| CONVERTIBLE NOTES PAYABLE – SHORT TERM | 4. CONVERTIBLE
NOTES PAYABLE SHORT TERM 2014 Convertible Notes Payable In July, November and December 2014,
the Company issued promissory notes (the Notes) pursuant to a Note Purchase Agreement entered into with certain accredited
investors for an aggregate principal amount of approximately $1,998,500, $47,916 of which was received by the Company in marketable
securities. The Notes mature one year from the date of issuance and bear interest at the rate of 8% per annum. All principal and
accrued interest under the Notes will automatically convert into the Companys next equity or equity-linked financing (a
Subsequent Financing) in accordance with the following formula: (outstanding balance of the Notes as of the closing
of the Subsequent Financing) x (1.15) / (the per security price of the securities sold in the Subsequent Financing). The
investors shall be considered to be purchasers in the Subsequent Financing by way of their converted Notes. In addition,
upon the closing of a Subsequent Financing, each of the investors shall be issued, in addition to any warrants issued in connection
with a Subsequent Financing, an additional warrant to purchase a number of shares of common stock equal to fifty percent (50%)
of the number of shares of common stock purchased by such investor in the Subsequent Financing assuming a per share purchase price
of the securities to be issued in the Subsequent Financing. In March 2015, the Company issued additional
Notes for an aggregate principal amount of $200,000. In connection with the issuance of the
2015 Convertible Notes (as defined and discussed below), the holders of the Notes, in the outstanding principal amount of $2,198,416,
amended their Notes to (i) extend the maturity date an additional six months, (ii) change the terms of the conversion premium from
1.15 to 1.25 to be consistent with conversion terms of the 2015 Convertible Notes , and (iii) provide that the issuance of
promissory notes by the Company in a transaction with a substantially similar structure to the transactions contemplated by the
Notes shall not be deemed a Subsequent Financing. In addition, in September 2014, the
Company issued a promissory note to a shareholder in the principal amount of $150,000. Interest accrues on the note at a rate
of 12% per annum in the event this note is repaid upon maturity on December 31, 2014; otherwise interest accrues at a rate of 16%
per annum. As of September 30, 2015, the Company accrued $20,218 in interest expense. As of September 30, 2015, the outstanding
balance of this note of $75,000 is included in convertible notes payable - short term in the condensed consolidated balance sheets
(see Note 9). 2015 Convertible Notes Payable On May 28, 2015, the Company accepted
subscriptions pursuant to a new Note and Warrant Purchase Agreement, as amended on August 6, 2015, for the issuance and sale in
a private placement of up to $3,000,000 of convertible promissory notes (the Convertible Notes). The Convertible
Notes mature one year from the date of issuance and bear interest at the rate of 8% per annum. All principal and accrued
interest under the Convertible Notes will, at the sole option of the investor (i) convert into the Companys next equity
or equity-linked financing in which the Company raises gross proceeds of at least $3,600,000 (the Subsequent Financing),
into such securities, including warrants of the Company as are issued in the Subsequent Financing, the amount of which shall be
determined in accordance with the following formula: (the outstanding balance of the Convertible Notes plus accrued interest as
of the closing of the Subsequent Financing) x (1.25) / (the per security price of the securities sold in the Subsequent Financing),
or (ii) convert into a new financing in which the Company shall issue to the investor one share of common stock and one-half of
one warrant at a purchase price no greater than $0.35 per share. The per security price of the securities sold in the Subsequent
Financing shall not exceed $0.35. In addition, the holders of the Convertible Notes shall have the option, at any time,
to convert all principal and accrued interest into common stock at price per share of $0.35. In the event that
the Company shall, at any time, issue or sell additional shares of common stock or common stock equivalents, as defined, at a price
per share less than $0.35, then the conversion price of the Convertible Notes shall be reduced to a price equal to the consideration
paid for these additional shares of common stock. Pursuant to the Note and Warrant Purchase
Agreement, the Company issued warrants at an initial exercise price per share of $0.50 to purchase a number of shares of common
stock equal to fifty percent of the number of shares of common stock such investor would receive upon full conversion of the Convertible
Notes at a conversion price of $0.35 per share. From May through September 2015, the
Company issued Convertible Notes in the aggregate principal amount of $2,780,005 and warrants to purchase 3,971,436 shares of common
stock at $0.50 per share. In connection with the issuance of the Convertible Notes, the Company paid to placement agents
a cash fee of $142,400 and issued 406,859 five-year warrants to purchase shares of common stock at an exercise price of $0.50 per
share. On the issuance date, the fair value of the placement agent warrants was $39,108 which was recorded as
a deferred offering cost and as a derivative warrant liability. Based upon the Companys analysis
of the criteria contained in ASC Topic 815-40, Derivatives and HedgingContracts in Entitys Own Equity
(ASC Topic 815-40), the Company has determined that since the exercise price of the warrants may be reduced if the
Company issues shares at a price below the then-current exercise price, the warrants issued in connection with the Convertible
Notes must be classified as derivative instruments. In accordance with ASC Topic 815-40, these warrants are also being re-measured
at each balance sheet date based on estimated fair value, and any resultant changes in fair value is being recorded in the Companys
consolidated statement of operations. In order to account for the issuance
of the Convertible Notes and warrants, the Company allocated the total gross proceeds of $2,780,005 between the Convertible Notes
and the warrants. The warrants were allocated their full fair value as of the respective grant dates totaling $358,255
and the residual net proceeds of $2,421,750 were allocated to the Convertible Notes. The conversion feature of the
Convertible Notes was then analyzed. The Company determined that the embedded conversion feature did not meet the requirements
for equity classification in accordance with ASC Topic 815-40. Therefore, the conversion feature fair value of $490,340
was bifurcated from the host contract, the Convertible Notes, and recorded as a derivative liability, thereby creating a further
discount on the Convertible Notes. The conversion feature is also being re-measured at each balance sheet date based
on estimated fair value, and any resultant changes in fair value is being recorded in the Companys consolidated statement
of operations. In connection with the issuance of the short-term financing Notes and the Convertible Notes, the Company incurred
$335,877 in issuance costs. These costs are recorded as deferred issuance costs, included in prepaid expenses and other
current assets on the Companys balance sheet and amortized to interest expense over the term of such Convertible Notes.
For the nine months ended September 30, 2015 and 2014, the Company has amortized $95,207 and $19,112, respectively, of issuance
costs to expense. For the nine months ended September 30, 2015 and 2014, the Company recorded non-cash interest expense
related to the amortization of the discount on the Convertible Notes of $125,449 and $0, respectively. Interest expense, including amortization
of deferred issuance costs and debt discounts related to the warrants and beneficial conversion feature, totaled $396,863 and $38,680
for the nine months ended September 30, 2015 and 2014, respectively. The issuance of the Convertible Notes
has resulted in an adjustment to the conversion price and exercise price of certain of the Companys outstanding securities,
including its Series A Preferred Stock, Series B Preferred Stock and certain outstanding warrants, to $0.35 per share as a result
of the various full-ratchet anti-dilution provisions contained in such securities. In connection with the private
placement of the Convertible Notes, the Company entered into a registration rights agreement with the investors, in which the
Company agreed to file a registration statement with the SEC to register for resale the shares underlying the Convertible
Notes and the warrants within 90 calendar days of the final closing date of the Convertible Notes and to have the
registration statement declared effective within 120 calendar days after the filing date. |
