Convertible Debt [Text Block] | NOTE 9 – CONVERTIBLE DEBT (PIK NOTES) The Company raised $23 million of financing through the issuance of two series of Paid-In-Kind (“PIK”)-Election Convertible Notes in 2013 (“Series 2023 Notes”) and 2014 (“Series A Notes”). The original terms of the Series A Notes included among other things: (i) a maturity of November 1, 2018 with an option to extend to November 1, 2019, (ii) a stated interest rate of 10% paid semi-annually and (iii) a conversion price of $0.90, adjusted downward based on an anti-dilution provision. The original terms of the Series 2023 Notes included among other things: (i) a maturity of August 1, 2023, (ii) a stated interest rate of 10% paid semi-annually and (iii) a conversion price of $1.40, adjusted downward based on an anti-dilution provision. On December 14, 2017, an amendment agreement, entered into between the Company and the holders of the Series A Notes and Series 2023 Notes, went into effect. The agreement resulted in changes to certain terms of the Series A and Series 2023 Notes. The key terms of the Series A and Series 2023 Notes, as amended, are highlighted in the table below: Key Terms Series 2023 Notes Series A Notes Inception Date 08/01/2013 11/03/2014 Cash Received $10,500,000 $12,500,000 Principal (Initial Liability) $10,500,000 $19,848,486 Maturity (Term) Matures on August 1, 2023, but convertible into shares of the Company’s common stock at the discretion of the holder or by the Company based on the market price of the Company’s stock; Matures on May 1, 2023 but extends to August 1, 2023 if the Series 2023 Notes are still outstanding. Convertible into shares of the Company’s common stock at the discretion of the holder or by the Company based on the market price of the Company’s stock; Exercise Price $0.59, adjusted downward based on anti-dilution provisions/downround protection $0.40, adjusted downward based on anti-dilution provisions/down-round protection; Stated Interest 10% per annum through December 14, 2017, 3% per annum thereafter, due semiannually; 10% per annum through December 14, 2017, 3% per annum thereafter, due semiannually; Derivative Liability $2,055,000 established at inception due to the existence of down-round protection; revalued every quarter using Monte Carlo model $9,212,285 established at inception due to existence of down-round protection; revalued every quarter using a Monte Carlo model As of December 31, 2019, the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table: Series 2023 Notes Series A Total PIK Note Payable, Gross $ 16,901,447 $ 28,265,165 $ 45,166,612 Less: Discount - (1,464,311 ) (1,464,311 ) PIK Note Payable, Net $ 16,901,447 $ 26,800,854 $ 43,702,301 PIK Note Derivative Liability $ - $ - $ - As of December 31, 2018, the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table: Series 2023 Series A Notes Total PIK Note Payable, Gross $ 16,394,688 27,622,913 44,017,601 Less: Discount (1,297,416 ) (7,259,175 ) (8,556,591 ) Less: Deferred Financing Cost (158,179 ) (266,511 ) (424,690 ) PIK Note Payable, Net $ 14,939,093 20,097,227 35,036,320 PIK Note Derivative Liability $ 253,215 1,526,857 1,780,072 Series A Notes (Amended) On November 3, 2014 (“Issue Date”), the Company issued, in a private placement pursuant to investment agreements, $19,848,486 principal amount of 10% PIK-Election Convertible Notes due 2018 ("Series A Notes") in exchange for $12,500,000 in cash and the cancellation of previously-issued warrants held by one investor. The original terms of the Series A Notes included among other things: (i) a maturity of November 1, 2018 with an option to extend to November 1, 2019, (ii) a stated interest rate of 10% paid semi-annually and (iii) a conversion price of $0.90, adjusted downward based on an anti-dilution provision. The original terms of both the Series A notes and Series 2023 Notes can be as exhibits to Forms 8-K filed on November 5, 2014. Below are key amended terms of the Series A Notes: ● Maturity ● Exercise Price ● Stated Interest ● Liquidated Damages ● The number of shares issuable under the Notes may be affected by the anti-dilution provisions of the Notes. The antidilution provisions adjust the Exercise Price of the Notes in the event of stock dividends and splits, issuance below the market price of the common stock, issuances below the conversion price of the Notes, pro rata distribution of assets, rights plans, tender offers, and exchange offers. The entire principal amount of the Series A Notes and accrued interest thereon shall be mandatorily converted into shares of the Company’s common stock if (i) the Volume Weighted Average Price (“VWAP”) of the thirty (30) preceding trading days is at or greater than $1.00 or the VWAP of the ten (10) preceding trading days is at or greater than $1.40; (ii) the closing market price of the shares of the Company’s common stock is at or greater than $1.00; (iii) all outstanding amounts under each Series 2023 Note or replacement financing, if any, shall have been converted into shares of the Company’s common stock pursuant to the terms of such Series 2023 Note or the replacement financing, if any, on or prior to the date on which a notice of mandatory conversion is received; and (iv) either (x) a registration statement is effective and available for the resale of all of the shares into which the Series A Notes convert on the date on which the Series A notes are mandatorily converted and each of the five (5) trading days prior to the date of mandatory conversion and on the date of mandatory conversion the holders of the Series A Notes are not restricted from selling or distributing any shares into which the Series A Notes convert pursuant to the provisions of the Registration Rights Agreement or (y) the holders Series A Notes may sell all such shares into which the Series A Notes convert immediately under Rule 144 under the Securities Act. These Series A Notes were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability, or any net investment in a foreign operation. In addition to the customary anti-dilution provisions the notes contain a down-round provision whereby the conversion price would be adjusted downward in the event that additional shares of the Company’s common stock or securities exercisable, convertible or exchangeable for the Company’s common stock were issued for cash consideration (e.g. a capital raise) at a price less than the conversion price. Therefore, the estimated fair value of the conversion feature of $9,212,285 (based on observable inputs using a Monte Carlo model) was bifurcated from the Series A Notes and accounted for as a separate derivative liability, which resulted in a corresponding amount of debt discount on the Series A Notes. In addition, an additional debt discount of $7,348,486 was recorded as a result of the difference between the $12,500,000 of cash received and the $19,848,486 of principal on the Series A Notes. This combined debt discount of $16,560,771 is being amortized using the effective interest method over the 9-year term of the Notes as Interest Expense, while the PIK Note Derivative is carried at fair value (using a Monte Carlo model) until the Notes are converted or otherwise extinguished. Any changes in fair value are recognized in earnings. During the year ended December 31, 2019, the Company issued additional Series A PIK Notes in lieu of interest payments of $833,305 and paid down $233,986 of PIK notes, increasing the Series A Notes Payable gross carrying value to $28,265,165 as of December 31, 2019. Additionally, during the year ended December 31, 2019, the Company recorded $5,433,052 impact of accounting change and amortized $786,502 of debt discount and deferred financing cost relating to the Series A Notes Payable, increasing the Series A Notes Payable net carrying value to 26,800,854 as of December 31, 2019. At December 31, 2018, the fair value of the Series A Note Derivative was estimated to be $1,526,857, which includes the value of the derivative related to the additional PIK Notes issued in May and November 2018 for the semi-annual interest payments due. During the year ended December 31, 2018, the Company issued additional Series A PIK Notes in lieu of interest payments of $713,197, increasing the Series A Notes Payable gross carrying value to $27,622,913 as of December 31, 2018. Additionally, during the year ended December 31, 2018, the Company amortized $709,173 of debt discount and deferred financing cost relating to the Series A Notes Payable, increasing the Series A Notes Payable net carrying value to 20,097,227 as of December 31, 2018. As of December 31, 2019, the Company was in compliance with the covenants of the Series A Notes. As of December 31, 2019, Samlyn Offshore Master Fund, Ltd. and Samlyn Onshore Fund, LP owned $9,284,784 and $4,955,681, respectively, of principal of the Series A Notes. Samlyn Offshore Master Fund, Ltd. and Samlyn Onshore Fund, LP are managed by Samlyn Capital, LLC. As of December 31, 2019, Michael Barry, a director of the Company, was the General Counsel and Chief Compliance Officer of Samlyn Capital, LLC. As of December 31, 2019, The IBS Turnaround Fund, LP, The IBS Turnaround (QP) (A Limited Partnership) and The IBS Opportunity Fund, Ltd. owned $1,347,172, $2,705,266 and $262,852, respectively, of principal of the Series A Notes. The IBS Turnaround Fund, LP, The IBS Turnaround (QP) (A Limited Partnership) and The IBS Opportunity Fund, Ltd. are managed by IBS Capital, LLC. At December 31, 2019, IBS Capital, LLC owned 13.6% of the shares of the common stock of the Company. As of December 31, 2019, M. Kingdon Offshore Master Fund, LP, a fund managed by Kingdon Capital Management, LLC, owned $4,315,293 of principal of the Series A Notes. As of December 31, 2019, Michael Pohly, a director of the Company, was an employee of Kingdon Capital Management, LLC. Series 2023 Notes (Amended) In August 2013, the Company received $10,500,000 of financing through the private placement of 10% mandatory convertible Notes due 2023 ("Series 2023 Notes"). The principal amount of the Notes is due on maturity. The Company can elect to pay semi-annual interest on the Series 2023 Notes with additional PIK Notes containing the same terms as the Series 2023 Notes, except interest will accrue from issuance of such notes. The Company can also elect to pay interest in cash. The Series 2023 Notes convert into the Company’s common stock at a conversion price of $0.59 per share, which is subject to customary anti-dilution adjustments; the holders may convert the Series 2023 Notes at any time. The Series 2023 Notes are mandatorily convertible after one year when the weighted average trading price of a share of the common stock for the preceding ten trading days is in excess of the conversion price. The Series 2023 Notes contain customary representations and warranties and several covenants. The proceeds are being used for general corporate purposes. No broker was used and no commission was paid in connection with the sale of the Series 2023 Notes. These Series 2023 Notes were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. In addition to the customary anti-dilution provisions the notes contain a down-round provision whereby the conversion price would be adjusted downward in the event that additional shares of the Company’s common stock or securities exercisable, convertible or exchangeable for the Company’s common stock were issued for cash consideration (e.g. a capital raise) at a price less than the conversion price. Therefore, the estimated fair value of the conversion feature of $2,055,000 (based on observable inputs using a Monte Carlo model) was bifurcated from the Series 2023 Notes and accounted for as a separate derivative liability, which resulted in a corresponding amount of debt discount on the Series 2023 Notes. The debt discount is being amortized using the effective interest method over the 10-year term of the Series 2023 Notes as Interest Expense, while the PIK Note Derivative is carried at fair value (using a Monte Carlo model) until the Series 2023 Notes are converted or otherwise extinguished. Any changes in fair value are recognized in earnings. During the year ended December 31, 2019, the Company issued additional Series 2023 PIK Notes in lieu of interest payments of $640,693 and paid down $133,936 of PIK notes, increasing the Series 2023 Notes Payable gross carrying value to $16,901,445 as of December 31, 2019. Additionally, during the year ended December 31, 2019, the Company recorded $1,297,416 impact of accounting change of debt discount relating to the Series 2023 Notes Payable, increasing the Series 2023 Notes Payable net carrying value to $16,901,445. At December 31, 2018, the fair value of the Series 2023 Note Derivative was estimated to be $253,215, which includes the value of the derivative related to additional PIK Notes issued in February and August 2018 for the semi-annual interest payments due. During the year ended December 31, 2018, the Company issued additional Series 2023 PIK Notes in lieu of interest payments of $303,967, increasing the Series 2023 Notes Payable gross carrying value to $16,394,688 as of December 31, 2018. Additionally, during the year ended December 31, 2018, the Company amortized $399,064 of debt discount and deferred financing cost relating to the Series 2023 Notes Payable, increasing the Series 2023 Notes Payable net carrying value to $14,939,093. As of December 31, 2019, the Company was in compliance with the covenants of the Series 2023 Notes. As of December 31, 2019, M. Kingdon Offshore Master Fund, LP, a fund managed by Kingdon Capital Management, LLC, owned $4,024,152 of principal of the Series 2023 Notes. As of December 31, 2019, Michael Pohly, a director of the Company, was an employee of Kingdon Capital, Management, LLC. |