6. Hybrid Debt Instrument
|9 Months Ended|
Sep. 30, 2015
|Derivative Instruments and Hedging Activities Disclosure [Abstract]|
|Hybrid Debt Instrument||
On July 1, 2015, the Company entered into a Securities Purchase Agreement (the SPA) with Pharmsynthez (the Holder) providing for the issuance of a minimum of a $3 million 10% Senior Secured Collateralized Convertible Promissory Note (the Note). The SPA also provides for the issuance of certain warrants up to the amount of the Note. See Note 8, Stockholders Equity, for discussion of the accounting treatment of the warrants. As explicated below, the convertible debt and its embedded debt-like features have been recorded on the face of the condensed consolidated balance sheet as an aggregate hybrid debt instrument with a balance of $2.8 million as of September 30, 2015.
On July 1, 2015, the Company issued the Note for $3 million plus a warrant to purchase 10 million shares of common stock in accordance with the terms of the SPA. The Note carries a term of one year and is convertible, in whole or in part, at the option of the Holder into shares of common stock at a conversion price of $0.15. The Note bears interest at the rate of 10% annually, payable quarterly in cash or, at the Companys option, in shares of common stock at the lessor of $0.15 or the then applicable conversion price. At any point after six months following the issuance of the Note, but before the maturity date of the Note, the Company has the option of prepayment of the Note and any accrued interest. If the Company exercises the prepayment option, the Company is obligated to pay the outstanding principal amount of the Note and accrued interest multiplied by 115%. If the Note is converted or redeemed, prior to the maturity date, the Company will pay cash to the Holder equal to the interest that would have accrued from the conversion or redemption date to the maturity date.
Upon a public offering in which the Company obtains financing of $7 million or greater (Public Offering), the Holder has the option to either redeem the Note for cash at the balance of principal plus accrued interest multiplied by 115% or convert the principal plus accrued interest multiplied by 115% into common stock at the effective conversion price. In the event of default, as defined under the terms of the Note, all obligations will be immediately due and payable and the interest rate will increase to 18% annually. The Company determined these two features represent contingent put options for the Holder.
The Company concluded the two contingent put option features related to a public offering and event of default, the Note conversion feature and the ability for interest to be paid in shares of common stock feature each meet the definition of a derivative under ASC Topic 815, Derivatives and Hedging (ASC 815), and require bifurcation and accounting as embedded derivatives. The four embedded derivatives, which were bifurcated and individually fair valued by the Company, have been recorded as a compound derivative within the Hybrid Debt Instrument. The Company calculated the fair values of each individual embedded derivative by taking the difference between the fair value of the Note with each embedded derivative and the fair value of the Note without the individual embedded derivative. The Company calculated the fair values using the discounted present value of each embedded derivative value as determined by Monte Carlo Simulations. The key valuation assumptions used consist of the Companys stock price, a risk free interest rate of 0.28% and an expected volatility of 115%. The embedded derivatives were recorded on the condensed consolidated balance sheet as a compound derivative liability at an estimated fair value of $1.4 million at issuance and created an offsetting debt discount that will be amortized over the life of the Note using the effective interest rate method.
The offset to debt arising from the recording of the compound derivative liability, the warrants and the associated issuance costs exceeded the debt proceeds by approximately $60,000. This amount was recorded as a loss in Other Expense in the condensed consolidated statement of comprehensive loss for the quarter ended September 30, 2015.
The fair value of the compound derivative is remeasured at each report date until settled, with changes in fair value recognized in the consolidated statement of comprehensive loss as a gain or loss on derivative. The fair value of the compound derivative increased $1.3 million since issuance to $2.8 million as of September 30, 2015. This change was recognized as a loss in Other Expense in the condensed consolidated statement of comprehensive loss for the quarter ended September 30, 2015.
The Company also evaluated the provision in the Note that increases the annual interest rate in the event of default and concluded that the initial value of this contingent feature is immaterial to the condensed consolidated financial statements as of September 30, 2015. The Company will evaluate the value of this contingent feature at each reporting period.
The entire disclosure for hybrid instruments and embedded derivatives, including discussion of the process used in evaluating whether a hybrid instrument in the form of a share constitutes a debt or equity security, and on what basis an embedded derivative was deemed to be separable or inseparable from the host instrument.
Reference 1: http://www.xbrl.org/2003/role/presentationRef