Debt

9 Months Ended

Sep. 30, 2017

Debt Disclosure [Abstract]

Debt

The Company’s outstanding debt was as follows as of (in thousands):

	September 30, 2017 (Unaudited)			December 31, 2016
Hannoversche Volksbank credit line #1	$	-		$	1,321
Hannoversche Volksbank credit line #2		-			397
Hannoversche Volksbank term loan #3		-			117
Secured promissory note		83			650
DZ Equity Partners Participation rights		-			789
GPB convertible note payable		5,356			-
Subordinated convertible notes payable		573			-
Total		6,012			3,274
Less:
Loan Fees and Original Issue Discount		(1,470	)		-
Less current portion of debt, net		(83	)		(3,214	)
Long-term debt	$	4,459		$	60

On September 26, 2017, the Company entered into the Purchase Agreement with GPB, pursuant to which the Company issued to GPB (i) a secured convertible promissory note in the aggregate principal amount of $5,356,400 (the “GPB Note”) at a purchase price equal to 97.5% of the face value of the of the original $5 million GPB Note and an additional discount of 300,000 Euro ($356,400 at September 26, 2017) attributed to the purchase and settlement of the 750,000 Euro ($890,325 at September 26, 2017) note with VR Equity Partners formerly DZ Equity Partners (“DZ”) by GPB and considered an additional purchase discount, with the Company receiving net proceeds of $4.7 million and (ii) a warrant to purchase an aggregate of 4,120,308 shares of common stock, of the Company (the “Warrant”). The Company allocated the proceeds received to the GPB Note and the warrants on a relative fair value basis at the time of issuance. The total debt discount will be amortized over the life of the GPB Note to interest expense. The estimated relative fair value of the warrants was $520,052. Amortization expense of the debt discount, which includes original issue discount, loan fees and the warrant value, during the three and nine months ended September 30, 2017 was $6,358. The GPB Note matures on the 36th month anniversary date following the Closing Date, as defined in the GPB Note (the “Maturity Date”). The GPB Note is secured by a senior secured first priority security interest on all of the assets of the Company and its subsidiaries evidenced b y a security agreement (the “Security Agreement”). Each subsidiary also entered into a guaranty agreement pursuant to which the subsidiaries have guaranteed all obligations of the Company to the GPB. The GPB Note bears interest at a rate of 13.25% per annum (which interest is increased to 18.25% upon an Event of Default). The GPB Note is initially convertible at a price of $0.65 (the “Conversion Price”) into 8,240,615 shares of common stock. There was no discount relate to the conversion feature. The exercise price of the Warrant is subject to a ratchet downside protection with a $0.30 per share floor price in the event the Company issues additional equity securities, and subject to adjustments for stock splits, dividends, combinations, recapitalizations and the like. The GPB Note is being amortized quarterly at a rate of 10% of the face value of the Note beginning on month 24, with the remaining 60% due at the Maturity Date. There is a flat 3% success fee which allows for the prepayment of the GPB Note and applies to the payment of principal during the Term through the Maturity Date. The GPB Note contains customary events of default. The GPB Notes contain certain covenants, such as restrictions on the incurrence of indebtedness, the existence of liens, the payment of restricted payments, redemptions, and the payment of cash dividends and the transfer of assets. GPB also has a right of participation for any Company offering, financing, debt purchase or assignment for 36 months after the closing date. The Company is required to maintain a 6 month interest reserve of $354,862. The shares underlying the convertible debt and the warrants are to be registered by the Company through a registration rights agreement within 60 days and the registration statement is to be declared effective within 180 days. Failure to file, or to meet other criteria defined as the event date will required the Company to pay 2% of the registrable securities times the price at the event date per month, up to 12% in cash payments.

In July 2006, MEDITE GmbH, Burgdorf, entered into a master credit line #1 with Hannoversche Volksbank. The line of credit was amended in 2012, 2015 and again in 2016. Borrowings on the master line of credit agreement #1 bore interest at a variable rate based on Euribor (Euro Interbank Offered Rate) depending on the type of advance elected by the Company and defined in the agreement. Interest rates depending on the type of advance elected ranged from 3.75 – 8.00% during the period ended September 30, 2017. The line of credit is collateralized by the accounts receivable and inventory of MEDITE GmbH, Burgdorf, and a mortgage on the building owned by the Company and was guaranteed by Michaela Ott and Michael Ott, stockholders of the Company. This master credit line was repaid with the proceeds of the GPB Note and the collateral and guarantees released.

In June 2012, CytoGlobe, GmbH, Burgdorf, entered into a credit line #2 with Hannoversche Volksbank. Borrowings on the master line of credit agreement #2 bore interest at a variable rate based on Euribor (Euro Interbank Offered Rate) depending on the type of advance elected by the Company and defined in the agreement. Interest rates ranged from 3.90 – 8.00% during the period ended September 30, 2017. The line of credit was collateralized by the accounts receivable and inventory of CytoGlobe GmbH, Burgdorf and was guaranteed by Michaela Ott and Michael Ott, stockholders of the Company, and the state of Lower Saxony (Germany) to support high-tech companies in the area. This credit line was repaid with the proceeds of the GPB Note and the collateral and guarantees released.

In November 2008, MEDITE GmbH, Burgdorf, entered into a Euro 400,000 ($472,510 as of September 30, 2017) term loan #3 with Hannoversche Volksbank with an interest rate of 4.7% per annum. The term loan was guaranteed by Michaela Ott and Michael Ott, stockholders of the Company, and was collateralized by a partial subordinated pledge of the receivables and inventory of MEDITE GmbH, Burgdorf. This term loan was repaid with the proceeds of the GPB Note and the collateral and guarantees released.

In March 2009, the Company entered into a participation rights agreement with DZ in the form of a debenture with a mezzanine lender who advanced the Company up to Euro 1.5 million, ($1.8 million as of September 30, 2017) in two tranches of Euro 750,000 each ($885,960 as of September 30, 2017). The first tranche was paid to the Company at closing with the second tranche being conditioned on MEDITE GmbH, Burgdorf and its subsidiaries hitting certain performance targets. Those targets were not met and the second tranche was never called. The debenture bore interest at the rate of 12.15% per annum. The rate of interest increased three percent, to 15.15% on June 1, 2017. GPB purchased the participation rights agreement with DZ and settled the debt owed by the Company and included the balance in the GPB Note.

On December 31, 2015, the Company entered into a Securities Purchase Agreement (the “2015 Purchase Agreement”) with seven individual accredited investors  (collectively the “Purchasers”), pursuant to which the Company agreed to issue to the Purchasers secured promissory notes in the aggregate principal amount of $500,000 with interest accruing at an annual rate of 15% (the “Note(s)”) and warrants to purchase up to an aggregate amount of 250,000 shares of common stock of the Company (the “Warrant(s)”) with an initial exercise price of $1.60 per share, subject to adjustment and are exercisable for a period of five years.  On March 15, 2016, the Board of Directors approved renegotiated terms to increase the warrants issued to the Purchasers from a total of 250,000 warrants to 500,000 and fixed the exercise price of the warrants to $0.80. The Notes mature on the earlier of the third month anniversary date following the Closing Date, as defined in the Note, or the third business day following the Company’s receipt of funds exceeding one million dollars from an equity or debt financing, not including the financing contemplated under the 2015 Purchase Agreement. The Notes are secured by the Company’s accounts receivable and inventories held in the United States.  If the Notes are not redeemed by the Company on maturity, the Purchasers are entitled to receive 10% of the principal balance of the Notes outstanding in warrants for every month that the Notes are not redeemed.  On March 31, 2016, these Notes matured and were not repaid.  Therefore the Notes were in default on April 1, 2016.  The Company agreed to pay the Purchasers 10% of the principal balance of the Notes in warrants until the Notes are repaid.  During the nine month period ended September 30, 2017, the Company issued 50,000 warrants in connection with the default provision and 270,000 warrants in connection with the January 2017 extension provision (see below), which were valued at $11,443 and $76,083, respectively, and recorded it as interest expense in the condensed consolidated statements of operations. The Notes are secured by the Company’s accounts receivable and inventories held in the United States. In January 2017, the Company extended the term of the Notes in default on April 1, 2016 to June 30, 2017 and reduced the price on the warrants issued from $0.80 to $0.50. The Company recorded $64,405 attributed to the repricing of the warrants. One noteholder did not extend the term of the notes and the Company defaulted on July 1, 2017 and received 33,333 warrants to purchase shares of common stock which the Company valued at that date at $8,741.

Using the proceeds from the GPB Note, the Company repaid $166,667 of outstanding Notes. In addition, Notes totaling $133,333 converted into subordinated convertible notes at a purchase price of 97.5% of the Face Value of the $136,752 notes with substantially the same terms as the GPB Note. In connection, the Company issued 105,194 warrants to purchase common stock with a term of 5 years and an exercise price of $0.60 per share with a ratchet downside protection of $0.30 exercise price per share floor. The Company allocated the value of these notes and the warrants on a relative fair value basis at the time of issuance. The total debt discount will be amortized over the life of these notes to interest expense. The estimated relative fair value of the warrants was $13,277. Amortization expense of the debt discount, which includes original issue discount and the warrant value, during the three and nine months ended September 30, 2017 was insignificant.

Another Note with a principal and accrued interest balance of $63,250 remains unpaid and is not considered in default as the Company received notification to freeze this account. The remaining Notes with an aggregate balance of $83,333 will be repaid once the Company receives final paperwork from the investors for authorization for repayment. The accrued interest on the remaining Notes of $25,250 is expected to be converted into 50,500 shares of common stock.

On May 25, 2016, the Company entered into a Securities Purchase Agreement (the “May Purchase Agreement”) with two individual accredited investors, one of which who serves on the Company’s  Board of Directors (collectively the “May Purchasers”), pursuant to which the Company agreed to issue to the May Purchasers secured promissory notes in the aggregate principal amount of $150,000 (the “May Note(s)”) with an interest rate of 15% and warrants to purchase up to an aggregate amount of 150,000 shares of common stock of the Company (the “May Warrant(s)”).  The May Notes may be converted into Units issued pursuant to the Company’s private financing of up to $5,000,000 (the “Follow On Offering”) Units at a price of $0.80/Unit (the “Units”) consisting of: (i) a  2 year unsecured convertible note, which converts into shares of common stock at an initial conversion price of $0.80 per share and (ii) a warrant to purchase one half additional share of common stock, with an initial exercise price equal to $0.80 per share (the “Follow On Warrant”). The May Notes are secured by the Company’s accounts receivable and inventories held in the United States. The Company recorded a debt discount of $51,000 related to the relative fair value of the warrants on the date of the May Purchase Agreement, which was amortized to interest expense in the consolidated statement of operations during the year ended December 31, 2016. If the May Notes are not redeemed by the Company on maturity, the Purchasers are entitled to receive 10% of the principal balance of the Notes outstanding in warrants for every month that the Notes are not redeemed. On August 25, 2016, these Notes matured and were not repaid.  Therefore the Notes were in default on August 26, 2016. The Company agreed to pay the Purchasers 10% of the principal balance of the May Notes in warrants until the May Notes are repaid.  In January 2017, the Company extended the term of the Notes in default to June 30, 2017 and reduced the price on the warrants issued from $0.80 to $0.50. During the three and nine month periods ended September 30, 2017, the Company issued 0 and 80,000 warrants in connection with the January 2017 extension provision, which were valued at $0 and $27,058 and recorded it as interest expense in the consolidated statements of operations. One noteholder did not extend the term of the notes and the Company defaulted on July 1, 2017 and issued 33,333 warrants to purchase shares of common stock which the Company valued at that date at $8,741 and recorded the amount as interest expense. One noteholder converted a $50,000 note plus accrued interest of $8,417 into 116,833 shares of common stock on June 30, 2017.

Accrued interest of $101,917 associated with the Notes and the May Notes was converted into 203,834 shares of common stock at a value of $0.50 per share during the three months ended September 30, 2017.

On September 27, 2017, the Company received $425,000 and issued $435,897 subordinated convertible debt with an original issue debt discount of $10,897 and with similar terms as the GPB Note. The Company issued 335,306 warrants to purchase shares of common stock with a term of 5 years and an exercise price of $0.60 per share, with a ratchet down side protection of $0.30. The Company allocated the value of these notes and the warrants on a relative fair value basis at the time of issuance. The total debt discount will be amortized over the life of these notes to interest expense. The estimated relative fair value of the warrants was $42,321. Amortization expense of the debt discount, which includes original issue discount and the warrant value, during the three and nine months ended September 30, 2017 was insignificant.

In November 2015 and February 2016, the Company entered into promissory notes totaling $927,000 with certain employees to repay wages earned prior to December 31, 2014 not paid (“Notes Due to Employees").  The Notes Due to Employees are to be paid monthly through September 2019, with no interest due on the outstanding balances.  The monthly amounts increase over the payment term.  The amounts due become immediately due and payable if payments are more than ten days late either one or two consecutive months as defined in the agreement with the employee. On March 30, 2017, the Company entered into a settlements with three current employees that hold notes, in the amount of $580,000 plus accrued vacation. The agreement supersedes all prior agreements with the group and was effective December 31, 2016. The Company was to pay these employees approximately $330,000, the first payment of $94,000 was paid in April 2017, the second payment of $94,000 was due 30 days from signing the agreement and the final payment of $142,000 was due 60 days from signing the agreements however the remaining payments remained due at September 30, 2017. In November 2017, the employees have agreed to renegotiate the March 30, 2017 agreement in good faith with the Company as to a future payment plan mutually agreeable by all parties. The Company issued 1,029,734 warrants to purchase common stock at $0.50 a share with a term of 5 years. The fair value of the warrants issued of $389,000 for the nine months ended September 30, 2017, was valued based on the Black Scholes model based on a stock price of $0.70, an interest free rate of 1.33% and volatility of 50%. The settlement was accounted for as an extinguishment under the applicable accounting guidance. The Company recorded a loss on extinguishment on notes payable due to employees of $158,000.