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SECURED CONVERTIBLE NOTES PAYABLE
12 Months Ended
Sep. 30, 2019
SECURED CONVERTIBLE NOTES PAYABLE  
SECURED CONVERTIBLE NOTES PAYABLE

NOTE G – SECURED CONVERTIBLE NOTES PAYABLE

On August 31, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with accredited investors and certain members of its management team and Board of Directors (the “Purchasers”), pursuant to which the Company issued and sold an aggregate of $1,650,000 in principal amount of secured convertible notes (the “August 2018 Notes”) bearing interest at a rate of 6% per annum. As part of the August 2018 Notes, the Company’s management and Board of Directors purchased August 2018 Notes with a principal amount of $1,185,000.

The August 2018 Notes are convertible, in whole or in part, at any time, at the option of the Purchasers, into shares of the Company’s Common Stock, in an amount determined by dividing the principal amount of each August 2018 Note, together with any and all accrued and unpaid interest, by the conversion price of $100.00. The Company has the right to require the Purchasers to convert all or any part of their August 2018 Notes into shares of its Common Stock at a conversion price of $100.00 if the price of the Common Stock remains at a closing price of $140.00 or more for a period of twenty consecutive trading days.

Upon any Change in Control (as defined in the August 2018 Notes), the Purchasers have the right to require the Company to redeem the August 2018 Notes, in whole or in part, at a redemption price equal to such August 2018 Notes’ outstanding principal balance plus accrued interest.

The August 2018 Notes contain certain events of default that are customarily included in financing of this nature. If an event of default occurs, the Purchasers may require the Company to redeem the August 2018 Notes, in whole or in part, at a redemption price equal to such notes’ outstanding principal balance plus accrued interest.

The August 2018 Notes bear interest at the rate of 6% per annum, payable semi-annually in cash or in kind, at the Company’s option, and are due and payable in full on August 30, 2021. Until the principal and accrued but unpaid interest under the August 2018 Notes is paid in full, or converted into shares of Common Stock pursuant to their terms, the Company’s obligations under the August 2018 Notes will be secured by a lien on substantially all assets of the Company (excluding certain cash accounts) and the assets of APDN (B.V.I.) Inc.

The Company has also entered into a registration rights agreement, dated as of the date of the Purchase Agreement, with the Purchasers, pursuant to which it has agreed to prepare and file a registration statement with the SEC to register under the Securities Act of 1933, as amended (the “Securities Act”) resales from time to time of the Common Stock issued or issuable upon conversion or redemption of the August 2018 Notes. The Company is required to file a registration statement within 60 days of receiving a demand registration request from holders of a majority of the outstanding principal balance of the August 2018 Notes, and to cause the registration statement to be declared effective within 45 days (or 90 days if the registration statement is reviewed by the SEC).

On November 29, 2018, the Company closed a securities purchase agreement with its chairman, president and chief executive officer and one member of the management team, pursuant to which the Company issued and sold an aggregate of $550,000 in principal amount of secured convertible notes bearing interest at a rate of 6% per annum (the “November 2018 Notes”). The November 2018 Notes are substantially similar to the Company’s August 2018 Notes except with respect to maturity date, which is November 29, 2021 The November 2018 Notes are secured on a pari passu basis with the same Company assets as the August 2018 Notes.

 

On July 17, 2019, the Company closed $1.5 million in gross proceeds in July 2019 Notes, bearing interest at a rate of 6% per annum, in a non-brokered private placement with an accredited investor, Dillon Hill Capital, LLC (“Dillon Hill”) and simultaneously amended the terms of the Existing Notes and, (together with the July 2019 Notes, the “Company Notes”) to, among other amendments, (i) reduce the conversion price of the Existing Notes to $21.60 to facilitate their conversion into equity and (ii) change the maturity date of the August 2018 Notes to be November 28, 2021. Under the terms of the July 2019 Notes, until October 13, 2019, Dillon Hill had the right to purchase on the same terms as the July 16, 2019 sale up to an additional $500,000 in principal amount of the July 2019 Notes, and up to an additional $1 million in principal amount of the July 2019 Notes if approved by the Company. This right was not exercised. In addition, Dillon Hill was granted a right to participate in certain future financing transactions of the Company (each a “Subsequent Financing”) until July 16, 2020 equal to the amount required for Dillon Hill to maintain its pro rata ownership of the Company as if the July 2019 Notes had been fully converted into Common Stock. Until July  16, 2020, Dillon Hill shall have the right to participate in full for the first $1 million of such Subsequent Financing. This right was exercised and Dillon Hill participated in the November 2019 underwritten public offering.

After giving effect to the amendments to the Existing Notes, the July 2019 Notes are substantially similar to the Existing Notes. The July 2019 Notes are secured on a pari passu basis with the same Company assets as the Existing Notes. In addition, on July 19, 2019, the Company also amended the security agreements dated as of October 19, 2018, to among other amendments, exclude 20% of the Company’s equity interest in LRx from the assets securing the Company Notes. The July 2019 Notes are convertible, in whole or in part, at any time, at the option of Dillon Hill, into shares of Common Stock, in an amount determined by dividing the principal amount of the July 2019 Notes, together with any and all accrued and unpaid interest, by the conversion price of $21.60 (the “Conversion Price”). The July 2019 Notes are due and payable in full on November 28, 2021.

On or before September 30, 2019, the Company had the right to prepay all or a portion of the July 2019 Notes. If the Company exercised such option, Dillon Hill had the option to (i) convert all or any part of the July 2019 Notes into shares of Common Stock at the Conversion Price or (ii) redeem the July 2019 Notes at a redemption price equal to the outstanding principal balance plus accrued interest of the July 2019 Notes and be issued warrants equal in amount to 40% of the shares of Common Stock that Dillon Hill would have received had it elected to convert its July 2019 Note into shares of Common Stock. Such warrants, if any, would have an exercise price equal to 105% of the Conversion Price. Further, the Company has the right to require Dillon Hill to convert all or any part of their Notes into shares of the Company’s Common Stock at the Conversion Price if the price of the Common Stock remains at a closing price of $140.00 or more for a period of twenty consecutive trading days.  The prepayment option expired on September 30, 2019.

The July 2019 Notes and the Existing Notes, after giving effect to the amendments to the Existing Notes, contain certain negative covenants that restrict the Company, including prohibitions or limitations, among other things, on the incurrence of additional indebtedness, subsidiary asset sales, intercompany loans, liens, amendments to the Company’s organization documents, dividends, and redemptions without consent of the Required Holders (as defined in the Company Notes).

The July 2019 Notes contain certain events of default that are customarily included in financings of this nature. If an event of default occurs, Dillon Hill (by an affirmative vote of the holders of the Company Notes representing at least 30% of the aggregate principal amount of the Company Notes then outstanding) may require the Company to redeem the July 2019 Notes, in whole or in part, at a redemption price equal to the greater of (i) their outstanding principal balance, plus all accrued and unpaid interest, divided by the Conversion Price, multiplied by the volume-weighted average price (VWAP) on the date the redemption price is either (x) demanded or otherwise due or (y) paid in full, whichever has a higher VWAP, or (ii) 130% of the outstanding principal, plus all accrued and unpaid interest.

The amendments to the Existing Notes resulted in a change in fair value of the conversion option that exceeded ten percent of the carrying amount of the Existing Notes.  Accordingly, the amendment was treated as an extinguishment of the Existing Notes and a corresponding loss on extinguishment of debt of $1,260,399. The fair value of the Existing Notes immediately after the amendments (“Amended Existing Notes”) was $3,498,457. Going forward, the Company has elected to record the Amended Existing Notes at fair value in accordance with ASC 825. As a result, the Company recorded a gain on the change in fair value of $65,576 for the year ended September 30, 2019.  The July 2019 Notes are recorded at carrying value.

During September 2019, a total of $2.2 million of the Amended Existing Notes was converted into 102,893 shares of the Company’s common stock.  As part of the total amount converted, Dr. James A. Hayward, our Chairman, Chief Executive Officer and President (“CEO”), converted approximately $1.59 million of the Amended Existing Notes, into approximately 73,400 shares of the Company’s common stock, and other directors, officers, and affiliates of the Company converted approximately $409,000 of such Existing Notes in September 2019 into 18,929 shares of the Company’s common stock.  The fair value of the Amended Existing Notes was calculated immediately prior to conversion and resulted in a gain on the change in fair value of the Amended Existing Notes of approximately $1,907,379. 

During the fiscal year ended September 30, 2019, the Company reclassified $126,980 from accrued liabilities to senior secured notes payable to represent interest due to noteholders that was paid in kind and therefore increasing the convertible note balance outstanding at September 30, 2019.

The Company incurred $64,848 to debt issuance costs based on the cost incurred to complete the Existing Notes financing, which was written off as part of the extinguishment accounting discussed above.  The Company incurred $64,608 to debt issuance costs based on the cost incurred to complete the July 2019 Notes. During the fiscal years ended September 30, 2019 and 2018 the Company amortized $23,828 and $1,479, respectively, of debt issuance costs resulting in unamortized debt issuance costs of $59,698 and the secured notes payable of $1,602,777 at September 30, 2019. The debt issuance cost will be amortized over the life of the Company Notes. During the fiscal years ended September 30, 2019 and 2018, the Company incurred $138,604 and $8,136 of interest expense. The effective interest rate for the fiscal years ended  September 30, 2019 and 2018 was 7.5% and 7.4%, respectively.