NOTE 15. 2014 FINANCINGS

March 2014 Financing

In March 2014, the Company signed agreements to raise $11.7 million (“March 2014 Financing”) through the sale of its newly designated Series C 8% Convertible Preferred Stock (“Series C Preferred Stock”), convertible into shares of the Company’s common stock, at an initial conversion price per share equal to the lower of $3.40 and 85% of the offering price in a future public equity offering of at least $10 million, a five-year warrant to purchase 50% or 100% (as per the agreement with each investor) of a share of common stock at an exercise price equal to the lower of $4.25 and 125% of the conversion price of the Preferred C Stock then in effect, and a five-year warrant to purchase 50% or 100% (as per the agreement with each investor) of its shares of common stock, at an exercise price equal to the lower of $5.10 and 150% of the conversion price of the Series C Preferred Stock then in effect (collectively, the “March 2014 Warrants”). One investor defaulted on payments of $1 million under a short-term promissory note, resulting in rejection by the Company of the investor’s participation in the March 2014 Financing. A total of approximately $0.4 million received from that investor during the second quarter of 2014 was applied for participation in later financing done by the Company (refer to Note 15 (d) (5)). In addition, two board members who participated in the March 2014 Financing and paid for their securities by fees earned for service as members of the Board of Directors, reduced their subscriptions by $20,000 each, resulting in the cancellation of an aggregate of 40 shares of the Series C Preferred Stock and the related warrants.

The Series C Preferred Stock carries a dividend of 8% per annum, based on the stated value of $1,000 per share, payable in cash or, at the option of the Company and subject to the satisfaction of certain conditions, in shares of common stock. Dividends on the Series C Preferred Stock accrue from the date of issuance and are paid on the date of conversion thereof. As of December 31, 2015 and 2014, a total of $0 and $0.3 million, respectively, was recorded for dividend liability.

In total, the Company issued 10,680 shares of Series C Preferred Stock, 1,680,945 March 2014 Warrants at an exercise price of $4.25 and 1,680,945 March 2014 Warrants at an exercise price of $5.10, for $1,000 per share. The Company received total net proceeds of approximately $10.2 million after deduction of related fees and expenses of $0.2 million, which were allocated to the value of the Series C Preferred Stock, and $0.3 million which was offset against existing debt to the Company’s employees, consultants, officers and directors. Additional offering expenses of $0.4 million were allocated to the March 2014 Warrants and recorded in the consolidated statement of operations during the year ended December 31, 2014. Included in net proceeds, was a deposit of $0.5 million the Company received in November and December 2013. Furthermore, in the third quarter of 2014, the Company accounted for the value of additional warrants to be issued to its placement agent. See Note 10.

The March 2014 Warrants were accounted for as a derivative liability, as both the exercise price and the number of warrants issued were subject to certain anti-dilution adjustments. See Notes 5 and 10. Therefore, on March 10, 2014 (agreement date), the March 2014 Warrants were recorded at their fair value of $7.4 million. The Series C Preferred Stock was recorded as the difference between overall consideration and the fair value of the March 2014 Warrants on grant date. Initially, a total amount of $3.1 million was recorded as mezzanine equity according to ASC 480 “Distinguishing Liabilities from Equity”, as such shares bear clauses allowing for a future adjustment to the number of shares issued to investors. As per above, such adjustment may only increase the number of shares issued, as the conversion price may only be reduced from the initially set level of $3.40.

In connection with the March 2014 Financing, the Company filed a Registration Statement on Form S-1 (Registration No. 333-195251) to register the resale of the shares of common stock underlying the Series C Preferred Stock, the shares of common stock underlying the March 2014 Warrants and certain shares of common stock that may be issuable as payment for dividends on the Series C Preferred Stock, which registration statement was declared effective by the SEC on April 25, 2014. Subsequently, and in accordance with the terms of the Series C Preferred Stock, such registration triggered a reduction of the conversion price of the Series C Preferred Stock from $3.40 to $2.71 and the exercise price of the warrants was reduced from $4.75 to $3.39 and from $5.10 to $4.07, as applicable. In addition, the number of March 2014 Warrants was adjusted to reflect the decrease in exercise price. Consequently, as of May 2, 2014, an additional 786,977 shares of common stock may be issuable upon the conversion of the Series C Preferred Stock, an additional 62,958 shares may be issuable as payment for dividends thereon (the dividend amount represents the annual 8% accrual for the additional common stock to be issued due to ratchet triggering event) and additional 427,983 March 2014 Warrants at an exercise price of $3.39 and 427,983 additional March 2014 Warrants at an exercise price of $4.07 were issued.

During the three month period ended June 30, 2014, prior to its reclassification out of mezzanine into equity, 4,168 shares of the Series C Preferred Stock were converted into 1,529,262 shares of the Company’s common stock. In addition, during the six-month period ended December 31, 2014, after reclassification from mezzanine into equity, certain investors elected to convert an additional 3,680 shares of the Series C Preferred Stock. As a result, 1,446,057 shares of common stock were issued by the Company.

On June 23, 2014, the holders of the Series C Preferred Stock agreed to amend the Company’s Certificate of Designation of Preferences, Rights and Limitations of the Series C Preferred Stock (“Certificate of Designations”). Pursuant to the amendment, the holders of the Series C Preferred Stock were entitled, subject to the limitations on beneficial ownership contained in the Certificate of Designation, to vote on all matters as to which holders of the Company’s shares of common stock are entitled to vote. Each share of the Series C Preferred Stock entitles its holder to such number of votes per share equal to the number of shares of common stock, which would be obtained upon the conversion of such share of the Series C Preferred Stock as if converted at market value of the common stock on the date of issuance. In addition, pursuant to the amendment, in the event of future adjustments, the conversion price of the Series C Preferred Stock will not be less than $0.25. As a result of the amendment, which limited the down round ratchet provision and fixed the maximum number of shares to be issued upon conversion, all then outstanding Series C Preferred Stock, in the total value of $1.9 million, was reclassified from mezzanine equity into stockholders equity of the Company.

In consideration for the consent of the Series C Preferred Stockholders to amend the Certificate of Designation, and pursuant to the consent of greater than 67% of the holders of the securities issued in the Company’s March 2014 Financing allowing issuance of new securities by the Company, on June 23, 2014, the Company agreed to issue two-year warrants (the “June Warrants”) to purchase up to an aggregate of 427,179 shares of the Company’s common stock to the original purchasers of the Series C Preferred Stock, at an exercise price of $3.00 per share.

The June Warrants were valued at approximately $0.4 million, using the Black-Scholes option pricing model, using the following assumptions: volatility of 81.38%, risk free interest rate of 0.45%, grant date stock price of $2.60, expected term of 2 years and 0% dividend yield. The June Warrants were accounted for within the Company’s equity. The Company accounted for the amendment of its Series C Preferred Stock, classified as mezzanine equity prior to such amendment, as a modification of terms, as the additional fair value granted to investors for such modification was less than 10% of pre-amendment value of the Series C Preferred Stock. As such, as of December 31, 2014, the Company recognized approximately $0.4 million, which was the total value of its June Warrants, as a deemed dividend.

On August 13, 2014, pursuant to an amendment agreement, the Company and all of the holders of March 2014 Warrants agreed to amend and restate the March 2014 Warrants to remove all anti-dilution provisions, and make certain other changes, in consideration for which, the exercise prices were reduced from $3.39 to $3.00 and from $4.07 to $3.50, and the number of warrants was increased from 2,108,938 to 2,381,342 and from 2,108,938 to 2,449,380, respectively. In addition, the Company issued to such holders a total of 224,127 of its unregistered shares of common stock, in consideration for their consent to modify such warrants (the “Amendment Agreement”).

The Company accounted for the Amendment Agreement using the guidance in ASC 815 “ Derivatives and Hedging ” and ASC 470-50 “ Debt - Modifications and Extinguishments ”. Under ASC 470-50-40, as the overall modification was significant, extinguishment accounting was applied. As such, the difference between the fair value of the March 2014 Warrants just prior to the amendment and the fair value of the restated warrants and the restricted shares of common stock issued to investors, is to be recognized as a gain or a loss. As of August 13, 2014, the fair value of the original March 2014 Warrants was determined to be $7.9 million, the fair value of the restated warrants was determined to be $10.2 million and the value of the unregistered shares of common stock was approximately $0.8 million. As a result, a non-operating expense of $3.1 million was recorded in the consolidated statement of operations to reflect the extinguishment. Additionally, a total non-operating expense of $2.3 million was recorded in the third quarter of 2014, representing the revaluation of the March 2014 Warrants derivative liability to its fair value just prior to its amendment on August 13, 2014. Since the warrants no longer contain the anti-dilution protection provisions after the amendment, they were no longer classified as liabilities, and therefore the fair value of the restated March 2014 Warrants of $10.2 million was reclassified to stockholders’ equity.

The fair value of the March 2014 Warrants was estimated using the Monte Carlo simulation and the Black-Scholes Model. The following assumptions were used to value the original warrants: volatility: 74.80%, share price: $4.11, risk free interest rate: 0.46%-0.52%, expected term: 2.50 years and dividend yield: 0%. The following assumptions were used to value the restated warrants: volatility: 74.40%, share price: $4.11, risk free interest rate: 0.71%, expected term: 2.03-2.08 years and dividend yield: 0%.

On August 22, 2014, the Company filed a registration statement on Form S-3 (Registration No. 333-198309) to register for resale the additional shares of common stock issuable upon conversion of shares of the Series C Preferred Stock based on the adjusted conversion price of $2.71 per share, shares of common stock that may be issued as payment for dividends on the additional Series C Preferred Stock, payable through May 2, 2015, shares of common stock issuable upon exercise of the June Warrants, and the shares of its common stock issuable upon exercise of the Company’s restated warrants. This registration statement on Form S-3 was declared effective on October 28, 2014, and subsequently, as a result, and in accordance with the terms of the Series C Preferred Stock, such registration triggered a reduction of the conversion price of the Series C Preferred Stock from $2.71 to $2.43. See Note 10 (b). In addition, as of December 31, 2014, the Company had paid $68,000 for its obligation to compensate its holders for the delayed filing of its registration statement, and $54,000 remained accrued for potential future obligations.

August 2014 Financing

In August 2014, the Company entered into an investment agreement with one of its investors. Pursuant to the agreement, the Company received gross proceed of $2.0 million upon closing. As consideration, the Company issued the investors 500,000 shares of its common stock, at $4.00 per share, and granted the investor 250,000 warrants (see Note 10 (b)(5)). Total issuance costs related to this financing were insignificant.

September 2014 Financing

In September 2014, the Company entered into an investment agreement with one of its investors. Pursuant to the agreement, the Company received gross proceed of approximately $0.4 million upon closing. As consideration, the Company issued the investors 96,000 shares of its common stock, at $4.00 per share, and granted the investor 162,000 warrants (see Note 10 (b)(5)). Total issuance costs related to this financing were insignificant.

November 2014 Convertible Promissory Note

On November 12, 2014, the Company received $1.0 million in cash proceeds resulting from a bridge financing (“Bridge”) by an investor who previously invested $2.0 million in August 2014. Under the agreement, the Company issued to the investor a convertible promissory note (the “Note”), bearing an annual interest rate of 12%. The Note was subordinated to the Company’s senior secured term loan from its lender, MidCap. If the Company completed an offering of common stock prior to November 6, 2019, the maturity date of the Note, the balance remaining outstanding under the Note would automatically convert into shares of its common stock, at the price per share of common stock sold in its next financing transaction. In addition, as consideration for the bridge financing, the Company entered into a side letter and agreed that if the price per share in its next public offering was less than $4.00 per share (the subscription price paid by such investor in the August 2014 Financing), it will issue additional shares of common stock to the investor in an amount such that the total subscription price paid in August 2014, when divided by the total number of shares issued to such investor will result in an actual price paid per share of common stock equal to such lower price. As a result, on November 12, 2014, the Company recognized a derivative liability, and a debt discount, in the same amount of approximately $0.7 million, to be accreted to interest expense through the maturity date of the Note, or upon conversion, if earlier. The derivative liability would be marked to market through the consolidated statement of operations at each reporting period until the next financing transaction of common stock.

Furthermore, in connection with the Note, the Company accelerated the vesting of 433,333 restricted shares held by Melini, a related party (see Note16), and of 433,333 restricted shares previously granted to another existing investor, as a fee for assisting the Company in obtaining the Bridge. Upon the acceleration of vesting, $2.2 million of previously unrecognized expense relating to these restricted shares was recorded as debt issuance costs which will be amortized as interest expense over the term of the debt, or to conversion, if earlier.

On November 20, 2014, the Company completed an underwritten offering of common stock that triggered the conversion of the Note, re-measurement and reclassification of the derivative liability and the expensing of the related debt discount and debt issuance costs. Prior to the reclassification of the derivative liability into equity the derivative was revalued and a derivative liability expense of $80,000 was recorded in the consolidated statement of operations. Subsequently, the total derivative liability of approximately $0.8 million was re-classified to equity. Additionally, the total debt discount of approximately $0.7 million and debt issuance costs of $2.2 million were amortized to interest expense in November 2014.

November 2014 Underwritten Offering

On November 20, 2014, the “Company” entered into an underwriting agreement (the “Underwriting Agreement”) with National Securities Corporation, as representative of the several underwriters named in Schedule VI to the Underwriting Agreement (the “Underwriters”), relating to an underwritten public offering of 3,450,000 units, with each unit consisting of (i) one share of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), and (ii) a warrant to purchase 0.25 of a share of Common Stock, at a public offering price of $2.50 per unit, less underwriting discounts and commissions (the “Offering”). Under the terms of the Underwriting Agreement, the Company has granted the Underwriters an option, exercisable for 30 days subsequent to the closing of the transaction to purchase up to an additional 517,500 units to cover over-allotments, if any.

The warrants issued in the offering are exercisable for a period of three years following the issuance, at an exercise price of $3.75 per share. The warrants were not be listed on The NASDAQ Capital Market or any other exchange and no trading market for the warrants is expected to develop. The shares of Common Stock and warrants will be mandatorily separable immediately upon issuance.

On November 26, 2014, the Company announced the completion of the underwriter’s partial exercise of the over-allotment option to purchase 459,697 units, each consisting of (i) one share of common stock of the Company and (ii) a warrant to purchase 0.25 of a share of common stock of the Company, at a public offering price of $2.50 per share.

The gross proceeds received by the Company from the primary offering, the partial exercise of overallotment shares and conversions of board fees owed for past services was $9.8 million. Underwriting commissions of approximately $0.7 million as well as additional financing fees of approximately $0.4 million offset the total gross proceeds. The offering resulted in the issuance of 3,909,697 shares of common stock and 1,078,725 warrants. The fair value of the issued warrants was approximately $1.4 million, which was determined using the Black-Scholes option pricing model, using the following assumptions: stock price of $2.75, expected term of 3.0 years, volatility of 84.66%, risk-free rate of 0.94%.