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Senior Secured Convertible Debentures

6 Months Ended

Sep. 30, 2019

Senior Secured Convertible Debentures [Abstract]

Note 8 — Senior Secured Convertible Debentures

On June 29, 2018, the Company entered into a Securities Purchase Agreement (the "SPA"), with JGB Partners, LP, JGB Capital, LP and JGB (Cayman) Finlaggan Ltd. (each, a "Purchaser" and collectively, the "Purchasers") pursuant to which the Company sold, in a private placement transaction (the "Financing"), for an aggregate cash purchase price of $10.0 million, $10.64 million in aggregate principal amount, of its 12.75% Original Issue Discount Senior Secured Convertible Debentures due June 29, 2021 (the "June 2018 Debentures"). In conjunction with the Financing, the Company (i) recorded issuance costs of $1.1 million against the liability and (ii) used $3.5 million of the proceeds to pay off 100% of the Company's revolving line of credit. Issuance costs are being amortized to interest expense over the term of the June 2018 Debentures.

The June 2018 Debentures mature on June 29, 2021, accrue interest at 12.75% per year, and are convertible into shares of common stock of the Company at a conversion price of $10.00 per share at the holder's option, subject to certain customary adjustments such as stock splits, stock dividends and stock combinations (the "Conversion Price"). Commencing with the calendar month of December 2018 (subject to the following sentence), the holders of the June 2018 Debentures will have the right, at their option, to require the Company to redeem an aggregate of up to $0.2 million of the outstanding principal amount of the Debentures per month. For the month of December 2018, the holders may not submit a redemption notice for such redemption prior to December 28, 2018. The Company will be required to promptly, but in any event no more than two trading days after a holder delivers a redemption notice to the Company, pay the applicable redemption amount in cash or, at the Company's election and subject to certain conditions, in shares of common stock. At the Company's election and subject to certain limitations, the Company may also pay interest in shares of its common stock. If the Company elects to pay the redemption amount or interest in shares of its common stock, then, subject to the next sentence, the shares will be delivered based on a price equal to the lesser of (a) a 10% discount to the average of the three lowest daily volume weighted average prices of the Company's common stock over the prior 20 trading days, or (b) the Conversion Price, subject to a certain minimum price per share and if certain conditions are met. The Company will not have the right to, and will not, make any redemption or interest payment in shares of its common stock unless and until it has obtained the requisite consent of its stockholders under the rules of Nasdaq or if the issuance of shares as a result of such election would reduce the number of shares that the Company is permitted to issue under Nasdaq listing standards upon the conversion in full of the June 2018 Debentures.

Subject to the satisfaction of certain conditions, at any time after June 28, 2019, the Company may elect to prepay all, but not less than all, of the June 2018 Debentures for a prepayment amount equal to the outstanding principal balance of the June 2018 Debentures plus all accrued and unpaid interest thereon, together with a Prepayment Premium equal to the amount as discussed further below.

The Company's obligations under the June 2018 Debentures can be accelerated upon the occurrence of certain customary events of default. In the event of default and acceleration of the Company's obligations, the Company would be required to pay the applicable prepayment amount described above.

The Company's obligations under the June 2018 Debentures have been guaranteed under a Subsidiary Guarantee (the "Subsidiary Guarantee") by its wholly-owned subsidiaries, Slacker, LiveXLive, Corp. and LXL Studios, Inc. (the "Guarantors"). The Company's obligations under the June 2018 Debentures and the Guarantors' obligations under the Subsidiary Guarantee are secured under a Security Agreement by a lien on all of the Company's and the Guarantors' assets, subject to certain exceptions.

On February 11, 2019, the Company amended the SPA with the Purchasers to obtain additional financing, increasing the cash purchase price of the Debentures by $3.0 million, $3.2 million in aggregate principal amount, of its 12.75% Original Issue Discount Senior Secured Convertible Debentures due June 29, 2021 (the "February 2019 Debentures" and together with the June 2018 Debentures, the "Debentures"). In conjunction with the additional financing, the Company (i) recorded issuance costs of $0.1 million against the liability, (ii) modified certain financial liquidity covenants in the Debentures, (iii) modified the definition of "Monthly Allowance" by increasing it from $170,000 to $221,000, and (iv) amended the definition of "Prepayment Amount" to mean, with respect to any payment of the Debentures prior to the maturity date, the entire outstanding principal balance (including any original issue discount) of the Debenture, all accrued and unpaid interest thereon, together with a prepayment premium (the "Prepayment Premium") equal to the following: (a) if the Debentures are prepaid on or after the original issuance date, but on or prior to December 31, 2019, all remaining regularly scheduled interest to be paid on the Debentures from the date of such payment of the Debentures to, but excluding, December 31, 2019, plus 10% of the entire outstanding principal balance of the Debentures, (b) if the Debentures are prepaid after December 31, 2019, but on or prior to June 30, 2020, 10% of the entire outstanding principal balance of the Debentures; (c) if the Debentures are prepaid after June 30, 2020, but on or prior to December 31, 2020, 8% of the entire outstanding principal balance of the Debentures; and (d) if the Debentures are prepaid on or after December 31, 2020, but prior to the maturity date, 6% of the entire outstanding principal balance of the Debentures. The terms of the February 2019 Debentures were otherwise the same as the June 2019 Debentures. The Company evaluated the amendment and the modification was not required to be accounted for as an extinguishment as the instruments are not considered substantially different under ASC 470-50, Debt – Modifications and Extinguishment. As a result of the modification, the change in fair value of the embedded conversion feature was recorded as an additional debt discount of $0.2 million with a corresponding increase to additional paid in capital. The outstanding principal balance of the Debentures at September 30, 2019 was $11.8 million, which included $0 of accrued interest and at March 31, 2019 was $13.2 million, which included $0.1 million of accrued interest.

The Debentures contain customary affirmative and restrictive covenants and representations and warranties, including limitations on indebtedness, liens, investments, dispositions of assets, organizational document amendments, issuance of disqualified stock, change of control transactions, stock repurchases, indebtedness repayments, dividends, the creation of subsidiaries, affiliate transactions, deposit accounts and certain other matters. The Company must also maintain a specified minimum cash balance, meet certain financial targets, and maintain minimum amounts of liquidity. As of September 30, 2019 the Company was in compliance with its financial covenants; however, the Company concluded that a future financial covenant violation associated with near term revenue targets remains probable, and as a result, the Debentures have been classified as current liabilities in accordance with ASC 470-10, Debt.

The Company has evaluated the Debentures and has identified two derivative instruments which are bifurcated from the underlying Debentures relating to provisions around an event of default and mandatory prepayments upon divestitures exceeding certain thresholds. The Company has performed a fair value analysis using a binomial lattice calculation on both of the derivative instruments using the following assumptions. Coupon Rate: 12.75%, Term: 3.0 years, Volatility: 18.3%, Market Rate: 13.0%, Probability of Divesture: 5.0% and Probability of Default: 7.74%. The Company determined that at issuance, the fair value of the instruments was $0.2 million. The Company has recorded the fair value of the derivatives and corresponding debt discount within June 2018 Debentures on the Company's condensed consolidated balance sheet.

At September 30, 2019, the Company performed a fair value analysis using a binomial lattice calculation on both of the derivative instruments using the following assumptions: Coupon Rate: 12.75%, Term: 1.75 years, Volatility: 84.1%, Market Rate: 17.70% and Probability of Default: 32.76%. The Company determined that as of the assessment date, the fair value is $0.4 million. The change in fair value of $0.2 million is recorded in Other income (expense) on the Company's condensed consolidated statements of operations at September 30, 2019.

At March 31, 2019, the Company performed a fair value analysis using a risk neutral model on the default event derivative instrument using the following assumptions: Coupon Rate: 12.75%, Term: 2.25 years, Discount Rate: 17.47 – 17.66%, Risk Free Rate: 2.26%, Recovery Rate: 53.99% and Probability of Default: 30.97%. The Company determined that as of the assessment date, the fair value was $0.6 million. The change in fair value of $0.3 million was recorded in Other income (expense) on the Company's consolidated statements of operations at March 31, 2019.

As of the date of this Quarterly Report, the Debentures holders have sent monthly redemption notices for December 2018 through November 2019 (inclusive). The Company has repaid $0.3 million of principal in January 2019 and $0.2 million of principal in each month in February 2019, March 2019, April 2019, May 2019, June 2019, July 2019, August 2019, September 2019, October 2019 and November 2019.

	September 30,			March 31,
	2019			2019
Senior Secured Convertible Debentures
Senior Secured Convertible Debentures	$	11,775		$	13,101
Accrued interest		-			142
Fair Value of Embedded Derivatives		392			586
Less: Discount		(1,259	)		(1,434	)
Net		10,908			12,395
Less: Senior Secured Convertible Debentures, current		10,908			2,111
Senior Secured Convertible Debentures, long-term	$	-		$	10,284