Convertible Notes Payable, Related Parties

12 Months Ended

Dec. 31, 2016

Convertible Notes Payable Related Parties

Convertible Notes Payable, Related Parties

10. Convertible Notes Payable, Related Parties

A summary of the Company’s convertible notes payable, related parties is as follows:

	December 31,
	2016		2015
Convertible notes payable, short term:
Equity Participation Notes	$	—	$	200
2014/2015 Convertible Notes		—		—
Other convertible notes payable		—		—
Total convertible notes payable, short term	$	—	$	200

Equity Participation Promissory Notes

In late 2009 and early 2010, the Company entered into unsecured promissory note agreements with certain of its existing stockholders for an aggregate principal amount of $675 with an original maturity date of May 31, 2010 (the “Equity Participation Notes”). The Company continues to accrue unpaid interest on the Equity Participation Notes at a rate 15% per annum, The terms of the Equity Participation Notes provide for the holder to convert, at any time, the outstanding principal and unpaid accrued interest into shares of common stock at an conversion rate of $10.00 per share provided, however, that in the event, that the Company’s common stock is registered in an initial public offering, prior to such time the Company achieves a net profit of $15 million, then the conversion rate shall be $5.00 per share. Additionally, the Equity Participation Notes provide the holder an equity participation right at the rates from .8330% to 4% on the first $15 million of net profit, which is defined as net profit before interest, taxes, depreciation, amortization (“EBITDA”) and compensation of officers, directors and any of their related parties. There were no amounts accrued for these contingent equity participation payments at December 31, 2016 and 2015.

2014 Convertible Promissory Notes

In the first quarter of 2015, the Company made an offer to the holders of the 2014 Notes to allow the holders to tender their convertible notes prior to maturity in exchange the Company would agree to include interest through the original maturity date in calculating the number of conversion shares. In May and June 2015, the Company converted the outstanding principal and accrued interest due on the 2014 Notes, totaling $452, into 71,446 shares of common stock at the following conversion rates: principal at $7.50 per share and interest at $5.00 per share. The discount on the 2014 Notes was amortized to interest expense through the conversion dates using the effective interest method. The Company recorded an expense of $231, including the charge of the unamortized discount of $142, for the inducement to convert the 2014 Notes as additional interest expense. The Company recorded interest expense on the 2014 Notes of $0 and $312 during the year ended December 31, 2016 and 2015, respectively.

2014/2015 Secured Convertible Promissory Notes

During the period from December 2014 through November 2015, the Company issued secured convertible promissory notes (the “2014/2015 Convertible Notes”) to certain existing stockholders which provided for borrowings of $2,365. The 2014/2015 Convertible Notes bore interest at a rate of 4% per annum, matured one year from their date of issuance and were collateralized by all of the Company’s personal property. The 2014/2015 Convertible Notes could not be repaid prior to their maturity date without the consent of the holders of at least a majority of the outstanding principal amount of the 2014/2015 Convertible Notes. The 2014/2015 Convertible Notes contained two conversion options contingent upon the occurrence of a future event, as follows: (i) all outstanding principal and unpaid accrued interest on the 2014/2015 Convertible Notes would automatically convert into equity securities upon the consummation of an equity financing with proceeds of at least $2 million (“Qualified Financing”) at conversion rates of 70% or 80%, as noted below; and (ii) if the Company was acquired, prior to a Qualified Financing, in a change in control transaction, the holder had an option to have all outstanding principal plus any unpaid accrued interest paid in cash or convert such amount into shares of common stock at a conversion price equal to $7.50 per share, subject to adjustment for such events as stock splits, combination, and reorganization.

The Company received proceeds of $875 from the 2014/2015 Convertible Notes issued from December 2014 through February 2015 with an aggregate principal amount of $875. In the event of a Qualified Financing, these 2014/2015 Convertible Notes provided automatic conversion of all outstanding principal and unpaid accrued interest thereon into the shares of the equity securities sold in the Qualified Financing at a conversion rate of 70% of the price per share paid by the other purchasers in the Qualified Financing.

From April 2015 through November 2015, the Company issued additional 2014/2015 Convertible Notes with an aggregate principal amount of $1,490 together with detachable common stock warrants for proceeds of $1,490. However, in the event of a Qualified Financing, these 2014/2015 Convertible Notes provided automatic conversion of all outstanding principal and unpaid accrued interest thereon into the shares of the equity securities sold in the Qualified Financing at a higher conversion rate of 80% of the price per share paid by the other purchasers in the Qualified Financing.

The Company determined that the conversion option upon a Qualified Financing is the predominant conversion option and is a conditional obligation that the Company would settle by issuing a variable number of its shares. In this manner, the value that the convertible note holder would receive upon a Qualified Financing conversion event is a fixed monetary amount known at inception. Although the two contingent conversion features are embedded derivative features, they did not require bifurcation to be accounted for separately. Therefore, the 2014/2015 Convertible Notes are measured initially at fair value and subsequently with changes in fair value recognized in earnings.

There were a total of 131,733 detachable common stock warrants issued with the 2014/2015 Convertible Notes. The 2014/2015 Convertible Notes and warrants exist independently as separate securities. See Note 9 for a description of the warrants. As the 2014/2015 Convertible Notes are measured at fair value, such notes are allocated a portion of the proceeds equal to their fair value with the remaining proceeds being allocated to the detachable warrants. The estimated aggregate fair value of the 2014/2015 Convertible Notes issued was determined to be $2,268 with the remaining $97 of proceeds allocated to the detachable warrants. The Company determined the estimated fair value of the 2014/2015 Convertible Notes using a lattice model. For the year ended December 31, 2016 and 2015, the Company recognized the changes in fair value on the 2014/2015 Convertible Notes of $0 and $671, respectively, within other income (expense), in the accompanying statements of operations and comprehensive loss.

As part of a Series B convertible preferred stock financing in December 2015, the Company provided an offer to the holders of the 2014/2015 Convertible Notes to cancel and exchange their notes as consideration for their purchase of the Series B convertible preferred stock at the same price as the shares to be sold to other investors in the preferred stock financing. In consideration of the Company pricing the Series B convertible preferred stock at $7.75 per share in the preferred stock financing and securing the $7.75 conversion price, the holders of the 2014/2015 Convertible Notes waived the discount that provided for the automatic conversion of the convertible notes into the equity securities sold in a Qualified Financing of at least $2 million. With this offer, the holders of the 2014/2015 Convertible Notes received no additional consideration, there was no modification of terms in their notes, and it did not represent the exercise of a conversion right obtained in the terms of the 2014/2015 Convertible Notes at issuance. On December 31, 2015, all holders of the 2014/2015 Convertible Notes accepted the Company’s offer to cancel and exchange their notes as consideration for the purchase of the Series B convertible preferred stock. The Company determined that the offer made to the holders of the 2014/2015 Convertible Notes should be accounted for as an extinguishment of debt.

The Company issued 312,861 shares of Series B convertible preferred stock to the holders of the 2014/2015 Convertible Notes to cancel and exchange the aggregate $2,365 principal amount and unpaid accrued interest totaling $2,465 on their notes as consideration for their purchase of the preferred stock at the $7.75 per share price. In determining the reacquisition price in the extinguishment of the convertible notes, the value of the Series B convertible preferred stock was readily determinable as the preferred stock was sold separately to other investors as part of the preferred stock financing at $7.75 per share. As a result, the $2,425 amount to reacquire the convertible notes was less than the $2,993 fair value carrying amount of the 2014/2015 Convertible Notes on December 31, 2015, the date of extinguishment. As such, the Company recorded a gain on extinguishment of $569, which represents the elimination of the fair value accounting adjustments in the year ended December 31, 2015.

Other convertible notes

The Company entered into an unsecured promissory note with a stockholder in the amount of $60 with interest accruing at a rate of 10% per annum. The note provided for the holder to convert the outstanding principal and accrued and unpaid interest into shares of common stock at a conversion rate equal to $7.50 per share. In 2015, the holder converted the note balance, including accrued and unpaid interest, in the aggregate amount of $68, into 8,971 shares of common stock in accordance with the original conversion terms of the note.