|6 Months Ended|
Jun. 30, 2019
|Debt Disclosure [Abstract]|
Note 11 — Debt
Senior Secured Convertible Note
In a private placement transaction with an institutional investor (“Investor”, “Lender”, and /or “Holder”) on December 27, 2018, the Company entered into a Securities Purchase Agreement under which it issued a Senior Secured Convertible Note, having an issue date of December 27, 2018, a contractual maturity date of December 31, 2020, a face value principal of $7.75 million, and a stated interest rate of 7.875% per annum - the “Senior Convertible Note”.
Bi-Monthly Payments & Conversion
The Senior Convertible Note requires bi-monthly payments on the 15th calendar day and the last trading day of the month, commencing January 15, 2019 and ending December 31, 2020, including a contractually stated face value principal repayment, referred to as a bi-monthly Installment Amount, and a payment based on the outstanding face value principal and the 7.875% annual interest rate, referred to herein as a bi-monthly non-installment payment. The bi-monthly payments of January 15, 2019 through June 15, 2019 were non-installment payments only, and the bi-monthly payments from June 28, 2019 through December 31, 2020 include both the Installment Amount and the non-installment payment.
The Senior Convertible Note Installment Amount includes 35 bi-monthly payments of $193,750 from June 28, 2019 through November 30, 2020, and two final payments of $484,375 on each of December 15, 2020 and December 31, 2020, with such bi-monthly dates referred to as Installment Dates. Notwithstanding, future contractual Installment Amounts are reduced by additional face value principal repayments, with the reductions applied in reverse order of maturity of the bi-monthly Installment Amounts, starting with the final December 31, 2020 bi-monthly Installment Amount. In this regard, as of June 30, 2019, the future bi-monthly Installment Amounts have been reduced by an aggregate of $1,337,250 resulting from conversions in excess of the contractual bi-monthly Installment Amount, including a series of “conversion price voluntary adjustments” and the “Accelerated Installment Amount”, each as discussed below.
At the election of the Holder, at any time after the December 27, 2018 issue date, the Senior Convertible Note may be converted into shares of common stock of the Company at an initial contractual conversion price of $1.60 per share. As amended on April 11, 2019, commencing with the June 28, 2019 bi-monthly payment, the bi-monthly Installment Amount and non-installment payment will be paid by the issue of shares of common stock of the Company, subject to the satisfaction of customary equity conditions, including minimum price and volume thresholds, referred to as an Installment Conversion.
In addition to the bi-monthly Installment Amount, the Holder may elect to accelerate the conversion of future bi-monthly Installment Amounts, and interest thereon, referred to herein as an Acceleration Installment Amount, utilizing the then current conversion price of the most recent bi-monthly Installment Conversion, with such Accelerated Installment Amount subject to certain restrictions, as defined.
The Senior Convertible Note provides for a voluntary adjustment of the conversion price by at the discretion of the Company, with the consent of the Holder, wherein during the term of the Senior Convertible Note, the Company may at any time reduce the then current conversion price to any amount and for any period of time deemed appropriate by the board of directors of the Company. The Company’s board of directors have adopted guidelines surrounding such a Senior Convertible Note voluntary adjustment of the conversion price, if any, to be implemented by management when favorable market conditions exist for the Company to orderly and effectively reduce its outstanding debt to the investor. See below for a discussion of the conversion price voluntary adjustments.
Measurement and Recognition
The Senior Convertible Note is a debt host containing embedded features and /or options generally required to be bifurcated from the debt host and recognized as separate derivatives subject to initial and subsequent periodic estimated fair value measurements under FASB Topic ASC 815, Derivatives and Hedging (“ASC 815). Notwithstanding, the Senior Convertible Note is being accounted for under the guidance of the “fair value option” (“FVO”) of FASB ASC Topic 825, Financial Instruments (“ASC 825”), including the FVO election provided for under ASC 825-10-15-4. As such, the Senior Convertible Note was initially measured at its December 27, 2018 issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date, with changes in estimated fair value recognized as current period income or expense, to the extent such change is not the result of a change in the instrument-specific credit risk of the Senior Convertible Note. See Note 10, Financial Instruments Fair Value Measurements, for the Senior Convertible Note estimated fair value and face value principal and corresponding changes in fair value and face value principal payable.
In the three and six months ended June 30, 2019, the Company recognized a debt extinguishment loss of $258,811 and $259,812, respectively, resulting from the difference between the face value principal and corresponding non-installment payments, as noted above, and the fair value of the shares of common stock issued upon conversion, with such fair value measured as the respective issue date closing quoted price per share of the common stock of the Company.
Subsequent to June 30, 2019: with respect to the July 15, 2019 and July 31, 2019 bi-monthly payments, total Installment Amount of face value principal repayment of $387,500 and the corresponding $38,909 of bi-monthly non-installment payments were settled by the issue of a total of 491,773 shares of common stock of the Company, with a fair value of $506,497. Additionally through August 12, 2019, total Acceleration Installment Amount face value principal repayments of $380,500 and the corresponding $328 of non-installment payment, was settled by the issue of 430,156 shares of common stock of the Company with a fair value of $454,795, with the common stock fair value measured as the respective issue date closing quoted price per share of the common stock of the Company.
Covenants and Other Provisions
The Company is subject to certain customary affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or redemptions, and the transfer of assets, and to have an unrestricted cash balance of at least $1.75 million at each quarterly balance sheet date, among other provisions and covenants, including:
Senior Secured Note
Interest expense recognized for the previous Senior Secured Note, which was repaid-in-full on December 27, 2018, was a total of $500,304 and $1,000,608 in the three and six months ended June 30, 2018, respectively, and was comprised of $194,570 with respect to the 15% interest expense and $305,734 related to the amortization of the debt discount, during the three months ended June 30, 2019; and, $389,141 with respect to the 15% interest expense and $611,467 related to the amortization of the debt discount, during the six months ended June 30, 2019.
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://fasb.org/us-gaap/role/ref/legacyRef