Note 4 - Convertible Promissory Note

9 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Debt Disclosure [Text Block]

4.

     

CONVERTIBLE PROMISSORY NOTE

On

January 29, 2019,

the Company agreed to issue and sell an unsecured note payable to an accredited investor (the “Accredited Investor”) for an aggregate of

$800,000

face value (the

“January 2019

Note”) that, after

six

months, is convertible into shares of the Company's common stock at a conversion price equal to the lower of (a)

$1.80

per share or (b)

90%

of the closing sale price of the Company's common stock on the date of conversion (subject to a floor conversion price of

$0.50

).

The

January 2019

Note bears interest at the rate of

twenty-four

percent (

24%

) per annum and is payable quarterly in arrears. Unless sooner converted in the manner described below, all principal under the

January 2019

Note, together with all accrued and unpaid interest thereupon, will be due and payable

eighteen

(

18

) months from the date of the issuance of the

January 2019

Note. The

January 2019

Note

may

be prepaid without penalty at any time after it becomes convertible (at which time the holder will have the right to convert it before prepayment thereof).

On the date that is

six

months after the issuance of the

January 2019

Note, and for so long thereafter as any principal and accrued but unpaid interest under the

January 2019

Note remains outstanding, the holder of the

January 2019

Note

may

convert such holder's

January 2019

Note, in whole or in part, into a number of shares of the Company's common stock equal to (i) the principal amount being converted, together with any accrued or unpaid interest thereon, divided by (ii) the conversion price in effect at the time of conversion. The

January 2019

Note has customary conversion blockers at

4.99%

and

9.99%

unless otherwise agreed to by the Company and the holder. It was concluded that the conversion option was beneficial. Accordingly, the Company recorded a debt discount in the amount of

$800,000,

upon stockholder approval of the conversion feature, which occurred on

May 30, 2019.

The discount represented the fair value of the incremental shares up to the proceeds received from the convertible note.

On

July 23, 2019,

the Company entered into Amendment

No.

1

to the

January 2019

Note (“Amended Note”). Under the terms of the amendment, the maturity date of the

January 2019

Note was extended from

July 29, 2020

to

July 31, 2022.

All other terms of the

January 2019

Note remain the same. The Amended Note was accounted for as an extinguishment of the

January 2019

Note as the change in the fair value of the embedded conversion option featured in the

January 2019

Note immediately before and after the amendment exceeded

10%

of the carrying amount of the

January 2019

Note. Accordingly, the Company recorded a loss on the constructive extinguishment of this debt in the amount of

$840,000

for the year ended

December 31, 2019.

The fair value of the Amended Note, which amounted to

$1,473,000

was recorded as a liability. The Company also evaluated the conversion option embedded in the Amended Note and determined it was beneficial. Accordingly, the Company recorded a debt discount in the amount of

$556,000

on the Amended Note for the year ended

December 31, 2019.

The Company amortized

$77,000

of the debt discount for the

January 2019

Note to interest expense for the year ended

December 31, 2019.

The Company utilized a Monte Carlo simulation model to determine the fair value of the Amended Note.

During the

nine

months ended

September 30, 2020,

the holder converted the remainder of the face value of the note into shares of common stock. For the

nine

months ended

September 30, 2020,

$369,000

was converted into

204,445

shares of common stock. Additionally, the unamortized premium for the portion of the note that was converted of

$46,000

was recorded to interest income during the

nine

months ended

September 30, 2020.

On

July 23, 2019,

the Company entered into a private placement with the Accredited Investor, pursuant to which the Company issued and sold to such investor an unsecured convertible promissory note in the original principal amount of

$1,000,000

(the

“July 2019

Note”). Such note is convertible into shares of the Company's common stock at a conversion price equal to the lower of (a)

$1.80

per share or (b)

90%

of the closing sale price of the Company's common stock on the date of conversion (subject to a floor conversion price of

$0.50

). The

July 2019

Note bears interest at the rate of

twenty-four

percent (

24%

) per annum and is payable quarterly in arrears. Unless sooner converted in the manner described below, all principal under the

July 2019

Note, together with all accrued and unpaid interest thereupon, will be due and payable

three

years from the date of the issuance on

July 31, 2022.

The

July 2019

Note

may

be prepaid without penalty at any time after it becomes convertible (at which time the holder will have the right to convert it before prepayment thereof). On the date that is

six

months after the issuance of the

July 2019

Note, the holder

may

convert the

July 2019

Note, in whole or in part, into a number of shares of the Company's common stock equal to (i) the principal amount being converted, together with any accrued or unpaid interest thereon, divided by (ii) the conversion price in effect at the time of conversion. The Company had accounted for the

July 2019

Note as a debt instrument until the conversion feature was approved by the Company's stockholders. Accordingly, the Company recorded a beneficial conversion feature in the amount of

$694,000,

upon stockholder approval of the conversion feature, which occurred on

June 4, 2020.

The discount represented the fair value of the incremental shares up to the proceeds received from the convertible note. The debt discount will be amortized to interest expense over the term of the

July 2019

Note. For the

three

and

nine

months ended

September 30, 2020,

$27,000

and

$107,000,

respectively, were amortized to interest expense.