| Senior Convertible Notes and Warrants, and Subordinated Notes and Warrants | 7. Senior Convertible Notes and Warrants, Subordinated
Notes and Warrants and Convertible Bridge Notes On
May 8, 2013, the Company consummated the sale of $9 million in aggregate principal amount of senior convertible notes (the Senior
Notes) due on February 8, 2015 and warrants (the Senior Warrants) to various institutional investors (Investors).
At closing, the Company received $2.76 million in net proceeds, after deducting placement agent fees of $240,000. Total offering
expenses were $494,500 and were recorded as deferred financing fees. The $6,000,000 balance of the gross proceeds from the sale
of Senior Notes was deposited into a series of control accounts in the Companys name. The Senior Notes and Senior Warrants
and the Subordinated Notes and Subordinated Warrants described below were issued in transactions exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended. As of the end of the second quarter, 2014, all of the proceeds have been
released, and the note holders have converted all amounts due under the note into shares of the Companys common stock. During the
nine month period ended September 30, 2014, amortization of deferred financing fees amounted to $66,930. Senior
Warrants The
Warrants entitled the holders to purchase, in the aggregate, 9,875 shares of common stock. The Warrants were exercisable beginning
November 8, 2013. On August 1, 2014, the Company entered into warrant exchange agreements (Warrant Exchange Agreements)
with the holders (Senior Warrant holders) of the Senior Warrants. Pursuant to the Warrant Exchange Agreements, the
Senior Warrant holders exchanged all of the Senior Warrants for shares of the Companys stock (Shares) at a ratio
of 1.7 Shares for each Senior Warrant exchanged, in a transaction exempt from registration under Section 3(a)(9) of the Securities
Act of 1933 as amended. Accounting
for the Conversion Option and Senior Warrants The
Company first considered whether the Senior Notes met the criteria under ASC 480-10-25-14 to be recorded as a liability and determined
that, due to their differing potential settlement features, they did not meet the criteria. The Company next considered whether
the conversion option met the definition of a derivative, requiring it to be bifurcated and recorded as a liability. Pursuant
to ASC 815-40, due to full-ratchet down-round price protection on the conversion price of the Senior Notes and the exercise price
of the Warrants, the Company determined that the conversion features of the Senior Notes and the exercise features of the Senior
Warrants are not indexed to the Companys owned stock and must be recognized separately as a derivative liability in the
consolidated balance sheet, measured at fair value and marked to market each reporting period until the Senior Notes have been
fully paid or converted and the Senior Warrants fully exercised. The
change in fair value of the Senior Warrants of $2,125,576 was recorded as a non-cash loss on change in value of these derivatives
for the nine month period ended September 30, 2014. The change in value of the conversion feature of the Senior Notes of $32 was
recorded as a non-cash gain on change in value of the derivative for the nine month period ended September 30, 2014. Pursuant
to the terms of the Senior Notes, the Company opted to pay the installment payments due prior to March 31, 2014 with shares of
the Companys common stock. During the nine months ended September 30, 2014, a loss on extinguishment was recognized
in the amount of $1,192,189, for the difference between the installment amount and the fair value of the shares at the issuance
date. In
addition, during the nine months ended September 30, 2014, debt discount amortization related to Senior Notes amounted to $863,793. Subordinated
Convertible Notes and Subordinated Warrants Simultaneously
with the closing of the $9 million principal amount Senior Note transaction, the Company sold $1 million principal amount of its
Subordinated Convertible Notes (the Subordinated Notes) to investors consisting of management and directors of the
Company and one individual investor. The sale of the Subordinated Notes did not carry any additional fees and expenses, so the
Company received the entire $1 million in proceeds from the Subordinated Notes at closing. The Subordinated Notes are subordinated
in right of repayment to the Senior Notes and mature 91 days subsequent to the maturity date of the Senior Notes. The Subordinated
Notes bear interest at the rate of 8% per year. Once 2/3 of the Senior Notes have been repaid, then the Subordinated Notes may
be converted and/or prepaid in cash so long as there is no Event of Default with respect to the Senior Notes and all Equity Conditions
(as defined in the securities purchase agreement for the Senior Notes) are met. The conversion price for the Subordinated Notes
is $462.00 per share. The holders of the Subordinated Convertible Notes were issued five year warrants to purchase 1,097 shares
of Company common stock (Subordinated Warrants). Each Subordinated Warrant has an exercise price of $528.50 per share.
All of the holders of the Subordinated Notes have verbally agreed to an extension of the maturity date of these notes to December
31, 2015, and the Company is not in default of its obligations under these notes. The
fair value of the warrants, issued in connection with the Subordinated Notes is $304,000 in the aggregate and was calculated using
the Black-Scholes option pricing model with the following assumptions: (i) expected life of 5 years, (ii) volatility of 80%, (iii)
risk free interest rate of 0.75% and (iv) dividend yield of zero. During
the nine months ended September 30, 2014, debt discount amortization related to the Subordinated Notes amounted to $64,352. The
outstanding principal balance at September 30, 2015 and December 31, 2014, related to the Subordinated Notes is $65,000. Senior
Convertible Bridge Notes On
August 7, 2015, the Company entered into a securities purchase agreement (Agreement) with several accredited investors,
including one director of the Company (each, an Investor) pursuant to which it sold $600,000 principal amount of Senior
Convertible Bridge Notes (Notes) to the Investors. The transaction was approved by the Companys Board of Directors
on August 5, 2015. The Notes carry an original issue discount (OID) of 15% so that the gross amount of proceeds to
the Company (before expenses) was $510,000. The Notes bear interest at the rate of 12% per annum, and the interest is payable
in cash upon repayment of the Notes or in shares of the Companys common stock upon conversion of the Notes. The Notes have
a term of 90 days from the date of issuance, which may be extended at the option of the Investor with respect to all or any portion
of a Note (i) in the event that and for so long as an event of default is occurring under a Note, (ii) through the date that all
shares issued upon conversion of the Note may be resold under Rule 144 without restriction and/or (iii) through the date that
is 10 business days after the consummation of a change in control transaction, all as specified in the Notes. The conversion price
for the Notes is $1.75 per share. The holders of the Notes were issued one five year warrant (Warrants) for each $1.00
of principal amount of the Note invested (510,000 Warrants in total). Each Warrant has an exercise price of $1.75 per share. The
Agreement, Notes and Warrants contain other terms and provisions which are customary for a transaction of this nature, including
standard representations and warranties and events of default. The transaction is exempt from registration under Section 4(a)(2)
of the Securities Act of 1933, as amended, and Regulation D, as promulgated thereunder, and closed on August 10, 2015. All monies
were received by August 11, 2015. $10,000 principal amount of the Senior Convertible Bridge Notes is held by an affiliate of the
Company. The
fair value of the warrants issued in conjunction with the Senior Convertible Bridge Notes is $257,550 in the aggregate and was
calculated using the binomial option model with the following assumptions: (i) expected life of 5 years, (ii) volatility of 100%,
(iii) risk free interest rate of 1.59% and (iv) dividend yield of zero. The
conversion feature of the Senior Convertible Bridge Notes and the related warrants were determined not to be derivative instruments,
in accordance with the guidance in ASC Topic 470-20 Debt with conversion and Other Options The
fair value of the warrants and the beneficial conversion feature were recorded as a debt discount to be amortized over the life
of the Senior Convertible Bridge Notes. The
balance at September 30, 2015 related to the Senior Convertibles Bridge Notes was comprised of:
Senior Convertible Bridge
notes payable, related and unrelated parties at August 10, 2015 $ 600,000
Fair value allocation of warrants reported
asa debt discount (153,169 )
OID (90,000 )
Beneficial conversion feature (179,947 )
Debt discount amortization
expense 238,410
Carrying value
of Senior Convertible Bridge Notes at September 30, 2015 $ 415,294 Notes
with Landlords On
August 28, 2015, the Companys signed a promissory note with each of the two landlords deferring lease payments until December
31, 2015. The aggregate amount of the promissory notes is $291,975 earning interest at 12% per annum compounded monthly and is
included in notes payables on the Condensed Consolidated Balance Sheet as of September 30, 2015. |
