Subordinated Debt - Convertible and Non - Convertible
|6 Months Ended|
Mar. 31, 2018
|Notes to Financial Statements|
|8. Subordinated Debt - Convertible and Non - Convertible||
At March 31, 2018 and September 30, 2017, the Company had outstanding balances under its Convertible and Non-convertible Subordinated Debt agreements, as follows (in thousands):
10% Convertible Subordinated Note
The Company had a Subordinated Note payable to Jax Legacy Investment 1, LLC (JAX Legacy), pursuant to a Subscription Agreement dated October 2, 2015, in the amount of $4,185,000, and which was scheduled to become due on October 2, 2018.
On April 3, 2017, the Company and JAX Legacy amended and restated the Subordinated Note in its entirety in the form of a 10% Convertible Subordinated Note (the 10% Note) in the aggregate principal amount of $4,185,000. The 10% Note matures on October 3, 2021 (the Maturity Date). The 10% Note is convertible into shares of the Companys Common Stock at a conversion price equal to $5.83 per share. All or any portion of the 10% Note may be redeemed by the Company for cash at any time on or after April 3, 2018 that the average daily VWAP of the Companys Common Stock reported on the principal trading market for the Common Stock exceeds the then applicable Conversion Price for a period of 20 trading days. The redemption price shall be an amount equal to 100% of the then outstanding principal amount of the 10% Note being redeemed, plus accrued and unpaid interest thereon. The Company agreed to issue to the investors in JAX Legacy approximately 77,775 shares of common stock, at a value of approximately $385,000 which was expensed as loss on the extinguishment of debt during the year ended September 30, 2017.
On December 13, 2017, the Company issued 135,655 shares of common stock for both the conversion and paid in kind interest through September 30, 2017.
On January 4, 2018, the Company issued approximately 41,000 shares of common stock to JAX Legacy related to the interest on the subordinated note through January 4, 2018. The stock was valued at approximately $105,000.
On April 4, 2018, the Company issued approximately 42,500 shares of common stock to JAX Legacy related to the interest on the subordinated note through January 4, 2018. The stock was valued at approximately $105,000.
Total discount recorded at issuance of the original Jax subordinated note payable was approximately $647,000. Total amortization of debt discount for the year ended September 30, 2017 was approximately $107,000, and the remaining $322,000 was written off to loss on extinguishment of debt upon amendment and restatement resulting in the 10% Note.
Amended and Restated Non-Negotiable Promissory Note
On October 4, 2017, the Company executed an Amended and Restated Non-Negotiable Promissory Note in favor of William Daniel Dampier and Carol Lee Dampier (sellers of Access Data Consulting Corporation) in the amount of $1,202,405 (the Note). This Note amends and, as so amended, restates in its entirety and replaces that certain Subordinated Nonnegotiable Promissory Note dated October 4, 2015, issued by the Company to William Daniel Dampier and Carol Lee Dampier in the original principal amount of $3,000,000. The Company agreed to pay William Daniel Dampier and Carol Lee Dampier 12 equal installments of $107,675, commencing on November 4, 2017 and ending on October 4, 2018. The entire loan is classified as current and subordinate to the senior debt.
Subordinated Promissory Note
On January 20, 2017, the Company entered into Addendum No. 1 (the Addendum) to the Stock Purchase Agreement dated as of January 1, 2016 (the Paladin Agreement) by and among the Company and Enoch S. Timothy and Dorothy Timothy (collectively, the Sellers). Pursuant to the terms of the Addendum, the Company and the Sellers agreed (a) that the conditions to the Earnouts (as defined in the Paladin Agreement) had been satisfied or waived and (b) that the amounts payable to the Sellers in connection with the Earnouts shall be amended and restructured as follows: (i) the Company paid $250,000 in cash to the Sellers prior to January 31, 2017 (the Earnout Cash Payment) and (ii) the Company shall issue to the Sellers a subordinated promissory note in the principal amount of $1,000,000 (the Subordinated Note), The Subordinated Note shall bear interest at the rate of 5.5% per annum. Interest on the Subordinated Note shall be payable monthly, principle can only be paid in stock until the term-loan and Revolving Credit Facility are repaid. The Subordinated Note shall have a term of three years and may be prepaid without penalty. The principal of and interest on the Subordinated Note may be paid, at the option of the Company, either in cash or in shares of common stock of the Company or in any combination of cash and common stock. The Sellers have agreed that all payments and obligations under the Subordinated Note shall be subordinate and junior in right of payment to any Senior Indebtedness (as defined in the Paladin Agreement) now or hereafter existing to Senior Lenders (current or future) (as defined in the Paladin Agreement).
9.5% Convertible Subordinated Notes
On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as part of the Merger Consideration (see note 11) an aggregate of $12.5 million in aggregate principal amount of its 9.5% Convertible Subordinated Notes (the 9.5% Notes). The 9.5% Notes mature on October 3, 2021 (the Maturity Date). The 9.5% Notes are convertible into shares of the Companys Common Stock at a conversion price equal to $5.83 per share. Interest on the 9.5% Notes accrues at the rate of 9.5% per annum and shall be paid quarterly in arrears on June 30, September 30, December 31 and March 31, beginning on June 30, 2017, on each conversion date with respect to the 9.5% Notes (as to that principal amount then being converted), and on the Maturity Date (each such date, an Interest Payment Date). At the option of the Company, interest may be paid on an Interest Payment Date either in cash or in shares of Common Stock of the Company, which Common Stock shall be valued based on the terms of the agreement, subject to certain limitations defined in the loan agreement. Each of the 9.5% Notes is subordinated in payment to the obligations of the Company to the lenders parties to that certain Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 by and among the Company, the Companys subsidiaries named as borrowers therein (collectively with the Company, the Borrowers), the senior lenders named therein and PNC Bank, National Association, as administrative agent and collateral agent (the Agent) for the senior lenders (the Senior Credit Agreement), pursuant to those certain Subordination and Inter-creditor Agreements, each dated as of March 31, 2017 by and among the Company, the Borrowers, the Agent and each of the holders of the 9.5% Notes.
None of the 9.5% Notes issued to the SNIH Stockholders are registered under the Securities Act of 1933, as amended (the Securities Act). Each of the SNIH Stockholders who received 9.5% Notes is an accredited investor. The issuance of the 9.5% Notes to such SNIH Stockholders is exempt from the registration requirements of the Act in reliance on an exemption from registration provided by Section 4(2) of the Act.
Future minimum payments of subordinated debt will total approximately $18,406,000 as follows: fiscal 2018 - $615,000, fiscal 2019 - $106,000, fiscal 2020 - $1,000,000, fiscal 2021- $0 and fiscal 2022 - $16,685,000.