|9 Months Ended|
Sep. 30, 2019
|Debt Disclosure [Abstract]|
On July 17, 2018, the Company entered into the Convertible Note, pursuant to which the Company issued an unsecured convertible promissory note to an institutional accredited investor in the initial principal amount of $2,625,000. The Company received consideration of $2,500,000, reflecting an original issue discount of $100,000, a beneficial conversion feature discount of approximately $328,000 and expenses payable by the Company of $25,000. The Convertible Note had an eighteen month term, carried interest at 10% per annum and was subordinated in right of payment to the ABL and PFG Term Note. The note was convertible into shares of the Company’s common stock at a conversion price of $24.00 per share (“Conversion Price”) upon five trading days’ notice, subject to certain adjustments (standard dilution) and ownership limitations specified in the Convertible Note. In May 2019, the conversion price was reduced to $6.82 for $1,250,000 of the balance of the Convertible Note; the remainder was still convertible at $24.00. The reduction in the conversion price increased the fair value of the embedded conversion option by approximately $547,000. The future cash flows of the Convertible Note changed by more than 10% as a result of the Standstill Agreement, so the Company amortized the remaining debt discount and debt issuance costs of $37,000, resulting in a loss on debt extinguishment of approximately $584,000 during the nine months ended September 30, 2019, of which approximately $328,000 was allocated to discontinuing operations. Loss on debt extinguishment allocated to continuing operations was recorded in interest expense.
The investor could redeem any portion of the Convertible Note upon five trading days’ notice (“Redemption Notice”) subject to a maximum monthly redemption amount of $650,000, with the Company having the option to pay such redemptions in cash, the Company’s common stock at the Conversion Price, or by a combination thereof, subject to certain conditions, including that the stock price is $30.00 per share or higher. The Company could prepay the outstanding balance of the Convertible Note, in part or in full, at a 10% premium to par value if prior to the one year anniversary of the date of issuance and at par if prepaid thereafter. At maturity, the Company could pay the outstanding balance in cash, the Company’s common stock at the Conversion Price, or by a combination thereof, subject to certain conditions. The note provides that in the event of default, the lender may, at its option, elect to increase the outstanding balance applying the default effect (defined as outstanding balance at date of default multiplied by 15% plus outstanding amount) by providing written notice to the Company. In addition, the interest rate increases to 22% upon default. The Convertible Note is the general unsecured obligation of the Company. At September 30, 2019, the principal balance of the Convertible Note is approximately $2.3 million, not including accrued interest of approximately $406,000, which is recorded in accounts payable and other accrued expenses on the Condensed Consolidated Balance Sheets.
In May 2019, Iliad converted $350,000 of the Convertible Note balance into 51,327 shares of our common stock at $6.82 per share. During the three and nine months ended September 30, 2019, the Company issued an aggregate of 173,557 shares of common stock to Iliad in exchange for the return of $612,175 of principal amount of the Convertible Note to the Company.
As of June 20, 2019, the Company was in default on the Convertible Note. The Convertible Note was accruing interest at the default rate of 22%, and the outstanding balance was increased by 15% (approximately $408,000) upon the notice of default. In October 2019, the Convertible Note was settled for $2,712,000, including interest of approximately $439,000, as discussed in Note 1.
Advance from NDX
On September 18, 2018, we entered into the Merger Agreement with NDX. In connection with signing the Merger Agreement, NDX loaned us $1,500,000. Interest accrued on the outstanding balance at 10.75% per annum until we terminated the Merger Agreement on December 15, 2018. As a result of the termination, the Advance from NDX, plus interest thereon, became due and payable on March 15, 2019. The termination was a specified event of default, so on December 15, 2018, the interest rate was increased to 21%. The default also gave NDX the right to convert all, but not less than all, of the outstanding balance into shares of the Company’s common stock at a conversion price of $18.18 per share. At September 30, 2019, the principal balance of the Advance from NDX was $1,500,000, not including accrued interest of approximately $288,000, which is recorded in accounts payable and other accrued expenses on the Condensed Consolidated Balance Sheets.
The Advance from NDX is the general unsecured obligation of the Company and was subordinated in right of payment to the ABL and PFG Term Note, provided that NDX has asserted that its obligation to standstill under its subordination agreements will not be applicable at a time when the Company attains certain levels of unrestricted cash, as a result of the Company having improperly terminated the Merger Agreement. The Company does not believe it improperly terminated the Merger Agreement. The Company and NDX entered into the NDX Settlement Agreement in October 2019, which is discussed in detail in Note 1.
Atlas Sciences Note
In October 2019, we entered into a twelve month unsecured promissory note with Atlas Sciences of $1,347,500. The Atlas Sciences Note resulted in cash receipts of $1,250,000, reflecting an original issue discount of $87,500 and expenses payable by us of $10,000. The Atlas Sciences Note has a 12 month term and bears interest at 10% per annum. Atlas Sciences may redeem any portion of the note, at any time after six months from the issuance date upon three business days' notice, subject to a monthly maximum redemption amount of $300,000. We may prepay the Atlas Sciences Note at any time without penalty. Upon the occurrence of an event of default, the interest rate will be adjusted to 22% per annum.
The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef