|6 Months Ended|
Jun. 30, 2019
|Debt Disclosure [Abstract]|
On July 17, 2018, the Company entered into the Convertible Note, pursuant to which the Company issued a convertible promissory note to an institutional accredited investor in the initial principal amount of $2,625,000. The Company received consideration of $2,500,000, reflecting an original issue discount of $100,000, a beneficial conversion feature discount of approximately $328,000 and expenses payable by the Company of $25,000. The Convertible Note has an 18 month term, carries interest at 10% per annum and is subordinated in right of payment to the ABL and PFG Term Note. The note is convertible into shares of the Company’s common stock at a conversion price of $0.80 per share (“Conversion Price”) upon five trading days’ notice, subject to certain adjustments (standard dilution) and ownership limitations specified in the Convertible Note. In May 2019, the conversion price was reduced to $0.2273 for $1,250,000 of the balance of the Convertible Note; the remainder is still convertible at $0.80. The reduction in the conversion price increased the fair value of the embedded conversion option by approximately $547,000. The future cash flows of the Convertible Note changed by more than 10% as a result of the Standstill Agreement, so the Company amortized the remaining debt discount and debt issuance costs of $37,000, resulting in a loss on debt extinguishment of approximately $584,000 during the three and six months ended June 30, 2019, of which approximately $328,000 was allocated to discontinuing operations. Loss on debt extinguishment allocated to continuing operations was recorded in interest expense.
The investor can redeem any portion of the Convertible Note upon five trading days’ notice (“Redemption Notice”) subject to a maximum monthly redemption amount of $650,000, with the Company having the option to pay such redemptions in cash, the Company’s common stock at the Conversion Price, or by a combination thereof, subject to certain conditions, including that the stock price is $1.00 per share or higher. The Company may prepay the outstanding balance of the Convertible Note, in part or in full, at a 10% premium to par value if prior to the one year anniversary of the date of issuance and at par if prepaid thereafter. At maturity, the Company may pay the outstanding balance in cash, the Company’s common stock at the Conversion Price, or by a combination thereof, subject to certain conditions. The note provides that in the event of default, the lender may, at its option, elect to increase the outstanding balance applying the default effect (defined as outstanding balance at date of default multiplied by 15% plus outstanding amount) by providing written notice to the Company. In addition, the interest rate increases to 22% upon default. The Convertible Note is the general unsecured obligation of the Company. At June 30, 2019, the principal balance of the Convertible Note is approximately $3.1 million.
In May 2019, Iliad converted $350,000 of the Convertible Note balance into 1,539,815 shares of our common stock at $0.2273 per share. Between July 24, 2019 and July 31, 2019, the Company issued an aggregate of 2,571,429 shares of common stock to Iliad in exchange for the return of $375,000 of principal amount of the Convertible Note to the Company.
As of June 20, 2019, the Company is in default on the Convertible Note. The Convertible Note is accruing interest at the default rate of 22%, and the outstanding balance was increased by 15% (approximately $408,000) upon the notice of default.
Advance from NDX
On September 18, 2018, we entered into the Merger Agreement with NDX. In connection with signing the Merger Agreement, NDX loaned us $1,500,000. Interest accrued on the outstanding balance at 10.75% per annum until we terminated the Merger Agreement on December 15, 2018. As a result of the termination, the Advance from NDX, plus interest thereon, became due and payable on March 15, 2019. The termination was a specified event of default, so on December 15, 2018, the interest rate was increased to 21%. The default also gives NDX the right to convert all, but not less than all, of the outstanding balance into shares of the Company’s common stock at a conversion price of $0.606 per share. At June 30, 2019, the principal balance of the Advance from NDX was $1,500,000.
The Advance from NDX is the general unsecured obligation of the Company and is subordinated in right of payment to the ABL and PFG Term Note, provided that NDX has asserted that its obligation to standstill under its subordination agreements will not be applicable at a time when the Company attains certain levels of unrestricted cash, as a result of the Company having improperly terminated the Merger Agreement. The Company does not believe it improperly terminated the Merger Agreement. The Company and NDX are currently negotiating a possible resolution or settlement of the Advance from NDX.
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