| Financing Arrangements | 5. Financing Arrangements The Company has
obtained debt financing through bank loans and loans from directors and other affiliated parties and unaffiliated third party investors.
Certain of the debt was issued with warrants that permit the investor to acquire shares of the CompanyÂ’s common stock at
prices as specified in the individual agreements. See Note 10 for additional information regarding conversions of debt and accrued
interest into common stock during the three months ended March 31, 2016. The Company adopted
ASU 2015-03 during the first quarter of 2016. Pursuant to the guidance in ASU 2015-03, the Company has reclassified unamortized
deferred financing costs associated with certain outstanding debt in the previously reported Consolidated Balance Sheet as of December
31, 2015. Following is a summary
of debt outstanding:
As of
March 31, 2016 December 31, 2015
Notes Payable to Directors and Affiliates $ 1,973,000 $ 1,748,000
Convertible Term Loan, due December 2016, interest at 10% 2,300,000 2,300,000
Series Subordinated Note, due January 2016, interest at 12% 415,398 415,398
Notes Payable, due the earlier of raising $10 million in proceeds from private placements or April 2016, interest between 8.25% and 12% 72,018 74,486
Note Payable, due August 2021, interest 0% 192,000 192,000
Installment Note Payable – Bank 303,900 260,949
Total 5,256,316 4,990,833
Unamortized deferred financing costs (22,932 ) (30,576 )
Total debt, net 5,233,384 4,960,257
Less: current maturities 4,833,827 4,768,257
Long-term portion $ 399,557 $ 192,000 Future maturities
of long-term debt at March 31, 2016 are as follows:
Nine months ending December 31, 2016 $ 3,006,879
2017 1,932,450
2018 115,129
2019 9,858
2020 -
2021 -
Thereafter 192,000
$ 5,256,316 Notes Payable to Directors and Affiliates In May 2014, the
Company entered into a $1.5 million line-of-credit agreement with Michael Hanson, a director. The original terms of the line-of-credit
agreement provided for a stated interest rate of 10% on the principal amount outstanding. There are no financial covenants with
the line of credit. Through the second quarter of 2014, the Company had drawn down the entire $1,500,000 under this facility. On
June 24, 2014, the Company entered into a letter agreement, with two directors, in which Mr. Hanson agreed to convert $500,000
of the principal related to the $1.5 million line-of-credit outstanding into 416,667 shares of common stock and also received five-year
warrants to purchase 333,333 shares of the CompanyÂ’s common stock at an exercise price of 125% of the IPO price or $1.88
per share. In addition, Mr. Hanson agreed to amend the repayment terms of the line-of-credit to occur on the earlier of (a) raising
an aggregate gross proceeds in one or more financing transactions (other than the IPO) of at least $10 million or (b) July 31,
2015. In July 2015, Mr. Hanson agreed to amend the repayment terms of the line-of-credit to occur on the earlier of (a) raising
aggregate gross proceeds in one or more financing transactions of at least $10 million or (b) December 31, 2015. In February 2016,
Mr. Hanson agreed amended the terms of the line-of-credit to extend the maturity date to January 31, 2017. The Company also agreed
to make interest-only payments on June 30, 2016, September 30, 2016 and December 31, 2016. The interest-only payments are for interest
accrued on the principal balance from February 1, 2016 to date of payment. The outstanding principal and accrued interest balance
is due in full on January 31, 2017. The amount of principal owed under the $1.5 million line of credit as of March 31, 2016 and
December 31, 2015 was $1,000,000 plus accrued interest of $196,904 and $171,973, respectively. As a result of the
Company completing its IPO on July 14, 2014, the Company determined there was a beneficial conversion feature related to the $1.0
million outstanding balance of the line of credit which totaled $250,000. This amount was recorded as a discount to the debt and
was amortized into interest expense through the amended maturity date of July 31, 2015. For the three months ended March 31, 2015,
the Company recorded interest expense of $62,499 related to amortization expense associated with the beneficial conversion feature.
The unamortized balance of the beneficial conversion feature as of March 31, 2015 was approximately $83,000. On July 30, 2014,
the Company entered into a financing commitment letter with Messrs. Hanson and Davis to lend the Company up to $2.5 million through
December 31, 2014, bearing interest at 10%, and due January 31, 2015, which was later extended to January 31, 2016. The terms provided
if any portion of the notes issued under the commitment letter were outstanding beyond January 31, 2015, the default interest rate
would be adjusted to 18%. As of December 31, 2014, $350,000 was outstanding. In January 2015, the Company received advancements
totaling $350,000. On February 3, 2015, Michael Hanson, one of our directors, converted $250,000 of the amount owed into 217,391
shares of Series B Convertible Preferred Stock (which Series B Convertible Preferred Stock was converted into common stock on February
27, 2015). Also in February 2015, the Company amended the terms of the commitment letter to extend the repayment of the outstanding
principal balance owed as of that date of $450,000 to January 31, 2016 at a rate of 10% per annum. As part of the amendment, the
directors did not renew the remaining amount available under the original terms of the commitment letter. In June 2015, Michael
Hanson converted $102,000 of the amount owed into 1,020 shares of Series C Convertible Preferred Stock and also received a five-year
warrant to purchase 232,983 shares of common stock at $0.4816 per share (since adjusted to $0.329 per share.) On October 23, 2015,
the Company entered into an addendum to the financing commitment letter under which Mr. Hanson agreed to an additional advancement
of $250,000. In February 2016, the Company amended the terms of the commitment letter to extend the maturity date to January 31,
2017 and maintain the interest rate at 10%. The Company also agreed to make interest only payments on June 30, 2016, September
30, 2016 and December 31, 2016. The interest-only payments are for interest accrued on the principal balance from February 1, 2016
to date of payment. The outstanding principal and accrued interest balance is due in full on January 31, 2017. The total principal
amount outstanding under the commitment letter equaled $598,000 at March 31, 2016 and December 31, 2015 plus accrued interest of
$69,766 and $54,857, respectively. In March 2015, the
Company issued a total of $400,000 of new demand promissory notes to Messrs. Davis and Hanson. The notes bore interest at a rate
of 10% and were due June 30, 2015. In June 2015, the $400,000 of notes were converted into 4,000 shares of Series C Convertible
Preferred Stock as part of the Series C preferred offering. Messrs. Davis and Hanson also received five year warrants to purchase
913,659 shares of common stock at $0.4816 (since adjusted to $0.329) per share. In December 2015, the Company issued a $150,000
demand promissory note to Mr. Hanson. The note bears an interest rate of 10% and is due June 30, 2016. In February 2016,
the Company entered into a thirty-day note payable with James L. Davis for $150,000 and Michael J. Hanson for $75,000. Under the
note agreements, in lieu of interest, the Company agreed to issue five-year cashless warrants to purchase 250,000 and 125,000 shares
of common stock at $0.329 per share to Messrs. Davis and Hanson, respectively. Additionally, for each 30 days the principal amount
is outstanding, the Company will issue the note holders an additional 250,000 and 125,000 warrants, respectively, with the same
terms as described above. On March 29, 2016, both notes were amended to change the due dates of the principal amounts owed to January
11 and January 31, 2017, under Messrs. HansonÂ’s and DavisÂ’ notes, respectively. Messrs. Davis and Hanson will continue
to earn the warrants on a 30-day basis until the principal is repaid. As of March 31, 2016, Messrs. Davis and Hanson have received
a total of 500,000 and 250,000 warrants, respectively. The Company has recognized non-cash expense to date of approximately $138,000
on Messrs. Davis and HansonÂ’s warrants, which represents the fair value of the warrants as determined using the Black-Scholes
option pricing model. Convertible Term Loan, due December
2016 In December 2013,
the Company entered into an agreement to issue convertible notes with Trooien Capital, LLC (the “Trooien Capital Note) in
a principal amount of up to $4 million. The proceeds of borrowings under the Trooien Capital Notes are expressly to be used to
repay amounts owed under the CompanyÂ’s senior secured note payable issued to another investor. Borrowings under the agreement
bear interest at 10% and the note matures in December 2016. In the event of default, the interest rate increases by either 2% or
4%, depending on the nature of the default. Under the note agreement, the investor has the right, but not the obligation, to advance
additional amounts up to the $4 million. The terms of the agreement originally provided that the lender could have multiple options
for converting the Trooien Capital Notes at varying rates and times following the completion of a qualifying financing transaction.
Depending on the timing of conversion, the holder could also receive warrants to purchase common stock. In addition to conversion
of the Trooien Capital Notes, the holder has the right to request shares of common stock, rather than cash, as payment for interest.
In May 2014 the Company agreed to include $356,616 in principal and accrued interest of convertible notes originally issued to
our senior debt holder during the fourth quarter of 2014, due March 2015, under the terms of the Trooien Capital Note, due December
2016. On May 12, 2014,
the Company entered into an agreement to amend the conversion terms of the Convertible Term loan, due December 2016 as follows: First Conversion
Right Second Conversion
Right On June 18, 2014,
the holder agreed to convert $1,000,000 of the then outstanding principal balance of $3,250,000 together with the accrued related
interest into common stock upon the completion of the IPO based on the terms described above in the First Conversion Right. Upon
completion of the CompanyÂ’s IPO on July 14, 2014, the $1,000,000 of principal and $58,630 of accrued interest converted into
980,213 shares of common stock and the Company also issued to the investor a five-year warrant to purchase 980,213 shares of the
CompanyÂ’s common stock at an exercise price equal to 125% of the IPO price, or $1.875. The balance of the
note as of March 31, 2016 and December 31, 2015 was $2.3 million plus accrued interest of $427,616 and $370,274, respectively. Series Subordinated Note The series subordinated
note totaling $613,808 in principal and $100,745 of accrued interest as of December 31, 2014 was originally due in December 2014.
In December 2014, the Company amended the terms of the note to include monthly installments of $50,000 due December 2014 and an
additional $50,000 due at the end of each following month through April of 2015, when the remaining principal balance and related
accrued interest becomes due. In May 2015, the Company entered into an amendment of the note to extend the maturity date from April
30, 2015 to December 31, 2015. Under the amended note, the Company was required to make monthly payments of $50,000 beginning May
31, 2015 and continuing to December 31, 2015, which time any remaining principal and unpaid accrued interest would become due.
As of October 31, 2015, the Company had not paid the $50,000 monthly installments since August 2015. On November 2, 2015, the Company
renegotiated the terms of the note. Under the amended terms, payments of $30,000 were due on each of November 15, 2015, December
15, 2015 and January 15, 2016, with the remaining balance of accrued, unpaid interest and principal due on January 31, 2016. As
of May 13, 2016, the Company has not paid the $30,000 monthly installments since December 2015. On March 31, 2016, the holder of
the note commenced an action against the Company in Hennepin County Court in the State of Minnesota alleging the Company breached
the terms of the note. The law suit alleges the Company owes the note holder $694,869 plus interest and assessments accruing after
April 1, 2016. The Company disputes the allegations of the note holder and intends to vigorously defend the claim. The principal
balance on the note as of March 31, 2016 and December 31, 2015 was $415,398. The accrued interest owed as of March 31, 2016 and
December 31, 2015 was $14,476 and $2,049. Notes Payable, due April 2016 In January 2014,
the Company assumed notes payable totaling $74,486 related to the acquisition of DE2. The original terms of the notes required
repayment on the earlier of January 31, 2016 or the date the Company completes a business combination with an operating company
in a reverse merger or reverse takeover transaction or other transaction after which the Company would cease to be a shell company.
The reverse merger was completed in February 2014, and the terms of the note were amended to state that the principal and related
accrued interest is due the earlier of January 31, 2016 or the date the Company completes one or more private placements of debt
or equity securities resulting in aggregate proceeds of $10,000,000. In March 2016, the Company paid off one of the notes with
a principal and interest balance of approximately $3,500 and amended all other notes to change the earlier of date from January
31, 2016 to April 30, 2016. A warrant for the issuance of 75,000 shares with an exercise price of $0.35 was issued in consideration
for the note extensions. As of May 13, 2016, the remaining notes and accrued interest have not been paid. Note Payable, due August 2021 In August 2014,
the Company entered into a 0% interest $192,000 note payable with the State of Minnesota as part of an Angel Loan program fund.
There are no financial loan covenants associated with the loan, which has a maturity date of August 2021. The loan contains a provision
whereby if the Company transfers more than a majority of its ownership, the loan becomes immediately due, along with a 30% premium
amount of the principal balance. In addition, if the Company is more than 30 days past due on any payments owed under the loan,
the interest rate increases to 20% per annum. Installment Note Payable –
Bank In April 2015, the
Company entered into a new installment note with a bank for approximately $330,000. The Company received the net amount between
a previous note and the new note or $113,000, which was primarily used for working capital purposes. The new note bore interest
at the prime rate plus 1%, but not less than 5%. The note was due on demand; if no demand was made then the note was due in monthly
payments of $9,903 from May 2015 through May 2018. Borrowings remained secured by substantially all of the CompanyÂ’s property
and are guaranteed by three of the CompanyÂ’s directors. In January 2016, the Company entered into a new installment note
replacing the above mentioned note. The balance of the existing note totaled approximately $261,000, while the new note was issued
for approximately $330,000. The company received the net amount between the two notes or $69,000, which was primarily used for
working capital purposes. The new note bears interest at the prime rate plus 1%, but not less than 5%. The note is due in monthly
payments of $9,901 from February 2016 through January 2019. The principal balance as of March 31, 2016 and December 31, 2015 was
$303,900 and $260,949, respectively. Other Information Regarding Debt The prime interest
rate was 3.50% at March 31, 2016 and December 31, 2015. As a result of either
the short term duration or recency of its financings, the Company believes that the fair value of its outstanding debt approximates
market value. |
