| NOTES PAYABLE | NOTE
5 — NOTES PAYABLE In April and May of
2016, the Company entered into secured loan agreements, pursuant to which it borrowed an aggregate amount of $1,295,000 at a fixed
interest rate of 10% per annum. These loans will mature on the earlier of the closing of a new debt financing (subject to certain
exceptions, including refinancings of its outstanding convertible notes) or May 1, 2017. These loans are secured by all of
the CompanyÂ’s personal property and are personally guaranteed by Dr. Niihara, its CEO, and secured by certain of his
real property. Furthermore, the loan agreements contain certain negative covenants that may hinder the CompanyÂ’s ability
to raise additional capital or might otherwise affect its liquidity, including restrictions on its ability to (1) acquire
material assets outside of the ordinary course of business, (2) sell, lease, license transfer or dispose of its personal
property outside of the ordinary course of business, (3) pay or declare dividends, (4) make investments in or loans
to other persons, (5) redeem or repurchase its stock, (6) make deposits or investments unless they are subject to a
deposit control account, (7) incur additional indebtedness other than permitted debt, (8) make payments on subordinated
obligations, (9) undergo a merger, change in control or sale of a substantial portion of its assets, or (10) use loan
proceeds to make payments to its affiliates. If the Company is unable to repay these loans when they become due, or if it otherwise
suffers an event of default under the loan agreements, the lender may have the right to foreclose on their collateral, which could
have a material and adverse effect on the CompanyÂ’s business, financial condition, liquidity and operations. In connection with these
loans, the Company issued the lender warrants for the purchase of 62,500 shares of its common stock at an exercise price of the
lowest of the fair market value of its common stock during the quarter ended June 30, 2016 or the lowest public sale price
of its common stock during the quarter ended June 30, 2016. In addition, if these loans remain outstanding for at least 30
days during the 90-day periods ending June 30, 2016, September 30, 2016 and December 31, 2016, the Company is obligated
to issue the lender additional warrants for the purchase of 37,500, 18,750 and 18,750 shares of its common stock, respectively,
for an exercise price of the lowest of the fair market value of its common stock as of the start or end of such 90-day period
or the lowest public sale price of its common stock during the quarter ended on the applicable measurement date. As these loans
have been outstanding for more than 30 days during the 90-day period ending June 30, 2016, the Company accordingly issued
the lender an additional warrant for the purchase of 37,500 shares of its common stock on the terms set forth above. These warrants
may be exercised through a cashless feature. Notes payable consisted
of the following at June 30, 2016 and December 31, 2015:
Year Issued Interest Rate Range Term of Notes Conversion Price Principal Outstanding June 30,
2016 Discount Amount June 30,
2016 Carrying Amount June 30, 2016 Shares Underlying Notes June
30, 2016 Principal Outstanding December 31, 2015 Discount Amount December 31, 2015 Carrying Amount December 31,
2015 Shares Underlying Notes
December 31, 2015
Notes payable
2013 10% Due
on demand — $ 972,200 $ — $ 972,200 — $ 830,000 $ — $ 830,000 —
2014 11% Due
on demand - 2 years — 613,615 — 613,615 — 1,446,950 — 1,446,950 —
2015 11% Due
on demand - 2 years — 2,530,532 — 2,530,532 — 2,379,799 — 2,379,799 —
2016 10
- 11% Due
on demand – 12.5
months — 2,678,335 426,491 2,251,844 — — — — —
$ 6,794,682 $ 426,491 $ 6,368,191 — $ 4,656,749 $ — $ 4,656,749 —
Current $ 6,794,682 $ 426,491 $ 6,368,191 — $ 4,656,749 $ — $ 4,656,749 —
Non-current $ — $ — $ — — $ — $ — $ — —
Notes payable -
related party
2012 8%
- 10% Due
on demand — $ 626,730 $ — $ 626,730 — $ 626,730 $ — $ 626,730 —
2013 8% Due
on demand — 50,000 — 50,000 — 50,000 — 50,000 —
2014 11% Due
on demand - 2 years — — — — — 240,308 — 240,308 —
2015 10%
- 11% Due
on demand - 2 years — 1,621,265 — 1,621,265 — 1,849,266 — 1,849,266 —
2016 10%
- 11% Due
on demand - 2 years — 993,843 993,843 — — — — —
$ 3,291,838 $ — $ 3,291,838 — $ 2,766,304 $ — $ 2,766,304 —
Current $ 3,291,838 $ — $ 3,291,838 — $ 2,766,304 $ — $ 2,766,304 —
Non-current $ — $ — $ — — $ — $ — $ — —
Convertible notes
payable
2010 6% 5
years $3.05 $ 2,000 $ — $ 2,000 656 $ 2,000 $ — $ 2,000 656
2011 10% 5
years $3.05 300,000 — 300,000 98,285 500,000 — 500,000 163,809
2013 10% 2
years $3.60 — — — — 525,257 — 525,257 185,553
2014 10% Due
on demand - 2 years $3.05-$3.60 2,716,505 119,448 2,597,057 887,820 4,378,563 353,700 4,024,863 1,120,470
2015 10% Due
on demand - 2 years $3.50-$7.00 4,728,288 319,566 4,408,722 1,283,410 5,681,166 526,066 5,155,100 1,517,996
2016 10% Due
on demand - 2 years $3.50-$4.50 4,061,535 923,086 3,138,449 1,005,657 — — — —
$ 11,808,328 $ 1,362,100 $ 10,446,228 3,275,828 $ 11,086,986 $ 879,766 $ 10,207,220 2,988,484
Current $ 7,137,644 $ 798,224 $ 6,339,420 2,111,764 $ 6,358,698 $ 358,351 $ 6,000,347 1,762,849
Non-current $ 4,670,684 $ 563,876 $ 4,106,808 1,164,064 $ 4,728,288 $ 521,415 $ 4,206,873 1,225,635
Convertible notes
payable - related party
2012 10% Due
on demand $3.30 $ 254,000 $ — $ 254,000 90,651 $ 298,000 $ — $ 298,000 108,505
2015 10% 2
years $4.50 320,000 — 320,000 75,900 320,000 — 320,000 72,354
$ 574,000 $ — $ 574,000 166,551 $ 618,000 $ — $ 618,000 180,859
Current $ 254,000 $ — $ 254,000 90,651 $ 298,000 $ — $ 298,000 108,505
Non-current $ 320,000 $ — $ 320,000 75,900 $ 320,000 $ — $ 320,000 72,354
Grand
Total $ 22,468,848 $ 1,788,591 $ 20,680,257 3,442,379 $ 19,128,039 $ 879,766 $ 18,248,273 3,169,343 The average stated interest
rate of notes payable as of June 30, 2016 and December 31, 2015 was 10%. The average effective interest rate of notes
payable for the six-month period ended June 30, 2016 and the year ended December 31, 2015 was 23% in each period, after
giving effect to discounts relating to beneficial conversion features and the fair value of warrants issued in connection with
these notes. The notes payable and convertible notes payable do not have restrictive financial covenants or acceleration clauses
associated with a material adverse change event. The holders of the convertible notes have the option to convert their notes into
the CompanyÂ’s common stock at the stated conversion price during the term of their convertible notes. Conversion prices on
these convertible notes payable range from $3.05 to $3.60 per share. Certain notes with a $4.50 or a $7.00 stated conversion price
in the second year of their two year term are subject to automatic conversion into shares of the CompanyÂ’s common stock at
a conversion price equal to 80% of the initial public offering price at the time of a qualified public offering. All due on demand
notes are treated as current liabilities. Contractual principal
payments due on notes payable are as follows:
Year Ending at June 30, 2016
2016 $ 12,767,736
2017 6,784,168
2018 2,916,944
Total $ 22,468,848 The Company estimated
the total fair value of any beneficial conversion feature and accompanying warrants in allocating the debt proceeds. The proceeds
allocated to the beneficial conversion feature were determined by taking the estimated fair value of shares issuable under the
convertible notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value
of the CompanyÂ’s common stock as of the date of issuance (see Note 2). The fair value of the warrants issued in conjunction
with notes was determined using the Black Scholes Merton option pricing model with the following inputs for the periods ended:
June 30, 2016 December 31, 2015
Stock
price $ 5.00 $ 4.50
Exercise
price $ 4.50
- 4.70 $ 4.90
Term 5
years 5 years
Risk-free
interest rate 1.01
- 1.28 % 1.57 %
Expected
dividend yield — —
Expected
volatility 65.4
-
67.8 % 67.3 % In situations where the
debt included both a beneficial conversion feature and a warrant, the proceeds were allocated to the warrants and beneficial conversion
feature based on their respective pro rata fair values. |
