6. Master Credit Facility

At June 30, 2016, the Company’s Master Credit Facility is comprised of the following:

 

On March 30, 2016, the Company entered into a Master Credit Facility with White Winston Select Asset Funds, LLC (“White Winston”), a private investment fund, pursuant to which the Company was granted a revolving credit facility (the “Master Credit Facility”) in the aggregate amount of up to $5,000,000. On June 30, 2016 (the “Closing Date”), the Company closed the Master Credit Facility and an initial disbursement of $1,572,576 (before reduction of related fees and expenses, or $1,022,623 of net proceeds) was made pursuant to the Master Credit Facility. Advances under the Master Credit Facility are issued at 95% of par value (the “Debt Discount”), with such Debt Discount deducted from the gross amount of the proceeds available under the Master Credit Facility at Closing and recorded as a debt issuance cost. White Winston shall make advances under the Master Credit Facility provided that the aggregate principal amount outstanding under the Master Credit Facility shall not exceed 75% of the then-outstanding balance of the Company’s customer receivables (as defined in the Master Credit Facility). With the discretionary approval of White Winston, as of June 30, 2016, the Company has drawn approximately $435,000 more than its availability under the Master Credit Facility. The Company may also request, subject to White Winston’s discretionary approval, additional advances that would be exempt from the limitation of eligible receivables. The Master Credit Facility matures on June 30, 2018 and bears interest at a rate of 8.0% per annum. Interest is payable monthly in arrears. In addition, from and after the first anniversary of the date of the Master Credit Facility and continuing until the Master Credit Facility is repaid in full, the Company is required to pay an additional fee of 3.0% on the average daily unborrowed portion of the Master Credit Facility. The fee is payable quarterly in arrears.

  

The Company granted White Winston a first priority lien in all tangible and intangible property now owned by the Company or to be acquired in the future, including all receivables and all of the outstanding ownership interests in each of the Company’s subsidiaries. In addition, the Company established a cash collateral account, pursuant to which all revenues and payments due to the Company will be deposited into such account and will act as security for the Master Credit Facility. The Company has unrestricted access to the cash collateral account.

Pursuant to the terms of the Master Credit Facility, on June 30, 2016 the Company issued to White Winston warrants to purchase up to (i) 1,000,000 shares of the Company’s common stock at a price of $0.25 per share (the “Fixed $0.25 Warrant”); (ii) 1,750,000 shares of the Company’s common stock at a price of $0.25 per share (the “Pro Rata Warrant”), provided that the number of shares for which the Pro Rata Warrants are exercisable shall be pro-rata based on the ratio of the actual advances made under the Facility to the aggregate face amount of the Facility and (iii) 1,000,000 shares of the Company’s common stock at a price of $2.50 per share (the “Fixed $2.50 Warrant”). The Fixed $0.25 Warrant and the Pro Rata Warrant are exercisable for five years from the date of issuance and the Fixed $2.50 Warrant is exercisable for five years beginning on December 30, 2016.

Pursuant to the terms of a Board Representation Agreement between the Company and White Winston, White Winston has the right to designate nominees for election to the Company’s Board of Directors from the date the principal amount outstanding under the Master Credit Facility first exceeds $2,000,000 until such time as White Winston’s interest (as defined in the Board Representation Agreement) falls below five percent for 60 consecutive days. The number of nominees that White Winston is entitled to designate shall be determined in accordance with the terms of the Board Representation Agreement and, provided that no event of default has occurred, shall not exceed two nominees. If an event of default has occurred and is continuing, White Winston shall have the right to designate two additional nominees for election to the Company’s Board of Directors. However, the aggregate number of nominees that White Winston is entitled to designate shall in no event exceed (i) 50 percent of the number of directors, rounded down to the nearest whole number, if the Board is comprised of an odd number of Directors, and (ii) one less than half of the number of Directors, if the Board is comprised of an even number of Directors.

           

The Company determined the fair value of the Fixed $0.25 Warrant and Fixed $2.50 Warrant issued to White Winston to be $272,133 using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 54.63%, (2) risk-free interest rate of 1.01% and (3) expected life of five years.

The Company determined that the Pro Rata Warrant should be treated as a derivative liability in accordance with ASC 815-40, “Derivatives and Hedging, Contracts in Entity’s Own Equity,” due to the variable number of shares issuable. Accordingly, the Pro Rata Warrant was initially recorded at fair value, with changes in the fair value of the liability recorded in other income/expense in the accompanying condensed consolidated statements of operations and comprehensive loss. The Company determined the fair value of the Pro Rata Warrant issued to White Winston on June 30, 2016 to be $511,325, of which $380,000 was valued as the portion attributable to the unexercisable Pro Rata Warrant using the Monte Carlo model with the following assumptions: (1) expected volatility of 100.00%, (2) risk-free interest rate of 1.01% and (3) expected life of five years.. The Company did not record any changes in the fair value of the liability during the three and six months ended June 30, 2016.

As of June 30, 2016, there were 550,402 Pro Rata Warrants exercisable. As such, the Company recorded the value of these warrants, amounting to $131,325, as a component of additional paid in capital in the accompanying condensed consolidated balance sheets.

The issuance of the Fixed $0.25 Warrant, the Fixed $2.50 Warrant and the Pro Rata Warrant has been treated as a debt issue cost and, accordingly, has been recorded as a direct deduction from the carrying amount of Master Credit Facility and is being amortized to interest expense over the contractual term of the Master Credit Facility. During the three and months ended June 30, 2016, accretion of the costs amounted to $0.

The Company incurred cash fees associated with the closing of the Master Credit Facility of $458,555. These amounts have been treated as a debt issue cost and, accordingly, have been recorded as a direct deduction from the carrying amount of Master Credit Facility and are being amortized to interest expense over the contractual term of the Master Credit Facility. During the three and six months ended June 30, 2016, accretion of the fees amounted to $0.

Contractual interest expense on the Master Credit Facility amounted to $0 for the three and six months ended June 30, 2016. Because the Company did not close on the Master Credit Facility until June 30, 2016, the Company did not incur interest expense on the outstanding amounts, nor did it record any amortization of debt issue costs related to the Master Credit Facility.

 

The Master Credit Facility contains customary representations and warranties, events of default and covenants, including, among other things and subject to certain exceptions, covenants that restrict the ability of the Company to incur additional indebtedness, create or permit liens on assets, make acquisitions, engage in mergers or consolidations and pay dividends or repurchase stock. In addition, the Master Credit Facility contains a covenant requiring the Company to maintain at the end of each semi-annual fiscal period commencing with the period ending December 31, 2016, a minimum current ratio of not less than 1.4 to 1.

On August 10, 2016, the Company entered into an Amendment to Master Credit Facility and Consent and Waiver Agreement with White Winston in connection with the CFL transaction (see Note 12). Pursuant to the Amendment, White Winston consented to the proposed transaction and waived certain rights in connection with the transaction. In consideration for the Amendment, the Company agreed that the Pro Rata Warrant would be exercisable in full without regard to the pro rata provisions of the warrant and paid a $15,000 financing fee, to be treated as a drawdown under the Master Credit Facility. In addition, White Winston granted the Company the right to repurchase the Pro Rata Warrant and Fixed Warrant for a period of time following the consummation of the proposed transaction.