| Convertible Notes Payable and Derivative Liability | NOTE 5 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE
LIABILITY
On July 21, 2014, as amended on September 19, 2014 and
October 20, 2014, the Company entered into a Securities
Purchase Agreement whereby the Company agreed to issue convertible
debentures (“July 2014 Debentures”) in the aggregate
principal amount of $3,500,000, in five tranches. The initial
closing in the aggregate principal amount of $1,000,000 occurred on
July 21, 2014. The second closing in the amount of $1,000,000
occurred on August 26, 2014; the third of $500,000 on
September 26, 2014. The fourth and fifth, each in the amount
of $500,000, were to occur within 2 and 5 business days,
respectively, of the effective date of the registration statement
filed by the Company for the resale of the shares of common stock
issuable upon conversion of the July 2014 Debentures. The
Registration statement was withdrawn and terminated in December
2014, and a new registration statement was filed on April 9,
2015. The July 2014 Debentures bear interest at the rate of
10% per year. The debt is due July 21, 2015, with the
original agreement calling for amortization payments, including
accrued principal and accrued interest, beginning on the eleventh
day of the fourth month after issuance and will continue on the
eleventh day of each following eight successive months
thereafter.
Also on September 19, 2014, as amended on October 20,
2014, the Company entered into a securities purchase agreement
pursuant to which it agreed to issue convertible debentures
(“September 2014 Debentures”) in the aggregate
principal amount of $2,500,000, in two tranches. The initial
closing in the principal amount of $1,000,000 occurred on
September 19, 2014. The second closing, of $1,500,000, is to
occur within 2 days of the effective date of the registration
statement filed by the Company for the resale of the shares of
common stock issuable upon conversion of the September 2014
Debentures. The September 2014 Debentures bear interest at the rate
of 5% per year. The debt is due September 19, 2015, and
the original agreement called for amortization payments, including
accrued principal and accrued interest, due in nine monthly
installments, commencing the fourth month after issuance.
Both the original July 2014 Purchase Agreement Debentures and
September 2014 Debentures prior to subsequent amendment, share the
following significant terms:
All amounts are convertible at any time, in whole or in part, at
the option of the holders into shares of the Company’s common
stock at a conversion price. The Notes were initially convertible
into shares of the Company’s common stock at the initial
Fixed Conversion Price of $11.75 per share. The Fixed Conversion
Price is subject to adjustment for stock splits, combinations or
similar events. If the Company makes any subsequent equity sales
(subject to certain exceptions), under which an effective price per
share is lower than the Fixed Conversion Price, then the conversion
price will be reduced to equal such price.
The Company may make the amortization payments on the debt in cash,
prompting a 30% premium or, subject to certain conditions, in
shares of common stock valued at 70% of the lowest volume weighted
average price of the common stock for the 20 prior trading
days.
In connection with each of the purchase agreements, the Company
entered into a registration rights agreement with the respective
investors, pursuant to which the Company agreed to file a
registration statement for the resale of the shares of common stock
issuable upon conversion of, or payable as principal and interest
on, the respective debentures, within 45 days of the initial
closing date under each agreement, and to have such registration
statements declared effective within 120 days of the initial
closing dates of each purchase agreement. Through subsequent
modifications of the July 2014 Debentures and September 2014
Debentures, the required date to file the registration statement
and the effective date of the registration statement have been
changed to April 15, 2015 and July 15, 2015,
respectively. The registration statement was filed on April 9,
2015, and became effective on June 11, 2015.
The conversion feature of the July 2014 Debenture and the September
2014 debenture meets the definition of a derivative and due to the
reset provision to occur upon subsequent sales of securities at a
price lower than the fixed conversion price, requires bifurcation
and is accounted for as a derivative liability. The derivative was
initially recognized at its estimated fair value of approximately
$1,885,000 and created a discount on the Notes that will be
amortized over the life of the Notes using the effective interest
rate method. The fair value of the embedded derivative is measured
and recognized at fair value each subsequent reporting period and
the changes in fair value are recognized in the Statement of
Operations as Change in fair value of derivative liability. For the
nine months ended September 30, 2015 the Company recognized a
gain on the change in fair value of derivative liabilities of
approximately $509,000 (including the change in fair value related
to the new convertible debentures issued in the first, second and
third quarters of 2015 discussed below). See Note 2 Fair value
measure for additional information on the fair value and gains or
losses on the embedded derivative.
On January 30, 2015, the Company and the Investors entered
into an Amendment, Modification and Supplement to the Purchase
Agreement (the “Purchase Agreement Amendment” or the
“Modification”) pursuant to which the Investors agreed
to purchase an additional $1,800,000 in seven Modified Closings:
(1) $200,000 was funded at the Closing of the Purchase
Agreement Amendment; (2) $100,000 to be funded within thirty
(30) days of the Closing; (3) $100,000 to be funded
within two days following the filing of a registration statement
with the SEC to register the shares underlying the Debentures (the
“Registration Statement”) and of the Company having
filed with the SEC a restatement of the Company’s
consolidated financial statements as described in the
Company’s Current Report on Form 8-K filed with the SEC on
December 22, 2014; (4) $100,000 to be funded within two
days of receipt of the first comment letter from the SEC with
regard to the Registration Statement; (5) $500,000 to be
funded within two days of the date that the
Registration Statement is declared effective by the SEC;
(6) $500,000 to be funded within five days of the date that
the Registration Statement is declared effective by the SEC; and
(7) $100,000 to be funded within each of 90, 120, 150, and 180
days from the Closing of the Purchase Agreement Amendment. The
Modification also eliminated the amortization payments discussed
above, and provided for accrued and unpaid interest to be payable
upon conversion or maturity rather than on specified payment dates.
The Company is also required to open a new dispensary in Portland,
Oregon during the first calendar quarter of 2015(which was later
modified to April 30, 2015). The Company must also file the
Registration Statement by March 8, 2015 (later amended), and
it must be declared effective by June 15, 2015 in order to
avoid default and acceleration under the Amended and Restated
Debenture. As noted above, the Registration Statement was filed on
April 9, 2015, and became effective June 11, 2015.
On March 13, 2015 the Company and the Investors entered into a
further amendment (“March 2015 Amendment”) to the
July 21, 2014, 10% Convertible debentures, as amended
January 30, 2015, whereby the reset of the fixed conversion
rate to $1.83 caused by recent dilutive issuances was reiterated
for all previously issued notes. In addition, the March 2015
Amendment modified the opening date of the Portland, Oregon
dispensary to be April 30, 2015. Neither of these modified
terms had an impact on the accounting treatment of the
Debentures.
The July 2014 financing was further modified on March 23,
2015. The closing dates of the financing were again modified,
investments by two members of the Board of Director’s
(“Board”) was required, and the deadline for filing of
the registration statement was changed to no later than
April 15, 2015, and its effective date to no later than
July 15, 2015. Neither of these modified terms had an impact
on the accounting treatment of the Debentures.
On April 9, 2015, the Company and their investors entered into
an Amendment, Modification and Supplement to the July 2014
convertible debenture, which amends the closings as set forth in
the March 23, 2015 Modification, to increase the amounts due
in the third tranche, due two days after the filing of the
Registration Statement, to $450,000.
On January 28, 2015, the Company and the Investors entered
into an Amendment, Modification and Supplement to the September
2014 Debenture, pursuant to which the remaining $1,500,000 will be
funded in four Modified Closings as set forth in the agreement, and
contains other modifications with the same terms as was contained
in the January 30, 2015 Modification.
The Company considered if the above modifications should be
accounted for as an extinguishment or modification of the existing
debt. The Company first evaluated if the modification of terms
could be considered a troubled debt restructuring, but the
modification did not meet the criteria as the Investors did not
grant a concession to the Company for economic or legal reasons
related to any financial difficulties of the Company. The majority
of the modifications related to deadlines being extended for
certain required events. The only financial modification was to
revise the payment schedule on the Debentures to eliminate the
amortization payments and instead require all to be due at
maturity. The Company concluded this is not regarded as a
concession as it is not the forgiveness of any interest payments,
nor reduction of principal, nor change to the maturity date.
Therefore, the modification of the terms was evaluated to determine
if the changes in the Debentures’ future cash flows were in
excess of 10% and considered substantial, which would require the
Debentures to be accounted for as extinguished and replaced with
new debt. As the modification resulted in a less than 10% estimated
change in future cash flows, the Company concluded that the
modification of the terms of the July 2014 and September 2014
Debentures was to be accounted for as a modification of the
existing Debentures.
As part of the January 30, 2015 Modification, the Parties
entered into a Modified Debenture Agreement for the $200,000 that
was funded at the Closing and agreed to use the same form of
Modified Debenture for each of the other foregoing Modified
Closings (collectively, the “Modified Debentures”). The
fixed conversion price of the Modified Debenture was the lower of
$5.00 or 51% of the lowest volume weighted average price for the 20
consecutive trading days prior to the applicable conversion date.
This new fixed conversion price was a dilutive issuance to the
outstanding July 2014 and September 2014 Debentures, thereby
triggering a reset of the older fixed conversion price. As a result
of the reset to the conversion price, at January 30, 2015, the
derivative liability was remeasured to a fair value of
approximately $2,690,000, using a weighted probability model as
estimated by management. A decrease in fair value of the derivative
liability of approximately $1,072,000 was recognized as a gain on
the Statement of Consolidated Comprehensive Loss in the nine months
ended September 30, 2015.
The additional Modified Debentures under the July 2014 Debentures
closed on February 27, 2015 in the amount of $100,000,
March 13, 2015 in the amount of $50,000, March 16, 2015
in the amount of $25,000, March 20, 2015 in the amount of
$75,000 and on March 26, 2015 in the amount of $150,000. All
these Modified Debentures have a fixed conversion price of the
lower of $1.83 or 51% of the VWAP for the last 20 days prior to the
conversion. This new fixed conversion price was a dilutive issuance
to the outstanding July 2014 and September 2014 Debentures, thereby
triggering a reset of the previous $5 fixed conversion price. This
reset resulted in the derivative liability being revalued at
February 27, 2015, using a weighted probability model for a
fair value of $2,720,000, for a decrease in fair value of
approximately $334,000, recognized as a gain on the Statement of
Consolidated Comprehensive Loss.
The additional Modified Debentures under the September 2014
Debentures closed on January 29, 2015 in the amount of
$100,000 and February 24, 2015 in the amount of $100,000.
These Modified Debentures have a fixed conversion price of the
lower of $5.00 or 51% of the VWAP for the last 20 days prior to the
conversion. This new fixed conversion price was a dilutive issuance
to the outstanding July 2014 and September 2014 Debentures, thereby
triggering a reset of the previous $5.00 fixed conversion price.
The resulting reset and remeasurement of the fair value of the
derivative liability is included in the amounts of the change to
fair value discussed above.
The additional fundings of the July 2014 Modified Debentures under
the closing schedule detailed above resulted in $2,811,500 being
received during the second quarter. The first $300,000 had a fixed
conversion price of the lower of $1.83 or 51% of the VWAP for the
last 40 days prior to the conversion. The April 17, 2015
closing contained a fixed conversion price of the lower of $0.88 or
51% of the VWAP for the last 40 days prior to the conversion. This
new fixed conversion price was a dilutive issuance to the
outstanding July 2014 and September 2014 Debentures, thereby
triggering a reset of the previous $1.83 fixed conversion price.
This reset resulted in the derivative liability being revalued at
April 17, 2015, using a weighted probability model for a fair
value of $3,287,000, for a increase in fair value of approximately
$1,764,000, recognized as a loss on the Statement of Consolidated
Comprehensive Loss during the second quarter of 2015.
There was additional funding of $1,300,000 of the September 2014
Modified Debentures under the closing schedule detailed above.
These Modified Debentures all have a fixed conversion price of the
lower of $0.88 or 51% of the VWAP for the last 40 days prior to the
conversion.
The Directors’ convertible debentures required under the
March 23, 2015 Modification, issued in the first quarter of
2015, total $150,000, and have a three year term and an interest
rate of 8% per annum. They were originally convertible at a
fixed conversion price of the lower of $1.83 or 51% of the VWAP for
the last 20 days prior to conversion. As with the Modified
Debentures, the debentures included a reset provision, which
resulted in the conversion feature being bifurcated and accounted
for as a derivative liability, with an initial fair value of
$132,175. The director’s convertible debentures also reset on
February 27, 2015 and April 17, 2015, with the changes to
fair value included in the amounts disclosed above.
The Modified Debentures also included a warrant instrument granting
the Investor the right to purchase shares of common stock of the
Company equal to the principal amount of the applicable Modified
Debenture divided by a price equal to 120% of the last reported
closing price of the Common stock on the applicable closing date of
the Modified Debenture, with a three year term.
The warrants issued in the nine months ended September 30,
2015 in connection with all the Modified Debentures detailed above,
and the August 2015 Securities Purchase Agreement (“August
2015 Debentures”) discussed below, are summarized below:
Date issued Number of warrants Exercise price Fair Value
July 2014 Modified Debentures
January 30, 2015 40,552 $ 4.93 $ 159,601
February 26, 2015 45,537 2.20 79,904
March 13, 2015 21,151 2.36 39,965
March 16, 2015 10,575 2.36 19,981
March 20, 2015 41,946 1.79 59,942
March 27, 2015 75,758 1.98 119,888
April 2, 2015 60,386 1.66 74,025
April 2, 2015 30,193 1.66 37,012
April 10,2015 107,914 1.39 112,460
April 17,2015 41,667 1.20 37,680
April 24,2015 127,119 1.18 112,635
April 24, 2015 21,186 1.18 18,772
May 1, 2015 156,250 .96 113,133
May 7, 2015 134,615 .78 79,234
May 8, 2015 42,000 .75 23,768
May 15, 2015 200,000 .75 113,365
May 22, 2015 250,000 .60 113,366
May 29, 2015 258,621 .58 112,537
June 5, 2015 288,462 .52 120,738
June 12, 2015 930,233 .43 303,246
June 19, 2015 3,448,276 .29 751,159
September 2014 Modified Debentures
January 28, 2015 18,038 5.54 80,156
February 13, 2015 57,870 1.73 96,689
April 2, 2015 181,159 1.66 222,109
April 24, 2015 90,579 1.10 80,548
May 15, 2015 200,000 .75 113,365
June 12, 2015 1,744,186 .43 570,248
August 2015 Debentures
August 24, 2015 6,666,667 .06 321,757
September 18, 2015 588,235 .17 82,804
Directors
January 5, 2015 129,305 .40 39,901
January 30, 2015 129,250 .40 39,916
February 2, 2015 237,778 .22 16,619
Total $ 16,375,508 $ 4,266,522
The Company determined that the warrants were properly classified
in equity as there is no cash settlement provision and the warrants
have a fixed exercise price and therefore result in an obligation
to deliver a known number of shares.
Effective September 18, 2015, the holder of the September 2014
Debentures and the Company agreed to amend its September 2014
Warrants, to reduce the exercise price of the warrants to purchase
an aggregate of 2,291,832 shares of the Company’s common
stock to six cents per share. The holder agreed to exercise in full
those warrants in cash within three trading days of the filing with
the SEC of a Form 8-K, which occurred on September 18, 2015.
During the three months ended September 30, 2015,
approximately 2,292,000 warrants were exercised.
Effective September 18, 2015, the holder of the July 2014
Debentures and the Company agreed to amend its July 2014 Warrants,
to reduce the exercise price of the warrants to purchase an
aggregate of 6,332,441 shares of Common Stock to six cents per
share. The holder agreed to exercise in full those warrants in cash
within three trading days of the filing with the SEC of a Form 8-K,
which occurred on September 18, 2015. As of September 30,
2015 the warrants have not yet been exercised, and will be upon the
finalization of the increase in authorized shares
(Note 8).
As a result of the conversion feature being bifurcated and
recognized as a derivative liability, the Company evaluated the
warrants and determined that they have a sufficient number of
authorized and unissued shares as of September 30, 2015, after
consideration of the subsequent increased authorized shares, (See
Note 10), to settle all existing commitments.
The Company adopted a sequencing policy that reclassifies
contracts, with the exception of stock options, from equity to
assets or liabilities for those with the earliest inception date
first. Future issuance of securities will be evaluated as to
reclassification as a liability under our sequencing policy of
earliest inception date first until either all of the convertible
debentures are converted or settled.
During the nine months ended September 30, 2015, $4,420,000
principal of the July 2014 Debentures and $1,710,000 principal and
approximately $49,000 accrued interest of the September 2014
Debentures, and $150,000 principal of the Directors debentures, in
addition to approximately $49,000 accrued interest were converted
into approximately 67,475,000 of the Company’s common shares
at an average price of $0.09, based on 51% of the calculated VWAP.
Upon conversion, the derivative fair value for the amounts
converted were remeasured through the date of conversion, with the
conversion date fair value reclassified to equity, amounting to
$4,519,000 in the nine months ended September 30,2015. As a
result of the conversions, the resulting decrease of fair value of
approximately $1,730,000 of the related debt discount was
recognized on the Statement of Consolidated Comprehensive Loss.
August 2015 Debentures
On August 14, 2015, the Company entered into a Securities
Purchase Agreement whereby the Company agreed to issue convertible
debentures in the aggregate principal amount of up $3,979,877. The
initial closing in the aggregate principal amount of $650,000
occurred on August 14, 2015. An additional 5 payments were
made in the total amount of $1,078,880 through September 30,
2015. The seventh tranche in the amount of $250,000 will occur
8 days after the filing of a registration statement filed by
the Company for the resale of the shares of common stock issuable
upon conversion of the August 2015 Debentures, the eighth tranche
in the amount of $1,250,000 will occur within 3 business days of
the effective date of the registration statement and the ninth
tranche, in the amount of $750,000 will occur within 7 business
days of the effective date of the registration statement. The
August 2015 Debentures bear interest at the rate of 10% per
year.
On August 20, 2015, the Company also entered into a Securities
Purchase Agreement with another investor, in the aggregate
principal amount of up to $1,500,000 (collectively the
“August 2015 Debentures”), which was amended on
September 19, 2015, to increase the principal by an additional
$200,000. Through September 30, 2015, two tranches totaling
$500,000 have been funded. A third tranche in the amount of
$500,000 (after amendment) is to occur within two days after the
filing of a registration statement, with the fourth tranche in the
amount of $700,000 to occur within 2 days of the effective date of
the registration statement.
The August 2015 Debentures contain the following significant
terms:
The debentures all mature in one year from the date of each
individual closing.
All amounts are convertible at any time, in whole or in part, at
the option of the holders into shares of the Company’s common
stock at a fixed conversion price. The conversion price is the
lower of (a) $0.75, or (b) a 49% discount to the lowest
daily VWAP (as reported by Bloomberg) of the Common Stock during
the 30 trading days prior to the conversion date. The Fixed
Conversion Price is subject to adjustment for stock splits,
combinations or similar events. If the Company makes any subsequent
equity sales (subject to certain exceptions), under which an
effective price per share is lower than the Fixed Conversion Price,
then the conversion price will be reset to equal such price. The
Company may prepay the Debentures in cash, prompting a 30% premium
or, subject to certain conditions, in shares of common stock valued
at 51% of the lowest volume weighted average price of the common
stock for the 30 prior trading days. The premium will be recognized
at such time as the Company may choose to prepay the
Debentures.
In connection with each of the purchase agreements, the Company
entered into a registration rights agreement with the respective
investors, pursuant to which the Company agreed to file a
registration statement for the resale of the shares of common stock
issuable upon conversion of, or payable as principal and interest
on, the respective debentures, within 45 days of the initial
closing date under each agreement, and to have such registration
statements declared effective within 120 days of the initial
closing dates of each purchase agreement. The pre-effective
registration statement was filed with the SEC on October 16,
2015.
The conversion feature of the August 2015 Debenture meets the
definition of a derivative and due to the reset provision to occur
upon subsequent sales of securities at a price lower than the fixed
conversion price, requires bifurcation and is accounted for as a
derivative liability. The derivative was initially recognized at
its estimated fair value of approximately $2,345,000 and created a
discount on the Notes that will be amortized over the life of the
Notes using the effective interest rate method. The fair value of
the embedded derivative is measured and recognized at fair value
each subsequent reporting period and the changes in fair value are
recognized in the Statement of Operations as Change in fair value
of derivative liability (discussed above). See Note 2 Fair value
measure for additional information on the fair value and gains or
losses on the embedded derivative.
The debenture entered into with the second investor on
August 20, 2015 included a warrant instrument granting the
Investor the right to purchase shares of common stock of the
Company equal to the principal amount of the applicable Debenture
divided by a price equal to 120% of the last reported closing price
of the Common stock on the applicable closing date of the
Debenture, with a three year term. During the three months ending
September 30, 2015, there were 7,254,902 warrants issued, with
a fair value of $404,561, calculated with the Black Sholes Merton
model. There were no conversions of the August 2015 Debentures
during the three months ended September 30, 2015.
Entry into Security Agreement
In connection with entry into the August 20 Purchase Agreement
and August 14 Purchase Agreement, the investors party to such
agreements and the Company entered into a Security Agreement, dated
August 21, 2015, securing the amounts underlying the
August 14 Debentures and the August 20 Debentures. The
Security Agreement grants a security interest in all assets and
personal property of the Company, subject to certain excluded real
property assets. The security interests under the Security
Agreement shall terminate following the date the registration
statement is declared effective.
July 2015 Debenture
On July 10, 2015, another accredited investor (the “July
2015 Investor”) purchased a separate Convertible Debenture
(the “July 2015 Debenture”) in the aggregate principal
amount of $500,000, that closed in five weekly tranches between
July 10 and August 15, 2015. The July 2015 Debenture is
in substantially the same form as the August 14 Debentures,
and does not include issuance of warrants . As such, the conversion
feature was also determined to require bifurcation, and derivative
accounting. All amounts related to the July 2015 derivative
liability are included in amounts disclosed above for the August
2015 debentures.
On October 14, 2015, the August 14 Investor assigned the
right to purchase August 14 Debentures in the principal amount
of $100,000 to the July 2015 Investor and the July 2015 Investor
purchased such August 15 Debentures on the same day. |
