| Private Placement |
4.
Private Placement
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On October 31, 2014, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with accredited investors (the “Investors”), pursuant to which the Company issued an aggregate of $6,000,000 principal amount of senior secured convertible notes (the “Convertible Notes”). In connection with the sale of the Convertible Notes (the “Bridge Financing”), the Company entered into a registration rights agreement (the “Registration Rights Agreement”) and a security agreement (the “Security Agreement”) with the Investors. The Bridge Financing was completed October 31, 2014. The Convertible Notes bear interest at 6% per annum and mature on December 31, 2015. |
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The principal and interest of the Convertible Notes are convertible into the Company’s common stock at a conversion price between $1.67 and $2.50 per share depending on the facts and circumstances at the time of the conversion. |
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The aggregate amount of accrued interest on the Convertible Notes was $65,589 and $244,110 as of December 31, 2014 and June 30, 2015, respectively. |
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Pursuant to the terms of the Convertible Notes, the conversion price was subject to adjustments in the event of an IPO, other financing and upon certain other events. The embedded conversion feature was not clearly and closely related to the host instrument and was bifurcated from the host Convertible Notes as a derivative, principally because the instrument’s variable exercise price terms would not qualify as being indexed to the Company’s own common stock. Accordingly, this conversion feature instrument was classified as a derivative liability in the accompanying condensed consolidated balance sheets as of December 31, 2014 and June 30, 2015. Derivative liabilities are initially recorded at fair value and are then re-valued at each reporting date, with changes in fair value recognized in earnings during the reporting period. |
The Company determined
that the initial fair value of the embedded conversion option was $212,155. From the aggregate principal amount of the Convertible
Notes of $6,000,000, the Company deducted in full the fair value of the embedded conversion feature, and offering costs of $848,824
as a debt discount. Prior to the conversion upon the IPO, the debt discount was being amortized under the effective interest method
over the term of the Convertible Notes. The balance of Convertible Notes as of June 30, 2015 and December 31, 2014 is as follows:
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December 31, |
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June 30, |
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2014 |
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2015 |
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| Face value of the Convertible Notes |
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$ |
6,000,000 |
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$ |
6,000,000 |
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| Debt discount, net of amortization |
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(909,411 |
) |
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(454,705 |
) |
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| Convertible Notes, net |
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$ |
5,090,589 |
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$ |
5,545,295 |
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The significant unobservable inputs
used in the fair value measurement of the reporting entity’s embedded conversion feature are expected stock prices, levels
of trading and liquidity of the Company’s stock. Significant increases in the expected stock prices and expected liquidity
would result in a significantly higher fair value measurement. Significant increases in either the probability or severity of default
of the host instrument would result in a significantly lower fair value measurement.
On September 8, 2014, the Company
entered into an agreement (the “Placement Agent Agreement”) with National Securities Corporation (“NSC”)
pursuant to which the Company appointed NSC to act as the Company’s placement agent in connection with the sale of the Company’s
securities (“Offering or Offerings”). Specifically, NSC was the placement agent in connection with the sale of its
Convertible Notes. The Placement Agent Agreement had an initial term of 180 days, after which it will continue in effect until
it’s terminated by either party with 60 days written notice to the other party.
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In connection with the sale of the Convertible Notes, the Company paid NSC a cash fee of $553,490 and issued on October 31, 2014 to NSC warrants (“Financing Warrants”) to purchase shares of the Company’s common stock. NSC subsequently transferred a portion of the Financing Warrants to associated persons. The Financing Warrants were fully vested upon issuance, have a term of five years, and are immediately exercisable, provided that upon the Company’s consummation of an IPO, the Financing Warrants may not be exercised until 90 days after the consummation of the IPO. Pursuant to the terms of the Financing Warrants, the per share exercise price is determined based upon 120% of the conversion price of the Convertible Notes upon the consummation of the IPO, or upon other events under which the Convertible Notes may convert. As of December 31, 2014 and June 30, 2015, the Financing Warrants were exercisable into 220,268 shares of the Company’s common stock assuming an exercise price of $3.00 per share (calculated as 120% of the Convertible Notes conversion price of $2.50 per share). |
The Company determined,
based upon authoritative guidance that the Financing Warrants are derivative instruments. Derivative liabilities are initially
recorded at fair value and are then re-valued at each reporting date, with changes in fair value recognized in earnings during
the reporting period.
The warrant holders have certain registration rights with
respect to the common stock issued upon exercise of the Financing Warrants.
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On September 8, 2014, the Company entered into a consulting agreement with Liquid Patent Consulting, LLC (“LPC”), pursuant to which LPC agreed to provide management, strategic and intellectual property advisory services. The Consulting Agreement had an initial term of 180 days, after which it will continue in effect until it is terminated by either party with 30 days written notice to the other party. |
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As consideration for services provided under the Consulting Agreement the Company issued warrants (“Consulting Warrants”) to LPC for the purchase of an aggregate of 436,364 shares of the Company’s common stock. LPC subsequently transferred a portion of the Consulting Warrants to a third party. |
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The Consulting Warrants vested upon issue, have a term of three years, an exercise price of $0.0033475 per share and are immediately exercisable, provided that upon the Company’s consummation of an IPO, the Consulting Warrants may not be exercised until 90 days after the consummation of the IPO. The Consulting Warrants may be exercised on a cashless basis. |
The warrant holders
have certain registration rights with respect to the common stock issued upon exercise of the Consulting Warrants.
The initial fair value of the Financing
Warrants was accounted for as a derivative issuance cost and along with the other private placement costs is amortized over the
life of the Convertible Notes. The initial fair value of the Consulting Warrants was expensed immediately as a consulting fee and
recorded within business development and management costs in the consolidated statement of operations for the period ended December
31, 2014. During the period since inception (June 20, 2014) to June 30, 2014 and the three and six months ended in June 30, 2015,
the Company recorded an increase of $0, $235,517 and $420,837, respectively, in the fair value of the Financing Warrant as a change
in the fair value of derivative liabilities within the statements of operations.
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