective May 11, 2014, the company’s shares of common stock have no par value. We are no longer limited to issuing shares
of common stock at a price less than par value. The methodology used to issue the shares of common stock upon conversion of convertible
debentures and preferred stock is based upon the value received for the shares of common stock issued. The value received is recorded
as additional paid in capital and no deemed dividends are required to be recorded.
The following table provides
a summary of the preferred stock conversions that have occurred since inception and the number of shares of common stock
issued upon conversion.
|
|
Preferred
shares
|
|
|
Preferred
shares
|
|
|
Preferred
shares
|
|
|
Common
shares
|
|
|
|
issued
|
|
|
converted
|
|
|
remaining
|
|
|
issued
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred Stock
|
|
|
22
|
|
|
|
17
|
|
|
|
5
|
|
|
|
97,468
|
|
Series D Preferred Stock
|
|
|
25
|
|
|
|
22
|
|
|
|
3
|
|
|
|
16,344
|
|
The outstanding principal and accrued interest for the debentures
as of June 30, 2014 is reflected in the following table in addition to the principal and interest converted since inception and
the number of shares of common stock issued upon conversion.
|
|
Outstanding
principal and
accrued interest
at June
30, 2014
|
|
|
Principal and
accrued interest
converted since
inception
|
|
|
Common
Shares
issued
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures
|
|
$
|
38,929
|
|
|
$
|
11,981
|
|
|
|
372,828
|
|
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 Convertible 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 from change in fair value of derivative liabilities - warrants.
Effective May 2014, in connection with
the merger and a concurrent reverse stock split of 15 to 1 as described in Note 2, the exercise price of the warrants increased
to $0.0015 from $0.0001 per share. These changes resulted in a decrease in the value of the warrants of approximately $207,000
during the quarter ended June 30, 2014, as reflected in the gain from the 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.
Assumptions used in calculating the preferred
share values as of June 30, 2014 included a remaining equivalent term of 1.09 years, annualized volatility of 205%, stated
dividend of 8%, equivalent credit-risk adjusted rate of 13.0% and conversion price of $0.001261. Equivalent amounts reflect
the net results of multiple modeling simulations that the Monte Carlo Simulation methodology applies to underlying assumptions.
During the three months ended March 31, 2014, we modified the valuation technique to consider the potentially dilutive impact
on the stock price resulting from the issuance of additional common shares upon the conversion of the preferred shares and convertible
debentures.
The following table reflects the face value
of the instruments 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 June 30, 2014 and December 31, 2013.
June 30, 2014
|
|
Face
|
|
|
Carrying
|
|
|
Embedded
Conversion
|
|
|
Common
Stock
|
|
|
|
Value
|
|
|
Value
|
|
|
Feature
|
|
|
Shares
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred Stock
|
|
$
|
4,597
|
|
|
$
|
4,597
|
|
|
$
|
48
|
|
|
|
3,159,450
|
|
Series D Preferred Stock
|
|
|
348
|
|
|
|
348
|
|
|
|
3
|
|
|
|
239,244
|
|
Total
|
|
$
|
4,945
|
|
|
$
|
4,945
|
|
|
$
|
51
|
|
|
|
3,921,570
|
|
December 31, 2013
|
|
Face
|
|
|
Carrying
|
|
|
Embedded
Conversion
|
|
|
Common
Stock
|
|
|
|
Value
|
|
|
Value
|
|
|
Feature
|
|
|
Shares
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred Stock
|
|
$
|
4,816
|
|
|
$
|
4,816
|
|
|
$
|
276
|
|
|
|
24,823,015
|
|
Series D Preferred Stock
|
|
|
348
|
|
|
|
348
|
|
|
|
20
|
|
|
|
1,794,330
|
|
Total
|
|
$
|
5,164
|
|
|
$
|
5,164
|
|
|
$
|
296
|
|
|
|
26,617,345
|
|
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 June 30, 2014 and December 31, 2013 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
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Series C Preferred Stock
|
|
$
|
100
|
|
|
$
|
76
|
|
|
$
|
228
|
|
|
$
|
1,878
|
|
Series D Preferred Stock
|
|
|
7
|
|
|
|
5
|
|
|
|
16
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
(16
|
)
|
Gain (loss) from change in fair value of derivative liability
|
|
$
|
107
|
|
|
$
|
55
|
|
|
$
|
244
|
|
|
$
|
1,998
|
|
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. 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 the lower amount.
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 June 30, 2014 included: (i) present
value of future cash flows for the debentures using an effective market interest rate of 13.0%, (ii) remaining term of 1.09 years,
(iii) annualized volatility of 205%, and (iv) anti-dilution adjusted conversion prices ranging from $0.001170-$0.001235. We also
modified the valuation technique to consider the potentially dilutive impact on the stock price from the issuance of common shares
upon the conversion of the debentures during the first quarter of 2014.
The following table reflects the face value
of the financial instruments, the fair value of the hybrid financial instrument and the number of shares of common stock into which
the instruments are convertible as of June 30, 2014 and December 31, 2013.
June 30, 2014
|
|
|
|
|
|
|
|
Common
|
|
|
|
Face
|
|
|
Fair
|
|
|
Stock
|
|
|
|
Value
|
|
|
Value
|
|
|
Shares
|
|
|
|
(in thousands)
|
|
Debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
1,962
|
|
|
$
|
2,011
|
|
|
|
1,912,226
|
|
2007
|
|
|
819
|
|
|
|
927
|
|
|
|
878,436
|
|
2008
|
|
|
2,017
|
|
|
|
1912
|
|
|
|
1,784,300
|
|
2009
|
|
|
91
|
|
|
|
116
|
|
|
|
110,140
|
|
2011
|
|
|
1,614
|
|
|
|
851
|
|
|
|
810,547
|
|
2012
|
|
|
210
|
|
|
|
1022
|
|
|
|
963,159
|
|
2013
|
|
|
29,211
|
|
|
|
28103
|
|
|
|
26,490,906
|
|
Total
|
|
$
|
35,924
|
|
|
$
|
34,942
|
|
|
|
32,949,714
|
|
December 31, 2013
|
|
|
|
|
|
|
|
Common
|
|
|
|
Face
|
|
|
Fair
|
|
|
Stock
|
|
|
|
Value
|
|
|
Value
|
|
|
Shares
|
|
|
|
(in thousands)
|
|
Debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
1,962
|
|
|
$
|
2,008
|
|
|
|
819,019
|
|
2007
|
|
|
839
|
|
|
|
533
|
|
|
|
216,720
|
|
2008
|
|
|
2,047
|
|
|
|
1,905
|
|
|
|
779,294
|
|
2009
|
|
|
134
|
|
|
|
151
|
|
|
|
61,563
|
|
2011
|
|
|
852
|
|
|
|
854
|
|
|
|
348,437
|
|
2012
|
|
|
972
|
|
|
|
1,392
|
|
|
|
568,305
|
|
2013
|
|
|
34,211
|
|
|
|
31,407
|
|
|
|
12,826,301
|
|
Total
|
|
$
|
41,017
|
|
|
$
|
38,250
|
|
|
|
15,619,639
|
|
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
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
(170
|
)
|
|
$
|
(105
|
)
|
|
$
|
(61
|
)
|
|
$
|
5,609
|
|
2007
|
|
|
(71
|
)
|
|
|
(115
|
)
|
|
|
(14
|
)
|
|
|
5,795
|
|
2008
|
|
|
(145
|
)
|
|
|
(121
|
)
|
|
|
(58
|
)
|
|
|
7,006
|
|
2009
|
|
|
(13
|
)
|
|
|
(18
|
)
|
|
|
(5
|
)
|
|
|
1,352
|
|
2010
|
|
|
-
|
|
|
|
(46
|
)
|
|
|
-
|
|
|
|
2,654
|
|
2011
|
|
|
(94
|
)
|
|
|
(12
|
)
|
|
|
(26
|
)
|
|
|
625
|
|
2012
|
|
|
(34
|
)
|
|
|
(16
|
)
|
|
|
(45
|
)
|
|
|
1,013
|
|
2013
|
|
|
(101
|
)
|
|
|
-
|
|
|
|
(964
|
)
|
|
|
-
|
|
Gain (loss) from changes in fair value of hybrid instruments
|
|
$
|
(628
|
)
|
|
$
|
(433
|
)
|
|
$
|
(1,173
|
)
|
|
$
|
24,054
|
|
Warrants –
The following table summarizes
the warrants outstanding, their fair value and their exercise price after adjustment for anti-dilution provisions:
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
|
Anti-
Dilution
|
|
|
|
|
|
|
|
|
Anti-
Dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
Expiration
|
|
|
Exercise
|
|
|
|
|
|
Fair
|
|
|
Exercise
|
|
|
|
|
|
Fair
|
|
|
|
Year
|
|
|
Price
|
|
|
Warrants
|
|
|
Value
|
|
|
Price
|
|
|
Warrants
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Warrants issued with preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D Preferred Stock
|
|
|
2017
|
|
|
|
0.001500
|
|
|
|
5,825
|
|
|
$
|
7
|
|
|
|
0.00010
|
|
|
|
87,368
|
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued with debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2015
|
|
|
|
0.001500
|
|
|
|
15,872
|
|
|
|
19
|
|
|
|
0.00010
|
|
|
|
238,079
|
|
|
|
294
|
|
2010
|
|
|
2015
|
|
|
|
0.001500
|
|
|
|
5,423
|
|
|
|
6
|
|
|
|
0.00010
|
|
|
|
81,350
|
|
|
|
101
|
|
2011
|
|
|
2016
|
|
|
|
0.001500
|
|
|
|
3,883
|
|
|
|
5
|
|
|
|
0.00010
|
|
|
|
58,246
|
|
|
|
72
|
|
2012
|
|
|
2017
|
|
|
|
0.001500
|
|
|
|
2,330
|
|
|
|
3
|
|
|
|
0.00010
|
|
|
|
34,947
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
33,333
|
|
|
$
|
40
|
|
|
|
|
|
|
|
499,990
|
|
|
$
|
620
|
|
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 June 30, 2014 included an expected life equal to
the remaining term of the warrants, an expected dividend yield of zero, estimated volatility ranging from 175% to 212%, and risk-free
rates of return ranging from 0.10% to 0.90%. 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 May 1, 2014, the exercise price
of the warrants is currently $.0015. 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 from change in fair value of derivative liability
– warrants
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Warrants issued with preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D Convertible Preferred Stock
|
|
$
|
39
|
|
|
$
|
46
|
|
|
$
|
104
|
|
|
$
|
661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued with debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
70
|
|
|
|
122
|
|
|
|
250
|
|
|
|
1,567
|
|
2010
|
|
|
37
|
|
|
|
43
|
|
|
|
97
|
|
|
|
530
|
|
2011
|
|
|
24
|
|
|
|
29
|
|
|
|
68
|
|
|
|
422
|
|
2012
|
|
|
37
|
|
|
|
18
|
|
|
|
61
|
|
|
|
244
|
|
Gain from change in fair value of derivative liability – warrants
|
|
$
|
207
|
|
|
$
|
258
|
|
|
$
|
580
|
|
|
$
|
3,424
|
|
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 six months ended June 30, 2014:
|
|
Compound
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
|
|
|
Warrant
|
|
|
Hybrid
|
|
|
|
|
|
|
Derivatives
|
|
|
Derivatives
|
|
|
Instruments
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, December 31, 2013 (restated):
|
|
$
|
296
|
|
|
$
|
620
|
|
|
$
|
38,250
|
|
|
$
|
39,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound embedded derivatives
|
|
|
(244
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(244
|
)
|
Warrant derivatives
|
|
|
-
|
|
|
|
(580
|
)
|
|
|
-
|
|
|
|
(580
|
)
|
Hybrid instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
1,173
|
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Extinguishment
|
|
|
|
|
|
|
|
|
|
|
(4,247
|
)
|
|
|
(4,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D Preferred Stock
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
August 24, 2006 financing
|
|
|
-
|
|
|
|
-
|
|
|
|
(60
|
)
|
|
|
(60
|
)
|
December 29, 2006 financing
|
|
|
-
|
|
|
|
-
|
|
|
|
(48
|
)
|
|
|
(48
|
)
|
March 27, 2007 financing
|
|
|
-
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
(20
|
)
|
October 28, 2008 financing
|
|
|
-
|
|
|
|
-
|
|
|
|
(30
|
)
|
|
|
(30
|
)
|
August 14, 2009 financing
|
|
|
-
|
|
|
|
-
|
|
|
|
(44
|
)
|
|
|
(44
|
)
|
February 8, 2011 financing
|
|
|
-
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
(14
|
)
|
March 11, 2011 financing
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
April 13, 2011 financing
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
May 31, 2011 financing
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
June 28, 2011 financing
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Ending balance, June 30, 2014
|
|
$
|
51
|
|
|
$
|
40
|
|
|
$
|
34,942
|
|
|
$
|
35,033
|
|
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.
Other
– On February
21, 2014, the Company received a correspondence (the “Delta Notice”) from Delta Capital Partners LLC (“Delta”),
asserting a claim for certain amounts owed under a secured convertible debenture. The principal amount outstanding and conversion
rights under such instrument had been assigned to Delta by YA Global (the “Assignment”), several years subsequent to
the original issuance of the instrument by the Company to YA Global. The Company’s understanding is that pursuant to the
terms of the Assignment, YA Global, as collateral agent, retained all rights in connection with the enforcement of any claims under
Delta’s secured convertible debenture. YA Global has indicated that it does not intend to assert any of the claims
described by Delta in the Delta Notice.
Note 6 – Stock-Based Compensation
The status of our outstanding, vested and exercisable options
during the six months ended June 30, 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Contractual
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Life
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Remaining
|
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
|
in Years
|
|
|
|
(in
thousands)
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
1,173
|
|
|
$
|
0.017
|
|
|
|
-
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
1,173
|
|
|
$
|
0.017
|
|
|
$
|
-
|
|
|
|
7.7
|
|
Exercisable at June 30, 2014
|
|
|
1,006
|
|
|
$
|
0.018
|
|
|
$
|
-
|
|
|
|
7.0
|
|
The following table summarizes information
about our stock options outstanding at June 30, 2014:
Options Outstanding
|
|
Options Exercisable
|
|
Exercise Prices
|
|
Number of Shares
|
|
|
Weighted-
Average
Remaining
Life
|
|
|
Weighted-
Average Exercise
Price
|
|
|
Number of Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
|
(in thousands)
|
|
|
(in years)
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.008
|
|
|
200
|
|
|
|
8.2
|
|
|
$
|
0.008
|
|
|
|
78
|
|
|
$
|
0.008
|
|
$0.014 to $0.03
|
|
|
884
|
|
|
|
7.0
|
|
|
|
0.015
|
|
|
|
839
|
|
|
|
0.016
|
|
$0.050
|
|
|
89
|
|
|
|
6.6
|
|
|
|
0.047
|
|
|
|
89
|
|
|
|
0.047
|
|
|
|
|
1,173
|
|
|
|
7.2
|
|
|
$
|
0.017
|
|
|
|
1,006
|
|
|
$
|
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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
United States
|
|
$
|
654
|
|
|
$
|
1,616
|
|
|
$
|
1,657
|
|
|
$
|
2,205
|
|
Germany
|
|
|
-
|
|
|
|
51
|
|
|
|
-
|
|
|
|
64
|
|
Total revenue
|
|
$
|
654
|
|
|
$
|
1,667
|
|
|
$
|
1,657
|
|
|
$
|
2,269
|
|
Approximately $46,000 and $142,000 of total assets were located
in Germany as of June 30, 2014 and December 31, 2013, respectively. All other assets were located in the U.S.
Note 8- Subsequent Events
The Company evaluated subsequent events through August 4, 2014,
the date which the financial statements were available to be issued. Except as disclosed below there were no additional subsequent
events.
|
·
|
163 shares of Series C preferred stock have been converted into
280,353,232 shares of common stock for the 3
rd
quarter up to August 12, 2014.
|
|
·
|
$258,087 of convertible debentures have been converted into
421,876,116 shares of common stock for the 3
rd
quarter up to August 12, 2014.
|
On July 16, 2014, we received correspondence
from the
SEC
, requesting that (i) we restate certain of our financial statements by filing amendments to the reports containing
such financials, and (ii) we file an 8-K to report non-reliance on such financials. We filed the 8-K to report that our previously
issued audited financial statements as of the year ended December 31, 2013, as presented on our 10-K as well as the financial statements
issued in our 10-Q for the period ending March 31, 2014 should no longer be relied upon.
In its correspondence, the SEC asserted
that certain modifications in our valuation methodology, deemed as accounting estimates, contained errors with respect to the valuation
of convertible debentures issued by us, in that such methodology did not capture the debentures’ potentially dilutive effect
upon their conversion into common stock. Our operational performance remains unchanged.
We intend to file an amended 10-K and an
amended 10-Q that will contain restated Financial Statements revised pursuant to the SEC’s comments