Quarterly report pursuant to Section 13 or 15(d)

Mezzanine Equity and Series D Convertible Preferred Stock

v3.20.1
Mezzanine Equity and Series D Convertible Preferred Stock
3 Months Ended
Mar. 31, 2020
Temporary Equity Disclosure [Abstract]  
Mezzanine Equity and Series D Convertible Preferred Stock

Note 14- Mezzanine Equity and Series D Convertible Preferred Stock

 

Series D Convertible preferred Stock

 

On November 15, 2019, the Company entered into a securities purchase agreement with selected accredited investors whereby the Company offered (i) up to 238,871 shares of Series D Convertible Preferred Stock the (“Series D Shares”) at a price of $40.817 per share and (ii) a ten-year warrant (the “Series D Warrant”) to purchase 14,669,757 shares of common stock. The Series D Warrants are exercisable for a period of 10 years from issuance at an initial exercise price of $0.75 per share, subject to adjustment for traditional equity restructurings and reorganizations.

 

On November 21,2019, the Company entered into a securities purchase agreement with FWHC HOLDINGS, LLC (“FWHC”) an accredited investor for the purchase of 146,998 shares of Series D Preferred Stock, par value $0.001 per share and the Series D Warrant resulting in $6.0 million in gross proceeds to the Company (the “FWHC Investment”). For further discussion of the Series D Shares, refer to Note 14 - “Mezzanine Equity and Series D Convertible Preferred Stock” on the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2019.

 

The Company determined that the nature of the Series D Shares was more analogous to an equity instrument, and that the economic characteristics and risks of the embedded conversion option was clearly and closely related to the Series D Shares. As such, the conversion option was not required to be bifurcated from the host under ASC 815, Derivatives and Hedging. The Company recognized a beneficial conversion feature related to the Series D Shares of approximately $623,000, which was credited to additional paid-in capital, and reduced the income available to common shareholders. Because the Series D Shares can immediately be converted by the holder, the beneficial conversion feature was immediately accreted and recognized as a deemed dividend to the preferred shareholders. Since the Series D Shares are redeemable in certain circumstances upon the occurrence of an event that is not solely within the Company’s control, they have been classified as mezzanine equity in the Consolidated Balance Sheets.

 

The Company determined that the economic characteristics and risks of the embedded redemption provision were not clearly and closely related to the Series D Shares. The Company assessed the embedded redemption provision further, and determined it met the definition of a derivative and required classification as a derivative liability at fair value. The redemption put liability as of March 31, 2020 and December 31, 2019, was approximately $79,000 and $267,000, respectively.

 

The Company’s approach to the allocation of the proceeds to the financial instruments was to first allocate basis to the redemption put liability at its fair values and the residual to the Series D Shares and the Series D Warrants. Based upon the amount allocated to the Series D Shares the Company was required to determine if a beneficial conversion feature (“BCF”) was present. A BCF represents the intrinsic value in the convertible instrument, adjusted for amounts allocated to other financial instruments issued in the financing. The effective conversion price is calculated as the amount allocated to the convertible instrument divided by the number of shares to which it is indexed. However, a BCF is limited to the basis initially allocated. After allocating a portion of the proceeds to the other instruments, the effective conversion price was $0.24 compared to the share price of $0.28, resulting in a BCF of $623,045 or $0.04 per share.

 

Based upon the above accounting conclusions and the additional information provided below, the allocation of the proceeds arising from the Series D Preferred financing transaction is summarized in the table below:

 

November 21, 2019 Series D Convertible Preferred and warrant financing:   Proceeds Allocation     Financing Cost Allocation     Total Allocation  
Gross proceeds   $ 6,000,000     $     $ 6,000,000  
Financing costs paid in cash           (111,983 )     (111,983 )
    $ 6,000,000     $ (111,983 )   $ 5,888,017  
                         
Derivative Liability:                        
Derivative Put Liability   $ (614,095 )   $     $ (614,095 )
Deferred Financing costs           8,100       8,100  
                         
Redeemable preferred stock:                        
Series D Convertible Preferred Stock     (2,869,854 )           (2,869,854 )
Financing costs (APIC)           1,106       1,106  
Financing costs (Retained Earnings)           66,265       66,265  
Beneficial Conversion Feature     (623,045 )           (623,045 )
                         
Investor Warrants (equity classified):                        
Proceeds allocation     (1,893,006 )           (1,893,006 )
Financing costs (APIC)           36,512       36,512  
    $ (6,000,000 )   $ 111,983     $ (5,888,017 )

 

Since the Series D Convertible Preferred Stock is perpetual and convertible at any time, the resulting discount of $3,130,146 was accreted as a Preferred Stock dividend on the date of issuance to record the Series D Convertible Preferred Stock to its redemption value of $6,000,000.

 

On January 17, 2020, the Company entered into a securities purchase agreement with an accredited investor for the purchase of 2,450 shares of Series D Preferred Stock, par value $0.001 per share and a Series D Warrant resulting in $100,000 in gross proceeds to the Company. The Series D Preferred Stock and Warrants had the same terms as the FWHC Investment. There was no BCF associated with this financing because the effective conversion price after allocating a portion of the proceeds to the other instruments was higher than the share price.

 

January 17, 2020 Series D Convertible Preferred and warrant financing:   Proceeds Allocation  
Gross proceeds   $ 100,000  
Financing costs paid in cash      
    $ 100,000  
         
Derivative Liability:        
Derivative Put Liability   $ (5,305 )
         
Redeemable preferred stock:        
Series D Convertible Preferred Stock     (62,793 )
         
Investor Warrants (equity classified):        
Proceeds allocation     (31,902 )
         
    $ (100,000 )

 

Since the Series D Convertible Preferred Stock is perpetual and convertible at any time, the resulting discount of $37,207 was accreted as a Preferred Stock dividend on the date of issuance to record the Series D Convertible Preferred Stock to its redemption value of $100,000.

 

For the three months ended March 31, 2020, the Company recorded $158,147 in deemed dividends on the Series D Convertible Preferred stock in accordance with the 8% stated dividend resulting in a total balance of Series D Convertible Preferred stock of $6,281,433 at March 31, 2020.

 

Series D CONVERTIBLE Preferred Stock Preferences

 

Voting Rights

 

Holders of our Series D Preferred Stock (“Series D Holders”) have the right to receive notice of any meeting of holders of common stock or Series D Preferred Stock and to vote upon any matter submitted to a vote of the holders of common stock or Series D Preferred Stock. Each Series D Holder shall vote on each matter submitted to them with the holders of common stock.

 

Liquidation

 

Upon the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, each Series D Holder shall be entitled to receive, for each share thereof, out of assets of the Company legally available therefore, a preferential amount in cash equal to the stated value plus all accrued and unpaid dividends. All preferential amounts to be paid to the Series D Holders in connection with such liquidation, dissolution or winding up shall be paid before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Company’s to the holders of the Company’s Series B and common stock. The Company accrues these dividends as they are earned each period.