Senior Secured Convertible Note Payable
|12 Months Ended
Aug. 31, 2018
|Notes to Financial Statements
|Note 7: Senior Secured Convertible Note Payable
On June 4, 2018, the Company issued convertible notes in the principal amount of $10 million for a purchase price of $9 million to institutional investors, bearing interest at a rate of 8%, with maturity date of September 4, 2019, for cash proceeds of $8.4 million for mobile application development and support, IT and HR platform development and support and working capital. The Company incurred approximately $0.6 million of debt issuance costs that are incremental costs directly related to the issuance of the senior secured convertible notes payable.
Concurrently with the sale of the notes, the Company also granted warrants to purchase 1,004,016 shares of common stock to its institutional investors and also granted warrants to purchase 216,867 shares of common stock to its investment banker as placement fees, at an exercise price of $2.49, subject to down round price protection adjustment, as defined in the agreements.
The terms of convertible notes are summarized as follows:
The Company had the following principal balances under its convertible notes outstanding as of August 31, 2018 and 2017:
The Company recognized amortization expense related to the debt discount and debt issuance costs of $704,746 and $0 for the year ended August 31, 2018 and 2017, respectively, which is included in interest expense in the statements of operations.
For the year ended August 31, 2018 and 2017, the interest expense on convertible notes was $191,111 and $0, respectively. As of August 31, 2018, and 2017, the accrued interest payable was $57,778 and $0, respectively.
Debt issuance costs
The Company paid approximately $0.8 million of incremental issuance costs directly attributable to the issuance of the senior secured convertible notes. These costs were recorded as a discount to the convertible notes and they are amortized straight line over the term to interest expense, which approximates the effective interest method.
The table below presents the changes of the debt issuance costs during the years ended August 31, 2018 and 2017:
During the year ended August 31, 2018, the Company recorded an aggregate debt discount of $2.8 million. The debt discount includes an initial $1 million resulting from the original issuance discount on the convertible notes and an initial $0.9 million resulting from the fair value of the warrants and $0.9 million resulting from the beneficial conversion feature on the non-detachable conversion option. The Company evaluated the warrants and determined that there was no embedded conversion feature as the warrants contained a set exercise price with an adjustment only based upon customary items including stock dividends and splits, subsequent rights offering and pro rata distributions. The Company reviewed the guidance under ASC 470 Debt and allocated the proceeds from the sale of a debt instrument with stock purchase warrants based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. As a result, the Company allocated $0.9 million to the warrants and was recorded as a debt discount with an offset to additional paid in capital in the accompanying financial statements.
The Company determined the fair value of the warrants using the Black-Scholes model and the variables used for the Black-Scholes model are as listed below:
The debt discount is amortized straight-line over the stated life of the obligation, which approximates the effective interest method.
As the Company allocated the proceeds based on the relative fair value, this reduced the proceeds allocated to the debt host instrument and as such, the effective conversion rate was lower than the stated conversion rate at commitment date, which triggered the recognition of a beneficial conversion option of approximately $0.9 million.
As of August 31, 2018, the remaining unamortized balance was $2.2 million.
The table below presents the changes of the debt discount during the years ended August 31, 2018 and 2017:
Event of default
The Company executed registration rights agreements with each of its institutional investors. These registration rights agreements require, among other things, that the initial registration statement should be (a) filed within 30 days of June 4, 2018, and (b) declared effective within 90 days of June 4, 2018. Our registration statement was filed on October 1, 2018 and it was declared effective by the SEC on October 29, 2018; thus, both the filing and effectiveness deadlines were missed.
The Company recorded in its consolidated financial statements the mandatory default amount as stipulated in the convertible note agreements. As of August 31, 2018, the Company recorded approximately $3.9 million, which is reported under other current liabilities in its consolidated statement of operations.