Annual report pursuant to Section 13 and 15(d)

Convertible Notes

v3.8.0.1
Convertible Notes
12 Months Ended
Dec. 31, 2017
Debt Disclosure [Abstract]  
Convertible Notes

10.       Convertible Notes

 

As described more completely under the caption “Interstate Battery Agreements” below in Note 13, the Company issued to Interstate Battery System International, Inc. and its wholly-owned subsidiary (collectively “Interstate Battery”) a convertible note with a face amount of $5.0 million and interest of 11% per annum due May 25, 2019. The note is convertible at $7.12 per share of common stock. The Company allocated the proceeds from the Interstate Battery agreements to the convertible note, common stock and warrants comprising the financing agreements based on the relative fair value of the individual securities on the May 24, 2016 closing date of the agreements. Additionally, the convertible notes contained an embedded conversion feature having intrinsic value at the issuance date, which value the Company treated as an additional discount attributed to the convertible note, subject to limitations on the absolute amount of discount attributable to the convertible notes and its allocated value. The Company recorded a corresponding credit to additional paid-in capital attributable to the beneficial conversion feature (“BCF”). The discounts attributable to the convertible note, an aggregate of $4,975,000, are being amortized using the effective interest method over the three-year term of the note, maturing on May 24, 2019. Because the discount on the convertible note exceeds 99% of its initial face value, and because the discount is amortized over the period from issuance to maturity, the calculated effective interest rate is 184.75% per annum.

 

Interest cost on the note for the years ended December 31, 2017 and 2016 totaled $ 0.6 million and $0.3 million, respectively. Amortization of the note discount for the years ended December 31, 2017 and 2016 totaled $0.4 million and $0.1 million, respectively. Amortization of the deferred financing costs, more fully described in Note 13, totaled $48,000 and $27,000 for the year ended December 31, 2017 and 2016, respectively.

 

The convertible note payable is comprised of the following (in thousands):

 

    December 31,  
    2017     2016  
             
Convertible note payable   $ 5,000     $ 5,000  
Accrued interest     961       343  
Deferred financing costs, net     (67 )     (115 )
Note discount     (4,562 )     (4,921 )
                 
Convertible note payable, non-current portion   $ 1,332     $ 307  

 

As of December 31, 2017, the Interstate Battery convertible note’s “if-converted value” did not exceed its principal amount.

 

Private Placement Convertible notes

 

On October 31, 2014, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with accredited investors (the “Investors”), pursuant to which the Company issued an aggregate of $6.0 million principal amount of senior secured convertible notes (the “Private Placement Convertible Notes”). In connection with the sale of the Private Placement Convertible Notes (the “Bridge Financing”), the Company entered into a registration rights agreement (the “Registration Rights Agreement”) and a security agreement (the “Security Agreement”) with the Investors. The closing of the Bridge Financing was completed October 31, 2014.

 

The principal, $6.0 million, and interest, $0.3 million, of the Private Placement Convertible Notes were converted into 2,511,871 shares of the Company’s common stock at a conversion price of $2.50 per share on August 5, 2015 as part of the Company’s Initial Public Offering (“IPO”).

 

Pursuant to the terms of the Private Placement Convertible Notes, the conversion price was subject to adjustments in the event of an IPO, other financing and upon certain other events. The embedded conversion feature was not clearly and closely related to the host instrument and was bifurcated from the host Convertible Notes as a derivative, principally because the instrument’s variable exercise price terms would not qualify as being indexed to the Company’s own common stock. Accordingly, this conversion feature instrument was classified as a derivative liability in the consolidated balance sheet at December 31, 2014. Derivative liabilities were initially recorded at fair value and were then re-valued at each reporting date, with changes in fair value recognized in earnings during the reporting period.

 

The Company determined that the initial fair value of the embedded conversion option was $0.2 million. From the aggregate principal amount of the Private Placement Convertible Notes of $6.0 million, the Company deducted in full the fair value of the embedded conversion feature and offering costs of $0.8 million as a debt discount. The debt discount was amortized under the effective interest method over the term of the Convertible Notes. Upon completion of the IPO, all remaining unamortized debt discount and BCF were immediately expensed. The amount of issuance cost amortized as interest expense on the statements of operations was $0.9 million for the year ended December 31, 2015.

 

The balance of Private Placement Convertible Notes as of December 31, 2014 was as follows (in thousands):

 

Face value of the Private Placement Convertible Notes   $ 6,000  
Debt discount and value of embedded option, net of amortization     (909 )
Private Placement Convertible Notes, net   $ 5,091  

 

The Company calculated the fair value of the embedded conversion feature of the Private Placement Convertible Notes using the Monte Carlo simulation, with the observable assumptions as provided in the table below. The significant unobservable inputs used in the fair value measurement of the reporting entity’s embedded conversion feature were expected stock prices, levels of trading and liquidity of the Company’s stock. Significant increases in the expected stock prices and expected liquidity would result in a significantly higher fair value measurement. Significant increases in either the probability or severity of default of the host instrument would result in a significantly lower fair value measurement (Aggregate fair value in thousands).

 

    As of     As of  
    October 31,     December 31,  
    2014     2014  
Fair value of stock price on valuation date   $ 1.77     $ 2.18  
High collar   $ 2.50     $ 2.50  
Low collar   $ 1.67     $ 1.67  
Term (years)     0.75       0.58  
Expected volatility     80 %     80 %
Weighted average risk-free interest rate     0.11 %     0.14 %
Trials     50,000       50,000  
Aggregate fair value   $ 212     $ 1,109  

 

The fair value of the embedded conversion feature at the time of the IPO and note conversion into common shares of the Company was $6.3 million. The increase of $5.2 million in fair value of the embedded conversion feature during 2015 until the IPO was recorded as a change in the fair value of derivative liabilities within the statements of operations.

 

On September 8, 2014, the Company entered into an agreement (the “Placement Agent Agreement”) with National Securities Corporation (“NSC”) pursuant to which the Company appointed NSC to act as the Company’s placement agent in connection with the sale of the Company’s securities (“Offering or Offerings”). Specifically, NSC was the placement agent in connection with the sale of its Private Placement Convertible Notes. The Placement Agent Agreement had an initial term of 180 days after which it will continue in effect until it’s terminated by either party with 60 days written notice to the other party.

 

In connection with the sale of the Private Placement Convertible Notes, the Company paid NSC a cash fee of $0.6 million and issued on October 31, 2014 to NSC warrants (“Financing Warrants”) to purchase shares of the Company’s common stock. NSC subsequently transferred a portion of the Financing Warrants to associated persons. The Financing Warrants were fully vested upon issuance, have a term of five years, and are immediately exercisable. The Financing Warrants were exercisable into 251,187 shares of the Company’s common stock assuming an exercise price of $3.00 per share (calculated as 120% of the Private Placement Convertible Notes conversion price of $2.50 per share).

 

The warrant holders have certain registration rights with respect to the common stock issued upon exercise of the Financing Warrants.

 

The Company calculated the fair value of the Financing Warrants using a Black Scholes Merton model with the assumptions provided in the table below. The fair market value of the stock used prior to the IPO was from 409A valuations prepared by an outside consultant.

 

Provided below are the principal assumptions used in the initial and subsequent measurement of the fair values of the Financing Warrants (Warrants fair value in thousands):

 

    10/31/14     12/31/14     8/5/15  
Fair market value of shares   $ 1.77     $ 2.18     $ 5.00  
Assumed exercise price   $ 3.00     $ 3.00     $ 3.00  
Term in years     5       4.84       4.25  
Volatility     80 %     80 %     80 %
Annual rate of dividends     0 %     0 %     0 %
Discount rate     1.62 %     1.65 %     1.55 %
Call option value   $ 0.88     $ 1.14     $ 3.51  
Warrant shares issuable     220,268       220,268       251,187  
Warrants fair value   $ 212     $ 276     $ 881  

 

The initial fair value of the Financing Warrants was accounted for as a derivative issuance cost and along with the other private placement costs was amortized over the life of the Private Placement Convertible Notes. During the year ended December 31, 2015, the Company recorded an increase of $0.6 million in the fair value of the Financing Warrant as a change in the fair value of derivative liabilities within the statements of operations. On August 5, 2015, after the conclusion of the IPO, the financing warrants fair value was fixed and the derivative liability of $0.9 million was reclassified to additional paid-in capital.

 

All of these warrants were exercised via cashless exercises during 2017.