| NOTES PAYABLE | Promissory Note and Promissory Note Amendments During the year ended February 29, 2016, the
Company entered into a note purchase agreement effective July 31, 2015 (the “Note Purchase Agreement”) with one its
existing institutional investors (the “Note Holder”). Pursuant to the Note Purchase Agreement, the Company
issued and sold a non-convertible promissory note in the principal amount of $1.2 million (the “Promissory Note”) and
a warrant (the “Note Warrant”) to purchase 43,636 shares of the Company’s common stock in a private placement
(the “Note Private Placement”). The Promissory Note matured on July 30, 2016,
accrued interest at a rate of eight percent (8%) per annum and may be prepaid by the Company at any time prior to the maturity
date without penalty or premium. The Note Holder has the right at its option to exchange (the “Note Voluntary
Exchange”) the outstanding principal balance of the Promissory Note plus the Conversion Interest Amount (as defined below)
into such number of securities to be issued in the Public Offering (as defined below). Upon effectuating such Note Voluntary
Exchange, the Note Holder shall be deemed to be a purchaser in the Public Offering. “Public Offering” means a
registered offering of equity or equity-linked securities resulting in gross proceeds of at least $5.0 million to the Company;
and “Conversion Interest Amount” means interest payable in an amount equal to all accrued but unpaid interest assuming
the Promissory Note had been held from the issuance date to the maturity date. In the event the Company completes a
Public Offering and the Note Holder elected not to effectuate the Note Voluntary Exchange, then the Company shall promptly repay
the outstanding principal amount of the Promissory Note plus all accrued and unpaid interest following completion of the Public
Offering. The Note Warrant contains an adjustment clause
affecting its exercise price, which may be reduced if the Company issues shares of common stock or convertible securities at a
price below the then-current exercise price of the Note Warrant. As a result, we determined that the Note Warrant was not indexed
to the Company’s common stock and therefore should be recorded as a derivative liability. The detachable Note Warrant issued
in connection with the Promissory Note was recorded as a debt discount based on its fair value (see Note 8 for fair value measurement).
The adjustment clause lapses upon listing of the Company’s common stock on a national stock exchange such as the NASDAQ,
New York Stock Exchange or NYSE MKT. The Company evaluated the Note Voluntary Exchange
provision, which provides for settlement of the Promissory Note at an 8% premium to the Promissory Note’s stated principal
amount, in accordance with ASC 815-15-25. The Voluntary Exchange provision is a contingent put that is not clearly and closely
related to the debt host instrument and therefore was initially bifurcated and measured at fair value and recorded as a derivative
liability in the Consolidated Balance Sheet. The derivative liability was measured at fair value on an ongoing basis,
with changes in fair value recognized in the statement of operations. The proceeds of the Note Private Placement were first allocated
to the fair value of the Note Warrant in the amount of approximately $151,000 and to the fair value of the Note Voluntary Exchange
provision in the amount of approximately $228,000, with the difference of approximately $822,000 representing the initial carrying
value of the Promissory Note. Further, approximately $105,000 of debt issuance cost was recorded as additional debt discount at
issuance. On February 12, 2016, the Company entered into
an amendment (the “Note Amendment”) with the Note Holder, whereby the Company and the Note Holder agreed to extend
the maturity date of the Promissory Note from July 31, 2016 to December 31, 2016 and increase the interest rate commencing August
1, 2016 to 12% per annum. The Company also obtained the Note Holder’s consent to the consummation of the OID Note Private
Placement (as defined below), as required under the Promissory Note. Additionally, pursuant to the Note Amendment,
the Note Voluntary Exchange was modified to effect a voluntary exchange of $600,000 principal amount (“Initial Exchange Principal
Amount”) of the Promissory Note plus the Initial Conversion Interest Amount into a Qualified Offering (as defined below)
or Public Offering. “Initial Conversion Interest Amount” shall mean interest payable in an amount equal to all accrued
but unpaid interest assuming the Initial Exchange Principal Amount has been held from the issuance date to the original maturity
date of July 31, 2016 (for the avoidance of doubt, such amount that is calculated using the following formula: (a) 8% multiplied
by the Initial Exchange Principal Amount ($600,000), multiplied by (b) the actual number of days elapsed in a year of three hundred
and sixty-five (365) days, which amount shall equal $48,000 in the aggregate). “Qualified Offering” means one or a
series of offerings of equity or equity-linked securities resulting in aggregate gross proceeds of at least $2,000,000 to the Company. Further, under the modified Note Voluntary Exchange,
the Note Holder shall have the right to effect a voluntary exchange with respect to the remaining $600,000 principal amount (the
“Remaining Principal Amount”) plus the Remaining Conversion Interest Amount into a Qualified Offering or Public Offering.
“Remaining Conversion Interest Amount” shall mean interest payable in an amount equal to the sum of (A) all accrued
but unpaid interest on such portion of the Remaining Principal Amount subject to such Voluntary Exchange assuming such portion
of the Remaining Principal Amount had been held from the original maturity date of July 31, 2016 to the amended maturity date of
December 31, 2016 (for the avoidance of doubt, such amount that is calculated using the following formula: (a) 12% multiplied by
such portion of the Remaining Principal Amount subject to such Voluntary Exchange, multiplied by (b) the actual number of days
elapsed in a year of three hundred and sixty-five (365) days, which amount shall equal $30,000 in the aggregate assuming the aggregate
Remaining Principal Amount of $600,000 is used in such calculation), plus (B) all accrued but unpaid interest assuming such portion
of the Remaining Principal Amount had been held from the issuance date to the original maturity date of July 31, 2016 (for the
avoidance of doubt, such amount that is calculated using the following formula: (a) 8% multiplied by such portion of the Remaining
Principal Amount, multiplied by (b) the actual number of days elapsed in a year of three hundred and sixty-five (365) days, which
amount shall equal $48,000 in the aggregate assuming the aggregate Remaining Principal Amount of $600,000 is used in such calculation).In
consideration for entering into the Note Amendment, the Company issued the Note Holder a warrant to purchase 43,636 shares of the
Company’s common stock (the “Amendment Warrant”) in substantially the same form as the Note Warrant issued in
the Note Private Placement, provided, however, that with respect to the “full-ratchet” anti-dilution price protection
adjustments for future issuances of other Company equity or equity-linked securities (subject to certain standard carve-outs),
such price protection adjustment shall be equal to 110% of the consideration price per share of the issued equity or equity-linked
securities. The Company evaluated the Note Amendment transaction
in accordance with ASC 470-50-40-12 and determined the Note Amendment did not constitute a substantive modification of the Promissory
Note and that the transaction should be accounted for as a debt modification. The Amendment Warrant contains an adjustment
clause affecting its exercise price, which may be reduced if the Company issues shares of common stock or convertible securities
at a price below the then-current exercise price of the Amendment Warrant. As a result, the Company determined that the Amendment
Warrant was not indexed to the Company’s common stock and therefore should be recorded as a derivative liability. The fair
value of the detachable Amendment Warrant issued in connection with the Note Amendment was recorded as a debt discount. The adjustment
clause lapses upon the Company completing a Qualified Offering. Accordingly, the Company recorded a debt discount
related to the warrant liability of approximately $85,000 and a debt discount related to the Voluntary Exchange of approximately
$104,000 during the year ended February 29, 2016. Effective October 21, 2016, in connection with
the Promissory Note Exchange as referenced in Note 4, $600,000 principal amount of the Promissory Note plus $48,000 of accrued
and unpaid interest was exchanged into the Additional 2016 Unit Private Placement. Accordingly, the Company recorded a loss on
extinguishment of approximately $694,000 during the year ended February 28, 2017. On January 17, 2017, in connection with the
Debt Exchange (as described in the Convertible Note subsection below), $600,000 principal amount of the Promissory Note plus $96,000
of accrued and unpaid interest was exchanged into the Convertible Note. During the year ended February 29, 2016, the
Company recognized approximately $301,000 of interest expense related to the Promissory Note, as amended, including amortization
of debt discount of approximately $245,000 and accrued interest expense of $56,000. Additionally, the Company recognized a loss
of approximately $8,500 in the year ended February 29, 2016 due to the change in estimated fair value of the Voluntary Exchange
provision. During the year ended February 28, 2017, the
Company recognized approximately $461,000 of interest expense related to the Promissory Note, as amended, including amortization
of debt discount of approximately $367,000 and accrued interest expense of approximately $94,000. Additionally, the Company recognized
a gain of approximately $340,000 in the year ended February 28, 2017 due to the change in estimated fair value of the Voluntary
Exchange provision. OID Notes and OID Note Amendments During the year ended February 29, 2016, the
Company entered into an OID note purchase agreement dated February 12, 2016 (the “OID Note Purchase Agreement”) in
a private placement (the “OID Note Private Placement”) with various accredited investors (the “OID Note
Holders”). Pursuant to the OID Note Purchase Agreement, the Company may issue and sell non-convertible OID promissory notes
(the “OID Notes”) up to an aggregate purchase price of $1,000,000 (the “Purchase Price”) and warrants (the
“OID Warrants”) to purchase 7,273 shares of the Company’s common stock for every $100,000 of Purchase Price.
The OID Notes shall have an initial principal balance equal to 120% of the Purchase Price (the “OID Principal Amount”). During the year ended February 29, 2016, the
Company entered into OID Note Purchase Agreements between February 12 and 22, 2016 (the “February 2016 OID Note Purchase
Agreements”) with various accredited investors. Pursuant to the February 2016 OID Note Purchase Agreements, the Company received
an aggregate Purchase Price of $500,000 and issued OID Notes in the aggregate OID Principal Amount of $600,000 and OID Warrants
to purchase an aggregate of 36,367 shares of the Company’s common stock. During the year ended February 28, 2017, the
Company entered into OID Note Purchase Agreements between March 4 and 15, 2016 (the “March 2016 OID Note Purchase Agreements”)
with various accredited investors. Pursuant to the March 2016 OID Note Purchase Agreements, the Company received an aggregate Purchase
Price of $125,000 and issued OID Notes with an aggregate OID Principal Amount of $150,000 and OID Warrants to purchase 9,902 shares
of the Company’s common stock. The OID Notes mature six (6) months following
the issuance date of each OID Note and may be prepaid by the Company at any time prior to the maturity date without penalty or
premium. In the event the OID Notes are prepaid in full on or before the date that is ninety (90) days following the issuance date
of each OID Note, the prepayment amount shall be equal to 110% of the Purchase Price and in the event the OID Notes are prepaid
following such initial ninety (90) day period, the prepayment amount shall be equal to the OID Principal Balance (the “Optional
Redemption”). The Company determined the Optional Redemption feature represents a contingent call option. The Company evaluated
the Optional Redemption provision in accordance with ASC 815-15-25. The Company determined that the Optional Redemption feature
is clearly and closely related to the debt host instrument and is not an embedded derivative requiring bifurcation. Each OID Note Holder has the right at its option
to act as a purchaser in a Qualified Offering and, in lieu of investing new cash subscriptions, mechanically effect a voluntary
exchange (the “OID Note Voluntary Exchange”) of the OID Principal Amount of the OID Notes into such number of securities
to be issued in a Qualified Offering. Upon effectuating such OID Voluntary Exchange, the OID Note Holders shall be deemed to be
purchasers in the Qualified Offering. The Company evaluated the OID Note Voluntary Exchange provision, which provides for settlement
of the OID Notes at the OID Principal Amount in accordance with ASC 815-15-25. The Company determined the OID Note Voluntary Exchange
provision is a contingent put that is not clearly and closely related to the debt host instrument and therefore was initially separately
measured at fair value and will be measured at fair value on an ongoing basis, with changes in fair value recognized in the statement
of operations. The OID Warrants contain an adjustment
clause affecting their exercise price, which may be reduced if the Company issues shares of common stock or convertible
securities at a price below the then-current exercise price of the OID Warrants. As a result, we determined that the OID
Warrants were not indexed to the Company’s common stock and therefore should be recorded as a derivative liability. The
detachable OID Warrants issued in connection with the OID Notes were recorded as a debt discount based on their fair value
(see Note 8 for fair value measurement). The adjustment clause lapses upon the Company completing the Qualified
Offering. Pursuant to the February 2016 closings of the
OID Note Private Placement, the OID Principal Amount was first allocated to the fair value of the OID Warrants in the amount of
approximately $76,000, next to the value of the original issuance discount in the amount of $100,000, then to the fair value of
the OID Note Voluntary Exchange provision in the amount of approximately $135,000, and lastly to the debt discount related to offering
costs of approximately $14,000 with the difference of approximately $275,000 representing the initial carrying value of the OID
Notes. During the year ended February 29, 2016, the
Company recognized approximately $9,000 of interest expense related to the OID Notes, including amortization of debt discount.
Additionally, the Company recognized a loss of approximately $2,000 in the year ended February 29, 2016 due to the change in estimated
fair value of the OID Note Voluntary Exchange provision Pursuant to the March 2016 closings of the OID
Note Private Placement, the OID Principal Amount was first allocated to the fair value of the OID Warrants in the amount of approximately
$15,000, next to the value of the original issuance discount in the amount of $25,000, then to the fair value of the OID Note Voluntary
Exchange provision in the amount of approximately $33,000, and lastly to the debt discount related to offering costs of approximately
$2,000 with the difference of approximately $75,000 representing the initial carrying value of the OID Notes issued in March 2016. Between August 12, 2016 and August 19, 2016,
the Company entered into certain amendments (the “OID Note Amendments”), to its outstanding non-convertible OID
Notes originally issued between February 12, 2016 and March 15, 2016 (the “OID Notes”), with the holders of an aggregate
of $750,000 principal amount of OID Notes, whereby the holders of the OID Notes extended the maturity date of the OID Notes an
additional three (3) months to between November 12, 2016 and December 15, 2016. In consideration for entering into the Note Amendments,
the Company (i) increased the principal amount of the OID Notes by 10% to $825,000 in the aggregate from $750,000 in the aggregate,
(ii) issued an aggregate of 45,459 common stock purchase warrants with an exercise price of $2.00 per share and a term of five
years, and (iii) modified the voluntary exchange provision of the OID Notes by reducing the “Qualified Offering” threshold
amount to $500,000 from $2,000,000. Additionally, the Company will have the sole option to extend the maturity date of the OID
Notes an additional three (3) months in consideration for a further 10% increase in the principal amount from $825,000 to $907,500. The Company evaluated the OID Note Amendments
transactions in accordance with ASC 470-50-40-12 and determined the OID Note Amendments did not constitute a substantive modification
of the OID Notes and that the transaction should be accounted for as a debt modification. Effective October 28, 2016, in connection with
the OID Note Exchange as referenced in Note 4, $553,000 principal amount of OID Notes was exchanged into the Additional 2016 Unit
Private Placement. Accordingly, the Company recorded a loss on extinguishment of approximately $555,000. Additionally, the Company
repaid $8,000 of OID Notes. Effective November 12, 2016, the Company provided
notice that it effected its sole option to extend the maturity date (the “Second OID Note Amendment”) of its outstanding
OID Note in the aggregate of $264,000 principal amount of OID Note, whereby the holder of the OID Note extended the maturity date
of the OID Note an additional three (3) months to February 12, 2017. In consideration for entering into the Note Amendment, the
Company increased the principal amount of the OID Note by 10% or $26,400 to $290,400 in the aggregate. The Company evaluated the Second OID Note Amendment
in accordance with ASC 470-50-40-12 and determined the OID Note Amendments did not constitute a substantive modification of the
OID Notes and that the transaction should be accounted for as a debt modification. On January 17, 2017, in connection with the
Debt Exchange, the OID Note with an OID Principal Amount of $290,400 was exchanged into the Convertible Note. See Convertible Note. During the year ended February 28, 2017, the
Company recognized approximately $583,000 of interest expense related to the OID Notes, as amended, including amortization of debt
discount. Additionally, the Company recognized a gain of approximately $275,000 in the year ended February 28, 2017 due to the
change in estimated fair value of the Voluntary Exchange provision. Convertible Note On January 17, 2017, the Company entered into
an exchange agreement, pursuant to which the Company issued to a new convertible promissory note in the principal amount of $1,000,000
(the “Convertible Note”) in exchange (the “Debt Exchange”) for the cancellation of (i) $600,000 principal
amount of the Promissory Note plus $96,000 of accrued and unpaid interest, and (ii) $290,400 principal amount of the OID Note.
In consideration for the Debt Exchange, the Company issued a warrant to purchase 100,000 shares of common stock at an exercise
price of $3.00 per share and a term of five years. The Convertible Note matures on September 30,
2017, accrues interest at a rate of ten percent (10%) per annum commencing as of January 1, 2017, and may be prepaid upon 10 days’
advanced written notice by the Company at any time prior to the maturity date without penalty or premium (the “Prepayment
Option”). The holder has the right to convert the outstanding principal balance of the Convertible Note plus all
accrued and unpaid interest thereon into shares of the Company’s common stock at a conversion price per share of $2.00 (the
“Conversion Option”). The Company evaluated the Debt Exchange transaction
in accordance with ASC 470-50-40-12 and determined the Debt Exchange constituted a substantive modification and that the transaction
should be accounted for as an extinguishment. The Company determined the Prepayment Option
feature represents a contingent call option. The Company evaluated the Prepayment Option in accordance with ASC 815-15-25. The
Company determined that the Prepayment Option feature is clearly and closely related to the debt host instrument and is not an
embedded derivative requiring bifurcation. Additionally, the Company determined the Conversion Option represents an embedded call
option. The Company evaluated the Conversion Option in accordance with ASC 815-15-25. The Company determined that the Conversion
Option feature meets the scope exception from ASC 815 and is not an embedded derivative requiring bifurcation. The Company evaluated the Convertible Note for
a beneficial conversion feature in accordance with ASC 470-20. The Company determined that the effective conversion price was above
the closing stock price on the commitment date, and the Convertible Note did not contain a beneficial conversion feature. The Company recorded the Convertible Note at
fair value of approximately $986,000 with an initial debt discount of $14,000. Accordingly, in accordance with ASC 470-50-40-2,
the Company recognized a loss on extinguishment of approximately $127,000, which equals the difference between the reacquisition
price of debt and the net carrying amount of the extinguished debt. During the year ended February 28, 2017, the
Company recognized approximately $19,000 of interest expense related to the Convertible Note, including amortization of debt discount
of approximately $3,000 and accrued interest expense of approximately $16,000 The following table summarizes the notes payable:
Note Payable Convertible Note Payable Note Discount Put Exchange Feature Note Payable, Net
February 28, 2015 balance $ - $ - $ - $ - $ -
Proceeds from issuance of notes 1,800,000 - (996,595 ) 466,387 1,269,792
Amortization of debt discount - - 253,313 - 253,313
Change in fair value of voluntary exchange feature - - - 10,015 10,015
February 29, 2016 balance 1,800,000 - (743,282 ) 476,402 1,533,120
Issuance of notes 150,000 - (74,931 ) 32,496 107,565
Repayment of notes (8,000 ) - - (8,000 )
Additional debt discount upon Notes amendments 101,400 - (251,081 ) 105,586 (44,095 )
Note conversions (2,043,400 ) 1,000,000 100,327 - (943,073 )
Amortization of debt discount - - 958,053 - 958,053
Change in fair value of voluntary exchange feature - - - (614,484 ) (614,484 )
February 28, 2017 balance $ - $ 1,000,000 $ (10,914 ) $ - $ 989,086 |
