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CONVERTIBLE NOTES | 12 Months Ended
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Dec. 31, 2018
Debt Disclosure [Abstract] |
CONVERTIBLE NOTES | 7. CONVERTIBLE NOTES. Convertible notes consists of the following:
|  | Dollars in Thousands
|  | December 31, 2018
Convertible bridge notes |  | $ | 4,294
Convertible bridge notes discount and debt issuance costs |  |  | (1,111)
Convertible bridge notes premiums |  |  | 647
Convertible promissory notes |  |  | 630
Convertible promissory notes debt issuance costs |  |  | (83)
Total convertible notes |  |  | 4,377
Current portion of convertible notes |  |  | (4,377)
Convertible notes, net of current maturities |  | $ | —
Convertible Bridge Notes. On April 20, 2018, the Company entered into a securities purchase agreement (the “2018 Note Agreement”) with certain investors (the “April 2018 Investors”), pursuant to which the Company would issue up to approximately $3,296,703 in Senior Secured Convertible Promissory Notes along with warrants (the “Transaction”). The number of warrants issued are equal to the number of shares of common stock issuable upon conversion of the notes based on the conversion price at the time of issuance. Half of the warrants will have a one-year term and half will have a five-year term. The 2018 Note Agreement includes customary representations, warranties and covenants by the Company and customary closing conditions. The Transaction consisted of a series unregistered Senior Secured Convertible Notes (the “Bridge Notes”), bearing interest at a rate of 8% annually and an original issue discount of 9%. The Bridge Notes are convertible at a price of $0.50 per share, provided that if the notes are not repaid within 180 days of the note’s issuance date, the conversion price shall be adjusted to 80% of the lowest volume weighted average price during the prior 10 days, subject to a minimum conversion price of $0.30 per share. The Transaction consisted of a number of drawdowns. The initial closing on April 20, 2018 provided the Company with proceeds of $1,660,000, net of an original issue discount of 9% and before debt issuance costs, for the issuance of notes with an aggregate principal of $1,824,176 (the “April 2018 Bridge Notes”). The Company completed three additional drawdowns for aggregate proceeds of $1.3 million, net of an original issue discount of 9% and before debt issuance cost, for the issuance on notes with an aggregate principal of $1.5 million, during the third quarter 2018. Drawdowns included the following funding from the April 2018 Investors (i) $348,104 in July 2018 for Bridge Notes with an aggregate principal of $382,526, (ii) $495,955 in August 2018 for Bridge Notes with an aggregate principal of $545,005 and (iii) $495,941 in September 2018 for Bridge Notes with an aggregate principal of $544,990 (collectively, the “Q3 2018 Bridge Notes”). The Bridge Notes are payable by the Company on the earlier of (i) the one year anniversary after each closing date or (ii) upon the closing of a qualified offering, namely the Company raising gross proceeds of at least $7,000,000 (the “Maturity Date”). At any time, provided that the Company gives 5 business days written notice, the Company has the right to redeem the outstanding principal amount of the Bridge Notes, including accrued but unpaid interest, all liquidated damages and all other amounts due under the Bridge Notes, for cash as follows: (i) an amount which is equal to the sum of 105% if the Company exercises its right to redeem the Bridge Notes within 90 days of the initial closing, (ii) 110% if the Company exercises its right to redeem the Bridge Notes within 180 days of the initial closing, or (iii) 115% if the Company exercises its right to redeem 180 days from the initial closing. The terms of the 2018 Note Agreement also stipulates that upon written demand by one of the April 2018 Investors after August 22, 2018, the Company shall file a registration statement within thirty (30) days after written demand covering the resale of all or such portion of the conversion shares for an offering to be made on a continuous basis pursuant to Rule 415. The registration statement filed shall be on Form S-3 or Form S-1, at the option of the Company. If the Company does not file a registration statement in accordance with the terms of the 2018 Note Agreement, then on the business day following the applicable filing date and on each monthly anniversary of the business day following the applicable filing date (if no registration statement shall have been filed by the Company in accordance herewith by such date), the Company shall pay to the April 2018 Investors an amount in cash, as partial liquidated damages, equal to 1% per month (pro-rata for partial months) based upon the gross purchase price of the Bridge Notes (calculated on a daily basis) under the 2018 Note Agreement. Conversion shares related to the April 2018 Note Agreement were included in a registration statement on Form S-3 that the Company filed with the SEC on February 6, 2019 and which became effective with the SEC on February 13, 2019. The obligations under the Bridge Notes are secured, subject to certain exceptions and other permitted payments by a perfected security interest on the assets of the Company. The 9% discount associated with the April 2018 Bridge Notes was approximately $164,000 and was recorded as a debt discount. The Company also incurred legal and advisory fees associated with the April 2018 Bridge Notes of approximately $164,000 and these were recorded as debt issuance costs. The 9% discount associated with the Q3 2018 Bridge Notes was approximately $133,000 and was recorded as a debt discount. As part of the initial closing, the April 2018 Investors received 3,648,352 warrants to purchase shares of common stock of the Company (the “April 2018 Warrants”) exercisable at a 150% premium to the April 2018 Bridge Notes conversion price or $0.75. Half of such April 2018 Warrants have a five-year term and half have a one-year term. The Company reviewed the provisions of the April 2018 Warrants to determine the balance sheet classification of the April 2018 Warrants. The Company concluded that there is an obligation to repurchase the April 2018 Warrants by transferring assets and accordingly the warrants were classified as a liability. The April 2018 Warrants were valued using a Black-Scholes option pricing model with an initial value of approximately $1.1 million at the date of issuance and were recorded as a liability with an offset to debt discount. The April 2018 Investors received 2,945,055 warrants to purchase shares of common stock of the Company in connection with the Q3 Bridge Note issuances (the “Q3 2018 Warrants”) with an initial exercise price of $0.75. Half of such Q3 2018 Warrants have a five-year term and half have a one-year term. The terms of the Q3 2018 Warrants are the same as the April 2018 Warrants and, as such, were classified as liabilities. The Q3 2018 Warrants were valued using a Black-Scholes option pricing model with an initial value of approximately $0.7 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 12 – Fair Value for further discussion. On September 20, 2018, immediately after the final drawdown of the Bridge Notes, the Company entered into an agreement with the April 2018 Investors whereby the exercise price of all warrants issued to the April 2018 Investors in connection with both the 2018 Note Agreement and the Q3 Bridge Notes were amended from $0.75 to $0.50. The Company reviewed this repricing to determine the appropriate accounting treatment and concluded that the repricing would be treated as a modification of the warrant agreements. As the warrants related to the Bridge Notes are classified as liabilities, the change in fair value attributable to the repricing would be reflected in the subsequent measurement on the warrants. Management calculated the change in fair value due to repricing to be an expense of approximately $0.1 million which is included in warrant revaluation and modification in the consolidated statements of operations. Pursuant to a letter agreement, dated as of April 20, 2018 (the “Letter Agreement”), the Company engaged a registered broker dealer as a financial advisor (the “Financial Advisor”). Pursuant to the Letter Agreement, the Company paid the Financial Advisor a fee of $116,000, approximately 7% of the proceeds from the sale of the April 2018 Bridge Notes. This is included in the debt issuance costs discussed above. Per the Letter Agreement, the Company also issued to the Financial Advisor 232,000 warrants to purchase shares of common stock of the Company with an exercise price of $0.75 (the “Advisor Warrants”). The Advisor Warrants are exercisable at any time and from time to time, in whole or in part, during the four-year period commencing six months from the date of the Letter Agreement. Like the April 2018 Warrants and like the Q3 2018 Warrants, the Advisor Warrants met the criteria to be classified as a liability. The Advisor Warrants were valued using a Black-Scholes option pricing model with an initial value of approximately $0.1 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 12 – Fair Value for further discussion. The Company reviewed the conversion option of the April 2018 Bridge Notes and determined that there was a beneficial conversion feature in connection with the issuance of the April 2018 Bridge Notes since the calculated effective conversion price was at a discount to the fair market value of the Company's common stock at issuance date. For purposes of calculating the beneficial conversion feature, the proceeds of $1.7 million from the April 2018 Bridge Notes were allocated to the notes and warrants based on their relative fair values at the date of issuance. The portion allocated to the April 2018 Bridge Notes was $0.6 million with the remaining $1.1 million allocated to the April 2018 Warrants. As a result of the allocation of the proceeds, the Company calculated a beneficial conversion feature of approximately $1.1 million which was recorded as a debt discount with an offset to additional paid in capital. The Q3 2018 Bridge Notes also contained beneficial conversion features. For purposes of calculating the beneficial conversion features, the net proceeds of $1.3 million from the Q3 2018 Bridge Notes were allocated to the notes and warrants based on their relative fair values at the date of issuance. The portion allocated to the Q3 2018 Bridge Notes was $0.6 million with the remaining $0.7 million allocated to the Q3 2018 Warrants. As a result of the allocation of the proceeds, the Company calculated a beneficial conversion feature of approximately $0.5 million which was recorded as a debt discount with an offset to additional paid in capital. The Company reviewed the redemption features of the Bridge Notes and determined that there is a redemption feature (the “Bridge Notes Redemption Feature”) that qualifies as an embedded derivative instrument which is required to be separated from the debt host contract and accounted for separately as a derivative. For the April 2018 Bridge Notes, the Company determined the initial fair value of the derivative at the time of issuance to be approximately $0.1 million which was recorded as a debt discount with an offset to derivative liability. For the Q3 2018 Bridge Notes, the Company determined the initial fair value of the derivatives at the time of issuance to be approximately $0.1 million which was recorded as a debt discount with an offset to derivative liability. The valuations were performed using the “with and without” approach, whereby the Bridge Notes were valued both with the embedded derivative and without, and the difference in values was recorded as the derivative liability. See Note 12 – Fair Value for further discussion. As detailed above, debt discounts and debt issuance costs related to the April 2018 Bridge Notes totaled $2.7 million. Since the costs exceeded the $1.8 million face amount of the debt, the Company recorded $1.8 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with the excess $0.9 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations. The total debt discounts and debt issuance costs related to the Q3 2018 Bridge Notes totaled $1.4 million, of which the Company recorded $1.3 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with $0.1 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations. The $0.1 million recorded as a loss on issuance of convertible notes was due to the fact that one of the drawdowns during the third quarter of 2018 had debt discount and debt issuance costs in excess of the face amount of the related debt. On November 29, 2018, the Company entered into an amendment and restatement agreement (the “Amendment Agreement”) amending and restating the terms of the 2018 Note Agreement. The Amendment Agreement provided for the issuance of up to $1,318,681 of additional Bridge Notes together with applicable warrants, in one or more tranches, with substantially the same terms and conditions as the previously issued Bridge Notes and related warrants. The conversion price of the notes was amended so that it shall be equal to the greater of $0.25 or $0.05 above the closing bid price of our common stock on the date prior to the original issue date. In the event the notes are not paid in full prior to 180 days after the original issue date, the conversion price shall be equal to 80% of the lowest volume weighted average price (“VWAP”) in the 10 trading days prior to the date of the notice of conversion, but in no event below the floor price of $0.15. In connection with the Amendment Agreement, during the fourth quarter of 2018, the Company completed two additional drawdowns for aggregate proceeds of $1.1 million, net of an original issue discount of 9% and before debt issuance costs, for the issuance of notes with an aggregate principal of $1.2 million (collectively, the “Q4 2018 Bridge Notes”). Approximately $0.3 million of the $1.1 million of proceeds was received after December 31, 2018 and is included in other current assets on our consolidated balance sheet at December 31, 2018. The 9% discount associated with the Q4 2018 Bridge Notes was approximately $108,000 and was recorded as a debt discount. In connection with the Q4 2018 Bridge Note issuances, the Company issued to the investors 4,501,712 warrants to purchase shares of common stock of the Company (the “Q4 2018 Warrants”) with an initial exercise price of $0.36 and a five-year term. The terms of the Q4 2018 Warrants are the same as the April 2018 Warrants and, as such, were classified as liabilities. The Q4 2018 Warrants were valued using a Black-Scholes option pricing model with an initial value of approximately $0.7 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 12 – Fair Value for further discussion. The Company reviewed the conversion option of the Q4 2018 Bridge Notes and determined that there was a beneficial conversion feature in connection with the issuance of the Q4 2018 Bridge Notes, as there was with the previously issued Bridge Notes. For purposes of calculating the beneficial conversion features, the net proceeds of $1.1 million from the Q4 2018 Bridge Notes were allocated to the notes and warrants based on their relative fair values at the date of issuance. The portion allocated to the Q4 2018 Bridge Notes was $0.4 million with the remaining $0.7 million allocated to the Q4 2018 Warrants. As a result of the allocation of the proceeds, the Company calculated a beneficial conversion feature of approximately $0.5 million which was recorded as a debt discount with an offset to additional paid in capital. The Q4 2018 Bridge Notes contain the Bridge Notes Redemption Feature that qualifies as an embedded derivative instrument which is required to be separated from the debt host contract and accounted for separately as a derivative. For the Q4 2018 Bridge Notes, the Company determined the initial fair value of the derivatives at the time of issuance to be approximately $15,000 which was recorded as a debt discount with an offset to derivative liability. See Note 12 – Fair Value for further discussion. The total debt discounts and debt issuance costs related to the Q4 2018 Bridge Notes totaled $1.4 million, of which the Company recorded $1.1 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with $0.3 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations. The $0.3 million recorded as a loss on issuance of convertible notes was due to the fact that one of the drawdowns during the fourth quarter of 2018 had debt discount and debt issuance costs in excess of the face amount of the related debt. At the time of the Amendment Agreement, the conversion price related to $3.3 million of previously issued Bridge Notes, the April 2018 Bridge Notes and Q3 2018 Bridge Notes, was amended. The Company reviewed the modification to the conversion price and concluded that the amendment will be treated as an extinguishment of the related Bridge Notes. The difference between the carrying value of the notes just prior to modification (the “Old Debt”) and the fair value of the notes just after modification (the “New Debt”) would be recorded as a gain or loss on extinguishment in the consolidated statements of operations. The Company removed the carrying value of the Old Debt which included $3.1 million of unamortized debt discounts, beneficial conversion features of $1.0 million and less than $0.1 million in derivative liabilities. The Company calculated the fair value of the New Debt to be $4.2 million. The Company reviewed whether or not a beneficial conversion feature existed on the New Debt but the calculation resulted in zero intrinsic value to the conversion options so no new beneficial conversion feature was recorded. Management also reviewed the Bridge Notes Redemption Feature of the New Notes but their fair value was zero so no derivative liability was recorded at the time of modification, however this will be reassessed at the end of each reporting period. As a result, the Company recorded a debt premium on the New Debt of $0.9 million and a loss on extinguishment of debt of $2.9 million in the consolidated statements of operations. During the year ended December 31, 2018, $0.2 million of Bridge Notes, plus interest, were converted into 1,400,000 shares of common stock of the Company. As a result of the conversions, the Company wrote-off approximately $0.1 million of debt premium with an offset to additional paid in capital. As of December 31, 2018, $4.3 million of outstanding Bridge Notes, net of $1.1 million of debt discounts partially offset by $0.6 million of debt premiums, was included in convertible notes in the Company’s consolidated balance sheet. The total debt discount and debt issuance costs for all Bridge Notes were $5.6 million during the year ended December 31, 2018. As discussed above, $3.1 million of debt discounts were written-off as a result of the extinguishment of certain Bridge Notes and $1.3 million of debt discounts were expensed as a loss on issuance of convertible notes in the consolidated statements of operations. Total debt premiums, relating to Bridge Notes, recorded during the year ended December 31, 2018 were $0.9 million and $0.1 million of the debt premiums were written-off in conjunction with the conversion of Bridge Notes. Debt discounts and debt premiums will be amortized to interest expense and interest income, respectively, over the life of the Bridge Notes on a basis that approximates the effective interest method. For the year ended December 31, 2018, amortization of debt discounts was approximately $0.1 million and is included in interest expense in the consolidated statements of operations and amortization of debt premiums was approximately $0.2 million and is included in interest income in the consolidated statements of operations. The remaining debt discounts of $1.1 million and debt premiums of $0.6 million, as of December 31, 2018, are expected to be fully amortized during 2019. During 2017, prior to the Merger, the Company had unsecured convertible bridge notes of $695,000. The notes accrued interest at a rate of 14% and were payable on demand and accrue interest until paid. In connection with the Merger, on the Closing Date, convertible bridge notes of $695,000, plus $192,000 of accrued interest, were converted into 155,639 shares of Precipio common stock. 2017 New Bridge Notes I. Prior to the Merger, the Company (then Transgenomic) completed the sale of an aggregate of $1.2 million of non-convertible promissory notes (the “2017 Bridge Notes”) in a bridge financing pursuant to a securities purchase agreement (the “Purchase Agreement”), for which $561,500 was then given to Precipio Diagnostics through the issuance of a promissory note and is eliminated in consolidation. The 2017 Bridge Notes had an annual interest rate of 4% and a 90‑day maturity. The 2017 Bridge Notes could be repaid by the Company at any time in cash upon payment of a 20% premium. In connection with the issuance of the 2017 Bridge Notes, the Company issued warrants (the “2017 Bridge Warrants”) to acquire 40,000 shares of the Company’s common stock at an exercise price of $15.00 per share, subject to anti-dilution protection. Aegis Capital Corp. (“Aegis”) acted as placement agent for the bridge financing and received a placement agent fee of $84,000 and warrants (the “Aegis Warrants”) to acquire 5,600 shares of the Company’s common stock at an exercise price of $15.00 per share. The Aegis Warrants are identical to the 2017 Bridge Warrants except that the Aegis Warrants do not have anti-dilution protection. At the time of the Merger, the 2017 Bridge Notes were extinguished and replaced with convertible promissory notes (the “2017 New Bridge Notes I”) with an original principal amount of $1.2 million in the aggregate pursuant to an Exchange Agreement (the “Exchange Agreement”) entered into on the Closing Date. The 2017 New Bridge Notes I had an annual interest rate of 8.0% and were due and payable upon the earlier to occur of (i) October 1, 2017 or (ii) the closing of a Qualified Offering (as defined in the 2017 New Bridge Notes I). The 2017 New Bridge Notes I were convertible into shares of our common stock at an initial conversion price of $3.736329 per share, subject to adjustment, and could be convertible into shares of our preferred stock at the holder’s option if the Company did not complete a Qualified Offering (as defined in the 2017 New Bridge Notes I) by October 1, 2017. The Company could redeem the 2017 New Bridge Notes I at any time in cash upon payment of a 20% premium, or $240,000. As the convertible promissory notes were convertible into the Company’s common stock at a conversion rate lower than the fair market value of the common stock at the time of issuance, the Company recorded $989,000 as a beneficial conversion feature, which was recorded as a debt discount in the balance sheet. The discount was amortized using the effective interest method through the first conversion date of the 2017 New Bridge Notes I. On August 28, 2017, these 2017 New Bridge Notes I were partially converted into the Company’s common stock and the remaining were paid off, refer below for further discussion. Pursuant to the Exchange Agreement, the 2017 Bridge Warrants were canceled and replaced with new warrants to acquire 45,600 shares of our common stock (the “2017 New Bridge Warrants”). The initial exercise price of the 2017 New Bridge Warrants was $7.50 (subject to adjustments). If the Company completed a Qualified Offering (as defined in the 2017 New Bridge warrants), the exercise price of the 2017 New Bridge Warrants would become the lower of (i) $7.50, or (ii) 110% of the per share offering price in the Qualified Offering, but in no event lower than $1.50 per share, which has been considered a down round provision. At issuance, the 2017 New Bridge Warrants had a fair value of $211,000 and were recorded as a debt discount to the related 2017 New Bridge Notes I, with the corresponding entry to additional paid in capital as the warrants were considered classified as equity in accordance with GAAP. As discussed in Note 2 of the accompanying consolidated financial statements, the Company early adopted ASU 2017‑11, which allowed the Company to treat the warrants as equity classified, despite the down round provision. 2017 New Bridge Note II. In connection with the Merger, on the Closing Date and pursuant to a Securities Purchase Agreement (the “Bridge Purchase Agreement”), the Company completed the sale of an aggregate of $800,000 of a convertible promissory note (the “2017 New Bridge Note II”). The Company received net proceeds of $721,000 from the sale of the 2017 New Bridge Note II. The 2017 New Bridge Note II had an annual interest rate of 8.0% and was due and payable upon the earlier to occur of (i) October 1, 2017 or (ii) the closing of a Qualified Offering (as defined in the 2017 New Bridge Note II). The 2017 New Bridge Note II was convertible into shares of our common stock at an initial conversion price of $3.736329 per share, subject to adjustment, and could be convertible into shares of our preferred stock at the holder’s option if the Company does not complete a Qualified Offering (as defined in the 2017 New Bridge Note II) by October 1, 2017. The Company could redeem the 2017 New Bridge Note II at any time in cash upon payment of a 20% premium, or $160,000. As the 2017 New Bridge Note II was convertible into the Company’s common stock at a conversion rate lower than the fair market value of the common stock at the time of issuance, the Company recorded $656,000 as a beneficial conversion feature, which was recorded as a debt discount in the accompanying balance sheet. The discount was amortized using the effective interest method through the first conversion date of the 2017 New Bridge Note II. On August 28, 2017, this 2017 New Bridge Note II was partially converted into the Company’s common stock and the remaining was paid off, refer below for further discussion. In connection with the bridge financing and the assumption of certain obligations by an entity controlled by Mark Rimer (a director of the Company), the Company issued to that entity warrants (the “Side Warrants”) to purchase an aggregate of 00,000 shares of the Company’s common stock. See Note 11 – Stockholders’ Equity for a discussion on terms of the Side Warrants. In addition, the agreement stipulated that if the Company were to consummate one or more rounds of equity financing following July 1, 2017, with aggregate gross proceeds of at least $7 million, the Company would be required to use a portion of the proceeds from such financing to repay the principal amount of the 2017 New Bridge Notes, together with any premium and interest. See discussion below regarding payment and conversion of the 2017 notes. Conversion and Payment of the 2017 New Bridge Notes I and New Bridge Note II (collectively, the “2017 New Bridge Notes”). On August 28, 2017, the Company completed an underwritten public offering (the “August 2017 Offering”) of 6,000 units consisting of one share of the Company’s Series B Preferred Stock and one warrant to purchase up to 400 shares of the Company’s common stock at a combined public offering price of $1,000 per unit for gross proceeds of $6.0 million (see Note 11 - Stockholders’ Equity). At the time of the closing of the August 2017 Offering, the aggregate amount due to the holders of the New Bridge Notes was $2,436,551 ($2,000,000 in principal, $400,000 for a 20% redemption premium and $36,551 in accrued interest). Upon the closing of the August 2017 Offering, the Company made a cash payment of $1,536,551 to extinguish certain notes and the remaining $900,000 of the Company’s 2017 New Bridge Notes were converted into an aggregate of 359,999 shares of the Company’s common stock (the “Note Conversion Shares”) at a conversion price of $2.50 per share and 359,999 warrants to purchase the Company’s common stock (the “Note Conversion Warrants”). The Company issued the Note Conversion Warrants to the holders of the 2017 New Bridge Notes as consideration for their election to convert their 2017 New Bridge Notes into shares of the Company’s common stock. The Company treated the $900,000 debt conversion as an induced conversion and determined that the fair value of the consideration given in the conversion exceeded the fair value of the debt pursuant to its original conversion terms by approximately $1.0 million. This amount was recorded as an expense included in loss on extinguishment of debt and induced conversion of convertible bridge notes in our consolidated statements of operations. The Company also recorded a loss on extinguishment of debt of approximately $0.4 million related to the extinguishment of the $1,536,551 portion paid in cash, which was also recorded as an expense within the loss on extinguishment of debt and induced conversion of convertible bridge notes line in our consolidated statements of operations. See Note 11 - Stockholders’ Equity for discussion of the Note Conversion Warrants. Upon conversion and payment of the 2017 New Bridge Notes, all remaining debt discounts and debt issuance costs associated with the conversions were fully amortized to interest expense and debt discounts and debt issuance costs associated with the portion paid in cash were amortized to interest expense up through the payment date. During the year ended December 31, 2017, debt discounts and debt issuance costs amortized to interest expense were $1.9 million. As of December 31, 2018 and 2017, there are no amounts outstanding of 2017 New Bridge Notes. Convertible Promissory Notes – Exchange Notes. As discussed above, during 2018, the Company entered into Exchange Agreements whereby $3.2 million of Secured Debt Obligations were exchanged for $2.8 million of Exchange Notes. Pursuant to the terms of the Exchange Notes, the Company shall pay to the Holders the aggregate principal amount of the Exchange Notes in eighteen equal installments beginning on August 1, 2019 and ending on January 1, 2021. In accordance with the terms of the Exchange Notes, the Holder shall have the right, to convert at the then applicable conversion price any amount of the Exchange Notes up to $300,000 on any given Trading Day, with a maximum conversion amount up to $500,000 during a period of five Trading Days (the “Conversion Option”). The conversion price shall be the lesser of (i) the average volume weighted average price for the five trading days prior to the date of conversion multiplied by 1.65 and (ii) $1.00 (the “Conversion Price”). At any time at which there is no Equity Conditions Failure, as defined in the terms of the Exchange Note, and only once every ten trading days, the Company shall have the right, but not the obligation, to direct the Holders to convert up to 20% of the then outstanding principal amount of the Exchange Notes under specified conditions (the “Company Put Option”). The Company will be subject to certain restrictive covenants pursuant to the Notes, including limitations on (i) amending its certificate of incorporation and bylaws (ii) indebtedness, (iii) asset sales or leases, (iv) restricted payments and investments, (v) redemptions or repurchases of capital stock and (vi) transactions with affiliates, and the conversion price of the Exchange Notes shall be subject to certain customary adjustments in the event of stock splits, dividends, rights offerings or other pro rata distributions to holders of the Company’s common stock. The Company considered the appropriate accounting treatment of the Exchange and determined that the Exchange will be treated as a debt extinguishment and the difference between the carrying amount of the Secured Debt Obligations and the face value of the Exchange Notes will be treated as a gain on extinguishment. See Secured Debt Obligations discussed above. The Company reviewed the Conversion Option and concluded that it meets the criteria for derivative accounting and requires bifurcation and separate accounting as a derivative. The Company determined the initial fair value of the derivative at the time of issuance to be approximately $0.4 million which was recorded as a debt discount with an offset to derivative liability. The valuation was performed using a Monte Carlo Simulation. See Note 12 – Fair Value for further discussion. The Company reviewed the Company Put Option and concluded that it meets the criteria for derivative accounting and requires bifurcation and separate accounting as a derivative. The Company determined the initial fair value of the derivative at the time of issuance to be immaterial. The valuation was performed using a Monte Carlo Simulation. The Company also reviewed certain redemption provisions and call options that exist in the terms of the Exchange Notes and determined that neither require bifurcation or separate accounting. During the year ended December 31, 2018, approximately $2.2 million of Exchange Notes were converted into 4,373,439 shares of common stock of the Company. As a result of the conversions, the Company wrote-off approximately $0.3 million of debt discount with an offset to additional paid in capital and wrote-off $0.3 million of derivative liability with an offset to additional paid in capital. The total debt discounts of $0.4 million for all Exchange Notes will be amortized to interest expense over the life of the Exchange Notes on a basis that approximates the effective interest method. Amortization for the year ended December 31, 2018 was less than $0.1 million and after the conversions discussed above, there was approximately $0.1 million of Exchange Note debt discounts remaining at December 31, 2018, which are included in convertible notes on our consolidate balance sheet. Amortization will be $0.1 million for the year ended December 31, 2019 and zero for years after that. As of December 31, 2018, the $0.6 million outstanding balance of the Exchange Notes, net of discounts, was included in convertible notes in the Company’s consolidated balance sheet.

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