| Description of the 2015 Private Placement | 11. Description of the 2015
Private Placement On
November 4, 2015, we entered into a financing transaction for the sale of convertible notes and warrants issued by us with gross
proceeds of $9,000,000 to us. Upon closing of the sale of the notes and warrants, which occurred on November 5, 2015, we received
cash proceeds of $1.85 million and deposited an additional $7,150,000 into a series of control accounts in our name. Under the
original terms of the notes, we are permitted to withdraw funds from our control accounts (i) in connection with certain conversions
of the notes or (ii) otherwise, as follows: $1 million on each 30-day anniversary of the commencing on the 30 th We
received approximately $1,790,000 in net proceeds at closing, which occurred on November 5, 2015, after deducting our placement
agent’s legal fee of $60,000. Offering expenses, including our placement agent’s fee, were approximately $183,750,
which were paid out of operating cash at Closing. At each release of funds starting on May 6, 2016, we were to receive approximately
$620,000 in net proceeds, after deducting our placement agent’s fee of $50,000, if equity conditions (certain stock price
and volume and other conditions set forth in the loan documents from our November 5, 2015) were met. As a result of a further
waiver and amendment entered into on May 1, 2016, the equity conditions were waived with respect to a release of $310,000 to us
on May 6, 2016. Further, the waiver and amendment (i) waives equity conditions for our ability to make all installment and preinstallment
payments in stock through May 6, 2017, and (ii) reduces the preinstallment and installment conversion prices to 75% of an average
vwap price over the five trading days preceding the date of issuance. In June of 2016 an additional $355,000 was released. In
the third quarter of 2016 and subsequently, we received the following releases from the control accounts as follows: July $668,866,
August $305,889, September $305,889 and October $288,889. The
initial conversion price of the notes was $492.00 per share (for optional conversions only and not Company amortization payments),
and the initial exercise price of the 10,975,608 warrants was $1.29 per share (and post reverse split, each warrant is exercisable
into 1/400th of a share of our common stock). As
a result of the “rollover” of $363,530 of principal amount and accrued and unpaid interest of our August 2015 Bridge
Notes, on November 10, 2015, an additional note in the principal amount of $363,530 and an additional 443,328 warrants were issued
to replace the rolled over Bridge Notes. The
outstanding principal bears interest at 9% per annum and shall be repaid or converted at monthly installment dates over a 14-month
period. Additionally, the notes are convertible by the holder at any time after issuance. Pursuant to the optional conversion
feature of these notes (as opposed to the monthly Company conversions which are at a discount formula as set forth below), the
Company would deliver the number of shares of common stock equal to the outstanding principal amount, accrued interest amount,
and a make whole amount equal to the interest that would be accrued on the conversion amount until maturity, divided by the fixed
conversion price of $492.00. Additionally, a portion of the outstanding amount would have been exchanged for common shares at
each Monthly Installment Date at a conversion price equal to the lower of the conversion price in effect and 85% of the fair value
of the common shares the trading day prior to the installment date (now 75%). On the 23 rd As
the Company was required to separate the conversion option in the notes under ASC 815, Derivatives and Hedging, At
inception, the warrants were valued by calibrating the aggregate fair value of the notes and warrants to the transaction price,
as required by ASC 820. Calibrating the valuation model to ensure that the model is consistent with the fair value at initial
recognition provides a basis for estimating the inputs required in the analysis that are not directly observable. For each subsequent
reporting date, the warrants are valued based on the payoff structure, considering the change in assumptions between the inception
and the subsequent reporting date. The
conversion feature fair value is determined at inception and for each reporting date using a “with” and “without”
analysis, based on the payoff structure of the notes. The same key assumptions utilized in the warrants valuation were considered
in the conversion feature fair value, Using
the Calibration model, to calculate the mark to market value at September 30, 2016, the following key assumptions were utilized
in both the valuations of the notes and warrants as follows: (i) risk free interest rate 0.29%, (ii) credit spread 125%, (iii)
volatility 41.57%, and (iv) stock price $0.01. Derivative
liability relating to the 2015 Private Placement The
change in the fair value of the 2015 Private Placement derivative liability is as follows:
Private
Placement derivative liability, January 1, 2016 $ 2,118,156
Change in derivative
value gain (1,357,948)
Loss
on forward shares 812,691
Private
Placement derivative liability September 30, 2016 $ 1,572,899 Securities
Purchase Agreement The
notes and warrants were issued pursuant to the terms of a Securities Purchase Agreement among us and the investors named therein.
The Purchase Agreement provided for the sale of the notes and warrants for gross proceeds of $9,000,000 to us. Ranking The
notes are senior unsecured obligations of us. Maturity
Date Unless
earlier converted or redeemed, the notes mature 14 months from the Closing, subject to the right of the investors to extend the
date (i) if an event of default under the notes has occurred and is continuing or any event shall have occurred and be continuing
that with the passage of time and the failure to cure would result in an event of default under the Notes and (ii) for a period
of 20 business days after the consummation of a fundamental transaction if certain events occur. Interest The
notes bear interest at the rate of 9% per annum and are compounded4 monthly, on the first calendar day of each calendar month.
The interest rate will increase to 18% per annum upon the occurrence and continuance of an event of default (as described below).
Interest on the notes is payable in arrears on each installment date (as defined below). If a holder elects to convert or redeem
all or any portion of a note prior to the maturity date, all accrued and unpaid interest on the amount being converted or redeemed
will also be payable. If we elect to redeem all or any portion of a note prior to the maturity date, all accrued and unpaid interest
on the amount being redeemed will also be payable. The amount of interest due at any time is the amount of any interest that,
but for any conversion, installment conversion, acceleration or redemption hereunder on such given date, would have accrued with
respect to the conversion amount or installment amount being converted or redeemed under the note at the interest rate for the
period from such given date through the maturity date of the note. Optional
Conversion All
amounts due under the notes are convertible at any time, in whole or in part, at the option of the holders into shares of our
common stock at a fixed conversion price, which is subject to adjustment as described below. The notes are initially convertible
into shares of our common stock at the initial price of $492.00 per share. This conversion price is subject to adjustment for
stock splits, combinations or similar events and “full ratchet” antidilution provisions. Payment
of Principal and Interest We
have agreed to make amortization payments with respect to the principal amount of each note in shares of our common stock, subject
to the satisfaction of certain equity conditions, or at our option, in cash on each of the following installment dates: the twenty-first
trading day after the earlier of (x) the initial effective date of a registration statement filed in connection with this offering
or (y) May 2, 2016; the first trading day of the calendar month immediately following the initial installment date (or if such
date is less than twenty trading days after the initial installment date, the second calendar month immediately following the
initial installment date to the extent); and then each month through and including the Maturity Date, each in an amount equal
to 1/11 of the principal amount of each note. Payment in stock was originally at 85% of the market price based upon a variable
weighted average price formula. As
a result of the amendment agreements entered into by us with each selling stockholder on January 28, 2016, an additional $1,800,000
was released from the controlled accounts on January 28, 2016, starting on May 2, 2016, and continuing for seven consecutive months
thereafter on the 1 st On
August 10, 2016, $3,464,124 from the restricted cash accounts was released from the control accounts and returned to the investors
on a pro rata basis based upon the original principal amount of the notes issued to each investor. Of the funds released, $3,299,166
was applied against the $9,363,530 notes and the additional $164,957 was applied as a 5% redemption premium to the investors.
The placement agent fees have been reduced by an amount of $247,437 due to the cash repayment on the senior convertible notes.
In addition, the debt discount recorded on the senior convertible notes was reduced by $339,458 as a result of the cash payment
made. Acceleration
and Deferral of Amortization Amounts During
each period after an installment date and prior to the immediately subsequent installment date, a holder may elect to accelerate
the amortization of the note at the applicable amortization conversion price for such prior installment date with respect to any
given installment period, the holder may not elect to effect any acceleration during such installment period if either (x) in
the aggregate, all the accelerations in such installment period exceeds the sum of two (2) other installment amounts, or (y) accelerations
have been consummated in four (4) prior installment periods. The
holder of a note may, at the holder’s election by giving notice to us, defer the payment of the installment amount due on
any installment dates, in whole or in part, to another installment date, in which case the amount deferred will become part of
such subsequent installment date and will continue to accrue interest. Events
of Default The
notes contain standard and customary events of default including but not limited: (i) failure to register our common stock within
certain time periods; (ii) failure to make payments when due under the Notes; and (iii) bankruptcy or insolvency of us. If
an event of default occurs, each holder may require us to redeem all or any portion of the notes (including all accrued and unpaid
interest thereon), in cash, at a price equal to the greater of (i) up to 125% of the amount being redeemed, depending on the nature
of the default, and (ii) the intrinsic value of the shares of common stock then issuable upon conversion of the note. Fundamental
Transactions The
notes prohibit us from entering into specified transactions involving a change of control, unless the successor entity assumes
in writing all of our obligations under the notes under a written agreement. In
the event of transactions involving a change of control, the holder of a note will have the right to require us to redeem all
or any portion of the Note it holds (including all accrued and unpaid interest thereon) at a price equal to the greater 125% of
the amount of the Note being redeemed and the intrinsic value of the shares of common stock then issuable upon conversion of the
note being redeemed. Limitations
on Conversion and Issuance A
note may not be converted and shares of common stock may not be issued under the notes if, after giving effect to the conversion
or issuance, the holder together with its affiliates would beneficially own in excess of 4.99% of our outstanding shares of common
stock. At each holder’s option, the note blocker may be raised or lowered to any other percentage not in excess of 9.99%. As
a result of the January 28, 2016 amendment agreements, there is no exchange cap in this transaction. January
28, 2016 Amendment Agreements On
January 28, 2016, we entered into amendment agreements with each of the selling stockholders with respect to the November 5, 2015
private placement exempt from securities registration under Section 4(a)(2) of the Securities Act of 1933 and Rule 506(b) of Regulation
D. On or about November 20, 2015, we filed a registration statement on Form S-1 to register the Registrable Securities, and as
a result of comments received from the SEC, we withdrew this original S-1 on January 21, 2016. Subsequent to the withdrawal of
the original S-1, we sought to make certain amendments to the terms of the securities purchase agreement and registration rights
agreement, entered into in connection with the sale of the senior secured convertible notes, as well as to the notes. The amendments
are embodied in the amendment agreements with each of the buyers. Changes
to the securities purchase agreement are as follows:
· The
term “principal market” was changed from the Nasdaq Capital Market to the OTCQB. This change was also made in
the notes and accompanying warrants for conformity.
· Section
4(d) was amended to add the following at the end of the Section. “Until the later of June 2, 2016 and the date on which
the Buyers are eligible to resell all shares of Company Common Stock underlying the Notes and Warrants (assuming cashless
exercise of the Warrants) without restriction under Rule 144 (assuming such Buyers are not then affiliates of we), we may
not make any payments to Affiliates of we other than (i) up to $11,800 to repay, in full, that certain bridge note issued
by we to Walker Wainwright; (ii) director and Board committee fees in the ordinary course of business, consistent with past
practices, to its non-management directors accruing on or after January 1, 2016 in an amount not to exceed $25,000, in the
aggregate, per calendar quarter, (iii) current compensation arrangements (but not accrued and unpaid obligations for compensation
to current and former officers of we) to its executive officers upon terms and conditions publicly existing as of December
31, 2015 and/or disclosed on a Current Report on Form 8-K on January 27, 2016; (iv) stock options and/or restricted stock
as per normal Board of Directors policy; and (v) customary, reasonable and usual travel and lodging expenses for Company business.”
· We no
longer have the obligation to obtain shareholder approval for the issuance of securities with respect to the private placement
as we are moving our listing to the OTCQB which does not require shareholder approval for issuance of securities in this transaction.
Accordingly, the “exchange cap” at 19.9% of issued and outstanding shares was also omitted. Changes
to the notes are as follows:
· The
definition of an event upon which funds can be released from any of the controlled accounts was amended to read as follows:
“Controlled Account Release Event” means, as applicable, (i) with respect to any Restricted Principal designated
to be converted in a Conversion Notice, our receipt of both (A) such Conversion Notice hereunder executed by the Holder in
which all, or any part, of the Principal to be converted includes any Restricted Principal and (B) written confirmation by
the Holder that the shares of Common Stock issued pursuant to such Conversion Notice have been properly delivered in accordance
with Section 3(c) (in each case, as adjusted, if applicable, to reflect the withdrawal of any Conversion Notice, in whole
or in part, by the Holder, whether pursuant to Section 3(c)(ii) or otherwise), (ii) our receipt of a notice by the Holder
electing to effect a release of any Restricted Principal to we, (iii) on the date of execution of the certain Amendment Agreements,
dated January 28, 2016, by and among we and certain holders of the Notes, which act as an amendment to the Notes, $1,800,000,
and (iv) on May 2, 2016, and the first Trading Day of each of the subsequent seven calendar months thereafter, the lesser
of (x) the amount of Restricted Principal then outstanding hereunder and (y) the Holder Pro Rata Amount of $668,750; provided,
in the case of clause (iv) above, as of such date of determination, no Equity Conditions Failure then exists. The Buyer hereby
waives all Equity Condition Failures existing on or before the date of this Agreement.”
· Each
existing note is being split into two notes, one of which is in the principal amount of the buyer’s pro rata portion
of the initial $3,650,000 principal amount of funds released from the controlled accounts, and the second of which represents
the remaining principal amount of the original note issued to that buyer. Changes
to the registration rights agreement are as follows:
· The
filing deadline for the initial registration statement (registering shares to be issued upon conversion of the $3,650,000
principal amount of the notes and interest thereon representing the total amount of funds released from the controlled accounts
to date) was changed to January 29, 2016, and the effectiveness deadline for the initial registration statement was changed
to February 16, 2016.
· The
number of registrable securities was reduced to 26,839 shares of our common stock which may be issued upon conversion of up
to $3.65 million principal amount of the notes and 2,416 shares of our common stock which may be issued upon conversion of
interest due and owing on the released $3.65 million principal amount.
· The
initial notice date for installment payments by us is now the earlier of the effectiveness date of the registration statement
being filed on January 29, 2016, and May 2, 2016.
May
1, 2016 Waiver and Amendment The
Company has entered into a Waiver and Amendment (“Waiver”) with each of the buyers listed on the Schedule of Buyers
attached to the securities purchase agreement. In each Waiver, the Company and the Buyer agreed as follows:
• With
respect to the Notes, the Buyer waives the Volume Failure (as defined in the securities purchase agreement) and the Price
Failure (as defined in the securities purchase agreement) on any and all Installment Conversions (as defined in the securities
purchase agreement) and delivery of shares for any Pre-Installment Conversion Shares (as defined in the securities purchase
agreement) pursuant to an Installment Notice (as defined in the securities purchase agreement) until May 1, 2017.
• Section
3(b)(2) of the Notes is amended by replacing the definition of Conversion Price, as defined in the Notes, with the following
definition: “as
of any Conversion Date or other date of determination, a price per share equal to the lowest of (x) $492.00, subject to adjustment
as provided in this Note (the price set forth in this clause (x), the "Fixed Conversion Price"), (y) 75% of the arithmetic average
of the Weighted Average Prices of the Common Stock during the five (5) consecutive Trading Day period ending immediately preceding
the time of delivery of the applicable Conversion Notice, and (z) 75% of the Weighted Average Price of the Common Stock on the
Trading Day of the delivery of the applicable Conversion Notice. For the avoidance of doubt, all such foregoing determinations
to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction during
the applicable calculation period.”
• All
references in paragraphs 7, 8 and 11 of the Notes to “Conversion Price” are amended to state “Fixed Conversion
Price.”
• Paragraph
4 of the Amendment Agreement, dated January 28, 2016, among the Company and the Buyers, is amended
by adding the following sentence at the end of the paragraph: “Notwithstanding
anything to the contrary in this paragraph 4, the Company and the Buyers hereby acknowledge that the Equity Conditions for the
Controlled Account Release Event on May 6, 2016 are not, and are deemed not to be, satisfied, and the Buyers hereby waive the
Equity Conditions for the Controlled Account Release Event on May 6, 2016, for an aggregate release of $310,000, to be released
proportionately among the Buyers based upon the pro rata share as a result of the original principal amounts of the Notes.” August
8, 2016 Waiver and Amendment to the November 2015 Notes The
Company has entered into a Waiver and Amendment (“Waiver”) with each of the buyers (“Holders”) listed
on the Schedule of Buyers attached to that certain Securities Purchase Agreement (“SPA”), dated November 5, 2015,
among the Company and the Holders (each capitalized term used below is used as defined in the SPA and notes entered into in conjunction
with the SPA, “Notes”). In each Waiver, the Company and the Holders agreed as follows:
· Section
31(n) of the Notes is hereby amended to add the following:
· “Notwithstanding
anything to the contrary within, there shall be a Controlled Account Release Event on August 8, 2016
in an amount equal to the Holder’s Pro Rata Amount of $300,000. The Company has requested further
Controlled Account Release Events on each of September
1, 2016, October 1, 2016 and November 1, 2016 in an amount equal to the Holder’s Pro Rata Amount of $300,000, and
if, as and when a future release or releases occur, the Holder shall have been automatically deemed to have waived any
Equity Condition Failures with respect to such release.”
· All
Restricted Principal in the Controlled Account in excess of the Holder’s Pro Rata Amount of $1,200,000 shall be immediately
returned to Holder, and the amount of the returned Restricted Principal shall be credited against the outstanding principal
balance of the Note such that for every $1.05 of Restricted Principal returned, the principal amount of the Note shall be
reduced by $1.00. The
Waivers became effective on August 8, 2016 upon entry into waivers by all of the Holders, individually, with the Company. 2015
Private Placement Debt Rollforward:
Balance- January 1, 2016 $ 7,085,818
Conversion of senior
convertible notes (3,573,412 )
Cash repayment of senior
convertible notes (3,299,166 )
Amortization
of senior convertible notes 2,244,807
Balance- September
30, 2016 $ 2,458,047 During
the nine months ended September 30, 2016, the Company has issued 37,509,851 shares of its common stock to convert $3,573,412 of
principal. In addition on September 30, 2016, the Company issued 4,453,568 shares of common stock for $272,046 interest and 1,133,546
shares of common stock for $171,613 make whole interest. The Company will be required to issue additional true-up shares which
cannot be calculated at this time. During the nine months ended September 30, 2016, the Company recognized an extinguishment loss
of $2,043,797 on the conversions of the senior convertible notes. The loss is determined based on the difference between the conversion
price as calculated on the installment date versus the previously calculated price on the notice date. As
of November 11, 2016 86,638,138 shares of our common stock have been issued as a result of the conversion of principal, interest,
make-whole and true ups related to the November 2015 Senior Convertible Notes which shall be applied consistent with the conversion
notices and for Pre-installment shares, calculation and application of the applicable Installment price and true-up arising therefrom.
Until and unless we are able to make more shares available for conversion of the notes, we will be unable to meet our obligations
to repay the notes, and we will likely be unable to obtain the remaining $321,889 in the control accounts. |
