Notes Payable | 7. Notes Payable On January 29, 2015, the company received a short-term loan of $200,000 from a strategic lender pursuant to which we issued a secured promissory note to the lender in the aggregate principal amount of $200,000. The note was secured by a first priority lien on certain equipment owned by the company with a net present value equivalent to the face value of the note, was due and payable on March 30, 2015 and accrued interest at the rate of 6% per annum. The note and accrued interest was repaid on the maturity date. On February 17, 2015, the company entered into a securities purchase agreement with an accredited investor pursuant to which we issued a promissory note in the aggregate principal amount of $100,000 and common stock purchase warrants to purchase up to 8,889 shares of common stock for gross proceeds of $100,000. The note was an unsecured obligation of the company, was not convertible into equity securities of the company and accrued interest at a rate of 8% per annum. The note was due and payable on the six month anniversary of the issue date, subject to the right of the investor to extend the maturity date for up to an additional six months. The net proceeds from this transaction were approximately $92,000. The warrants vested in equal monthly installments over twelve months if the notes were outstanding and, subject to vesting requirements, were exercisable for a period of 54 months commencing on the six month anniversary of the issuance date at an initial exercise price of $9.09 per share. Although the securities purchase agreement that the company entered into with this investor contemplated a second closing for $900,000 of additional proceeds, the second closing did not occur and the company did not receive the additional funds. This note and the vested portion of the warrants were exchanged for notes and warrants issued in the June 8, 2015 transaction discussed below and the warrants issued for this transaction were cancelled. On February 17, 2015, in a separate transaction, the company issued a short-term promissory note in the aggregate principal amount of $950,000 and warrants to purchase 11,056 shares of common stock to an accredited investor for gross proceeds of $950,000. The holder of the short-term note is an entity controlled by Douglas B. Luce, the brother of J. David Luce, a former member of the board of directors of the company. The short-term note was an unsecured obligation of the company, was not convertible into equity securities of the company and accrued interest at a rate of 5.76% per annum. The short-term note was due and payable on the first to occur of the one month anniversary of the issue date or the date on which the company received at least $950,000 in proceeds from equity or debt financing. The note contained covenants and events of default customary for similar transactions. The net proceeds from this transaction were approximately $940,000. The warrants are exercisable for a period of 54 months commencing on the six month anniversary of the issuance date at an initial exercise price of $9.091 per share. On April 3, 2015, the company entered into an amendment agreement with the holder of the $950,000 short-term promissory note in order to amend such note to extend its maturity date from March 19, 2015 to July 2, 2015. In addition, pursuant to the amendment agreement, the company also agreed to grant the holder the right to exchange the principal amount of the short-term note (and unpaid interest thereon) into the securities of the company sold in the next financing, as defined in the amendment agreement. This investor subsequently agreed not to participate in the convertible debt financing for which a closing was held June 8, 2015 and in consideration of such election, the participation right was modified to allow him to exchange such note for comparable securities in an alternative transaction. In consideration of waivers previously granted by the holder of potential events of default under the short-term note and the amendment to extend the maturity date, the company agreed to issue the holder warrants to purchase 351,852 shares of common stock of the company. The warrants are exercisable for a period of 54 months commencing six months following the date of issuance and have an exercise price equal to $2.79 per share. Through a series of amendment agreements, the maturity date of this note was further extended and the interest rate was increased to 12% per annum in connection with such extensions. On December 11, 2015, we entered into an exchange agreement with the holder of the $950,000 note pursuant to which the company agreed to issue such holder, in consideration of the cancellation of the original note, a new convertible note in the aggregate principal amount of $950,000 and warrants to purchase 422,222 shares of common stock. The closing of the exchange transaction occurred on December 17, 2015. The new convertible note is convertible into shares of common stock at an initial conversion price of $2.25 per share, subject to adjustment. The new convertible note is convertible beginning July 1, 2016 and is due one year from the closing date. Based on the initial conversion price, the note will be convertible into up to 422,222 shares of common stock. If the company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the conversion price then in effect, such conversion price will be decreased to equal 85% of such lower price. The foregoing adjustments to the conversion price will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In addition, the conversion price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. The new convertible note bears interest at 9% per annum with interest payable upon maturity or on any earlier redemption date. Following the date on which the new convertible note first becomes convertible, the company will have the right to redeem all or any portion of the outstanding principal balance of the note, plus all accrued but unpaid interest at a price equal to 110% of such amount. The holder of the new convertible note shall have the right to convert any or all of the amount to be redeemed into common stock prior to redemption. Subject to certain exceptions, the new convertible note is senior to existing and future indebtedness of the company and will be secured to the extent and as provided in the amended security agreement entered into between the company and the holder. To provide for the collateral to secure the repayment of the new convertible note, MKA 79, LLC, an entity affiliated with J. David Luce agreed to an amendment to the security agreement entered into in August 2015 to provide that the new convertible note shall be secured by the collateral defined in such earlier security agreement. Subject to certain exceptions, the new convertible note contains customary covenants against incurring additional indebtedness and granting additional liens and contains customary events of default. Upon the occurrence of an event of default under the new convertible note, the holder may require the company to repay all or a portion of the note in cash, at a price equal to 110% of the principal and accrued and unpaid interest. Subject to certain limitations, the additional warrants are exercisable on or after the first business day following the twelve-month anniversary of the issue date; provided, however, if the company consummates the closing with AEON, then the initial exercise date of the additional warrants shall be the date that is the three year anniversary date of such closing. The initial exercise price of the additional warrants is $2.70 per share and is subject to adjustment for certain events. If the company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the conversion price of the new note, the exercise price of the additional warrants will be decreased to a lower price based on the amount by which the conversion price of the new note was reduced due to such transaction. The foregoing adjustments to the exercise price for future stock issues will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In addition, the exercise price of the additional warrants is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. In addition, the additional warrants provide that, after their initial exercise date, the company shall have the right to cause the holder to exercise the additional warrants provided that that the following conditions are satisfied: (i) the closing bid price of the company’s common stock is at least $4.05 for the 20 consecutive trading days prior to the date of the mandatory exercise notice and (ii) the holder is not prevented from exercising the additional warrants pursuant to a lockup agreement. The additional warrants will expire 54 months from their initial exercise date. The holder shall not have the right to convert the new convertible note or exercise the additional warrants to the extent that such conversion or exercise would result in the holder being the beneficial owner in excess of 4.99% of the company’s common stock. In addition, the holder shall have no right to convert the new convertible note or exercise the additional warrants if the issuance of the shares of common stock upon such conversion or exercise would exceed the aggregate number of shares the company may issue without breaching the company’s obligations under Nasdaq listing rules. On April 24, 2015, the company issued a promissory note in the aggregate principal amount of $500,000 to Lazarus Investment Partners LLLP, the beneficial owner of approximately 29.3% of the company’s common stock at the time, in a private transaction. The note was unsecured and was not convertible into equity securities of the company. The note was originally due and payable on the first to occur of July 2, 2015 or the date on which the company received at least $900,000 in proceeds from equity or debt financing transactions. Interest on the note was originally 5.76% per annum payable at maturity. The note contained terms and events of default customary for similar transactions. In consideration of the loan, the company and Lazarus entered into a warrant amendment agreement pursuant to which the company agreed to amend certain of the terms of the existing 692,626 common stock purchase warrants held by Lazarus to reduce the exercise price of such warrants to $2.25, which was above the most recently reported closing consolidated bid price of the company’s common stock prior to the execution of the transaction documents, and to extend the expiration date of the warrants to October 25, 2019. The warrants amended were issued in various transactions from 2010 through 2014 at exercise prices ranging between $7.92 and $18.00. The fair value related to the warrant modifications was recorded as a debt discount and amortized over the term of the agreement. Through a series of amendment agreements, the maturity date of this note was further extended and the interest rate was increased to 12% per annum in connection with such extensions. On December 15, 2015, we entered into an exchange agreement with Lazarus Investment Partners pursuant to which we agreed to issue such holder, in consideration of the cancellation of the original note, a new note in the aggregate principal amount of $532,811, which amount includes $32,811 in accrued interest on their original note, and warrants to purchase 111,111 shares of common stock. The closing of the exchange transaction with Lazarus Investment Partners occurred on December 15, 2015. The new note bears interest at 20% per annum, payable in arrears, and is due upon the earlier of (i) twelve months from the date of issuance, (ii) June 8, 2016 if the company has not consummated the closing with AEON by such date, or (iii) within 5 days of the closing of a sale of equity or debt securities of the company, or series of closings, as part of the same transaction, of equity or debt securities within a period of 90 days, in the gross amount of at least $5,000,000 in cash proceeds. The new note is neither secured by any of the company’s assets nor convertible into equity securities of the company. The new note contains certain events of default that are customary for similar transactions. Subject to certain limitations, the new warrants are exercisable on or after the first business day following the twelve-month anniversary of the issue date; provided, however, if the company consummates the closing of the transaction with AEON, then the initial exercise date of the new warrant shall be the date that is the three year anniversary date of such closing. The initial exercise price of the new warrants is $2.70 per share and is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. Pursuant to the exchange agreement entered into between the company and Lazarus Investment Partners, the expiration date of all warrants held by Lazarus Investment Partners shall be amended to be December 15, 2022. Further, the holder shall not have the right to exercise the warrants to the extent that such exercise would result in it being the beneficial owner of in excess of 4.99% of the company’s common stock. In addition, the holder shall have no right to exercise the warrants if the issuance of the shares of common stock upon such exercise would exceed the aggregate number of shares the company may issue without breaching the company’s obligations under Nasdaq listing rules. The company agreed to grant the holder piggyback registration rights with respect to the shares of common stock issuable upon conversion of the new warrants. On June 8, 2015, the company entered into definitive agreements relating to a private placement of up to $3.0 million in principal amount of senior secured convertible notes and common stock purchase warrants. An initial closing for an aggregate principal amount of $900,000 of notes and warrants to purchase 402,963 shares of common stock was held on June 8, 2015. Subject to certain limitations, the warrants are exercisable on or after the six month anniversary of the date of issuance at an initial exercise price of $2.70 per share and will expire 54 months from the initial exercise date. In addition, subject to certain limitations, the warrants provide that, beginning six months from issuance, the company shall have the right to cause the holder to exercise the warrants provided that the following conditions are satisfied: (i) the closing bid price of the company’s common stock is at least $4.05 for the 20 consecutive trading days prior to the date of the mandatory exercise notice and (ii) all of the warrants issued in the transaction are called by the company for a mandatory exercise. A final closing for up to $2.1 million of debentures and warrants to purchase 933,333 shares of common stock did not occur. As a condition of the initial closing, the holder of an aggregate principal amount of $100,000 of previously issued promissory notes was required to exchange such notes and certain warrants held by it for senior secured notes and warrants issued in this transaction. These notes, subject to certain exceptions, rank senior to existing and future indebtedness of the company and are secured to the extent and as provided in the security agreement entered into between the company and the purchasers. Each note matures on the one-year anniversary of the issuance date thereof and, subject to certain limitations, is convertible at any time at the option of the holder into shares of the company’s common stock at an initial conversion price of $2.25 per share. Subject to certain exemptions, if the company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the conversion price then in effect, the conversion price then in effect will be decreased to equal 85% of such lower price and the exercise price of the warrants will be decreased to a lower price based on the amount by which the conversion price of the notes was reduced due to such transaction. The foregoing adjustments to the conversion price will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In addition, the conversion price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. The senior secured notes bear interest at 9% per annum with interest payable upon maturity or on any earlier redemption date. At any time after the issuance date, the company will have the right to redeem all or any portion of the outstanding principal balance of the notes, plus all accrued but unpaid interest at a price equal to 110% of such amount and the holders shall have the right to convert any or all of the amount to be redeemed into common stock prior to redemption. The notes are secured by a first priority lien on the company’s assets related to its “Inscrybe Referral and Order Management” and “Inscrybe Hospital Discharge” solutions. Subject to certain exceptions, the notes contain customary covenants against incurring additional indebtedness and granting additional liens and contain customary events of default. Upon the occurrence of an event of default under the notes, a holder may require the company to repay all or a portion of its notes in cash, at a price equal to 110% of the principal and accrued and unpaid interest. The company also agreed to file a registration statement covering the resale of the shares of the company’s common stock issuable upon conversion of the June 8, 2015 notes and exercise of the warrants and to use commercially reasonable efforts to have the registration declared effective in a timely manner. The Company will be subject to certain monetary penalties, as defined in the agreement if the registration statement is not filed, does not become effective on a timely basis, or does not remain available for the resale, as such term is defined in the registration rights agreement. On August 7, 2015, the company issued a senior secured promissory note in the aggregate principal amount of $320,000 to an accredited investor in a private transaction. The note was due and payable on December 31, 2015 and interest shall accrue on the note at the rate of 10.0% per annum. The note was not convertible into equity securities of the company and it contains terms and events of default customary for similar transactions. The note is secured by a first priority lien on certain of our assets, as described in a security agreement entered into between the company and the purchaser dated as of August 7, 2015. Subject to certain exceptions, the note contains customary covenants against incurring additional indebtedness and granting additional liens and contains customary events of default. In consideration of the loan, the company and the purchaser entered into a warrant amendment agreement pursuant to which the company agreed to amend certain of the terms of the existing 608,314 common stock purchase warrants currently held by the purchaser and an affiliate to reduce the exercise price of such warrants to $1.53 and to extend the expiration date of the warrants to December 13, 2019. The warrants amended were issued in various transactions from 2012 through 2013 at exercise prices ranging between $8.55 and $12.06. The fair value related to the warrant modifications was recorded as a debt discount and is being amortized over the term of the new agreement. The purchaser is an entity affiliated with J. David Luce. Following an extension of the maturity date of the senior secured note to January 15, 2016, on such date we entered into a note amendment with the investor pursuant to which we agreed to modify certain of the terms of the senior secured note to extend the maturity date to April 15, 2016 and to allow the investor to elect to further extend the note for an additional 90 days. In consideration for such agreements, the company agreed that the senior secured note would be further modified so that it would be convertible into shares of common stock of the company at an initial conversion price of $4.86 per share, which was equal to the most recent consolidated closing bid price of the company’s common stock immediately prior to the execution of the amendment agreement. Based on the conversion price, the principal amount of the note will be convertible into up to 65,844 shares of common stock. The conversion price is only subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. The holder shall not have the right to convert the note to the extent that such conversion would result in the holder being the beneficial owner in excess of 4.99% of the company’s common stock. The other terms and conditions of the note were not amended. On August 26, 2015, the company issued promissory notes in the aggregate principal amount of $400,000 to Lazarus Investment Partners LLLP, the beneficial owner of approximately 29.0% of the company’s common stock at the time, and an entity affiliated with J. David Luce in a private transaction. The notes are unsecured obligations of the company and are not convertible into equity securities of the company. The notes bear interest at 20% per annum, payable in arrears, and are due upon the earlier of (i) August 26, 2016, or (ii) within 30 days of the closing of the contemplated acquisition, merger or similar transaction with Peachstate Health Management, LLC (d/b/a AEON Clinical Laboratories) as described above, or a similar alternative acquisition, merger or similar transaction with an unaffiliated third party, or (iii) the closing of a sale of equity or debt securities of the company, or series of closings, as part of the same transaction, of equity or debt securities within a period of 90 days, in the gross amount of at least $5,000,000 in cash proceeds. The holders have the right, at their option, to convert interest and principal due on the note into any alternative financing that may be undertaken by the company while the notes are outstanding. In September 2015, the company issued promissory notes in the aggregate principal amount of $525,000 to accredited investors in a private transaction. The notes are unsecured and are not convertible into equity securities of the company. The notes bear interest at 20% per annum, payable in arrears, and are due upon the earlier of (i) September 18, 2016, or (ii) within 30 days of the closing of a sale of equity or debt securities of the company, or series of closings, as part of the same transaction, of equity or debt securities within a period of 90 days, in the gross amount of at least $5,000,000 in cash proceeds. The company also issued the investors warrants to purchase an aggregate of 116,667 shares of common stock. The warrants are exercisable commencing twelve months following their issuance for a period of 54 months at an exercise price of $2.70 per share. These closings are part of an offering of up to $1 million of notes and 222,222 warrants. Except for the June 8, 2015, December 11, 2015 and December 15, 2015 transactions, the company allocated the proceeds from the initial note transactions to the notes and the related warrants based on the relative fair values of such instruments using the fair value of the notes at a market rate of interest and the fair value of the warrants based on the Black-Scholes option pricing model and the applicable assumptions set forth in Note 3 of Notes to Condensed Consolidated Financial Statements. These allocations resulted in effective interest rates for the $100,000 note of approximately 39% per annum, for the $950,000 note of approximately 65% per annum, for the $500,000 note of approximately 71% per annum for the $800,000 senior secured note of approximately 36% per annum, for the $320,000 secured note of approximately 63%, for the $400,000 note of approximately 20% and for the $525,000 notes of approximately 54%, respectively. However, since the subjective nature of the inputs for the option pricing and other models used to calculate fair values can materially affect fair value estimates, in management’s opinion, such models may not provide a reliable single measure of the fair value of the warrants and the resulting effective interest rates. In connection with the note transactions the company recorded promissory notes of $4,078,000, debt discount of $913,000, a warrant liability of $2,690,000, non-cash loss on extinguishments discussed below of $3,534,000 and additional paid-in-capital of $3,068,000 related to the fair value of the warrants. In October 2015, the company issued a promissory note in the aggregate principal amount of $450,000 to Peachstate Medical Holdings LLC, d/b/a AEON Clinical Laboratories in a private transaction. The note is unsecured and is not convertible into equity securities of the company. The note bears interest at 20% per annum, payable in arrears, and is due upon the earlier of (i) October 28, 2016, or (ii) within 30 days of the closing of a sale of equity or debt securities of the company, or series of closings, as part of the same transaction, of equity or debt securities within a period of 90 days, in the gross amount of at least $5,000,000 in cash proceeds. The company also issued the investor warrants to purchase an aggregate of 111,111 shares of common stock. The warrants are exercisable commencing twelve months following their issuance for a period of 54 months at an exercise price of $2.70 per share. As a result of the ratchet provision included in the June 8, 2015 transaction, the company recorded a warrant liability and a debt discount based on the fair value of the warrants issued in connection with the new senior secured note. As a result of similar provisions included in the December 11, 2015 transaction, the company recorded a warrant liability and a loss on extinguishment based on the difference between the reacquisition cost and the carrying amount of the old note. As discussed more fully in Note 13 of Notes to Condensed Consolidated Financial Statements, the company is required to revalue these warrants at the end of each reporting period. In connection with the modifications of the $100,000, $950,000 and $500,000 short-term notes discussed above, the company issued additional warrants and agreed to certain modifications that, for accounting purposes, resulted in the extinguishment of certain old notes and the creation of new notes. Accordingly, the company recorded non-cash losses on extinguishment of approximately $557,000 as other expense in the fourth quarter of fiscal 2015 ended June 30, 2015 and $2,977,000 in the second quarter of fiscal 2016 ended December 31, 2015. The modification of the $320,000 note on January 15, 2016 will be accounted as an extinguishment in the third quarter of fiscal 2016. The non-cash amortization of the debt discount of $244,000 and $371,000 and deferred financing costs of $49,000 and $92,000 is included in other expense for the three and six months ended December 31, 2015, respectively. There was no amortization for the three and six months ended December 31, 2014. The following table sets forth the notes and unamortized debt discount (in thousands): December 31, 2015 June 30, 2015 Notes payable Secured notes payable $ 2,170 $ 900 Unsecured notes payable 1,908 1,450 Unamortized debt discount (395 ) (200 ) Notes payable $ 3,683 $ 2,150 |