7. FINANCING ARRANGEMENTS |
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7. FINANCING ARRANGEMENTS |
7. FINANCING ARRANGEMENTS
Notes Payable on the condensed consolidated balance sheets consists of:
Paycheck Protection Program Loans
The Companys wholly-owned subsidiaries received proceeds under the Paycheck Protection Program (PPP). The PPP, established as part of the CARES Act, provided for loans to qualifying business for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The PPP Loan (Note) and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities and maintains its payroll levels. The amount of forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.
During April and May 2020, the UL US Entities received aggregate proceeds of $1,646,062 through this program. The promissory notes mature for dates ranging from April 2022 through May 2022. As of February 28, 2021 and May 31, 2020, the outstanding balance due under these promissory notes was $0 and $1,646,062, respectively.
The interest rate on the above PPP notes is 1.0% per annum, with interest accruing on the unpaid principal balance computed on the basis of the actual number of days elapsed in a year of 360 days. No payments of principal or interest are due during the six-month period beginning on the date of the Note (Deferral Period).
As noted above, the principal and accrued interest under the Note evidencing the PPP Loans are forgivable after twenty-four weeks as long the Company has used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the Company terminates employees or reduces salaries during the twenty-four-week period. The Company used the proceeds for purposes consistent with the PPP. In order to obtain full or partial forgiveness of the PPP Loan, the Company must request forgiveness and must provide satisfactory documentation in accordance with applicable Small Business Administration (SBA) guidelines. Interest payable on the Note may be forgiven only if the SBA agrees to pay such interest on the forgiven principal amount of the Note. The Company will be obligated to repay any portion of the principal amount of the Note that is not forgiven, together with interest accrued and accruing thereon at the rate set forth above, until such unforgiven portion is paid in full.
Beginning one month following expiration of the Deferral Period and continuing monthly until 24 months from the date of the Note (the Maturity Date), the Company is obligated to make monthly payments of principal and interest to the Lender with respect to any unforgiven portion of the Note, in such equal amounts required to fully amortize the principal amount outstanding on the Note as of the last day of the Deferral Period by the Maturity Date. The Company is permitted to prepay the Note at any time without payment of any premium.
During January 2021, the PPP notes, which were assumed without recourse in the May 2020 acquisition (see Note 2) were utilized for eligible purposes under the terms of the agreements and were forgiven after the expiration of the twenty four week period discussed above. The total amount forgiven was $1,646,062 and is included in gain on forgiveness of promissory notes on the condensed consolidated statements of operations.
Economic Injury Disaster Loan
Pursuant to a certain Loan Authorization and Agreement (the SBA Loan Agreement) in June 2020, the Company securing a loan (the EIDL Loan) with a principal amount of the EIDL Loan of $150,000, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum and will accrue only on funds advanced from the date of each advance. Installment payments, including principal and interest, are due monthly beginning June 2021. The balance of principal and interest is payable thirty years from the date of the SBA Note. As of February 28, 2021 and May 31, 2020, the outstanding balance due was $150,000 and $0, respectively, which is included in promissory notes on the condensed consolidated balance sheets.
Notes Payable
On May 29, 2020, the Company entered into a $1,825,000 note payable as part of the acquisition related to UL ATL. The loan bears a zero percent interest rate and has a maturity of three years, or May 29, 2023. The agreement calls for six semi-annual payments of $304,166.67, for which the first payment was due on November 29, 2020. As of February 28, 2021 and May 31, 2020, the outstanding balance due under the note was $1,520,833 and $1,825,000, respectively.
On May 29, 2020, the Company entered into a non-compete, non-solicitation and non-disclosure agreement with a former owner of ATL. The amount payable under the agreement is $500,000 over a three-year period. The agreement calls for twenty-four monthly non-interest bearing payments of $20,833.33 with the first payment on June 29, 2020. As of February 28, 2021 and May 31, 2020, the outstanding balance due under the agreement was approximately $312,500 and $500,000, respectively.
Convertible Notes Payable
Trillium SPA
On October 8, 2020, the Company entered into a Securities Purchase Agreement (the Trillium SPA) with Trillium Partners (Trillium) pursuant to which the Company sold to Trillium (i) a 10% secured subordinated convertible promissory note in the principal aggregate amount of $1,111,000 (the Trillium Note) realizing gross proceeds of $1,000,000 (the Proceeds) and (ii) a warrant to purchase up to 570,478,452 shares of the Companys common stock at an exercise price of $0.001946, subject to adjustment as provided therein (the Trillium Warrant). The note was amended on October 14, 2020 to adjust the conversion price to $0.00179638 as noted below. The transaction with Trillium closed on October 19, 2020 upon receipt of the proceeds.
The Trillium Note matures on October 6, 2021 (the Maturity Date) and is convertible at any time. The conversion price of the Trillium Note shall be equal to $0.00179638 (the Conversion Price); provided, however, that in no instance shall the investor be entitled to convert at a price lower than $0.00119759 (the Trillium Note Floor Price) and in no instance shall Trillium be entitled to convert into such an amount of common stock that, together with all shares of common stock which have been previously converted, would equal greater than 13.8875% of the total issued and outstanding shares of common stock of the Company, subject to adjustment as provided herein, including, but not limited to, adjustments for any stock split, stock combination, reclassification or similar transaction that proportionately decreases or increases the common stock during such measuring period. The Conversion Price shall be rounded down to the nearest $0.0001 and in no event lower than $0.00119759.
Provided that the Company has satisfied all of the Equity Conditions (as defined in the Trillium Note) the Company may deliver a notice to Trillium an Optional Redemption Notice, of its irrevocable election to redeem some or all of the then outstanding principal or interest amount of the Trillium Note for cash in an amount equal to the Optional Redemption Amount as further described in the Trillium Note (the Optional Redemption Amount) on the 20th Trading Day following the Optional Redemption Notice.
The Trillium Warrant has a term of five years and may only be exercised on a cash basis at an Exercise Price equal to $0.001946, subject to adjustment (the Exercise Price); provided, however, that in no instance shall Trillium be entitled to at a price lower than $0.001946 (the Floor Price) and in no instance shall Trillium be entitled to exercise the Trillium Warrant into such an amount of common stock that, together with all shares of Common Stock which have been previously exercised by Trillium, would equal greater than 8.546% of the total issued and outstanding shares of common stock of the Company, subject to adjustment, including, but not limited to, adjustments for any stock split, stock combination, reclassification or similar transaction that proportionately decreases or increases the common stock during such measuring period. The Exercise Price shall be rounded down to the nearest $0.0001 and in no event lower than $0.001946.
The original issue discount of $111,000 will be amortized to interest expense over the life of the note. In addition, the Company paid legal fees of $50,000 which will be amortized to interest expense over the life of the note. As discussed below, the note was amended on October 14, 2020 at which point all unamortized discount was written off.
The Company determined the fair value of the warrant and the beneficial conversion feature of the note using the Black-Scholes model and recorded an adjustment to the carrying value of the note liability with an equal and offsetting adjustment to Stockholders Equity. The warrant was valued at $563,341 and the beneficial conversion feature was originally valued at $65,453. Upon amendment of the note on October 14, 2020, the Company accounted for the modification as debt extinguishment and the Company recorded a loss on extinguishment of $1,147,856. In addition, the Company recorded a beneficial conversion feature with a value of $436,844 which was recorded to additional paid in capital. See assumptions used for fair value calculation below.
There was total unamortized debt discount related to the Trillium SPA of $0 as of February 28, 2021. During the three and nine months ended February 28, 2021, the Company recorded amortization of debt discount totaling $13,054 until amendment of the note as discussed above.
As of February 28, 2021, the outstanding balance on the Trillium Note was $1,100,000 and the Company was deemed in default. On January 29, 2021, the Company and Trillium entered into a waiver agreement which waived any and all defaults underlying the Trillium SPA and the Trillium Note for a period of six months.
3a SPA
On October 14, 2020, the Company entered into a Securities Purchase Agreement (the 3a SPA) with 3a Capital Establishment (3a) pursuant to which the Company sold to 3a (i) a 10% secured subordinated convertible promissory note in the principal aggregate amount of $1,111,000 (the 3a Note) realizing gross proceeds of $1,000,000 (the Proceeds) and (ii) a warrant to purchase up to 570,478,452 shares of the Companys common stock at an exercise price of $0.001946, subject to adjustment as provided therein (the 3a Warrant). The transaction with 3a closed on October 19, 2020 upon receipt of the Proceeds.
The 3a Note matures on October 6, 2021 (the Maturity Date) and is convertible at any time. The conversion price of the 3a Note shall be equal to $0.00179638 (the Conversion Price); provided, however, that in no instance shall the investor be entitled to convert at a price lower than $0.00119759 (the 3a Note Floor Price) and in no instance shall 3a be entitled to convert into such an amount of common stock that, together with all shares of common stock which have been previously converted, would equal greater than 13.8875% of the total issued and outstanding shares of common stock of the Company, subject to adjustment as provided herein, including, but not limited to, adjustments for any stock split, stock combination, reclassification or similar transaction that proportionately decreases or increases the common stock during such measuring period. The Conversion Price shall be rounded down to the nearest $0.0001 and in no event lower than $0.00119759.
Provided that the Company has satisfied all of the Equity Conditions (as defined in the 3a Note) the Company may deliver a notice to 3a an Optional Redemption Notice, of its irrevocable election to redeem some or all of the then outstanding principal or interest amount of the 3a Note for cash in an amount equal to the Optional Redemption Amount as further described in the 3a Note (the Optional Redemption Amount) on the 20th Trading Day following the Optional Redemption Notice.
The 3a Warrant has a term of five years and may only be exercised on a cash basis at an Exercise Price equal to $0.001946, subject to adjustment (the Exercise Price); provided, however, that in no instance shall 3a be entitled to at a price lower than $0.001946 (the Floor Price) and in no instance shall 3a be entitled to exercise the 3a Warrant into such an amount of common stock that, together with all shares of Common Stock which have been previously exercised by 3a, would equal greater than 8.546 % of the total issued and outstanding shares of common stock of the Company, subject to adjustment, including, but not limited to, adjustments for any stock split, stock combination, reclassification or similar transaction that proportionately decreases or increases the common stock during such measuring period. The Exercise Price shall be rounded down to the nearest $0.0001 and in no event lower than $0.001946.
The original issue discount of $111,000 will be amortized to interest expense over the life of the note.
The Company determined the fair value of the warrant using the Black-Scholes model and recorded an adjustment to the carrying value of the note liability with an equal and offsetting adjustment to Stockholders Equity. The warrant had a grant date fair value of $563,156 and the beneficial conversion feature was valued at $436,844.
There was total unamortized debt discount related to the 3a SPA of $673,333 as of February 28, 2021. During the three and nine months ended February 28, 2021, the Company recorded amortization of debt discount totaling $275,455 and $437,667, respectively.
If the Company or any subsidiary thereof, as applicable, at any time while the Trillium Note or the 3a Note are outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any common stock or common stock equivalents, at an effective price per share less than the Conversion Price then in effect other than in respect of an Exempt Issuance (as defined therein) (such lower price, the Base Share Price and such issuances collectively, a Dilutive Issuance), then simultaneously with the consummation of each Dilutive Issuance, the Conversion Price shall be reduced and only reduced to equal the Base Share Price. Such adjustment shall be made whenever such common stock or common stock equivalents are issued.
As of February 28, 2021, the outstanding balance on the 3a Note was $1,111,000 and the Company was deemed in default. On January 29, 2021, the Company and 3a entered into a waiver agreement which waived any and all defaults underlying the 3a SPA and the 3a Note for a period of six months.
The estimated fair value of the warrants was valued using the Black-Scholes option pricing model, using the following assumptions during the nine months ended February 28, 2021:
Trillium and 3a
On January 28, 2021, the Company entered into a Securities Purchase Agreement (the Purchase Agreement) with Trillium Partners LP (Trillium) and 3a Capital Establishment (3a together with Trillium, the Investors) pursuant to which the Company sold to each of the Investors (i) a 10% secured subordinated convertible promissory note in the principal aggregate amount of $916,666 or $ 1,833,333 in the aggregate (each a Note and together the Notes) realizing gross proceeds of $1,666,666 (the Proceeds).
The Notes mature on January 28, 2022 (the Maturity Date) and are convertible at any time. The conversion price of the Note is $0.0032 (the Conversion Price).
Provided that the Company has satisfied all of the Equity Conditions (as defined in the Notes) the Company may deliver a notice to the Investors (an Optional Redemption Notice, of its irrevocable election to redeem some or all of the then outstanding principal or interest amount of the Notes for cash in an amount equal to the Optional Redemption Amount as further described in the Notes (the Optional Redemption Amount) on the 20th Trading Day following the Optional Redemption Notice.
If the Company or any subsidiary thereof, as applicable, at any time while the Notes are outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any common stock or common stock equivalents, at an effective price per share less than the Conversion Price then in effect other than in respect of an Exempt Issuance (as defined therein) (such lower price, the Base Share Price and such issuances collectively, a Dilutive Issuance), then simultaneously with the consummation of each Dilutive Issuance the Conversion Price shall be reduced and only reduced to equal the Base Share Price. Such adjustment shall be made whenever such common stock or common stock equivalents are issued.
Additionally, while the Notes remain outstanding the Company shall not, without prior written approval from Investors, enter into a Variable Rate Transaction (as defined in the Notes). Further, as long as the Notes remain outstanding, upon any issuance by the Company of common stock, common stock equivalents or other indebtedness or other securities, whether for cash consideration or a combination of units thereof (a Subsequent Financing), the Investors shall have the right to participate up to is Pro Rata Portion (as defined in the Purchase Agreement) of a percentage of such Subsequent Financing equal to, in the aggregate, one hundred percent (100%) in case of any offering on the same terms, conditions and price provided for in the Subsequent Financing.
In connection with the issuance of the Notes, the Company entered into a Security Agreement (the Security Agreement) by and among the Company, certain wholly owned subsidiaries of the Company (the Guarantors), as guarantors, and Trillium, whereby the Company and the Guarantors pledged and granted to Trillium for the benefit of the Investors, a lien on and security interest in all of the right, title and interest in substantially all of the assets of the Company and the Guarantors, subject to certain exceptions specified therein.
Additionally, in connection with the issuance of the Notes, the Company entered into a Guaranty Agreement (the Guaranty Agreement) by and among the Company, the Guarantors, and the Investors, whereby the Guarantors absolutely and unconditionally guarantee the payment by the Company of all amounts due with respect to the Notes and the performance by the Company of its obligations under the Notes.
In connection with the issuance of the Notes the Company and the Investor also entered into a registration rights agreement (Registration Rights Agreement) pursuant to which the Company has agreed to register the common stock underlying the Notes within a period of 180 days from the date of the Closing.
Further, on January 28, 2021, the Company and the Investors entered into a waiver (Waiver) waiving any and all defaults for a period of six months in connection with (i) the Purchase Agreement and Notes (ii) the securities purchase agreement (as modified from time to time, the Trillium Purchase Agreement), dated as of October 7, 2020 by and between the Company and Trillium providing for, among other things, the issuance at the applicable closing, (A) a 10% Secured Subordinated Convertible Promissory Note (as modified from time to time, the Trillium Note) and (B) Warrants to purchase shares of the Common Stock (as modified from time to time, the Trillium Warrants); and (iii) securities purchase agreement (as modified from time to time, the 3a Capital Purchase Agreement), dated as of October 14, 2020 between the Company and 3a providing for, among other things, the issuance at the applicable closing, (A) a 10% Secured Subordinated Convertible Promissory Note (as modified from time to time, the 3a Note) and (B) Warrants to purchase shares of the Common Stock (as modified from time to time, the 3a Warrants). The Waiver is applicable to the January 2021 notes issued to Trillium and 3A.
The convertible notes are subordinated to Corefund Capital LLC(See Note 1, Accounts Receivable Trade).
Future maturities related to the above promissory notes, notes payable and convertible notes are as follows:
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