Annual report pursuant to Section 13 and 15(d)

STOCKHOLDERS' DEFICIT

v3.20.4
STOCKHOLDERS' DEFICIT
12 Months Ended
Dec. 31, 2019
Stockholders Equity Note [Abstract]  
STOCKHOLDERS' DEFICIT

NOTE 9—STOCKHOLDERS’ DEFICIT

Purchase Agreement with GPB—On December 29, 2017, the Company entered into the Purchase Agreement with GPB Debt Holdings II, LLC (“GPB”), pursuant to which the Company issued to GPB a $13 million principal amount senior secured convertible promissory note (the “GPB Note”) for an aggregate purchase price of $12.5 million, reflecting a 4.0% original issue discount.

In connection with the issuance of GPB Note, the Company also issued to GPB a warrant (the “GPB Warrant”) to purchase up to 240,764 of common stock at an exercise price of $10.80 per share, with customary adjustments for stock splits, stock dividends and other recapitalization events and anti-dilution provisions set forth in the GPB Warrant. In the events of a “dilutive issuance” of common stock, the exercise price is to adjusted on a one-time basis to a 10% premium to the dilutive issuance price and the number of shares issuable under the GPB Warrant will be increased on a full ratchet basis. The GPB Warrant became exercisable six months after issuance and has a term of five years from the initial exercise date.

 

The Company determined that under ASC 815-40, GPB Warrant should be separately recognized at fair value as a liability upon issuance. The warrant liability is remeasured at fair value on a recurring basis using Level 3 inputs and any change in the fair value of the liability is recorded in earnings.

 

The following table sets forth the fair values of the warrants as of December 31, 2019 and 2018 (in thousands):

 

Warrant liability—GPB

 

December 31, 2019

 

 

December 31, 2018

 

Balance, beginning of period

 

$

1,399

 

 

$

1,882

 

Change in fair value included in the statement of comprehensive income (loss)

 

 

(1,361

)

 

 

(483

)

Balance, end of period

 

$

38

 

 

$

1,399

 

 

 

Prior to the Merger, the value of warrant derivative liabilities and any change in fair value were determined using a Binominal Monte-Carlo Cliquet Option Pricing Model. After the Merger, the fair value of the warrant derivative liabilities was determined using the Black-Scholes option pricing models.

 

The value as of the dates set forth the in the table below, were based on upon following assumptions:

 

 

 

December 31, 2019

 

 

December 31, 2018

 

Stock price

 

$

1.97

 

 

$

9.10

 

Risk‑free interest rate

 

 

1.64

%

 

 

2.48

%

Expected volatility (peer group)

 

 

60.00

%

 

 

70.00

%

Expected life (in years)

 

 

3.50

 

 

 

4.00

 

Expected dividend yield

 

 

 

 

 

Number outstanding

 

 

252,802

 

 

 

240,764

 

Balance, end of period:

 

 

 

 

 

 

 

 

Warrant derivative liabilities (long-term) (in thousands)

 

$

38

 

 

$

1,399

 

 

 

 

 

 

 

 

 

 

Purchase Agreement with Holders of 10% Senior Secured Debentures - In October 2018, EMI sold and issued $12.2 million principal amount of 10% Senior Secured Debentures and common stock purchase warrants to purchase an aggregate of up to 1,220,000 shares of EMI common stock to a limited number of accredited investors. The net proceeds of the sale of the debentures and warrants were used to fund EMI’s loan to EJ Holdings, Inc in October 2018 reflected in the Company’s consolidated financial statements.

The debentures were amended and restated in their entirety in conjunction with the Merger on July 17, 2019 as described in Note 12. As originally issued, the debentures bore interest at the rate of 10% per annum, payable monthly commencing November 1, 2018, and were to mature on April 21, 2020. EMI was to be obligated to redeem $1 million principal amount of debentures monthly, commencing in May 2019 and to redeem the debentures in full upon a “subsequent financing” of at least $20 million, subject to certain exceptions, or in the “event of default” (as defined). EMI’s obligations under the debentures are secured by a security interest in substantially all EMI assets and guaranteed by EMI’s U.S. subsidiaries.

The common stock purchase warrants also were amended and restated in their entirety in conjunction with the Merger. As originally issued, the common stock purchase warrants were exercisable for five years beginning April 22, 2019 at an initial exercise price of $11.30 per share, which was to be subject to reduction if EMI became a listed company or its common stock became listed or quoted on a trading market based upon the public offering price or “VWAP” of the common stock. The exercise price also was subject to adjustment in certain other customary circumstances In accordance with the fee agreement, EMI paid the placement agent a cash fee equal to 5% of the gross proceeds received from the purchasers, granted the warrants to purchase up to 120,000 shares of EMI common stock on the same terms as the common stock purchase warrants sold to the purchasers and reimbursed the agent for certain legal fees and expenses. Effective as of March 5, 2019, EMI entered into a securities amendment agreement with the debenture and warrant holders which amended in certain respects the original securities purchase agreement provided that the debentures and warrants were to be amended in certain respects and restated in their entirety immediately prior to and subject to the completion of the then-pending Merger. Pursuant to the terms of the securities amendment agreement, (i) the debenture holders waived their right to the monthly redemption of $1,000,000 principal amount of the debentures that was due May 1, 2019 and their right to accelerate the repayment of the debentures in connection with the proposed Merger and (ii) the provision of the debentures requiring their mandatory redemption in connection with any “subsequent financing” was eliminated. The debenture holders subsequently waived their rights to the monthly redemptions due June 1 and July 1, 2019 respectively.

The amended and restated debentures provide that the mandatory monthly redemption of $1,000,000 principal amount thereof would commence in November 2019 and that they would mature on October 21, 2020, six months later than the original maturity date of the debentures. Unlike the debentures, the amended and restated debentures were convertible at the option of each holder into shares of EMI common stock at a conversion price of $10.00 a share, subject to adjustment for stock splits, merger reorganizations and other customary events. The amended and restated warrants will be exercisable for up to an aggregate of up to 1,460,000 shares of EMI common stock, or 244,000 more shares than were previously purchasable under the original warrants, at an initial exercise price of $10.00 per share, or $1.30 less than the original exercise price of the warrants. The exercise price of the warrants was subject to reduction in connection with a “going public event” such as the Merger based upon the “VWAP” (i.e., volume-weighted average trading price) of the Company common stock at the time of the Merger. The exercise price also will be subject to adjustment for stock splits and other customary events. Upon completion of the Merger, the warrants became exercisable for shares of the Company common stock and the exercise price of the warrants and the number of underlying warrant shares were adjusted based upon exchange ratio in the Merger. Subsequent to the Merger, the exercise price of the warrants was adjusted in accordance with their terms to $5.87 per share based upon the VWAP of the Company common stock on the day following completion of the Merger.

The Company evaluated common stock purchase warrants issued in connection with the original issuance in October 2018 of the Company’s outstanding 10% Senior Secured Debentures under ASC 815-40 and concluded that the warrants should be separately recognized at fair value as a liability. The liability is remeasured at fair value on a recurring basis using Level 3 input and any changes in fair value is recorded in earnings. In 2019, the debentures were amended and restated to be convertible into Company common stock immediately prior to completion of the Merger, which resulted in the related warrants being reclassified to equity. The following table presents information regarding the warrants measured at fair value when reclassified to equity and as of December 31, 2018 (in thousands):

 

Liability instrument—10% Senior Secured Convertible Debentures

 

July 19, 2019

 

 

December 31, 2018

 

Balance, beginning of period

 

$

7,540

 

 

$

 

Fair value at issuance date

 

 

 

 

 

 

9,686

 

Change in fair value included in the statement of comprehensive income (loss)

 

 

(1,204

)

 

 

(2,146

)

Fair value at reclassification to equity

 

 

(6,336

)

 

 

 

Balance, end of period

 

$

 

 

$

7,540

 

 

The fair value and change in fair value of warrant derivative liabilities are determined using a Binominal Monte-Carlo Cliquet Option Pricing Model prior to the Merger. The model is similar to Black-Scholes option pricing models, except that the exercise price resets at certain dates in the future.

 

The fair value as of the dates set forth the in the table below were based upon following assumptions:

 

 

July 19, 2019

 

 

December 31, 2018 (As Restated)

 

Stock price

 

$

6.86

 

 

$

9.00

 

Risk‑free interest rate

 

 

1.79

%

 

 

2.51

%

Expected volatility (peer group)

 

 

65.00

%

 

 

70.00

%

Expected life (in years)

 

 

4.26

 

 

 

4.81

 

Expected dividend yield

 

 

 

 

Balance, end of period:

 

 

 

 

 

 

 

 

Warrant liabilities (in thousands)

 

$

6,336

 

 

$

7,540

 

 

A summary of outstanding warrants as of December 31, 2019 and 2018 is presented below:

 

 

Year ended

 

 

Year ended

 

 

December 31, 2019

 

 

December 31, 2018

 

Warrants outstanding, beginning of period

 

3,436,431

 

 

 

5,265,432

 

Assumed as part of Merger

 

1,044,939

 

 

 

 

Deemed Granted

 

500,729

 

(a)

 

1,542,000

 

Exercised

 

(51,000

)

 

 

(2,385,317

)

Cancelled, forfeited and expired

 

 

 

 

(985,684

)

Warrants outstanding, end of period

 

4,931,099

 

 

 

3,436,431

 

 

(a)

Represents warrant shares issuable upon the Merger by reason of antidilution adjustments under former EMI warrants.

A summary of outstanding warrants by year issued and exercise price as of December 31, 2019 is presented below.

 

 

 

 

 

 

Outstanding

 

 

Exercisable

 

Year issued

Exercise Price

 

 

Number of

Warrants

Issued

 

 

Weighted

Average

Remaining

Contractual

Life (Years)

 

 

Weighted

Average

Exercise

Price

 

 

Total

 

 

Weighted

Average

Exercise

Price

 

Prior to January 1, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$4.29-$10.28

 

 

 

1,937,407

 

 

 

1.57

 

 

$

5.43

 

 

 

1,937,407

 

 

$

5.43

 

 

Total

 

 

 

1,937,407

 

 

 

 

 

 

 

 

 

 

 

1,937,407

 

 

 

 

 

At December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10.76

 

 

 

210,553

 

 

 

3.61

 

 

$

10.76

 

 

 

210,553

 

 

$

10.76

 

 

$

5.87

 

 

 

1,407,000

 

 

 

3.81

 

 

$

5.87

 

 

 

1,407,000

 

 

$

5.87

 

 

2018 Total

 

 

 

1,617,553

 

 

 

 

 

 

 

 

 

 

 

1,617,553

 

 

 

 

 

At December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6.12

 

 

 

32,391

 

 

 

4.41

 

 

$

6.12

 

 

 

32,391

 

 

$

6.12

 

 

$

12.00

 

 

 

76,575

 

 

 

3.73

 

 

$

12.00

 

 

 

76,575

 

 

$

12.00

 

 

$

14.04

 

(a)

 

174,999

 

 

 

3.24

 

 

$

14.04

 

 

 

174,999

 

 

$

14.04

 

 

$

31.50

 

(a)

 

737,975

 

 

 

2.57

 

 

$

31.50

 

 

 

737,975

 

 

$

31.50

 

 

$

36.24

 

(a)

 

22,333

 

 

 

2.57

 

 

$

36.24

 

 

 

22,333

 

 

$

36.24

 

 

$

60.00

 

(a)

 

666

 

 

 

1.00

 

 

$

60.00

 

 

 

666

 

 

$

60.00

 

 

$

5.87

 

 

 

256,200

 

 

 

3.83

 

 

$

5.87

 

 

 

256,200

 

 

$

5.87

 

 

$

7.68

 

 

 

75,000

 

 

 

4.55

 

 

$

7.68

 

 

 

75,000

 

 

$

7.68

 

 

2019 Total

 

 

 

1,376,139

 

 

 

 

 

 

 

 

 

 

 

1,376,139

 

 

 

 

 

 

Grand Total

 

 

 

4,931,099

 

 

 

 

 

 

 

 

 

 

 

4,931,099

 

 

 

 

 

 

(a)

The exercise price of these warrants was reduced to $12 per share for the one-year period following the Merger.

 

Stock Options – Upon completion of the Merger, the EMI Amended and Restated 2011 Stock Incentive Plan was assumed by the Company. The 2011 Stock Incentive Plan permits grants of incentive stock options to employees, including executive officers, and other share-based awards such as stock appreciation rights, restricted stock, stock units, stock bonus and unrestricted stock awards to employees, directors, and consultants for up to 9,000,000 shares of common stock. On February 28, 2013, the number of shares of common stock authorized for issuance under the 2011 Stock Incentive Plan was increased from 3,000,000 shares to 6,000,000 shares. On July 14, 2014, the number of shares of common stock authorized for issuance under the 2011 Stock Incentive Plan was increased from 6,000,000 shares to 9,000,000 shares. Options granted under the 2011 Stock Incentive Plan expire ten years after grant. Options granted to directors vest in quarterly installments, and all other option grants vest over a minimum period of three years, all based on continuous service with the Company. Each stock option outstanding under the 2011 Stock Incentive Plan at the effective time of the Merger was automatically converted into a stock option exercisable for a number of shares of the Company’s common stock and at an exercise price calculated based on the exchange ratios in the Merger.

 

The Company also maintains a 2012 Omnibus Incentive Compensation Plan under which the Company may grant incentive stock options to selected employees including officers, non-employee consultants and non-employee directors. All outstanding stock options under the 2012 Omnibus Incentive Compensation Plan were fully vested prior to the Merger.

 

Management has valued stock options at their date of grant utilizing the Black‑Scholes‑Merton Option pricing model. The fair value of the underlying shares was determined by the market value of stock of similar companies and recent arm’s length transactions involving the sale of the Company’s common stock. Prior the Merger, the Company lacked company-specific historical and implied volatility information for its common stock. Therefore, the expected volatility was calculated using the historical volatility of a comparative public traded companies. The following table presents the assumptions used on recent dates on which options were granted by the Company.

 

 

 

6/19/2019

 

 

9/27/2018

 

 

8/8/2018

 

 

2/27/2018

 

Stock Price

 

$

10.30

 

 

$

11.10

 

 

$

11.30

 

 

$

11.40

 

Exercise Price

 

$

10.30

 

 

$

11.10

 

 

$

11.30

 

 

$

11.40

 

Term

 

6 years

 

 

6 years

 

 

6 years

 

 

6 years

 

Risk-Free Rate

 

1.83%

 

 

 

2.99

%

 

 

2.88

%

 

 

2.75

%

Dividend Yield

 

 

 

 

 

 

 

 

Volatility

 

 

67.16

%

 

 

69.14

%

 

 

66.09

%

 

 

68.18

%

 

The risk‑free interest rate is based on the implied yield available on U.S. Treasury issues with a term approximating the expected life of the options depending on the date of the grant and expected life of the respective options.

During the year ended December 31, 2019, the Company granted options to purchase 50,000 shares of common stock. The options have an exercise price of $10.30 per share. During the year ended December 31, 2018, the Company granted stock option to purchase up to 357,000 common stock. All of the options are exercisable with respect to one‑third (1/3) of the underlying shares on the first anniversary of the grant date and as to the remaining two‑thirds (2/3) of shares in twenty‑four (24) approximately equal monthly installments over a period of two years thereafter.

A summary of the Company’s stock option activity for the years ended December 31, 2019 and 2018 is presented below:

 

 

December 31, 2019

 

 

December 31, 2018

 

 

 

Number of

Options

 

 

Weighted‑

Average

Exercise

Price

 

 

Number of

Options

 

 

Weighted‑

Average

Exercise

Price

 

Options outstanding, beginning of period

 

 

6,642,200

 

 

$

4.40

 

 

 

6,775,200

 

 

$

4.12

 

Granted or deemed issued

 

 

636,683

 

(a)

$

10.10

 

 

 

357,000

 

 

$

11.28

 

Exercised

 

 

(167

)

 

$

5.00

 

 

 

(170,000

)

 

$

4.59

 

Cancelled, forfeited and expired

 

 

(33,366

)

 

$

11.29

 

 

 

(320,000

)

 

$

6.06

 

Options outstanding, end of period

 

 

7,245,350

 

 

$

4.68

 

 

 

6,642,200

 

 

$

4.40

 

Options exercisable at end of year

 

 

7,001,680

 

 

$

4.47

 

 

 

5,958,783

 

 

$

3.87

 

Options available for future grant

 

 

2,167,150

 

 

 

 

 

 

 

2,357,800

 

 

 

 

 

 

(a)

Upon the Merger, the exercise prices of outstanding EMI options were adjusted and additional options were deemed issued based upon the exchange ratio in the Merger.

 

During the years ended December 31, 2019 and 2018, the Company recognized $3.7 million and $4.6 million, respectively, of share‑based compensation cost arising from stock option grants including $1.9 million of one-time adjustments resulting from the Merger. As of December 31, 2019, there was $1.4 million of total unrecognized compensation cost related to unvested share‑based compensation arrangements granted under the 2011 Stock Incentive Plan. That cost is expected to be recognized over the weighted-average remaining period of 1.8 years.