10. STOCKHOLDERS' EQUITY

Preferred Stock

In December 2014, the Company amended its articles of incorporation to reduce the total number of authorized shares of preferred stock after giving effect to the reverse stock split (see Note 2). The amended articles of incorporation authorize the issuance of up to 5,000,000 shares of “blank check” preferred stock, with such designation rights and preferences as may be determined from time to time by the Board of Directors.

Conversion of Series A and Series B Preferred Stock into Common Stock.

On October 9, 2014, the Company filed with the Nevada Secretary of State an Amendment (the "Series A Amendment") to the Certificate of Designation, as amended (the "Series A Certificate of Designation") of the Series A Preferred Stock. The Series A Amendment, which became effective on October 9, 2014, (i) amended the Series A Certificate of Designation to allow the stockholders representing eighty percent (80%) of the issued and outstanding shares of Series A Preferred Stock to elect to convert all issued and outstanding shares of Series A Preferred Stock into Common Stock of the Company, $0.001 par value per share (the "Common Stock"), at the then-effective "Conversion Price," as defined in the Series A Certificate of Designation, and (ii) as consideration for approving such amendment, amended the Conversion Price from $31.25 per share to $19.25 per share, except with respect to the shares of Series A Preferred Stock covered by that certain Agreement and Consent dated as of June 25, 2008 by and among the Company and certain holders of Series A Preferred Stock. The fair value of the reduction in the conversion price was determined based on the five day volume weighted average price of the Series A common stock equivalent immediately before and immediately after the reduction in conversion price. Immediately following effectiveness of the Series A Amendment, the stockholders representing over 88 percent (88%) of the then-issued and outstanding Series A Preferred Stock elected to convert all issued and outstanding Series A Preferred Stock into Common Stock at the Conversion Price, as amended. As a result of this election by the holders of Series A Preferred Stock, 1,894,969 shares of Series A Preferred Stock were converted into 4,133 shares of Common Stock.

In addition, on October 9, 2014, the Company also filed with the Nevada Secretary of State an Amendment (the "Series B Amendment") to the Certificate of Designation (the "Series B Certificate of Designation") of the Series B Preferred Stock. The Series B Amendment, which became effective on October 9, 2014, amended the Series B Certificate of Designation to allow the holders of a majority of the Series B Preferred Stock, including NJTC Investment Fund, LP, to elect to convert all issued and outstanding shares of Series B Preferred Stock into Common Stock. Immediately following effectiveness of the Series B Amendment, the stockholders representing over 93 percent (93%) of the then-issued and outstanding Series B Preferred Stock elected to convert all issued and outstanding Series B Preferred Stock into Common Stock. Each share of Series B Preferred Stock had a stated value of $100.00 (the "Series B Stated Value"), and was convertible into that number of shares of Common Stock equal to the Series B Stated Value at a conversion price of $0.90. As consideration for approving the Series B Amendment, the holders of Series B Preferred Stock received a one-time dividend equal to ten percent (10%) of the shares of Series B Preferred Stock then held. As a result of this election by the holders of Series B Preferred Stock, 84,283.99 shares of Series B Preferred Stock were issued a dividend of 10% and then the 92,712.27 shares were converted into 409,778 shares of Common Stock. As a result of the conversion, the carrying value of the Series B stock was reclassified to permanent equity.

After giving effect to the conversions of the Series A Preferred Stock and Series B Preferred Stock described above, there are no shares of Preferred Stock of the Company issued and outstanding as of December 31, 2014.

During the years ended December 31, 2014 and 2013, the Company issued 135,303 and 165,502 shares of Series A Preferred Stock respectively as payment of stock dividends at the stated value of $1.00 per share. The fair value of the non-cash stock dividends, including the value of the conversion price reduction, amounted to $238,313 and $16,601, respectively, for the years ended December 31, 2014 and 2013.

During the years ended December 31, 2014 and 2013, the Company issued 14,499.96 and 7,461.55 shares of Series B Preferred Stock respectively as payment of stock dividends at the stated value of $100.00 per share. The fair value of the non-cash stock dividends, which includes the one-time dividend disclosed above, amounted to $9,028,360 and $2,378,919, respectively, for the years ended December 31, 2014 and 2013.

Determination of Stock Dividend Fair Value

The Company utilizes a five day volume weighted average price of actual closing market prices for the Company's Common Stock as its basis for estimating the fair value of the preferred stock dividends.

Common Stock

On March 7, 2014, the Company entered into subscription agreements with certain investors providing for the issuance and sale by the Company, or the March 2014 Offering, of 1,632,000 units, or the Units, for an aggregate purchase price of $10,200,000. Each Unit is comprised of one share of the Company's common stock, priced at $6.25 per share, par value $0.001 per share and a warrant to purchase 0.50 shares of common stock at an exercise price of $7.8125 per share. The warrants are convertible into a total of 816,000 shares of common stock. Each warrant is exercisable for a period of five (5) years beginning on March 11, 2014, the date of the closing of the sale of these securities, and are only exercisable for cash if at the time of exercise there is an effective registration statement registering the warrants and shares underlying the warrants.

The Company received net proceeds from the March 2014 Offering of approximately $9,451,000 million. The net proceeds received by the Company from the March 2014 Offering will be used for building additional sales and marketing infrastructure, clinical studies, working capital and general corporate purposes.

The Company conducted the March 2014 Offering pursuant to a registration statement on Form S-1 (File No. 333-193053) which was declared effective by the Securities and Exchange Commission on February 14, 2014 and an additional registration statement on Form S-1 (File No. 333-194394) to register an additional amount of securities having a proposed maximum aggregate offering price of $2,762,500, which increased the total registered amount to $16,575,000 assuming the full cash exercise of the warrants for cash. The Company filed a final prospectus on March 7, 2014, disclosing the final terms of the March 2014 Offering.

In connection with the March 2014 Offering, on March 7, 2014, the Company entered into a placement agency agreement with Brean Capital, LLC pursuant to which the placement agent agreed to act as the Company's exclusive placement agent for the March 2014 Offering and sale of the Units.

In connection with the successful completion of the March 2014 Offering, the placement agent received an aggregate cash placement agent fee equal to 6% of the gross proceeds of the sale of the Units in the Offering and a warrant to purchase 48,960 shares of Common Stock at an exercise price of $7.50 per share exercisable for five years from the effective date of the placement agency agreement. The placement agent warrant contains piggy-back registration rights which expire on the fifth anniversary of the effective date of the registration statement. We have also agreed to reimburse the placement agent for actual out-of-pocket expenses up to a maximum of 2% of gross proceeds from the transaction. We also granted the placement agent a right of first refusal to participate in any subsequent offering or placement of our securities that takes place within twelve months following the effective date of the registration statement.

In December 2014, the Company amended its articles of incorporation to reduce the total number of authorized shares of common stock after giving effect to the reverse stock split (see Note 2). The amended articles of incorporation authorize the issuance of up to 50,000,000 shares with a par value of $0.001 per share.

In May 2010, the Company executed a purchase agreement, or the Purchase Agreement, and a registration rights agreement, or the Registration Rights Agreement, with Lincoln Park Capital Fund, LLC (“LPC”). Under the Purchase Agreement, LPC is obligated, under certain conditions, to purchase from the Company up to $6 million of our Common Stock, from time to time over a 750 day (twenty-five (25) monthly) period.

The Company had the right, but not the obligation, to direct LPC to purchase up to $6,000,000 of its Common Stock in amounts up to $50,000 as often as every two business days under certain conditions. The Company could also accelerate the amount of its common stock to be purchased under certain circumstances. No sales of shares could occur at a purchase price below $2.50 per share or without a registration statement having been declared effective. The purchase price of the shares will be based on the market prices of our shares at the time of sale as computed under the Purchase Agreement without any fixed discount. The Company may at any time at its sole discretion terminate the Purchase Agreement without fee, penalty or cost upon one business days' notice.

The Company issued 46,154 shares of our Common Stock to LPC as a commitment fee for entering into the agreement, and was obligated to issue up to an additional 46,154 shares pro rata as LPC purchases up to $6,000,000 of its Common Stock as directed by the Company. LPC may not assign any of its rights or obligations under the Purchase Agreement. During the years ended December 31, 2014 and 2013 the Company issued a total of 99,336 and 840,851 shares of Common Stock, which includes the commitment shares per the terms of the Purchase Agreement with LPC at an average price of approximately $3.09 and $2.80 per share of Common respectively. The fair value of the Commitment shares has been recorded as a cost of raising capital.

In December 2011, the Company terminated the Purchase Agreement and executed a new purchase agreement, or the New Purchase Agreement, and a registration rights agreement, or the New Registration Rights Agreement, with Lincoln Park Capital Fund, LLC (“LPC”). Under the New Purchase Agreement, LPC is obligated, under certain conditions, to purchase from the Company up to $8.5 million of our Common Stock, from time to time over a thirty-two (32) month) period.

The Company had the right, but not the obligation, to direct LPC to purchase up to $8,500,000 of its Common Stock in amounts up to $50,000 as often as every two business days under certain conditions. The Company could also accelerate the amount of its common stock to be purchased under certain circumstances. No sales of shares could occur at a purchase price below $2.50 per share or without a registration statement having been declared effective. The purchase price of the shares was based on the market prices of our shares at the time of sale as computed under the Purchase Agreement without any fixed discount. The Company could at any time at its sole discretion terminate the Purchase Agreement without fee, penalty or cost upon one business days' notice.

There was no up-front commitment fee paid to LPC for entering into the new agreement, however the Company is obligated to issue up to an additional 65,385 shares pro rata as LPC purchases up to $8,500,000 of its Common Stock as directed by the Company. LPC could not assign any of its rights or obligations under the Purchase Agreement.

The Company has not sold any shares of its Common Stock under the New Purchase Agreement since January 17, 2014. The New Purchase Agreement expired pursuant to its terms in August 2014. At the time of expiration, $2,400,000 remained unused under the New Purchase Agreement with LPC.

Stock Option Plans

As of December 31, 2014, the Company had two Long Term Incentive Plans (the “2014 Plan” and the “2006 Plan”) to attract, retain, and provide incentives to employees, officers, directors, and consultants. The Plans generally provide for the granting of stock, stock options, stock appreciation rights, restricted shares, or any combination of the foregoing to eligible participants.

A total of 3,100,000 and 1,600,000 shares of common stock are reserved for issuance under the 2014 Plan and the 2006 Plan, respectively. As of December 31, 2014 there were outstanding options to purchase approximately 927,000 and 1,375,000 shares of common stock reserved under the 2014 Plan and the 2006 Plan, respectively.

The 2014 and 2006 Plans as well as grants issued outside of the Plan are administered by the Board of Directors. The Board is authorized to select from among eligible employees, directors, advisors and consultants those individuals to whom incentives are to be granted and to determine the number of shares to be subject to, and the terms and conditions of the options. The Board is also authorized to prescribe, amend and rescind terms relating to options granted under the Plans. Generally, the interpretation and construction of any provision of the Plans or any options granted hereunder is within the discretion of the Board.

The Plan provides that options may or may not be Incentive Stock Options (ISOs) within the meaning of Section 422 of the Internal Revenue Code. Only employees of the Company are eligible to receive ISOs, while employees and non-employee directors, advisors and consultants are eligible to receive options, which are not ISOs, i.e. “Non-Qualified Options.” Because the Company has not yet obtained shareholder approval of the 2006 Plan, all options granted thereunder to date are “Non-Qualified Options” and until such shareholder approval is obtained, all future options issued under the 2006 Plan will also be “Non-Qualified Options.”

In December 2014, the Company's received shareholder approval authorizing the Board of Directors to implement the form, terms and provisions of the 2014 Plan. Accordingly, any options issued to employees under the 2014 Plan will be ISOs within the meaning of Section 422 of the Internal Revenue Code.

Stock-based Compensation

Total share-based employee, director, and consultant compensation for the years ended December 31, 2014 and 2013 amounted to approximately $695,800 and $456,900, respectively. These amounts are included in the statement of operations under the captions research and development ($143,700 and $112,500) and general and administrative ($552,100 and $344,400), respectively.

The summary of the stock option activity for the years ended December 31, 2014 and 2013 is as follows:

						Weighted
				Weighted		Average
				Average		Remaining
				Exercise		Contractual
	Shares			per Share		Life (Years)
Outstanding January 1, 2013		1,466,709		$	5.75		6.1
Granted		563,040		$	2.75		5.5
Cancelled		(89,400	)	$	3.00		—
Expired		(1,129	)	$	192.75		—
Exercised		(22,269	)	$	1.00		—
Outstanding, December 31, 2013		1,916,951		$	5.00		5.1
Granted		732,800		$	5.02		8.7
Cancelled		(227,810	)	$	3.26		—
Expired		(2,502	)	$	45.80		—
Exercised		(117,252	)	$	0.97		—
Outstanding, December 31, 2014		2,302,187		$	5.37		6.1

The fair value of each stock option was estimated using the Black Scholes pricing model which takes into account as of the grant date the exercise price (ranging from $2.88 to $8.05 per share) and expected life of the stock option (ranging from 5 to 10 years), the current price of the underlying stock and its expected volatility (approximately 28 percent), expected dividends (-0- percent) on the stock and the risk free interest rate (.93 to 2.06 percent) for the term of the stock option.

The weighted-average grant date fair value for options granted during the years ended December 31, 2014 and 2013 amounted to approximately $1.48 and $0.75 per share, respectively. As of December 31, 2014 the Company's outstanding options had exercise prices ranging from $0.88 to $539.25 per share of Common Stock.

At December 31, 2014, the aggregate intrinsic value of options outstanding and options currently exercisable amounted to approximately $10,001,000. As of December 31, 2014, the Company had options currently exercisable into an aggregate total of 1,427,657 shares of common stock which have a weighted average exercise price of $5.80 per share.

The summary of the status of the Company's non-vested options for the year ended December 31, 2014 is as follows:

				Weighted
				Average
				Grant Date
	Shares			Fair Value
Non-vested, December 31, 2012		536,720		$	0.85
Granted		732,800			1.47
Cancelled		(194,450	)		0.83
Vested		(200,540	)		1.91
Non-vested, December 31, 2013		874,530		$	1.37

As of December 31, 2014, there was approximately $389,000 of total unrecognized compensation cost related to stock options. In 2014, the Board of Directors has set aside a pool of 548,000 options to be awarded to the Company's employees if the Company achieves certain specific, predetermined milestones. In January of 2015, the Board of Directors determined that the Company had achieved certain specific 2014 milestones and awarded 441,380 of these options. The total expense associated with these options was approximately $637,000 of which approximately $486,000 has been included in the 2014 financial statements.

The Company has reserved a separate pool of 624,000 shares of restricted stock that may be issued to employees and directors as part of a long term incentive plan tied to corporate objectives.

As of December 31, 2014, the Company has the following warrants to purchase common stock outstanding:

Number of Shares		Warrant Exercise		Warrant
To be Purchased		Price per Share		Expiration Date
	70,000	$	2.500	August 16, 2015
	64,000	$	3.125	August 16, 2015
	53,335	$	3.750	August 16, 2015
	19,600	$	2.500	October 22, 2015
	7,840	$	3.125	October 22, 2015
	6,535	$	3.750	October 22, 2015
	20,000	$	2.500	November 19, 2015
	8,000	$	3.125	November 19, 2015
	6,667	$	3.750	November 19, 2015
	28,000	$	2.500	February 15, 2016
	61,600	$	3.125	February 15, 2016
	56,670	$	3.750	February 15, 2016
	9,605	$	31.250	October 24, 2016
	46,668	$	4.375	February 15, 2017
	175,680	$	3.750	June 21, 2018
	134,000	$	3.150	September 30, 2018
	48,960	$	7.500	March 11, 2019
	796,000	$	7.8125	March 11, 2019
	1,613,160