Note 6. Senior Secured Convertible Notes

On May 4, 2015 (the “Closing Date”), the Company entered into a securities purchase agreement with certain institutional investors in a registered direct offering of $12,500 of Senior Secured Convertible Notes (the “Notes”) and warrants to purchase 5,375,000 shares of the Company’s common stock. On the Closing Date, the Company issued the Notes, which are convertible into shares of the Company’s common stock at $1.00 per share, bear 8% interest and mature in 21 months from the date of issuance, unless earlier converted. In addition, the Company issued 5,375,000 warrants to purchase shares of the Company’s common stock, which are exercisable at $1.00 per share and are exercisable for a period of five years, beginning on November 5, 2015. In connection with the issuance of the Notes and warrants, the Company received net cash proceeds of $12,425. The Company also incurred third party costs directly associated with the issuance of Notes of $218, which are capitalized as debt issuance costs and included in Other assets, and are amortized over the term of the Note. The Company’s obligations under the outstanding Notes are secured by a first priority perfected security interest in substantially all of the Company’s U.S. assets. In addition, stock of certain subsidiaries of the Company has been pledged. The outstanding Notes contain customary events of default, as well as covenants which include restrictions on the assumption of new debt by the Company. As of September 30, 2015, all covenants were met and there were no events of default.

The principal amount of the outstanding Notes is being repaid monthly, and the Company may make such payments and related interest payments in cash or, subject to certain conditions, in registered shares of the Company’s common stock, at its election. On each of the principal installment dates, the Company’s scheduled principal amortization payment is an amount equal to $595. If the Company chooses to repay the Notes in shares of its common stock, the shares are issued at a 15% discount, based on the then-current market price data of the Company’s common stock. The Company may also repay the Notes in advance of the maturity schedule subject to early repayment penalties. The holders of the Notes may accelerate up to six principal installment payments on each of the principal installment dates. The Company may choose to settle such amounts in cash or shares issued at a 15% discount, based on the then-current market price data of the Company’s common stock. Further, the Notes contain provisions that under certain events of default, as defined in the agreement, the amount owed could increase by amounts ranging from 115% to 120% of the face value depending on when the event occurred, and additionally, the interest rates would increase to 16.5% per annum upon the occurrence and continuance of an event of default. In addition, the Company may choose to repay the Notes early at a premium ranging from 115% to 120% of the face value depending on when the election is made.

The 8% interest is paid quarterly, beginning July 1, 2015, and the Company may make such payments in cash or registered shares of the Company’s common stock, at its election. If the Company chooses to repay the Notes in shares of its common stock, the shares for the payment of interest are issued at the then-current market price of the Company’s common stock.

Upon issuance of the Notes on May 4, 2015, the Company recorded the following as of June 30, 2015 and September 30, 2015:

Net cash proceeds from the Notes ($12,500 less investors issuance costs of $75)	$	12,425
Debt discount:
May 2015 Warrants		1,717
Conversion feature		1,244
Total Debt discount attributed to Warrants and Conversion feature		2,961

Net Total – May 4, 2015		9,464
Q2 Debt discount amortization		289
Q2 Debt repayments		(1,191)
Net Total – June 30, 2015		8,562
Q3 Debt discount amortization		1,436
Q3 Debt repayments		(5,912)
Net Total – September 30, 2015 (presented as short-term)	$	4,086

The debt discount is attributable to the value of the separately accounted for conversion feature and May 2015 Warrants issued in connection with the financing. The embedded conversion feature derivatives relate to the conversion option, redemption in case of an event of default, and redemption in the case of a change in control features of the Notes. The embedded derivatives were evaluated under ASC topic 815-15, were bifurcated from the debt host, and were classified as liabilities in the consolidated balance sheet. The debt discount is amortized using the effective interest method over the term of the Notes. For the three and nine months ended September 30, 2015, the Company recorded $1,436 and $1,725, respectively, of debt discount amortization included in interest expense on the consolidated statements of operations. In addition, for the three and nine months ended September 30, 2015, the Company recorded $93 and $114, respectively, of amortization of debt issuance costs included in interest expense and recorded an interest accrual of $179 included in Accounts payable and accrued expenses as of September 30, 2015.

During August 2015, the holders of the Notes accelerated six principal installments in exchange for common stock as permitted under the securities purchase agreement. The debt is now expected to mature in July 2016.

During the three and nine months ended September 30, 2015, the Company made principal payments in the aggregate amount of $5,912 and $7,103, respectively. The Company elected to make these principal payments in shares of the Company’s common stock, which are issued at a 15% discount to the market price. As such, the Company issued 14.6 million shares and 16.9 million shares in lieu of principal payments for the three and nine months ended September 30, 2015, and recorded $1,044 and $1,254 as extinguishment of debt expense on the consolidated statements of operations for the three and nine months ended September 30, 2015, respectively.

See Note 7 and 8 for further detail on the fair value of the May 2015 Warrants and conversion feature.