Note 7 - Convertible Debt (PIK Notes)

6 Months Ended

12 Months Ended

Jun. 30, 2018

Dec. 31, 2017

Notes to Financial Statements

Convertible Debt [Text Block]

NOTE

7–

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

June 30, 2018,

the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table:

	Series 2023 Notes			Series A Notes			Total
PIK Note Payable, Gross	$	16,152,402		$	27,214,693		$	43,367,095
Less: Discount		(1,453,542	)		(5,488,161	)		(6,941,703	)
Less: Deferred Financing Cost		(201,756	)		(268,436	)		(470,192	)
PIK Note Payable, Net	$	14,497,104		$	21,548,096		$	35,955,200
PIK Note Derivative Liability	$	748,417		$	8,000,101		$	8,748,518

 As of

December 31, 2017,

the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table:

	Series 2023 Notes			Series A Notes			Total
PIK Note Payable, Gross	$	16,090,721		$	26,909,716		$	43,000,437
Less: Discount		(1,538,299	)		(7,701,839	)		(9,240,138	)
Less: Deferred Financing Cost		(221,280	)		(294,414	)		(515,694	)
PIK Note Payable, Net	$	14,331,142		$	18,913,463		$	33,244,605
PIK Note Derivative Liability	$	163,634		$	1,883,630		$	2,047,264

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. 

At

June 30, 2018,

the fair value of the Series A Note Derivative was estimated to be

$8,000,101.

During the

three

and

six

months ended

June 30, 2018,

the Company amortized

$80,142

and

$2,239,656,

respectively of debt discount and deferred financing cost relating to the Series A Notes Payable and issued additional PIK Notes of

$304,977

in lieu of cash interest payments, increasing the Series A Notes Payable carrying value to

$21,458,096

as of

June 30, 2018.

At

December 31, 2017,

the fair value of the Series A Note Derivative was estimated to be

$1,883,630,

which includes the value of the derivative related to the additional PIK Notes issued in

May

and

November 2017

for the semi-annual interest payments due and the additional notes issued in

December, 2017.

During the year ended

December 31, 2017,

the Company amortized

$5,808,294

of debt discount and deferred financing cost relating to the Series A Notes Payable and issued additional PIK Notes in lieu of interest payments of

$2,797,836,

increasing the Series A Notes Payable carrying value to

$26,909,721

as of

December 31, 2017.

As of

June 30, 2018,

the Company was in compliance with the covenants of the Series A Notes.

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. In

February, 2017

and

August, 2017,

the Company issued

$703,550

and

$738,728,

respectively, in additional Series

2023

Notes to the holders to pay the semi-annual interest. Additionally, on

December 14, 2017,

the Company issued

$577,439

of additional

2023

Notes, which represented the accrued interest of the Series

2023

Notes on the day on which the terms of the Series

2023

Notes were effectively amended.

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. 

At

June 30, 2018,

the fair value of the Series

2023

Note Derivative was estimated to be

$748,417,

which includes the value of the derivative related to additional PIK Notes issued in

February 2018.

During the

three

and

six

months ended

June 30, 2018,

the Company amortized

$50,115

 and

$104,281,

respectively of debt discount and deferred financing cost relating to the Series

2023

Notes Payable and issued additional PIK Notes of

$61,681

in lieu of cash interest payments, increasing the Series

2023

Notes Payable carrying value to

$14,497,104

as of

June 30, 2018.

At

December 31, 2017,

the fair value of the Series

2023

Note Derivative was estimated to be

$163,634,

which includes the value of the derivative related to additional PIK Notes issued in

February

and

August 2016

for the semi-annual interest payments due and the additional notes issued in

December, 2017.

During the year ended

December 31, 2017,

the Company amortized

$200,360

of debt discount and deferred financing cost relating to the Series

2023

Notes Payable and issued additional PIK Notes of

$2,019,717

in lieu of cash interest payments, increasing the Series

2023

Notes Payable carrying value to

$16,090,721

as of

December 31, 2017.

As part of the amendment agreement, the holders of the Series

2023

Notes received warrants to purchase

3,720,000

million shares of common stock at

$0.10

per share. The Black Scholes value of these warrants totaled

$224,290.

As of

June 30, 2018,

the Company was in compliance with the covenants of the Series

2023

Notes.

NOTE

8

– 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, 2017,

the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table:

	Series 2023 Notes			Series A Notes			Total
PIK Note Payable, Gross	$	16,090,721		$	26,909,716		$	43,000,437
Less: Discount		(1,538,299	)		(7,701,839	)		(9,240,138	)
Less: Deferred Financing Cost		(221,280	)		(294,414	)		(515,694	)
PIK Note Payable, Net	$	14,331,142		$	18,913,463		$	33,244,605
PIK Note Derivative Liability	$	163,634		$	1,883,630		$	2,047,264

As of

December 31, 2016,

the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table:

	Series 2023 Notes			Series A Notes			Total
PIK Note Payable, Gross	$	14,071,008		$	24,125,958		$	38,196,966
Less: Discount		(1,721,898	)		(13,421,225	)		(15,143,123	)
Less: Deferred Financing Cost		(5,064	)		(8,686	)		(13,750	)
PIK Note Payable, Net	$	12,344,046		$	10,696,047		$	23,040,093
PIK Note Derivative Liability	$	142,909		$	2,033,643		$	2,176,552

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 : May 1, 2023 but extends to August 1, 2023 if the Series 2023 Notes are outstanding.

● Exercise Price : $0.40 per share and will be adjusted from time to time pursuant anti-dilution provisions. 

● Stated Interest : 10% payable semiannually in arrears through December 14, 2017, 3% payable semiannually in arrears thereafter.

● Liquidated Damages : The Company is required to pay the noteholders 1% of the principal amount of the Series A Notes if a Registration statement is not filed and effective within 90 days of the inception date (and further damages for every 30 days thereafter).

● The number of shares issuable under the Notes may be affected by the anti-dilution provisions of the Notes. The antidilition 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.

In

May 2017

and

November 2017,

the Company issued

$1,206,289

and

$1,266,613,

respectively, in additional Series A Notes to the holders to pay the semi-annual interest. Additionally, on

December 14, 2017,

the Company issued

$324,925

of additional Series A Notes, which represented the accrued interest of the Series A Notes on the day on which the terms of the Series A Notes were effectively amended. As part of the amendment agreement, the holders of the Series A Notes received warrants to purchase

6,280,000

million shares of common stock for

$0.10

per share. The Black Scholes value of these warrants totaled

$298,420.

At

December 31, 2017,

the fair value of the Series A Note Derivative was estimated to be

$1,883,630,

which includes the value of the derivative related to the additional PIK Notes issued in

May

and

November 2017

for the semi-annual interest payments due and the additional notes issued in

December, 2017.

During the year ended

December 31, 2017,

the Company amortized

$5,808,294

of debt discount and deferred financing cost relating to the Series A Notes Payable and issued additional PIK Notes in lieu of interest payments of

$2,797,836,

increasing the Series A Notes Payable carrying value to

$26,909,721

as of

December 31, 2017.

At

December 31, 2016,

the fair value of the Series A Note Derivative was estimated to be

$2,033,643,

which includes the value of the derivative related to the additional PIK Notes issued in

May

and

November 2016

for the semi-annual interest payments due. During the year ended

December 31, 2016,

the Company amortized

$2,549,433

of debt discount and deferred financing cost relating to the Series A Notes Payable and issued additional PIK Notes in lieu of interest payments of

$2,243,003,

increasing the Series A Notes Payable carrying value to

$10,696,047

as of

December 31, 2016.

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. In

February, 2017

and

August, 2017,

the Company issued

$703,550

and

$738,728,

respectively, in additional Series

2023

Notes to the holders to pay the semi-annual interest. Additionally, on

December 14, 2017,

the Company issued

$577,439

of additional

2023

Notes, which represented the accrued interest of the Series

2023

Notes on the day on which the terms of the Series

2023

Notes were effectively amended.

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. As of

December 31, 2017,

the Company was in compliance with the covenants.

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.

At

December 31, 2017,

the fair value of the Series

2023

Note Derivative was estimated to be

$163,634,

which includes the value of the derivative related to additional PIK Notes issued in

February

and

August 2016

for the semi-annual interest payments due and the additional notes issued in

December, 2017.

During the year ended

December 31, 2017,

the Company amortized

$200,360

of debt discount and deferred financing cost relating to the Series

2023

Notes Payable and issued additional PIK Notes of

$2,019,717

in lieu of cash interest payments, increasing the Series

2023

Notes Payable carrying value to

$16,090,721

as of

December 31, 2017.

As part of the amendment agreement, the holders of the Series

2023

Notes received warrants to purchase

3,720,000

million shares of common stock for

$0.10

per share. The Black Scholes value of these warrants totaled

$224,290.

At

December 31, 2016,

the fair value of the Series

2023

Note Derivative was estimated to be

$142,909,

which includes the value of the derivative related to additional PIK Notes issued in

February

and

August 2016

for the semi-annual interest payments due. During the year ended

December 31, 2016,

the Company amortized

$154,567

of debt discount and deferred financing cost relating to the Series

2023

Notes Payable and issued additional PIK Notes in lieu of interest payments of

$1,308,192,

increasing the Series

2023

Notes Payable carrying value to

$12,344,046

as of

December 31, 2016.