|9 Months Ended|
Sep. 30, 2020
NOTE 10 – DEBENTURES PAYABLE
In a series of transactions from the period October 2018 through February 2020, the Company sold an aggregate of $21.0 million of convertible debentures (the “$21M Debentures”) to an accredited investor pursuant to an amended securities purchase agreement (the “SPA”). The following table summarizes the purchase dates and selected terms of each debenture transaction that comprises the $21M Debentures:
SCHEDULE OF DEBENTURE TRANSACTION
The holder of the $21M Debentures (the “Holder”) has the right at any time to convert all or a portion of the $21M Debentures, along with accrued and unpaid interest, into the Company’s common stock at conversion prices equal to 80% of a calculated average, as determined in accordance with the terms of the $21M Debentures, of the daily volume-weighted price during the ten consecutive trading days preceding the date of conversion, subject to a cap in certain conversions. Notwithstanding this conversion right, the Holder shall limit conversions in any given month to certain agreed-upon amounts based on the conversion price, and the Holder shall also be limited from beneficially owning more than 4.99% of the Company’s outstanding common stock (potentially further limiting the Holder’s conversion right).
The Company has the right to redeem all or a portion of the $21M Debentures, along with accrued and unpaid interest, at a 10% premium, provided that the Company first delivers advance written notice to the Holder of its intention to make a redemption, with the Holder allowed to effect certain conversions of the $21M Debentures during such notice period.
Upon a change in control transaction, as defined, the Holder may require the Company to redeem all or a portion of the $21M Debentures at a price equal to 110% of the outstanding principal amount of the $21M Debentures, plus all accrued and unpaid interest thereon. So long as the $21M Debentures are outstanding, in the event the Company enters into a Variable Rate Transaction (“VRT”), as defined in the SPA, the Holder may cause the Company to revise the terms of the $21M Debentures to match the terms of the convertible security issued in such VRT.
In conjunction with the issuance of the $21M Debentures, the Company issued the Holder three-year warrants to purchase an aggregate of 1,354,675 shares of the Company’s common stock at exercise prices ranging from $0.75 to $5.50 per share, of which warrants to purchase 180,000 shares of common stock at an exercise price of $0.75 were issued in the nine months ended September 30, 2020. The fair value of the warrants of approximately $2.2 million was recorded as a discount to the carrying amount of the $21M Debentures and are amortized to interest expense over the respective term of the individual debentures comprising the $21M Debentures.
Based on the conversion prices of the $21M Debentures in relation to the market value of the Company’s common stock, the $21M Debentures provided the Holder with a beneficial conversion feature, as the embedded conversion option was in-the-money on the commitment date. The aggregate intrinsic value of the beneficial conversion feature of approximately $10.2 million was recorded as a discount to the carrying amount of the $21M Debentures, with an offset to additional paid-in-capital. The beneficial conversion feature is amortized to interest expense over the respective term of the individual debentures comprising the $21M Debentures.
Pursuant to the terms of a registration rights agreement with the Holder, entered into concurrently with the SPA, the Company agreed to provide the Holder with certain registration rights with respect to any potential shares issued pursuant to the terms of the SPA and the $21M Debentures. An addendum to the SPA stipulates that the Holder has agreed not to undertake a conversion of all or a portion of the $21M Debentures that would require the Company to issue more shares than the amount of available authorized shares at the time of conversion, which amount of authorized shares shall not be less than the , thereby eliminating the requirement to bifurcate and account for the conversion feature of the $21M Debentures as a derivative.
The Holder converted, in several transactions from November 2018 through September 2020, an aggregate of $16.8 million of principal and approximately $768,000 of accrued interest into shares of common stock at conversion prices ranging from $0.11 to $3.06 per share. Of these conversions, an aggregate of $6.8 million of principal and approximately $356,000 of accrued interest was converted into shares of common stock at exercise prices of $0.11 and $0.34 per share during the nine months ended September 30, 2020.
All of the aforementioned conversions were performed in accordance with the terms of their respective convertible debenture agreements, and therefore the Company was not required to record a gain or loss on such conversions.
During the nine months ended September 30, 2020 and 2019, amortization of the beneficial conversion features, after adjustment for the aforementioned conversions, approximated $2,553,000 and $4,646,000, respectively; amortization of the warrant discounts approximated $545,000 and $913,000 respectively; and the amortization of original issue discounts approximated $267,000 and $107,000, respectively. Additionally, accrued interest expense for such periods approximated $234,000 and $421,000, respectively.
At September 30, 2020, the aggregate outstanding principal balance of the $21M Debentures was $4,200,000. Also on such date, the unamortized balances of the beneficial conversion features, the warrant discounts, and original issue discounts were approximately $867,000, $300,000, and $105,000, respectively. Accordingly, at September 30, 2020, the carrying value of the $21M Debentures was approximately $2,928,000, all of which was current.
At December 31, 2019, the aggregate outstanding principal balance on the $21M Debentures was $10,000,000. Also on such date, the unamortized balances of the beneficial conversion features, the warrant discounts, and original issue discounts were approximately $3,041,000, $817,000, and $307,000, respectively. Accordingly, at December 31, 2019, the carrying value of the $21M Debentures was approximately $5,835,000, all of which was long term.