NOTE 11. SERIES D PREFERRED STOCK

On July 28, 2015, the Company entered into Stock Purchase Agreements (the “Purchase Agreements”) with mutual fund Discover pursuant to which the Company agreed to issue and sell up to an aggregate of 947 shares of the Company’s newly designated Series D Redeemable Convertible Preferred Stock (“Series D Preferred Stock”) of the Company, par value $0.0001 per share, convertible into shares of the Company’s Common Stock, at a fixed conversion price of $2.50 per share (the “Conversion Price”), at a purchase price of $10,000 per share, for total gross proceeds of $9.0 million after taking into account a 5% original issue discount, or the sale of approximately $9.47 million. Original issue discount of approximately $0.4 million was recorded as a reduction of the Series D Preferred Stock in the consolidated balance sheets as of December 31, 2015.

The Company sold 444 shares of the Series D Preferred Stock to Discover pursuant to a prospectus supplement to the Company's “shelf” registration statement on Form S-3 (File No. 333-198647), which became effective on October 28, 2014. The Company sold the remaining 503 shares to Discover pursuant to section Regulation 4(a)(2) of the securities act governing private placements. The Company has filed a registration statement on Form S-3 with the SEC covering the resale of the shares of common stock issuable upon conversion of the Series D Preferred Stock issued in the private placement as well as any dividends payable in shares of common stock which registration statement became effective on September 25, 2015.

The Company agreed to issue and sell an additional 316 shares of Series D Preferred Stock for gross proceeds of $3.0 million (with a 5% original issue discount) upon the satisfaction of certain customary closing conditions for transactions of this type as well as (i) approval by the Company’s stockholders of issuance of shares of Common Stock in accordance with the requirements of NASDAQ Listing Rule 5635(d) and (ii) a registration statement registering the shares of common stock issuable under the terms of the Series D Preferred Stock being declared effective by the SEC.

On September 24, 2015, the Company held a Special Meeting of Stockholders (the “Special Meeting”) to vote on a proposal to approve the potential issuance of more than 19.99% of the Company’s outstanding common stock upon conversion of the Series D Preferred Stock, together with certain additional shares the Company issued pursuant to other transactions that are aggregated under the NASDAQ Listing Rules in accordance with the stock purchase agreements between the Company and Discover dated July 28, 2015. This proposal was approved at the Special Meeting. On September 29, 2015, pursuant to the Stock Purchase Agreement and the satisfaction of the closing conditions included therein, the Company issued and sold 316 shares of the Company’s Series D Preferred Stock to Discover for total gross proceeds of $3.0 million, after taking into account a 5% original issue discount, or the sale of approximately $3.16 million of Series D Preferred Stock. The Company received the additional $3.0 million on September 29, 2015. Total original issue discount of $0.2 million was recorded as a reduction of the Series D Preferred Stock in the consolidated balance sheets as of December 31, 2015.

The Series D Preferred Stock is convertible at a fixed price of $2.50 per share and has a six and a half year maturity term, at which time it will convert automatically into common stock at $2.50 per share. The Series D Preferred Stock bears an accrued annual dividend rate of 8.0%, which may range from 0% to 15%, based on certain adjustments and conditions, including changes in the volume weighted average price of the Company’s common stock. Upon conversion, the Company shall pay the holders of the Series D Preferred Stock being converted a conversion premium equal to the amount of dividends that such shares would have otherwise been issued if they had been held through the maturity date (“Conversion Premium”).

The dividends and conversion premium may be paid in cash or, at the Company’s option, shares of common stock. If the Company elects to pay the dividends or conversion premium amount in the form of common stock, the number of shares to be issued is calculated as follows: (i) if there is no triggering event (as such term is defined in the Certificate of Designations), 90.0% of the average of the five lowest individual daily volume weighted average prices during the applicable measurement period, which may be non-consecutive, less $0.05 per share of common stock, not to exceed 100% of the lowest sales price on the last day of such measurement period, less $0.05 per share of common stock, or (ii) following any triggering event, 80.0% of the lowest daily volume weighted average price during any measurement period, less $0.05 per share of common stock, not to exceed 80.0% of the lowest sales price on the last day of any measurement period, less $0.05 per share of common stock.

The face value of the Series D Preferred Stock of $12.6 million, inclusive of $0.6 million in debt discount, has been accounted for as mezzanine equity in the consolidated balance sheets at December 31, 2015 in accordance with ASC 480 “Distinguishing Liabilities from Equity”, as upon liquidation, the Company will be required to redeem the outstanding Series D Preferred Stock for cash. The beneficial conversion feature relating to the Series D Preferred Stock resulted in a deemed dividend of $3.0 million on the date of issuance of the Series D Preferred Stock and was reflected as a reduction of the net loss attributable to common stockholders as the effective conversion price of the Series D Preferred Stock was below the Company’s stock price.

The conversion premium and the dividends associated with the Series D Preferred Stock contain an anti-dilution feature within the dividend rate, which fluctuates inversely to the changes in the value of the Company’s stock price. The conversion premium and dividends with the noted features are redeemed upon conversion of the Series D Preferred Stock. The Company’s management analyzed the conversion premium and dividends with the noted features and determined that they required liability treatment. Accordingly, the conversion premium and the dividends have been bifurcated from the Series D Preferred Stock. Initial and subsequent measurement of this derivative liability will be at fair value, with changes in fair value recognized in earnings on a quarterly basis. The Company calculated the fair value of the total derivative liability of $8.0 million at inception of the two tranches of the Series D Preferred Stock issued to Discover, which have been recorded as a reduction of the Series D Preferred Stock in the consolidated balance sheet since redemption is not currently deemed to be probable. A proportionate amount of the derivative liability that was recorded at inception of each tranche of the issuance of the Series D Preferred Stock will be reflected as a deemed dividend as the conversions occur. The Discover derivative liability was reduced by $1.8 million upon the Series D Preferred Stock conversions during the year ended December 31, 2015. The Company recorded a loss on the change in the estimated fair value of the derivative liability of $0.3 million for the year ended December 31, 2015, which was recorded in non-operating expense in the consolidated statements of operations. The fair value of the Discover derivative liability as of December 31, 2015 was $6.5 million (see Note 5).

Upon closing of the $9.0 million Discover financing, the co-placement agents received an aggregate of $0.6 million upon the closing and each received warrants to purchase an aggregate of 275,000 shares of the Company’s common stock, for a total of 550,000 shares of common stock, at an exercise price of $2.50 per share, exercisable commencing six months following the issuance date and ending five years following the issuance date. The Company valued the warrants issued to the placement agents using the Black-Scholes options-pricing model and calculated a fair value of $0.6 million, which has been recorded as a reduction to the Series D Preferred Stock in the consolidated balance sheet. Upon closing of the additional $3.0 million Discover financing, the co-placement agents received an aggregate of $0.2 million in cash and each received warrants to purchase an aggregate of 114,000 shares of the Company’s common stock, for a total of 228,000 shares of common stock, at an exercise price of $2.50 per share, exercisable six months following the issuance date and ending five years following the issuance date. The Company valued the 114,000 warrants issued to placement agents using the Black-Scholes options-pricing model and calculated a fair value of $0.2 million.

In addition, the Company paid legal fees of $0.1 million, which were recorded as a reduction of the Series D Preferred Stock in the consolidated balance sheet. Total Series D Preferred Stock issuance costs of approximately $1.7 million were recorded as a reduction of the Series D Preferred Stock in the consolidated balance sheet as of December 31, 2015.

During the year ended December 31, 2015, Discover converted 300 shares of Series D Preferred Stock into a total of 1,200,000 of the Company’s common stock. In addition, the Company issued an additional 3,311,730 of common stock to Discover as payment of dividends and conversion premium. The Company recorded a proportionate amount of the Series D Preferred Stock as a deemed dividend of $2.4 million upon conversion, which was charged to additional paid-in capital. In addition, during the year ended December 31, 2015, $3.0 million was credited to additional paid-in capital from the conversion of the 300 shares of Series D Preferred Stock. Subsequent to December 31, 2015, Discover converted an additional 100 shares of Series D Preferred Stock for a total of 400,000 common shares and the Company issued an additional 2,604,434 common stock as payment of dividends and conversion premium.

Below is the activity for the Company’s Series D Preferred Stock issuances for the periods presented ($ in thousands):

	Shares		Amount
December 31, 2014		-	$	-
Issuance of Series D Preferred Stock		1,263		12,632
Series D Preferred Stock original issue discount		-		(632)
Series D Preferred Stock derivative liability		-		(8,007)
Conversion of Series D Preferred Stock		(300)		(3,000)
Accretion of Series D Preferred Stock		-		2,398
Series D Preferred Stock issuance costs		-		(1,732)
December 31, 2015		963	$	1,659