Annual report pursuant to Section 13 and 15(d)

Convertible Note

v3.3.1.900
Convertible Note
12 Months Ended
Sep. 30, 2015
Notes to Financial Statements  
6. Convertible Note

On August 7, 2014, the Company issued a Convertible Note (the "Note") with an original principal balance of $632,500 to Brio Capital Master Fund LTD ("Brio"), for a purchase price of $550,000. The Note matures on February 6, 2016, and is payable in thirteen monthly installments of $48,654, commencing in the sixth month post-closing. Brio had the right, however not the obligation, to convert all or any part of the outstanding Note into the Company's common stock at an initial conversion price of $2.00 per share. After six months from closing, the conversion price had a one-time reset to the lower of $2.00 or 90% of the average of the 3 lowest closing prices for the previous 10 trading days, subject to a floor of $1.40 per share. The Company was allowed to force conversion if the Company's common stock trades at 250% greater than the conversion price for 20 consecutive trading days (see Note 9). 

 

In addition to the Note, the Company issued a warrant to purchase up to 237,188 shares of the Company's common stock. The warrant is exercisable at $2.50 per share, vests 6 months after the closing, and expires 5 years thereafter.

 

The Note contained an embedded conversion feature requiring bifurcation and liability treatment. The Company accounted for this conversion feature and the detachable warrants by allocating the proceeds from issuance of the convertible notes to the conversion feature and the warrants. These were valued by a third party using a binomial pricing model with the following assumptions: Volatility - 130.00%; Risk-Free Rate - 0.29%; Conversion Price Floor - $0.14; Conversion Price Cap - $0.20.

 

To recognize the fair value of the warrants, the Company discounted the note and increased additional paid in capital. The fair value of the conversion feature was approximately $178,000 at inception, the Company discounted the note and created a derivative liability, which is evaluated each quarter and adjusted for any change in value. 

 

During the second quarter, Brio converted $500,000 of its outstanding loan in two tranches into 250,000 shares of the Company's common stock. Based on the closing stock price of $8.50 and $10.30 per common share, the 250,000 shares were valued at approximately $2,350,000 and the Company has recognized a loss on the extinguishment of debt of approximately $210,000. Included in the loss in extinguishment was the fair value of the derivative liability at the date of conversion. 

 

During the third quarter, Brio converted the remaining $132,500 of its outstanding loan into 66,250 shares of the Company's common stock. Based on the closing stock price of $7.80 per common share, the 66,250 shares were valued at approximately $517,000.

 

Since the issuance in 2014, the Company received approximately $517,000 in net cash that was converted by Brio into 316,250 shares of the Company's common stock. Related to this transaction the Company recorded approximately $2,867,000 in equity (including 219,000 in warrants valued in 2014), $2,204,000 in a derivative loss, $234,000 extinguishment of debt, and interest expense of approximately $115,500 during the year ended September 30, 2015.