Quarterly report pursuant to Section 13 or 15(d)

8. NOTES PAYABLE

v3.5.0.2
8. NOTES PAYABLE
9 Months Ended
Sep. 30, 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 remaining 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 nine months ended September 30, 2016 and for the year ended December 31, 2015 is summarized in the table below:

 

          September 30, 2016     December 31, 2015        
    Maturity     Balance     Balance     Interest Rate  
Senior Secured Convertible Promissory Notes:                                
Tranche 1 (Note 1)     May 19, 2016     $     $ 510,000       10%  
Tranche 2 (Note 2)     June 12, 2016       255,000       510,000       10%  
Tranche 3 (Note 3)     July 24, 2016       510,000       510,000       10%  
Tranche 4 (Note 4)     September 16, 2016       255,000       255,000       10%  
Total borrowings             1,020,000       1,785,000          
                                 
Convertible notes converted (Note 1)                   (510,000 )        
Convertible notes converted (Note 2)             (255,000 )     (255,000 )        
Convertible notes converted/repaid (Note 3)             (510,000 )              
Convertible notes repaid (Note 4)             (255,000 )              
Unamortized debt issuance cost                   (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 nine months ended September 30, 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.

  

On May 25, 2016 (the “Purchase Price Date”), the Company entered into a Securities Purchase Agreement (“Iliad SPA”) with Iliad Research and Trading, L.P. (the “Lender” or “Iliad”) pursuant to which the Lender loaned the Company $2,000,000. On the Purchase Price Date, the Company issued to Lender a Secured Convertible Promissory Note (the “Iliad Note”) in the principal amount of $2,055,000 in exchange for payment by Lender of $2,000,000. The principal sum of the Iliad Note reflects the amount invested, plus a 2.25% “Original Issue Discount” (“OID”) and a $10,000 reimbursement of Lender’s legal fees. Out of the proceeds from the Iliad Note, the Company paid the sum of $25,000 to its placement agent, Myers & Associates, L.P. The Company received net proceeds of $1,975,000 in exchange for the Iliad Note. The Iliad Note requires the repayment of all principal and any interest, fees, charges and late fees on the date that is thirteen months after the Purchase Price Date (the “Maturity Date”). Interest is to be paid on the outstanding balance at a rate of ten percent (10%) per annum from the Purchase Price Date until the Iliad Note is paid in full. Interest is accrued during the term of the Iliad Note and all interest calculations shall be computed on the basis of a 360-day year comprised of twelve (12) thirty (30)-day months and shall compound daily. Subject to adjustment as set forth in the Iliad Note, the conversion price for each Lender conversion shall be $0.50 (the “Lender Conversion Price”), convertible into shares of fully paid and non-assessable common stock. Beginning on the date that is six months after the Purchase Price Date and continuing until the Maturity Date, Iliad shall have the right to redeem a portion of the Iliad Note in any amount up to the Maximum Monthly Redemption Amount ($275,000, which is the maximum aggregate redemption amount that may be redeemed in any calendar month), for which payments may be made in cash or by converting the redemption amount into shares of Company common stock at a conversion price which is the lesser of (a) the Lender Conversion Price of $0.50 and (b) the Market Price, defined as 70% (“the Conversion Factor”), subject to adjustment as follows: if at any time (1) the average of the three lowest closing bid prices in the previous twenty (20) trading days is below $0.25 per share then the Conversion Factor will be reduced by 10%, (2) the Company is not Deposit/Withdrawal At Custodian eligible, then the Conversion Factor will be reduced by an additional 5%, or (3) there has occurred a “Major Default” then the Conversion Factor will be reduced by an additional 5%. The Company may prepay the Iliad Note at any time by payment to Lender of 125% of the principal, interest and other amounts then due under the Note. The Company may prepay the Iliad Note notwithstanding an earlier notice of conversion from the Lender, provided that in such event the Lender may convert an amount not to exceed $300,000 under the Iliad Note. In connection with the Iliad Note, as set forth above, the Company incurred an original issue discount of $45,000 and $35,000 of other debt issuance costs, which will be amortized over the Iliad Note term. The Iliad Note is securitized by the Company’s accounts receivable, inventory and equipment.

  

The Company’s borrowing under the Iliad Note for the nine months ended September 30, 2016 and for the year ended December 31, 2015 is summarized in the table below:

 

          September 30, 2016     December 31, 2015        
    Maturity     Balance     Balance     Interest Rate  
                         
Secured promissory note payable     June 24, 2017     $ 2,055,000     $       10%  
Interest accrued             73,779                
Unamortized original issue discount and debt issuance costs             (53,797 )              
Unamortized debt discount - beneficial conversion feature             (107,419 )              
                                 
Net carrying amount of debt             1,967,563                
Less current portion             (1,967,563 )              
Long-term borrowings - net of current portion           $     $          

 

Due to the variability in potential convertible common shares, the Company recorded a beneficial conversion feature of $370,000 at the time of the transaction, which will be amortized over six months. During the three and nine months ended September 30, 2016, the Company recorded interest expense of $185,000 and $262,581, respectively for amortization of the beneficial conversion feature. The assumptions used by the Company for calculating the fair value of the beneficial conversion feature using the Binomial Lattice valuation model were: (i) Volatility of 74.0%; (ii) Risk-Free Interest Rate of 0.44%; and (iii) Expected Term of five months.

 

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, for which the interest-only payments obligation commenced on 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. 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 nine months ended September 30, 2016 and for the year ended December 31, 2015 is summarized below:

 

          September 30, 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             (32,380 )              
Unamortized debt discount - fair value of warrants             (177,867 )              
                                 
Net carrying amount of debt             639,753                
Less current portion                            
Long-term borrowings - net of current portion           $ 639,753     $          

 

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 and nine months ended September 30, 2016, the Company recorded interest expense of $33,350 and $88,933, respectively, 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.