Annual report pursuant to Section 13 and 15(d)

Preferred Stock Warrants and Warrant Liability

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Preferred Stock Warrants and Warrant Liability
12 Months Ended
Dec. 31, 2011
Preferred Stock Warrants and Warrant Liability [Abstract]  
Preferred Stock Warrants and Warrant Liability
9. Preferred Stock Warrants and Warrant Liability

Preferred Stock Warrants

At September 30, 2011, the outstanding warrants to purchase the Company’s Series C and Series D preferred stock which were issued in connection with certain financing arrangements and amendments to existing financing arrangements were expired unexercised in connection with the Merger. Information relating to these warrants at December 31, 2010 is summarized as follows:

 

                 

Warrants

  Remaining
Number
Outstanding
    Exercise Price  

Series C Warrants-2008 Loan and Security Agreement

    280,803     $ 0.7345  

Series D Warrants-2009 Convertible Debt

    4,368,948     $ 0.1198  

Series D Warrants-Series D Preferred Stock Issuance

    8,347,236     $ 0.1198  

*Series D Warrants-1 st Amendment

    6,243,362     $ 0.1198  

*Series D Warrants-2 nd Amendment

    8,694,558     $ 0.1198  

*Series D Warrants-3 rd Amendment

    4,462,227     $ 0.1198  

*Series D Warrants-5 th Amendment

    2,260,440     $ 0.1198  

*Series D Warrants-6 th Amendment

    6,900,685     $ 0.1198  
   

 

 

         

Total

    41,558,259          
   

 

 

         

 

* Warrants issued to lenders in conjunction with amendments to 2008 Loan and Security Agreement (see Note 7).

 

Warrant Liability

The warrants issued in conjunction with the 2008 Loan and Security Agreement (see Note 7) are issuable for Series C preferred stock. The warrants issued in connection with the 2009 Convertible Debt (see Note 7) and the Series D Preferred Stock (see Note 8) are issuable for Series D preferred stock. Both the Series C and Series D preferred stock are considered contingently redeemable based on the stockholders’ right to redeem the shares on or after January 7, 2015. In accordance with Accounting Standards Codification on Distinguishing Liabilities from Equity, since the warrants are indexed to contingently redeemable securities of the Company, they are classified as liabilities upon issuance. As liability classified derivative financial instruments, the warrants are initially and subsequently required to be measured at their fair values as defined in Accounting Standards Codification on Fair Value Measurement.

The change in fair value of the warrants between each reporting period is recorded in the consolidated statements of operations and was estimated by the Company using a binomial lattice valuation model. The following assumptions were incorporated into the valuations for 2011 and 2010:

 

         
    2011   2010

Exercise price

  $ 0.1198 – $0.7345   $ 0.1198 – $0.7345

Market value of stock at end of period

  $0.01   $0.01

Expected dividend rate

  N/A   N/A

Expected volatility

  33.47% – 62.86%   39.46% – 75.57%

Risk-free interest rate

  0.03% – 3.18%   0.12% – 3.39%

Expected life in years

  3.40 – 9.90   7.33 – 10.00

Shares underlying warrants outstanding classified as liabilities

  41,558,259   41,558,259

The Company recorded income of $62,305 and $78,306 for 2011 and 2010, respectively, as a result of the change in the fair value of warrant liability between reporting periods which was recorded in other income (expense) on the consolidated statements of operations. The total balance of the warrant liability as of September 30, 2011 of $2,607,510 was forfeited in accordance with the Merger.