| Senior Secured Convertible Notes and Warrants | 10.
Senior Secured Convertible Notes and Warrants On February 8, 2017, the Company issued two Senior Secured Convertible Notes (the “February 2017 Notes”) to an institutional investor (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 in the principal amount of $5,000,000 (the “February 2017 Investor Note”) which offsets the February 2017 notes of the same amount. 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 February 2017 Notes. 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 three months ended March 31, 2018 and March 31, 2017, the Company had interest expense of $0 and $10,277, respectively, 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 a principal amount equal to the product of the prepayment amount ($2,500,000) multiplied by a fraction, the numerator of which is 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 Exchange Agreement. On August 16, 2017, the Company issued to the Investor 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”) 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 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 was issued in exchange for a $250,000 Senior Secured Convertible Note; therefore, a discount of $30,000 was recognized upon issuance and accreted into interest expense over the life of the note using the effective interest method. Upon issuance, the Investor Warrant was recorded at fair value and accounted for as an original issuance discount to the August 2017 Notes. The excess in value of the Investor Warrant 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 three months ended March 31, 2018, the Company had $37,126 of interest expense pertaining to the unpaid principal amount of the August 2017 Notes. The full outstanding principal balance of $4,677,899 and accrued interest of $37,126 were converted to 1,169,475 shares of the Company’s common stock on February 20, 2018. The Investor Warrant included anti-dilution provisions. The anti-dilution provisions were triggered when the Company issued a new senior convertible note to the Investor in the aggregate principal amount of $697,000 (the “Exchange Note”). 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, in a cashless transaction, to exercise the Investor Warrant to purchase 1,715,006 shares of common stock and also paid the Company the sum of $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 Investor 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, which stockholder approval was obtained at a special meeting of the Company’s stockholders in October 2017.
● 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). In exchange for the Company’s receipt of the waivers described above, including without limitation, the Additional Offering Prohibition Waiver, the Company and the holder of the Exchange Warrant agreed that after the Adjustment Time, one of the following shall occur: (i) if the net proceeds from the sale of shares of common stock issuable upon conversion of the Remaining August Note by the holder of the Exchange Warrant exceeds $18.1 million (subject to reduction for any cash payment of the Remaining August Note), the Company will receive up to the first $5 million in excess of such amount; (ii) if the net proceeds from the sale of shares of common stock issuable upon conversion of the Remaining August Note by the holder of the Exchange Warrant is less than $18.1 million (subject to reduction for any cash payment of the Remaining August Note) (such difference, the “Redemption Maximum Amount”), either of the following may occur:
● If the Stockholder Approval has been obtained, the holder of the Exchange Warrant may request to affect an alternate cashless exercise of the Exchange Warrant, in whole or in part, pursuant to which, in lieu of the shares of common stock issuable upon exercise of the Exchange Warrant, the holder would receive up to the Redemption Maximum Amount in shares of common stock at the Alternate Cashless Exercise Price (as defined below) (an “Alternate Cashless Exercise”); or
● The holder of the Exchange Warrant may request a redemption in cash of all, or any part, of the Exchange Warrant at a price equal to such difference; provided, that if certain equity conditions are met (including obtaining the Stockholder Approval), the Company may elect to pay such redemption price in shares of common stock in an Alternate Cashless Exercise. The Alternate Cashless Exercise Price is defined as that price which shall be the greater of (x) $2.86 and (y) the lowest of (i) the applicable exercise price as in effect on the applicable exercise date, (ii) 85% of the VWAP of the shares of common stock as of the trading day immediately preceding the trading day of delivery of the applicable exercise notice, and (iii) 85% of the lowest VWAP of the shares of common stock on any trading day during the 2 trading day period commencing on, and including, the trading day of the delivery of the applicable exercise notice. In March 2018, the Investor converted the entire Exchange Warrant into 3,265,186 shares of our common stock at pursuant to an Alternate Cashless Exercise. 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. In March of 2018 the Investor
exercised the Exchange Warrant by means of a cashless exercise into 4,353,581 shares of common stock and a cash payment from the Company of $779,219, resulting in a reduction of the warrant liability and corresponding adjustment to Additional Paid in Capital. On November 7, 2017, the Company issued two Senior Secured Convertible Notes in the aggregate principal amount of $100,000,000 (collectively, the “November 2017 Notes”) to institutional 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”). As of December 31, 2017, purchasers of the November 2017 Notes prepaid $15,650,000 of the November 2017 Investor Note with the remaining principal being subject to master netting agreements between the Company and such holders. In conjunction with the prepayment, the Company was also obligated to pay the holders interest which would have accrued with respect to the outstanding balance for the period from the redemption date 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. On January 2, 2018, an additional $646,263 of interest was capitalized and added to the principal balance of the note and on January 26, 2018 investors redeemed principal of $2,894,062 in exchange for cash. The November 2017 Notes have a maturity date of November 7, 2019. As of December 31, 2017, the contracted conversion price for the November 2017 Notes, which include both the November Initial Note and November Additional Note, was $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 three months ended March 31, 2018, the Company had $1,394,169 of interest expense pertaining to the November 2017 Notes and $1,394,169 accrued at March 31, 2018. On January 23, 2018, pursuant to a securities purchase agreement (the “SPA”) entered into by the Company and an institutional investor (the “Buyer”), the Company sold and issued senior convertible notes in the aggregate principal amount of $60,000,000 (each, a “Note” and collectively, the “Notes”), consisting of (i) a Series A-1 Senior Bridge Subordinated Convertible Note in the aggregate principal amount of $25,000,000 (the “Series A-1 Note”) and (ii) a Series B-1 Senior Secured Bridge Convertible Note in the aggregate principal amount of $35,000,000 (the “Series B-1 Note”) for consideration consisting of (i) a cash payment in the aggregate amount of $25,000,000 (the “Cash Amount”), and (ii) a secured promissory note payable by the Buyer to the Company (the “Investor Note”) in the aggregate principal amount of $35,000,000 (the “Financing”). The date on which the Notes were issued is referred to as the “Closing Date.” Unless earlier converted or redeemed, the Notes will mature on the second anniversary of the Closing Date. The Company is required to redeem the Notes (i) at the option of the Buyer from and after June 7, 2018; (ii) at the option of the Buyer if the Company completes a subsequent public or private offering of debt or equity securities, including equity-linked securities (subject to certain excluded issuances); (iii) upon the occurrence of an Event of Default, including a Bankruptcy Event of Default (each, as defined in the Notes); or (iv) in the event of a Change of Control (as defined in the Notes). With the exception of a redemption required by an Event of Default, which may be paid with cash or shares of the Company’s common stock at the election of the Buyer, the Company will be required to redeem the Notes with cash. The Notes and the shares of common stock into which the Notes may be converted
(collectively, the “Conversion Shares”) are sometimes referred to in this report as the “Securities.” All amounts outstanding under the Notes will be secured by the Investor Note and all proceeds therefrom. The Notes will not be secured by, and the Investors will not have a lien on, any assets of the Company other than the Investor Note. MoviePass Inc. has guaranteed the obligations arising under the Notes in accordance with the terms of a Guaranty (the “MoviePass Guaranty”). In accordance with the terms of the SPA, the Company is obligated to convene a special meeting of its stockholders on or prior to June 1, 2018, for the purpose of approving the issuance of all Securities that may be issued in connection with the Financing. Provided there has been no Equity Conditions Failure (as defined in the Notes) and, as to the Series A-1 Note, no senior secured convertible notes issued by the Company on August 16, 2017 (the “August Notes”) or senior convertible bridge notes issued by the Company on November 7, 2017 (the “November Notes”) remain outstanding, and as to the Series B-1 Note, no August Notes, November Notes, Series A-1 Note or Series B-1 Note with any Unrestricted Principal remain outstanding, the Company will have the right to redeem all, but not less than all, of the Outstanding Amount remaining unpaid under the Notes. The portion of the Notes subject to redemption can be redeemed by the Company in cash at a price equal to 115% of the amount being redeemed. Under the Series B-1 Note, the Company may reduce, on a dollar for dollar basis, the Restricted Principal by the surrender for cancellation of such portion of the corresponding Investor Note equal to the amount of Restricted Principal included in the redemption. The Buyer has the right to require the Company to redeem the Notes (i) at the option of the Buyer from and after June 7, 2018; (ii) if the Company completes a Subsequent Placement, as defined in the SPA; (iii) upon the occurrence of an Event of Default, including a Bankruptcy Event of Default (as defined in the Notes); or (iv) in the event of a Change of Control. With the exception of a redemption required by an Event of Default, which may be paid with cash or shares of the Company’s common stock at the election of the Buyer, the Company will be required to redeem the Notes with cash. On February 13, 2018, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Canaccord Genuity Inc., on behalf of itself and as representative of the underwriters named therein (the
“Underwriters”), pursuant to which the Company agreed to issue and sell to the Underwriters in a best-efforts underwritten public offering (the “Offering”) up to approximately $105 million in gross proceeds of securities of the Company including (A) 7,425,000 Series A-1 units (the “Series A-1 Units”), with each Series A-1 Unit consisting of (i) one share (a “Share”) of the Company’s common stock, par value $0.01 per share (the “Common Stock”), and (ii) one Series A-1 warrant to purchase one share of Common Stock (a “Series A-1 Warrant”); and for those purchasers whose purchase of Series A-1 Units would result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 9.99% of the Company’s outstanding Common Stock following the consummation of the Offering, (B) 11,675,000 Series B-1 units (the “Series B-1 Units”, and together with the “Series A-1 Units”, the “Units”), consisting of (i) one pre-funded Series B-1 warrant to purchase one share of Common Stock (a “Series B-1 Warrant”; and the Series B-1 Warrants, together with the Series A-1 Warrants, the “Warrants”) and (ii) one Series A-1 Warrant. The Units were sold at a price to the public equal to $5.50 per Unit. Each Warrant is exercisable at any time on or after the issuance date until the five-year anniversary of the issuance date. Each Series A-1 Warrant is exercisable at a price of $6.50 per share of Common Stock. Each Series B-1 Warrant has an aggregate exercise price of $5.50 per share of Common Stock, all of which will be pre-funded except for a nominal exercise price of $0.001 per share of Common Stock. The Warrants will not be listed on The NASDAQ Capital Market or any other securities exchange. As of the date of this report, all Series B-1 Warrants have been exercised. The Company received approximately $96,923,231 in net proceeds from the sale of the Units, after deducting underwriting discounts and commissions equal to $5,882,800 and estimated offering expenses of approximately $450,000, not taking into account any exercise of the Warrants. 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 February 2017 Notes. The Placement Agent accepted from the Company a 5-year warrant (each a “February Placement Agent Warrant”) as partial payment for the Placement Agent’s services. The February Placement Agent Warrants allow 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 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 March 31, 2018 the Placement Agent has not elected to exercise any February Placement Agent Warrants. 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 (each, an “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 August Placement Agent 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 August Placement Agent Warrants for the purchase of 176,000 shares of common stock at exercise prices of $3.00 and $14.27 per share. As of March 31, 2018, the Placement Agent has not elected to exercise any 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 (each, a “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 March 31, 2018, the Company received no cash payments for the November 2017 Notes resulting in no issuances of warrants at an exercise prices of $12.06 per share. As of March 31, 2018, the Placement Agent has not elected to exercise any November Placement Agent Warrants. Note Activity: Senior Secured Convertible Notes consist of the following:
March 31, 2018 December 31, 2017
August 2017 Notes $ - $ 2,061,072
November 2017 Notes 641,206 1,550,555
$ 641,206 $ 3,611,627 Under ASC 210-20-45-1, management offset the Notes by the Investor Notes yet to be funded. As of March 31, 2018, there was no unfunded portion of the Investor Note remaining. The carrying value of the Senior Secured Convertible Notes is comprised of the following:
March 31, 2018 December 31, 2017
August 2017 Notes $ - $ 4,505,440
November 2017 Notes 695,270 2,943,069
Unamortized discounts (54,064 ) (3,836,882 )
$ 641,206 $ 3,611,627 During the three months ended March 31, 2018, the Investor has converted a total of $4,640,773 in principal and $37,126 in interest into 1,169,475 shares of the Company’s common stock. Warrant Activity: The following is a summary of the Company’s warrant activity during the three months ended March 31, 2018:
Warrant Shares Weighted Average Exercise Price Weighted
Outstanding/exercisable – December 31, 2017 9,631,588 $ 6.04 4.86
Granted 30,949,826 6.15 4.88
Exercised (10,860,000 ) 5.51 4.88
Outstanding/exercisable – March 31, 2018 29,721,414 $ 5.99 4.88 |
