Quarterly report pursuant to Section 13 or 15(d)

Debt

v3.19.3
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9 Months Ended
Sep. 30, 2019
Debt Disclosure [Abstract]  
Debt

Note 6 — Debt

 

Senior Secured Convertible Note - December 2018

 

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 - referred to herein as the “December 2018 Senior Convertible Note”. At the election of the Holder, the December 2018 Senior Convertible Note may be converted into shares of common stock of the Company, as discussed below.

 

The December 2018 Senior Convertible Note proceeds were $7.0 million after payment of $750,000 of lender fees. The Company incurred total offering costs of $614,940, inclusive of the payment of a $455,000 placement agent fee and legal fees, with such offering costs recognized as a current period expense on December 27, 2018.

 

Bi-Monthly Payments & Conversion

 

The December 2018 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.

 

As originally structured, the December 2018 Senior Convertible Note Installment Amount included 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 September 30, 2019, the future bi-monthly Installment Amounts have been reduced by an aggregate of $2,218,500 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 December 2018 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 December 2018 Senior Convertible Note provides for a voluntary adjustment of the conversion price at the discretion of the Company, with the consent of the Holder, wherein during the term of the December 2018 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 December 2018 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 December 2018 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 December 2018 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 December 2018 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 December 2018 Senior Convertible Note. See Note 5, Financial Instruments Fair Value Measurements, for the December 2018 Senior Convertible Note estimated fair value and face value principal and corresponding changes in fair value and face value principal payable.

 

The December 2018 Senior Convertible Note fair value adjustments resulted in the recognition of income $379,229 and an expense of $340,830 in the three and nine months ended September 30, 2019, respectively. As the December 2018 Senior Convertible Note was issued on December 27, 2018, there is no such fair value adjustment recognized in the corresponding prior year periods of three and nine months ended September 30, 2018.

 

In the three nine months ended September 30, 2019, the aggregate principal repayments of $1,850,000 and $3,381,000, respectively, and 89,332 and $112,293 of corresponding non-installment payments, respectively, were settled by the issue of 2,334,186 and 3,850,427 shares of common stock of the Company, respectively, resulting in a debt extinguishment loss in the three and nine months ended September 30, 2019, of $406,858 and $666,670, respectively, summarized as follows:

 

    Three     Nine  
    Months     Months  
    Ended     Ended  
    September 30,     September 30,  
    2019     2019  
Bi-monthly Installment Amount principal repayments   $ 968,750     $ 1,162,500  
Accelerated Installment Amount principal repayments     881,250       904,500  
Voluntary conversion price adjustments principal repayments     —        1,314,000  
Sub-Total: principal repayments     1,850,000       3,381,000  
Non-installment payments     89,332       112,293  
Total Installment repayments and Non-Installment payments   $ 1,939,332     $ 3,493,293  
Fair Value - Common Stock Issued   $ 2,346,190     $ 4,159,963  
Debt Extinguishment Loss   $ 406,858     $ 666,670  

 

As noted above, the debt extinguishment loss resulted from the difference between the total of the bi-monthly Installment Amount principal repayments and the Accelerated Amount principal repayments and corresponding non-installment payments, as compared to the fair value of the shares of common stock issued upon such conversions, with the common stock fair value measured as the respective issue date closing quoted price per share of the common stock of the Company.

 

As provided for in the December 2018 Senior Secured Convertible Note Agreement, the Holder elected to defer the September 30, 2019 bi-monthly Installment Amount, as well as, subsequent to September 30, 2019, the Installment Amount for each of the October 15, 2019 and October 31, 2019 bi-month Installment Dates. Subsequent to September 30, 2019 and through November 12, 2019, total Acceleration Installment Amount face value principal repayments of $150,000 and the corresponding $1,641 of non-installment payment, was settled by the issue of 202,950 shares of common stock of the Company with a fair value of $184,864, 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

 

Under the December 2018 Senior Convertible Note, 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.

 

Senior Secured Note - July 2017

 

On December 27, 2018, concurrent with the issue of the December 2018 Senior Convertible Note, the Company repaid-in-full the previously issued Senior Secured Note. The Senior Secured Note total interest expense recognized was $707,714 and $1,708,322, respectively, in the three and nine months ended September 30, 2018. The total interest expense was comprised of: the Senior Secured Note stated 15% interest expense of $201,867 and $591,007, respectively; and debt discount amortization of $505,847 and $1,117,315, respectively, for the three and nine months ended September 30, 2018.