Senior Convertible Notes
|9 Months Ended|
Sep. 30, 2014
|Debt Disclosure [Abstract]|
|Senior Convertible Notes||
6. Senior Convertible Notes
The Company issued approximately $15.0 million aggregate principal amount of its 8.00% Convertible Notes due May 31, 2015 (the “Convertible Notes”) from June 2013 through June 2014. Dr. Sol Barer, a director of the Company, purchased $2.0 million principal amount of the Convertible Notes, Alpha Spring Limited, for which Mr. Zan, one of the Company’s directors, is the sole director, purchased $831,350 principal amount of the Convertible Notes, Mr. Low, one of the Company’s directors, purchased $90,000 principal amount of the Convertible Notes and Ms. Julia P. Gregory, the Company’s Chief Executive Officer, purchased $25,000 principal amount of the Convertible Notes.
On August 1, 2014, in conjunction with the closing of the Company’s IPO, the principal amount of the Convertible Notes, and all accrued and unpaid interest thereon, automatically converted into 5,109,988 shares of common stock. Upon the closing of the offering, the Company accelerated the amortization of the remaining debt discount balance to interest expense.
The Company determined that both the warrants and the Convertible Notes were free standing instruments for accounting purposes. The terms of the warrants included an exercise price “cap” that is analogous to “down round protection” which precluded the Company from classifying the warrants in equity. As such, the warrants were classified as a liability and allocated their full fair value on day one and the residual value was ascribed to the Convertible Notes. In addition, the Convertible Notes also included embedded derivatives (i.e. penalty provisions) that required bifurcation. The Company aggregated these bifurcated features and reflected the values of these embedded derivatives in the account “embedded derivative liability”. These warrants and embedded derivatives were re-measured at each reporting period and immediately prior to the closing of the Company’s IPO, and changes in fair value were recognized in the statement of operations (see Note 3, “Fair Value Measurements”). Upon the closing of the offering, the Company reclassified the balances of the convertible note related warrant and embedded derivative liabilities to additional paid-in capital as the terms of the warrants, including any penalty warrants, became fixed and the interest penalties were paid in the Company’s common stock, and therefore both the warrants and penalties were no longer considered a liability. Based on the terms of the warrants, the Company determined the total number of shares of the Company’s common stock underlying the warrants held by purchasers of the Convertible Notes to be 3,321,416 at an exercise price of $3.00 per share.
At issuance, the Convertible Notes included a beneficial conversion feature for which a discount could not be calculated due to the indeterminable number of shares of common stock that could have been issued upon conversion contingent on the Company’s IPO. On the closing of the Company’s IPO, this contingency was resolved and the Company determined the amount of the discount to be recognized for each tranche of Convertible Notes issued by calculating the difference between the common stock value on the date of issuance and the effective conversion price, based on the number of shares of common stock actually issued on conversion. The Company determined the aggregate discount of $7,428,547 for the beneficial conversion feature and recognized this amount as additional interest expense upon the closing of its IPO.
As of September 30, 2014 and December 31, 2013, the Convertible Notes consisted of the following:
Placement Agent Warrants
The Maxim Group, LLC (“Maxim”) received a warrant to purchase 10% of the total number of shares of common stock into which the note purchased by the holder is convertible. The exercise price of the warrant was equal to 110% of the lower of a 25% discount to the initial public offering price, or $10.50 in the event there was no initial public offering within six months of the Company’s initial filing. The Company classified this warrant as a liability since it also did not meet the requirements to be included in equity. The warrant was re-measured at each reporting period and changes in fair value were recognized in the statement of operations.
On July 25, 2014, Maxim forfeited the warrant and the warrant was cancelled by the Company. The Company reclassified the balance of the warrant to additional paid-in capital as a reduction of the offering costs.
The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.
Reference 1: http://www.xbrl.org/2003/role/presentationRef