SALE OF PREFERRED SHARES AND WARRANTS

12 Months Ended

Sep. 30, 2015

Stockholders' Equity Note [Abstract]

SALE OF PREFERRED SHARES AND WARRANTS

3. SALE OF PREFERRED SHARES AND WARRANTS (not in thousands)

 

On May 11, 2011, we completed a registered public offering of 5,506 units at a price of $1,000 per unit. Each unit consisted of one 6% Series A convertible preferred share which is convertible into 500 common shares, one Class A Warrant to purchase 250 common shares at an exercise price of $2.00 per share, and one Class B Warrant to purchase 250 common shares at an exercise price of $2.00 per share.

The designation, rights, preferences and other terms and provisions of the Series A preferred shares are set forth in the Certificate of Designation. Until May 11, 2014, the Series A preferred shares had a stated dividend rate of 6% per annum, payable quarterly in cash or, subject to certain conditions, in common shares or a combination of cash and common shares, at our election. After May 11, 2014, the Series A preferred shares participate in any dividends payable upon our common shares on an "as converted" basis. If the preferred shares had converted prior to May 11, 2014, we would have also been required to pay to the converting holder in cash, or subject to certain conditions, in common shares or a combination of cash and common shares, a “make-whole” payment of $180 per $1,000 of the stated value of the preferred shares less any dividends paid prior to conversion. The Class A Warrants are exercisable currently and expire in May 2016. The Class B Warrants expired in May 2012. The net proceeds from the sale of the units, after deducting the fees and expenses of the placement agent and other expenses were $4.6 million. We used the proceeds for the purchase of laboratory equipment and for working capital and general corporate purposes.

The holders of the preferred shares are not entitled to vote together with common shareholders unless converted to common shares. The Series A preferred shares are considered to be an equity instrument. The warrants have been accounted for as a liability and valued using the Black Scholes pricing model. The total fair value of the Class A Warrants at issuance was $1.973 million and the total fair value of the Class B Warrants at issuance was $1.072 million for a total liability of $3.045 million. The assumptions used to compute the fair value of the warrants at the time of issuance were as follows:

	Warrant A			Warrant B
Risk-free interest rate		1.87	%		0.18	%
Dividend yield		0.00	%		0.00	%
Volatility of the Company's common shares		106.91	%		116.01	%
Expected life of the warrants (years)		5.0			1.0
Fair value per unit	$	1.433		$	0.779

The Series A preferred shares were valued using the common shares available upon conversion of all preferred shares of 2,753,000 and the closing market price of our stock on May 11, 2011 of $1.86. Adding in the total possible dividend for the preferred shares of 18% over three years, or $991,080, the total calculated fair value of the preferred shares was $6.112 million. We then allocated the gross proceeds of the offering of $5.506 million to the preferred shares after deducting the fair value of the warrants described above.

We have also recognized a beneficial conversion feature related to the Series A preferred shares, to the extent that the conversion feature, based on the proceeds allocated to the Series A preferred shares, was in-the-money at the time they were issued. Such beneficial conversion feature amounted to approximately $2.461 million on May 11, 2011. Because the Series A preferred shares do not have a stated redemption date and may be converted by the holder at any time, the discount recognized by the allocation of proceeds to the beneficial conversion feature has been immediately charged through accumulated deficit as a deemed dividend to the holders of the Series A preferred shares in the amount of $5.506 million. This was the only deemed distribution recorded for the Series A preferred shares included in the offering. Further, because the preferred dividends or make-whole payments are payable any time after the closing on May 11, 2011 at the option of the holder, we recognized the full value, $991,080, as a liability included in accounts payable and charged immediately through accumulated deficit. There will be no other dividends recorded for the Series A preferred shares included in the offering.

As of September 30, 2015, 4,321 preferred shares have been converted into 2,564,108 common shares and 217,366 common shares have been issued for quarterly preferred dividends for remaining outstanding, unconverted preferred shares. As of September 30, 2015, 577,897 warrants have been exercised. At September 30, 2015, 1,185 preferred shares and 798,603 warrants remained outstanding. Also at September 30, 2015 and September 30, 2014, $0 of the $991,080 in preferred dividends remains accrued in accounts payable for future preferred dividends. All dividends have been paid according to the agreement.

The following table summarizes the change in the estimated fair value of the Company’s Class A warrants as of September 30 (in thousands):

	2015		2014
Balance at beginning of year	$	676	$	612
Fair value of Class A warrants exercised		—		(854)
Increase (decrease) in fair value of Class A warrants		(487)		918
Balance at end of year	$	189	$	676

For the years ended September 30, 2015 and 2014, the Company recognized income (expense) of $487,000 and ($918,000), respectively, due to the change in the estimated fair value of the Company’s warrants. This income (expense) was recorded as Change in fair value of warrant liability on the Company’s consolidated statements of operations and comprehensive income (loss) for the respective periods.