Quarterly report pursuant to Section 13 or 15(d)

Note 8 - Debt

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Note 8 - Debt
6 Months Ended
Jun. 30, 2017
Debt Disclosure [Abstract]  
Debt

As of June 30, 2017 and December 31, 2016, the Company’s debt consisted of the following (in thousands):

 

   

As of

June 30,

2017

   

As of

December 31,

2016

 
2015 Convertible Note due November 2017 with a related party   $ 6,000     $ 6,000  
2016 Convertible Note due November 2017 with a related party, net of discount     10,772       10,465  
Obligations under secured borrowing arrangement     3,147       2,681  
Total debt     19,919       19,146  
Less: current portion     (19,919 )     (19,146 )
Long term debt   $     $  

 

Related-Party Convertible Notes

 

In November 2016, the Company entered into a convertible secured promissory note agreement (the “2016 Convertible Note”) with Mr. Ryan Drexler, the Company’s Chairman of the Board, Chief Executive Officer and President, pursuant to which Mr. Drexler loaned the Company $11.0 million. Proceeds from the 2016 Convertible Note were used to fund settlement of litigation. The 2016 Convertible Note is secured by all assets and properties of the Company and its subsidiaries, whether tangible or intangible. The 2016 Convertible Note carries interest at a rate of 10% per annum, or 12% if there is an event of default. Both the principal and the interest under the 2016 Convertible Note are due on November 8, 2017, unless converted earlier. Mr. Drexler may convert the outstanding principal and accrued interest into 6,010,929 shares of the Company’s common stock for $1.83 per share at any time. The Company may prepay the 2016 Convertible Note at the aggregate principal amount therein, plus accrued interest, by giving Mr. Drexler between 15 and 60 day-notice depending upon the specific circumstances, provided that Mr. Drexler may convert the 2016 Convertible Note during the applicable notice period. The Company recorded the 2016 Convertible Note as a liability in the balance sheet and also recorded a beneficial conversion feature of $601,000 as a debt discount upon issuance of the convertible note, which is being amortized over the term of the debt using the effective interest method. The beneficial conversion feature was calculated based on the difference between the fair value of common stock on the transaction date and the effective conversion price of the convertible note. As of June 30, 2017 and December 31, 2016, the 2016 Convertible Note had an outstanding principal balance of $11.0 million and a carrying value of $10.8 million and $10.5 million, respectively.

 

In December 2015, the Company entered into a convertible secured promissory note agreement (the “2015 Convertible Note”) with Mr. Drexler, pursuant to which he loaned the Company $6.0 million. Proceeds from the 2015 Convertible Note were used to fund working capital requirements. The 2015 Convertible Note is secured by all assets and properties of the Company and its subsidiaries, whether tangible or intangible. The 2015 Convertible Note originally carried an interest at a rate of 8% per annum, or 10% in the event of default. Both the principal and the interest under the 2015 Convertible Note were originally due in January 2017, unless converted earlier. The due date of the 2015 Convertible Note was extended to November 8, 2017 and the interest rates was raised to 10% per annum, or 12% in the event of default. Mr. Drexler may convert the outstanding principal and accrued interest into 2,608,695 shares of common stock for $2.30 per share at any time. The Company may prepay the convertible note at the aggregate principal amount therein plus accrued interest by giving the holder between 15 and 60 day-notice, depending upon the specific circumstances, provided that Mr. Drexler may convert the 2015 Convertible Note during the applicable notice period. The Company recorded the 2015 Convertible Note as a liability in the balance sheet and also recorded a beneficial conversion feature of $52,000 as a debt discount upon issuance of the 2015 Convertible Note, which was amortized over the original term of the debt using the effective interest method. The beneficial conversion feature was calculated based on the difference between the fair value of common stock on the transaction date and the effective conversion price of the convertible note. As of June 30, 2017 and December 31, 2016, the convertible note had an outstanding principal balance and carrying value of $6.0 million. In connection with the Company entering into the 2015 Convertible Note with Mr. Drexler, the Company granted Mr. Drexler the right to designate two directors to the Board.

 

For the three months ended June 30, 2017 and 2016, interest expense related to the related party convertible secured promissory notes was $0.4 million and $0.1 million, respectively. For the six months ended June 30, 2017 and 2016, interest expense related to the related party convertible secured promissory notes was $0.9 million and $0.2 million, respectively. During the six months ended June 30, 2017 and 2016, $0.9 million and $0.2 million, respectively, in interest was paid in cash to Mr. Drexler.

 

Secured borrowing arrangement

 

In January 2016, the Company entered into a Purchase and Sale Agreement (the “Agreement”) with Prestige Capital Corporation (“Prestige”) pursuant to which the Company agreed to sell and assign and Prestige agreed to buy and accept, certain accounts receivable owed to the Company (“Accounts”). Under the terms of the Agreement, upon the receipt and acceptance of each assignment of Accounts, Prestige will pay the Company 80% of the net face amount of the assigned Accounts, up to a maximum total borrowings of $10.0 million subject to sufficient amounts of accounts receivable to secure the loan. The remaining 20% will be paid to the Company upon collection of the assigned Accounts, less any chargeback, disputes, or other amounts due to Prestige. Prestige’s purchase of the assigned Accounts from the Company will be at a discount fee which varies based on the number of days outstanding from the assignment of Accounts to collection of the assigned Accounts. In addition, the Company granted Prestige a continuing security interest in and lien upon all accounts receivable, inventory, fixed assets, general intangibles and other assets. The Agreement’s term has been extended to September 29, 2017. Prestige may cancel the Agreement with 30-day notice.

 

During the three months ended June 30, 2017, the Company sold to Prestige accounts with an aggregate face amount of approximately $9.0 million, for which Prestige paid to the Company approximately $7.2 million in cash. During the three months ended June 30, 2017, $13.6 million was subsequently repaid to Prestige, including fees and interest. During the six months ended June 30, 2017, the Company sold to Prestige accounts with an aggregate face amount of approximately $14.5 million, for which Prestige paid to the Company approximately $12.1 million in cash. During the six months ended June 30, 2017, $11.8 million was subsequently repaid to Prestige, including fees and interest.

 

During the three months ended June 30, 2016, the Company sold to Prestige accounts with an aggregate face amount of approximately $20.4 million, for which Prestige paid to the Company approximately $16.4 million in cash. During the three months ended June 30, 2016, $13.8 million was subsequently repaid to Prestige, including fees and interest. During the six months ended June 30, 2016, the Company sold to Prestige accounts with an aggregate face amount of approximately $49.3 million, for which Prestige paid to the Company approximately $39.5 million in cash. During the six months ended June 30, 2016, $31.3 million was subsequently repaid to Prestige, including fees and interest.