Convertible Promissory Notes
|3 Months Ended|
Mar. 31, 2020
|Debt Disclosure [Abstract]|
|Convertible Promissory Notes||Convertible Promissory Notes
On March 1, 2019, Inuvo entered into a Securities Purchase Agreement with three accredited investors (the “Purchasers”) for the purchase and sale of an aggregate of $1,440,000 of principal of Original Issue Discount Unsecured Subordinated Convertible Notes due September 1, 2020 (the “Calvary Notes”) to fund working capital and additional expenses resulting from the delay in closing of the Mergers associated with the government shut down. The initial conversion price of the Calvary Notes was $1.08 per share which would make them convertible into 1,333,333 unregistered shares of Inuvo’s common stock upon conversion. The Calvary Notes were issued in a private placement and the shares of common stock issuable upon conversion are restricted, subject to resale under Rule 144. The proceeds to Inuvo from the offering were $1,200,000. Inuvo did not pay any commissions or finders fees in connection with the sale of the Calvary Notes and Inuvo utilized the proceeds for working capital. The Calvary Notes are reported net of unamortized original issue discounts and initial value attributed to the bifurcated embedded conversion feature. At March 31, 2020, the remaining principal amount outstanding is $315,000, with a carrying amount net of discounts of $271,108.
Consideration of Down Round price adjustment
The Notes contain certain triggers that create adjustments to the conversion ratio, which provide down round protection to the holders. Because the conversion feature has been bifurcated as an embedded derivative and is marked to fair value at each reporting period, the actual occurrence of a trigger and the resulting adjustment to the conversion rate does not require any additional accounting treatment at the time of the price adjustment. Rather, the next fair value computation reflects the new terms of the conversion feature.
On July 15, 2019, we closed on an underwritten public offering of 13,750,000 shares at an offering price of $0.30 per share. As a result, this triggered a corresponding adjustment to the conversion ratio in the Notes to $0.30. The fair value of the embedded derivative at September 30, 2019, reflected these new terms.
On November 11, 2019 we entered into Note Modification and Release Agreements with the holders of $1,080,000 principal amount of the Calvary Notes. Under the terms of the Note Modification and Release Agreement, the parties agreed that in consideration of such noteholder’s agreement to convert a minimum of 50% of the outstanding amount of the note (the “First Conversion Amount”) that the conversion price for the First Conversion Amount would be $0.265 per share and that the conversion price for any remaining amount due under the note would be $0.30 per share, subject to future adjustments under the terms of the note including dilutive issuances at a price below $0.30 per share, subject to a floor of $0.23 per share. The agreement contains mutual general releases. These holders converted an aggregate of $765,000 due under the Calvary Notes into 2,886,792 shares of our common stock. Immediately prior to the conversion, the carrying value of the derivative was marked-to-market. Upon converting, the issued shares were recorded at their fair value of $0.29 per share. This resulted in a loss on extinguishment. Both the loss due to the marking to market and the loss on extinguishment totaling approximately $193,000 were recorded to other income, net.
In January 2020, a noteholder of the Original Issue Discount Unsecured Subordinated Convertible Notes due September 1, 2020 converted $360,000 principal amount due under the Note into 1,200,000 shares of our common stock. The carrying value of the bifurcated derivative was marked-to-market immediately prior to the conversion. Upon conversion, the issued shares were recorded at their fair value. Both the loss due to the marked-to-market and loss on extinguishment of approximately $69,000 were recorded to other income, net. See Note 8 for discussion.
The entire disclosure for long-term debt.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef