| Securities Purchase Agreement | 13. Securities Purchase Agreement Senior Secured Convertible Notes and Warrants On September 7, 2016, the Company issued Senior Secured Convertible Notes (“September 2016 Notes”) in the aggregate principal amount of $4,301,075 for consideration consisting of (i) a cash payment by an institutional investor (the “Investor”) in the amount of $1,000,000 together with a secured promissory note payable by the Investor to the Company (the “Investor Note”) in the principal amount of $3,000,000 to finance a portion of the purchase price, fees and expenses for the acquisition of Zone. The September 2016 Notes had a maturity date of December 7, 2017. As of December 31, 2017, the Investor had fully prepaid the Investor Note and subsequently converted the amount due under the September 2016 Notes into 83,306 shares during the year ended December 31, 2017 and 804,401 shares during the year ended December 31, 2016 of the Company’s common stock in full payment of the September 2016 Notes. On any principal balance owed by the Company to the Investor, a 6% interest obligation was due quarterly and calculated on a 360-day basis. For the twelve months ended December 31, 2017, the Company had interest expense of $1,217 related to the September 2016 Notes as the final principal balance was converted in January of 2017. On December 2, 2016, the Company issued two Senior Secured Convertible Notes (the “December 2016 Notes”) to the Investor in the aggregate principal amount of $6,720,000 for consideration consisting of (i) a cash payment by the Investor in the amount of $1,100,000 and (ii) a secured promissory note payable by the Investor to the Company (the “December 2016 Investor Note”) in the principal amount of $4,900,000 to aid in the funding of Zone prior to the entity’s ability to generate revenues. The unpaid principal amount of the secured promissory note is offset by the same principal amount owed to the Company pursuant to the December 2016 Investor Note. As cash payments are applied to the December 2016 Investor Note, a derivative liability is recognized and placement agent warrants are issued. At the time of issuance, a note in the amount of $720,000 was issued as an original issue discount in conjunction the December 2016 Notes. This note, and both the derivative liability and the warrants are accounted for as debt discount to the December 2016 Notes and accreted into interest expense over the life of the note using the effective interest method. The December 2016 Notes had a maturity date of August 2, 2017 which was subsequently amended to October 8, 2017. On September 19, 2017 (the “Exchange Date”) $5,820,000 of the principle balance of this noted had already been converted to shares of the Company’s common stock when the Company and the Investor entered into an Amendment and Exchange Agreement. Pursuant to this agreement, the Company exercised a mandatory conversion of $890,000 of the remaining $900,000 in principal of the December 2016 Notes in exchange for 445,367 shares of the Company’s common stock and an Investor prepayment of $670,000 of the December 2016 Investor Note. The principal balance converted contained an original issuance discount related to placement agent warrants issued in conjunction with the financing and a derivative liability associated with the embedded conversion feature. Upon exercise of the mandatory conversion, the outstanding balance of the original issuance discount was derecognized
through interest expense. On the Exchange Date the Company issued to the Investor a Senior Convertible Note in the principal amount of $697,000 (the “Exchange Note”) in exchange for the remaining $10,000 outstanding principal amount of the December 2016 Notes. With the issuance of the Exchange Note, the resulting cash flows of the remaining December 2016 Notes were considered to be significantly modified within the context of ASC 470 and a loss on extinguishment was recognized in the amount of $683,885. The Exchange Note was a non-interest-bearing note and was convertible into shares of the Company’s common stock at a price of $3.00 per share. As of December 31, 2017, the Investor had fully converted the Exchange Note for 232,334 shares of the Company’s common stock. Interest for the December 2016 Notes accrued at the rate of 6%, was due quarterly and was calculated on a 360-day basis. For the twelve months ended December 31, 2017, the Company had $150,265 of interest expense pertaining to the unpaid principal amount of the December 2016 Notes. On February 8, 2017, the Company issued two Senior Secured Convertible Notes (the “February 2017 Notes”) to the Investor in the aggregate principal amount of $5,681,818 for consideration consisting of a secured promissory note payable by the Investor to the Company (the “February 2017 Investor Note”) in the principal amount of $5,000,000 which offsets the February 2017 notes of the same amount. The issuance of this note is meant to aid in the funding of Zone prior to the entity’s ability to generate revenues. Upon issuance, the initial note with a principal balance of $681,818 was accounted for as an original issuance discount and accreted into interest expense over the life of the note. As cash payments are applied to the February 2017 Investor Note, a derivative liability is recognized and placement agent warrants are issued. Both the derivative liability and the warrants are accounted for as debt discount to the February 2017 Notes and accreted into interest expense over the life of the note using the effective interest method. The February 2017 Notes had a maturity date of October 8, 2017. As of December 31, 2017, the Investor had fully prepaid the February 2017 Investor Note and had subsequently converted the principal amount due under the February 2017 Notes and approximately $49,000 of interest into 1,852,886 shares of the Company’s common stock in full payment of the February 2017 Notes. On any principal balance owed by the Company to the Investor, a 6% interest obligation was due quarterly and calculated on a 360-day basis. For the year ended December 31, 2017, the Company had interest expense of $173,963 related to the February 2017 Notes as the final principal balance was converted in August 2017. In a letter agreement executed on August 27, 2017, in consideration for the prepayment in the amount of $2,500,000, on the February 2017 Investor Note, which the Investor subsequently made on August 28, 2017, the Investor and the Company agreed that the Investor would have the right, but not the obligation, until December 31, 2017, to effect an exchange (the “Share Exchange”) of 841,250 shares of the Company’s common stock (the “Exchange Shares”) for one or more senior secured convertible promissory notes in the form of the February Additional Note (the “New Note”), with the right to substitute the alternate conversion price of the New Note with the alternate conversion price of the Company’s Series B Senior Secured Convertible Note (the “Series B Note”) that was issued on August 16, 2017. Any New Note issued would be in the principal amount equal to the product of the prepayment amount ($2,500,000) multiplied by a fraction, the numerator of which was the number of the aggregate shares being tendered to the Company in the Share Exchange and the denominator of which is 841,250. The maturity date of any New Note was 45 days following the issuance of the New Note, and the conversion price of the New Notes was $4.50, or, at the election of the Investor, the Investor could convert at the Alternate Conversion Price. The Alternate Conversion Price was defined as either (A) the lower of (i) $4.50 and (ii) the greater of (I) $4.00 and (II) 85% of the quotient of (x) the sum of the volume weighted average price of the common stock for each of the 5 consecutive trading days ending on the trading day immediately preceding the delivery of the Conversion Notice, divided by (y) 5 or (B) that price which shall be the lowest of (i) $3.00 and (ii) the greater of (I) the Floor Price then in effect and (II) 85% of the quotient of (x) the sum of the volume weighted average price of the Company’s common stock for each of the 5 consecutive trading days ending and including the date of the alternate conversion, divided by (y) 5. The Floor Price was defined as $3.00 through October 4, 2017 and $0.50 following October 4, 2017. On October 23, 2017, the Company and the Investor entered into a Third Amendment and Exchange Agreement (the “Third Exchange Agreement”) for the purpose of exchanging the New Note for 947,218 shares of common stock (the “New Exchange Shares”) and rights (the “Rights”) to receive 552,782 additional shares of common stock. As partial consideration for the New Exchange Shares and the Rights, the Investor agreed, among other things, to terminate the Investor’s right to exchange the remaining Exchange Shares for New Notes. The termination of these rights is accounted for as financing fees associated with the February 2017 Notes and valued at $19,950,000 based on the trading price of the Company’s stock on the date of the Third Amendment and Exchange Agreement. On August 16, 2017, the Company issued three Senior Secured Convertible Notes (the “August 2017 Notes”) in the aggregate principal amount of $10,300,000 and a 5-year warrant for the purchase of 1,892,972 shares of the Company’s common stock at an exercise price of $3.25 per share (the “Investor Warrant”) to the Investor for consideration consisting of a secured promissory note payable by the Investor to the Company (the “August 2017 Investor Note”) in the principal amount of $8,800,000 and $220,000 which offsets the August 2017 Notes of the same amount. The issuance of these notes is meant to aid in the funding of the acquisition of the MoviePass Shares (the “MoviePass Shares”). The August 2017 Notes have a maturity date of April 16, 2018 and the Investor Warrant will expire on April 16, 2022. The $220,000 secured promissory note payable by the Investor is issued in exchange for a $250,000 Senior Secured Convertible Note, therefore a discount of $30,000 is recognized upon issuance and accreted into interest expense over the life of the note using the effective interest method. Upon issuance, the Investor Warrants were recorded at fair value and accounted for as an original issuance discount to the August 2017 Notes. The excess in value of the Investor Warrants over the August 2017 Notes upon issuance was recorded as interest expense, while the capitalized balance was accreted into interest expense over the life of the August 2017 Notes. At December 31, 2017, the contracted conversion prices for the August 2017 Notes, which include an Initial Series A Note, an Additional Series A Note and the Series B Note, were $4.00 for the Initial Series A Note and the Additional Series A Note and $3.00 for the Series B Note. As of December 31, 2017, the Investor had fully prepaid the August 2017 Investor Note and subsequently converted $5,794,560 in principal amount, plus accrued interest, of the August 2017 Notes into 1,482,639 shares of the Company’s common stock. As of December 31, 2017, the unpaid principal amount of the August 2017 Notes owed to the Investor was $4,505,440. On any principal balance owed by the Company to the Investor, a 6% interest obligation is due quarterly and calculated on a 360-day basis. For the year ended December 31, 2017, the Company had $115,096 of interest expense pertaining to the unpaid principal amount of the August 2017 Notes with $68,572 accrued as of year end. The Investor Warrant included anti-dilution provisions. The anti-dilution provisions were triggered when the Company issued the Exchange Note in the principal amount of $697,000 to the Investor. Because the Exchange Note had a conversion price of $3.00 per share, which was lower than the Investor Warrant per share exercise price of $3.25, the number of shares of the Company’s common stock issuable to the Investor pursuant to the Investor Warrant was increased from 1,892,972 to 2,050,720 and the per share exercise price of the Investor Warrant was decreased from $3.25 to $3.00. As of December 31, 2017, the Investor had elected to, in a cashless transaction, exercise the Investor Warrant to purchase 1,715,006 shares of common stock and also paid the Company $977,142 to exercise the Investor Warrant for an additional 325,714 shares of common stock. On November 21, 2017 in conjunction with the Fourth Amendment and Exchange Agreement, the remaining 10,000 shares of common stock subject to the Investor Warrant were exchanged for a new warrant (the “Exchange Warrant”). The Exchange Warrant is in substantially the form of the August Warrant, except that:
● The Exchange Warrant has an exercise price of $14.31
● The expiration date of the Exchange Warrant is November 21, 2022.
● The Exchange Warrant may not be exercised for the purchase of shares of common stock unless the stockholders of the Company approve the issuance in compliance with the rules and regulations of the Nasdaq Capital Market (the “Stockholder Approval”).
● The Exchange Warrant is subject to redemption, refund or alternate cashless exercise after the August Note is no longer outstanding (or on or after February 16, 2018 if the Company fails to remain current in its filings or an event of default under the August 2017 Notes occurs) (the “Adjustment Time”). With the issuance of the Exchange Warrant, the resulting cash flows of the remaining Investor Warrant were considered to be significantly modified within the context of ASC 470. Accordingly, the incremental change in fair value between the Investor Warrant and the Exchange Warrant is calculated as $12,878,864 and recorded as interest expense. On November 7, 2017, the Company
issued two Senior Secured Convertible Notes (the “November 2017 Notes”) in the aggregate principal amount of $100,000,000 (collectively, the “November 2017 Notes”) to institutional investors (the “Investors”). The November Notes consist of a Senior Secured Convertible Note in the amount of $5,000,000 (the “November Initial Note”) and a Senior Secured Convertible Note in the amount of $95,000,000 (the “November Additional Note”) in exchange for an upfront cash payment of $5,000,000 and a senior secured promissory note of $95,000,000 (the “November 2017 Investor Note”) to aid in the funding of the acquisition of the MoviePass Shares. As of December 31, 2017, the investors prepaid $15,650,000 of the November 2017 Investor Note with the remaining principal being subject to master netting agreements between the Company and the Investors. In conjunction with the prepayment, the Company was also obligated to pay the Investor interest which would have accrued with respect to the outstanding balance for the period from the redemption through the maturity date (the “Make-Whole Interest”). The Company elected to defer payment of the Make-Whole Interest by capitalizing the full balance under the same terms as the original November 2017 Notes. As of December 31, 2017 the outstanding balance owed on the Make-Whole Interest was $2,943,069. The November 2017 Notes have a maturity date of November 7, 2019. As of December 31, 2017, the contracted conversion prices for the November 2017 Notes, which include both the November Initial Note and November Additional Note, were $12.06. As of December 31, 2017, the Investors had converted $0 of the November 2017 Notes into shares of the Company’s common stock. On any unfunded principal balance of the November 2017 Investor Notes the Company owed to the Investors a 5.25% interest obligation which is due quarterly and calculated on a 360-day basis. For the funded portion of the November 2017 Notes the Company has a 10% interest obligation. For the year ended December 31, 2017, the Company had $4,714,723 of interest expense pertaining to the November 2017 Notes and $633,873 accrued at yearend. The Placement Agent Notes and Warrants The Company entered into an agreement with a placement agent (the “Placement Agent”) for assistance with the placement of the September 2016 Notes. The Placement Agent accepted from the Company a Senior Secured Convertible Note (the “September Placement Note”) in the aggregate amount of $80,000 in partial payment of the Placement Agent’s fee. Unless earlier converted or redeemed, the September Placement Note matures 15 months from the date of issuance. The Placement Agent Note bears interest at a rate of 6% due quarterly and calculated on a 360-day basis. For the twelve months ended December 31, 2017, the Company had interest expense pertaining to the September Placement Note in the amount of $1,200. The Placement Agent also received a 5-year warrant (the “Placement Agent Warrant”) for the purchase of the Company’s common stock as partial payment for the Placement Agent’s services. The Placement Agent Warrant is issued in tranches in conjunction with cash payments received by the Company on the corresponding Investor Note. During 2016, Placement Agent Warrants were earned allowing for the purchase of 48,714 shares of the Company’s common stock at exercise prices ranging from $4.54 per share to $9.36 per share. On October 2, 2017 the Placement Agent elected to exercise the Placement Agent Warrant in full in the form of a cashless exercise, calculated based on the September 29, 2017 VWAP. On October 5, 2017, 22,578 shares were issued. The Company entered into an agreement with the Placement Agent for assistance with the placement of the December Notes. The Placement Agent accepted from the Company a 5-year warrant (the “December Placement Agent Warrant”) as partial payment for the Placement Agent’s services. The December Placement Agent Warrant is issued in tranches in conjunction with cash payments received by the Company on the corresponding December 2016 Investor Note. As of December 31, 2016, the Placement Agent had the right to purchase, pursuant to the terms of the December Placement Agent Warrant, 22,000 shares of the Company’s common stock at an exercise price of $4.54 per share. Through the first nine months of 2017 the Company has received $4,900,000 of cash payments for the December Notes, resulting in the issuance of an additional 104,001 December Placement Agent Warrants at exercise prices of $3.00 per share, $3.47 per share,
$4.00 per share and $6.13 per share. On October 6, 2017 the Placement Agent elected to exercise the Placement Agent Warrant in full in the form of a cashless exercise, calculated based on the September 29, 2017 VWAP. On October 6, 2017, 84,735 shares were issued. The Company entered into an agreement with the Placement Agent for assistance with the placement of the February 2017 Notes. The Placement Agent accepted from the Company a 5-year warrant (the “February Placement Agent Warrant”) as partial payment for the Placement Agent’s services. The February Placement Agent Warrant allows the purchase of up to 8% of the number of shares of the Company’s common stock into which the unrestricted principal of the February 2017 Notes may be converted. Through the first nine months of 2017 the Company received $5,000,000 of cash payments for the February 2017 Notes, resulting in the issuance of an additional February Placement Agent Warrants for the purchase of 133,334 shares of common stock at an exercise price of $3.00 per share. As of December 31, 2017 the Placement Agent has not elected to exercise the Placement Agent Warrant. The Company entered into an agreement with the Placement Agent for assistance with the placement of the August 2017 Notes and Investor Warrant. The Placement Agent accepted from the Company a 5-year warrant (the “August Placement Agent Warrant”) as partial payment for the Placement Agent’s services. The August Placement Agent Warrant allows the purchase of up to 8% of the number of shares of the Company’s common stock into which the unrestricted principal of the Additional Series A Note and the Series B Note in the combined principal amount of $9,050,000 becomes convertible at an exercise price equal to the greater of the exercise price of the August 2017 Notes and the consolidated closing bid price of the Company’s common stock on the date that the Placement Agent becomes entitled to the warrant. During the period ended December 31, 2017, the Company received $8,800,000 of cash payments in conjunction with the August 2017 Notes and issued 176,000 of August Placement Agent Warrants for the purchase of shares of common stock at exercise prices of $3.00 and $14.27 per share. As of December 31, 2017, the Placement Agent has not elected to exercise any shares of the August Placement Agent Warrants. The Company entered into an agreement with the Placement Agent for assistance with the placement of the November 2017 Notes. The Placement Agent accepted from the Company a 5-year warrant (the “November Placement Agent Warrant”) as partial payment for the Placement Agent’s services. The November Placement Agent Warrant allows the purchase of up to 8% of the number of shares of the Company’s common stock into which the unrestricted principal of the November Series A Note and the November Series B Note in the combined principal amount of $100,000,000 becomes convertible at an exercise price equal to the greater of the exercise price of the November 2017 Notes and the consolidated closing bid price of the Company’s common stock on the date that the Placement Agent becomes entitled to the November Placement Agent Warrant. During the period ended December 31, 2017, the Company received $11,400,000 of cash payments for the November 2017 Notes resulting in the issuance of 75,618 warrants at exercise prices of $12.06 per share. As of December 31, 2017, the Placement Agent had not purchased any shares from the exercise of the November Placement Agent Warrants. Note Activity: Senior Secured Convertible Notes consist of the following:
December 31, 2017 December 31, 2016
September Notes $ - $ 20,480
September Placement Note - 902
December Notes - 10,043
February 2017 Notes - -
August 2017 Notes 2,061,072 -
September 2017 Exchange Note - -
November 2017 Notes 1,550,555 -
$ 3,611,627 $ 31,425 Under ASC 210-20-45-1, management offset the Notes by the Investor Notes yet to be funded. The carrying value of the Senior Secured Convertible Notes is comprised of the following:
December 31, 2017 December 31, 2016
September 2016 Notes $ - $ 332,000
September Placement Agent Note - 80,000
December 2016 Notes - 1,820,000
February 2017 Notes - -
August 2017 Notes 4,505,440 -
September 2017 Exchange Note - -
November 2017 Notes 2,943,069 -
Unamortized discounts (3,836,882 ) (2,200,575 )
$ 3,611,627 $ 31,425 During the year ended December 31, 2017, the Investor converted a total of $19,215,378 in principal and $154,577 in interest into 5,577,605 shares of the Company’s common stock. |
