Quarterly report pursuant to Section 13 or 15(d)

Convertible Senior Notes Payable

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Convertible Senior Notes Payable
9 Months Ended
Sep. 30, 2018
Convertible Senior Notes Payable [Abstract]  
Convertible Senior Notes Payable

Note 8—Convertible Senior Notes Payable

 

Convertible Senior Notes payable consisted of the following as of September 30, 2018:

 

    Principal    

Debt

Discount

    Offering Costs    

Net

Total

 
Balance, December 31, 2017   $ 10,687,000       (4,448,000 )     (245,000 )     5,994,000  
Amortization of debt discount and offering costs           6,027,000       231,000       6,258,000  
2018 convertible senior secured notes issuance     1,328,000       (625,000 )     (76,000 )     627,000  
Discount for additional beneficial conversion feature           (4,167,000 )           (4,167,000 )
Conversion into common shares     (25,000 )     11,000             (14,000 )
Balance, September 30, 2018     11,990,000       (3,202,000 )     (90,000 )     8,698,000  
Less: current portion     (11,990,000 )     3,202,000       90,000       (8,698,000 )
Long term portion   $     $     $     $  

 

On January 25, 2018, the Company and certain investors agreed to further amend and restate the securities purchase agreement under which such investors purchased unregistered convertible senior secured promissory notes in September, November and December 2017 in aggregate principal amount of approximately $1,555,556 (the “2017 Senior Notes”), pursuant to which the Company agreed to issue to certain accredited investors, pursuant to a series of joinder agreements, additional unregistered convertible senior secured promissory notes in aggregate principal amount of approximately $555,556 (the “2018 Senior Notes”) and five-year warrants to purchase an aggregate of 222,219 shares of common stock at an exercise price of $1.50 per share, with aggregate gross proceeds to the Company of $465,000 and cancellation of indebtedness of $35,000. The closing of the first 2018 Senior Notes financing occurred on January 25, 2018.

 

On March 26, 2018, the Company and certain investors agreed to further amend and restate the securities purchase agreement under which such investors purchased the 2017 Senior Notes and 2018 Senior Notes, pursuant to which the Company agreed to issue to certain accredited investors, pursuant to a series of joinder agreements, additional 2018 Senior Notes in principal amount of approximately $333,335 and five-year warrants to purchase an aggregate of 133,332 shares of common stock at an exercise price of $1.50 per share, with aggregate cash gross proceeds to the Company of approximately $200,000 and cancellation of indebtedness of approximately $100,000, which consists of earned and unpaid salary due to certain employees of the Company who elected to receive payment in the form of 2018 Senior Notes in lieu of cash. The closing of the second 2018 Senior Notes financing occurred on March 26, 2018.

 

On June 5, 2018, the Company entered into a securities purchase agreement pursuant to which it issued convertible senior secured promissory notes in the aggregate principal amount of approximately $439,444 (the “June 2018 Senior Notes”) and related warrants to purchase an aggregate of 878,889 shares of common stock at an exercise price of $0.30 per share, with aggregate cash gross proceeds to the Company of approximately $394,500. The June 2018 Senior Notes are convertible into shares of common stock at a price of $0.25 per share. The June 2018 Senior Notes rank pari passu with the 2018 Senior Notes, 2017 Senior Notes, 2016 Senior Notes (as defined below) and 2015 Senior Notes (as defined below). The closing of the June 2018 Senior Notes financing occurred on June 5, 2018.  

 

During the nine months ended September 30, 2018, one holder of 2016 Senior Notes converted an aggregate of $25,000 of principal outstanding under such 2016 Senior Notes into 100,000 shares of common stock. As a result of this conversion, the Company recorded a loss of $11,000, representing the unamortized debt discount and deferred financing fees associated with the 2016 Senior Notes converted.

 

Concurrent with the closing of our debt financing on June 5, 2018, pursuant to which certain investors purchased unregistered convertible senior secured promissory notes in aggregate principal amount of approximately $439,444, the Company and certain investors agreed to amend certain outstanding Senior Notes (as defined below) to reduce the conversion price of such Senior Notes from $2.50 per share of common stock to $0.25 per share of common stock, which conversion price was $0.10 lower than the closing price of the Company’s common stock on such date. We evaluated the conversion price adjustment to determine whether the change should be recorded as a debt extinguishment or a modification of terms and determined that the price adjustment should be accounted for as a modification. The intrinsic value, $0.10 per share of common stock, resulted in an additional beneficial conversion feature for the remaining Senior Notes of $4,167,000. This additional beneficial conversion feature was recorded as an additional Senior Notes discount and will be amortized ratably over the remaining life of the Senior Notes.

 

We incurred $76,000 of offering costs in conjunction with the issuance and sale of the 2018 Senior Notes consisting of legal and professional fees. We will amortize the offering costs to interest expense over the expected remaining life of the 2018 Senior Notes.

  

The Company refers to the June 2018 Senior Notes, 2018 Senior Notes, the 2017 Senior Notes, the convertible senior secured promissory notes in the fourth quarter of 2016 (the “2016 Senior Notes”) and the amended and restated convertible senior secured promissory notes originally issued in April and May 2015 (the “2015 Senior Notes”), collectively, as the “Senior Notes”. The Senior Notes are fully secured by all assets of the Company and the Company’s subsidiaries.

  

Upon an Event of Default, the Senior Notes will bear interest at a rate of 10% per annum. The Senior Notes will mature on December 31, 2018 and rank senior to the convertible unsecured notes issued in September 2016 (the “Convertible Unsecured Notes”). The Senior Notes are convertible at the option of the holder into the Company’s common stock at an exercise price of $0.25 (as subject to adjustment therein) and will automatically convert into shares of the Company’s common stock on the fifth trading day immediately following the issuance date of the Senior Notes on which (i) the Weighted Average Price (as defined in the Senior Notes) of the Company’s common stock for each trading day during a twenty trading day period equals or exceeds $5.00 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction) and no Equity Conditions Failure (as defined in the Senior Notes) has occurred. The Senior Notes also contain a blocker provision that prevents the Company from effecting a conversion in the event that the holder, together with certain affiliated parties, would beneficially own in excess of either 4.99% or 9.99%, with such threshold determined by the holder prior to issuance, of the shares of the Company’s common stock outstanding immediately after giving effect to such conversion.

 

Upon an Event of Default and delivery to the holder of the Senior Note of notice thereof, such holder may require the Company to redeem all or any portion of its Senior Note at a price equal to 115% of the Conversion Amount (as defined in the Senior Notes) being redeemed. Additionally, upon a Change of Control and delivery to the holder of the Senior Note of notice thereof, such holder may also require the Company to redeem all or any portion of its Senior Note at a price equal to 115% of the Conversion Amount being redeemed. Further, at any time from and after January 1, 2019 and provided that the Company has not received either (i) initial deposits for at least eight 2 MW Power Oxidizer units or (ii) firm purchase orders totaling not less than $3,500,000 and initial payment collections of at least $1,600,000, in each case during the period commencing on the issuance date of the 2016 Senior Notes and ending on December 31, 2018, the holder of the Senior Note may require the Company to redeem all or any portion of its Senior Note at a price equal to 100% of the Conversion Amount being redeemed.

 

At any time after the issuance date of the Senior Notes, the Company may redeem all or any portion of the then outstanding principal and accrued and unpaid interest with respect to such principal, at 100% of such aggregate amount; provided, however, that the aggregate Conversion Amount to be redeemed pursuant to all Senior Notes must be at least $500,000, or such lesser amount as is then outstanding. The portion of the Senior Note(s) to be redeemed shall be redeemed at a price equal to the greater of (i) 110% of the Conversion Amount of the Senior Note being redeemed and (ii) the product of (A) the Conversion Amount being redeemed and (B) the quotient determined by dividing (I) the greatest Weighted Average Price (as defined in the Senior Notes) of the shares of the Company’s common stock during the period beginning on the date immediately preceding the date of the notice of such redemption by the Company and ending on the date on which the redemption by the Company occurs by (II) the lowest Conversion Price (as defined in the Senior Notes) in effect during such period.

 

The Senior Notes contain a provision that prevents the Company from entering into or becoming party to a Fundamental Transaction (as defined in the Senior Notes) unless the Company’s successor entity assumes all of the Company’s obligations under the Senior Notes and the related transaction documents (the “Transaction Documents”) pursuant to written agreements in form and substance satisfactory to at least a certain number of holders of the Senior Notes.

 

In connection with foregoing, Ener-Core Power, Inc., the Company’s wholly-owned subsidiary, entered into a Guaranty, pursuant to which it agreed to guarantee all of the obligations of the Company under the securities purchase agreements for the Senior Notes and the Transaction Documents.