Quarterly report pursuant to Section 13 or 15(d)

Senior Secured Notes

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Senior Secured Notes
6 Months Ended
Jun. 30, 2018
Debt Disclosure [Abstract]  
SENIOR SECURED NOTES

3 — SENIOR SECURED NOTES

 

Senior Secured Bridge Note

 

Effective May 1, 2017, the Company entered into a senior secured bridge note financing with a third party investment fund (the “Senior Holder”) for the principal sum of $287,500 (the “Senior Secured Bridge Note”) of which $250,000 was received as proceeds and $37,500 was recorded as original issue discount. The interest on the principal amount was at the rate of two percent per annum. The maturity date at issue was November 1, 2017, at which time the principal and accrued and unpaid interest and other fees herein, was due and payable. The Senior Secured Bridge Note was secured by all the assets held by the Company.

 

The Senior Holder had the right to require repayment of 115% of the outstanding principal amount plus interest upon the Company receiving proceeds of $250,000 or more from the sale of its equity (or equivalent securities) or the issuance of debt. The Senior Holder was also entitled to receive warrants, which amounts were based on the above principal sum of $287,500 divided by the equity price sold to investors in the contemplated IPO, as defined with the exercise price equal to the offering price. There were also commitment shares, as defined in the agreement, that were due to the Senior Holder in the amount of $29,000 to be paid on consummation of the contemplated IPO. In the event of default, the full principal amount of $287,500 plus accrued interest would be immediately due and payable; in addition, $25,000 would be due and payable to the Senior Holder for every calendar month the Senior Secured Bridge Note was in default until full payment were made. Because the default provisions required payment of significant penalties in the case of a default event (greater than 10% of the principal), the default provision was determined to be a derivative instrument. Refer to Note 6 for derivative liability disclosure.

 

On October 23, 2017, the Company amended the Senior Secured Bridge Note. Pursuant to the amendment, the Holder agreed to accept on the Maturity Date, which was extended to December 4, 2017, payment by the Company the sum of $349,900 in full and complete satisfaction of the principal sum of the Senior Secured Bridge Note and all accrued and unpaid interest thereon. The amendment was accounted for as debt extinguishment, and the remaining debt discount was written off and recorded as interest expense.

 

On November 20, 2017, the Senior Secured Bridge Note was further amended, extending the maturity date to February 5, 2018, the Senior Holder agreeing to accept $375,000 in full and complete satisfaction of the principal sum of the Senior Secured Bridge Note and all accrued and unpaid interest thereon. The amendment was accounted for as debt modification, and the new debt discount was added to the remaining unamortized debt discount at the date of the amendment.

 

On February 22, 2018, the Company executed an agreement to settle in full the outstanding Senior Bridge Note. Under the terms of this agreement, the Company paid $150,000 cash at time of execution of the settlement and is to pay an additional cash payment of $100,000 at the earlier of the Next Financing or at the same time and in equal amount (up to a maximum of $100,000) as payments are made to MVA under the senior secured note held by MVA (see below). Failure to make the payment in full at the time of the Next Financing or of payments to MVA will render the settlement agreement null and void. In addition, at such time as the Company completes the Next Financing, the Company agreed to issue (i) warrants to purchase a number of shares of the Company’s common stock equal to $325,000 divided by the price per share of the Next Financing; and (ii) a number of shares of the Company’s common stock equal to $50,000 divided by the price per unit of the Next Financing. The warrants are to have an exercise price equal to the price per share of the Next Financing and a term of two years. The remaining debt discount of $23,363 was amortized to interest expense through February 5, 2018. As a result of this settlement, classified as a troubled debt restructuring, the Company deferred any extinguishment gain recognition as such settlement agreement is null and void if remaining agreed payments which are contingent upon a financing are not made.

 

On July 31, 2018, on completion of the IPO and as required under the terms of the settlement agreement, the Company made a cash payment of $100,000 and issued shares of stock and warrants to the Senior Holder, as a result of which the Company’s obligations under the settlement agreement were fully satisfied (see Note 11).

  

Senior Secured Notes (Related Parties $470,000)

 

On February 22, 2018 and March 1, 2018, the Company entered Security Purchase Agreements to issue Secured Notes (the “Secured Notes”) to a number of Company directors and a consultant in the aggregate principal amount of $510,000. The Secured Notes rank pari passu with respect to seniority to one another, senior to all other debt, and secured against all assets of the Company. The Secured Notes matured on July 1, 2018 and bore 18% interest, payable at maturity or at the time of the Company’s next equity or debt, including, without limitation, an IPO or a change of control of us. In the event of default, the outstanding principal and accrued interest will become due and payable, and the interest rate was to increase to 24.99%. Additionally, the Company has the option to extend the due date of the Secured Notes upon payment of the extension fee of 25% of the principal amount for extension to the fifth month anniversary of the issue date, payment of an additional 35% of the principal amount for extension to the sixth month anniversary of the issue date, and payment of an additional 35% of the principal amount for extension to the seventh month anniversary of the issue date.

 

Additionally, upon the consummation by the Company of any debt or equity financing in the amount of $2 million or more (the “Next Financing”), the Company agreed to issue holders of the Secured Notes (i) warrants to purchase the securities offered in the Next Financing, such aggregate number of securities to be equal to 400% of the aggregate principal amount of the Secured Notes divided by the price per security of the Next Financing; and (ii) an aggregate number of the securities offered equal to 400% of the of the aggregate principal amount of the Secured Notes divided by the price per security of the Next Financing Secured Notes. The warrants to be issued are to have an exercise price equal to the price per security of the Next Financing and a term of five years. The Secured Notes were issued for $100,000 in debt exchanged for subordinated notes, with the remaining amount of cash proceeds received.

 

In the offering as contemplated by the Company as of June 30, 2018, the securities offered were to be a unit that consists of a share of common stock and a warrant to purchase a share of common stock at 125% of the offering price of the unit. Holders of the Secured Notes, therefor, were to be issued units and warrants to purchase units in the numbers described above.

 

On June 8, 2018, the Secured Notes were amended, extending the maturity date to August 1, 2018. In addition to the extension of term, the extension fees were changed as follows: the extension fee for extension to the fifth month anniversary of the issue date was eliminated, the fee for extension to the sixth month anniversary of the issue date was made 99.4% of the principal amount, and the fee for extension to the seventh month anniversary of the issue date was made an additional 46.3% of the principal amount.

 

At June 30, 2018 the balance of the Secured Notes was $510,000. For the six months ended June 30, 2018, interest expense on the Secured Notes was $30,255.

 

On July 31, 2018, upon the consummation of the IPO and as required by the terms of the Secured Notes, the principal and interest outstanding of the Secured Notes was paid in full and shares of stock and warrants were issued the to the holders, as a result of which the obligation of the Company with respect to Senior Secured Notes were fully satisfied (see Note 11).

 

Senior Note

 

On June 3, 2018, the Company entered into a Security Purchase Agreement pursuant to which it issued a senior secured note in the principal amount of $325,000 to one accredited institutional investor (the “June 2018 Senior Note”). The June 2018 Senior Note ranked pari passu with respect to seniority as to payment with the $510,000 in outstanding other Secured Notes issued by the Company in February and March 2018, senior as to payment as to all other outstanding debt and is secured by a lien on substantially all of the Company’s assets. (With the payment in full of the other Senior Notes on July 31, 2018, the June 2018 Senior Note is senior as to payment with respect to all remaining debt.) The June 2018 Senior Note was issued at an original issue discount of 15.4%, or $50,000, does not bear interest and is payable on March 5, 2019 or upon an earlier event of default, including, without limitation, a change of control of the Company.

 

The June 2018 Senior Note is convertible into shares of our common stock at a conversion price of $2.00 per share, subject to adjustment for certain dilutive issuances. Additionally, in the event of the consummation by the Company of a Dilutive Financing (defined as any debt or equity financing in the amount of $2,000,000 or more, at a price of less than $4.00 per share of common stock), the Company has agreed to reduce the conversion price then in effect to a price equal to 50% of the per share price of the common stock issued in the Dilutive Financing. The Company also issued to the investor a warrant to purchase 300,000 shares of our common stock exercisable at $3.75 per share which will be exercisable for a term of five years. The warrant further provides that in the event our next financing of $2,000,000 or more includes the issuance of more than one warrant with each share of common stock sold in such next financing, then, the number of shares of common stock issuable under the warrant will be equal to 300,000 multiplied by the number of warrants sold with the common stock in the next offering. As a result, if the next financing were to include two warrants issued for each share issued, then the number warrant shares would be adjusted to be 600,000. Any such adjustment would not change the warrant exercise price. The lender has agreed to be subject to the underwriter’s six month lockup, post-IPO. At the time of the issuance of the note, the Company discounted the principal by $222,950 for the relative value of the warrants issued and $52,050 for the relative value of the beneficial conversion feature, for total additional paid in capital of $275,000, which was the entire cash value of the Note at issuance.

 

At June 30, 2018 the balance of the June 2018 Secured Note was $28,676, net of discounts of $296,324. For the six months ended June 30, 2018, amortization of discounts on the June 2018 Secured Note was $28,676.

 

Upon closing of the IPO on July 31, 2018, which was the next financing under the warrant issued pursuant to the Senior Note, the number of warrant shares issuable under the warrant became fixed at 300,000.