| Financing Arrangements | 4. Financing Arrangements The Company has
obtained debt financing through bank loans, 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 Companys common stock at
prices as specified in the individual agreements. See Note 8 Shareholders Deficit. The Companys
debt and accrued interest outstanding as of the periods presented consisted of the following:
Principal Balance Accrued Interest
(Dollar amounts in thousands) September 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015
Notes Payable to Directors and Affiliates $ 2,697 $ 1,748 $ 367 $ 232
Convertible Term Loan, due December 2016, interest at 10% 2,300 2,300 543 370
Convertible Notes, due 2016 and 2017, interest at 0% 1,093
Series Subordinated Note, due January 2016, interest at 12% 415 415 39 2
Notes Payable, due October 2016, interest between 8.25% and 12% 67 75 30 28
Note Payable, due August 2021, interest at 0% 192 192
Installment Note Payable Bank 260 261
Total 7,024 4,991 979 632
Unamortized deferred financing costs (94 ) (31 )
Total debt, net 6,930 4,960
Less: short-term debt and current portion of long-term debt 6,586 4,768
Long-term debt, net of current portion $ 344 $ 192 Future maturities
of long-term debt as of September 30, 2016 are as follows (in thousands):
Three months ending December 31, 2016 $ 3,894
2017 2,814
2018 115
2019 9
2020 -
2021 192
Thereafter -
$ 7,024 Notes Payable to Directors and Affiliates The Company has
historically relied on two directors of the Company, Michael J. Hanson (Mr. Hanson) and James L. Davis (Mr.
Davis, and collectively with Mr. Hanson, Messrs. Hanson and Davis), to provide financing to fund the Companys
operations. See Note 10 Related Party Transactions. Convertible Term Loan, due December
2016, interest at 10% In December 2013,
the Company entered into a loan and security agreement with Trooien Capital, LLC (Trooien Capital, and the Company
refers to this note as the Trooien Capital Note) for a principal amount of up to $4 million. Borrowings under the
Trooien Capital Note bear interest at 10% and mature in December 2016. Under the agreement, Trooien Capital has the right, but
not the obligation, to advance additional amounts up to the $4 million. Trooien Capital has the right to request shares of common
stock, rather than cash, as payment for interest. Trooien Capital had two conversion rights under the Trooien Capital Note, the
first of which has expired. Under the second conversion right, Trooien Capital has the right, through the maturity date of the
note, to convert the principal and accrued interest into common stock at a conversion rate equal to 125% of the price at which
the common stock was sold in the Companys July 2014 initial public offering. Under the terms of this conversion agreement,
Trooien Capital will receive 100% warrant coverage. On or about May 24, 2016, Trooien Capital commenced legal action against the
Company. See Note 6 Commitments and Contingencies. Convertible Notes, due 2016 and 2017,
interest at 0% For accounting purposes,
the Company accounts for the debt, warrants and conversion features of the following convertible notes using an allocation process.
As a result, the reported amount of the debt has been reduced and will be accreted to face value through each of the maturity dates. Convertible notes that will convert
upon listing During the nine
months ended September 30, 2016, the Company issued to several investors convertible notes, which are unsecured and do not bear
any interest. Each of the investors may elect to convert the principal amount of the notes into shares of the Companys common
stock at any time before the maturity date of the notes at a conversion price equal to the lower of $5.55 and 80% of the per share
sale price of the Companys common stock in its next underwritten public offering. The Company has the right to require each
of the investors to convert the notes into shares of its common stock at that conversion price if the Companys common stock
is listed on the Nasdaq Capital Market, the Nasdaq Global Market or the Nasdaq Global Select Market. In addition, under the Companys
agreement with each of the investors, it is required to file with the SEC a registration statement covering the resale of the shares
of its common stock issuable under the notes and the warrants within 21 days after the offering, or 90 days following the date
on which the Companys current financing plan is terminated. If the Company fails to file a registration statement in a timely
manner, the Company will be required to issue to each of the investors additional warrants to purchase shares of its common stock.
The following table provides additional information about each financing.
Note Date Maturity Date Proceeds (1) Principal (1) Fair Value (2)
(in thousands)
June 1, 2016 June 1, 2017 $ 1,000 $ 1,053 $ 1,262
August 11, 2016 August 11, 2017 500 526 631
September 15, 2016 September 15, 2017 95 100 120
(1) As provided for in the relevant agreements
(2) As of September 30, 2016 Convertible notes to June 9, 2016
Investors On June 9, 2016,
the Company agreed to issue to each of Old Main Capital, LLC , The notes do not bear any
interest, other than during an event of default. Each tranche funded under a note is due and payable in full six months after the
date of funding. The first tranche is due on December 9, 2016. In addition to providing three days advance written notice
to the June 9, 2016 Investors, under the terms of each note upon repayment of the note (including on the maturity date), the Company
is obligated to pay a 20% premium on the then outstanding principal and any accrued default interest then due on the note, which
in the aggregate is equal to 120% of the then outstanding principal and any accrued default interest then due on the note. Series Subordinated Note, due January 2016,
interest at 12% The series subordinated
note was due in January 2016. As of September 30, 2016, the Company has not repaid the note. On March 31, 2016, the holder of the
note commenced legal action against the Company. See Note 6 Commitments and Contingencies. Notes Payable, due October 2016, interest
between 8.25% and 12% In January 2014, the Company
assumed notes payable in connection with the reverse merger transaction pursuant to which the Company acquired the Subsidiary.
During the nine months ended September 30, 2016, the Company repaid three of the notes for approximately $11,000, including principal
and accrued interest. During 2016, the Company also extended the maturity date of the remaining notes to August 2016 and then to
October 2016. As of the date that these financial statements were available to be issued, the Company has not yet repaid these
notes but is actively negotiating with the lender to further extend the maturity date of the notes. Note Payable, due August 2021, interest
at 0% In August 2014, the Company
entered into a 0% interest, $192,000 note payable to 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 January 2016, the Company
entered into an installment note payable with a bank, replacing a previous note, for a principal amount of approximately $330,000.
The company received the net amount between the two notes, or approximately $69,000, which was primarily used for working capital
purposes. The note bears interest at the prime rate plus 1%, but not less than 5%. The note is due in January 2019. The prime rate
of interest was 3.50% as of September 30, 2016 and December 31, 2015. Other Information Regarding Debt Except for the Convertible
Notes, Due 2016 and 2017, as a result of either the short term duration or recency of its financings or refinancings, the Company
believes that the estimated fair value of its outstanding indebtedness approximates market value. | 6. Financing Arrangements The Company has
raised debt through several forms of borrowing including bank loans, 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 Company’s
common stock at prices as specified in the individual agreements. See Note 12 for additional information regarding conversions
of debt and accrued interest into common stock during the years ended December 31, 2015 and 2014. Following is a summary
of debt outstanding:
As of
December 31, 2015 December 31, 2014
Notes Payable to Directors and Affiliates $ 1,748,000 $ 1,350,000
Convertible Term Loan, due December 2016, interest at 10% 2,300,000 2,300,000
Series Subordinated Note, due January 2016, interest at 12% 415,398 613,808
Notes Payable, due the earlier of raising $10 million in proceeds from private placements or January 2016, interest between 8.25% and 12% 74,486 74,486
Note Payable, due August 2021, interest 0% 192,000 192,000
Installment Note Payable – Bank 260,949 252,244
Total 4,990,833 4,782,538
Unamortized discount - (145,835 )
Total debt, net 4,990,833 4,636,703
Less: current maturities 4,798,833 2,070,217
Long-term portion $ 192,000 $ 2,566,486 Future maturities of long-term debt
at December 31, 2015 are as follows:
2016 $ 4,798,833
2017 -
2018 -
2019 -
2020 -
Thereafter 192,000
$ 4,990,833 Senior Secured Note Payable In October 2012,
the Company entered into a Loan and Security Agreement (the “Secured Loan Agreement”) with Michaelson Capital Partners,
LLC (the “Senior Secured Lender”) that provides for borrowings of up to $1,500,000. Borrowing under the Secured Loan
Agreement is secured by all property of the Company including tangible and intangible property. In addition, the Secured Loan Agreement
contained certain negative pledges and restrictions on certain types of transactions and use of loan proceeds. The note is guaranteed
by a Company director and the spouse of the director. The loans carried stated interest rates from 10-16%. In the event of default
the interest rate increased to 14% - 20%. The Secured Loan Agreement’s stated expiration date was April 23, 2013. Beginning
in August 2013, the Company was in default and outstanding borrowings and interest began to accrue at the default rates. In addition,
the agreement contained certain covenants, some of which the Company was not in compliance with. The note was amended in February
2013 and an additional $1,000,000 was borrowed. Further, as part of this amendment the lender received a payoff premium of $750,000
which the Company accrued as interest expense in 2013 and paid in 2014. On December 6, 2013,
the Company entered into a Forbearance Agreement (the “Forbearance Agreement”) with the Senior Secured Lender. The
Forbearance Agreement provided that the Senior Secured Lender would not accelerate repayment of the amounts owing, or enforce its
security interests or any other rights, under the Secured Loan Agreement, until March 6, 2014. In March 2014, the
Forbearance Agreement was extended to May 12, 2014. In consideration for the extension the Company agreed to issue $1 million of
the Company’s common stock, the number of shares to be determined by reference to the lowest per share price in the Company’s
then planned public offering of common stock. On July 14, 2014 the Company issued to the Senior Secured Lender 44,445 shares of
common stock at $22.50 per share for a total value of $1,000,000. In 2014, the Company recorded interest expense of $1,000,000,
related to this extension. On May 1, 2014,
the Company entered into an agreement with an investor to draw on the $4 million convertible term loan, due December 2016, described
below for an amount sufficient to satisfy their outstanding obligation to the Senior Secured Lender, but not to exceed the loan
limit of $4 million, for a maximum borrowing of $3.4 million as of March 31, 2014. On May 19, 2014, the Company entered into a
second forbearance agreement with the Senior Secured Lender through May 23, 2014 in return for the Company repaying a total sum
of $500,000 on this date. In addition, the Company agreed to reduce the price per share related to the $1.0 million of common stock
to 80% of the lowest price per share of common stock issued to any investor in the Company if the stock was not publicly traded
on or before July 15, 2014. On May 29, 2014, the Company received an advance totaling $1.950 million under the terms of the convertible
term loan and repaid a total of $2.0 million of the outstanding balance to the Senior Secured Lender, leaving a remaining balance
of $150,660. On May 30, 2014, the Company entered into an unsecured convertible note payable with the Senior Secured Lender for
a total of $150,660. The note bore interest at an annual rate of 10% and the principal and accrued interest were due on or prior
to July 31, 2014. Upon a thirty day written notice to the Company from the issuance date, the Senior Secured Lender had an option
to convert the note into common stock at 90% of the conversion terms offered in the Convertible Subordinated Notes, due June 2015,
described below. In addition, upon conversion of the note, the holder was entitled to receive warrants equal to the number of shares
received from the conversion at a price of 125% of the IPO price. In July 2014, the Company repaid the remaining note outstanding
of $150,660, along with accrued interest totaling $2,559 which satisfied all remaining obligations to the Senior Secured Lender. The Senior Secured
Lender also received a warrant to purchase 5,082 shares of Company common stock at $135.00 per share. The warrant expires in October
2017. Including the value of the warrant at the date of issuance, the effective interest rate on the full $2,500,000 available
under the Secured Loan Agreement was 38%. The exercise price of the warrant is subject to downward adjustment in the event of the
subsequent sale of common stock or convertible debt at a lower price, as defined, prior to exercise of the warrant. As a result
of this provision, the Company determined that the warrant should be accounted for as a liability carried at fair value. In February
2013, the exercise price was adjusted to $43.20 and the number of shares of Company common stock to be acquired was increased to
15,881 based on a qualifying transaction. In July 2014, the Company entered into an agreement to modify the terms of the warrant.
Under the new terms, the exercise price was reduced to $18.00 per share which is 80% of the IPO share price and the number of shares
of Company common stock to be acquired was increased to 38,114. In connection with the issuance of warrants with an exercise price
of $17.25 as part of the PIPE transaction completed in 2015, the Company increased the total number of shares of common stock issuable
upon exercise of the warrant issued to the Senior Secured Lender to 49,714 and reduced the exercise price to $13.80 per share.
In connection with the reduction in exercise price of the warrants issued as part of the PIPE transaction to $4.94, the Company
increased the total number of shares of common stock issuable upon exercise of the warrant issued to the Senior Secured Lender
to 175,911 and reduced the exercise price to $3.90 per share. The Company determined
the value of the warrant to be $537,000 and $146,000 at December 31, 2015 and 2014, respectively, and both of these amounts were
recorded as a liability on the balance sheet as of these dates. The Company also
incurred financing costs in conjunction with this transaction aggregating $62,500 that are owed under the same terms as terms as
the Secured Loan Agreement. The entire amount was fully amortized as of December 31, 2014. Secured Convertible Notes, due June
through August 2014 From June through
August 2013, the Company borrowed $770,000 under various secured convertible notes. The notes bore interest at the annual rate
of 10% and mature one year from the date of issue. Borrowings under the notes were secured by all property of the Company including
tangible and intangible property. In addition, the notes contained certain negative pledges and restrictions on certain types of
transactions and use of loan proceeds. Upon completion
of certain equity financing transactions as defined in the notes, the outstanding principal and unpaid interest was automatically
converted into common stock. The conversion rate per share was equal to 75% of the per share price of the securities offered in
the defined financing transaction . Notes Payable to Directors and Affiliates In March 2014, the
Company borrowed $1,500,000 from a director to fund the acquisition of Select Mobile Money from DeviceFidelity. (See Note 10) The
note had an interest rate equal to 24%, payable monthly commencing April 2014. The Company failed to pay the accrued interest on
the note due April 2014. As a result, the interest rate increased to 48% in April 2014 and continued to accrue at this rate until
the note and all accrued interest was repaid in full. The principal and any unpaid accrued interest became due on May 15, 2014.
In addition, the Company agreed to issue common stock as consideration for the note equal to 12.5% of the principal amount or $187,500,
which equaled 5,209 shares using the required share price of $36.00. Because the Company failed to pay the accrued interest due
April 2014, the Company owed additional common stock equal to 3.125% of the outstanding principal amount or $46,875, which equaled
1,303 shares on each successive 5th business day for as long as any portion of the principal amount of the loan was outstanding.
The Company issued a total of 25,521 shares of common stock in connection with this note and recorded interest expense of $890,624
related to the common stock issued for the year ended December 31, 2014. A total of $1,731,781 of principal and accrued interest
was repaid in July 2014. In addition to the
$1,500,000 March 2014 note above, the Company also issued a total of $3,690,000 of new notes to three directors during the year
ended December 31, 2014. Of this amount, $1,925,000 of the notes bears interest at a rate of 10% and becomes due between February
and September of 2015, and $1,500,000 represents a line-of-credit agreement with one director of the Company. The original terms
of the line-of-credit agreement provided for a stated interest rate of 10% on the principal amount outstanding. Both the principal
and unpaid accrued interest is payable upon the earlier of September 30, 2014 or completion of a public offering of securities.
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. At the option of the director, all the principal and unpaid accrued interest under the line-of-credit
could have been converted upon the completion of an IPO of the Company’s common stock at a 20% discount to the price at which
the shares are of the Company’s stock were sold in the offering. The director exercised this conversion right with respect
to $500,000 of indebtedness in connection with our July 2014 IPO (see June 24, 2014 Letter Agreement below). The Company entered
into three notes with directors totaling $265,000 that were due June 30, 2015 and accrued interest at a rate of 8%. The terms of
these notes included a provision whereby all principal and accrued interest automatically converted into the Company’s common
stock upon the successful consummation of an IPO. On July 14, 2014, the Company completed an IPO and the conversion price equaled
80% of the per share purchase price at which the Company’s common stock was sold in the IPO. On July 14, 2014, $265,000 of
principal and $6,763 of accrued interest converted into 15,098 shares of common stock. On June 17, 2014,
the Company entered into a conversion agreement with two directors under which a total of $1,050,000 of principal related to the
10% term notes due between February and March 2015 would automatically convert into common stock upon the completion of an IPO
of the Company’s common stock at a 20% discount to the price at which the shares of the Company’s stock were sold in
the IPO. These notes were converted into common stock at the time of our IPO. Upon conversion, the two directors also received
100% warrant coverage at a price equal to 125% of the IPO price or $28.13. On June 24, 2014,
the Company entered into a letter agreement with two directors under which a total of $900,000 of the principal of the 10% term
notes due between February and March 2015 and $500,000 of principal owed under the 10% line-of-credit due September 2014 would
automatically convert upon the Company completing an IPO. In addition, the director 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. The conversion terms are the same as described in the conversion agreement
dated June 17, 2014 above. On July 14, 2014,
the Company completed its IPO resulting in $3,375,000 of principal and $204,134 of accrued interest of short-term notes payable
with a stated interest rate of 10% converting into 198,841 shares of the Company’s common stock. In addition, the two directors
received five-year warrants to purchase a total of 150,000 shares of the Company’s common stock at an exercise price of 125%
of the IPO price or $28.20 per share. Lastly, as part of the letter agreement entered into on June 24, 2014, a director agreed
to convert $500,000 of principal related to the $1.5 million line-of-credit outstanding into 27,778 shares of common stock and
also received five-year warrants to purchase a total of 22,223 shares of the Company’s common stock at an exercise price
of 125% of the IPO price or $28.20 per share. The amount of principal owed under the $1.5 million line-of-credit as of December
31, 2015 and December 31, 2014 was $1,000,000 plus accrued interest as of $171,973 and $71,973, respectively. In February 2016,
the Company 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. 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
is being amortized into interest expense through the maturity date of July 31, 2015. For the fiscal year ended December 31, 2015
and December 31, 2014, the Company recorded interest expense of $145,835 and $104,165, respectively, related to amortization expense
associated with the beneficial conversion feature. The unamortized balance of the beneficial conversion feature as of the end of
December 31, 2015 and December 31, 2014 was approximately $0 and $146,000, respectively. 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 15,533 shares of common stock at $7.22 per share (since adjusted to $4.94 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. As of December 31, 2015, the total principal and accrued interest amount outstanding to Messrs. Davis and Hanson related
to advances under the commitment letter equaled $598,000 and $54,857, respectively. 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. 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
60,911 shares of common stock at $7.22 (since adjusted to $4.94) 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 16,667 and 8,334 shares
of common stock at $4.94 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 16,667 and 8,334 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. Hanson’s and Davis’ notes, respectively. Messrs. Davis and Hanson will continue
to earn the warrants on a 30-day basis until the principal is repaid. Convertible Notes due March 2015 In 2013, the Company
borrowed $575,000 under convertible notes. These notes were due March 15, 2015. The notes bore a stated interest rate of 10%. Warrants
to purchase 5,834 shares of common stock at $60.00 per share were issued with $350,000 of this debt, resulting in an effective
interest rate of 19% on that portion of the borrowing. In May 2014, the
Company entered into an amendment with various lenders to modify the terms on $350,000 of these convertible notes to the terms
provided under the convertible notes due December 2016. Therefore, prior to the Company’s completion of its IPO on July 14,
2014, the total principal amount outstanding of convertible notes due March 31, 2015 was $225,000. Upon the completion of the Company’s
IPO, the total outstanding balance of $225,000 in principal and $15,015 of accrued interest automatically converted into 11,853
shares of common stock. 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 Notes are expressly to be used to repay amounts
owed under the Senior Secured Note Payable. 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 investor may have several options to convert 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 may 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 the 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 1, 2014,
the Company entered into an agreement which requires, within 10 calendar days of a written request on or prior to May 12, 2014,
the holder of the convertible notes to make additional advances to the Company in an amount sufficient to satisfy the senior debt
amount outstanding, but not to exceed the loan limit of $4.0 million. 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 Company’s IPO on July 14, 2014, the $1,000,000 of principal and $58,630 of accrued interest converted into
65,348 shares of common stock and the Company also issued to the investor a five-year warrant to purchase 65,348 shares of the
Company’s common stock at an exercise price equal to 125% of the IPO price, or $28.13. 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 remaining
$2.3 million outstanding balance of the Convertible Term Loan, due December 2016 which totaled $894,444. This amount was recorded
as a discount to the debt and was amortized into interest expense on a straight-line basis over the 120 days following the closing
of the IPO which represents the period that during which the debt could be converted at a discount to the IPO price. The Company
recorded interest expense of $894,444 related to amortization expense associated with the beneficial conversion feature for the
year ended December 31, 2014. The balance of the note as of December 31, 2015 and December 31, 2014 was $2.3 million plus accrued
interest of $370,274 and $140,275, respectively. Convertible Subordinated Notes, due
March 2012 In March 2011, the
Company issued $1,432,561 in face amount of convertible debt, the “March 2011 Notes”. These notes had a stated interest
rate of 6%. The terms of the notes allowed the holders to convert the debt into common stock at any time prior to maturity at a
conversion rate equal to the lesser of $135.00 per share or 25% below the offering price in the sale of securities in a qualified
sale of securities, as defined. Payment of principal and interest on these notes was unsecured and subordinated to senior indebtedness,
as defined. Concurrent with the issuance of these notes, the Company issued warrants to purchase 7,163 shares of Company common
stock at $60.00 per share. In July and August 2011, the Company prepaid the majority of these notes and accrued interest. After
the prepayment, holders of these notes purchased 8,297 shares of Company stock at $135.00 per share for an aggregate purchase price
of $1,120,000. In February 2013 and January 2014 an additional $200,000 and $14,422 was converted into common stock, respectively.
(See Note 12) The remaining outstanding balance of $100,000 was converted into 1,667 shares of the Company’s common stock
as part of its IPO on July 14, 2014 and the Company repaid accrued interest totaling $19,644 as of this date. Convertible Subordinated Note, due
April 2015 In April 2013, the
Company borrowed $200,000 under a convertible note. The note had a stated interest rate of 9% and was due April 1, 2015. The note
was convertible at the option of the holder any time after April 1, 2014. The note would be automatically converted upon the occurrence
of certain equity financing transactions or a change in control as defined in the note. The conversion price was $60.00 per share.
On July 14, 2014, the outstanding principal balance of $200,000 and $21,699 of accrued interest was converted into 3,695 shares
of common stock as a result of completing the Company’s IPO. Convertible Subordinated Notes, due
February 2015 In February 2014,
the Company borrowed $100,000 under a convertible note. The note was non-interest bearing and was due the earlier of February 27,
2015 or the completion of an equity offering by the Company of at least $5,000,000. The note was convertible at the option of the
holder at the time at in which the Company completed such an equity offering of its common stock. The conversion price was equal
to the offering price of the Company’s common stock. During the year ended December 31, 2014, the Company repaid the principal
balance outstanding of $100,000. Convertible Subordinated Notes, due
June 2015 In May 2014, the
Company borrowed $330,000 under convertible notes. The notes bore interest at a stated rate of 8% per annum. The principal amounts
of the notes, along with the accrued interest, were both due June 2015. The terms of these notes includes a provision whereby all
principal and accrued interest automatically converted into the Company’s common stock upon the successful consummation of
an IPO. The conversion price was 80% of the per share price at which the Company’s common stock was sold in our IPO. Upon
completion of the July 14, 2014 IPO which raised $6,750,000 gross proceeds, the principal amount outstanding of $330,000 was converted
into 18,334 shares of common stock. The Company repaid accrued interest totaling $5,017 to the holders of the notes. Series Subordinated Notes The Series Notes
were issued in tranches that contained various terms with regard to maturity dates, interest rates, subordination, conversion features
and the number of warrants issued with each tranche. In 2013, all but $863,808 face amount of the Series Notes had been converted
into common stock and all but approximately 5,000 of the related warrants were exchanged for common stock. In January 2014, $250,000
in debt and $650,647 in accrued interest were converted into 15,011 shares of common stock at a conversion rate of $60.00 per share.
(See Note 12) The remaining $613,808 in principal and accrued interest of $100,745, at 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 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 April 12, 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 as of December 31, 2015 and 2014 was $415,398 and $613,808, respectively. Notes Payable, due February 2015 In December 2013
and January 2014, the Company issued promissory notes for $100,000 and $150,000, respectively. The notes accrued interest at a
rate of 10% and were originally due the earlier of the Company raising sufficient new funds as determined by the holder or March
31, 2014. In February 2014, the Company entered into an amendment which extended the maturity date of the agreement to February
18, 2015. All other terms of the agreement remained unchanged. During the year ended December 31, 2014, the Company repaid the
principal amount outstanding of $250,000, along with accrued interest totaling $13,233. During fiscal year
2014, the Company issued detachable warrants to purchase common stock equal to 25% of the principal amounts under these notes.
The life of the warrants range between three and five years with an exercise price of $54.00. The total number of shares issuable
under the warrants totaled 54,750 related to a total of $3,285,000 short term notes issued in consideration for the loans to the
Company. Of this total, $2,875,000 and warrants to purchase 47,917 shares relates to two directors of the Company. In addition,
of the total warrants issued, warrants to purchase 20,167 shares relates to short term notes, which were converted into equity
during 2013. The Company determined the fair value of the warrants to be $573 using the Black-Scholes model. See Note 12 for the
inputs used in valuing the warrants using the Black-Scholes model. Notes Payable, due January 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 5,000 shares with an exercise price of $5.25 was issued in consideration
for the note extensions. 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,
an interest rate of 20% per annum becomes due. Installment Note Payable –
Bank In March 2014, the
Company entered into an installment note with a bank for a total of $330,020. The note bears interest at the prime rate plus 1%,
but not less than |
