The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Description of Business, Liquidity and Going Concern
Secure Point Technologies, Inc. (the Company) formerly known as Implant Sciences Corporation, up until the time of the sale of its business to L-3 Communications Corporation in January 2017 (as described below) provided systems and sensors for the homeland security market and related industries. We developed and acquired technologies using ion mobility spectrometry to develop a product line for use in trace explosives and narcotics detection. Prior to the sale of the Companys business to L-3 Communications Corporation in January 2017, the Company marketed and sold its existing trace explosives and narcotics detector products while continuing to make significant investments in developing the next generation of these products. At the present time, We are a shell company with no operations. We are actively considering various acquisition targets and other business opportunities. We hope to acquire one or more operating businesses or consummate a business opportunity within the next twelve months. However, we cannot guarantee that we will successfully consummate an acquisition or other business opportunity within such timeframe, or at all.
Sale of Explosives Detector Assets and Bankruptcy Filing
On October 10, 2016, we and our subsidiaries entered into an asset purchase agreement (as amended, the Asset Purchase Agreement) with L-3 Communications Corporation (L-3) to sell our explosives trace detection assets, constituting our entire business, to L-3 for $117.5 million in cash, plus the assumption of specified liabilities, subject to adjustment (the Transaction). The Asset Purchase Agreement served as the stalking horse bid in a sale process that was conducted under Section 363 of the U.S. Bankruptcy Code (the Bankruptcy Code) and an order of the U.S. Bankruptcy Court for the District of Delaware (the Bankruptcy Court) establishing certain procedures and protections (the Sales Procedures Order). In connection with the Asset Purchase Agreement, on October 10, 2016, the Company and its subsidiaries IMX Acquisition Corp., C Acquisition Corp. and Accurel Systems International Corp. (together with the Company, the Debtors) filed voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. After commencement of the Chapter 11 proceedings, we continued to operate our businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. On the Petition Date, we filed several first day motions with the Bankruptcy Court, including a motion to have the Chapter 11 cases jointly administered. At a hearing held on October 11, 2016, the Bankruptcy Court entered orders approving the various first day motions.
On December 16, 2016, after completion of the auction process in accordance with the requirements of the Bankruptcy Code and the Sales Procedures Order, the Bankruptcy Court entered an order authorizing and approving the Transaction with L-3 under Section 363 of the Bankruptcy Code.
On January 5, 2017, the closing of the Transaction occurred and L-3 acquired substantially all the assets of the Debtors in exchange for $117.5 million in cash plus the assumption of certain liabilities. In connection with the closing of the Transaction, on January 5, 2017, each of Drs. William J. McGann and Darryl Jones, Messrs. Roger Deschenes and Todd Silvestri and Ms. Brenda L. Baron resigned from their positions as executive officers and employees of the Company, and Dr. William J. McGann resigned from his position as a member of the Companys board of directors. Also in connection with the closing of the Transaction, on January 5, 2017, the Company filed Articles of Amendment to the Companys Articles of Organization in the State of Massachusetts to change the Companys name to Secure Point Technologies, Inc.
On the closing date of the Transaction, Mr. Robert Liscouski, our President, assumed the senior executive role for the Company and continues to serve as a Director of the Company along with the other two remaining board members, Mr. Michael Turmelle (Chairman) and Mr. James Simon, Jr. Effective January 9, 2017, the Company entered into a service agreement with Mr. Christopher Roberts, pursuant to which Mr. Roberts agreed to assist in the preparation of the Companys financial statements and provide related services. In connection therewith, on January 9, 2017, the board of directors of the Company appointed Mr. Roberts as the chief financial officer of the Company.
Effective February 1, 2017, the Company changed its address to 215 Depot Ct. SE, Leesburg, VA 20175.
In connection with the commencement of the Chapter 11 cases, we filed a motion seeking the approval of the Bankruptcy Court for a super-priority senior secured loan of $5.7 million (the Original DIP Loan) between the Debtors and DIP SPV I, L.P., as the debtor-in-possession lender ( the Original DIP Lender) pursuant to a Senior Secured Super-Priority Debtor-in-Possession Loan and Security Agreement entered into by the Debtors and the Original DIP Lender on October 10, 2016 (as amended on November 3, 2016, the Original DIP Agreement). The Original DIP Loan would bear interest at 12% and included a one-time closing fee of $199,500 on the closing date of the Original DIP Loan and an exit fee equal to $427,500, less any interest, other that default interest (which was at a rate of 24%), paid to the Original DIP Lender as of the termination date of the Original DIP Loan. The Original
- 6 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DIP Loan was payable in full upon the consummation of the sale under the Asset Purchase Agreement with L-3 or a sale to any other winning bidder in the Bankruptcy Court auction. On October 13, 2016, we borrowed $1,500,000 under the Original DIP Loan.
The use of proceeds from the Original DIP Loan were limited to working capital and other general corporate purposes consistent with the budget that the Company presented to the Original DIP Lender, including payment of costs and expenses related to the administration of the bankruptcy proceedings and payment of other expenses as approved by the Bankruptcy Court.
On November 7, 2016, as a result of an auction process run in accordance with the requirements of the Bankruptcy Code, the Debtors terminated the Original DIP Agreement and entered into a replacement Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the New DIP Agreement) with Tannor Partners Credit Fund, LP, (the New DIP Lender), which New DIP Agreement was approved by the Bankruptcy Court on an interim basis pursuant to an order dated as of November 7, 2016 for the initial loan amount of $5,700,000. Under the New DIP Agreement, subject to the terms and conditions thereof, the New DIP Lender lent up to a total of $8.0 million to the Debtors, with the initial installment of $5,700,000 paid upon the Bankruptcy Court entering the interim order for the New DIP Agreement and the remaining $2,300,000 paid upon the Bankruptcy Court entering the final order for the New DIP Agreement, which final order was entered by the Bankruptcy Court on November 30, 2016. The New DIP Agreement was substantially identical to the Original DIP Agreement, except for the amounts of the closing fee and the exit fee, which was $35,000 and $425,000 (minus any interest other than default interest), respectively. On November 8, 2016, we borrowed $5,700,000 under the New DIP Agreement and borrowed an additional $2,300,000 on November 30, 2016. In connection with the termination of the Original DIP Agreement, the Company paid $1,610,769 to the Original DIP Lender and its advisors to satisfy outstanding obligations under the Original DIP Agreement, including $74,354 for expense reimbursement for the Original DIP Lenders advisors.
On or about December 8, 2016, New DIP Lender asserted that we were not in compliance with Section 7.1(a) of the New DIP Agreement, wherein the net cash receipts for the cumulative period commencing on November 7, 2016 and ending on November 30, 2016 were required be equal to or exceed 85% of the budgeted cash receipts amount (the DIP Budget), which event constituted an event of default under the New DIP Agreement. Effective as of December 1, 2016 the interest rate under the New DIP Agreement increased 12.0% to 24.0%. Subject to the terms of a Stipulation and Order entered in the Bankruptcy Case, we agreed with the New DIP Lender to waive such asserted default in exchange for an agreement by us to pay an additional $96,000 of interest, which interest was not credited against the exit fee.
The total amount borrowed under the New DIP Agreement together with accrued interest was paid in full effective January 5, 2017 in connection with the closing of the Transaction with L-3.
We believe that the proceeds from the Transaction with L-3 and the assumption by L-3 of certain liabilities, after taking into account the payment of the New DIP Loan, related expenses and exit fee, will be sufficient to pay all secured and unsecured creditor claims, financial advisor and legal expenses associated with the Transaction, payments due under our Change of Control Plan which were not assumed by L-3, and, legal fees and other expenses associated with the bankruptcy filing. $2.5 million of the cash proceeds from the Transaction are being held in an escrow account to secure the Debtors obligations for the purchase price adjustments under the Asset Purchase Agreement for the Debtors net working capital, which adjustments are expected to be completed in the first half of calendar 2017. The
Companys Board of Directors is exploring opportunities to provide optionality to our shareholders with the remaining proceeds after the closing of the Transaction with L-3. We intend to provide alternatives as part of the plan to emerge from voluntary Chapter 11 bankruptcy that would recognize the value of a publicly listed shell. These alternatives may include the merger of an operating entity into the shell or a liquidation of the company, which determination is subject to approval by our shareholders. A plan of reorganization was required to be
filed with the Bankruptcy Court on February 7, 2017, but on January 26, 2017 we filed a motion with the Bankruptcy Court requesting a 60 day extension of the date by which the Debtors have an exclusive right to file a plan of reorganization.
Termination of Zapata Industries SAS Letter of Intent
On July 18, 2016, the Company and Zapata Industries SAS (Zapata) entered into a Letter of Intent (the LOI) regarding a potential business combination between us and Zapata. On November 21, 2016, the LOI was terminated. On December 2, 2016 Zapata filed a claim seeking a breakup fee related to the cancellation of the acquisition. The Company disputes any payment obligations it may have to Zapata in connection with the LOI or the termination thereof.
- 7 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Liquidity, Going Concern and Managements Plans
On December 10, 2008, we entered into a note and warrant purchase agreement with DMRJ Group LLC (DMRJ) pursuant to which we issued a senior secured convertible promissory note in the principal amount of $5,600,000 and a warrant to purchase 1,000,000 shares of our common stock. We have entered into a series of amendments, waivers and modifications with DMRJ. On July 20, 2016, we amended our credit agreements with DMRJ pursuant to which, amongst other matters, we extended the maturity date of all of our indebtedness to DMRJ to October 31, 2016.
On May 4, 2015, we entered into an assignment agreement with DMRJ and Montsant Partners, LLC (Montsant), wherein DMRJ assigned its rights, title and interest in the senior secured promissory note dated December 10, 2008 and appointed DMRJ as its collateral agent under the promissory note agreement. On July 20, 2016, we amended our credit agreement with Montsant, extending the maturity date of our indebtedness to October 31, 2016.
DMRJ and Montsant are funds managed by Platinum Partners Value Arbitrage Fund LP.
On March 19, 2014, we entered into a note purchase agreement with a group of institutional investors and BAM Administrative Services LLC (BAM), an administrative agent for the investors, pursuant to which we issued senior secured promissory notes in the aggregate principal amount of $20,000,000. We used all of the proceeds from the sale of the notes to repay (i) $17,624,000 of our outstanding indebtedness to DMRJ under revolving promissory note (ii) $1,809,000 of interest outstanding under that facility and (iii) $567,000 of interest outstanding under our senior secured convertible promissory note (see Note 12 to the condensed consolidated financial statements). We have entered into several amendments, waivers and modifications with BAM. The notes bore interest at 16% per annum. Due to the
filing of the voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court, we were deemed to be in default under our note purchase agreement with BAM and our interest rate was increased to 18.5% effective as of October 10, 2016.
The maturity of our indebtedness to BAM was automatically extended to October 30, 2016 as a result of the extension of the maturity date of our indebtedness to DMRJ and Montsant.
The payment of our indebtedness to DMRJ and Montsant are stayed pending the conclusion of the bankruptcy proceedings.
The full amount of the BAM Promissory Note and all accrued interest, along with the New DIP Loans and all accrued interest were paid in full on January 5, 2017 upon the closing of the Transaction with L-3.
We are incurring and expect to continue to incur increased legal and financial adviser costs associated with the bankruptcy proceedings following the closing of the Transaction with L-3. These ongoing costs raise doubt as to our ability to successfully emerge from Chapter 11 and provide a recovery to equity holders.
Our common stock was delisted by the NYSE Amex LLC in June 2009 as result of our failure to comply with certain continued listing requirements. Our common stock has been quoted on the OTC Bulletin Board since May 2009 and is also quoted on the OTC Markets Groups OTCQB tier under the symbol IMSC. We believe that trading over the counter has limited our stocks liquidity and has impaired our ability to raise capital. We have submitted paperwork for a symbol change based on the corporate name change. We anticipate that FINRA will issue a new ticker symbol in the near future.
For the six months ended December 31, 2016, we reported a net loss of $25,594,000 and used $5,916,000 in cash from operations. As of December 31, 2016, the Company had an accumulated deficit of approximately $226,075,000 and a working capital deficit of $95,585,000.
As of December 31, 2016, our obligations to DMRJ under each of the three promissory notes and a revolving line of credit approximated $11,970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of December 31, 2016, our obligation to DMRJ for accrued interest under these instruments approximated $9,129,000 and is included in current liabilities in the condensed consolidated financial statements.
As of December 31, 2016, our obligations to Montsant under a promissory note approximated $5,284,000. Further, as of December 31, 2016, our obligation to Montsant for accrued interest under this instrument approximated was $405,000.
As of December 31, 2016, our obligations under the senior secured promissory notes for which BAM is the agent were $20,000,000. Further, as of December 31, 2016, our obligation under such notes for accrued interest amounted to approximately $4,113,000 and is included in current liabilities in the condensed consolidated financial
- 8 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
statements. The total amounts borrowed under the BAM senior secured promissory notes together with accrued interest were paid in full effective January 5, 2017 upon the closing of the Transaction with L-3.
As of February 13, 2017, our obligations to DMRJ under each of the three promissory notes and a revolving line of credit approximated $11,970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of February 13, 2017, our obligation to DMRJ for accrued interest under these instruments approximated $10,012,000. Please refer to Note 14 to the condensed consolidated financial statements for a discussion of the August 2016 conversions of principal indebtedness by DMRJ.
As of February 13, 2017, our obligations to Montsant under a promissory note approximated $5,284,000. Further, as of February 13, 2017, our obligation to Montsant for accrued interest under this instrument approximated $502,000.
On December 11, 2015, we entered into an Accounts Receivable Purchase Agreement (the RCA Purchase Agreement) with Republic Capital Access, LLC (RCA), pursuant to which we may sell eligible accounts receivables relating to U.S. government prime contracts or subcontracts (as defined in the RCA Purchase Agreement, Eligible Receivables) to RCA. The total amount of Eligible Receivables that we may sell to RCA is subject to a maximum limit of $2,000,000 of outstanding receivables at any given time. On April 11, 2016, we amended the RCA Purchase Agreement (the Amended RCA Purchase Agreement). As amended, the total amount of Eligible Receivables that we may sell to RCA is subject to a maximum limit of $3,500,000 of outstanding receivables at any given time.
Pursuant to the terms of the RCA Purchase Agreement, we will receive from RCA, within two business days of the submission of the applicable invoice, an initial payment equal to 90% of the face value of an Eligible Receivable purchased by RCA. Following payment of such Eligible Receivable to RCA by the relevant customer, RCA shall pay the Company the residual 10% of such receivable, less transaction fees payable to RCA by the Company pursuant to the RCA Purchase Agreement.
We have paid, the following fees, as applicable, to RCA pursuant to the RCA Purchase Agreement: (i) an initial enrollment fee equal to $5,000.00; (ii) a discount factor equal to 0.35%, for U.S. government contracts (or 0.53% for U.S. government subcontracts), of the amounts of purchased receivables; (iii) a program access fee equal to 0.017% of the daily ending account balance for each day that receivables are outstanding; (iv) a commitment fee equal to 1% of Maximum Amount minus the amount of purchased receivables; and (v) expenses relating to the negotiation of the RCA Purchase Agreement, which amount is not expected to exceed $1,000. As of December 31, 2016, RCA has purchased $16,913,000 of our receivables pursuant to the RCA Purchase Agreement.
The RCA Purchase Agreement terminated on October 10, 2016, as a consequence of our filing of
voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. As of that date, w
e were no longer able to sell eligible accounts receivable to RCA and we have collected all amounts owed under the RCA Purchase Agreement from RCA. As of December 31, 2016 the outstanding amount borrowed under the RCA Purchase Agreement was $0.
$2.5 million of the cash proceeds from the Transaction with L-3 are being held in an escrow account to secure the Debtors obligations for the purchase price adjustments under the Asset Purchase Agreement for the Debtors net working capital, which adjustments are expected to be completed in the first half of calendar 2017.
The payment of our secured obligations with DMRJ and Montsant will be stayed until such time that the Official Committee of Equity Holders has concluded their activities to assert certain estate claims and causes of action and challenge the validity, enforceability, and perfection of certain prepetition secured claims. Subject to the terms of a settlement that will be filed with the Bankruptcy Court, and which is subject to Bankruptcy Court approval, interest on our debt obligations with DMRJ and Montsant will not accrue until such time that the obligations are paid by us, or until August 10, 2017. Further, upon the occurrence of an event of default under certain provisions of our credit agreements with DMRJ, Montsant and BAM, we could be required to pay default rate interest equal to the lesser of 2.5% per month and the maximum applicable legal rate per annum on the outstanding principal balance. The failure to cure an event of default or negotiate further extensions of our obligations to our secured lenders would have a material adverse impact on our liquidity and financial condition and could raise doubt as to our ability to successfully emerge from Chapter 11 and provide a recovery to equity holders.
On August 24, 2016, a Cayman Islands court appointed an insolvency specialist, RHSW Caribbean, to liquidate the assets of Platinum Partners Value Arbitrage Fund LP (Platinum). On October 18, 2016, RHSW Caribbean filed a Chapter 15 bankruptcy petition
with the United States Bankruptcy Court for the District of Southern New
- 9 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
York,
which seeks to protect Platinum's U.S. assets from its creditors while an insolvency proceeding is underway in the Cayman Islands.
We have suffered recurring losses from operations. Our condensed consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
There can be no assurances that our forecasted results will be achieved or that we will be able to raise additional capital necessary to operate our business. These conditions raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
2.
Interim Financial Statements and Basis of Presentation
Principles of Consolidation
The accompanying condensed consolidated financial statements include our operations in Massachusetts, California and Shanghai, China, and those of our wholly-owned subsidiaries. On March 25, 2015, our Board of Directors approved restructuring actions to better align costs with current and future geographic revenue sources and to improve efficiencies. Our San Diego, CA advanced technology office was relocated to our Wilmington, MA facility and our Shanghai office was closed. All intercompany transactions and accounts have been eliminated in consolidation.
Accounting Principles
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments), which we consider necessary for a fair presentation of the financial position at such date and of the operating results and cash flows for the periods presented. The results of operations and cash flows for the three months ended may not necessarily be indicative of results that may be expected for any succeeding quarter or for the entire fiscal year. The balance sheet at June 30, 2016 has been derived from our audited consolidated financial statements at that date, but does not include all of the information and notes required by U.S. GAAP for complete financial statements.
The information contained in this Form 10-Q should be read in conjunction with our audited financial statements, included in our Form 10-K, as of and for the year ended June 30, 2016.
Use of Accounting Estimates
The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Some of the more significant estimates include allowance for doubtful accounts, allowance for sales returns, inventory valuation, warranty reserves, and long-lived assets. Management's estimates are based on the facts and circumstances available at the time estimates are made, past historical experience, risk of loss, general economic conditions and trends and management's assessments of the probable future outcome of these matters. Consequently, actual results could differ from such estimates.
Significant accounting policies are described in Note 2 to the condensed consolidated financial statements included in Item 7 of our Form 10-K for the fiscal year ended June 30, 2016.
Foreign Currency Translation
The assets and liabilities of our Shanghai representative office were translated into U.S. dollars at current exchange rates as of the balance sheet date, expenses were translated at average monthly exchange rates. Net unrealized translation gains or losses associated with the Shanghai office were recorded directly to other comprehensive income. Realized gains and losses from foreign currency transactions were not material for any of the periods presented. We had short-term inter-company receivables from our Shanghai office which were adjusted each period for changes in foreign currency exchange rates with a corresponding entry recorded as a component of the consolidated statement of operations and comprehensive loss.
- 10 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Reclassification
Certain prior year amounts have been reclassified for consistency with the current period presentation.
On October 10, 2016, we and our subsidiaries entered into an asset purchase agreement to sell our explosives trace detection assets, constituting substantially all of our assets, to L-3 Communications Corporation for $117.5 million in cash, plus the assumption of specified liabilities, subject to adjustment.
We concluded that it was appropriate to classify the assets used in our explosives detection business as held for sale, as all of the criteria established under ASC 205 were met. Corresponding reclassifications have also been made to the balance sheet at June 30, 2016. These changes in classification had no effect on the previously reported condensed consolidated statement of operations for any period and did not materially affect previously reported cash flows in the condensed consolidated statement of cash flows.
Discontinued Operations and Assets Classified as Held for Sale
Accounting Standards Codification (Topic 205)
Presentation of Financial Statements Reporting Discontinued Operations
(ASC 205), establishes the criteria for a component of an entity classification as held for sale and reporting an entities financial statements as a discontinued operation. Under ASC 205, a component or group of components, or a business should be classified as held for sale in period in which all of the criteria are met.
·
Management, having the authority to approve the action, commits to a plan to sell the entity to be sold.
·
The entity to be sold is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such entities to be sold.
·
An active program to locate a buyer or buyers and other actions required to complete the plan to sell the entity to be sold have been initiated.
·
The sale of the entity to be sold is probable (the future event or events are likely to occur), and transfer of the entity to be sold is expected to qualify for recognition as a completed sale, within one year, unless events or circumstances beyond an entitys control extend the period required to complete the sale as discussed below.
·
The entity to be sold is being actively marketed for sale at a price that is reasonable in relation to its current fair value.
·
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Financial Accounting Standards Board issued Accounting Standards Update No. 2014-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
(ASU 2014-08). Under ASU 2014-08, a disposal of a component of an entity, a component or group of components shall be reported in discontinued operation if the if the disposal represents a strategic shift that has or will have a major effect on an entitys operations and financial results, as determined when the component or group of components; meets the criteria to be classified as held for sale; is disposed of by sale; or, is disposed of other than by sale.
The sale of our explosive detection assets will have a significant effect on our operations and financial results, given that we are disposing of essentially all of the assets used in our sole business and product line.
- 11 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following balance sheet provides the major classes of our explosives detection business held for sale assets and liabilities and is reconciled to our condensed consolidated balance sheet as of December 31, 2016 and June 30, 2016.
|
|
|
|
| |
Secure Point Technologies, Inc.
|
Condensed Consolidated Balance Sheet
|
As of December 31, 2016
|
(in thousands)
|
|
|
Held for Sale
|
|
Continuing
|
|
Total
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
3,354
|
|
$
-
|
|
$
3,354
|
Restricted cash and investments
|
367
|
|
-
|
|
367
|
Accounts receivable-trade, net
|
3,806
|
|
-
|
|
3,806
|
Inventories, net
|
10,633
|
|
-
|
|
10,633
|
Prepaid expenses and other current assets
|
677
|
|
149
|
|
826
|
Total current assets
|
18,837
|
|
149
|
|
18,986
|
Property and equipment, net
|
832
|
|
-
|
|
832
|
Other non-current assets
|
98
|
|
-
|
|
98
|
Total assets
|
$
19,767
|
|
$
149
|
|
$
19,916
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Debtor-in-possession super-priority senior secured promissory note
|
$
-
|
|
$
8,000
|
|
$
8,000
|
Senior secured promissory note BAM
|
-
|
|
20,000
|
|
20,000
|
Senior secured convertible promissory note Montsant Partners
|
-
|
|
5,284
|
|
5,284
|
Senior secured promissory note DMRJ
|
-
|
|
1,000
|
|
1,000
|
Second senior secured convertible promissory note DMRJ
|
-
|
|
11,970
|
|
11,970
|
Third senior secured convertible promissory note - DMRJ
|
-
|
|
17,523
|
|
17,523
|
Line of credit - DMRJ
|
-
|
|
17,662
|
|
17,662
|
Current maturities of obligations under capital lease
|
15
|
|
-
|
|
15
|
Warrant derivative liability
|
-
|
|
2,167
|
|
2,167
|
Accrued expenses
|
5,169
|
|
18,643
|
|
23,812
|
Accounts payable
|
4,589
|
|
1,770
|
|
6,359
|
Deferred revenue
|
779
|
|
-
|
|
779
|
Total current liabilities
|
10,552
|
|
104,019
|
|
114,571
|
Long-term liabilities:
|
|
|
|
|
|
Long-term obligations under capital lease, net of current maturities
|
29
|
|
-
|
|
29
|
Deferred revenue, net of current
|
451
|
|
-
|
|
451
|
Total long-term liabilities
|
480
|
|
-
|
|
480
|
Total liabilities
|
11,032
|
|
104,019
|
|
115,051
|
Commitments and contingencies
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
Common stock;
|
-
|
|
80
|
|
80
|
Preferred stock; no stated value; 5,000,000 shares authorized
|
|
|
|
|
|
Series G Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
Series H Convertible Preferred Stock
|
-
|
|
7,000
|
|
7,000
|
Series I Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
Series J Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
Additional paid-in capital
|
-
|
|
123,957
|
|
123,957
|
Accumulated deficit
|
-
|
|
(226,075)
|
|
(226,075)
|
Deferred compensation
|
-
|
|
(24)
|
|
(24)
|
Other comprehensive income
|
-
|
|
-
|
|
-
|
Treasury stock, at cost
|
-
|
|
(73)
|
|
(73)
|
Total stockholders' deficit
|
-
|
|
(95,135)
|
|
(95,135)
|
Total liabilities and stockholders' deficit
|
$
11,032
|
|
$
8,884
|
|
$
19,916
|
- 12 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
| |
Secure Point Technologies, Inc.
|
Condensed Consolidated Balance Sheet
|
As of June 30, 2016
|
(in thousands)
|
|
|
Held for Sale
|
|
Continuing
|
|
Total
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
1,338
|
|
$
-
|
|
$
1,338
|
Restricted cash and investments
|
367
|
|
-
|
|
367
|
Accounts receivable-trade, net
|
7,123
|
|
-
|
|
7,123
|
Inventories, net
|
4,681
|
|
-
|
|
4,681
|
Prepaid expenses and other current assets
|
229
|
|
235
|
|
464
|
Total current assets
|
13,738
|
|
235
|
|
13,973
|
Property and equipment, net
|
874
|
|
-
|
|
874
|
Other non-current assets
|
98
|
|
-
|
|
98
|
Total assets
|
$
14,710
|
|
$
235
|
|
$
14,945
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Senior secured promissory note BAM
|
$
-
|
|
$
20,000
|
|
$
20,000
|
Senior secured convertible promissory note Montsant Partners
|
-
|
|
5,284
|
|
5,284
|
Senior secured promissory note DMRJ
|
-
|
|
1,000
|
|
1,000
|
Second senior secured convertible promissory note DMRJ
|
-
|
|
18,970
|
|
18,970
|
Third senior secured convertible promissory note - DMRJ
|
-
|
|
17,523
|
|
17,523
|
Line of credit DMRJ
|
-
|
|
17,662
|
|
17,662
|
Current maturities of obligations under capital lease
|
18
|
|
-
|
|
18
|
Accrued expenses
|
5,729
|
|
9,452
|
|
15,181
|
Accounts payable
|
3,143
|
|
1,512
|
|
4,655
|
Deferred revenue
|
406
|
|
-
|
|
406
|
Total current liabilities
|
9,296
|
|
91,403
|
|
100,699
|
Long-term liabilities:
|
|
|
|
|
|
Long-term obligations under capital lease, net of current maturities
|
35
|
|
-
|
|
35
|
Deferred revenue, net of current
|
479
|
|
-
|
|
479
|
Total long-term liabilities
|
514
|
|
-
|
|
514
|
Total liabilities
|
9,810
|
|
91,403
|
|
101,213
|
Commitments and contingencies
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
Common stock;
|
-
|
|
79
|
|
79
|
Preferred stock; no stated value; 5,000,000 shares authorized
|
|
|
|
|
|
Series G Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
Series H Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
Series I Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
Series J Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
Additional paid-in capital
|
-
|
|
114,255
|
|
114,255
|
Accumulated deficit
|
-
|
|
(200,084)
|
|
(200,084)
|
Deferred compensation
|
-
|
|
(467)
|
|
(467)
|
Other comprehensive income
|
-
|
|
22
|
|
22
|
Treasury stock, at cost
|
-
|
|
(73)
|
|
(73)
|
Total stockholders' deficit
|
-
|
|
(86,268)
|
|
(86,268)
|
Total liabilities and stockholders' deficit
|
$
9,810
|
|
$
5,135
|
|
$
14,945
|
- 13 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Warrant Derivative Liability
Accounting Standards Codification (ASC) 815-40-15 Derivatives and Hedging, requires freestanding contracts that are settled in common stock, including common stock warrants to be designated as an equity instrument, asset or liability. On July 20, 2016, we issued a warrant to purchase 50,657,894 shares of our common stock to DMRJ LLC, which warrant has since expired since the Zapata acquisition was not consummated. Under the provisions of ASC 815-40-15, a contract designated as an asset or a liability must be carried at fair value until exercised or expired, with any changes in fair value recorded in the results of operations. The warrant derivative liability should initially and subsequently be measured at fair value with changes in fair value recorded in earnings in each reporting period.
The fair value is estimated using a binomial option pricing model, which includes variables such as the expected volatility of our share price, interest rates, and dividend yields. These variables are projected based on our historical data, experience, and other factors. Changes in any of these variables could result in material adjustments to the expense / income recognized for changes in the valuation of the warrant liability.
Beneficial Note Conversion Feature - DMRJ
Accounting Standards Codification (ASC) 470-20 Debt, addresses the accounting for financial instruments which have a beneficial conversion feature. In accordance with ASC 470-20, a conversion feature is beneficial, or in the money, when the conversion rate of the convertible security is below the market price of the underlying common stock. A beneficial conversion feature, calculated as of the commitment date, is the difference between the convertible instruments conversion price and the fair value of the companys common stock on that date multiplied by the number of common shares the debt converts into.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), which supersedes the revenue recognition requirements in ASC 605,
Revenue Recognition.
The FASB issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The core principle of this updated guidance
is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new rule also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein, which is effective for our fiscal year beginning July 1, 2018, the first day of our 2019 fiscal year
. We are currently evaluating the impact of this accounting guidance and do not expect any significant impact on our consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update 2014-12,
Compensation-Stock Compensation
(ASU 2014-12). The FASB issued ASU 2014-12 to provide specific guidance on share-based payment awards that provide for achievement of a specific performance target that could be achieved after the requisite service period. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, which is effective for our fiscal year beginning July 1, 2016, the first day of our 2017 fiscal year. Earlier adoption is permitted. ASU 2014-12 may be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this guidance should be recognized in the financial statements as an adjustment to the opening retained earnings balance at that date. The adoption of ASU 2014-12 did not have a material imp
act on our consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic 205-40)
(ASU 2014-15). ASU 2014-15 provides guidance to U.S. GAAP about managements responsibility to evaluate whether there is a substantial doubt about an entitys ability to continue as a
- 14 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
going concern and to provide related footnote disclosures. This new rule requires management to assess an entitys ability to continue as a going concern by incorporating and expanding upon certain principles currently in U.S. auditing standards. Specifically, ASU 2014-15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods, (3) provides principles for considering the mitigating effect of managements plan, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of managements plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued. This guidance is effective for annual periods ending after December 15, 2016, which is effective for our fiscal year beginning July 1, 2016, the first day of our 2017 fiscal year. The adoption of ASU 2014-15 did not have a material impact on our consolidated financial statements.
In July 2015, the FASB issued Accounting Standards Update 2015-11,
Inventory (Topic 330)
(ASU 2015-11). ASU 2015-11 was issued to more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards. The core principle of this updated guidance is that an entity should measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in ASU 2015-11 apply to inventory that is measured using the first-in, first-out or average cost methods. ASU 2015-11 amends some of the guidance in Topic 330 to more clearly articulate the requirements for the measurement and disclosure of inventory, but the clarifications are not intended to result in any changes in practice other than the change in the subsequent measurement guidance from the lower of cost or market to the lower of cost or net realizable value for inventory. There are no other substantive changes to the guidance on the measurement of inventory. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which is effective for our fiscal year beginning July 1, 2017, the first day of our 2018 fiscal year. We are currently evaluating the impact of this accounting guidance and do not expect any significant impact on our consolidated financial statements.
In August 2015, the FASB issued Accounting Standards Update 2015-15,
Interest Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU 2015-15).
ASU 2015-15 states that Staff at the Securities and Exchange Commission would not object to an entity deferring or presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance cost ratably over the term of the line-of-credit arrangement, regardless of whether there were outstanding borrowings under the arrangement.
3.
Fair Value Measurement
Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, establishes a three-level fair value hierarchy to classify the inputs used in measuring fair value, which are as follows:
Level 1 inputs to the valuation methodology are based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 inputs to the valuation methodology are based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
Level 3 inputs to the valuation methodology are based on unobservable inputs that reflect the companys own assumptions about the assumptions market participants would use in pricing the asset or liability.
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Our financial instruments at December 31, 2016 and June 30, 2016 include cash equivalents, restricted cash, accounts receivable accounts payable, derivative instruments, borrowings under our senior secured convertible promissory note, senior secured promissory note, debtor-in-possession financing, and a revolving line of credit. The carrying amounts of cash and cash equivalents, restricted cash, receivable and accounts payable are representative of their respective fair values because of the short-term maturities or expected settlement dates of these instruments. The fair value of debt, included in Note 12 to the condensed consolidated financial statements, is based on the fair value of similar instruments. These instruments are short-term in nature and there is no known trading market for our debt.
- 15 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the non-recurring fair value measurements of assets and liabilities as of December 31, 2016:
|
|
|
|
|
|
|
| |
|
|
|
|
Fair Value Measurements as of
December 31, 2016
|
(In thousands)
|
|
Carrying
Value at
December 31, 2016
|
|
Quoted Prices in Active Markets for Identical Asset
Level 1
|
|
Significant Other Observable Inputs
Level 2
|
|
Significant Unobservable Inputs
Level 3
|
Certificate of deposit
|
|
$
312
|
|
$
312
|
|
$
-
|
|
$
-
|
Debtor-in-possession super-priority senior secured promissory note
|
|
8,000
|
|
-
|
|
-
|
|
8,000
|
Senior secured promissory note BAM
|
|
20,000
|
|
-
|
|
-
|
|
20,000
|
Senior secured convertible promissory note Montsant
|
|
5,284
|
|
-
|
|
-
|
|
5,284
|
Senior secured promissory note DMRJ
|
|
1,000
|
|
-
|
|
-
|
|
1,000
|
Second senior secured convertible promissory note DMRJ
|
|
11,970
|
|
-
|
|
-
|
|
11,970
|
Third senior secured convertible promissory note DMRJ
|
|
17,523
|
|
-
|
|
-
|
|
17,523
|
Line of credit DMRJ
|
|
17,662
|
|
-
|
|
-
|
|
17,662
|
The following table provides the non-recurring fair value measurements of assets and liabilities as of June 30, 2016:
|
|
|
|
|
|
|
| |
|
|
|
|
Fair Value Measurements as of
June 30, 2016
|
(In thousands)
|
|
Carrying
Value at
June 30, 2016
|
|
Quoted Prices in Active Markets for Identical Asset
Level 1
|
|
Significant Other Observable Inputs
Level 2
|
|
Significant Unobservable Inputs
Level 3
|
Certificate of deposit
|
|
$
312
|
|
$
312
|
|
$
-
|
|
$
-
|
Senior secured promissory note BAM
|
|
20,000
|
|
-
|
|
-
|
|
20,000
|
Senior secured convertible promissory note Montsant
|
|
5,284
|
|
-
|
|
-
|
|
5,284
|
Senior secured promissory note DMRJ
|
|
1,000
|
|
-
|
|
-
|
|
1,000
|
Second senior secured convertible promissory note DMRJ
|
|
18,970
|
|
-
|
|
-
|
|
18,970
|
Third senior secured convertible promissory note DMRJ
|
|
17,523
|
|
-
|
|
-
|
|
17,523
|
Line of credit - DMRJ
|
|
17,662
|
|
-
|
|
-
|
|
17,662
|
The following table summarizes the changes in the fair value of our Level 3 financial liabilities that are measured at fair value for each reporting period:
|
|
|
|
|
|
| |
(In thousands)
|
Warrant Derivative Liability
For the Three Months Ended
December 31,
|
|
Warrant Derivative Liability
For the Six Months Ended
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Balance at beginning of period
|
$
12,664
|
|
$
-
|
|
$
-
|
|
$
-
|
Fair value on date of issuance
|
-
|
|
-
|
|
15,703
|
|
-
|
Net change in fair value of financial instrument
|
(10,497)
|
|
-
|
|
(13,536)
|
|
-
|
Balance at end of period
|
$
2,167
|
|
$
-
|
|
$
2,167
|
|
$
-
|
- 16 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.
Restricted Cash and Investments
As of December 31, 2016 and June 30, 2016, we had restricted cash and investments, with maturities of less than one year, of $367,000 and $367,000, respectively. Restricted cash and investments consisted of the following:
|
|
|
| |
(In thousands)
|
|
December 31, 2016
|
|
June 30, 2016
|
Current assets
|
|
|
|
|
Certificates of deposit
|
|
$
312
|
|
$
312
|
Cash maintained to secure corporate credit card
|
|
55
|
|
55
|
Total
|
|
$
367
|
|
$
367
|
The restricted investments of $312,000 held in certificates of deposit collateralize our performance under an irrevocable letter of credit issued in April 2010, aggregating to $297,000, in connection with our contract with the India Ministry of Defence, plus the bank required collateralization deposit of $15,000. The letter of credit provides warranty performance security equal to 5% of the contract amount under the terms of the contract with the India Ministry of Defence. We have amended the letter of credit, extending the expiration date to April 15, 2017.
In May 2015, we entered into a corporate credit card agreement with our primary bank, pursuant to which the bank reserves $55,000 of our available cash held in our operating account maintained with the bank to collateralize 105% of the credit limit that is available under the credit card agreement.
5.
Stock Based Compensation
For the three months ended December 31, 2016 and 2015, our consolidated statements of operations and comprehensive loss include $180,000 and $326,000, respectively, of compensation costs and no income tax benefit related to our stock-based compensation arrangements for employee and non-employee director awards. For the six month ended December 31, 2016 and 2015, our condensed consolidated statements of operations and comprehensive loss include $470,000 and $668,000, respectively, of compensation costs and no income tax benefit related to our stock-based compensation arrangements for employee and non-employee director awards, as follows:
|
|
|
|
|
|
|
| |
|
|
For the Three Months Ended
December 31,
|
|
For the Six Months Ended
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cost of revenues
|
|
$
12
|
|
$
31
|
|
$
37
|
|
$
61
|
Research and development
|
|
25
|
|
46
|
|
47
|
|
130
|
Selling, general and administrative
|
|
143
|
|
249
|
|
386
|
|
477
|
Total
|
|
$
180
|
|
$
326
|
|
$
470
|
|
$
668
|
As of December 31, 2016, the total amount of unrecognized stock-based compensation expense was approximately $614,000, which will be recognized over a weighted average period of 1.47 years.
As of December 31, 2016, there were options outstanding to purchase 20,241,500 shares of our common stock at exercise prices ranging from $0.08 to $1.50.
6.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
|
|
| |
(In thousands)
|
|
December 31, 2016
|
|
June 30, 2016
|
Inventory deposit
|
|
$
486
|
|
$
109
|
Insurance
|
|
129
|
|
128
|
Bank fees
|
|
4
|
|
12
|
Other prepaid expenses
|
|
207
|
|
215
|
Total
|
|
$
826
|
|
$
464
|
- 17 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7.
Inventories, net
We value our inventories at lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, including material, labor and factory overhead. The components of inventories, net of reserves, consist of the following:
|
|
|
| |
(In thousands)
|
|
December 31, 2016
|
|
June 30, 2016
|
Raw materials
|
|
$
7,479
|
|
$
3,067
|
Work in progress
|
|
1,406
|
|
976
|
Finished goods
|
|
1,748
|
|
638
|
Total
|
|
$
10,633
|
|
$
4,681
|
As of December 31, 2016 and June 30, 2016, our reserves for excess and slow-moving inventories were $106,000 and $171,000, respectively.
8.
Property and Equipment, net
Property and equipment consist of the following:
|
|
|
| |
(In thousands)
|
|
December 31, 2016
|
|
June 30, 2016
|
Machinery and equipment
|
|
$
538
|
|
$
529
|
Computers and software
|
|
502
|
|
507
|
Furniture and fixtures
|
|
98
|
|
96
|
Leasehold improvements
|
|
191
|
|
178
|
Equipment under capital lease
|
|
94
|
|
94
|
Construction in progress
|
|
342
|
|
342
|
|
|
1,765
|
|
1,746
|
Less: accumulated depreciation and amortization
|
|
933
|
|
872
|
Total
|
|
$
832
|
|
$
874
|
For the three months ended December 31, 2016 and 2015, depreciation expense was approximately $34,000 and $50,000, respectively.
For the six months ended December 31, 2016 and 2015, depreciation expense was approximately $77,000 and $104,000, respectively.
9.
Accrued Expenses
Accrued expenses consist of the following:
|
|
|
| |
(In thousands)
|
|
December 31, 2016
|
|
June 30, 2016
|
Current liabilities
|
|
|
|
|
Accrued interest
|
|
$
13,646
|
|
$
7,703
|
Accrued compensation and benefits
|
|
2,131
|
|
3,347
|
Accrued warranty costs
|
|
2,692
|
|
2,282
|
Accrued legal and accounting
|
|
3,898
|
|
533
|
Accrued taxes
|
|
78
|
|
106
|
Accrued dividends
|
|
397
|
|
-
|
Other accrued liabilities
|
|
970
|
|
1,210
|
Total
|
|
$
23,812
|
|
$
15,181
|
On January 16, 2015, Glenn D. Bolduc, resigned his positions as Chief Executive Officer and President of the Company), as well as his seat on the Companys Board of Directors and his position as Chairman of the Board. In connection with and prior to Mr. Bolducs resignations, Mr. Bolduc entered into a Separation Agreement and Release (the Separation Agreement) with the Company. The Separation Agreement provides that Mr. Bolducs resignation will be deemed an involuntary termination without cause pursuant to his Amended and Restated
- 18 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Employment Agreement dated as of June 25, 2013. In this regard, and subject to the terms contained in the Employment Agreement, Mr. Bolduc is entitled to receive: (i) annual base salary for 18 months on a regular payroll basis; (ii) a pro rata portion of any bonus earned in 2015; (iii) continuation of coverage under and contributions to health care, dental and life insurance benefits for a 12 month period; and (iv) transfer of any key man life insurance. In connection with Mr. Bolducs resignation, we recorded a non-recurring charge of $725,000 in our consolidated statements of operations and comprehensive loss for the year ended June 30, 2015. As of December 31, 2016 and June 30, 2016, $0 and $55,000, respectively, of separation benefits are included in accrued expenses in our condensed consolidated financial statements.
10.
Deferred Revenues Current and Long-Term
Deferred revenues are recorded when we receive payments for product or services for which we have not yet completed our obligation to deliver product or have not completed services required by the contractual agreements.
As of December 31, 2016 and June 30, 2016, we had customer advance payment and extended warranty service agreements with maturities of less than one year, of $779,000 and $406,000, respectively, and extended warranty service agreements, with maturities of more than one year, of $451,000 and $479,000, respectively. Deferred revenues consisted of the following:
|
|
|
| |
(In thousands)
|
|
December 31, 2016
|
|
June 30, 2016
|
Current liabilities
|
|
|
|
|
Customer advance payments
|
|
$
282
|
|
$
42
|
Extended warranty service agreements
|
|
497
|
|
364
|
Total
|
|
$
779
|
|
$
406
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
Extended warranty service agreements
|
|
$
451
|
|
$
479
|
Total
|
|
$
451
|
|
$
479
|
11.
Earnings Per Share
Basic earnings per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period plus additional weighted average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method and assumed conversion of certain convertible promissory notes and convertible preferred stock. In addition, the numerator is adjusted for any changes in income or loss that would result from the assumed conversion of potential shares. As of December 31, 2016 and 2015, potentially dilutive shares are excluded from the earnings per share calculation, because their effect would be antidilutive. Shares deemed to be antidilutive include stock options, warrants, convertible debt and convertible preferred stock.
|
|
|
|
|
|
|
| |
|
|
For the Three Months Ended
December 31,
|
|
For the Six Months Ended
December 31,
|
(In thousands, except share and per share amounts)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
1,590
|
|
$
(3,313)
|
|
$
(25,594)
|
|
$
(4,224)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
79,875,620
|
|
78,528,620
|
|
79,767,287
|
|
77,367,787
|
Basic and diluted income (loss) per share
|
|
$
0.02
|
|
$
(0.04)
|
|
$
(0.32)
|
|
$
(0.05)
|
- 19 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Common stock equivalents excluded from the diluted earnings per share calculation for the three and six months ended December 31, 2016 and 2015, were as follows:
|
|
|
|
|
|
|
| |
|
|
For the Three Months Ended
December 31,
|
|
For the Six Months Ended
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Common stock equivalents excluded
|
|
|
|
|
|
|
|
|
Stock options
|
|
85,324
|
|
556,561
|
|
315,368
|
|
686,859
|
Warrants
|
|
-
|
|
-
|
|
-
|
|
32,396
|
Convertible debt
|
|
69,858,383
|
|
39,800,000
|
|
77,777,723
|
|
39,800,000
|
Convertible preferred stock
|
|
-
|
|
-
|
|
27,456,640
|
|
-
|
|
|
69,943,707
|
|
40,356,561
|
|
105,549,731
|
|
40,519,255
|
12.
Long-Term Debt and Credit Arrangements
Term Debt and Revolving Credit Facility with DMRJ Group, LLC and Term Debt with Montsant Partners, LLC
We are a party to several loan and credit agreements with DMRJ Group LLC (DMRJ), an accredited institutional investor. In December 2008, we entered into a note and warrant purchase agreement with DMRJ pursuant to which we issued a senior secured convertible promissory note in the principal amount of $5,600,000 and a warrant to purchase 1,000,000 shares of our common stock. Thereafter, we entered into a series of amendments, waivers and modifications of this facility. The note, which is collateralized by all of our assets, originally bore interest at 11.0% per annum.
The note contains restrictions and financial covenants including: (i) restrictions against declaring or paying dividends or making any distributions; against creating, assuming or incurring any liens; against creating, assuming or incurring any indebtedness; against merging or consolidating with any other company, provided, however, that a merger or consolidation is permitted if we are the surviving entity; against the sale, assignment, transfer or lease of our assets, other than in the ordinary course of business and excluding inventory and certain asset sales expressly permitted by the note purchase agreement; against making investments in any company, extending credit or loans, or purchasing stock or other ownership interest of any company; and (ii) covenants that we have authorized or reserved for the purpose of issuance, 150% of the aggregate number of shares of our common stock issuable upon exercise of the warrant; that we maintain a minimum cash balance of at least $500,000; that the aggregate dollar amount of all accounts payable be no more than 100 days past due; and that we maintain a current ratio, defined as current assets divided by current liabilities, of no less than 0.60 to 1.00.
On March 19 2015, we amended each of our credit instruments with DMRJ, pursuant to which the maturity of all of our indebtedness to DMRJ was extended from March 31, 2015 to March 31, 2016 and DMRJ waived our compliance with certain financial covenants contained in each of our promissory notes and all related credit agreements through the new maturity date.
On May 4, 2015, we entered into an assignment agreement with DMRJ and Montsant Partners LLC (Montsant), wherein DMRJ assigned its rights, title and interest in the senior secured promissory note dated December 10, 2008 and appointed DMRJ as its collateral agent under the promissory note agreement.
DMRJ and Montsant Partners, LLC are funds managed by Platinum Partners Value Arbitrage Fund LP.
The note purchase agreement with Montsant contains restrictions and financial covenants including: (i) restrictions against declaring or paying dividends or making any distributions; against creating, assuming or incurring any liens; against creating, assuming or incurring any indebtedness; against merging or consolidating with any other company, against the sale, assignment, transfer or lease of our assets, other than in the ordinary course of business; against making investments in any company, extending credit or loans, or purchasing stock or other ownership interest of any company; and (ii) covenants that we maintain a minimum cash balance of at least $500,000; that the weighted average age of all accounts payable be no more than 100 days past due; and that we maintain a current ratio, defined as current assets divided by current liabilities, of no less than 0.60 to 1.00. Montsant waived our compliance with certain financial covenants in our promissory notes through the maturity date, consistent with the financial covenants which have been waived in each of our promissory notes and all related credit agreements with DMRJ.
- 20 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On March 31, 2016, we further amended each of our credit instruments with DMRJ and Montsant, which were entered into on April 6, 2016 and effective March 31, 2016, pursuant to which:
·
the maturity of all of our indebtedness to DMRJ under (i) a senior secured promissory note dated July 1, 2009 and (ii) a credit agreement dated September 4, 2009, was extended from March 31, 2016 to June 30, 2016;
·
the maturity of all of our indebtedness to (i) Montsant under an amended and restated senior secured convertible promissory note dated March 12, 2009 (the March 2009 Note), (ii) DMRJ under a senior secured convertible promissory note dated September 5, 2012 (the September 2012 Note) and (iii) to DMRJ under a senior secured convertible promissory note dated February 28, 2013 (the February 2013 Note and together with the March 2009 Note, the July 2009 Note, the September 2012 Note, the Notes), was extended from March 31, 2016 to December 30, 2016;
·
the provisions regarding the prepayment of the March 2009 Note were deleted;
·
the blocker provisions of the March 2009 Note limiting the number of shares of our common stock, par value $0.001 per share (Common Stock) to be issued upon the conversion of the March 2009 Note, when aggregated with the all other shares of Common Stock beneficially owned by the holder of the March 2009 Note at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time were deleted;
·
the conversion provisions of the March 2009 Note were fixed to remove the limitations on the conversion to only upon prepayment of the note or during the 30-day period ending March 31, 2014;
·
we agreed to make the amendments to our Series H Convertible Preferred Stock (the Series H Preferred Stock), Series I Convertible Preferred Stock (the Series I Preferred Stock) and Series J Convertible Preferred Stock (the Series J Preferred Stock and together with the Series H Preferred Stock and the Series I Preferred Stock, the Amended Preferred Stock Series;
·
we agreed to prepay the interest due on each of the March 2009 Note, the September 2012 Note and the February 2013 Notes from the date of the amendment through June 30, 2016 by increasing the outstanding aggregate principal amount under each such Note;
·
all outstanding amounts due to DMRJ and Montsant shall be immediately due and payable if (a) we receive an offer from another person or entity with respect to a Major Transaction, (b) DMRJ notifies us that such offer is satisfactory to DMRJ (in its sole discretion), and (c) either (i) our Board of Directors does not approve such transaction within ten (10) days of our receipt of such notice from DMRJ, (ii) if such transaction is subject to stockholder approval, we do not file a preliminary proxy statement with the SEC within fifteen (15) days of the receipt of such notice from DMRJ or (iii) if such transaction is subject to stockholder approval, our stockholders do not approve such transaction within ninety (90) days of the receipt of such notice from DMRJ, that we shall be obligated to immediately forward to DMRJ any offer that we receive with respect to any Major Transaction;
·
we shall provide not less than thirty (30) business days written notice to DMRJ and Montsant, as applicable, of the our intent to repay all or any portion of the principal, interest and other amounts outstanding under our indebtedness and following receipt of any such notice, DMRJ and Montsant shall have the option to convert all or any portion of their Notes in accordance with the applicable conversion terms of the applicable Note;
·
each Note, plus all accrued and unpaid interest thereon at the time of any conversion, may be converted at the option of DMRJ or Montsant, as applicable, at any time and from time to time into such number of shares of the applicable preferred stock of the Company, upon one (1) business days notice to us, and upon Montsants conversion of the March 2009 Note, the shares of preferred stock shall be issued to Montsant or any designee(s) of Montsant;
·
we agreed that if there is any breach of the Comfort Letter , the interest rate under each term note and advances under the Credit Agreement will be increased by an additional fourteen percent (14%) per annum (pro-rated for partial years), not to exceed the maximum amount of such interest permitted by applicable New York law;
·
agreed that we will not, and will not permit any Subsidiary to, enter into, create, incur, assume, suffer, become or be liable for in any manner, or permit to exist, any indebtedness, or guarantee, assume,
- 21 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
endorse or otherwise become responsible for (directly or indirectly), any indebtedness, performance or obligations of any other person, and failure by us to comply with this clause shall be an immediate event of default;
·
we shall be obligated to provide DMRJ and Montsant with written notice of the anticipated record date with respect to any Major Transaction at least five (5) business days prior to such record date, and failure by us to comply with this clause shall be an immediate event of default;
·
we agreed not to amend the terms of any Amended Preferred Stock Series without the prior written consent of the DMRJ and Montsant, and any breach is an immediate event of default; and
·
we agreed not to issue any shares of any Amended Preferred Stock Series other than upon the conversion of the March 2009 Note, the September 2012 Note and the February 2013 Note or with the prior written consent of the Investor, and any breach of this provision is an immediate event of default.
The prepayment by us of all interest to be accrued from the March 31, 2016 through June 30, 2016, amounted to $119,400 on account of the March 2009 Note, $450,000 on account of the September 2012 Note and $450,000 on account of the February 2013 Note. Such prepayments were effected by increasing the outstanding aggregate principal amount under each of the March 2009 Note, the September 2012 Note and the February 2013 Note, respectively. Further, the accrued interest amount due under each of the March 2009 Note, the September 2012 Note and the February 2013 Note, as of March 31, 2016, of $1,980,000, $6,520,000 and $5,073,000, respectively, were added to the outstanding principal amount under each of the notes, as of March 31, 2016. Consequently, the new outstanding principal balance under (i) the March 2009 Note was $5,284,000, (ii) the September 2012 Note was $18,970,000 and (iii) the February 2013 Note was $17,523,000, as of March 31, 2016.
However, despite the best efforts of the Company, DMRJ and the Assignee, certain post-closing effectiveness conditions to the April 6, 2016 amendment with respect to the delivery of an opinion of counsel and payment of the fees and expenses of DMRJ and the Assignee were not satisfied, and the April 6, 2016 amendment was, therefore, never deemed effective, resulting in our being in default of our obligations to DMRJ and the Montsant since March 31, 2016.
On July 20, 2016, we further amended each of our credit instruments with DMRJ and Montsant, effective as of June 30, 2016, pursuant to which:
·
the maturity of all of our indebtedness to DMRJ under (i) the amended and restated senior secured convertible promissory note, dated March 12, 2009 (as amended, the March 2009 Note), (ii) the senior secured promissory note dated July 1, 2009 (as amended, the July 2009 Note), (iii) the credit agreement dated September 4, 2009 (as amended, the September 2009 Credit Agreement), (iv) the senior secured convertible promissory note, dated September 5, 2012 (as amended, the September 2012 Note), and (v) the senior secured convertible promissory note, dated February 28, 2013 (as amended, the February 2013 Note) were each extended to October 31, 2016;
·
the blocker provisions of the March 2009 Note held by the Assignee, limiting the number of shares of Common Stock, to be issued upon the conversion of such notes, when aggregated with the all other shares of Common Stock beneficially owned by the holders of such notes at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time, were confirmed as never having been deleted by the April 6, 2016 Amendment and an identical blocker provision was added to the September 2012 Note held by DMRJ;
·
the conversion and anti-dilution provisions of the February 2013 Note held by DMRJ were deleted in their entirety, and the conversion provisions of the September 2012 Note were limited to an aggregate total of $7,000,000 in obligations thereunder;
·
the conversion price for the September 2012 Note was reduced from $1.09 to $0.19 per share for up to $7,000,000 of the obligations thereunder, DMRJ agreed to convert $7,000,000 of the principal under the September 2012 Note prior to the consummation of the Zapata acquisition, and the remaining conversion rights under the September 2012 Note and the February 2013 Note were waived;
·
we agreed to amend our Series H Convertible Preferred Stock (the Series H Preferred Stock), Series I Convertible Preferred Stock (the Series I Preferred Stock) and Series J Convertible Preferred Stock (the Series J Preferred Stock and together with the Series H Preferred Stock and the Series I Preferred Stock, the Amended Preferred Stock Series) to correct and amend and reinsert the 4.99%
- 22 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
blocker provisions in lieu and in replacement of the similar provision that was added in the Articles of Amendment to the Restated Articles of Organization that was filed on July 18, 2016;
·
we agreed to issue to DMRJ a warrant to purchase 50,657,894 shares of our common stock (see Note 16 to the condensed consolidated financial statements), which warrant has expired since the Zapata acquisition was not consummated; and
·
DMRJ and Montsant waived any defaults from the failure of the effectiveness of the March 31, 2016 amendment.
As of December 31, 2016, our obligations to DMRJ under each of the three promissory notes and a revolving line of credit approximated $11,970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of December 31, 2016, our obligation to DMRJ for accrued interest under these instruments approximated $9,129,000 and is included in current liabilities in the condensed consolidated financial statements.
As of December 31, 2016, our obligations to Montsant under a promissory note approximated $5,284,000. Further, as of December 31, 2016, our obligation to Montsant for accrued interest under this instrument approximated was $405,000.
As of February 13, 2017, our obligations to DMRJ under each of the three promissory notes and a revolving line of credit approximated $11,970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of February 13, 2017, our obligation to DMRJ for accrued interest under these instruments approximated $10,012,000. Please refer to Note 14 to the condensed consolidated financial statements for a discussion of the August 2016 conversions of principal indebtedness by DMRJ.
As of February 13, 2017, our obligations to Montsant under a promissory note approximated $5,284,000. Further, as of February 13, 2017, our obligation to Montsant for accrued interest under this instrument approximated $502,000.
The payment of our indebtedness to DMRJ and Montsant are stayed pending the conclusion of the bankruptcy proceedings.
Term Debt with BAM
On March 19, 2014, we entered into a note purchase agreement with a group of institutional investors and BAM Administrative Services LLC (BAM), an administrative agent for the investors, pursuant to which we issued senior secured promissory notes in the aggregate principal amount of $20,000,000. The notes bear interest at 15% per annum and mature on March 31, 2015. The proceeds from the sale of the notes were used to repay (i) $17,624,000 of our outstanding indebtedness to DMRJ under the amended and restated revolving promissory note dated September 29, 2011 (ii) $1,809,000 of interest outstanding under the amended and restated promissory note and (iii) $567,000 of interest outstanding under our senior secured convertible promissory note dated September 5, 2012.
On March 19, 2015, we extended our credit agreement with BAM pursuant to which, amongst other matters, the interest rate increased to 16% per annum, commencing on April 1, 2015 and we extended the maturity date of our indebtedness from March 31, 2015 to March 31, 2016. The maturity of our indebtedness to BAM was automatically extended to October 30, 2016 as a result of the extension of the maturity date of our indebtedness to DMRJ and Montsant. Due to the
filing of the voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court we were deemed to be in default under our note purchase agreement with BAM and our interest rate was increased to 18.5% effective as of October 10, 2016.
The notes purchase agreement contains restrictions and financial covenants including: (i) restrictions against declaring or paying dividends or making any distributions; against creating, assuming or incurring any liens; against creating, assuming or incurring any indebtedness; against merging or consolidating with any other company, against the sale, assignment, transfer or lease of our assets, other than in the inventory ordinary course of business ; against making investments in any company, extending credit or loans, or purchasing stock or other ownership interest of any company; and (ii) covenants that we maintain a minimum cash balance of at least $500,000; that the weighted average age of all accounts payable be no more than 100 days past due; and that we maintain a current ratio, defined as current assets divided by current liabilities, of no less than 0.60 to 1.00. BAM waived our compliance with certain financial covenants in our promissory notes through the maturity date, consistent with the financial covenants which have been waived in each of our promissory notes and all related credit agreements with DMRJ.
- 23 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Further, upon the occurrence of an event of default under certain provisions of our agreements with BAM, we could be required to pay default rate interest equal to the lesser of 2.5% per month and the maximum applicable legal rate per annum on the outstanding principal balance outstanding.
On April 6, 2016, we extended our credit agreement with BAM, effective March 31, 2016 pursuant to which;
·
the maturity of our indebtedness to the investors extended from March 30, 2016 to June 29, 2016; provided that in the event we extend the maturity date on all obligations owed to DMRJ, to a date past June 30, 2016, the maturity date of the Secured Term Notes shall automatically extend to such business day as is immediately prior to such extended maturity date of the DMRJ obligations;
·
all outstanding amounts due to the under the notes shall be immediately due and payable if (a) we receive an offer from another person or entity with respect to a Major Transaction (as defined below under the heading Amendments to Preferred Stock), (b) BAM, on behalf of the investors, notifies us that such offer is satisfactory to the investors (in their sole discretion), and (c) either (i) our Board of Directors does not approve such transaction within ten (10) days of receipt of such notice from BAM, (ii) if such transaction is subject to stockholder approval, we do not file a preliminary proxy statement with the SEC within fifteen (15) days of receipt of such notice from BAM or (iii) if such transaction is subject to stockholder approval, our stockholders do not approve such transaction within ninety (90) days of receipt of such notice from BAM; provided, that we shall be obligated to immediately forward to BAM, on behalf of the investors, any offer that we receive with respect to any Major Transaction;
·
we shall provide not less than thirty (30) business days written notice to BAM, of our intent to repay all or any portion of the principal, interest and other amounts outstanding under our obligations to the investors;
·
agreed that we will not, and will not permit any subsidiary to, enter into, create, incur, assume, suffer, become or be liable for in any manner, or permit to exist, any indebtedness, or guarantee, assume, endorse or otherwise become responsible for (directly or indirectly), any indebtedness, performance or obligations of any other person, and failure by us to comply with this clause shall be an immediate event of default;
·
we agreed to make the amendments to our Series H Convertible Preferred Stock (the Series H Preferred Stock), Series I Convertible Preferred Stock (the Series I Preferred Stock) and Series J Convertible Preferred Stock (the Series J Preferred Stock and together with the Series H Preferred Stock and the Series I Preferred Stock, the Amended Preferred Stock Series.
As of December 31, 2016, our obligations under the senior secured promissory notes for which BAM is the agent were $20,000,000. Further, as of December 31, 2016, our obligation under such notes for accrued interest amounted to approximately $4,113,000 and is included in current liabilities in the consolidated financial statements.
The total amount borrowed under the BAM senior secured promissory notes together with accrued interest were paid in full effective January 5, 2017 upon the closing of the Transaction with L-3.
Debtor-in-Possession Financing
In connection with the Chapter 11 filings, we filed a motion seeking the approval of the Bankruptcy Court for a super-priority senior secured loan of $5.7 million (the Original DIP Loan) between the Debtors and DIP SPV I, L.P., as the debtor-in-possession lender ( the Original DIP Lender) pursuant to a Senior Secured Super-priority debtor-in-possession Loan and Security Agreement entered into by the Debtors and the Original DIP Lender on October 10, 2016. The Original DIP Loan would bear interest at 12% and shall pay a one-time closing fee of $199,500 on the closing date of the Original DIP Loan and an exit fee equal to $427,500, less any interest, other that default interest (which is at a rate of 24%), paid to the Original DIP Lender as of the termination date of the Original DIP Loan. The Original DIP Loan is payable in full upon the consummation of the sale under the Asset Purchase Agreement with L-3 or a sale to any other winning bidder in the Bankruptcy Court auction. On October 13, 2016, we borrowed $1,500,000 under the Original DIP Loan.
The use of proceeds from the Original DIP Loan would be limited to working capital and other general corporate purposes consistent with the budget that the Company presented to the Original DIP Lender, including payment of costs and expenses related to the administration of the bankruptcy proceedings and payment of other expenses as approved by the Bankruptcy Court.
- 24 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On November 7, 2016, we terminated the Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement, dated as of October 10, 2016 (as amended on November 3, 2016, the Original DIP Agreement), with the original lender, DIP SPV I, L.P. (the Original DIP Lender). In connection with such termination, we paid $1,610,769 to the Original DIP Lender and its advisors to satisfy outstanding obligations under the Original DIP Agreement, including $74,354 for expense reimbursement for the Original DIP Lenders advisors.
On November 7, 2016 (the Effective Date), we entered into a replacement Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the New DIP Agreement) with Tannor Partners Credit Fund, LP, the New DIP Lender, which DIP Agreement was approved by the Bankruptcy Court on an interim basis pursuant to an order dated as of the Effective Date for the initial loan amount of $5.7 million. Under the New DIP Agreement, subject to the terms and conditions thereof, the New DIP Lender agreed to lend up to a total of $8.0 million to us, with the initial installment of $5.7 million payable upon the Bankruptcy Court entering the interim order for the New DIP Agreement and the remaining $2.3 million payable upon the Bankruptcy Court entering the final order for the New DIP Agreement. On November 8, 2016, we borrowed $5,700,000 under the New DIP Agreement and borrowed an additional $2,300,000 on November 30, 2016. As of December 31, 2016 the total amount borrowed under the New DIP Agreement was $8,000,000, plus accrued interest of $0. Interest for the month ended December 31, 2016 was paid on December 30, 2016.
On or about December 8, 2016, New DIP Lender asserted that we were not in compliance with Section 7.1(a) of the New DIP Agreement, wherein the net cash receipts for the cumulative period commencing on November 7, 2016 and ending on November 30, 2016 were required be equal to or exceed 85% of the budgeted cash receipts amount (the DIP Budget), which event constituted an event of default under the New DIP Agreement. Effective as of December 1, 2016 the interest rate under the New DIP Agreement increased 12.0% to 24.0%. Subject to the terms of a Stipulation and Order entered in the Bankruptcy Case, we agreed with the New DIP Lender to waive such asserted default in exchange for an agreement by us to pay an additional $96,000 of interest, which interest was not credited against the exit fee.
The total amount borrowed under the New DIP Agreement together with accrued interest was paid in full effective January 5, 2017 upon the closing of the Transaction with L-3.
13.
Convertible Preferred Stock
Series H Convertible Preferred Stock
In connection with the September 7, 2012 amendment to our credit instruments with DMRJ we issued to DMRJ a second senior secured convertible promissory note in the principal amount of $12,000,000 (the September 2012 Note). The September 2012 convertible promissory note is convertible in whole or in part, at DMRJs option, into shares of Series H Convertible Preferred Stock at an initial conversion rate of $1,000 per share (as adjusted in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series H Preferred Stock, the Series H Original Issue Price). The number of shares of our Preferred Stock, par value $0.10 per share (the Preferred Stock), designated as Series H Preferred Stock was 15,000.
The holders of the Series H Preferred Stock will be entitled to receive, prior to the payment of any dividends with respect to our Common Stock and/or Series G Convertible Preferred Stock, cumulative dividends on each share of Series H Preferred Stock at a rate equal to 15% of the Series H Original Issue Price per annum, (i) when, as and if declared by our Board of Directors, (ii) upon a liquidation, dissolution or winding up of the Company (a Liquidation Event), or (iii) upon the repurchase or conversion of the Series H Preferred Stock. All dividends accruing on the Series H Preferred Stock are payable by the issuance of additional shares of Series H Preferred Stock.
Each share of Series H Preferred Stock will be convertible, at the option of the holder, into that number of shares of Common Stock as is determined by (i) dividing the Series H Original Issue Price by the Series H Conversion Price (as defined below) in effect at the time of conversion and (ii) multiply the result by 1,000. The Series H Conversion Price will initially be equal to $1,090, and is subject to adjustment in the event that (a) we issue additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (b) there is a split or subdivision of outstanding shares of Common Stock, or (c) there is a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series H Original Issue Price or the Series H Conversion Price, the New Note will be convertible indirectly, at DMRJs option, into shares of Common Stock at an effective conversion price of $1.09 per share, which represents a discount of approximately 20% from the daily volume weighted average price of the Common Stock over the 20 trading days preceding the date of the amendment.
- 25 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Upon a Liquidation Event, the holders of shares of Series H Preferred Stock then outstanding will be entitled to be paid out of the assets of the company available for distribution to its stockholders, before any payment is made to the holders of Common Stock and/or Series G Preferred Stock in respect of such stock, an amount per share equal to the Series H Original Issue Price, plus any accrued but unpaid dividends thereon, whether or not declared. At the option of holders of a majority of the outstanding Series H Preferred Stock, (i) a consolidation or merger of us with or into another entity or person, or any other corporate reorganization, in which our stockholders immediately prior to such consolidation, merger or reorganization do not hold at least a majority of the resulting or surviving entities voting power immediately following such consolidation, merger or reorganization, or (ii) a sale or transfer of all or substantially all of our assets for cash, securities or other property, will be deemed to be a Liquidation Event.
The holders of the Series H Preferred Stock will have no voting rights except as required by applicable law. However, without the consent of the holders of a majority of the outstanding Series H Preferred Stock, we may not (i) amend, alter or repeal any provision of its Articles of Organization or By-laws in a manner that adversely affects the powers, preferences or rights of the Series H Preferred Stock; (ii) authorize or issue any equity securities (or any equity or debt securities convertible into equity securities) ranking prior and superior to the Series H Preferred Stock with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up; or (iii) consummate any capital reorganization or reclassification of any of its equity securities (or debt securities convertible into equity securities) into equity securities ranking prior and superior to the Series H Preferred Stock with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up.
On July 18, 2016, the Company adopted and filed Articles of Amendment to the Restated Articles of Organization of the Company (the July 18 Preferred Stock Articles of Amendment), pursuant to which the initial conversion price of the Series H Preferred Stock was reduced from $1,090 per share to $190 per share; and the blocker provisions of the Amended Series H Preferred Stock Series limiting the number of shares of the Common Stock to be issued upon the conversion of the applicable Amended Preferred Stock Series, when aggregated with the all other shares of Common Stock beneficially owned by the holder of such Amended Preferred Stock Series at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time, which the Company purported to delete in the Articles of Amendment filed in connection with the Fourteenth Amendment, were reinserted. In connection with such amendment, on July 20, 2016, DMRJ agreed to waive its rights under the September 2012 Note so that only $7,000,000 of the principal under the September 2012 Note would be convertible into shares of Series H Preferred Stock and the remaining balance would not be convertible.
Between August 11, 2016 and August 23, 2016, DMRJ converted $7,000,000 of principal into 7,000 Series H Preferred Stock shares, of which DMRJ assigned 4,401.54 shares of Series H Preferred Stock to Platinum Partners Value Arbitrage Fund LP and distributed 1,467.18 shares to ED&F Man Capital Markets Limited and 1,131.28 shares to Prime Capital (Bermuda) Limited.
As of December 31, 2016, 7,000 shares of Series H Convertible Preferred Stock were issued and outstanding.
Series I Convertible Preferred Stock and Series J Convertible Preferred Stock
In connection with the February 28, 2013 amendment to our credit instruments with DMRJ we issued to DMRJ a third senior secured convertible promissory note in the principal amount of $12,000,000 (the February 2013 Note). The February 2013 Note is convertible in whole or in part, at DMRJs option, into shares of Series I Convertible Preferred Stock at an initial conversion rate of $1,000 per share (as adjusted in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series I Preferred Stock, the Series I Original Issue Price). The number of shares of our Preferred Stock, par value $0.10 per share (the Preferred Stock), designated as Series I Preferred Stock was 15,000.
As amended, the March 2009 Note is convertible in whole or in part, at DMRJs option, into shares of Series J Convertible Preferred Stock at an initial conversion rate of $1,000 per share (as adjusted in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series J Preferred Stock, the Series J Original Issue Price). The number of shares of our Preferred Stock, par value $0.10 per share (the Preferred Stock), designated as Series J Preferred Stock was 6,000.
Each share of Series I Preferred Stock will be convertible, at the option of the holder, into that number of shares of Common Stock as is determined by (i) dividing the Series I Original Issue Price by the Series I Conversion Price (as defined below) in effect at the time of conversion and (ii) multiplying the result by 1,000. The Series I Conversion Price will initially be equal to $1,180.00, and is subject to adjustment in the event that (a) we issue additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (b) there is a split or subdivision of outstanding shares of Common Stock, or (c) there is a combination or reverse stock
- 26 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series I Original Issue Price or the Series I Conversion Price, the February 2013 Note will be convertible indirectly, at DMRJs option, into shares of Common Stock at an effective conversion price of $1.18 per share, which represents premium of approximately 3% over the closing price of the Common Stock on the trading day preceding the date of the February 28, 2013 amendments.
The holders of the Series I Preferred Stock will be entitled to receive, prior to the payment of any dividends with respect to our Common Stock and/or Series G Preferred Stock, cumulative dividends on each share of Series I Preferred Stock at a rate equal to 15% of the Series I Original Issue Price per annum, (i) when, as and if declared by our Board of Directors, (ii) upon a Liquidation Event, or (iii) upon the conversion of the Series I Preferred Stock All dividends accruing on the Series I Preferred Stock are payable by the issuance of additional shares of Series I Preferred Stock.
The holders of Series J Preferred Stock will be entitled to participate on an as converted basis in all dividends or distributions declared or paid on our Common Stock.
Upon a Liquidation Event, the holders of shares of Series I Preferred Stock and Series J Preferred Stock then outstanding will be entitled to be paid out of the assets of the company available for distribution to its stockholders,
pari passu
with distributions made with respect to the Series H Preferred Stock but before any payment is made to the holders of Common Stock and /or Series G Preferred Stock in respect of such stock, (i) an amount per share of Series I Preferred Stock equal to the Series I Original Issue Price, plus any accrued but unpaid dividends thereon, whether or not declared, and (ii) an amount per share of Series J Preferred Stock equal to the Series J Original Issue Price, plus any dividends declared but unpaid thereon. At the option of holders of a majority of the outstanding Series I Preferred Stock, (i) a consolidation or merger of the company with or into another entity or person, or any other corporate reorganization, in which the stockholders of the company immediately prior to such consolidation, merger or reorganization do not hold at least a majority of the resulting or surviving entities voting power immediately following such consolidation, merger or reorganization, or (ii) a sale or transfer of all or substantially all of our assets for cash, securities or other property, will be deemed to be a Liquidation Event.
Upon any such Liquidation Event, and after all payments described in the preceding paragraph are made in full in respect of the Series H Preferred Stock, the Series I Preferred Stock and the Series J Preferred Stock, the holders of the Series G Preferred Stock will be entitled to be paid out of the assets of the company available for distribution to its stockholders an amount equal to $8.00 per share of Series G Preferred Stock, plus any declared but unpaid dividends, prior to the payment of any amounts to the holders of our Common Stock by reason of their ownership of such stock.
Each share of Series J Preferred Stock will be convertible, at the option of the holder, into that number of shares of Common Stock as is determined by dividing the Series J Original Issue Price by the Series J Conversion Price (as defined below) in effect at the time of conversion. The Series J Conversion Price will initially be equal to $0.08, and is subject to adjustment in the event that (a) the Company issues additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (b) there is a split or subdivision of outstanding shares of Common Stock, or (c) there is a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series J Original Issue Price or the Series J Conversion Price, the March 2009 Note will be convertible indirectly, at DMRJs option, into shares of Common Stock at an effective conversion price of $.08 per share. Prior to the execution of the amendment, the March 2009 Note was convertible directly into shares of Common Stock at a conversion price of $0.08 per share. Accordingly, we do not believe this change to be material.
The holders of the Series I Preferred Stock and the Series J Preferred Stock will have no voting rights except as required by applicable law. However, without the consent of the holders of a majority of the outstanding Series I Preferred Stock or Series J Preferred Stock, as the case may be, with each such series voting as a separate class, we may not (i) amend, alter or repeal any provision of our Articles of Organization or By-laws in a manner that adversely affects the powers, preferences or rights of the Series I Preferred Stock or Series J Preferred Stock, as the case may be; (ii) authorize or issue any equity securities (or any equity or debt securities convertible into equity securities) ranking prior and superior to the Series I Preferred Stock or Series J Preferred Stock, as the case may be, with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up; or (iii) consummate any capital reorganization or reclassification of any of its equity securities (or debt securities convertible into equity securities) into equity securities ranking prior and superior to the Series I Preferred Stock or Series J Preferred Stock, as the case may be, with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up.
- 27 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In connection with the March 31, 2016 amendment to our credit agreements with DMRJ and Montsant, we agreed to amend certain terms of each of the Amended Preferred Stock Series as follows, which amendments were set forth in Articles of Amendment adopted on April 6, 2016:
·
the number of shares of our Preferred Stock, par value $0.10 per share (the Preferred Stock), designated as Series H Preferred Stock was increased from 15,000 shares to 22,500 shares, Series I Preferred Stock was increased from 15,000 shares to 21,000 shares and Series J Preferred Stock was increased from 6,000 shares to 6,500 shares;
·
the Series J Preferred Stock was amended so that its holders are entitled to receive preferred dividends equal to fifteen percent (15%) of the original issue price (subject to certain adjustments) of such shares of Preferred Stock, which is paid by the issuance of additional shares of Series J Preferred Stock;
·
the Series J Preferred Stock was amended so that it has the same dividend rights as the Series H Preferred Stock and the Series I Preferred Stock wherein we cannot declare, pay or set aside any dividends on any shares of Common Stock unless the holders of the Series J Preferred Stock then outstanding shall simultaneously receive a dividend on each outstanding share of Series J Preferred Stock in an amount at least equal to that dividend per share of Series J Preferred Stock as would equal the product of (i) the dividend payable on each share of Common Stock and (ii) the number of shares of Common Stock issuable upon conversion of a share of Series J Preferred Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend;
·
we agreed that if there is any breach of the Comfort Letter, the preferred dividend rate under each Amended Preferred Stock Series will be increased by an additional fourteen percent (14%) per annum (pro-rated for partial years), not to exceed the maximum amount (if any) permitted by law;
·
each Amended Preferred Stock Series was amended so that in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company (a Liquidation Event), instead of receiving just the original issue price (subject to certain adjustments) of such shares of Preferred Stock, the holders of such Preferred Stock receive the greater of the original issue price (subject to certain adjustments) of such shares of Preferred Stock and the amount that they would have received if all such shares of such Amended Preferred Stock Series were converted into Common Stock in accordance with the terms of such Amended Preferred Stock Series immediately prior to such Liquidation Event;
·
the Series J Preferred Stock was amended so that its holders have the same rights as the holders of Series H Preferred Stock and Series I Preferred Stock to, at the option of the holders of a majority of the outstanding applicable Amended Preferred Stock Series, have a Liquidation Event also include (i) a consolidation or merger of the Company with or into another entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization do not hold at least a majority of the resulting or surviving entities voting power immediately following such consolidation, merger or reorganization (solely in respect of their equity interests), or (ii) a sale or transfer of all or substantially all of the Companys assets for cash, securities or other property;
·
each Amended Preferred Stock Series was amended to give their respective holders voting rights on any Major Transaction that is approved by our board of directors and presented to the our stockholders for their action or consideration at any meeting of our stockholders (or, if applicable, by written consent of stockholders in lieu of meeting) (a Major Transaction Stockholder Vote), entitling them to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of the applicable Amended Preferred Stock Series held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter (irrespective of whether any such conversion would result in economic gain or loss to the holder) and shall be entitled to notice of any such meeting of stockholders in accordance with our by-laws, which holders of the applicable
Amended Preferred Stock Series, except as provided by law or as otherwise provided therein, vote on any Major Transaction Stockholder Vote together with the holders of Common Stock as a single class;
·
the blocker provisions of each Amended Preferred Stock Series limiting the number of shares of the Common Stock to be issued upon the conversion of the applicable Amended Preferred Stock Series, when aggregated with the all other shares of Common Stock beneficially owned by the holder of such
- 28 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amended Preferred Stock Series at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time were deleted; and,
·
we shall be obligated to provide each holder of an Amended Preferred Stock Series with written notice of the anticipated record date with respect to any Major Transaction at least five (5) business days prior to such record date, where Major Transaction means (i) the consolidation, merger or other business combination by us with or into another entity or person (other than (x) pursuant to a migratory merger effected solely for the purpose of changing the our jurisdiction of incorporation or (y) a consolidation, merger or other business combination in which holders of the Companys voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities); (ii) the sale or transfer of more than fifty percent (50%) of our assets (based on the fair market value as determined in good faith by the Board of Directors) other than inventory in the ordinary course of business in one or a related series of transactions; or (iii) the closing of a purchase, tender or exchange offer made to the holders of more than fifty percent (50%) of the outstanding shares of Common Stock in which more than fifty percent (50%) of the outstanding shares of Common Stock were tendered and accepted.
Further, we adopted on July 20, 2016, and filed on July 21, 2016, Articles of Amendment to the Restated Articles of Organization of the Company (the July 21 Preferred Stock Articles of Amendment), pursuant to which each of the Amended Preferred Stock Series was corrected and amended to reinsert the blocker provisions of each Amended Preferred Stock Series limiting the number of shares of the Common Stock to be issued upon the conversion of the applicable Amended Preferred Stock Series, when aggregated with the all other shares of Common Stock beneficially owned by the holder of such Amended Preferred Stock Series at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time, in lieu and in replacement of the similar provisions in the July 18 Preferred Stock Articles of Amendment. In connection with such amendment, on July 20, 2016, DMRJ agreed to waive its rights under the February 2013 Note so that it would no longer be convertible into shares of Series I Preferred Stock.
As of December 31, 2016, there were no shares of Series I Preferred Stock or Series J Preferred Stock outstanding.
14.
Derivative Liabilities
Beneficial Note Conversion Feature - DMRJ
Accounting Standards Codification (ASC) 470-20 Debt, addresses the accounting for financial instruments which have a beneficial conversion feature. On July 20, 2016, we extended the maturity date of our obligations with DMRJ LLC. As amended, the conversion and anti-dilution provisions of the February 2013 Note held by DMRJ were deleted in their entirety, and the conversion provisions of the September 2012 Note were limited to an aggregate total of $7,000,000 in obligations thereunder. The conversion price for the September 2012 Note was reduced from $1.09 to $0.19 per share for up to $7,000,000 of the obligations thereunder. The market price of our common stock on the date of the note extension was $0.44 per share; therefore a beneficial conversion feature existed.
In accordance with ASC 470-20, a conversion feature is beneficial, or in the money, when the conversion rate of the convertible security is below the market price of the underlying common stock. A beneficial conversion feature, calculated as of the commitment date, is the difference between the convertible instruments conversion price and the fair value of the companys common stock on that date multiplied by the number of common shares the debt converts into. For the six months ended December 31, 2016 we recorded a non-cash interest charge of $9,217,000 in our condensed consolidated statements of operations.
Between August 11, 2016 and August 23, 2016, DMRJ converted $7,000,000 of principal into 7,000 Series H Convertible Preferred Stock shares, of which DMRJ assigned 4,401.54 shares of Series H Convertible Preferred Stock to Platinum Partners Value Arbitrage Fund LP and assigned 1,467.18 shares to ED&F Man Capital Markets Limited and 1,131.28 shares to Prime Capital (Bermuda) Limited.
Warrant Derivative Liability
Accounting Standards Codification (ASC) 815-40-15 Derivatives and Hedging, requires freestanding contracts that are settled in common stock, including common stock warrants to be designated as an equity instrument, asset or liability. Under the provisions of ASC 815-40-15, a contract designated as an asset or a liability
- 29 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
must be carried at fair value until exercised or expired, with any changes in fair value recorded in the results of operations. On July 20, 2016, we issued a warrant to purchase 50,657,894 shares of our common stock to DMRJ LLC at an exercise price of no lower than $0.19 per share with a five-year term, first exercisable on October 31, 2016. The specific exercise price shall be the higher of: (i) $0.19 per share; and (ii) in the event that we sell our existing business (which would not include any assets acquired by us) on or prior to October 31, 2016, the price in such sale. This warrant has since expired since the Zapata acquisition was not consummated.
The warrant derivative liability was valued using a binomial option pricing model, with the following assumptions on the following dates:
|
|
|
|
| |
|
Warrant Derivative Liability Fair Value Calculation
|
|
July 20, 2016
|
|
September 30, 2016
|
|
December 31, 2016
|
Shares eligible to be purchased
|
50,657,894
|
|
50,657,894
|
|
50,657,894
|
Exercise price
|
$
0.19
|
|
$
0.19
|
|
$
0.19
|
Stock price on date of measurement
|
$
0.44
|
|
$
0.37
|
|
$
0.09
|
Expected volatility
|
61.9%
|
|
64.8%
|
|
81.1%
|
Expected dividend yield
|
0.0%
|
|
0.0%
|
|
0.0%
|
Risk free interest rate
|
1.17%
|
|
1.13%
|
|
1.43%
|
Expected life (in years)
|
5.00
|
|
4.81
|
|
4.55
|
Fair value
|
$
15,703,000
|
|
$
12,664,000
|
|
$
2,167,000
|
The warrant derivative liability was initially and is subsequently measured at fair value with changes in fair value recorded in earnings in each reporting period.
As of the date of grant, we recorded a warrant derivative liability of $15,703,000 and will accrete the fair value of the warrant derivative liability to non-cash interest expense in our condensed consolidated statements of operations over the least of the warrant vesting period or duration of the new note conversion feature. For the six months ended December 31, 2016, we accreted $15,703,000 to non-cash interest expense in our condensed consolidated statement of operations, given the new note conversion amount was converted to shares of our Series H Convertible Preferred Stock in August 2016 (see Note 13 to our condensed consolidated financial statements). For the three and six months ended December 31, 2016, we recorded a non-cash benefits of $10,497,000 and $13,536,000, respectively, in our consolidated statements of operations and comprehensive loss to recognize the change in the fair value of the warrant as of that date. The fair value is estimated using a binomial option pricing model, which includes variables such as the expected volatility of our share price, interest rates, and dividend yields. These variables are projected based on our historical data, experience, and other factors. Changes in any of these variables could result in material adjustments to the expense / income recognized for changes in the valuation of the warrants liability.
15.
Stockholders Deficit
Common Shares Authorized
On July 1, 2015, at an Annual Meeting of Stockholders, our stockholders approved an amendment to the Companys Restated Articles of Organization to increase the number of authorized shares of common stock by 50,000,000 shares to 250,000,000 shares. Articles of Amendment to our Restated Articles of Organization with the Commonwealth of Massachusetts were filed on July 20, 2016 to affect that increase. As a result of the stockholder approval, we are authorized to issue 250,000,000 shares of our common stock.
Common Stock Options and Stock Purchase Warrants
In connection with various financing agreements and services provided by consultants, we have issued warrants to purchase shares of our common stock. The fair value of warrants issued is determined using a binomial or Black-Scholes option pricing model.
Common Stock Options
In December 2004, we adopted the 2004 Stock Option Plan (the 2004 Plan). The 2004 Plan provides for the grant of incentive stock options and non-qualified stock options to employees and affiliates. The exercise price of the options equa1 100% of the fair market value on the date of the grant or 110% of the fair market value for beneficial owners of more than 10% of our stock. Options expire between five and ten years from the date of the option grant and have various vesting periods. Options may be exercised by delivering to the company cash in an amount equal to such aggregate exercise price of the options exercised, or with the consent of the Committee, shares
- 30 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
of our common stock having a fair market value equal to such aggregate exercise price, a personal recourse note issued to the company in a principal amount equal to such aggregate exercise price, other acceptable consideration including a cashless exercise/resale procedure, or any combination of the foregoing. A total of 500,000 shares were originally reserved for issuance under the 2004 Plan. In December 2005, our stockholders approved an increase in the 2004 Plan from 500,000 shares to 1,000,000 shares. In December 2007, our stockholders approved an increase in the 2004 Plan from 1,000,000 shares to 2,000,000 shares. In March 2012, our stockholders approved an increase in the 2004 Plan from 2,000,000 shares to 4,000,000. The 2004 Plan expired in May 2014, as such no further options grants may be issued under this plan. In September 2012, our Board of Directors adopted an amendment to our 2004 Stock Option increasing the total number of shares of our common stock issuable thereunder from 4,000,000 shares to 20,000,000 shares. On July 1, 2015, at the 2015 Annual Meeting of Stockholders, the September 2012 amendment was approved by our stockholders.
On July 2, 2014, our Board of Directors adopted the 2014 Stock Option Plan (the 2014 Plan). The 2014 Plan provides for the grant of incentive stock options and non-qualified stock options to employees and affiliates. The exercise price of the options equa1 100% of the fair market value on the date of the grant or 110% of the fair market value for beneficial owners of more than 10% of our stock. Options expire between five and ten years from the date of the option grant and have various vesting periods. Options may be exercised by delivering to the company cash in an amount equal to such aggregate exercise price of the options exercised, or with the consent of the Committee, shares of our common stock having a fair market value equal to such aggregate exercise price, a personal recourse note issued to the company in a principal amount equal to such aggregate exercise price, other acceptable consideration including a cashless exercise/resale procedure, or any combination of the foregoing. A total of 15,000,000 shares were originally reserved for issuance under the 2014 Plan. The 2014 Plan was approved by our stockholders on July 1, 2015 at the 2015 Annual Meeting of Stockholders.
As of December 31, 2016, there were options outstanding to purchase
20,241,500 shares of our common stock at exercise prices ranging from $0.08 to $1.50.
We issued no shares and 20,000 shares of common stock during the three months ended December 31, 2016 and 2015, respectively, as a result of the exercise of options by employees and consultants. We issued no shares and 83,000 shares of common stock during the six months ended December 31, 2016 and 2015, respectively, as a result of the exercise of options by employees and consultants.
Stock Purchase Warrants and Stock Issuances
In connection with various financing agreements and services provided by consultants, we have issued warrants to purchase shares of our common stock. The fair value of warrants issued is determined using the Black-Scholes option pricing model.
In May 2015 we entered into two advisory and consulting services agreements, which provided for the issuance of an aggregate of 2,200,000 shares of our common stock as payment. In June 2015, we issued 550,000 shares of common and the advisory and services agreements provide for the issuance of the remaining 1,650,000 shares in equal monthly installments of 110,000 shares commencing in September 2015. During the six months ended December 31, 2016, we issued 440,000 shares of common stock having a value of $183,000 to these two advisors for services rendered under the advisory and consulting services agreement and issued 50,000 shares of our common stock to a third advisor having a value of $20,000.
As of December 31, 2016, there were warrants outstanding to purchase 52,832,894, shares of our common stock at exercise prices ranging from $0.19 to $1.22 expiring at various dates between May 1, 2017 and October 20, 2021.
16.
Income Taxes
We are required to file federal and state income tax returns in the United States. The preparation of these tax returns requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by us. In consultation with our tax advisors, we base our tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various federal and state taxing authorities in the jurisdictions in which we file tax returns. As part of these reviews, a taxing authority may disagree with respect to the income tax positions taken by us (uncertain tax positions) and, therefore, may require us to pay additional taxes. As required under applicable accounting rules, we accrue an amount for our estimate of additional income tax liability, including interest and penalties, which we could incur as a result of the ultimate or effective resolution of the uncertain tax positions. We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying
- 31 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.
We account for uncertain income tax positions by accruing for the estimated additional amount of taxes for the uncertain tax positions when the uncertain tax position does not meet the more likely than not standard for sustaining the position. We review and update our accrual as more definitive information becomes available from taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate.
Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of the assets and liabilities using the enacted tax rate in effect in the years in which the differences are expected to reverse. A valuation allowance has been recorded against the deferred tax asset as it is more likely than not, based upon our analysis of all available evidence, that the tax benefit of the deferred tax asset will not be realized.
A valuation allowance has been established for our tax assets as their use is dependent on the generation of sufficient future taxable income, which cannot be predicted at this time. Included in the valuation allowance is approximately $800,000 related to certain operating loss carryforwards resulting from the exercise of employee stock options, the tax benefit of which, when recognized, will be accounted for as a credit to additional paid-in capital rather than a reduction in income tax.
As of December 31, 2016, the Company has the following unused net operating loss and tax credit carryforwards available to offset future federal and state taxable income, both of which expire at various times as noted below:
|
|
|
|
|
|
| |
(In thousands)
|
|
Net Operating Losses
|
|
Investment AMT & Research Credits
|
|
Expiration Dates
|
|
Federal
|
|
$
115,701
|
|
$
1,615
|
|
2022 to 2036
|
|
State
|
|
$
81,872
|
|
$
1,099
|
|
2017 to 2036
|
|
We have recorded a full valuation allowance against our net deferred tax assets of $52,892,000 as of December 31, 2016, due to uncertainties related to our ability to utilize these assets. The valuation allowance is based on our estimates of taxable income and the period over which our deferred tax assets will be recoverable.
Potential 382 Limitation
Our net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service. Our ability to utilize our net operating loss (NOL) and alternative minimum tax (AMT) and research and development credit (R&D) carryforwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL, AMT and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined in Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups.
The sale of our explosives trace detection assets, constituting our entire business, to L-3 for $117.5 million in cash, plus the assumption of specified liabilities, subject to adjustment (the Transaction) will result in the recognition of a taxable gain of approximately $100 million. W
e have engaged a consulting firm to perform a study to assess whether one or more ownership changes have occurred since we became a loss corporation as defined in Section 382 of the Code, but we believe that it is likely that an ownership change has occurred. If we have experienced an ownership change, utilization of the NOL, AMT and R&D credit carryforwards would be subject to an annual limitation, which is determined by first multiplying the value of our common stock at the time of the
- 32 -
SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any such limitation may result in the expiration of a portion of the NOL, AMT or R&D credit carryforwards before utilization. Until a study is completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit under ASC 740. Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding adjustment to the valuation allowance. Due to the existence of the valuation allowance, it is not expected that any potential limitation will have a material impact on our operating results.
From time to time we may be assessed interest or penalties by major tax jurisdictions, namely the states of Massachusetts and California. As of June 30, 2016, we had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. No interest and penalties have been recognized by the Company to date.
Tax years 2013 through 2016 are subject to examination by the federal and state taxing authorities. There are no income tax examinations currently in process.
For the six months ended December 31, 2016 and 2015, we provided for no taxes in our consolidated statement of operations as we have significant net loss carryforwards.
Our net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service and are subject to certain limitations in the event of cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%.
17.
Commitments and Contingencies
On April 1, 2013, we entered into a lease for manufacturing, research and office space in Wilmington, Massachusetts, the lease of which expires on June 30, 2020. Under the terms of the lease, we are responsible for our proportionate share of real estate taxes and operating expenses relating to this facility. We leased research and office space in San Diego, California and leased 300 square feet of office space in Shanghai, China. On March 25, 2015, our Board of Directors approved restructuring actions to better align costs with current and future geographic revenue sources and to improve efficiencies. We have exited from our leases in San Diego, CA and Shanghai, China in November 2015. Total rent expense, including assessments for maintenance and real estate taxes for the six months ended December 31, 2016 and 2015, was $367,000 and $363,000, respectively. On January 5, 2017, in connection with the closing of the Transaction with L-3, L-3 assumed our obligations under the Wilmington, Massachusetts lease.
License Agreements
We are obligated under one license agreement, assumed in connection with the acquisition of Ion Metrics, whereby we were granted rights to use certain intellectual property for safety, security and narcotic applications. The license agreement expired on September 30, 2016 and as of December 31, 2016 we have no obligation under this license agreement for future minimum guaranteed payments.
18.
Financial Information By Segment
Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision maker or decision making group, in determining how to allocate resources and in accessing performance. Our chief operating decision making group is composed of the chief executive officer and members of senior management. Based on qualitative and quantitative criteria, we have determined that we operate within one reportable segment, which is the Security Products Segment.
19.
Legal
On March 23, 2015, Bernard Miller (Mr. Miller), individually and on behalf of all others similarly situated shareholders of the company, filed a complaint against Dr. William J. McGann, Messrs. Glenn D. Bolduc, John H. Hassett, John A. Keating, Robert P. Liscouski, Howard Safir and Michael C. Turmelle and the Company in the Suffolk Superior Court of the Commonwealth of Massachusetts, seeking derivative action as a result of director breaches of fiduciary duty and unjust enrichment. Amongst other things, the plaintiff requested that the court compel the Company to hold an annual stockholders meeting; subject the September 2012 Amendment to the 2004 Plan to a vote at the next annual stockholders meeting; rescind the stock option awards granted under the September 2012 Amendment to 2004 Plan in the event that the amendment is not approved by a majority of our stockholders; impose a trust, in favor of the Company, for any benefits improperly received; and award costs and expenses, including reasonable attorney fees.
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SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On July 1, 2015 we held our 2015 Annual Meeting of Stockholders. Stockholders approved an amendment to the Companys 2004 Stock Option Plan to increase the aggregate number of shares of the Companys common stock, par value $0.001 per share available for issuance under the Plan by 16,000,000 shares to 20,000,000 shares and approved the Companys Amended and Restated 2014 Stock Option Plan.
On May 22, 2015, a motion to dismiss the Complaint with prejudice was served on the plaintiff and subsequently filed with the Court. On July 21, 2015, the Court endorsed an Order of Stipulation the parties entered into. The Stipulation provides, among other things, that the Complaint is dismissed with prejudice and the Motion to Dismiss is moot. On December 17, 2015, the Court ruled that the Plaintiffs counsel was entitled to a fee of $70,000 together with costs of approximately $6,000. During the fiscal year ended June 30, 2016, we recorded a charge of $76,000 in our condensed consolidated statement of operations and comprehensive loss.
On October 10, 2016, in connection with entering into the Asset Purchase Agreement with L-3, the Company and its subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court.
On November 21, 2016, the LOI with Zapata was terminated and Zapata filed a claim seeking a breakup fee related to the cancellation of the acquisition. The Company disputes any payment obligations it may have to Zapata in connection with the LOI or the termination thereof.
We are not currently a party to any other legal proceedings, other than routine litigation incidental to our business that which we believe will not have a material effect on our business, assets or results of operations. From time to time, we are subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities and in connection with the Chapter 11 cases. Each of these matters may be subject to various uncertainties.
20.
Subsequent Events
Sale of Explosives Detector Assets, Bankruptcy Filing and Court Order Authorizing Sale
On October 10, 2016, we and our subsidiaries entered into an asset purchase agreement (as amended, the Asset Purchase Agreement) with L-3 Communications Corporation (L-3) to sell our explosives trace detection assets, constituting our entire business, to L-3 for $117.5 million in cash, plus the assumption of specified liabilities, subject to adjustment (the Transaction). The Asset Purchase Agreement constituted a stalking horse bid in a sale process that was conducted under Section 363 of the U.S. Bankruptcy Code (the Bankruptcy Code). In connection with the Asset Purchase Agreement, on October 10, 2016, the Company and its subsidiaries IMX Acquisition Corp., C Acquisition Corp. and Accurel Systems International Corp. (together with the Company, the Debtors) filed voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court). After the filings, we continued to operate our businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. On the petition date, we filed several motions with the Bankruptcy Court, including a motion to have the Chapter 11 cases jointly administered.
On December 16, 2016, after the completion of the auction process in accordance with the requirements of the Bankruptcy Code, the Bankruptcy Court issued an order authorizing the Transaction with L-3 under Section 363 of the Bankruptcy Code.
On January 5, 2017, the closing of the Transaction occurred and L-3 acquired substantially all the assets of the Debtors. In connection with the closing of the Transaction, on January 5, 2017, each of Drs. William J. McGann and Darryl Jones, Messrs. Roger Deschenes and Todd Silvestri and Ms. Brenda L. Baron resigned from their positions as executive officers and employees of the Company, and Dr. William J. McGann resigned from his position as a member of the Companys board of directors. Also in connection with the closing of the Transaction, on January 5, 2017, the Company filed Articles of Amendment to the Companys Articles of Organization in the State of Massachusetts to change the Companys name to Secure Point Technologies, Inc.
On the closing date of the Transaction, Robert Liscouski took over as President and the senior executive of the company and remains serving as a Director of the Company along with the other two remaining board members, Michael Turmelle (Chairman) and James Simon. Effective January 9, 2017, the Company entered into a service agreement with Christopher Roberts, pursuant to which Mr. Roberts agreed to assist in the preparation of the Companys financial statements and provide related services. In connection therewith, on January 9, 2017, the board of directors of the Company appointed Mr. Roberts as the chief financial officer of the Company.
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SECURE POINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Debtor-in-Possession Financing
In connection with the Chapter 11 filings, we filed a motion seeking the approval of the Bankruptcy Court for a super-priority senior secured loan of $5.7 million (the Original DIP Loan) between the Debtors and DIP SPV I, L.P., as the debtor-inpossession lender ( the Original DIP Lender) pursuant to a Senior Secured Super-Priority Debtor-in-Possession Loan and Security Agreement entered into by the Debtors and the Original DIP Lender on October 10, 2016 (as amended on November 3, 2016, the Original DIP Agreement). The Original DIP Loan would bear interest at 12% and included a one-time closing fee of $199,500 on the closing date of the Original DIP Loan and an exit fee equal to $427,500, less any interest, other that default interest (which is at a rate of 24%), paid to the Original DIP Lender as of the termination date of the Original DIP Loan. The Original DIP Loan was payable in full upon the consummation of the sale under the Asset Purchase Agreement with L-3 or a sale to any other winning bidder in the Bankruptcy Court auction. On October 13, 2016, we borrowed $1,500,000 under the Original DIP Loan.
The use of proceeds from the Original DIP Loan were limited to working capital and other general corporate purposes consistent with the budget that the Company presented to the Original DIP Lender, including payment of costs and expenses related to the administration of the bankruptcy proceedings and payment of other expenses as approved by the Bankruptcy Court.
On November 7, 2016, as a result of an auction process run in accordance with the requirements of the Bankruptcy Code, the Debtors terminated the Original DIP Agreement and entered into a replacement Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the New DIP Agreement) with Tannor Partners Credit Fund, LP (the New DIP Lender), which New DIP Agreement was approved by the Bankruptcy Court on an interim basis pursuant to an order dated as of November 7, 2016 for the initial loan amount of $5,700,000. Under the New DIP Agreement, subject to the terms and conditions thereof, the New DIP Lender lent up to a total of $8.0 million to the Borrowers, with the initial installment of $5,700,000 paid upon the Bankruptcy Court entering the interim order for the New DIP Agreement and the remaining $2.3 million paid upon the Bankruptcy Court entering the final order for the New DIP Agreement. The New DIP Agreement was substantially identical to the Original DIP Agreement, except for the amounts of the closing fee and the exit fee, which was $35,000 and $425,000 (minus any interest other than default interest), respectively. On November 8, 2016, we borrowed $5,700,000 under the New DIP Agreement and borrowed an additional $2,300,000 on November 30, 2016. In connection with the termination of the Original DIP Agreement, the Company paid $1,610,769 to the Original DIP Lender and its advisors to satisfy outstanding obligations under the Original DIP Agreement, including $74,354 for expense reimbursement for the Original DIP Lenders advisors.
On or about December 8, 2016, New DIP Lender asserted that we were not in compliance with Section 7.1(a) of the New DIP Agreement, wherein the net cash receipts for the cumulative period commencing on November 7, 2016 and ending on November 30, 2016 were required be equal to or exceed 85% of the budgeted cash receipts amount (the DIP Budget), which event constituted an event of default under the New DIP Agreement. Effective as of December 1, 2016 the interest rate under the New DIP Agreement increased 12.0% to 24.0%. Subject to the terms of a Stipulation and Order entered in the Bankruptcy Case, we agreed with the New DIP Lender to waive such asserted default in exchange for an agreement by us to pay an additional $96,000 of interest, which interest was not credited against the exit fee.
The total amounts borrowed under the New DIP Agreement together with accrued interest were paid in full effective January 5, 2017 upon the closing of the Transaction with L-3.
Christopher Roberts Service Agreement and Appointment as Chief Financial Officer
Effective January 9, 2017, the Company entered into a service agreement with Christopher Roberts, pursuant to which Mr. Roberts agreed to assist in the preparation of the Companys financial statements and provide related services. In connection therewith, on January 9, 2017, the board of directors of the Company appointed Mr. Roberts as the chief financial officer of the Company.
Change of Address
Effective February 1, 2017, the Company changed its address to 215 Depot Ct. SE, Leesburg, VA 20175.
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Item 2.