Quarterly report pursuant to Section 13 or 15(d)

Note and Securities Purchase Agreement, Senior Secured Note , and Series S Warrants

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Note and Securities Purchase Agreement, Senior Secured Note , and Series S Warrants
9 Months Ended
Sep. 30, 2017
Debt Disclosure [Abstract]  
Note and Securities Purchase Agreement, Senior Secured Note , and Series S Warrants

Note 12 — Note and Securities Purchase Agreement, Senior Secured Note , and Series S Warrants

 

The Company and Scopia Holdings LLC (“Scopia or the Lender”) entered into a Note and Security Purchase Agreement, under which, upon Scopia delivering to the Company $4.8 million in net cash proceeds by wire transfer on July 3, 2017, the Company issued to Scopia and its designees, a Senior Secured Note with an initial principal amount of $5.0 million (“Scopia Note”), and 2,660,000 Series S Warrants to purchase shares of common stock of the Company.

 

The Scopia Note and the Series S Warrants are freestanding financial instruments, as the Series S Warrants were immediately legally detachable from the Scopia Note and were immediately exercisable. The Series-S Warrants are classified as equity in the condensed consolidated balance sheet. See Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for further information with respect to the Series S Warrants.

 

The $4,842,577 of cash proceeds, net of the Lender’s debt issuance costs, have been allocated to the Scopia Note and the Series S Warrants based on their respective relative fair value, resulting in an allocation of $1,408,125 to the Scopia Note and $3,434,452 to the Series S-Warrants, with the resulting difference of $3,591,875 between the Scopia Note initial principal amount and the allocated amount accounted for as debt discount, amortized as interest expense over the term of the Scopia Note. See below for issue-date fair value information.

 

The Scopia Note bears interest at a fixed annual rate of 15.0%, with interest payable semi-annually in arrears on June 30 and December 30 of each calendar year, commencing on December 30, 2017. The Company may elect, at its sole discretion, to defer payment of up to 50% of the semi-annual interest due, with the remaining unpaid portion added to and increasing the outstanding interest-bearing principal balance of the Scopia Note by such amount of the deferred interest payment. The aggregate remaining unpaid principal balance of the Scopia Note is due on June 30, 2019.

 

Interest expense recognized was $362,142, including $187,500 with respect to the semi-annual interest payment and $174,642 with respect to the amortization of debt discount, in the three and nine months ended September 30, 2017. The Scopia Note remaining unamortized debt discount is $3,417,233 at September 30, 2017.

 

At the discretion of the Company, the aggregate principal balance of the Scopia Note and any earned and unpaid interest may be repaid at any time without penalty or premium. Additionally, under the Scopia Note, if at the Company’s discretion, it sells its implantable intraosseous vascular access device (the “PortIO Product”), then the Scopia Note holders’ may require the Company to repay the then outstanding aggregate principal amount of the Scopia Note, in whole or in part, together with any accrued interest thereon, from the net cash proceeds of such PortIO Product sale, provided such principal and interest repayment is limited to the amount of the net cash proceeds from such PortIO Product sale.

 

The Note and Security Purchase Agreement with Scopia contains various customary negative covenants of the Company including restrictions on the Company incurring any additional indebtedness or liens or declaring or paying any dividends, subject to certain exceptions provided for in the Note and Security Purchase Agreement with Scopia, while any amount under the Scopia Note remains outstanding. The Note and Security Purchase Agreement with Scopia also contains certain affirmative covenants of the Company, including, among others:

 

If the PortIO Product obtains initial FDA 510(k) clearance, then, commencing four months after such FDA 510(k) clearance, the Company will use its reasonable best efforts to attempt to sell the PortIO Product on commercially reasonable terms for an amount not less than $10.0 million. If the net cash proceeds are $10.0 million or greater from such PortIO product sale, and there are no continuing obligations imposed on the Company, which would constitute an undue burden on the Company, resulting from such PortIO Product sale transaction, then the Scopia Note holders may request the Company to repay the then aggregate remaining unpaid principal balance of the Scopia Note. Notwithstanding, such Note and Securities Purchase Agreement provision has been rendered moot, as the FDA has indicated the PortIO Product will be reviewed for approval under a regulatory pathway other than a 510(k) clearance;
   
Effective with the first bi-monthly payroll in July 2017, the Company’s CEO agreed to the payment of a reduced salary of $4,200 per month, with the payment of the earned but unpaid salary amount deferred until the earlier to occur of (a) the date that FDA 510(k) clearance for the PortIO Product is obtained or (b) the date the aggregate remaining unpaid principal balance of the Scopia Note is repaid in full; and,
   
The Company agreed to use its commercially reasonable best efforts to file a registration statement with the U.S. Securities and Exchange Commission (SEC) registering for resale of all of the shares of common stock underlying the Series S Warrants with such registration statement having an effectiveness date on or before November 27, 2017.

  

Additionally, the Note and Security Purchase Agreement with Scopia provides, for so long as the Lender holds at least 50% of the aggregate remaining unpaid principal balance of the Scopia Note, the Lender shall have the ability to nominate one individual to the Company’s board of directors, provided the board of directors shall have the right to reject any such Lender nominee if it determines in good faith such Lender nominee is not reasonably acceptable. In this regard, on August 3, 2017, the Lender nominee was appointed to the Company’s board of directors.

 

Payment of all amounts due and payable under the Scopia Note are guaranteed by the Company, and the obligations under the Scopia Note are secured by all of the assets of the Company pursuant to the terms of a Note and Guaranty Security Agreement. The Lender may transfer or assign all or any part of the Scopia Note to any person with the prior written consent of the Company, provided no consent shall be required from the Company for any transfer to an affiliate of the Lender, or upon the occurrence and during the continuance of an Event of Default, as defined in the Scopia Note.

 

The Scopia Note issue-date fair value of $4.1 million was estimated using a discounted cash flow analysis with a required rate of return of 25.5%, with such rate of return determined through a synthetic credit rating analysis involving a comparison of market yields on publicly-traded secured corporate debentures with characteristics similar to those of the Scopia Note. The Series S Warrants issue-date fair value of $10.0 million was estimated using a Black-Scholes valuation model using the following assumptions:

 

    Issue  
Series S Warrants   Date  
Exercise price per share   $ 0.01  
Value of common stock   $ 4.50  
Expected term (years)     15.0  
Volatility     48 %
Risk free rate     2.4 %
Dividend yield     0 %