Note 5 - Notes Payable and Restricted Cash | 9 Months Ended |
Sep. 30, 2014 |
Debt Disclosure [Abstract] | ' |
Debt Disclosure [Text Block] | ' |
5. Notes Payable and Restricted Cash |
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November 2013 Financing Transaction |
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On November 13, 2013, we entered into the securities purchase agreement (the “Purchase Agreement”) with a group of institutional investors (the “Investors”), relating to the private placement of $1,816,667 in principal amount of senior secured convertible promissory notes. The notes were issued with an original issue discount of $166,667 and the aggregate purchase price of the notes was $1,650,000, which included a placement agent fee of $150,000, as more fully discussed below. Therefore, the Notes were issued for a cash purchase price of $1,500,000, and with warrants to purchase up to 2,422,222 shares of our common stock, on the terms set forth below. The notes originally matured on November 13, 2014, but were extended to July 13, 2015 per the terms of two amendments, which were effective on October 31, 2014. In addition, certain of these notes have been assigned to one of the original investors and others were purchased by Magna Equities II, LLC (“Magna”) in October 2014, as more fully discussed in Note 14. |
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In connection with the financing, we agreed to allow our placement agent to participate in the offering for $150,000 in lieu of our obligation to pay a cash fee of $150,000. In addition, the placement agent will receive 5% of the aggregate cash exercise price received by us upon exercise of any warrants in the offering, and they received 222,222 warrants entitling them to purchase 222,222 shares of common stock as part of their placement agent fee. Thus, the aggregate number of warrants, issued in the financing was 2,644,444. We also issued 300,000 warrants under the terms of a letter agreement dated November 13, 2013 in connection with the financing. Therefore, the warrants issued on November 13, 2013 aggregated 2,944,444. |
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In connection with the sale of the notes and the warrants issued to the Investors, (i) we entered into a registration rights agreement with the Investors, (ii) we and certain of our subsidiaries entered into a security and pledge agreement in favor of the collateral agent for the Investors, (iii) certain of our subsidiaries entered into a guaranty in favor of the collateral agent for the Buyers, and (iv) we and each depository bank in which such bank account is maintained entered into certain account control agreements with respect to certain accounts described in the notes and the security agreement. The transaction closed on November 13, 2013 (the “Closing”). |
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At Closing, we received proceeds, net of $115,000 of the Investor’s expenses that were paid for by the Company, of $635,000 and $750,000 of the proceeds were placed in restricted bank accounts in amounts proportionate to each Investors note balance. The restricted funds were to be applied to pay any redemption or other payment due under the applicable note to the applicable holder from time to time. Per the term of the securities purchase agreement, we were required upon the sale of 50,000 shares of MGT Capital Investments Inc.’s common stock that we owned to place the proceeds from the sale into the restricted bank accounts on a pro rata basis. Accordingly, on November 21, 2013, upon the sale of the 50,000 shares of MGT’s common stock under the terms of a stock purchase agreement, we placed approximately $132,500 into the restricted accounts. The balance in the restricted bank accounts totaled approximately $0.9 million at December 31, 2013. In April 2014, June 2014 and July 2014, to provide the Company with additional liquidity, several of the Investors transferred approximately $145 thousand, $0.3 million and $35 thousand, respectively, of the restricted funds to our operating account. In connection with a Right to Shares Agreement dated June 24, 2014, $0.4 million of the restricted funds were used to pre-pay a portion of one of the outstanding notes. Therefore, the balance in the restricted cash is approximately $12 thousand as of September 30, 2014, which consists of cash in one restricted account. All other restricted bank accounts have been closed. |
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May 30, 2014 Financing Transaction |
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Under the terms of a May 30, 2014 financing, the Company issued promissory notes totaling $0.3 million to two of the Investors. The promissory notes at issuance were convertible into shares of the Company’s common stock at an exercise price of $0.20 per share. As a result of the May 30, 2014 financing, certain reset provisions under the terms of the November 13, 2013 promissory notes were triggered. Accordingly, the conversion price of the notes with an aggregate principal balance of $1,816,667 was reset to $0.20 per share from $0.75 per share of the Company’s common stock and the exercise price of the warrants issued on November 13, 2013, was changed to $0.20 per share from $2.84 per share of the Company’s common stock. In addition, on May 30, 2014, the number of warrants was increased from common stock warrants to acquire 2,944,444 shares of the Company’s common stock to warrants to acquire 41,811,114 shares of the Company’s common stock, subject to adjustment based on the cashless provisions of the warrants. On June 10, 2014 and June 24, 2014, the Company entered into Right to Shares Agreements with two of the Investors related to the notes and warrants as more fully discussed below. |
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On June 10, 2014, a Right to Shares Agreement was entered into with one of the holders of a promissory note and common stock warrant issued on November 13, 2013 and reset on May 30, 2014 as discussed above. The warrant holder exercised the warrant in full in a cashless exercise for the right to receive 11,500,000 shares of the Company’s common stock of which 495,711 shares of common stock were issued during June 2014 and the remainder of the shares subject to the Right to Shares Agreement were issued during the three-months ended September 30, 2014. |
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On June 24, 2014, the Company entered into a Right to Shares Agreement with one of the holders of a promissory note and common stock warrant issued on November 13, 2013 and reset on May 30, 2014. Pursuant to that agreement, the Company and the shareholder acknowledged that the shareholder desired to (1) exchange the common stock warrant, for a right to acquire 17,763,325 shares of common stock to be issued to the shareholder, with such right being determined based on the cashless exercise formula contained in the warrant; (2) redeem $400,000 of its promissory note for $400,000 in cash, and (3) convert $190,667 of its promissory note into 953,334 shares of common stock. Pursuant to the agreement, the shareholder had a right to receive 18,716,659 shares of common stock, and the balance of the shareholder’s remaining note that was issued on November 13, 2013 was reduced to $190,667. As of June 30, 2014, we issued 150,000 shares under the June 24, 2014 Right to Shares Agreement and the remaining 18.6 million shares of the Company’s common stock subject to the agreement were issued during the three-months ended September 30, 2014. |
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Consulting and Advisory Relationships and Impact on Promissory Notes and Warrants |
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On July 1, 2014, July 14, 2014, and July 15, 2014, the Company entered into consulting and advisory agreements with Hanover Financial Services (“HFS”), SmallCapVoice.com, Inc. (“SCV”) and RedChip Companies Inc. (“RedChip”), respectively, relating to investment advisory and investor relations services. Under the terms of the agreements, the Company issued 550,000 shares of common stock to HFS, 500,000 shares of common stock to SCV and 500,000 shares of common stock to Redchip. The Company had previously accrued for the issuance of 200,000 shares to Redchip. Accordingly, as a result of the issuances, the Company recorded approximately $146 thousand and $0.3 million during the three and nine-months ended September 30, 2014 for the consulting and advisory services. Under the terms of financing transactions entered into on November 13, 2013 and on May 30, 2014, the conversion price of notes and the exercise price of warrants issued in connection with such transactions automatically adjust following the issuance of the Company’s common stock at a price per share less than the previously-applicable exercise price or conversion price. The previously applicable price was $0.20 per share. Because the issuance to Redchip was deemed to be an issuance of shares of the Company’s common stock at a price per share of $0.08 per share, as of July 15, 2014, the exercise price and conversion price in connection with the notes and warrants issued in the November 13, 2013 financing transaction and the conversion price in connection with the notes issued in the May 30, 2014 financing transaction, reset to $0.08 per share. Under the terms of the warrants, the aggregate exercise price must remain the same, so the number of shares of common stock subject to warrant also increased. Accordingly, following July 15, 2014, the number of shares issuable upon conversion of the notes was approximately 17.7 million shares of common stock and the number subject to warrant was adjusted to approximately 38.8 million shares at an exercise price of $0.08. |
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Variable Priced Promissory Notes |
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During the three-months ended September 30, 2014, the Company entered into convertible promissory notes containing variable conversion price formulas. These notes had principal amounts aggregating approximately $0.9 million, of which approximately $0.2 million of principal was issued in exchange for an existing non-convertible promissory note and accrued interest thereon. In addition, a promissory note issued in March 2014, with a principal balance of $25 thousand by its terms became convertible with a variable conversion price formula during the three-months ended September 30, 2014. During the three-months ended September 30, 2014, $75 thousand of principal of one of these promissory notes was converted into approximately 11.0 million shares of the Company’s common stock per the variable price conversion formula. |
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At September 30, 2014, the aggregate outstanding principal and accrued interest of these promissory notes was approximately $0.9 million. If all such outstanding notes had been converted on September 30, 2014 based on the variable conversion price formula, it would have resulted in an issuance of approximately 297.7 million shares of the Company’s common stock and the elimination of the liability for the Company. (Certain of these notes by their terms are not eligible to be converted until 180 days after their effective dates.) Because the variable price formula changes with the value of the Company’s common stock, the number of shares into which the notes are convertible varies. |
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Impact of Promissory Notes and Warrants of Variable Priced Promissory Notes |
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Under the terms of the financings on November 13, 2013 and May 30, 2014, the holders of the notes and warrants issued in connection with such transactions, following the issuance of any security with a variable price conversion feature, may substitute the variable price formula for their conversion or exercise prices. The promissory notes issued by the Company during the three-months ended September 30, 2014, which are more fully described in the paragraph above and in the table below, contain variable price conversion features. As a result, the holder of a promissory note and warrant issued on November 13, 2013 and a promissory note issued on May 30, 2014 may substitute a formula resulting in a lower price. Moreover, the warrants provide that the holder of the warrant has the right to invest the same aggregate amount. Accordingly, whenever a lower price applies, a larger number of shares may be purchased. The exact number of shares that may be issued varies depending on the stock price at the time of exercise or conversion, and in the case of the warrants, the cashless exercise formula. As a result, during the three-months ended September 30, 2014, in addition to the shares issued in connection with the Rights to Shares Agreements discussed above, approximately 13.3 million shares of the Company’s common stock were issued upon exercise of a portion of the November 13, 2013 warrants per the cashless exercise provisions and approximately 19.8 million shares were issued upon conversion of approximately $154 thousand of the November 13, 2013 promissory notes. On September 30, 2014, if all of the remaining warrants issued in connection with the November 13, 2013 financing had been exercised under the alternative price formulation the number of shares of the Company’s common stock that would have been issued would have been approximately 1.1 billion shares based on an exercise price of $0.0027 per share and subject to adjustment for the cashless exercise provisions. On September 30, 2014, an aggregate of approximately $1.3 million principal amount of notes issued in connection with the November 13, 2013 and May 30, 2014 financings was outstanding. If all such outstanding notes had been converted on such date, it would have resulted in an issuance of approximately 466.3 million shares of the Company’s common stock and the elimination of the liability for the Company. Because the variable price formula changes with the value of the common stock, the number of shares subject to warrant and the number of shares into which the notes are convertible varies. |
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Notes payable consists of the following (in thousands): |
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| | September 30, | | | December 31, | |
2014 | 2013 |
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Note originally with PositiveID Corporation (“PSID”) for $200 dated January 11, 2012, bore interest at 5% per annum, was originally payable in monthly instalments beginning January 11, 2013 through December 11, 2014. Note was amended in July 2013 to allow for conversion into common stock and extend payment terms. After the note was partially converted into common stock in October 2013, PSID assigned the note to a group of lenders in November 2013. One of the lenders converted $60 of the note and $10 of accrued interest into 47 shares of common stock in February 2014. The remaining principal is convertible at $1.50 per share. The Company issued warrants to acquire 300 shares of its common stock to PSID in connection with a letter agreement entered into in November 2013. At September 30, 2014, the number of warrants was reset to warrants to acquire 315,556 shares at an exercise price of $0.0027 per share based on a variable price formula, which is subject to change. (2)(3) | | $ | 114 | | | $ | 175 | |
Demand note for $80 issued October 11, 2013 to our CEO, bears interest at 5% per annum and repaid in November 2013, February and April 2014. (1) | | | — | | | | 30 | |
Demand note for $30 issued October 29, 2013 to our CEO, bears interest at 5% per annum repaid in April and July 2014. (1) | | | — | | | | 30 | |
Senior Secured Convertible Notes issued November 13, 2013 for $1,817, of which $880 was repaid and converted as of September 2014, net of discount of $112 and $1,585, to group of institutional investors, are convertible into shares of common stock at $0.0027 per share on September 30, 2014 based on a variable conversion price formula, which is subject to change. The notes originally matured on November 13, 2014 but have been extended to July 13, 2015. Notes were issued with Warrants to acquire 2,644 shares of common stock with an exercise price of $2.84. As of September 30, 2014, a portion of the warrants have been exercised and the remainder have been reset to warrants to acquire 775,747 shares of common stock with an exercise price of $0.0027 per share based on a variable price formula, which is subject to change. (2)(4)(5) | | | 825 | | | | 232 | |
Demand note for $60 issued January 8, 2014 to Michael Krawitz, our CFO, bears interest at 5% per annum. (1) | | | 60 | | | | — | |
Demand note for $60 issued January 16, 2014 to our CEO, bears interest at 5% per annum and partially repaid in July and August 2014 (1) | | | 30 | | | | — | |
Demand note for $40 issued January 16, 2014 to our President, bears interest at 5% per annum. (1) | | | 40 | | | | — | |
Demand note for $25 issued March 4, 2014 to a Director, bears interest at 5% per annum. (1) | | | 25 | | | | — | |
Note for $25 issued March 5, 2014 to Deephaven Enterprises, Inc., net of discount of $14, bears interest at 9% per annum, due March 5, 2015. Effective May 30, 2014, the note became convertible into shares of common stock at a price of $0.35 per share. | | | 11 | | | | — | |
Note for $25 issued on March 6, 2014, to James Rybicki Trust, net of discount of $14, bears interest at 9% per annum, due March 6, 2015. Effective May 30, 2014, the note became convertible into shares of common stock at a price of $0.35 per share. | | | 11 | | | | — | |
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Note for $25 issued on March 10, 2014, to William Caragol, net of discount of $1, bears interest at the rate of 9% per annum, due March 10, 2015. Effective, July 16, 2014, the note is convertible into shares of common stock at a price equal to 60% of the lowest closing bid price over the 10-trading days immediately preceding a conversion notice. (5) | | | 24 | | | | — | |
Note for $61 issued on March 20, 2014 to Deephaven Enterprises, Inc., net of discount of $27, bears interest at the rate of 9% per annum, due March 20, 2015. Effective May 30, 2014, existing outstanding common stock warrants held by the holder became exercisable at $0.35 per share and an additional 300 warrants to acquire shares of the Company’s common stock with an exercise price of $0.35 per share were granted. (2) | | | 34 | | | | — | |
Note for $25 issued April 16, 2014 to William Caragol, net of discount of $15, bears interest at 9% per annum, due April 16, 2015. Effective May 30, 2014, the note became convertible into shares of common stock at a price of $0.35 per share if conversion is elected by the holder or 60% of the lowest closing bid price over the 10-trading days immediately preceding a conversion notice if elected by the Company. | | | 10 | | | | — | |
Note for $30 issued on April 16, 2014, to Ned Siegel, net of discount of $19, bears interest at 9% per annum, due April 16, 2015. Effective May 30, 2014, the note became convertible into shares of common stock at a price of $0.35 per share. (1) | | | 11 | | | | — | |
Note for $20 issued on May 1, 2014, to Ned Siegel, net of discount of $13, bears interest at the rate of 9% per annum, due May 1, 2015. Effective May 30, 2014, the note became convertible into shares of common stock at a price of $0.35 per share. The note was issued with 100 warrants to acquire shares of the Company’s common stock with an exercise price of $0.35 per share. (1) (2). | | | 7 | | | | — | |
Senior Convertible Note for $222 issued May 30, 2014 to an Investor, net of discount of $148, convertible into shares of common stock at $0.0027 per share on September 30, 2014 based on a variable conversion price formula, which is subject to change, and matures May 30, 2015. Note was issued with an original issue discount of $22 in lieu of interest. (4)(5) | | | 74 | | | | — | |
Senior Convertible Non-Interest Bearing Note for $100 issued on May 30, 2014 to an Investor, net of discount of $67, convertible into shares of common stock at $0.0027 per share on September 30, 2014 based on a variable conversion price formula, which is subject to change, due May 30, 2015. (4)(5) | | | 33 | | | | — | |
Note for $83 effective on July 15, 2014 to KBM Worldwide, Inc., net of discount of $5, bears interest at the rate of 8% per annum, due April 14, 2015, convertible after 180 days into shares of common stock at a price equal to 61% of the average of the three lowest closing bid prices over the 10-trading days immediately preceding a conversion notice.(4)(5) | | | 78 | | | | — | |
Note for $500 effective on July 16, 2014 to JMJ Financial, of which $139 was funded (net of an original issue discount of $14) as of September 30, 2014. The note has an additional discount of $9 as of September 30, 2014, bears no interest for first three-months and at 12% per annum thereafter, is due July 16, 2016, and is convertible into shares of common stock at the lesser of $0.14 per share or 60% of the lowest bid price over the 25 trading days immediately preceding a conversion notice. (4)(5) | | | 116 | | | | — | |
Note for $50 effective on August 4, 2014 to Union Capital LLC, net of discount of $3, bears interest at 12% per annum, due August 4, 2015, convertible after 180 days into shares of common stock at 61% of the average of the three lowest closing bid prices over the 20 trading days immediately preceding a conversion notice. (5)(6) | | | 47 | | | | — | |
Note for $75 effective on August 6, 2014 to LG Capital Funding LLC, net of discount of $4, bears interest at 8% per annum, due July 31, 2015, convertible after 180 days into shares of common stock at 61% of the average of the three lowest closing bid prices over the 15 trading days immediate preceding a conversion notice. (5)(7) | | | 71 | | | | — | |
Note for $128 effective on August 20, 2014 to Magna, net of discount of $8, bears interest at 6% per annum, due August 4, 2015, convertible into shares of common stock at 40% discount from the average of three lowest trading prices over the 10 trading days immediately preceding a conversion notice. (4)(5) | | | 120 | | | | — | |
Note for $184 effective on August 20, 2014 to Magna, net of discount of $6, bears interest at 6% per annum, due August 4, 2015, convertible into shares of common stock at 40% discount from the average of three lowest trading prices over the 10 trading days immediately preceding a conversion notice, $75 was converted in September 2014. This note was exchanged for a previously issued non-convertible note. (4)(5) | | | 103 | | | | — | |
Note for $42 effective on August 21, 2014 to KBM Worldwide, Inc., net of discount of $2, bears interest at 8% per annum, due May 15, 2015, convertible after 180 days into shares of common stock at equal to 61% of the average of the three lowest closing bid prices over the 10-trading days immediately preceding a conversion notice.(4)(5) | | | 40 | | | | — | |
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Note for $115 effective on August 25, 2014 to Iliad Research and Trading L.P., net of discount of $16, non-interest bearing for the first ninety days with a one-time interest payment of 12% on the ninety-first day, due August 25, 2015, convertible into shares of common stock at equal to 60% of the average of the three lowest closing bid prices over the 20-trading days immediately preceding a conversion notice. Issued with an original issue discount of $10. Lender has the right but not the obligation to issue up to an additional four tranches of 100 each. (5) | | | 99 | | | | — | |
Note for $100 effective on August 26, 2014 to Corbin Properties, LLC., net of discount of $5, bears interest at 8% per annum, due August 26, 2015, convertible into shares of common stock at equal to 60% of the average of the three lowest closing bid prices over the 10-trading days immediately preceding a conversion notice. (5) | | | 95 | | | | — | |
Total notes payable | | | 2,078 | | | | 467 | |
Less: Current maturities | | | (1,962 | ) | | | (467 | ) |
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Note payable long-term | | $ | 116 | | | $ | — | |
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Subordinated Convertible Note Payable elected at fair value: | | | | | | | | |
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Non-interest bearing subordinated convertible note payable with a principal amount of $3,300 dated December 3, 2012. Note is convertible into common stock equal to 1/3 of the shares beneficially held by the CEO on the date of conversion. Note was amended in July 2013 to extend the maturity date to June 30, 2015. The note is recorded at its estimated fair value and will be revalued at each reporting period with changes in the fair value recorded as other expense/income. See Note 6. | | $ | 2,199 | | | $ | 4,925 | |
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-1 | These notes have been issued to related parties. See Note 10. | | | | | | | |
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-2 | The warrants are more fully described in Notes 7 and 14. | | | | | | | |
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-3 | This note when originally issued was issued to a related party who subsequently sold it to unrelated investors. See Note 10. | | | | | | | |
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-4 | If and whenever we issue or sell, or are deemed to have issued or sold, any shares of common stock for a consideration per share less than a price equal to the conversion price in effect immediately prior to such issue or sale or deemed issuance or sale (the foregoing a “Dilutive Issuance”), then, immediately after such Dilutive Issuance, the holder has the right to elect that the conversion price then in effect be reduced to an amount equal to the new issuance price. | | | | | | | |
-5 | The convertible option of these notes was bifurcated from the notes and recorded as its fair value on the date of issuance and at each reporting date, with the change in the fair value being charged/credited to other income/expense. The conversion price of the notes has continued to reset as more fully discussed in Note 14. | | | | | | | |
-6 | In connection with this note, the lender issued a second note that was paid for by the issuance of an offsetting $50 thousand secured note issued by the Company to the lender. The second note is to be paid in cash to the Company within 8 months at the lender’s option. If and when the cash is paid to the Company, the Company will record the second note as a liability. The second note has substantially the same terms as this funded note. | | | | | | | |
-7 | In connection with this note, the lender issued a second note that was paid for by the issuance of an offsetting $75 thousand secured note issued by the Company to the lender. The second note is to be paid in cash to the Company within 8 months at the lender’s option. If and when the cash is paid to the Company, the Company will record the second note as a liability. The second note has substantially the same terms as this funded note. | | | | | | | |
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Interest expense was approximately $0.5 million and $36 thousand for the three-months ended September 30, 2014 and September 30, 2013, respectively, and $2.1 million and $0.5 million for the nine-months ended September 30, 2014 and 2013, respectively. The majority of the interest expense is due to the accretion of debt discounts and, therefore, the weighted average interest rates for each of the periods are not meaningful numbers. |
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See Note 14 for a summary of promissory notes issued subsequent to September 30, 2014. |