Senior Secured Convertible Notes and Warrants

9 Months Ended

Sep. 30, 2016

Debt Disclosure [Abstract]

Senior Secured Convertible Notes and Warrants

Note 6 — Senior Secured Convertible Notes and Warrants

Concurrent with the consummation of the XTouch acquisition, on April 16, 2015 (the “Effective Date”), and pursuant to a Securities Purchase Agreement, we sold $15 million in Senior Secured Convertible Notes, together with warrants for the purchase of 1,151,121 shares of our common stock (the “Warrants”), to two accredited investors (the “Investors”). In addition, we sold an additional $0.5 million Convertible Note to one of these Investors in November 2015, and the Warrant issued to that Investor was adjusted for an additional 38,371 shares of common stock. The number of shares of common stock subject to the Warrants equaled 65% of the number of shares of common stock the Investors would receive if the Convertible Notes were converted at the Conversion Price (as defined below) on the trading day immediately prior to the Effective Date.

The Convertible Notes accrue simple interest at the rate of 9% per year (“Interest”). On November 23, 2015, the Interest was reduced to 4%. The Convertible Notes together with all accrued and unpaid Interest were due and payable on April 16, 2016 (the “Maturity Date”). The Investors may, at any time, elect to convert the Convertible Notes into shares of our common stock at the conversion price, subject to certain beneficial ownership limitations. The conversion price is the lesser of $8.47 per share (the “Conversion Price”), subject to adjustment as set forth in the Convertible Notes for stock splits, dividends, recapitalizations and similar events, which equaled 110% of the last closing price of our common stock prior to the execution and delivery of the Securities Purchase Agreement and 85% of the lowest closing sale price during the prior 30 trading day period. As of February 16, 2016, the Convertible Note had been fully repaid.

The Warrants when issued had a five-year term and a per share exercise price of $9.63, subject to adjustment as set forth in the Warrants, which equaled 125% of the closing price of our common stock prior to the Effective Date. If, after the Effective Date, we issue or sell, or are deemed to have issued or sold, any shares of common stock (with the exception of certain Excluded Securities, as those are defined in the Warrants) for a consideration per share less than a price equal to the exercise price of the Warrants in effect immediately prior to such issue or sale (or deemed issuance or sale) (a “Dilutive Issuance”), then immediately after the Dilutive Issuance, (x) if the Dilutive Issuance occurs prior to the one year anniversary of the Effective Date, then the exercise price then in effect will be reduced to an amount equal to the product of (A) the exercise price in effect immediately prior to the Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the exercise price in effect immediately prior to the Dilutive Issuance and the number of Common Shares Deemed Outstanding (as defined in the Warrants) immediately prior to the Dilutive Issuance plus (II) the consideration, if any, received by us on such Dilutive Issuance, by (2) the product derived by multiplying (I) the exercise price in effect immediately prior to the Dilutive Issuance by (II) the number of Common Shares Deemed Outstanding immediately after the Dilutive Issuance and (y) if the Dilutive Issuance occurs after the one year anniversary of the Effective Date but within five years of the Effective Date, the exercise price then in effect will be reduced to an amount equal to the price of the shares of common stock issued in the Dilutive Issuance. The Warrants will be exercisable for cash, but if a prospectus covering the shares of common stock underlying the Warrants is not available, the Investors may exercise the Warrants using a cashless exercise provision. The Warrants may not be exercised if, after giving effect to the exercise, the Investor would beneficially own in excess of 4.99% or 9.99% of the outstanding shares of common stock, depending on the Investor. At the Investor’s option, the cap applicable to the exercise of the Warrants may be raised or lowered to any other percentage not in excess of 9.99%, except that any increase will only be effective upon 61-days’ prior notice to us.

As per the terms of the November 2015 equity transaction, the 1,189,492 Warrants were exchanged for new warrants to purchase an equivalent number of shares of common stock in the same form and same terms as the warrants issued in such equity transaction, including a repricing to $1.50 per share exercise price. The exercise price of the Warrants and the number of shares for which the Warrants are exercisable are subject to certain adjustments if the Company issues or sells additional shares of common stock or common stock equivalents at a price per share less than the exercise price then in effect, or without consideration. Notwithstanding the foregoing, there will be no adjustment to the exercise price of the Warrants or number of warrant shares issuable upon exercise in connection with the issuance of common stock upon Board of Director-approved employee benefit plans or upon the conversion, exercise or payment of certain outstanding, excluded securities.

Pursuant to a Pledge and Security Agreement (the “Security Agreement”) we entered into in favor of Hudson Bay Fund LP as Collateral Agent, the Convertible Notes are secured by a perfected first priority security interest in all of our assets and are senior in right of payment to all of our existing and future indebtedness, subject to Permitted Liens, as defined in the Convertible Notes. With the exception of Permitted Liens, we have agreed that we will not grant a security interest in our assets so long as the Convertible Notes remain outstanding and that we will not incur any new debt except for Permitted Indebtedness, as that term is defined in the Convertible Notes.

In conjunction with the issuance of the Convertible Notes and the Warrants, we entered into a Registration Rights Agreement pursuant to which we agreed to file a registration statement covering the sum of (i) 200% of the maximum number of shares underlying the Convertible Notes and (ii) the maximum number of shares underlying the Warrants (the “Registrable Securities”). We have agreed to keep any registration statement we file pursuant to the Registration Rights Agreement effective until the earlier of (i) the date as of which the Investors may sell all of the Registrable Securities covered by the Registration. Statement without restriction or limitation pursuant to Rule 144 and without the requirement to be in compliance with Rule 144(c)(1) (or any successor thereto) or (ii) the date on which the Investors shall have sold all of the securities covered by such Registration Statement.

We were to use our reasonable best efforts to have the registration statement declared effective within 90 days after the Effective Date (the “Registration Statement Effective Date”). If we failed to register the Registrable Securities or the registration statement is not declared effective by the SEC before the Registration Statement Effective Date, or if on any day after the Registration Statement Effective Date, sales of the Registrable Securities required to be included on the Registration Statement cannot be made (collectively, a “Registration Default”), we will pay to each Investor an amount in cash equal to 1% of the aggregate Purchase Price (as that term is defined in the Securities Purchase Agreement) of the Investor’s Registrable Securities, whether or not the Registrable Securities were included in the registration statement, and 1% per month (or a portion thereof pro rata) that the Registration Default continues to exist. We are not required to make these payment if, when a Registration Default occurs, the Investors can freely sell our common stock pursuant to Rule 144 without restriction or limitation. We filed the registration statement within 90 days and therefore did not have to make any payments to the Investors.

Investors in the offering have the right to participate for no less than 35% of any future offering of our equity or equity equivalent securities until the second anniversary of the Effective Date when the Convertible Notes were purchased.

We had agreed to keep at least $6.0 million of restricted cash on our balance sheet at all times until the Maturity Date or until the outstanding principal amount of the Convertible Notes is less than $6.0 million, at which time the amount of restricted cash we are required to keep on our balance sheet will be adjusted downward, dollar for dollar. As of September 30, 2016 and December 31, 2015, the restricted cash was $0 and $4.1 million, respectively.

As additional security for repayment of the Convertible Notes, Uni-Pixel Displays, Inc. entered into to a Guarantee Agreement in favor of the Investors.

Cowen and Company, LLC acted as our financial advisor in the acquisition of the assets and as our placement agent in the financing transaction. We paid Cowen and Company, LLC approximately $1.7 million for these services.

On April 16, 2015, the Company determined that the Convertible Notes had a carrying amount of $3.1 million. The Company utilized a binomial model in determining the fair market value of the Warrants of $6.0 million.

The Company also determined there was a beneficial conversion feature (“BCF”) as a result of the intrinsic value between the effective exercise price and the market price at the time of conversion of $6.0 million. The BCF was included in additional paid in capital. As a result of the down-round protection on the warrants, they have been accounted for as a derivative liability upon issuance and at December 31, 2015.

At inception, the Convertible Notes balance (in thousands) and unamortized discount in millions were as follows:

Convertible notes	$	15,000
Discount attributable to warrants		(5,980	)
Discount attributable to BCF		(5,970	)
Carrying amount of Convertible Notes at inception	$	3,050

As of September 30, 2016, the Investors were issued an aggregate of 13,984,411 shares of common stock on the conversion of $11.6 million of principal and $0.3 million of interest As of September 30, 2016 the convertible note balances were $0.

The following table summarizes the charges to interest, amortization and other expense, net for the nine months ended September 30, 2016 (in thousands):

	September 30, 2016		September 30, 2015
Interest expense on convertible notes	$	9	$	434
Accretion of convertible not discount	$	1,291	$	7,171