COMMON STOCK AND WARRANTS - Note 7

9 Months Ended

Sep. 30, 2013

Common Stock And Warrants - Note 7

COMMON STOCK AND WARRANTS - Note 7

7. COMMON STOCK AND WARRANTS

In September 2013, we raised $6.6 million before issuance costs of approximately $434,000 from the sale of 3.5 million shares of common stock and warrants to purchase up to an aggregate of 2.1 million shares of our common stock in a registered direct offering. The warrants have an exercise price of $2.444 per share, a five year term, and are exercisable beginning on the date of issuance. Each warrant to purchase a share of common stock may also be exchanged during its term for a number of shares of common stock (but not more than one share of common stock for each warrant so exchanged) with a value determined by a negotiated formula if, among other things, our common stock is then trading at a price at or lower than the warrant exercise price per share. Subject to limitations in the warrants, we may require the warrants be exercised for cash if the closing bid price of our stock is over $3.055 for 20 consecutive trading days and the average daily dollar volume over that period is equal to or exceeds $300,000.

In May 2013, we raised $5.85 million before issuance costs of approximately $362,000 from the sale of 2.6 million shares of common stock and warrants to purchase up to an aggregate of 2.0 million shares of our common stock in a registered direct offering. The warrants have an exercise price of $2.886 per share, a five year term, and are exercisable beginning on the date of issuance. Each warrant to purchase a share of common stock may also be exchanged during its term for a number of shares of common stock (but not more than one share of common stock for each warrant so exchanged) with a value determined by a negotiated formula if, among other things, our common stock is then trading at a price at or lower than the warrant exercise price per share. Subject to limitations in the warrants, we may require the warrants be exercised for cash if the closing bid price of our stock is over $3.61 for 20 consecutive trading days and the average daily dollar volume over that period is equal to or exceeds $300,000.

Based on the terms of the May 2013 and September 2013 warrants, we have determined that the warrants should be classified as a liability given that the warrants could result in the issuance of a variable number of shares of common stock based on a conditional exchange provision that is outside of our control at any point when the share price of our common stock is equal to or less than the stated exercise prices of $2.886 and $2.444 per share. At the date of issuance, and as of September 30, 2013, our common stock was trading at a value less than the stated exercise prices. As such, the holders may elect to exchange the warrants for a variable number of shares of common stock as determined by a negotiated formula included in the warrants. However, the warrants limit the number of shares that may be issued under this exchange provision to one share of common stock for each warrant exchanged. The maximum number of shares that we could be required to issue is under the terms of the warrants is 4,071,552. In September 2013, 118,243 shares of common stock were issued on a one-for-one basis under the warrant exchange provision of the May 2013 agreement. As of September 30, 2013, based upon the terms of the then outstanding warrants and the quoted market price of our common stock, if the exchange feature had been exercised, we would have been required to issue 3,859,669 shares of common stock, equal to an estimated fair market value of $6,716,000, which we believe is the best indication of the fair value of the warrant obligation as of September 30, 2013. Changes in the market value of our common stock may increase or decrease the number of shares to be issued under this exchange feature.

At each balance sheet date, we evaluate the fair value of the warrants and any change in value will be recorded as a non-operating gain or loss on the statement of operations. During the three months ended September 30, 2013, we recorded non-operating gains of $397,000 related to the change in value of the warrants.