Note 5 - Line of Credit |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Notes to Financial Statements | |
| Debt Disclosure [Text Block] |
NOTE
5
- LINE OF CREDIT
Line of Credit On October 2, 2014, the Company entered into a line of credit (“Line of Credit”) agreement in the maximum amount of $500,000 with a non-related lender (“Lender”). Borrowings under the Line of Credit bear interest at 8% per annum, with all unpaid principal and accrued interest due and payable on September 19, 2016 pursuant to the terms of the Secured Convertible Promissory Note (the “Note”). In addition, at the election of Lender, all or any portion of the outstanding principal, accrued but unpaid interest and/or late charges under the Line of Credit may be converted into shares of the Company ’s common stock at any time at a conversion price of $0.12 per share. Borrowings under the Line of Credit are guaranteed by the Company, and are secured by all of the assets of the Company pursuant to the terms of a certain Security Agreement and Guaranty Agreement dated as of October 2, 2014. Proceeds from the Line of Credit can be used solely for working capital purposes. As of September 30, 2016 and June 30, 2016, the Company had borrowed a total of $215,000 under the Line of Credit. Accrued interest at September 30, 2016 was $34,000. The Company’s inability to repay the Note on the September 19, 2016 due date has resulted in an event of default under the Note. Upon the occurrence of a default under the Note, the outstanding obligations are subject to a default interest rate of 18% and a penalty fee. In addition, Lender may exercise its rights as a secured party under the Security Agreement. We are currently in the process of renegotiating with Lender terms to remedy the event of default. As of the filing date of this Quarterly Report on Form 10-Q, Lender has not issued a notice of default.
In connection with the Line of Credit, the Company granted a warrant to the Lender to purchase a certain number of shares of common stock of the Company equal to the outstanding advances under the Line of Credit divided by the conversion price of $0.12, for a term of five years, at an exercise price per share equal to $0.20. Accordingly, in connection with the advance of $215,000, Lender is entitled to purchase up to 1,791,667 shares of common stock upon exercise of the warrant at $0.20 per share. The Lender has no other material relationship with the Company or its affiliates. The estimated relative fair value of warrants issued in connection with advances under the Line of Credit was recorded as a debt discount and amortized as additional interest expense over the term of the underlying debt. The Company recorded debt discount of approximately $85,000 based on the relative fair value of these warrants. In addition, as the effective conversion price of the debt was less than the market price of the underlying common stock on the date of issuance, the Company recorded additional debt discount of approximately $80,000 related to the beneficial conversion feature. As of September 30, 2016 and June 30, 2016, the $215,000 principal amount outstanding under this agreement is presented net of unamortized debt discount totaling $0 and $19,000, respectively. During the three months ended September 30, 2016 and 2015, the Company recorded debt discount amortization of approximately $19,000 and $22,000, respectively, which is included in interest expense in the accompanying condensed consolidated statements of operations.
The Company retained Security Research Associates Inc. (“SRA”), on a best-efforts basis, as its placement agent for the placement of the Line of Credit. The Company agreed to pay SRA a cash amount equal to 5% of the gross proceeds raised and a warrant for the purchase of the common stock of the Company. The number of common stock shares subject to the warrant equals 5% of the aggregate gross proceeds from the Line of Credit received by the Company from the Lender divided by $0.12 per share. The warrant will have a term of 3 years, an exercise price equal to $0.12 per share and will also include cashless exercise provisions as well as representations and warranties that are customary and standard in warrants issued to placement agents or underwriters. During fiscal 2015 and in connection with the Line of Credit, SRA earned a commission of $10,750 and warrants to purchase 89,583 shares of the Company
’s common stock at $0.12 per share. Mr. Timothy Collins, the former Executive Chairman of the Company’s board of directors is the Chief Executive Officer, President, director and shareholder of SRA. On July 31, 2015, the Agency Agreement with SRA reached its termination date, and was not renewed.
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