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8. CONVERTIBLE PROMISSORY NOTES

12 Months Ended

Dec. 31, 2014

On July 25, 2012, Opexa issued a total of $4,085,000 in principal amount of secured convertible promissory notes (the “Notes” or the “July 2012 Notes”) to third parties and related parties (collectively, the “Noteholders”), of which an aggregate of $630,000 was issued to related parties (See Note 9). The Notes were originally scheduled to mature on July 25, 2014 and accrued interest at the rate of 12% per annum, compounded annually. Interest was payable semi-annually on June 30 and December 31 in either cash or registered shares of common stock, at Opexa’s election. The Notes were secured by substantially all of Opexa’s assets and were convertible into a new class of non-voting Series A convertible preferred stock. The Notes could be converted into Series A convertible preferred stock at the option of the investors at a price of $100.00 per share, subject to certain limitations and adjustments. Additionally, Opexa could elect to convert the Notes into Series A convertible preferred stock if (i) Opexa’s common stock closed at or above $10.00 per share for 20 consecutive trading days or (ii) Opexa achieved certain additional funding milestones to continue its clinical trial program. These milestones included (x) executing a strategic agreement with a partner or potential partner by which Opexa will receive a minimum of $5 million to partially fund, or an option to partner with Opexa for, its Phase II clinical trial for Tcelna in patients with SPMS and (y) receiving a minimum of $25 million in additional capital (including the Note offering proceeds) from any partner, potential partner or any other source.

The Series A convertible preferred stock accrued dividends at the rate of 8% per annum, which are cumulative and payable semi-annually on June 30 and December 31 in either cash or registered shares of common stock at Opexa’s election. The Series A convertible preferred stock had a liquidation preference of $100.00 per share, entitling holders to payment from the assets of the Company available for distribution to its shareholders before any payment is made to the holders of the common stock. The Series A convertible preferred stock participated in any dividends or other distributions on shares of common stock (other than dividends payable in shares of common stock) along with the common stock. As a result of anti-dilution adjustments following the November 2012 sale of shares of Opexa’s common stock, the Series A convertible preferred stock was convertible into shares of the Company’s common stock at a price of $3.12 per share (the floor price), subject to certain limitations and conditions, and up to 1,308,236 shares of common stock were issuable if all 12% convertible secured promissory notes issued in the July 2012 financing and outstanding at December 31, 2012 were converted to Series A convertible preferred stock and such stock is then converted into common stock. Additionally, Opexa could elect to convert the Series A convertible preferred stock into common stock if the Company’s common stock closes at or above $16.00 per share for 20 consecutive trading days. As of December 31, 2013 and 2012, no shares of Series A convertible preferred stock were outstanding.

As part of the security interest in all of the Company’s assets granted to the Noteholders, $1.0 million of the proceeds was originally maintained in a controlled account . During the year ended December 31, 2013, the restricted cash was reduced to $0 and the controlled account was terminated.

The Notes were analyzed at issuance for a beneficial conversion feature and Opexa concluded that a beneficial conversion feature exists. The beneficial conversion feature was measured using the commitment-date stock price and was determined to be $1,497,634, of which $230,969 was attributable to related parties. During the year ended December 31, 2012, the Company recorded $1,497,634 as a debt discount and this amount was amortized to interest expense in the consolidated statements of operations over the term of the Notes. Opexa also analyzed the Notes for derivative accounting consideration and determined that derivative accounting does not apply.

In connection with the issuance of the Notes, Opexa also issued Series I warrants to the Noteholders to initially purchase an aggregate of 957,422 shares of Opexa’s common stock at $5.00 per share, subject to certain limitations and adjustments. The warrants have a five-year term and are exercisable six months from the date of issuance, or January 25, 2013. As a result of anti-dilution adjustments, the number of warrant shares for which the Series I warrants are exercisable increased to an aggregate increase of 1,436,121 shares of Opexa’s common stock at an adjusted exercise price of $2.56 per share, subject to further certain limitations and adjustments. As a result, Opexa accounted for these reset provisions in accordance with FASB ASC 815-40, which requires Opexa to record the warrants as a derivative liability at the grant date and to record changes in fair value relating to the warrants at each subsequent balance sheet date (see Note 13). Opexa can redeem the warrants at $0.01 per share if its common stock closes at or above $10.00 per share for 20 consecutive trading days.

The initial fair value of the warrant liabilities of $2,314,635, together with the beneficial conversion feature of $1,497,634 were recognized as a debt discount and were amortized to interest expense in the consolidated statements of operations over the term of the Notes using the effective interest method. During the year ended December 31, 2012, the amortized debt discount was $104,032 and Opexa recognized $552,978 as a derivative gain in the consolidated statements of operations due to the change in fair value of the liability. The unamortized discount as of December 31, 2012 amounted to $3,708,237.

In February 2013, three of the third party holders of the Notes elected to convert their principal amounts of $900,000 into shares of the Company’s Series A convertible preferred stock with further immediate conversion into 288,229 shares of the Company’s common stock.

On September 23, 2013, the Company entered into an amendment to the Notes with certain Noteholders with respect to certain terms relating to conversion of the Notes. Pursuant to the Note amendment, all outstanding Notes were amended such that, in addition to the existing conversion arrangements, the Notes became convertible at the Company’s election directly into shares of common stock (rather than any intermediate conversion to shares of Series A convertible preferred stock), at a conversion price of not less than $1.50 nor more than $2.25, based on the most recent closing market price of the Company’s common stock on the NASDAQ Stock Market at the time of the Company’s election to convert the Notes (including any accrued but unpaid interest through the conversion date) into shares of common stock. Notes in the aggregate principal amount of $3,185,000 were outstanding at the time of the Note amendment.

On September 24, 2013, the Company converted the principal amount of the Notes and unpaid interest totaling $3,275,053 into an aggregate of 1,714,697 shares of common stock at a conversion price of $1.91, which was the most recent closing market price of the Company’s common stock on the NASDAQ Stock Market when the Company effected such conversion. The Company determined that the conversion of the Notes qualifies as a debt extinguishment since the Notes were converted based on the amended conversion price. Consequently, the Company recorded a loss on extinguishment of debt of $2,518,912 in the consolidated statements of operations, which represents the difference in the fair value of the shares issued of $3,275,053 and the carrying amount of the Notes (including accrued interest of $98,053) of $756,141 at the date of conversion. The carrying amount of the Notes is net of the unamortized discount and deferred financing costs at the date of conversion amounting to $2,432,681 and $86,231, respectively.

On January 23, 2013, Opexa closed a private offering consisting of convertible notes (the “January 2013 Notes”) and warrants to purchase shares of common stock for gross proceeds of $650,000 of which $100,000 was from a related party (see Note 9). The January 2013 Notes were originally scheduled to mature on January 23, 2014 and accrued interest at the rate of 12% per annum, compounded annually. The January 2013 Notes were convertible into common stock at the option of the investors at a price of $1.30 per share, subject to certain limitations. The principal balance plus accrued interest was payable within five business days of the receipt by Opexa of an aggregate of at least $7.5 million in proceeds from the sale of its equity securities and/or as payments from one or more partners or potential partners in return for granting a license, other rights, or an option to license or otherwise acquire rights with respect to Tcelna.

The January 2013 Notes were analyzed at issuance for a beneficial conversion feature and Opexa concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and was determined to be $141,829 of which $21,820 was attributable to the related party. Opexa also analyzed the Notes for derivative accounting consideration and determined that derivative accounting does not apply.

In connection with the issuance of the January 2013 Notes, Opexa also issued Series J warrants to purchase an aggregate of 243,750 shares of Opexa’s common stock (see Note 13), subject to certain limitations and adjustments. The relative fair value of the warrant liability of $195,969, together with the beneficial conversion feature of $141,829, were recognized as a debt discount and were amortized to interest expense during the year ended December 31, 2013 in the consolidated statements of operations over the term of the January 2013 Notes using the effective interest method.

On February 26, 2013, following the receipt of $3.25 million in gross proceeds during February 2013 from the sale of common stock and Series L warrants to purchase shares of common stock, and following the receipt of the upfront payment of $5 million from Merck Serono on February 20, 2013, Opexa paid principal and interest totaling $567,368 to holders of the January 2013 Notes, of which $100,000 was to a related party, and issued 77,034 shares of common stock to one holder of the January 2013 Notes who elected to convert the principal of $100,000.

During the year ended December 31, 2013, the debt discount of $337,798 in connection with the January 2013 Notes was fully amortized to interest expense in the consolidated statements of operations.

The following table provides a summary of the changes in convertible debt – third parties, net of unamortized discount, during the year ended December 31, 2013:

Balance at December 31, 2012	$	318,658
January 2013 Notes, face value		550,000
Discount on beneficial conversion feature of January 2013 Notes at issuance		(120,009	)
Discount on fair value of Series J warrant liability at issuance		(165,820	)
Repayment of January 23, 2013 Notes		(450,000	)
Conversion of January 23, 2013 Notes into common stock		(100,000	)
Conversion of July 25, 2012 Notes into common stock		(900,000	)
Conversion of July 25, 2012 Notes into common stock		(2,555,000	)
Unamortized discount closed to loss on debt extinguishment		1,949,003
Amortization of debt discount to interest expense through December 31, 2013		1,473,168
Balance at December 31, 2013	$	—