NOTE 12: RELATED PARTY TRANSACTIONS

Loans from Officers

On November 3, 2010, the Company entered into a line of credit agreement for borrowing up to $500,000 from its Chairman of the Board and Chief Executive Officer pursuant to a promissory note. The note bears a 10% interest rate per annum. An aggregate of $140,000 was funded to the Company under the line of credit as of March 31, 2011 which was repaid on May 31, 2011, including approximately $6,093 in accrued interest. As of December 31, 2011, the unpaid principal balance drawn from the line of credit was $5,078, which was fully repaid on March 31, 2012.

On July 30, 2012, the Company entered into a line of credit agreement for borrowing up to $500,000 from its Chairman of the Board and Chief Executive Officer pursuant to a promissory note. The note bears a 12% interest rate per annum. An aggregate of $79,300 was funded to the Company under the line of credit as of December 31, 2012. The principal balance of $79,300 and interest of $1,440 was fully repaid on October 11, 2012.

Exclusive License Agreement

On July 27, 2009, the Company entered into an exclusive license agreement with Ensisheim Partners LLC (“Ensisheim”), an entity solely owned by the Chairman and Chief Executive Officer of the Company and the Chief Scientific Officer of the Company, who is also the Company’s Chairman and CEO’s wife. Pursuant to that agreement, Ensisheim granted the Company an exclusive, worldwide, perpetual, irrevocable, royalty-bearing, license to the MASCT System, with the right to grant and authorize sublicenses. The license agreement provided that the Company would pay Ensisheim a royalty equal to 2% of net sales revenue, with a minimum royalty of $12,500 per fiscal quarter during the term of the agreement, which would have increased to a minimum royalty of $25,000 per fiscal quarter beginning in the quarter in which the first commercial sale of a licensed product would have taken place. From inception through December 31, 2010, the Company had incurred $16,250 in patent-related expenses under the license agreement with Ensisheim, and $0 subsequent to December 31, 2010.

On June 17, 2010, the Company and Ensisheim entered into an Assignment Agreement, whereby Ensisheim assigned to the Company all rights to the patents and patent applications underlying the MASCT System. Pursuant to the assignment, the Company will have all responsibility for prosecution, maintenance, and enforcement and will indemnify Ensisheim from any and all claims against the patent estate. Ensisheim retained no residual rights with respect to the patents and patent applications. In conjunction with the assignment, the Company terminated the exclusive license agreement between the Company and Ensisheim dated July 27, 2009. As a result of the termination, the Company has no further obligations with respect to royalty payments to Ensisheim due under the old licensing agreement. As a result, the $12,500 of patent royalty payable to Ensisheim recorded as accrued royalty payable at December 31, 2009 has been reversed through royalty expense during the second quarter of 2010.

Executive Compensation

On May 19, 2010, the Company entered into employment agreements with its Chief Executive Officer, and its Chief Scientific Officer. The annual base salaries under each agreement were calculated based on combined consideration of the success of capital raise and the operating results of the Company, and capped at $360,000, and $250,000, respectively for the two executives.

On July 22, 2010, the Company restated and amended the employment agreements with its CEO and CSO. The agreements modified the base annual salary amounts to $250,000 and $200,000, respectively, effective retroactively to May 19, 2010. For the year ended December 31, 2013, salaries and bonuses of CEO and CSO amounted to $359,250 and $267,400, of which $137,044 and $221,932 were recorded to research and development expense, respectively. Compensation expense due to options granted to CEO and CSO amounted $41,692 and $16,677, respectively, for the year ended December 31, 2013, all recorded in general and administration expense. For the year ended December 31, 2012, the total amount of salaries and bonuses of the CEO and CSO was $322,590 and $243,554, of which $161,554 and $243,554 was recorded to research and development expense, respectively. Compensation expense due to options granted to CEO and CSO amounted $42,151 and $16,861, respectively, for the year ended December 31, 2012, all recorded in general and administration expense

Share-Based Compensation

The amended employment agreement with the CEO, entered into on July 22, 2010, granted options to purchase 250,000 shares (or 565,830 shares prior to the reverse stock-split on September 28, 2010) at a price of $5.00 per share, in consideration of his service to the Company. Of these options, 25% (or 62,500 shares) vested on December 31, 2010 with the remaining 75% (or 187,500 shares) to vest in equal quarterly installments over the next three years so long as the executive remains employed with the company. These options have five-year contractual terms.

The amended employment agreement with the CSO, entered into on July 22, 2010, granted options to purchase 100,000 shares (or 226,332 shares prior to the reverse stock-split on September 28, 2010) at a price of $5.00 per share in consideration of her service to the Company. Of these options, 25% (or 25,000 shares) vested on December 31, 2010 with the remaining 75% (or 75,000 shares) to vest in equal quarterly installments over the next three years so long as the executive remains employed with the company. These options have five-year contractual terms.

The Company estimated the fair value of these options using the Black-Scholes-Merton option pricing model based on the following weighted-average assumptions:

2010 through December 2012	Employees	Employees & Officers			Directors	CEO & CSO
Date of Grant	December 2012	September 2011			September 2011-April 2012	July 2010
Fair value of common stock on date of grant	$4.11-$4.24(D)	$	0.9060	(B)	$0.9060 (B) -$6.00(C)	$	2.7560	(A)
Exercise price of the options	$4.11 - $4.24	$	1.25		$1.25-$6.00	$	5.00
Expected life of the options (years)	5.74 - 6.11		5.65		5.00 – 5.65		3.33
Dividend yield	0.00%		0.00	%	0.00%		0.00	%
Expected volatility	42.44 – 44.58%		53.90	%	53.90-62.46%		58.59	%

Risk-free interest rate	0.91-0.99%		1.08	%	0.89 – 1.08%		1.03	%
Expected forfeiture per year (%)	10.00%		10.00	%	0.00%		0.00	%
Weighted average fair value of the options per unit	$1.7426-$1.7842	$	0.3579		$0.3579-$3.0367	$	0.6744

Year Ended December 2013	Employees	Employees & Officers	Directors	CEO & CSO
Date of Grant	January - December 2013	January - June 2013	May & October 2013	March 2013
Fair value of common stock on date of grant(E)	$2.05 - $5.19(D)	$4.11 - $4.58(D)	$2.04 - $6.59 (D)	$	6.57	(D)
Exercise price of the options	$2.05 - $5.19	$4.11 - $4.58	$2.04 - $6.59	$	6.57
Expected life of the options (years)	6.09 - 6.11	5.00 – 6.11	5.00 – 5.31		5.00
Dividend yield	0.00%	0.00%	0.00%		0.00	%
Expected volatility	40.73 – 41.81%	40.96 - 41.05%	41.06-41.53%		47.09	%

Risk-free interest rate	1.73 -1.97%	1.03-1.36%	0.73 - 1.49%		1.13	%
Expected forfeiture per year (%)	10.00%	10.00%	10.00%		0.00	%
Weighted average fair value of the options per unit	$0.878 - $2.18	$1.69 - $1.89	$0.790 - $2.49	$	2.70

(A)

The fair value of the Company's common stock was derived implicitly from the public offering filed in March 2010 at $3.00 per share and from the terms of an underwritten offering contemplated in July 2010 at $6.00 per Unit that was filed in October 2010, with $2.756 per share being allocated to common stock using an iterative approach in order for the combined fair value of the common stock and warrants to equal the amount of consideration to be received for the offering.

(B)

The fair value of the Company's common stock was derived implicitly from the Private Placement during April through June 2011 at $1.25 per Unit, wherein one Unit was comprised of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $1.60 per share.

(C)

The fair value of the Company's common stock was derived implicitly from the public offering filed in February 2012 at $6.00 per share.

(D)

The fair values of the Company's common stock were derived from the closing prices on the NASDAQ Capital Market as of the dates of grant.

In accordance with the guidance provided in ASC Topic 718, Stock Compensation (formerly SFAS 123R), the compensation costs associated with these options are recognized, based on the grant-date fair values of these options, over the requisite service period, or vesting period. Accordingly, the Company recognized a compensation expense of $140,056 and $1,443,760 for the years ended December 31, 2013 and 2012, respectively.

In October 2010, the Company filed a Registration Statement on Form S-1 with the SEC. However, the market for early stage investments in medical technology transactions had deteriorated between mid-2010 and early 2011. In addition, the Company’s ability to negotiate with potential investors was limited. The Company’s cash position had also diminished since the summer of 2010 and the founders of the Company were unable to finance the Company at the level needed for growth. The withdrawal of the Registration Statement in February 2011 further weakened the impression of the Company in the market. The fair value of the Company’s common stock decreased from $2.756 in 2010 to $0.906 in 2011 primarily because the grants in 2011 relied on the arm’s-length negotiation of the private placement financing (for illiquid stock) as opposed to relying on an anticipated initial public offering (of publicly-traded stock), as was the case in 2010. The private placement transactions were between the company and over 200 accredited investors and ascribed a value of $0.906 to the Company’s common stock.

Fair value hierarchy of the above assumptions can be categorized as follows:

(1)

Level 1 inputs include:

Stock price- The fair values of the Company's common stock after the commencement of being publicly traded in November 2012 were derived from the closing prices on the NASDAQ Capital Market as of the dates of grant.

(2)

Level 2 inputs include:

Risk-free rate- The risk-free rate of return reflects the interest rate for United States Treasury Note with similar time-to-maturity to that of the options.

(3)

Level 3 inputs include:

Expected lives- The expected lives of options granted were derived from the output of the option valuation model and represented the period of time that options granted are expected to be outstanding.

Expected forfeitures per year- The expected forfeitures are estimated at the dates of grant and will be revised in subsequent periods pursuant to actual forfeitures, if significantly different from the previous estimates.

Expected volatility- We did not have a historical trading history sufficient to develop an internal volatility rate for use in the model. As a result, as required by ASC 718-10-30, the Company has accounted for the options using the calculated value method. The Company identified five to seven public entities in the similar industry for which share price information was available, and considered the historical volatilities of those public entities’ share prices in calculating the expected volatility appropriate to the Company.

Stock price- The fair values of the Company's common stock prior to the commencement of being publicly traded in November 2012 were derived implicitly from the contemplated public offerings and private placements prior to the grant dates.

The estimates of fair value from the model are theoretical values of stock options and changes in the assumptions used in the model could result in materially different fair value estimates. The actual value of the stock options will depend on the market value of the Company’s common stock when the stock options are exercised.

Fair value of the Company’s common stock determined at $6.00 per share for the April 2012 option grants

Notwithstanding that the fair market value of the Company’s common stock in September 2011 was $0.906 per share, the Company filed a Registration Statement on Form S-1 in February 2012 to offer shares of its common stock at $5.00 to $7.00 per share. This increase in share value is justified by the accomplishments achieved by the Company between September 2011 and February 2012. Specifically, the MASCT System manufacturing had been completed, supplies for the Field Experience Trial were completed and the Company had established an FDA-compliant inventory and warehousing facility. Further, the National Reference Laboratory for Breast Health, the Company’s wholly-owned subsidiary, was established as a Delaware corporation, was equipped and staffed, and the protocols and procedures needed to be a CLIA-registered facility were put in place. Moreover, the NAF cytology test, which involves cytopathology and five biomarkers of hyperplasia and one biomarker of sample integrity, was completed, tested, and validated to CLIA standards. Computer hardware and software was acquired, set up, made operational, and the ForeCYTE report template, with unique reporting information for the requesting physician and a patient letter template, were created. The company explored and identified a technology for the ArgusCYTE test, negotiated a supply agreement with the supplier, and tested and validated the test. An ArgusCYTE report template was also established and a new reporting scheme invented and a patent application filed.

Further, the Company negotiated the acquisition of the FullCYTE Microcatheter System from Hologics, reestablished the supply chain and began preparing for a commercial launch later in 2012 or early 2013. In doing so, the Company increased its U.S. patent portfolio from 5 to 31 and its total portfolio of patents and applications to over 120. The Hologic patent estate also contains the key patents that permit microcatheter-based intraductal treatment of cancer and pre-cancer. The Company also prepared marketing documents for the launch of the ForeCYTE and ArgusCYTE tests, which occurred in December 2011. The Company launched a clinical trial of the FullCYTE microcatheter to establish the feasibility of performing Next Generation Sequencing on the samples obtained with the microcatheter, negotiated the acquisition of the NextCYTE technology, and is conducting a study of the utility of the technology in providing superior information in the setting of cancer diagnosis and treatment selection.

The Company also established third-party relationships to perform the reimbursement billing in anticipation of the commercial launch and to permit electronic remittance of testing revenue. The Company launched a Field Test Experience limited launch of both the ForeCYTE and ArgusCYTE tests on schedule in December 2011 and has seen significant market acceptance of both tests from the doctors and clinics using the tests. The Company passed a CLIA inspection and became CLIA-certified, has obtained several state licenses and has pending applications in all remaining states where licensure is required. Finally, the Board of Directors and scientific advisory board were each strengthened with the addition of key new executives and scientists.

The Board of Directors considered each of the foregoing achievements, and considered input from the Company’s investment bankers, in determining that the value of the Company supports a valuation of $5.00 to $7.00 per share of the Company’s common stock.

Options issued and outstanding as of December 31, 2013 and their activities during the twelve months then ended are as follows:

	Number of Underlying Shares	Weighted-Average Exercise Price Per Share		Weighted-Average Contractual Life Remaining in Years
Outstanding as of January 1, 2013	1,052,137	$	3.79
Granted	1,507,584		4.86
Expired	(1,625)		6.00
Forfeited	(269,831)		4.40
Exercised	(5,546)		1.79
Outstanding as of December 31, 2013	2,282,719		4.43	7.89
Exercisable as of December 31, 2013	1,063,612		4.49	6.34
Vested and expected to vest ⁽¹⁾	2,125,932		4.43	7.79

(1) Includes vested shares and unvested shares after a forfeiture rate is applied.

As of December 31, 2013 and 2012, the aggregate intrinsic value of options outstanding was $3,656,782 and $1,150,416, respectively.

Issuance of Restricted Common Stock for Director’s Compensation

On October 10, 2013, the Company issued 24,510 shares of restricted stock with a grant date value of $50,000 or $2.04 per share to a new board member. The restriction will be removed quarterly for a proportional number of granted shares over the first year of service on the board, and the grant date value of such shares will be expensed in the quarter the restriction is removed. For the year ended December 31, 2013, $11,248 was recorded through the Company’s general and administration expense.