Convertible Notes Payable

3 Months Ended

Mar. 31, 2014

Debt Disclosure [Abstract]

Convertible Notes Payable

CONVERTIBLE NOTES PAYABLE

On December 7, 2012, the Company issued convertible notes (the “2012 Convertible Notes”). The 2012 Convertible Notes are, at the holders’ option, redeemable in cash upon maturity at December 31, 2014, or convertible into shares of common stock at a conversion price ($2.58 per share as of March 31, 2014), which is subject to adjustment upon certain dilutive issuances of common stock. The 2012 Convertible Notes bear interest at 7% per annum, which is payable quarterly at the Company’s option in cash or, if the Company’s net cash balance is less than $3.0 million at the time of payment, in shares of common stock. If paid in shares of common stock, then the price of the stock issued is determined at 95% of the five-day weighted average of the market price of the common stock prior to the time of payment.

The fair value of the 2012 Convertible Notes was determined based on a discounted cash flow model using a risk adjusted annual interest rate of approximately 16%, which represents a Level 3 measurement within the fair value hierarchy given that this is an unobservable input. The fair value of these notes as of March 31, 2014 approximates the book value. The holders had the option to redeem $1.525 million of the principal on the 2012 Convertible Notes on April 1, 2014. The holders exercised their redemption rights and the Company made principal cash payments of $1.525 million plus accrued interest during April 2014.

The 2012 Convertible Notes have an anti-dilution provision that results in an embedded conversion feature that has been accounted for as a derivative. The fair value as of March 31, 2014 was determined using the following inputs: stock price of $2.15, 54% volatility, a 0.75 year term and a risk-free interest rate of 0.13%. The estimated fair value of the conversion feature as of March 31, 2014 and December 31, 2013 was $0.1 million and $0.5 million, respectively, which has been recorded as a derivative liability in the consolidated balance sheets. These unobservable inputs represent a Level 3 measurement within the fair value hierarchy. The estimated fair value of the conversion feature is revalued on a monthly basis and any resulting increases or decreases in the estimated fair value are recorded within other income (expense).

During 2013, the Company issued 486,923 common shares upon the conversion of $1.25 million of the principal balance of the 2012 Convertible Notes into common stock. $0.7 million of the derivative liability was re-classified to additional paid in capital upon conversion, and $0.2 million of the debt discount was credited to additional paid in capital.

The Company’s convertible notes payable balance consisted of the following (in thousands):

	March 31, 2014			December 31, 2013
Convertible notes payable	$	2,750		$	2,750
Less: unamortized debt discount	(91		)	(150		)
Total short-term debt	$	2,659		$	2,600

The Company recognized interest expense related to its convertible notes payable of $0.1 million for each of the three months ended March 31, 2014 and 2013.