Temporary Equity

12 Months Ended

Dec. 31, 2018

Temporary Equity [Abstract]

Temporary Equity

Note 6 - Temporary Equity

Series A Preferred Stock

The following table summarizes the Company’s Series A Preferred Stock activities for the year ended December 31, 2018 (dollars in thousands):

	Series A Preferred Stock
	Shares			Amount
Total temporary equity as of December 31, 2017		1,935		$	1,935
Sale of Series A preferred stock		1,700			1,700
Conversion of advances into preferred stock		250			250
Preferred stock converted to common stock		(55	)		(55	)
Beneficial conversion feature of Series A preferred stock		-			(956	)
Deemed dividends related to beneficial conversion feature of Series A preferred stock		-			956
Accrued Series A dividends		378			378
Deemed dividend on Series A preferred stock		-			687
Fair Value of common stock warrant issued with Series A preferred stock		-			(687	)
Total temporary equity as of December 31, 2018		4,208		$	4,208

The following table summarizes the Company’s Series A Preferred Stock activities for the year ended December 31, 2017 (dollars in thousands):

	Series A Preferred Stock
	Shares		Amount
Total temporary equity as of December 31, 2016		-	$	-
Proceeds from sale of Series A preferred stock		1,670		1,670
Conversion of advances into preferred stock		150		150
Beneficial conversion feature of Series A preferred stock		-		(807	)
Deemed dividends related to beneficial conversion feature of Series A preferred stock		-		807
Accrued Series A dividends		115		115
Deemed dividend on Series A preferred stock		-		649
Fair Value of common stock warrant issued with Series A preferred stock		-		(649	)
Total temporary equity as of December 31, 2017		1,935	$	1,935

On February 8, 2018, the Company entered into a preferred stock purchase agreement (“Stock Purchase Agreement”) with several accredited and institutional investors, pursuant to which the Company agreed to issue and sell in a private placement 1,950 shares of Series A Preferred Stock, as well as 975,000 warrants to purchase the Company’s common stock, at a purchase price of $1,000 per share, for total gross proceeds of $1.95 million (including previous advances from related parties). The warrants have a 5-year term and an exercise price of $2.00. Steven M. Payne converted $100,000, Jerome I. Feldman converted $50,000 and Jim Kilman through KielStrand Capital LLC converted $100,000 advances into preferred stock. Sam Pitroda through Pitroda Group LLC invested $500,000 and the Company issued 500 Series A Preferred Stock and 250,000 warrants, which included in the total Preferred Stock and warrant count described above, on the same terms as other accredited and institutional investors.

The Company has determined that the warrants should be accounted as a component of stockholders’ equity. On the issuance date, the Company estimated the fair value of the warrants at $1.2 million using the Black-Scholes option pricing model using the following primary assumptions: contractual term of 5.0 years, volatility rate of 74.8%, risk-free interest rate of 2.57% and expected dividend rate of 0%. Based on the warrant’s relative fair value to the fair value of the Series A Preferred, approximately $687,000 of the $1.2 million of aggregate fair value was allocated to the warrants, creating a corresponding preferred stock discount in the same amount.

Due to the reduction of allocated proceeds to Series A Preferred, the effective conversion price was approximately $1.13 per share creating a beneficial conversion feature of $956,000 which further reduced the carrying value of the Series A Preferred. Since the conversion option of the Series A Preferred was immediately exercisable, the discounts resulting from the warrants and the beneficial conversion feature were immediately accreted to preferred dividends, resulting in an increase in the carrying value of the Series A Preferred.

On May 17, 2017, the Company entered into a preferred stock purchase agreement (“Stock Purchase Agreement”) with several accredited and institutional investors, pursuant to which the Company agreed to issue and sell in a private placement 1,820 shares of its newly designated Series A Preferred Stock, par value $0.01 per share (“Series A Preferred”), as well as 910,000 warrants to purchase the Company’s common stock, par value $0.01 per share (“Common Stock”), at a purchase price of $1,000 per share, for total gross proceeds of $1.82 million (including previous advances from related parties). The warrants have a 5-year term and an exercise price of $2.00. Steven M. Payne, Jerome I. Feldman and Jim Kilman each converted $50,000 advances into preferred stock.

The Company has determined that the warrants should be accounted as a component of stockholders’ equity. On the issuance date, the Company estimated the fair value of the warrants at $1.1 million using the Black-Scholes option pricing model using the following primary assumptions: contractual term of 5.0 years, volatility rate of 79.8%, risk-free interest rate of 1.76% and expected dividend rate of 0%. Based on the warrant’s relative fair value to the fair value of the Series A Preferred, approximately $649,000 of the $1.1 million of aggregate fair value was allocated to the warrants, creating a corresponding preferred stock discount in the same amount.

Due to the reduction of allocated proceeds to Series A Preferred, the effective conversion price was approximately $1.1 per share creating a beneficial conversion feature of $807,000. Since the conversion option of the Series A Preferred was immediately exercisable, the discounts resulting from the warrants and the beneficial conversion feature were immediately accreted to preferred dividends, resulting in an increase in the carrying value of the Series A Preferred.

During the year ended December 31, 2018, there were 55 shares of preferred stock converted into 31,460 shares of common stock. As of December 31, 2018 and 2017, the dividends accrued and outstanding were $378,000 and $115,000, respectively, and reflected in carrying value of temporary equity.

The Series A Preferred is entitled to accrue cumulative dividends at a rate equal to 10.0% simple interest per annum on the original issue price of $1,000 per share (the “Original Issue Price”). Accrued dividends will be payable quarterly based on a 365-day year and may be paid in cash or in additional shares of Series A Preferred. Each share of Series A Preferred is convertible into 572 shares of Common Stock, subject to customary increases or decreases for stock splits, stock dividends recapitalizations and the like, and may be converted to Common Stock at any time after issuance at the option of a holder. The Company will have the right, at the Company’s option, to redeem all or a portion of the shares of Series A Preferred Stock at any time or times after the one year anniversary of the Issuance Date of such Series A Preferred Stock, at a price per share (the “Redemption Price”) equal to the sum of the following (without duplication): (a) the Original Issue Price, plus (b) any accrued but unpaid Dividends. Upon any liquidation, dissolution or winding up of the Company, liquidation of the Company’s assets will be made in the following order of priority: (a) first, payment or provision for payment of debts and other liabilities; (b) second, payment to the holders of Series A Preferred an amount with respect to each share of Series A Preferred equal to the Original Issue Price, plus any accrued but unpaid Dividends thereon; and (c) third, payment to the holders of Common Stock. Except as required by applicable law or as set forth herein, the holders of shares of Series A Preferred Stock will vote together with the holders of shares of Common Stock and not as a separate class. Each share of Series A Preferred Stock will have a number of votes equal to the number of shares of Common Stock then issuable upon conversion of such share of Series A Preferred Stock.

The Series A Preferred Stock is being classified as temporary equity because it has redemption features that are outside of the Company’s control upon certain triggering events, such as a deemed liquidation event. A “Deemed Liquidation Event” is defined in the Company’s Amended and Restated Certificate of Incorporation as a merger that results in a change in control or the sale of substantially all the assets of the Company. In the case of a Deemed Liquidation Event, the assets of the Company will be paid in order of liquidation preference to the holders of preferred and common stock. Because certain holders of the Series A Preferred Stock constitute a majority of the Company’s Board of Directors, a potential Deemed Liquidation Event is considered to be outside the control of the Company along with the call provision that can be exercised in one year, resulting in classification of the Series A Preferred Stock as temporary equity.