NOTE

10.

CONVERTIBLE NOTE

March 26, 2019 (

the “Closing Date”), the Company entered into a Securities Purchase Agreement with Iliad Research and Trading, L.P. (the “Lender”), pursuant to which the Company issued a Secured Convertible Promissory Note (the “Convertible Note”) to the Lender dated as of the Closing Date. The Convertible Note has an original principal amount of

$2.2

million, bears interest at a rate of

10%

per annum and will mature on

September 26, 2020,

unless earlier paid, redeemed or converted in accordance with its terms. The Company received net proceeds of

$2.0

million after deducting an original issue discount of

$200

thousand and debt issuance cost of Lender’s transaction fees of

$15

thousand. The Company recognized an additional

$182

thousand of debt issuance costs associated with the issuance of the Convertible Note.

The Convertible Note provides the Lender with the right to convert, at any time, all or any part of the outstanding principal and accrued but unpaid interest into unregistered shares of the Company’s common stock at a conversion price of

$1.65

per share. Beginning on

September 26, 2019,

the Convertible Note also provides the Lender with the right to redeem all or any portion of the Convertible Note (“Redemption Amount”) up to

$200

thousand per calendar month. The payments of each Redemption Amount

may

be made, at the option of the Company, in cash, by converting such Redemption Amount into unregistered shares of Common Stock (“Redemption Conversion Shares”), or a combination thereof. The number of Redemption Conversion Shares equals the portion of the applicable Redemption Amount being converted divided by the lesser of

$1.65

or the Market Price. The Market Price is defined as

85%

of the lowest closing bid price during the

trading days immediately preceding the applicable measurement date. In addition, the Company

may

redeem the Convertible Note at its option at any time at a redemption price equal to

115%

of the aggregate outstanding balance of principal and interest.

The Company has reserved

3,200,000

shares of its authorized and unissued common stock to provide for all issuances of common stock under the Convertible Note.

Pursuant to a Security Agreement between the Company and the Lender, repayment of the Convertible Note is secured by all of the assets of the Company. The assets covered by the Security Agreement are currently

first

encumbered by that certain lien of up to

$1.0

million, plus accrued and unpaid interest and fees, in favor of Pioneer Hong Kong described above.

The Convertible Note contains events of default upon the occurrence and during the continuance of which all obligations

may

be declared immediately due and payable. Under certain events of default, the outstanding balance of principal and interest shall be automatically due and payable in cash. Upon other events of default, the Lender, at its option, can elect to increase the outstanding balance by up to

15%,

depending on the magnitude of the default, without accelerating the outstanding balance.

The Company’s prepayment terms represent an embedded call option, the Lender’s share redemption terms represent an embedded put option and certain events of default represent embedded derivatives, each of which require bifurcation. A single derivative comprising all bifurcatable features was measured at fair value using a Monte Carlo simulation model. The key assumptions used to value the combined embedded derivative upon issuance at

March 26, 2019

were as follows:

	As of
Assumption	March 26, 2019
Stock price (latest bid price)	$	1.28
Equity volatility		93.8	%
Risk-free interest rate		2.34	%
Remaining term		1.5

The key assumptions used to value the combined embedded derivative as of

December 31, 2019

were as follows:

	As of
Assumption	December 31, 2019
Stock price	$	0.65
Equity volatility		192.6	%
Risk-free interest rate		1.60	%
Remaining term		0.74

The fair value of the combined embedded derivative was

thousand as of

December 31, 2019.

During the year ended

December 31, 2019,

the Company recorded a gain of

$424

thousand, in the consolidated statements of operations and comprehensive loss.

The aggregate

$627

thousand discount, including the original issue discount, and the aggregate

$197

thousand of debt issuance costs, including the Company’s issuance costs and payment for the Lender’s transaction fees, were recorded at issuance, and were classified as an offset to the Convertible Note on the consolidated balance sheet. The Convertible Note is presented as follows as of

December 31, 2019:

(in thousands)
Principal amount	$	1,563
Unamortized discount		(117	)
Unamortized debt issuance costs		(37	)
Total debt		1,409
Less: short-term		1,409
Long-term	$	—

The discount and debt issuance costs are being amortized to interest expense using the effective interest rate method over the term of the Convertible Note, assuming that the Convertible Note will be redeemed at the maximum

$200

thousand per month beginning in

September 2019.

During the year ended

December 31, 2019,

the effective interest rate on the Convertible Note was

52.67%.

Interest expense recognized, including amortization of the issuance costs and debt discount, was

$831

thousand during the year ended

December 31, 2019.

August 8, 2019,

the Company entered into a securities purchase agreement (the

“August

SPA”) with certain domestic investors for the sale and issuance of

4,198,566

shares of common stock in a registered direct offering and

4,198,566

warrants exercisable for

4,198,566

shares of common stock in a simultaneous private placement at an offering price of

$1.00

per share. The

August

SPA prohibits the Company from redeeming in common stock or common stock equivalents in satisfaction of the Promissory Note with Iliad Research & Trading, L.P. and

may

only issue common stock in satisfaction of the Promissory Note if the stock price equals or exceeds

$2.00.

See Note

12,

“Stockholders’ Equity” for further discussion of the terms of the

August

SPA.

The Lender started redeeming

$200

thousand of the Convertible Note every month since

September 27, 2019.

As of

December 31, 2019,

the Company had repaid a total of

$800

thousand in cash,

$652

thousand of which was applied against the outstanding balance of the convertible note. As of

December 31, 2019,

the Company's contractual maturity of the principal balance of the Convertible Note was as follows:

(in thousands)
2020	$	1,563
2021 and thereafter		—
Total	$	1,563