Note 3 - Convertible Debentures

3 Months Ended

Sep. 30, 2015

Convertible Debentures

Convertible debentures consist of the following as of September 30, 2015:

Convertible debentures	$	5,500
Unamortized debt discount		(4,707	)
Unamortized debt issue costs		(778	)
Convertible debentures, net	$	15

On August 31, 2015, the Company sold senior secured convertible debentures in a financing to raise up to $15,000 (“Debentures”), Series A warrants to purchase up to 22,058,823 shares of the Company’s common stock at an exercise price equal to $0.68 per share for a period of five and one-half years (“Series A warrants”) and Series B warrants to purchase up to 12,132,353 shares of the Company’s common stock at an exercise price equal to $0.68 per share for a period of eighteen months (“Series B warrants”). At the initial closing on August 31, 2015, the Company received gross proceeds of $5,500 and 8,088,235 Series A warrants vested and 4,448,529 Series B warrants vested. The second closing for up to an additional $9,500 was dependent on receiving approval from CIRM of a grant in the amount of $10,000, for the pivotal trial for CLIRST III. The Company applied for the CIRM grant in August 2015. However, based upon preliminary feedback received in early November, the Company withdrew its application for, and shall not receive, the CIRM grant. Therefore any funds released in a second close will only be at the election of the holders. The warrants issued in contemplation of a second close will remain outstanding until they expire.

The Debentures bear no interest, may be converted into shares of the Company’s common stock at a conversion price of $0.68 per share, are secured by all of the Company’s assets and, unless previously converted, will mature on the 30 year anniversary of the date of issuance. The Series A warrants and Series B warrants are subject to vesting based upon the amount of funds actually received by the Company in the sale of the Debentures and became exercisable on October 30, 2015, the date stockholder approval was received. The warrants are non-cancelable and will expire in accordance with their terms. The Series A warrants may be exercised for cash or, upon the failure to maintain an effective registration statement, on a cashless basis. The Series B warrants may be exercised on a cashless basis at 90% of the weighted-average price at the time of exercise if it is lower than the conversion price subject to a floor of $0.10 per share with a 250% uplift in the number of shares to be issued.

In addition to standard and customary events of default, it will constitute an event of default under the Debentures if: a registration statement registering all of the registrable securities shall not have been declared effective by the earlier of (a) the CIRM grant approval date or (b) February 27, 2016 or the Company does not meet the current public information requirements under Rule 144 in respect of the registrable securities.

It will also constitute an event of default if the holders are not able to resell the registrable securities for a period of more than 20 consecutive trading days or 30 non-consecutive trading days in a year. Currently, the Company is unable to register all of the registrable securities and will be in default under the debentures after the 20

consecutive trading day following the effectiveness of the registration statement unless the Company obtains a waiver.

If there is an event of default, the holder of the Debentures may require the Company to redeem all or any portion of the Debentures (including all accrued and unpaid interest, if any), in cash, at a price equal to the greater of: (i) the outstanding principal amount of the Debentures, plus all accrued and unpaid interest thereon, divided by the conversion price on the date the default amount is either (A) demanded (if demand or notice is required to create an event of default) or otherwise due or (B) paid in full, whichever has a lower conversion price, multiplied by the Volume Weighted Average Price (“VWAP”) on the date the default amount is either demanded or otherwise due, or paid in full, whichever has a higher VWAP, or (ii) 130% of the outstanding principal amount of the Debentures.

In connection with this financing, the Company entered into a registration rights agreement pursuant to which the Company agreed to register (a) all of the shares of common stock then issued and issuable upon conversion in full of the Debentures (assuming on such date the Debentures are converted in full without regard to any conversion limitations therein) and (b) all warrant shares then issued and issuable upon exercise of the warrants (assuming on such date the warrants are exercised in full without regard to any exercise limitations therein). In addition, the holders are entitled to receive liquidated damages upon the occurrence of a number of events relating to filing, getting an effective and maintaining an effective registration statement including the failure of the Company to have such registration statement declared effective by November 16, 2015. The liquidated damages will be payable upon the occurrence of each of those events and each monthly anniversary thereof until cured. The amount of liquidated damages payable is equal to 4% of the subscription amount paid by each holder. If the Company fails to pay any partial liquidated damages in full within seven days after the date payable, the Company will pay 18% interest.

As the Company has not filed an effective registration statement by November 16, 2015 and the Company is precluded by the SEC from registering all of the registrable securities on a single registration statement, management considers November 16, 2015 as a liquidated damages event date, owing $220. Management does not believe the event will be cured until the holders are able to trade securities under Rule 144 or approximately February 27, 2016. Although management is in discussions with the holders to waive the potential liquidated damages, management considers it probable that four months of liquidated damages will be paid for a total of $880 accrued as registration rights liquidated damages in the three months ended September 30, 2015.

For financial reporting purposes, the net proceeds of $4,720 was allocated first to the residual fair value of the Series A warrants, amounting to $3,385, then to the residual fair value of the obligation to issue the Series B warrants of $897, the remaining value to the intrinsic value of the beneficial conversion feature on the convertible debentures of $438, resulting in an initial carrying value of the Debentures of $0. The initial debt discount on the Debentures totaled $4,720 and is being amortized over the 30 year life of the convertible debentures. During the three months ended September 30, 2015, the Company amortized $15 of the debt discount.

Beneficial Conversion Feature

The beneficial conversion feature value was calculated as the difference resulting from

subtracting the effective conversion price from the market price of the common stock on the issuance date, multiplied by the number of common shares into which the initial funding of the Debentures are convertible.