Quarterly report pursuant to Section 13 or 15(d)

8. NOTES PAYABLE

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8. NOTES PAYABLE
3 Months Ended
Mar. 31, 2016
Debt Disclosure [Abstract]  
NOTES PAYABLE

Secured Convertible Promissory Notes Payable

On May 19, 2015 (the “Closing Date”), the Company entered into a Securities Purchase Agreement (“SPA”) with Redwood Management, LLC (the “Investor” or “Redwood”) pursuant to which the Investor committed to lend to the Company up to $6,500,000 (the “Financing”).

 

During the year ended December 31, 2015, the Company issued four tranches of convertible promissory notes (“Notes”) in the aggregate principal amount of $1,785,000 to the Investor and other third parties who were assigned rights by the Investor to participate in the Financing (together with the Investor, the “Investors”). During the first quarter of 2016, the Company repaid all obligations under the SPA and has no intention of seeking further capital from the Investor, or any other investor(s) in the Financing.

 

The Company’s borrowings and conversions under the SPA for the three months ended March 31, 2016 and for the year ended December 31, 2015 is summarized in the table below:

 

         

March 31,

2016

    December 31, 2015        
    Maturity     Balance     Balance     Interest Rate  
Senior Secured Convertible Promissory Notes:                                
Tranche 1 (Promissory Note 1)   May 19, 2016     $     $ 510,000       10%  
Tranche 2 (Promissory Note 2)   June 12, 2016       255,000       510,000       10%  
Tranche 3 (Promissory Note 3)   July 24, 2016       510,000       510,000       10%  
Tranche 4 (Promissory Note 4)   September 16, 2016       255,000       255,000       10%  
Total borrowings                   1,020,000       1,785,000          
                                 
Convertible notes converted (Promissory Note 1)                   (510,000 )        
Convertible notes converted (Promissory Note 2)             (255,000 )     (255,000 )        
Convertible notes converted/repaid (Promissory Note 3)             (510,000 )              
Convertible notes repaid (Promissory Note 4)             (255,000 )              
Unamortized debt issuance costs                   (99,805 )        
Unamortized debt discount - beneficial conversion feature                   (38,392 )        
                                 
Net carrying amount of debt                   881,803          
Less current portion                   881,803          
Long-term borrowings - net of current portion           $     $          

 

During the three months ended March 31, 2016, the Company repaid the remaining principal and interest balance under the Notes as follows: (i) issued 3,062,535 shares of its common stock to the Investors in connection with conversion of the remaining $255,000 principal balance of Promissory Note 2; (ii) repaid $357,000 of the aggregate principal amount of Promissory Note 3 plus interest in the amount of $148,944 in cash to the Investors, and issued 2,500,000 shares of its common stock to the Investors in connection with the conversion of the remaining principal amount of $153,000 of Promissory Note 3; and, (iii) repaid the entire principal amount of Promissory Note 4 in the amount of $255,000 plus interest in the amount of $93,075 in cash to the Investors.

  

Unsecured Note Payable

On January 29, 2016, the Company issued an unsecured promissory note to a lender in the principal amount of $850,000 (“Promissory Note”) in consideration of a loan provided to the Company by the lender. The Promissory Note bears interest at 12% per annum, and the Company is obligated to make monthly interest-only payments in the amount of $8,500, commencing March 1, 2016. All principal and accrued and unpaid interest is due under the Promissory Note on February 1, 2018. The Company has the right to prepay the Promissory Note without penalty or premium, provided that if a prepayment of principal is made before July 1, 2016, the investor is entitled to a prepayment interest guarantee equal to six months’ interest payments on the Promissory Note. In connection with the Promissory Note, the Company incurred an original issue discount of $30,000 and $18,570 of other debt issuance costs, which will be amortized over the Promissory Note term.

 

The Company’s borrowing under the Promissory Note for the three months ended March 31, 2016 and for the year ended December 31, 2015 is summarized below:

 

         

March 31,

2016

    December 31, 2015        
    Maturity     Balance     Balance     Interest Rate  
Unsecured promissory note payable   February 1, 2018     $ 850,000     $        –       12%  
Unamortized original issue discount and debt issuance costs                    (44,522 )              
Unamortized debt discount - fair value of warrants             (244,567 )              
                                 
Net carrying amount of debt             560,911                
Less current portion                            
Long-term borrowings - net of current portion           $ 560,911     $          

 

Pursuant to the terms of the Promissory Note, the Company issued to the lender a common stock purchase warrant providing the lender with the right to purchase up to 2,000,000 shares of the Company’s common stock (the “Warrant”). The Warrant is exercisable, subject to certain limitations, subsequent to July 1, 2017 and before the date that is five years from the date of issuance at an exercise price of $0.20 per share, subject to adjustment upon the occurrence of certain events such as stock splits and dividends. The Company recorded the fair value of the Warrant of $266,800 as a debt discount associated with the Promissory Note. During the three months ended March 31, 2016, the Company recorded interest expense of $22,233 for amortization of the Warrant fair value. The assumptions used by the Company for calculating the fair value of the Warrant using the Black-Scholes valuation model were: (i) Volatility of 83.3%; (ii) Risk-Free Interest Rate of 2.12%; and (iii) Expected Term of five years.