| AGREEMENT WITH HEALTHCOR | NOTE
10 – AGREEMENT WITH HEALTHCOR On
April 21, 2011, we entered into a Note and Warrant Purchase Agreement (as subsequently amended) with HealthCor Partners Fund,
LP (“HealthCor Partners”) and HealthCor Hybrid Offshore Master Fund, LP (“HealthCor Hybrid” and, together
with HealthCor Partners, “HealthCor”) (the “HealthCor Purchase Agreement”). Pursuant to the terms of the
HealthCor Purchase Agreement, we sold and issued Senior Secured Convertible Notes to HealthCor in the principal amount of $9,316,000
and $10,684,000, respectively (collectively the “2011 HealthCor Notes”). The 2011 HealthCor Notes have a maturity
date of April 20, 2021. We also issued Warrants to HealthCor for the purchase of an aggregate of up to 5,488,456 and 6,294,403
shares, respectively, of our Common Stock at an exercise price of $1.40 per share (collectively the “2011 HealthCor Warrants”).
So long as no event of default has occurred, the outstanding principal balances of the 2011 HealthCor Notes accrue interest from
April 21, 2011 through April 20, 2016 (the “First Five-Year Note Period”) at the rate of 12.5% per annum, compounding
quarterly and shall be added to the outstanding principal balances of the 2011 HealthCor Notes on the last day of each calendar
quarter. Interest accruing from April 21, 2016 through April 20, 2021 (the “Second Five Year Note Period”) at a rate
of 10% per annum, compounding quarterly, may be paid quarterly in arrears in cash or, at our option, such interest may be added
to the outstanding principal balances of the 2011 HealthCor Notes on the last day of each calendar quarter. For the period from
April 21, 2016 through September 30, 2018 interest has been added to the outstanding principal balance. Pursuant to the terms
of the Ninth Amendment, as discussed below, the accrual of interest has been suspended after September 30, 2018. From the date
any event of default occurs, the interest rate, then applicable, shall be increased by five percent (5%) per annum. HealthCor
has the right, upon an event of default, to declare due and payable any unpaid principal amount of the 2011 HealthCor Notes then
outstanding, plus previously accrued but unpaid interest and charges, together with the interest then scheduled to accrue (calculated
at the default rate described in the immediately preceding sentence) through the end of the First Five Year Note Period or the
Second Five Year Note Period, as applicable. Subject to the terms of the Ninth Amendment as discussed below, HealthCor’s
ability to convert any portion of the outstanding and unpaid accrued interest on and principal balances of the 2011 HealthCor
Notes into fully paid and non-assessable shares of our Common Stock has been eliminated. On
January 31, 2012, we entered into the Second Amendment to the HealthCor Purchase Agreement with HealthCor (the “Second Amendment”)
amending the HealthCor Purchase Agreement and sold Senior Secured Convertible Notes to HealthCor in the principal amounts of $2,329,000
and $2,671,000, respectively (collectively the “2012 HealthCor Notes”). As provided by the Second Amendment, the 2012
HealthCor Notes are in substantially the same form as the 2011 HealthCor Notes, with changes to the “Issuance Date,”
“Maturity Date,” “First Five-Year Note Period” and other terms to take into account the timing of the
issuance of the 2012 HealthCor Notes. The 2012 HealthCor Notes have a maturity date of January 30, 2022. In addition, the provisions
regarding interest payments, interest acceleration, optional conversion, negative covenants, and events of default, preemptive
rights and registration rights are the same as those of the 2011 HealthCor Notes. At any time after January 30, 2012, HealthCor
is entitled to convert any portion of the outstanding and unpaid accrued interest on and principal balances of the 2012 HealthCor
Notes into fully paid and non-assessable shares of our Common Stock at a conversion rate of $1.25 per share, subject to adjustment
in accordance with anti-dilution provisions set forth in the 2012 HealthCor Notes. Pursuant to the terms of the Ninth Amendment,
as discussed below, the accrual of interest has been suspended after September 30, 2018 On
August 20, 2013, we entered into a Third Amendment to the HealthCor Purchase Agreement with HealthCor (the “Third Amendment”)
to redefine our minimum cash balance requirements. Previously we were required to maintain a minimum cash balance of $5,000,000
and should we drop below that balance, it triggered a default. The Third Amendment allowed for a reduced minimum cash period,
as defined in the HealthCor Purchase Agreement, which allowed us to drop below $5,000,000, but not below $4,000,000. All other
terms and conditions of the HealthCor Purchase Agreement, including all amendments thereto, remain the same. Upon entering the
reduced minimum cash period (which occurred on October 7, 2013), we had 120 days to return our minimum cash balance to the original
$5,000,000. On January 16, 2014, we increased our cash balance to in excess of the original $5,000,000 minimum allowable balance. On
January 16, 2014, we entered into a Fourth Amendment to the HealthCor Purchase Agreement with HealthCor (the “Fourth Amendment”)
and sold Senior Secured Convertible Notes to HealthCor in the principal amounts of $2,329,000 and $2,671,000 (collectively the
’’2014 HealthCor Notes’’). As provided by the Fourth Amendment, the 2014 HealthCor Notes are in substantially
the same form as the 2011 HealthCor Notes, with changes to the “Issuance Date,” “Maturity Date,” “First
Five-Year Note Period” and other terms to take into account the timing of the issuance of the 2014 HealthCor Notes. The
2014 HealthCor Notes have a maturity date of January 15, 2024. In addition, the provisions regarding interest payments, interest
acceleration, optional conversion, negative covenants, and events of default, preemptive rights and registration rights are the
same as those of the 2011 HealthCor Notes. At any time after January 16, 2014, HealthCor is entitled to convert any portion of
the outstanding and unpaid accrued interest on and principal balances of the 2014 HealthCor Notes into fully paid and non-assessable
shares of our Common Stock at a conversion rate of $0.40 per share, subject to adjustment in accordance with anti-dilution provisions
set forth in the 2014 HealthCor Notes. Additionally, we issued Warrants to HealthCor for the purchase of an aggregate of up to
4,000,000 shares of our Common Stock at an exercise price of $0.40 per share (collectively the “2014 HealthCor Warrants”).
As of June 30, 2019, the underlying shares of our Common Stock related to the 2014 HealthCor Notes totaled approximately 24,000,000. On
December 4, 2014, we entered into a Fifth Amendment to the HealthCor Purchase Agreement (the “Fifth Amendment”) with
HealthCor and certain additional investors (such additional investors, the “2015 Investors” and, collectively with
HealthCor, the “Investors”) and agreed to sell and issue (i) additional notes in the initial aggregate principal amount
of $6,000,000,with a conversion price per share of $0.52 (subject to adjustment as described therein) (the “Fifth Amendment
Notes”) and (ii) additional Warrants for an aggregate of up to 3,692,308 shares of our Common Stock at an exercise price
per share of $0.52 (subject to adjustment as described therein) (the “Fifth Amendment Warrants”). As provided by the
Fifth Amendment, the Fifth Amendment Notes are in substantially the same form as the 2011 HealthCor Notes, with changes to the
“Issuance Date,” “Maturity Date,” “First Five-Year Note Period” and other terms to take into
account the timing of the issuance of the Fifth Amendment Notes. The Fifth Amendment Notes have a maturity date of February 16,
2025. In addition, the provisions regarding interest payments, interest acceleration, optional conversion, negative covenants,
and events of default, preemptive rights and registration rights are the same as those of the 2011 HealthCor Notes. The 2015 Investors
are composed of all but one of our current directors and one of our officers. On February 17, 2015, the Company and the Investors
closed on the transactions contemplated by the Fifth Amendment. In connection with this closing, the Company and the Investors
entered into an Amended and Restated Pledge and Security Agreement (the “Amended Security Agreement”), amending and
restating that certain Pledge and Security Agreement dated as of April 20, 2011, and an Amended and Restated Intellectual Property
Security Agreement (the “Amended IP Security Agreement”), amending and restating that certain Intellectual Property
Security Agreement dated as of April 20, 2011. As of June 30, 2019, the underlying shares of our Common Stock related to the Fifth
Amendment Notes totaled approximately 3,000,000 to HealthCor and 17,000,000 to the 2015 Investors. On
March 31, 2015, we entered into the Sixth Amendment to the HealthCor Purchase Agreement (the “Sixth Amendment”) pursuant
to which, among other things, (i) the requirement to maintain a minimum cash balance of $5,000,000 was reduced to a minimum cash
balance of $2,000,000 and (ii) the amendment provision was revised to permit the HealthCor Purchase Agreement to be amended by
the Company and the holders of the majority of the Common Stock underlying the outstanding notes and warrants to purchase shares
of our Common Stock sold pursuant to the HealthCor Purchase Agreement. On March 31, 2015, we also issued a warrant to HealthCor
to purchase up to an aggregate of 1,000,000 shares of our Common Stock in consideration for certain prior waivers of the minimum
cash balance requirement in the HealthCor Purchase Agreement (the “Sixth Amendment Warrant”). The Sixth Amendment
Warrant has an exercise price per share of $0.53 (subject to adjustment as described therein) and an expiration date of March
31, 2025. On
June 26, 2015, we (i) entered into a Seventh Amendment to the HealthCor Purchase Agreement (the “Seventh Amendment”)
pursuant to which the HealthCor Purchase Agreement was amended to permit the Company to enter into and perform its obligations
under the PDL Credit Agreement (as detailed in NOTE 9); (ii) executed an Amendment to the Registration Rights Agreement between
the Company and HealthCor dated April 21, 2011 (the “RR Agreement”) pursuant to which the RR Agreement was amended
to make its priority of registration consistent with the Registration Rights Agreement executed by the Company and PDL; (iii)
amended the 2011 HealthCor Notes to extend the maturity date, in the event that Tranche Two of the PDL Credit Agreement is funded,
for such notes to 90 days after the earlier of the Tranche Two maturity date or repayment date, but not later than December 31,
2022, (iv) amended the 2012 HealthCor Notes, to set the maturity date at January 30, 2022 and, in the event that Tranche Two of
the PDL Credit Agreement is funded, to extend such maturity date to 90 days after the earlier of the Tranche Two maturity date
or repayment date, but later than December 31, 2022; and (v) amended each of the Senior Secured Convertible Notes issued under
the HealthCor Purchase Agreement (the “HealthCor Notes”) to, among other things, subordinate the HealthCor Notes to
the loans under the PDL Credit Agreement and to increase certain event of default acceleration and payment thresholds. ). As pertains
to (iii) and (iv) above, pursuant to the terms of the PDL Credit Agreement and having not met the Tranche Two Milestones by July
26, 2017, the Tranche Two funding was terminated in full. On
February 23, 2018, we entered into an Eighth Amendment to the HealthCor Purchase Agreement (the “Eighth Amendment”)
with HealthCor, the 2015 Investors and certain investors (such additional investors, the “February 2018 Investors”)
and agreed to sell and issue (i) additional notes in the initial aggregate principal amount of $2,050,000,with a conversion price
per share of $0.05 (subject to adjustment as described therein) (the “Eighth Amendment Notes”) and (ii) additional
Warrants for an aggregate of up to 512,500 shares of our Common Stock at an exercise price per share of $0.05 (subject to adjustment
as described therein) (the “Eighth Amendment Warrants”). As provided by the Eighth Amendment, the Eighth Amendment
Notes are in substantially the same form as the 2011 HealthCor Notes, with changes to the “Issuance Date,” “Maturity
Date,” “First Five-Year Note Period” and other terms to take into account the timing of the issuance of the
Eighth Amendment Notes. The Eighth Amendment Notes have a maturity date of February 22, 2028. In addition, the provisions regarding
interest payments, interest acceleration, optional conversion, negative covenants, and events of default, preemptive rights and
registration rights are the same as those of the 2011 HealthCor Notes. The 2018 Investors are composed of all but one of our current
directors, one of our officers and an entity. As of June 30, 2019, the underlying shares of our Common Stock related to the Eighth
Amendment Notes totaled approximately 48,000,000 to the February 2018 Investors. On
July 10, 2018, we entered into the Ninth Amendment to the HealthCor Purchase Agreement (the “Ninth Amendment”) with
HealthCor, the 2015 Investors and the February 2018 Investors, pursuant to which the parties agreed to amend the HealthCor Purchase
Agreement, the 2011 HealthCor Notes, the 2012 HealthCor Notes, the 2014 HealthCor Notes, the Fifth Amendment Notes and the Eighth
Amendment Notes, as applicable, to (i) remove the rights of the holders of the 2011 HealthCor Notes and the 2012 HealthCor Notes
to convert such notes to Common Stock after September 30, 2018; (ii) suspend the accrual of interest on the 2011 HealthCor Notes
and the 2012 HealthCor Notes for periods after September 30, 2018; (iii) provide for the potential earlier repayment of the 2011
HealthCor Notes and the 2012 HealthCor Notes by the Company, 120 calendar days following a written demand for payment by the holder
of such notes; provided, however, that such written demand may not be given prior to the twelve-month anniversary of the date
on which the obligations of the Company under the PDL Credit Agreement are repaid in full; (iv) cancel the 2011 HealthCor Warrants;
(v) provide for the seniority of the 2011 HealthCor Notes and the 2012 HealthCor Notes in right of payment over notes subsequently
issued pursuant to the Purchase Agreement, including the 2014 HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment
Notes; (vi) amend the terms of the 2014 HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment Notes to reflect the
seniority in payment of the 2011 HealthCor Notes and 2012 HealthCor Notes; and (vii) reduce the number of shares of Common Stock
that the Company must at all times have authorized and reserved for the purpose of issuance upon conversion of the notes issued
pursuant to the HealthCor Purchase Agreement (collectively, the “Notes”) and exercise of the warrants issued pursuant
to the HealthCor Purchase Agreement (collectively, the “Warrants”), from at least 120% of the aggregate number of
shares of Common Stock then issuable upon full conversion of the Notes and exercise of the Warrants to at least 100% of such aggregate
number of shares. In addition, on July 10, 2018, along with PDL, HealthCor, the 2015 Investors and the February 2018 Investors,
we entered into a Second Amendment to the Subordination and Intercreditor Agreement, to amend the Subordination and Intercreditor
Agreement dated as of June 26, 2015, as amended to provide that, in the event of a sale of the Company’s hospital assets,
after the net proceeds are first applied to repay obligations under the PDL Credit Agreement, as amended, until paid in full,
up to the next $5,000,000 of such net proceeds may be retained by the Company for working capital purposes before all remaining
net proceeds are then applied to repay the obligations under the Notes in accordance with the priorities set forth in the HealthCor
Purchase Agreement and the Notes. On
July 13, 2018, we entered into the Tenth Amendment to the HealthCor Purchase Agreement with HealthCor, the 2015 Investors, the
February 2018 Investors and certain investors (all of which are directors of the Company) (such additional investors, the “July
2018 Investors”), pursuant to which we sold and issued convertible secured promissory notes for an aggregate of $1,000,000
to the July 2018 Investors with a conversion price per share equal to $0.05 (subject to adjustment as described therein) (the
“Tenth Amendment Notes”). As provided by the Tenth Amendment, the Tenth Amendment Notes are in substantially the same
form as the 2011 HealthCor Notes, with changes to the “Issuance Date,” “Maturity Date,” “First Five-Year
Note Period” and other terms to take into account the timing of the issuance of the Tenth Amendment Notes. The Tenth Amendment
Notes have a maturity date of July 12, 2028. In addition, the provisions regarding interest payments, interest acceleration, optional
conversion, negative covenants, and events of default, preemptive rights and registration rights are the same as those of the
2011 HealthCor Notes. As of June 30, 2019, the underlying shares of our Common Stock related to the Tenth Amendment Notes totaled
approximately 23,000,000 to the July 2018 Investors. On
March 27, 2019, we entered into the Eleventh Amendment to the HealthCor Purchase Agreement, as amended, with HealthCor, the 2015
Investors, the February 2018 Investors and the July 2018 Investors, pursuant to which all parties agreed to amend and restate
Section 5.3 Minimum Cash Balance (“Section 5.3”), wherein the requirement of maintaining a minimum cash balance has
been removed and any breach of Section 5.3 has been waived in perpetuity. On
May 15, 2019, we entered into the Twelfth Amendment to HealthCor Purchase Agreement with HealthCor, the 2015 Investors, the February
2018 Investors, the July 2018 Investors, and an investor (a member of our board of directors) (such additional investor, the “2019
Investor”), pursuant to which we sold and issued a convertible secured promissory note for $50,000 to the 2019 Investor
with a conversion price per share equal to $0.03 (subject to adjustment as described therein) (the “Twelfth Amendment Note”).
As provided by the Twelfth Amendment, the Twelfth Amendment Notes are in substantially the same form as the 2011 HealthCor Notes,
with changes to the “Issuance Date,” “Maturity Date,” “First Five-Year Note Period” and other
terms to take into account the timing of the issuance of the Twelfth Amendment Notes. The Twelfth Amendment Notes have a maturity
date of May 15, 2029. In addition, the provisions regarding interest payments, interest acceleration, optional conversion, negative
covenants, and events of default, preemptive rights and registration rights are the same as those of the 2011 HealthCor Notes.
As of June 30, 2019, the underlying shares of our Common Stock related to the Twelfth Amendment Note totaled approximately 2,000,000
to the 2019 Investor. Accounting
Treatment When
issuing debt or equity securities convertible into common stock at a discount to the fair value of the common stock at the date
the debt or equity financing is committed, a company is required to record a beneficial conversion feature (“BCF”)
charge. We had three separate issuances of equity securities convertible into common stock that qualify under this accounting
treatment, (i) the 2011 HealthCor Notes, (ii) the 2012 HealthCor Notes and (iii) the 2014 HealthCor Notes. Because the conversion
option and the 2011 HealthCor Warrants on the 2011 HealthCor Notes were originally classified as a liability when issued due to
the down round provision and the removal of the provision requiring liability treatment, and subsequently reclassified to equity
on December 31, 2011 when the 2011 HealthCor Notes were amended, only the accrued interest capitalized as payment in kind (’‘PIK’’)
since reclassification qualifies under this accounting treatment. We recorded an aggregate of $2,171,960 and $1,719,400 in interest
for the six months ended June 30, 2019 and 2018, respectively, related to these transactions. The face amount of the 2012 HealthCor
Notes, 2014 HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment Notes and all accrued PIK interest also qualify
for BCF treatment as discussed above. Under the accounting standards, we determined that the restructuring of the HealthCor notes,
pursuant to the terms of the Ninth Amendment, resulted in a troubled debt restructuring. As the future cash flows were greater
than the carrying amount of the debt at the date of the amendment, we accounted for the change prospectively using the new effective
interest rate. During the six months ended June 30, 2019 and 2018, we recorded a BCF of $31,951 and $64,561, respectively. The
BCF was recorded as a charge to debt discount and a credit to additional paid in capital, with the debt discount, using the effective
interest method, amortized to interest expense over the term of the notes. As
Warrants were issued with the Fifth Amendment Notes, the proceeds were allocated to the instruments based on relative fair value
as the warrants did not contain any features requiring liability treatment and therefore were classified as equity. The value
allocated to the Fifth Amendment Warrants was $1,093,105, which was recorded as debt discount with the credit to additional paid
in capital. We recorded an aggregate of $16,598 and $13,997 in interest for the six months ended June 30, 2019 and 2018, respectively,
related to the Fifth Amendment Notes and Fifth Amendment Warrants. The carrying value of the Fifth Amendment Notes at December
31, 2018 approximates fair value as the interest rates used are those currently available to us and would be considered level
3 inputs under the fair value hierarchy. The Sixth Amendment Warrants also did not contain features requiring liability accounting
and were recorded at fair value on the date of issuance with the offsetting credit recorded in equity. The value allocated to
the Sixth Amendment Warrant was $378,000, which was recorded as debt costs with the credit to additional paid in capital. We recorded
an aggregate of $28,901 in interest expense for both the six months ended June 30, 2019 and 2018. The Eighth Amendment Warrants
also did not contain features requiring liability accounting and were recorded at fair value on the date of issuance with the
offsetting credit recorded in equity. The value allocated to the Eighth Amendment Warrants was $10,707, which was recorded as
interest expense at June 30, 2019. |
