| CONVERTIBLE NOTES PAYABLE - SHORT TERM | 2014 Convertible Notes Payable During 2014 and 2015, the Company issued promissory
notes (the “2014 Notes”) pursuant to a Note Purchase Agreement entered into with certain accredited investors for an
aggregate principal amount of $2,198,416. The 2014 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 2014 Notes will automatically convert into the Company’s 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 2014 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 May 2015, in connection with the issuance
of the Convertible Notes (as defined and discussed below), the holders of the 2014 Notes, in the outstanding principal amount of
$2,198,416, amended their 2014 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 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 2014 Notes shall not be deemed a Subsequent Financing. On January 20, 2016, the Company further amended the
2014 Notes (the “Amended 2014 Notes”), in order to (i) extend the maturity date for an additional
six months, (ii) retroactively increase the interest rate to 12%, (iii) provide the ability to voluntary convert the
notes, including principal and interest multiplied by 1.25, at a conversion price of $0.35 per share (which results in an effective
conversion price of $0.28 per share), (iv) provide resale registration rights, and (v) provide “full-ratchet” anti-dilutive
protection. As a result of this amendment, the conversion price of each of the Company's existing Series A Preferred Stock, Series
B Preferred Stock, the Convertible Notes and certain related warrants, has been adjusted to $0.28 per share. The Company applied guidance in FASB ASC 470-50,
“Debt Modifications and Extinguishments,” (ASC 470-50) and determined that the amendment qualified as a debt extinguishment
(the “Debt Extinguishment”). This determination was made after calculating that the newly amended terms increased
the fair value of the embedded conversion feature in excess of 10 percent. In order to account for the Debt Extinguishment,
the Company recorded the Amended 2014 Notes and the embedded conversion feature at their then fair values of $2,495,582 and $945,951,
respectively. The embedded conversion feature was recorded as a derivative liability after determining the requirements
for equity classification, in accordance with ASC Topic 815-40, were not met. The difference between the carrying value
of the 2014 Notes, including all principal, accrued interest and deferred financing costs and the fair value of the Amended 2014
Notes and embedded conversion feature was recorded as a loss on debt extinguishment of $1,022,520 in the statement of operations. The
difference between the principal amount of the Amended 2014 Notes and the fair value of the Amended 2014 Notes of $238,515 will
be amortized to interest expense over the term of the notes. During the nine months ended September 30, 2016, the Company amortized
interest of $181,706 on the Amended 2014 Notes. On July 22, 2016, the Company entered into a further amendment to
the 2014 Notes to extend the maturity date of the Notes for an additional ninety days. During the nine months ended September 30, 2016,
the Company issued 653,988 shares of common stock pursuant to the conversion of Amended 2014 Notes. The carrying value of the converted
Amended 2014 Notes plus accreted interest was approximately $178,731 and the fair value of the derivative related to the embedded
conversion feature was $15,271. The Company recorded a gain on extinguishment related to these conversions totaling $26,785. The calculation of the net loss on extinguishment is as follows:
September 30,
Fair value – Amended 2014 Notes $ 2,495,582
Fair value – embedded conversion feature 945,951
Total Amended 2014 Notes 3,441,533
Principal – 2014 Notes 2,198,416
Accrued interest – 2014 Notes 232,235
Deferred financing costs – 2014 Notes (11,638 )
Total 2014 Notes 2,419,013
Loss on Extinguishment from 2014 Note Amendment 1,022,520
Carrying value – Amended 2014 Notes converted 175,922
Value of interest accretion – Amended 2014 Notes converted 2,809
Fair value of embedded conversion feature – Amended 2014 Notes converted 15,271
Fair value – common stock issued upon conversion (167,217 )
Gain on Extinguishment from Amended 2014 Note Conversions 26,785
Loss on Extinguishment, net $ 995,735 The derivative liability related to the embedded
conversion feature is 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 Company’s consolidated statement of operations. Upon conversion, the notes and embedded derivatives
are removed at their carrying value, after a final mark-to-market of the embedded derivative’s fair value. Common stock issued
upon conversion is measured at its current fair value, with any difference recorded as a gain or loss on extinguishment. 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 Company’s 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. As a result of the 2016 amendment to the 2014 Notes, the conversion price of
the Convertible Notes was adjusted to $0.28 per share. 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. As a result of the 2016 amendment to the 2014 Notes, the exercise price of
the warrants was adjusted to $0.28 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 Company’s analysis of the
criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s 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 Company’s 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 Company’s consolidated statement
of operations. On May 26, 2016, the 2015 Notes were amended
to (i) extend the maturity date an additional six months and (ii) increase the interest rate, from 8% to 12%, applied retroactively
from the initial issuance date of the Notes. The Company applied guidance in ASC 470-50 and determined that the amendment did not
qualify as a debt extinguishment. This determination was made after calculating that the present value of the cash flows under
the modified debt instrument is less than a 10 percent change from the present value of the remaining cash flows under the original
debt. Lewis Opportunity Fund, an affiliate of W. Austin
Lewis, IV, a member of the Company’s Board of Directors, participated as an investor in the Convertible Notes in 2015 in
an aggregate principal amount of $2,000,000 and was issued warrants to purchase an aggregate of 2,857,143 shares of common stock. 2016 Convertible Notes Payable On March 23, 2016, the Company accepted subscriptions
pursuant to a new Note Purchase Agreement for the issuance and sale in a private placement of an aggregate principal amount of
up to $1,000,000 of convertible promissory notes (the “2016 Convertible Notes”), convertible into shares of common
stock. The initial closing of the private placement was consummated on March 23, 2016 for an aggregate amount of $150,000, which
was invested by Dr. Thomas H. Tulip, the Company’s chief executive officer. The Company may conduct any number of additional
closings so long as the final closing occurs on or before the 240th day following the initial closing date. From April 26, 2016 through August 17, 2016,
the Company issued additional 2016 Convertible Notes in the aggregate principal amount of $260,000. The 2016 Convertible Notes mature one year from
the date of issuance and bear interest at the rate of 12% per annum payable upon the earlier of (i) exchange or voluntary conversion
of the 2016 Convertible Notes in accordance with the terms thereof and (ii) the maturity date. All principal and accrued interest
under the 2016 Convertible Notes (the “Outstanding Balance”) will automatically convert into the Company’s next
equity or equity-linked financing (the “Subsequent Financing”), without any action on the part of the investor, into
such securities, including warrants of the Company that are issued in the Subsequent Financing, the amount of which shall be determined
in accordance with the following formula: (the Outstanding Balance as of the closing of the Subsequent Financing) x (1.25) / (the
per security price of the securities sold in the Subsequent Financing). For the purpose of calculating the formula above, the per
security price of the securities sold in the Subsequent Financing shall not exceed $0.35. The issuance of promissory notes by the
Company in a transaction with a substantially similar structure to the 2016 Convertible Notes (as determined in
good faith by the Company’s board of directors) shall not be deemed a Subsequent Financing. Each investor also has the right, at its option
at any time, to convert the Outstanding Balance into shares of common stock as is obtained by dividing (i) the Outstanding Balance
to be converted multiplied by 1.25, by (ii) a conversion price, $0.35 per share; provided, however, if an event of default has
occurred and is continuing, the conversion price shall be adjusted to $0.15 per share. The 2016 Convertible Notes are subject to
customary adjustments for issuances of shares of common stock as a dividend or distribution on shares of the common stock, or mergers
or reorganizations, as well as “full-ratchet” anti-dilution adjustments for future issuances of other Company securities
(subject to certain standard carve-outs). 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 (the “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. The terms of the Additional Warrants shall be substantially identical
to the terms of the warrants issued in the Subsequent Financing, except the exercise price per share of the Additional Warrants
shall be equal to the per share purchase price of the securities issued in the Subsequent Financing. In the event no warrants are
issued in the Subsequent Financing, each of the investors shall nonetheless be entitled to an Additional Warrant, which Additional
Warrant shall be non-callable, exercised on a cash only basis and have a term of five (5) years following the closing date of the
Subsequent Financing. The conversion feature of the 2016 Convertible
Notes was 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 with a fair value of $83,343 was
bifurcated from the host contract, the 2016 Convertible Notes, and recorded as a derivative liability, thereby creating a discount
on the 2016 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 Company’s consolidated statement of
operations. On July 22, 2016, the 2016 Convertible Notes were amended to change
the final closing date from 120 days to 240 days after the initial closing of March 23, 2016. In connection with the issuance of the short-term
financing notes and the convertible notes in 2014, 2015 and 2016, the Company incurred $344,296 in issuance costs. These
costs are recorded as deferred issuance costs, which are offset against the proceeds from the convertible notes on the Company’s
balance sheet and amortized to interest expense over the term of such convertible notes. For the nine months ended September 30,
2016 and 2015, the Company has amortized $104,641 and $95,208, respectively, of issuance costs to expense. For
the nine months ended September 30, 2016 and 2015, the Company recorded non-cash interest expense related to the amortization of
the discount on the convertible notes of $448,071 and $125,448, respectively. A reconciliation of the Company’s Convertible
Notes Payable – Short Term, as of September 30, 2016, is as follows:
2014 Amended 2015 Convertible 2016 Convertible Total
Principal $ 2,198,416 $ 2,780,005 $ 410,000 $ 5,388,421
Adjustments to fair value, net of accretion 478,872 — — 478,872
Conversions (175,922 ) — — (175,922 )
Debt discount — (79,397 ) (48,587 ) (127,984 )
Deferred financing costs — (23,786 ) (4,366 ) (28,152 )
$ 2,501,366 $ 2,676,822 $ 357,047 $ 5,535,235 Interest expense, including accretion of the
2014 Amended Notes to fair value, amortization of deferred issuance costs and debt discounts related to the warrants and beneficial
conversion feature, totaled $1,065,514 and $398,775 for the nine months ended September 30, 2016 and 2015, respectively. 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. For embedded conversion features that are accounted
for as a derivative liability, the Company used a Binomial Options Pricing model. The primary assumptions used to determine
the fair values of these embedded conversion features were: risk free interest rate with a range 0.35% - 1.14%, volatility of 68.09%,
and actual term of the related convertible notes. Other Notes Payable On September 27, 2016, the Company borrowed
$100,000 in the form of a short term promissory note (the “Note”). The Note matures on October 31, 2016 and bears interest
at the rate of 5% per annum if the Note is repaid on or prior to the maturity date and 15% if the Note is not repaid by the maturity
date. |
