Annual report pursuant to Section 13 and 15(d)

Private Placement

Private Placement
12 Months Ended
Dec. 31, 2015
Debt Disclosure [Abstract]  
Private Placement

8.        Private Placement


Convertible notes


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 closing of the Bridge Financing was completed October 31, 2014. Upon issuance, the Convertible Notes bore simple interest at 6% per annum and upon the occurrence of any specified event of default, the Convertible Notes would bear interest at 12% per annum and were scheduled to mature on December 31, 2015.


The principal and interest of the Convertible Notes were 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 (see below). The Convertible Notes were required to be converted upon a qualifying IPO, if any, in which case the conversion price was to be equal to 50% of the price to the public in such offering (but not more than $2.50 or less than $1.67 per share).


In the event of an optional conversion by the holder of a Convertible Note, the conversion price would be $2.50. The conversion price under the Convertible Notes was further subject to adjustments in the event of stock splits, combinations or the like and upon certain other events, all as provided in the Convertible Notes.


The aggregate amount of accrued interest on the Convertible Notes was $65,589 as of December 31, 2014. The Company had an IPO on July 31, 2015 and the Convertible Notes and accrued interest were converted into 2,400,000 and 111,871 shares of the Company common stock, respectively, at a conversion price of $2.50 per share.


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 consolidated balance sheet as of December 31, 2014. Derivative liabilities were initially recorded at fair value and were 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. The debt discount was amortized under the effective interest method over the term of the Convertible Notes. The balance of Convertible Notes as of December 31, 2014 was as follows:


Face value of the Convertible Notes   $ 6,000,000  
Debt discount and value of embedded option, net of amortization     (909,411 )
Convertible Notes, net   $ 5,090,589  


The Company calculated the fair value of the embedded conversion feature of the Convertible Notes using the Monte Carlo simulation, with the observable assumptions as provided in the table below. The significant unobservable inputs used in the fair value measurement of the reporting entity's embedded conversion feature were 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.


    As of     As of  
    October 31,     December 31,  
    2014     2014  
Fair value of stock price on valuation date   $ 1.77     $ 2.18  
High collar   $ 2.50     $ 2.50  
Low collar   $ 1.67     $ 1.67  
Term (years)     0.75       0.58  
Expected volatility     80 %     80 %
Weighted average risk-free interest rate     0.11 %     0.14 %
Trials     50,000       50,000  
Aggregate fair value   $ 212,155     $ 1,108,955  


The fair value of the embedded conversion feature at the time of the IPO and note conversion into common shares of the Company was $6,279,677.


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.


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, 2015 and at December 31, 2014 the Financing Warrants were exercisable into 251,187 and 220,268, respectively, 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 warrant holders have certain registration rights with respect to the common stock issued upon exercise of the Financing Warrants. 


The Company calculated the fair value of the Financing Warrants using a Black Scholes Merton model with the assumptions provided in the table below. The fair market value of the stock used prior to the IPO was from 409A valuations prepared by an outside consultant.


Provided below are the principal assumptions used in the initial and subsequent measurement of the fair values of the Financing Warrants:


    10/31/14     12/31/14     8/5/15  
Fair market value of shares   $ 1.77     $ 2.18     $ 5.00  
Assumed exercise price   $ 3.00     $ 3.00     $ 3.00  
Term in years     5       4.84       4.25  
Volatility     80 %     80 %     80 %
Annual rate of dividends     0 %     0 %     0 %
Discount rate     1.62 %     1.65 %     1.55 %
Call option value   $ 0.88     $ 1.14     $ 3.51  
Warrant shares issuable     220,268       220,268       251,187  
Warrants fair value   $ 212,155     $ 275,827     $ 881,359  


The initial fair value of the Financing Warrants was accounted for as a derivative issuance cost and along with the other private placement costs was amortized over the life of the Convertible Notes. During the year ended December 31, 2015 and the period from inception (June 20, 2014) through December 31, 2014, the Company recorded an increase of $605,532 and $63,672, respectively, in the fair value of the Financing Warrant as a change in the fair value of derivative liabilities within the statements of operations. On August 5, 2015, after the conclusion of the IPO, the financing warrants fair value was fixed and the derivative liability of $881,359 was reclassified to additional paid in capital.