NOTE 5 — NOTES PAYABLE

In April and May of 2016, the Company entered into secured loan agreements, pursuant to which it borrowed an aggregate amount of $1,295,000 at a fixed interest rate of 10% per annum. These loans will mature on the earlier of the closing of a new debt financing (subject to certain exceptions, including refinancings of its outstanding convertible notes) or May 1, 2017. These loans are secured by all of the Company’s personal property and are personally guaranteed by Dr. Niihara, its CEO, and secured by certain of his real property. Furthermore, the loan agreements contain certain negative covenants that may hinder the Company’s ability to raise additional capital or might otherwise affect its liquidity, including restrictions on its ability to (1) acquire material assets outside of the ordinary course of business, (2) sell, lease, license transfer or dispose of its personal property outside of the ordinary course of business, (3) pay or declare dividends, (4) make investments in or loans to other persons, (5) redeem or repurchase its stock, (6) make deposits or investments unless they are subject to a deposit control account, (7) incur additional indebtedness other than permitted debt, (8) make payments on subordinated obligations, (9) undergo a merger, change in control or sale of a substantial portion of its assets, or (10) use loan proceeds to make payments to its affiliates. If the Company is unable to repay these loans when they become due, or if it otherwise suffers an event of default under the loan agreements, the lender may have the right to foreclose on their collateral, which could have a material and adverse effect on the Company’s business, financial condition, liquidity and operations.

In connection with these loans, the Company issued the lender warrants for the purchase of 62,500 shares of its common stock at an exercise price of the lowest of the fair market value of its common stock during the quarter ended June 30, 2016 or the lowest public sale price of its common stock during the quarter ended June 30, 2016. In addition, if these loans remain outstanding for at least 30 days during the 90-day periods ending June 30, 2016, September 30, 2016 and December 31, 2016, the Company is obligated to issue the lender additional warrants for the purchase of 37,500, 18,750 and 18,750 shares of its common stock, respectively, for an exercise price of the lowest of the fair market value of its common stock as of the start or end of such 90-day period or the lowest public sale price of its common stock during the quarter ended on the applicable measurement date. As these loans have been outstanding for more than 30 days during the 90-day period ending June 30, 2016, the Company accordingly issued the lender an additional warrant for the purchase of 37,500 shares of its common stock on the terms set forth above. These warrants may be exercised through a cashless feature.

Notes payable consisted of the following at June 30, 2016 and December 31, 2015:

Year Issued	Interest Rate Range	Term of Notes	Conversion Price	Principal Outstanding June 30, 2016		Discount Amount June 30, 2016		Carrying Amount June 30, 2016		Shares Underlying Notes June 30, 2016	Principal Outstanding December 31, 2015		Discount Amount December 31, 2015		Carrying Amount December 31, 2015		Shares Underlying Notes December 31, 2015
Notes payable
2013	10%	Due on demand	—	$	972,200	$	—	$	972,200	—	$	830,000	$	—	$	830,000	—
2014	11%	Due on demand - 2 years	—	613,615		—		613,615		—	1,446,950		—		1,446,950		—
2015	11%	Due on demand - 2 years	—	2,530,532		—		2,530,532		—	2,379,799		—		2,379,799		—
2016	10 - 11%	Due on demand – 12.5 months	—	2,678,335		426,491		2,251,844		—	—		—		—		—
				$	6,794,682	$	426,491	$	6,368,191	—	$	4,656,749	$	—	$	4,656,749	—

		Current		$	6,794,682	$	426,491	$	6,368,191	—	$	4,656,749	$	—	$	4,656,749	—
		Non-current		$	—	$	—	$	—	—	$	—	$	—	$	—	—
Notes payable - related party
2012	8% - 10%	Due on demand	—	$	626,730	$	—	$	626,730	—	$	626,730	$	—	$	626,730	—
2013	8%	Due on demand	—	50,000		—		50,000		—	50,000		—		50,000		—
2014	11%	Due on demand - 2 years	—	—		—		—		—	240,308		—		240,308		—
2015	10% - 11%	Due on demand - 2 years	—	1,621,265		—		1,621,265		—	1,849,266		—		1,849,266		—
2016	10% - 11%	Due on demand - 2 years	—	993,843				993,843		—	—		—		—		—
				$	3,291,838	$	—	$	3,291,838	—	$	2,766,304	$	—	$	2,766,304	—

		Current		$	3,291,838	$	—	$	3,291,838	—	$	2,766,304	$	—	$	2,766,304	—
		Non-current		$	—	$	—	$	—	—	$	—	$	—	$	—	—
Convertible notes payable
2010	6%	5 years	$3.05	$	2,000	$	—	$	2,000	656	$	2,000	$	—	$	2,000	656
2011	10%	5 years	$3.05	300,000		—		300,000		98,285	500,000		—		500,000		163,809
2013	10%	2 years	$3.60	—		—		—		—	525,257		—		525,257		185,553
2014	10%	Due on demand - 2 years	$3.05-$3.60	2,716,505		119,448		2,597,057		887,820	4,378,563		353,700		4,024,863		1,120,470
2015	10%	Due on demand - 2 years	$3.50-$7.00	4,728,288		319,566		4,408,722		1,283,410	5,681,166		526,066		5,155,100		1,517,996
2016	10%	Due on demand - 2 years	$3.50-$4.50	4,061,535		923,086		3,138,449		1,005,657	—		—		—		—
				$	11,808,328	$	1,362,100	$	10,446,228	3,275,828	$	11,086,986	$	879,766	$	10,207,220	2,988,484

		Current		$	7,137,644	$	798,224	$	6,339,420	2,111,764	$	6,358,698	$	358,351	$	6,000,347	1,762,849
		Non-current		$	4,670,684	$	563,876	$	4,106,808	1,164,064	$	4,728,288	$	521,415	$	4,206,873	1,225,635
Convertible notes payable - related party
2012	10%	Due on demand	$3.30	$	254,000	$	—	$	254,000	90,651	$	298,000	$	—	$	298,000	108,505
2015	10%	2 years	$4.50	320,000		—		320,000		75,900	320,000		—		320,000		72,354
				$	574,000	$	—	$	574,000	166,551	$	618,000	$	—	$	618,000	180,859

		Current		$	254,000	$	—	$	254,000	90,651	$	298,000	$	—	$	298,000	108,505
		Non-current		$	320,000	$	—	$	320,000	75,900	$	320,000	$	—	$	320,000	72,354
		Grand Total		$	22,468,848	$	1,788,591	$	20,680,257	3,442,379	$	19,128,039	$	879,766	$	18,248,273	3,169,343

The average stated interest rate of notes payable as of June 30, 2016 and December 31, 2015 was 10%. The average effective interest rate of notes payable for the six-month period ended June 30, 2016 and the year ended December 31, 2015 was 23% in each period, after giving effect to discounts relating to beneficial conversion features and the fair value of warrants issued in connection with these notes. The notes payable and convertible notes payable do not have restrictive financial covenants or acceleration clauses associated with a material adverse change event. The holders of the convertible notes have the option to convert their notes into the Company’s common stock at the stated conversion price during the term of their convertible notes. Conversion prices on these convertible notes payable range from $3.05 to $3.60 per share. Certain notes with a $4.50 or a $7.00 stated conversion price in the second year of their two year term are subject to automatic conversion into shares of the Company’s common stock at a conversion price equal to 80% of the initial public offering price at the time of a qualified public offering. All due on demand notes are treated as current liabilities.

Contractual principal payments due on notes payable are as follows:

Year Ending	at June 30, 2016
2016	$	12,767,736
2017	6,784,168
2018	2,916,944
Total	$	22,468,848

The Company estimated the total fair value of any beneficial conversion feature and accompanying warrants in allocating the debt proceeds. The proceeds allocated to the beneficial conversion feature were determined by taking the estimated fair value of shares issuable under the convertible notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of the Company’s common stock as of the date of issuance (see Note 2). The fair value of the warrants issued in conjunction with notes was determined using the Black Scholes Merton option pricing model with the following inputs for the periods ended:

	June 30, 2016			December 31, 2015
Stock price	$	5.00		$	4.50
Exercise price	$	4.50 - 4.70		$	4.90
Term	5 years			5 years
Risk-free interest rate	1.01 - 1.28		%	1.57		%
Expected dividend yield	—			—
Expected volatility	65.4 - 67.8		%	67.3		%

In situations where the debt included both a beneficial conversion feature and a warrant, the proceeds were allocated to the warrants and beneficial conversion feature based on their respective pro rata fair values.