|3 Months Ended|
Mar. 31, 2020
On January 23, 2020, we entered into a funding agreement, as amended (the "Funding Agreement"), which provided for the issuance to an unaffiliated accredited investor of a convertible promissory note in the principal amount of $111,100, reflecting a 10% original issue discount, 500 shares of our common stock and a five-year warrant exercisable for 7,936 shares of our common stock at an exercise price of $9.80 per share in consideration for $100,000, which was funded on January 24, 2020. The Funding Agreement, was due 45 days from execution of the Funding Agreement, or March 9, 2020, and the investor was granted a most favored nation right. On March 31, 2020, the outstanding debt owed to such investor pursuant to the Funding Agreement was fully repaid. During the three months ended March 31, 2020, the Company recognized $20,000 of interest expense from amortization of debt discounts.
Convertible Promissory Note
On March 30, 2020, the Company completed a private placement (the "March 2020 Private Placement") of a senior secured convertible instrument in the principal amount of $2,040,000 (the "March 2020 Note") and a warrant (the "March 2020 Warrant") to purchase 227,679 shares of common stock at an exercise price of $6.40 per share, pursuant to which Maxim Group LLC, the representative of the underwriters in this offering ("Maxim"), acted as placement agent. The March 2020 Note and March 2020 Warrant were issued pursuant to a securities purchase agreement, entered into as of March 22, 2020 (the "March 2020 Purchase Agreement") by and between the Company and an institutional investor (the "Investor"). The March 2020 Private Placement resulted in gross proceeds of $1,700,000, before fees and other expenses associated with the transaction, including but not limited to, an $85,000 commitment fee payable to the Investor. Additionally, the Company agreed to issue to Maxim a warrant to purchase up to an aggregate of 20,400 shares of common stock, subject to adjustment, as partial consideration for serving as placement agent in connection with the March 2020 Private Placement.
The March 2020 Note ranks senior to the Company's existing and future indebtedness and is secured to the extent and as provided in the Security Agreements entered into between the Investor and each of the Company and its wholly-owned subsidiary, in connection with the March 2020 Private Placement. The March 2020 Note is convertible in whole or in part at the option of the Investor into shares of common stock (the "Conversion Shares") at the Conversion Price (as defined below) at any time following the earlier of (i) 60 days from execution of the Purchase Agreement and (ii) the date on which a registration statement covering the shares of common stock underlying each of the March 2020 Note and the related warrant is declared effective by the U.S. Securities and Exchange Commission (the "SEC"); however, if the Company enters into an underwriting agreement within 45 days of the date on which the March 2020 Note was issued in connection with an underwritten offering that closes within 45 days of the execution of the Purchase Agreement, the Investor may not convert the March 2020 Note prior to the 61st day after the date on which such underwriting agreement was executed.
The March 2020 Note defines "Conversion Price" as equal to the lesser of (a) 90% of the average of the five lowest daily VWAPs during the previous twenty trading days prior to delivery to the Company of the Investor's applicable notice of conversion (the "Conversion Notice") and (b) $6.40 (the "Base Conversion Price"). The Base Conversion Price is subject to full ratchet antidilution protection, subject to certain price limitations required by the rules and regulations of the Nasdaq Stock Market ("Nasdaq") and certain exceptions, upon any subsequent transaction at a price lower than the Base Conversion Price then in effect and standard adjustments in the event of stock dividends, stock splits, combinations or similar events. Additionally, upon three days' written notice to the holder after receipt of a Conversion Notice, in lieu of delivering Conversion Shares, the Company has the right to pay the Investor in cash an amount equal to 103% of the portion of the outstanding principal amount stated in such Conversion Notice. Further, at the Investor's option, the March 2020 Note is convertible into shares of common stock or redeemable for 103% of the portion of the outstanding principal amount to be converted in the event that any transaction causes the Conversion Price to be lower than as required by Nasdaq rules and regulations. Subject to certain exceptions, commencing on the Conversion Trigger Date and for a nine-month period after such date, the Investor may convert only up to an aggregate of $102,000 in outstanding principal amount during any calendar month.
At any time after issuance of the March 2020 Note, the Company may repay all (but not less than all) of the outstanding principal amount of the March 2020 Note upon ten days' written notice to the Investor (the "Prepayment Notice"). If the Company exercises its right to prepay the March 2020 Note, the Investor shall have the right, upon five days written notice to the Company after receipt of the Prepayment Notice, to convert up to 33% of the principal amount of the March 2020 Note at the Conversion Price. The Investor also has the right to make the Company repay 105% of the outstanding principal amount of the March 2020 Note in the event of a Change of Control (as defined in the Purchase Agreement).
At any time after the closing date of the March 2020 Private Placement, in the event that the Company issues or sells any shares of common stock or common stock equivalents (as defined in the March 2020 Note), subject to certain exceptions, at an effective price lower than the Base Conversion Price then in effect or without consideration, then the Base Conversion Price shall be reduced to the price per share paid for such shares of common stock or common stock equivalents.
In connection with the March 2020 Note, the Company issued warrants to investors and Maxim to purchase common shares of 227,679 and 20,400, respectively (see Note 6 – Convertible Preferred Stock and Stockholders’ Equity (Deficit) for fair value computation). The sum of the fair value of the warrants, the original issue discount for interest and issuance costs for the March 2020 Notes were recorded as debt discounts to be amortized to interest expense over the respective term using the effective interest method. During the three months ended March 31, 2020, the Company recognized $17,000 of interest expense from the amortization of debt discounts.
The March 2020 Note contains several embedded conversion features. The Company determined that there was no significant value for the embedded conversion features as the underlying events to trigger the conversion features were not likely to occur. The Company did not record any embedded conversion liability related to the March 2020 Note.
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