Quarterly report pursuant to Section 13 or 15(d)

8. SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE

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8. SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE
9 Months Ended
Sep. 30, 2015
Debt Disclosure [Abstract]  
SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE

On May 19, 2015 (the “Closing Date”), the Company entered into a Securities Purchase Agreement (“SPA”) with an investment group (collectively, the “Investor”) pursuant to which the Investor committed to lend to the Company up to $6,500,000, deliverable in five tranches (the “Financing”). The Company’s obligations under the Financing are secured by substantially all of the Company’s assets. On the Closing Date, the Company issued to the Investor a 10% Senior Secured Promissory Note (the “Initial Note”) in the principal amount of $510,000, in exchange for payment by the Investor of the total sum of $500,000. The principal sum of the Initial Note reflects the amount invested, plus a 2% Original Issue Discount (“OID”). On June 12, 2015, the Company issued to the Investor a promissory note for the second tranche of the Financing in the principal amount of $510,000, in exchange for payment by the Investor of the total sum of $500,000 (“Note 2”). The principal sum of Note 2 reflects the amount invested, plus a 2% OID. On July 24, 2015, the Company issued to the Investor a promissory note for the third tranche in the principal amount of $510,000, in exchange for payment by the Investor of the total sum of $500,000 (“Note 3”). The principal sum of Note 3 reflects the amount invested, plus a 2% OID.

 

On September 16, 2015, the Company and the Investor entered into an Amendment No. 1 to the SPA (the “Amendment”) pursuant to which the parties amended the terms of the fourth tranche of funding to provide that as of the date of the Amendment, the Investor is irrevocably bound to fund the fourth tranche of the Financing and that such tranche shall have a conversion price equal to 60% of the lowest traded price in the 30 days prior to conversion, as further discussed below. The parties further agreed that the fourth tranche would be broken into two sub-tranches – each in the amount of $250,000. Pursuant to the Financing, on September 16, 2015, and pursuant to the terms of the SPA, the Company issued to the Investor a promissory note for the first half of the fourth tranche in the principal amount of $255,000, in exchange for payment by the Investor of the total sum of $250,000 (“Note 4”). The principal sum of Note 4 reflects the amount invested, plus a 2% OID. The Investors agreed to fund the additional $250,000 of the fourth tranche on or prior to October 1, 2015, subject to the equity conditions, discussed below.

 

In connection with the Financing, the Company incurred debt issuance costs of $364,504, which will be amortized over the Financing term. Debt issuance costs of $79,464 and $91,833 were amortized to interest expense during the three and nine months ended September 30, 2015, respectively.

 

The Company’s outstanding borrowings under the SPA as of September 30, 2015 were as follows:

 

    September 30, 2015
    Maturity   Balance     Interest Rate
Senior Secured Convertible Promissory Notes:                
Tranche 1   May 19, 2016   $ 510,000     10%
Tranche 2   June 12, 2016     510,000     10%
Tranche 3   July 24, 2016     510,000     10%
Tranche 4   September 16, 2016     255,000     10%
Total borrowings         1,785,000      
Unamortized debt issuance costs         (307,671 )    
Net carrying amount of debt         1,477,329      
Less current portion         1,477,329      
Long-term borrowings - net of current portion       $      

 

In connection with the Financing, and in addition to the SPA and the Initial Note, on the Closing Date, the Company and Investor entered into a Security Agreement, an Intellectual Property Security Agreement and a Registration Rights Agreement, and each of our subsidiary companies entered into a Subsidiary Guarantee (the “Transaction Documents”).

 

On September 15, 2015, the Company and the Investor also entered into an Amendment No. 1 to the promissory notes (the “Notes Amendment”) pursuant to which the parties amended the terms of the Initial Note, Note 2 and Note 3 to provide that each such promissory note shall have a conversion price for amortization payments equal to 60% of the lowest traded price in the 15 days prior to conversion, as further discussed below.

 

Pursuant to the Financing, and provided we are not in default under the terms of any of the Transaction Documents, the Investor will provide three additional funding tranches in exchange for delivery of additional 10% Senior Secured Convertible Promissory Notes (each, a “Note” and together with the Initial Note, Note 2, Note 3 and Note 4, the “Notes”), as follows:

 

Tranche 4 - $250,000, pursuant to the terms of the Amendment, as described above; and

 

Tranche 5 - $2,250,000, upon the SEC declaring the Company’s S-1 Registration Statement effective.

 

Tranche 6 - $2,250,000, three days after the funding of Tranche 5.

 

The principal amount of each Note shall include an OID of 2% and the Company shall pay interest on the aggregate unconverted and then outstanding principal amount, at the rate of 10% per annum, half of which interest amount is guaranteed.

 

The Notes mature in 12 months, and are convertible at the option of the Investor at any time into shares of the Company’s common stock at a conversion price equal to the lowest Volume Weighted Average Price (“VWAP”) in the 15 trading days prior to the Closing Date (the “Fixed Conversion Price”). Amortization payments under the Notes commence on the five-month anniversary of the issuance of a Note, and 1/15th of the principal amount and accrued interest are payable in bi-weekly installments until the maturity of such Note; provided, however, that pursuant to the terms of the Notes Amendment, the Company has a thirty (30)-day extension to make the first amortization payment under the Initial Note, Note 2 and Note 3. The Company may choose in its discretion to make amortization payments under the Notes in common stock, at a conversion price equal to the lower of (a) 70% of the VWAP for the 15 consecutive trading days prior to conversion, or (b) the Fixed Conversion Price (the lower of (a) and (b), the “Amortization Conversion Price”); provided, that if the average daily dollar volume of the Company’s common stock for the previous 20 days prior to payment is less than $50,000, then the conversion price shall be equal to 60% of the lowest traded price in the 30 days prior to conversion; and provided, further, that pursuant to the terms of the Amendment and the Notes Amendment, the conversion price under the Initial Note, Note 2 and Note 3 and the promissory notes issued in connection with the fourth tranche (including without limitation Note 4) shall have a conversion price equal to 60% of the lowest traded price in the 15 days prior to conversion. The Company may only make amortization payment in common stock, in lieu of cash, if no event of default has occurred under the Notes and it meets certain financial and non-financial covenants as defined in the Transaction Documents. As of September 30, 2015, the Company was in compliance with all such covenants, with the exception of one equity condition that requires the Company to maintain certain average daily dollar trading volumes, as further described in the Transaction Documents. The Company is evaluating the applicability of recording a beneficial conversion expense in connection with the Financing.