Annual report pursuant to Section 13 and 15(d)

Note 16 - Redeemable Convertible Preferred Stock

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Note 16 - Redeemable Convertible Preferred Stock
12 Months Ended
Dec. 31, 2015
Disclosure Text Block Supplement [Abstract]  
Preferred Stock [Text Block]
Note 16
– Redeemable Convertible Preferred Stock

Redeemable Convertible Preferred Stock

The table below shows the Company’s par value, authorized shares, issued shares and outstanding shares of its Redeemable Convertible Preferred Stock for the periods indicated:

Redeemable Convertible Preferred Stock
 
December 31, 2015
(Audited)
   
December 31, 2014
(Audited)
 
Authorized; par value $0.00001
   
10,000,000
     
10,000,000
 
Issued
   
1,088
     
-
 
Outstanding
   
1,088
     
-
 

Background

On August 10, 2015, the Company entered into a Stock Purchase Agreement (“SPA”) with a single institutional investor pursuant to which the Company agreed to issue and sell 1,088 shares of the Company’s newly designated Series A Redeemable Convertible Preferred Stock of the Company, par value $0.00001 per share (the “Redeemable Preferred Stock”), convertible into shares of the Company’s Common Stock, at a fixed conversion price of $5.25 per share, at a purchase price of $10,000 per share with an 8% original issue discount, for total gross proceeds of $10.0 million, or the sale of approximately $10.88 million.

Conversion Feature

The Redeemable Preferred Stock may be converted to shares of the Company’s Common Stock at either the holder or the Company’s option provided certain equity conditions are met.

Redemption Feature

The Stock Purchase agreement contains a redemption and an early redemption option at the Company’s option, not the holders (provided that no Trigger Event has occurred).

Dividends

The dividend rate amounts to 8.5% per annum subject to certain upward or downward adjustments based upon the market value of the Company’s Common Stock, with a maximum dividend rate of 17.0% and a minimum dividend rate of 0.0%, and will accrue until the earlier of conversion, redemption, or maturity.  In addition, the dividend rate will increase by 10 percentage points in the event of certain “triggering events,” including as described below.  The Redeemable Preferred Stock will mature seven years following the issuance date, at which time such shares will automatically convert into shares of Common Stock.

Conversion Premium

Upon conversion, the Company shall pay the holders of the Redeemable Preferred Stock being converted a conversion premium equal to the amount of dividends that such shares would have otherwise received if they had been held through the dividend maturity date.  The conversion premium is only payable in certain circumstances and meets the definition of a contingent dividend.  The dividends and conversion premium may be paid in cash or, at the Company’s option, shares of Common Stock.  If the Company elects to pay the dividends or conversion premium amount in the form of Common Stock, the number of shares to be issued shall be calculated (subject to adjustment under certain triggering events) by using 90.0% of the average of the five lowest daily volume weighted average prices during the measurement period, less $0.05 per share of Common Stock, not to exceed 100% of the lowest sales price on the last day of such measurement period, less $0.05 per share of Common Stock.  The Company will not issue any of its Common Stock that would result in the holder being deemed to beneficially own more than 4.99% of the total Common Stock outstanding at any one-time (which may be increased to 9.99% at the option of the holder).  The net proceeds of the transaction are intended to be used to finance potential future acquisitions, global expansion, increase sales and marketing efforts, and for general corporate purposes, including working capital to foster the Company’s continued growth.

Authorized, issued and outstanding stock are as follows for the periods indicated:

Series A Redeemable Convertible Preferred Stock
 
December 31, 2015 (Audited)
   
December 31, 2014
(Audited)
 
Stock authorized
   
1,088
     
-
 
Stock outstanding
   
1,088
     
-
 
Par value
 
$
0.00001
     
-
 
Conversion price
 
$
5.25
     
-
 
Dividend rate
   
26.00
%
   
-
 
Original issue date
 
August 10, 2015
     
-
 
Redemption date
 
August 10, 2022
     
-
 

Triggering Event

On September 10, 2015 the Company’s trading was halted at a closing bid of $2.90.  As a result, the “Triggering Event” as defined within the SPA as “a suspension from trading or the failure of the Common Stock to be trading or listed on the NASDAQ Capital Market;" is considered to be met.  Accordingly, this event had the following implications on the Redeemable Preferred Stock:

·
The dividend rate will adjust upward by 10 percentage points from the applicable dividend rate.

·
If the Company elects to pay dividends or the conversion premium amount in Common Stock, the number of shares to be issued will be calculated by using 80.0% of the lowest daily volume weighted average price during any Measurement Period for any conversion by Holder, less $0.05 per share of Common Stock, not to exceed 80.0% of the lowest sales price on the last day of any Measurement Period, less $0.05 per share of Common Stock.

·
The Company no longer has the option to redeem the shares prior to the dividend maturity date.

·
As the equity conditions per the SPA were not met at December 31, 2015, the Company does not have the ability to convert the Redeemable Preferred Stock to Common Shares prior to the Dividend Maturity date.

·
The measurement date is adjusted to the period beginning from the Issuance date and ending 30 trading days after all applicable Conversion shares have actually been received into the Holder’s designated brokerage account.  For each trading day during the Measurement Period on which less than all of the conditions of the agreements are not met, 1 Trading Day will be added to what otherwise would have been the end of the Measurement Period.

Administrative and legal fees incurred as of December 31, 2015 and 2014 related to the issuance of the Redeemable Preferred Stock are $614,402 and $0, respectively, and are recorded as a reduction to the carrying value of the Redeemable Preferred Stock.

Classification and Accounting of Redeemable Preferred Stock

The Redeemable Preferred Stock are to be classified as part of temporary equity (mezzanine equity) along with the associated identified financial instruments including the embedded conversion feature and the redemption feature in the Company’s Consolidated Balance Sheets based upon the terms and conditions of the SPA.  The initial carrying amount of Redeemable Preferred Stock is equal to the amount of proceeds received upon issuance, as reduced for the derivative liability associated with the dividend anti-dilution protection and conversion premium.

The conversion premium and the dividends associated with the Redeemable Preferred Stock contain an anti-dilution feature within the dividend rate, which fluctuates inversely to the changes in the value of the Company’s stock price.  Under ASC 480 Distinguishing Liabilities from Equity (“ASC 480”) the Company’s management noted that this inverse relationship triggers liability treatment of such features.  Accordingly, the conversion premium and the dividends are identified as a derivative liability which require bifurcation from the Redeemable Preferred Stock. Initial and subsequent measurement of these feature will be recorded at fair value, with changes in fair value recognized in earnings on a quarterly basis.

The fair value of the conversion premium and dividend anti-dilution features were determined to be $7,927,280 upon issuance at August 10, 2015 and $17,220,000 as of December 31, 2015.  The change between the two valuations of $9,292,720 is recorded as part of the Loss on derivative liability.

Below is the activity for the Company’s preferred issuances for the periods presented:

 
 
Redeemable Convertible Preferred Stock
 
 
 
Shares
   
Amount
 
December 31, 2014
   
-
   
$
-
 
Issuance of preferred stock
   
1,088
     
10,000,000
 
Bifurcation of anti-dilution features
   
-
     
(7,927,280
)
Equity issuance costs
   
-
     
(614,402
)
December 31, 2015
   
1,088
   
$
1,458,318