Long Term Obligations

9 Months Ended

Sep. 30, 2013

NOTE 4. Long Term Obligations

On May 27, 2011, the Company sold convertible promissory notes in the aggregate principal amount of $15,275,000, convertible into an aggregate of approximately 2,679,824 shares of Series A-2 Convertible Preferred Stock at a price of $5.70 per share, with each 9.939 shares being convertible into one share of common stock. The convertible promissory notes were sold along with convertible preferred stock and warrants for aggregate gross proceeds of $30,550,000, which after deducting issuance costs of $2,524,963 left net proceeds of $28,025,037. Interest on the convertible promissory notes accrued at a rate of 5% per annum, and could either be paid on the last day of each fiscal quarter, or added to the principal amount of the notes, at the Company’s option.

Using the relative fair value of the securities issued, the Company initially allocated the gross proceeds of $30,550,000 as follows:

Security	Allocated Fair Value		Issuance Costs			Interest Expense		Net Allocation

Series A-1 Convertible Preferred Stock	$	10,724,991	$	(886,422	)	$	—	$	9,838,569
Convertible promissory notes		10,072,592		(832,502	)		2,255,074		11,495,164
Warrants		9,752,417		(806,039	)		—		8,946,378

Total	$	30,550,000	$	(2,524,963	)	$	2,255,074	$	30,280,111

The debt discount (which included the discount associated with the embedded conversion derivative) related to the debt element of the convertible promissory notes of $14,442,497 was, prior to the 2013 Exchange (see Note 1), being amortized as non-cash interest expense using the effective yield method over the 3.5 year contractual term of the convertible promissory notes. The $832,502 in issuance costs allocated to the convertible promissory notes was recorded as a deferred financing cost, which was also being amortized as a non-cash interest expense using the effective yield method over the 3.5 year contractual term of the promissory notes.

The Company valued the derivative liability for the conversion element of the convertible promissory notes using a Monte Carlo Simulation approach, using assumptions provided by management reflecting conditions at the valuation dates.

The fair value of this derivative liability had diminished to nil by the time of the 2013 Exchange. At September 30, 2012, the fair value was estimated to be $458,310, using a closing stock price of $7.95 and assumptions including estimated volatility of 126.57%, a risk-free interest rate of 0.16%, a zero dividend rate and a contractual term of 2.16 years.

The fair value of this derivative liability at December 31, 2012 and 2011, was estimated to be $274,928 and $1,931,295, respectively. The decrease in the fair value of this derivative liability of $274,928 and $1,472,985 during the nine months ended September 30, 2013 and 2012, respectively, was recorded as a revaluation gain (see Note 9).

The balance of the convertible promissory notes comprises the following at September 30, 2013, and December 31, 2012:

	September 30, 2013			December 31, 2012

Convertible Promissory Notes Payable:
Face value	$	15,275,000		$	15,275,000
Interest added to principal		1,809,894			1,262,028
Stated value		17,084,894			16,537,028
Debt discount – conversion element, net of accumulated amortization of $3,392,963 and $1,298,628 respectively		11,049,534			13,143,869

Notes payable, net of debt discount, prior to exchange		6,035,360			3,393,159

Amount extinguished in 2013 Exchange		(6,035,360	)		—

Notes payable, net of debt discount	$	—		$	3,393,159

The Company recorded a loss on early extinguishment of debt of $4,970,410 as a result of the 2013 Exchange (see Note 1).