• Filing Date: 2018-05-15
  • Form Type: 10-Q
  • Description: Quarterly report
v3.8.0.1
PREFERRED STOCK AND DETACHABLE WARRANTS
3 Months Ended
Mar. 31, 2018
Equity [Abstract]  
PREFERRED STOCK AND DETACHABLE WARRANTS
PREFERRED STOCK AND DETACHABLE WARRANTS

The total number of authorized shares of the Company’s preferred stock is 50,000,000 shares, $0.001 par value per share. The total number of designated shares of the Company’s Series A Convertible Preferred Stock is 5,000,000 (“Series A Preferred”). The total number of designated shares of the Company’s Series B Convertible Preferred Stock is 10,000,000. The total number of designated shares of the Company’s Series B1 Convertible Preferred Stock is 17,000,000. The number of designated shares of the Company's Series C Convertible Preferred Stock is 44,000. As of March 31, 2018 and December 31, 2017, there were 453,567 shares and 453,567 shares of Series A Preferred Stock issued and outstanding, respectively. As of March 31, 2018 and December 31, 2017, there were 3,479,016 and 3,427,597 shares of Series B Preferred Stock issued and outstanding, respectively. As of March 31, 2018 and December 31, 2017, there were 12,947,916 and 13,151,989 shares of Series B1 Preferred Stock issued and outstanding, respectively. As of both March 31, 2018 and December 31, 2017, there were 31,568 shares of Series C Preferred Stock issued and outstanding.
Series B Preferred Stock and Temporary Equity
Dividends on our Series B Preferred Stock accrue at an annual rate of 6% of the original issue price of the preferred stock ($3.10 per share), subject to increase under certain circumstances, and are payable on a quarterly basis. The dividends are payable by the Company, at the Company’s election, in registered common stock of the Company (if available), cash or in-kind in Series B Preferred Stock at $3.10 per share.

The Company has the option to redeem the outstanding shares of Series B Preferred Stock at $3.10 per share, plus any accrued and unpaid dividends on such Series B Preferred Stock redeemed, at any time beginning on June 24, 2017, and the Company is required to redeem the Series B Preferred Stock at $3.10 per share, plus any accrued and unpaid dividends, on June 24, 2020. Notwithstanding either of the foregoing, the Series B Preferred Stock may not be redeemed unless and until amounts outstanding under the Company’s senior credit facility have been paid in full.

The Warrants issued in connection with the Series B Preferred Stock (Series B Warrants) were valued using the Dynamic Black Scholes Merton formula pricing model that computes the impact of share dilution upon the exercise of the warrant shares at $7,028,067. In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity, the convertible preferred shares are accounted for net outside of stockholders’ equity with the Warrants accounted for as liabilities at their fair value. The initial value assigned to the derivative warrant liability was recognized through a corresponding discount to the Series B Preferred Stock. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded in earnings. The initial valuation of the warrants resulted in a beneficial conversion feature on the convertible preferred stock of $5,737,796. The amounts related to the warrant discount and beneficial conversion feature will be accreted over the term as a deemed dividend. Fees in the amount of $1.4 million relating to the stock placement were netted against proceeds.
The following table represents the activity related to the Series B Preferred Stock, classified as Temporary Equity on the accompanying Consolidated Balance Sheet, during the three months ended March 31, 2018 and 2017:
 
2018
 
2017
Balance at beginning of period
$
7,190,467

 
$
5,676,467

Plus: discount accretion
254,069

 
206,916

Plus: dividends in kind
139,186

 
214,227

Balance at end of period
$
7,583,722

 
$
6,097,610



The Series B Warrants and Series B1 Warrants were revalued at March 31, 2018 and December 31, 2017 using the Dynamic Black Scholes model that computes the impact of a possible change in control transaction upon the exercise of the warrant shares at approximately $2,677,159 and $2,245,408, respectively. At March 31, 2018, the Series B Warrants and Series B1 Warrants were valued at approximately $905,484 and $1,771,675, respectively. The Dynamic Black Scholes Merton inputs used were: expected dividend rate of 0%, expected volatility of 76%-100%, risk free interest rate of 2.33% (Series B Warrants) and 2.54% (Series B1 Warrants), and expected term of 2.22 years (Series B Warrants) and 3.61 years (Series B1 Warrants).
At both March 31, 2018 and December 31, 2017, a total of $139,186 and $139,186 of dividends were accrued on our outstanding Series B Preferred Stock. During the three months ended March 31, 2018 and 2017, we paid dividends in-kind in additional shares of Series B Preferred Stock of $139,186 and $214,227, respectively.
Series B1 Preferred Stock and Temporary Equity

Dividends on our Series B1 Preferred Stock accrue at an annual rate of 6% of the original issue price of the preferred stock ($1.56 per share), subject to increases if certain EBITDA thresholds are not met, and are payable on a quarterly basis. The dividends are payable by the Company, at the Company’s election, in registered common stock of the Company (if available), cash, or in-kind in Series B Preferred Stock at $1.56 per share. At March 31, 2018, the EBITDA thresholds were not met resulting in a 9% dividend rate.

The Company has the option to redeem the outstanding shares of Series B1 Preferred Stock at $1.72 per share, plus any accrued and unpaid dividends on such Series B1 Preferred Stock redeemed, at any time beginning on June 24, 2017, and the Company is required to redeem the Series B1 Preferred Stock at $1.56 per share, plus any accrued and unpaid dividends, on June 24, 2020. Notwithstanding either of the foregoing, the Series B1 Preferred Stock may not be redeemed unless and until amounts outstanding under the Company’s senior credit facility have been paid in full.

The Warrants issued in connection with Series B1 Preferred Stock offering (Series B1 Warrants) were initially valued using the Dynamic Black Scholes Merton formula pricing model that computes the impact of share dilution upon the exercise of the May 2016 Warrant shares at $2,867,264. In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity, the convertible Series B1 Preferred Stock shares are accounted for net outside of stockholders’ equity at $15,659,226 with the May 2016 Warrants accounted for as liabilities at their fair value. The initial value assigned to the derivative warrant liability was recognized through a corresponding discount to the Series B1 Preferred Stock. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded in earnings. This initial valuation of the warrants resulted in a beneficial conversion feature on the convertible preferred stock of $2,371,106. The amounts related to the warrant discount and beneficial conversion feature will be accreted over the term as a deemed dividend. Fees in the amount of $0.6 million relating to the stock placement were netted against proceeds.

The following table represents the activity related to the Series B1 Preferred Stock, classified as Temporary Equity on the accompanying Consolidated Balance Sheet, for the three months ended March 31, 2018, and 2017:

 
2018
 
2017
Balance at beginning of period
$
15,769,478

 
$
13,927,788

Less: conversions of shares to common
(595,563
)
 
(86,468
)
Plus: dividends-in-kind
281,527

 
292,553

Plus: discount accretion
203,784

 
193,313

Balance at end of period
$
15,659,226

 
$
14,327,186



As of March 31, 2018 and December 31, 2017, respectively, a total of $415,731 and $276,144 of dividends were accrued on our outstanding Series B1 Preferred Stock. During the three months ended March 31, 2018 and 2017, we paid dividends in-kind in additional shares of Series B Preferred Stock of $281,527 and $292,553, respectively.

The following is an analysis of changes in the derivative liability for the three months ended:

Level Three Roll-Forward
 
 
 
 
 
2018
2017
Balance at beginning of period
 
$
2,245,408

$
4,365,992

Change in valuation of warrants
 
431,751

(920,672
)
Balance at end of period
 
$
2,677,159

$
3,445,320