COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION

12 Months Ended

Dec. 31, 2017

LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' DEFICIT

COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION

NOTE 10

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COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION

Description of the rights attached to the Common Stock

Each share of Common Stock entitles the holder to one vote, either in person or by proxy, on each matter submitted to the approval of the Company’s stockholders. The holders of Common Stock are not permitted to vote their shares cumulatively. As described below, holders of Preferred Stock are entitled to vote together with the holders of Common Stock on an as-converted basis. Accordingly, the holders of the Company's Common Stock together with the holders of the Preferred Stock who hold, in the aggregate, more than fifty percent of the total voting rights can elect all of the directors and, in such event, the holders of the remaining shares will not be able to elect any of such directors. The vote of the holders of a majority of the issued and outstanding shares of Common Stock, voting together with the holders of the Preferred Stock on an as converted basis, are entitled to vote thereon is sufficient to authorize, affirm, ratify or consent to any act or action submitted to the vote of the Company’s stockholders, except as otherwise provided by law.

Description of the rights attached to the Series A Preferred Stock

Holders of Series A Preferred Stock are entitled to receive cumulative dividends at a rate of 5% per annum, based on the stated value per share of the Series A Preferred Stock, which was initially $1,000 per share. Dividends on the Series A Preferred Stock are payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on March 31, 2013, and on each conversion date (with respect to the shares of Series A Preferred Stock being converted). Until September 13, 2013, dividends were payable only in cash. Thereafter, dividends on the Series A Preferred Stock became payable, at the option of the Company, in cash and/or, if certain conditions are satisfied (including, among others, that the volume weighted average trading price for the Common Stock on its principal trading market is equal to or greater than 110% of the then current conversion price for the Series A Preferred Stock for five consecutive trading days prior to the dividend payment date), in shares of Common Stock, valued at the then current conversion price of the Series A Preferred Stock. The Company will incur a late fee of 9% per annum, payable in cash, on dividends that are not paid within three trading days of the applicable dividend payment date. During the years ended December 31, 2017, 2016 and 2015 the Company paid an aggregate of $5,731 $13,529 and $57,061and accrued a cash dividend in the amount of $9,400 $4,700 and 0$, respectively, in cash dividends to its Series A Preferred Stockholders.

The Company may become obligated to redeem the Series A Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, a material breach by the Company of certain contractual obligations to the holders of the Series A Preferred Stock, the occurrence of a change in control of the Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holder of Series A Preferred Stock will have the option to require the Company to redeem such holder’s shares of Series A Preferred Stock for a redemption price payable in shares of Common Stock or receive an increased dividend rate of 9% on all of such holder’s outstanding Series A Preferred Stock.

Subject to certain conditions, the Company will have the option to force the conversion of the Series A Preferred Stock (in whole or in part) if the volume weighted average price for the Common Stock on its principal trading market exceeds $11.60 for each of any 20 trading days during any 30 consecutive Trading Day period and the average daily dollar trading value for the Common Stock during such 30 day period exceeds $100,000.

If the Company fails to timely deliver certificates for shares of Common Stock issuable upon conversion of the Series A Preferred Stock (the “Series A Conversion Shares”) and, as a result, the holder is required by its brokerage firm to purchase shares of Common Stock to deliver in satisfaction of a sale by such holder of the Series A Conversion Shares (a “Buy-In”), the Company will be required to: (a) pay the converting holder in cash an amount equal to the amount, if any, by which such holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds the product of (i) the aggregate number of Series A Conversion Shares due to the holder, multiplied by (ii) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions); and (b) at the option of such holder, either reissue (if surrendered) the shares of Series A Preferred Stock equal to the number of shares of Series A Preferred Stock submitted for conversion (in which case, such conversion will be deemed rescinded) or deliver to such holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements.

In addition, the Company will be required to pay partial liquidated damages of $10 for each $1,000 of stated value of any shares of Series A Preferred Stock which have been converted by a holder and in respect of which the Company fails to deliver Series A Conversion Shares by the eighth trading day following the applicable conversion date.

Subject to the beneficial ownership limitation described below, holders of Series A Preferred Stock will vote together with the holders of Common Stock on an as-converted basis. Holders will not be permitted to convert their Series A Preferred Stock if such conversion would cause such holder to beneficially own more than 4.99% of the outstanding number of shares of Common Stock outstanding after giving effect to such conversion (subject to increase to 9.99%, at the option of the holder, upon no less than 61 days prior written notice to the Company) (the “Beneficial Ownership Limitation”). In addition, no holder may vote any shares of Series A Preferred Stock (on an as converted to Common Stock basis) in excess of the Beneficial Ownership Limitation.

Subject to certain limitations, so long as any initial Series A Unit purchaser holds any shares of Series A Preferred Stock, if (1) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (2) a Purchaser then holding Series A Preferred Stock, Warrants, Conversion Shares or Warrant Shares (defined below) reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such purchaser, then the purchaser will be permitted to require the Company to amend the terms of this transaction (only with respect to such purchaser) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such purchaser).

The conversion price of the shares of Series A Preferred Stock that were included in the Series A Units is subject to adjustment for certain issuances of Common Stock or other securities of the Company at an effective price per share that is lower than the conversion price then in effect ($4.50 per share at December 31, 2017 and 2016, respectively), as well as for stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders.

Description of the rights attached to the Series B Preferred Stock

Holders of Series B Preferred Stock are entitled to receive cumulative dividends at a rate of 5.5% per annum, based on the stated value per share of Series B Preferred Stock. Dividends on the Series B Preferred Stock are payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on September 30, 2014, and on each conversion date (with respect to the shares of Series B Preferred Stock being converted). For so long as required under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock, dividends on Series B Preferred Stock will be payable only in shares of Common Stock. Thereafter, dividends on the Series B Preferred Stock will be payable, at the option of the Company, in cash and/or, if certain conditions are satisfied, shares of Common Stock or a combination of both. Shares of Common Stock issued as payment of dividends will be valued at the lower of (a) the then current conversion price of the Series B Preferred Stock or (b) the average of the volume weighted average price for the Common Stock on the principal trading market therefor for the 10 trading days immediately prior to the applicable dividend payment date. The Company will incur a late fee of 9% per annum, payable in cash, on dividends that are not paid within three trading days of the applicable dividend payment date. During the years ended December 31, 2017, 2016, and 2015 the Company issued a total of 359,505, 272,282 and 168,926 shares of Common Stock, respectively at an estimated fair value of $854,647, $647,215 and $390,219, respectively as in kind dividends to holders of Series B Preferred Stock.

Subject to certain ownership limitations described below, the Series B Preferred Stock is convertible at the option of the holder at any time and from time to time into shares of Common Stock at a conversion price of $4.5 per share (the original conversion price was $5.8 per share, during 2016 the conversion price was decrease to $4.5 per share as a result of the issuance of series C) (calculated by dividing the stated value per share of Series B Preferred Stock, which is initially $1,000, by the conversion price per share). The conversion price of the Series B Preferred Stock is subject to adjustment for certain issuances of Common Stock or other securities of the Company at an effective price per share that is lower than the conversion price then in effect, as well as for stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders. In addition, the holders of Series B Preferred Stock will be entitled to receive any securities or rights to acquire securities or property granted or issued by the Company pro rata to the holders of Common Stock to the same extent as if such holders of Series B Preferred Stock had converted all of their shares of Series B Preferred Stock prior to such distribution. In the event of a fundamental transaction, such as a merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations of the Company, the holders of Series B Preferred Stock will be entitled to receive, upon conversion of their shares of Series B Preferred Stock, any securities or other consideration received by the holders of the Common Stock pursuant to the fundamental transaction.

Subject to certain conditions contained in the Certificate of Designations, Preferences and Rights relating to the Series B Preferred Stock, the Company will have the option to force the conversion of the Series B Preferred Stock (in whole or in part) if (a) the volume weighted average price for the Common Stock on its principal trading market exceeds $10.00 for each of any 20 trading days during any 30 consecutive Trading Day period and the average daily dollar trading value for the Common Stock during such 30 day period exceeds $50,000 or (b) the Company receives approval to list the Common Stock on a national securities exchange.

If the Company fails to timely deliver certificates for shares of Common Stock issuable upon conversion of the Series B Preferred Stock (the “Series B Conversion Shares”) which results in a Buy-In, the Company will be required to: (a) pay the converting holder in cash an amount equal to the amount, if any, by which such holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds the product of (i) the aggregate number of Series B Conversion Shares due to the holder, multiplied by (ii) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions); and (b) at the option of such holder, either reissue (if surrendered) the shares of Series B Preferred Stock equal to the number of shares of Series B Preferred Stock submitted for conversion (in which case, such conversion will be deemed rescinded) or deliver to such holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements.

In addition, the Company will be required to pay partial liquidated damages of $10 for each $1,000 of stated value of any shares of Series B Preferred Stock which have been converted by a holder and in respect of which the Company fails to deliver Series B Conversion Shares by the eighth trading day following the applicable conversion date.

As long as at least 35% of the originally issued shares of Series B Preferred Stock are outstanding, without the written consent of the holders of a majority in stated value of the outstanding Preferred Stock, the Company will not be permitted to, among other things, incur indebtedness or liens not permitted under the Certificate of Designations for the Series B Preferred Stock; repay, repurchase, pay dividends on or otherwise make distributions in respect of any shares of Common Stock or other securities junior to the Series B Preferred Stock; or enter into certain transactions with affiliates of the Company.

Subject to any limitations under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock, the Company may become obligated to redeem the Series B Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, a material breach by the Company of certain contractual obligations to the holders of the Series B Preferred Stock, the occurrence of a change in control of the Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holder of Series B Preferred Stock will have the option to require the Company to redeem such holder’s shares of Series B Preferred Stock for a redemption price payable in shares of Common Stock or receive an increased dividend rate of 9% on all of such holder’s outstanding Series B Preferred Stock.

Subject to the Beneficial Ownership Limitation, holders of Series B Preferred Stock will vote together with the holders of Common Stock and Series A Preferred Stock on an as-converted basis. Holders will not be permitted to convert their Series B Preferred Stock if such conversion would cause such holder to beneficially own shares of outstanding Common Stock in excess of the Beneficial Ownership Limitation.

Subject to certain limitations, so long as any Purchaser holds any shares of Series B Preferred Stock, if (a) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (b) a Purchaser then holding Series B Preferred Stock, Series B Warrants, Conversion Shares or Warrant Shares (defined below) reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such Purchaser, then the Purchaser will be permitted to require the Company to amend the terms of this transaction (only with respect to such Purchaser) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such Purchaser).

Description of the rights attached to the Series C Preferred Stock

Holders of Series C Preferred Stock are entitled to receive cumulative dividends at a rate of 5.5% per annum, based on the stated value per share of Series C Preferred Stock. Dividends on the Series C Preferred Stock are payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on June 30, 2016, and on each conversion date (with respect to the shares of Preferred Stock being converted). For so long as required under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock or Series B Preferred Stock, dividends will be payable only in shares of Common Stock. Thereafter, dividends on the Series C Preferred Stock will be payable, at the option of the Company, in cash and/or, if certain conditions are satisfied, shares of Common Stock or a combination of both. Shares of Common Stock issued as payment of dividends will be valued at the lower of (a) the then current conversion price of the Series C Preferred Stock or (b) the average of the volume weighted average price for the Common Stock on the principal trading market therefor for the 10 trading days immediately prior to the applicable dividend payment date. The Company will incur a late fee of 9% per annum, payable in cash, on dividends that are not paid within three trading days of the applicable dividend payment date. During the years ended December 31, 2017, and 2016, the Company issued a total of 237,169 and 64,148 shares of Common Stock, respectively at an estimated fair value of $566,033 and $152,480, as in kind dividends to holders of Series C Preferred Stock

The Series C units, each consisting of (i) one share of our newly designated Series C 5.5% Convertible Preferred Stock, par value $0.001 per share are convertible into shares of our common stock, par value $0.001 per share, at an initial conversion price of $4.50 per share, (ii) a five year warrant to purchase, at an exercise price of $4.50 per share, up to such number of shares of our common stock issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-1 Warrant”) and (iii) a five year warrant to purchase, at an exercise price of $7.75 per share, up to such number of shares of our common stock issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-2 Warrant” and, together with the Series C-1 Warrants, collectively, the “Series C Warrants”).

Subject to any limitations under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock or Series B Preferred Stock, the Company may become obligated to redeem the Series C Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, a material breach by the Company of certain contractual obligations to the holders of the Series C Preferred Stock, the occurrence of a change in control of the Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holder of Series C Preferred Stock will have the option to require the Company to redeem such holder’s shares of Preferred Stock for a redemption price payable in shares of Common Stock or receive an increased dividend rate of 9% on all of such holder’s outstanding Series C Preferred Stock.

Subject to certain conditions contained in the Certificate of Designations, Preferences and Rights relating to the Series C Preferred Stock (the “Certificate of Designations”), the Company will have the option to force the conversion of the Series C Preferred Stock (in whole or in part) if (a) the volume weighted average price for the Common Stock on its principal trading market exceeds $7.00 for each of any 20 trading days during any 30 consecutive trading day period and the average daily dollar trading value for the Common Stock during such 30 day period exceeds $50,000 or (b) the Company receives approval to list the Common Stock on a national securities exchange.

Subject to certain exceptions contained in the Certificate of Designations, if the Company fails to timely deliver certificates for shares of Common Stock issuable upon conversion of the Series C Preferred Stock (the “Conversion Shares”) and, as a result, the holder is required by its brokerage firm to purchase shares of Common Stock to deliver in satisfaction of a sale by such holder of the Conversion Shares (a “Buy-In”), the Company will be required to: (a) pay the converting holder in cash an amount equal to the amount, if any, by which such holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds the product of (i) the aggregate number of Conversion Shares due to the holder, multiplied by (ii) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions); and (b) at the option of such holder, either reissue (if surrendered) the shares of Series C Preferred Stock equal to the number of shares of Series C Preferred Stock submitted for conversion (in which case, such conversion will be deemed rescinded) or deliver to such holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements. In addition, the Company will be required to pay partial liquidated damages of $10 for each $1,000 of stated value of any shares of Series C Preferred Stock which have been converted by a holder and in respect of which the Company fails to deliver Conversion Shares by the fifth trading day following the applicable conversion date and the Company will continue to pay such partial liquidated damages for each trading day after such eighth trading day until such certificates are delivered or the holder rescinds such conversion.

As long as at least 35% of the originally issued shares of Series C Preferred Stock are outstanding, without the written consent of the holders of a majority in stated value of the outstanding Series C Preferred Stock, the Company will not be permitted to, among other things, incur indebtedness or liens not permitted under the Certificate of Designations; repay, repurchase, pay dividends on or otherwise make distributions in respect of any shares of Common Stock or other securities junior to the Series C Preferred Stock; enter into certain transactions with affiliates of the Company; or enter into any agreement with respect to the foregoing.

Subject to the beneficial ownership limitation described below, holders of Series C Preferred Stock will vote together with the holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock on an as-converted basis. Holders will not be permitted to convert their Series C Preferred Stock if such conversion would cause such holder to beneficially own more than 4.99% of the outstanding Common Stock (subject to increase to 9.99%, at the option of the holder, upon no less than 61 days prior written notice to the Company) (the “Beneficial Ownership Limitation”). In addition, no holder may vote any shares of Series C Preferred Stock (on an as-converted to Common Stock basis) in excess of the Beneficial Ownership Limitation.

Subject to certain limitations, so long as any purchaser holds any shares of Series C Preferred Stock, if (a) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (b) a purchaser then holding Series C Preferred Stock, Warrants, Conversion Shares or Warrant Shares (defined below) reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such purchaser after taking into account all of the terms and conditions of the terms granted to the purchasers under the purchase agreement and the terms granted in such subsequent issuance or sale, including all of the components of the Series C Units and of the securities or units involved in such subsequent issuance or sale, then the purchaser will be permitted to require the Company to amend the terms of this transaction (only with respect to such purchaser) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such purchaser).

Description of the rights attached to the Series D units

Holders of the Series D Units of the Company (each a “Unit” and, collectively, the “Units”), each consisting of (a) one share (collectively, the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), (b) a five year warrant to purchase, at an exercise price of $4.50 per share, one share of Common Stock (collectively, the “Series D-1 Warrants”), (c) a five year warrant to purchase, at an exercise price of $5.75 per share, one share of Common Stock (collectively, the “Series D-2 Warrants”), and (d) a five year warrant to purchase, at an exercise price of $7.75 per share, one share of Common Stock (collectively, the “Series D-3 Warrants”, and together with the Series D-1 Warrants and Series D‑2 Warrants, the “Warrants”).

Warrants

The Warrants have a five-year term. Until the end of the term, the Warrants will be exercisable at any time and from time to time.

Subject to the beneficial ownership limitation, holders of the Warrants will not be permitted to exercise their Warrants if such exercise would cause such holder to beneficially own more than 4.99% of the outstanding Common Stock (subject to increase to 9.99%, at the option of the holder, upon no less than 61 days prior written notice to the Company) (the “Beneficial Ownership Limitation”).

If the Company fails to timely deliver certificates for shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”) and, as a result, the holder is required by its brokerage firm to purchase shares of Common Stock to deliver in satisfaction of a sale by such holder of the Warrant Shares (a “Buy-In”), the Company will be required to: (a) pay in cash to the holder the amount, if any, by which (i) the holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (ii) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed; and (b) at the option of such holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations.

Registration Rights

In connection with the sale of the Units which occurred on December 2017, the Company entered into a Registration Rights Agreement with the Purchasers (the “Registration Rights Agreement”) pursuant to which, subject to certain exceptions, the Company has agreed to file with the Securities and Exchange Commission, no later than 90 days after the final issuance of Units, a registration statement covering the resale of all of (a) the Shares, (b) the shares of Common Stock issuable upon exercise of the Warrants in full (the “Warrant Shares”); (c) any additional shares of Common Stock issuable in connection with any anti-dilution provisions in the Warrants; and (d) any securities issued or then issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing. Subject to certain exceptions and limitations specified in the Registration Rights Agreement, the Company will be required to pay each holder monthly partial liquidated damages in the amount of 2% of the aggregate purchase price paid by such holder pursuant to the Purchase Agreement, if the Company fails to timely file a registration statement; timely file a request for acceleration of a registration statement; timely respond to SEC comments with respect to a registration statement; obtain the effectiveness of a registration statement within 120 days from the filing thereof; or maintain the effectiveness of a registration statement for the periods required under the Registration Rights Agreement.

Placement Agent Compensation

Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with the placement agent for the Offering (the “Placement Agent”), at the closing of the sale of the Units the Company paid the Placement Agent, as a commission, a cash amount equal to 7% of the aggregate sales price of the Units, plus 3% of the aggregate sales price as a management fee plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Units. In addition, pursuant to the placement agent agreement, we are required to issue to the Placement Agent warrants to purchase up to such number of shares of Common Stock equal to 10% of the aggregate Shares sold in the Offering plus warrants equal to 10% of the total number of the Warrants issued to the Purchasers in the Offering (collectively, the “Placement Agent Warrants”). The terms of the Placement Agent Warrants will be substantially similar to the Warrants except that the Placement Agent Warrants will also be exercisable on a cashless basis and will include full ratchet anti-dilution protection.

The 2016 Offering

Between April 2016 and December 31, 2016, and during the first seven months of 2017, the Company received aggregate net proceeds of approximately $4.9 million and $5.4 million, respectively (net of related cash expenses), from the issuance and sale in a private placement transaction, at a price of $1,000 per unit, of 12,003.80 Series C Units. As of December 31, 2017, the shares of Series C Preferred Stock comprising the Series C Units are convertible into an aggregate of 2,667,539 shares of Common Stock, and the Series C Warrants comprising the Series C Units are exercisable for an aggregate of 5,335,079 shares of Common Stock, in each case subject to adjustment in certain circumstances. The Series C Warrants have a five-year term commencing on their respective issuance dates. Until the end of the applicable term, each Series C Warrant will be exercisable at any time and from time to time at an exercise price of $4.50 per share (with respect to the Series C-1 Warrants) or $7.75 per share (with respect to the Series C-2 Warrants). The Series C Warrants contain adjustment provisions substantially similar to those to the adjustment provisions of the Series C Preferred Stock as described above (See Note 10A.4), except that the Series C Warrants do not include dilution protection for issuances of securities at an effective price per share lower than the conversion price of such Series C Warrants. In addition, the Series C Warrants provide for protection for a Buy-In on substantially the same terms as described above with respect to the Series C Preferred Stock. No holder may exercise its Series C Warrants in excess of the Beneficial Ownership Limitation.

In connection with the 2016 Offering the Company incurred a total of $2,304,714 of issuance costs of which $634,819 attributable to non-cash compensation expenses relating to warrants issued to the Placement Agent (See Notes 9C and Note 10D). The allocation method of the issuance proceeds to the Series C Preferred Stock and to the detachable Series C Warrants and their respective issuance costs is described in Note 2T.

As a result of the initial issuance and sale of the Series C Units, pursuant to the terms of the Series A Warrants, on April 8, 2016, the exercise price per share of the remaining Series A Warrants decreased from $5.80 per share to $4.50 per share and the number of shares of Common Stock issuable upon exercise of each of the Series A Warrants, in the aggregate, increased such that the aggregate exercise price payable thereunder, after taking into account the decrease in the exercise price, will be equal to the aggregate exercise price prior to such adjustment. Also as a result of the initial issuance and sale of the Series C Units, pursuant to the terms of the certificates of designations for the Series A Preferred Stock and Series B Preferred Stock, on April 8, 2016, the conversion price per share of the remaining Series A Preferred Stock and Series B Preferred Stock decreased to $4.50 per share.

Pursuant to the purchase agreements relating to the issuance and sale of the Series A Units and the Series B Units, the Company was required to and did notify the holders of the Series A Preferred Stock and Series B Preferred Stock of the closing of the sale of the Series C Units, and following receipt thereof such holders of Series A Preferred Stock and Series B Preferred Stock will be entitled, pursuant to the “most favored nation” provisions contained in their respective purchase agreements (as described above), to elect to amend the terms of their Series A Units and Series B Units, respectively, to match the terms of the Series C Units. The Company is obligated to amend the terms of any of Series A Units or Series B Units who timely makes such election and tenders its Series A Units or Series B Units for exchange. As of the issuance of the consolidated financial statements no Series A or Series B Unit holders have elected to utilize such right.

Upon initial recognition, the Series C Preferred Stock issued together with detachable Series C Warrants (classified as equity) were measured based on the relative fair value basis and were presented each net of the direct issuance expenses that were allocated to them (see Note 2T) .

The Company has determined that due to the economic characteristics and risks of the Series C Preferred Stock, based on their stated or implied substantive terms and features, that such Preferred Stock, are considered as more akin to equity than debt. Accordingly, it was determined that the economic characteristics and the risks of the embedded conversion option to Common Stock and those of the Series C Preferred Stock themselves (the 'host contract') are clearly and closely related. As a result, the embedded conversion feature was not required to be bifurcated.

Since at the issuance dates of the Series C Preferred Stock, the exercise price of the conversion feature (based on the effective conversion rate of the Series C Preferred Stock into Common Stock) was higher than the estimated fair value of the Company’s Common Stock, it was determined that the conversion feature was not beneficial. Also, due to the liquidation preference and certain redemption rights for the benefit of the holders of the Series C Preferred Stock, upon the occurrence of the certain contingent events, which are not considered as solely within the Company's control management determined that the Series C Preferred Stock were to be presented as temporary equity. See Note 2T1.

The 2017 Offering

On December 1, 2017, the Company raised $425,000 in gross proceeds from the issuance of one closing totalling 94,444 Series D Units. After giving effect to the payment of commissions to the Placement Agent (See Note 9C) for the offering and the payment of certain offering expenses, the Company received net proceeds from the offering of approximately $377,250 ( due to the fact that $25,000 of the cash issuance expenses was deferred by the placement agent and was paid in March 2018). The Series D Warrants have a five-year term commencing on their respective issuance dates. Until the end of the applicable term, each Series D Warrant will be exercisable at any time and from time to time at an exercise price of $4.50 per share (with respect to the Series D-1 Warrants) or $5.75 per share (with respect to the Series D-2 Warrants) or $7.75 per share (with respect to the Series D-3 Warrants). The Series D Warrants contain adjustment provisions substantially similar to those to the adjustment provisions of the Series C Preferred Stock as described above (See Note 10A.4), except that the Series D Warrants do not include dilution protection for issuances of securities at an effective price per share lower than the conversion price of such Series D Warrants. In addition, the Series D Warrants provide for protection for a Buy-In on substantially the same terms as described above with respect to the Series D Preferred Stock. No holder may exercise its Series D Warrants in excess of the Beneficial Ownership Limitation.

In connection with the 2017 Offering the Company incurred a total of $99,984 of issuance costs of which $27,141 attributable to non-cash compensation expenses relating to warrants issued to the Placement Agent (See Notes 9C and Note 10D). The allocation method of the issuance proceeds to the Series D Common Stock and to the detachable Series D Warrants and their respective issuance costs was based on the relative fair value of such installments.

Pursuant to the purchase agreements relating to the issuance and sale of the Series A Units the Series B Units and Series C Units, the Company was required to and did notify the holders of the Series A Preferred Stock, Series B Preferred Stock and Series and the C Preferred Stock of the closing of the sale of the Series D Units, and following receipt thereof such holders of Series A Preferred Stock, Series B Preferred Stock and the Series C preferred Stock will be entitled, pursuant to the “most favored nation” provisions contained in their respective purchase agreements, to elect to amend the terms of their Series A Units, Series B Units and Series C units, respectively, to match the terms of the Series D Units. The Company is obligated to amend the terms of any of Series A Units or Series B Units or Series C units who timely makes such election and tenders its Series A Units or Series B Units or Series C units for exchange. As of the issuance of the consolidated financial statements no Series A or Series B Unit or Series C unit holders have elected to utilize such right.

Upon initial recognition, common stock issued together with detachable Series D Warrants (classified as equity) were measured based on the relative fair value basis and were presented each net of the direct issuance expenses that were allocated to them.

Warrants with down round protection

The investor’s remaining Series A Warrants and the placement agent Warrants (hereinafter "warrants") have a five-year term commencing on their issuance date. In accordance with their original terms, the Warrants were exercisable at any time at a certain exercise price. These Warrants contain adjustment provisions substantially similar to the adjustment provisions of the Series A Preferred Stock (See Note 10A.2), including provisions requiring an adjustment of the number of shares and the exercise price to the price at which the Company subsequently issues share or other equity-linked financial instruments, if that price is less than the original exercise price of the Warrants (down-round protection). In addition, the Warrants provide for protection for a Buy-In on substantially the same terms as described above with respect to the Series A Preferred Stock. No holder may exercise its Warrants in excess of the Beneficial Ownership Limitation

As a result of future issuances, the exercise price per share and the number of shares of Common Stock issuable upon exercise of each such warrant were adjusted several times.

As of December 31, 2017 the number of warrants with down round protection is 1,443,419, 9,444 and 487,527 and the exercise prices are $4.5, $5.75 and $7.75 respectively.

The Company has determined its derivative warrant liability to be a Level 3 fair value measurement and has used the Binomial pricing model to calculate its fair value. Because the warrants contain a price protection feature, the probability that the exercise price of the warrants would decrease as the stock price decreased was incorporated into the valuation calculations.

The changes in the fair value of the Level 3 liability are as follows (in US dollars):

	Warrants with Down-Round Protection
	December 31,
	2017			2016

Balance, Beginning of the year		681,970			321,695
Warrants issued as consideration for placement services		353,721			308,239
Stock based compensation to financial advisor		32,880			-
Amount classified out of stockholders’ deficit and presented as Warrants with Down-Round Protection		-			341,662
Change in fair value of Warrants with Down-Round Protection		(300,322	)		(289,626	)
Balance, End of year		768,249			681,970

The key inputs used in the fair value calculations were as follows:

	December 31, 2017		December 31, 2016
Dividend yield (%)		-		-
Expected volatility (%) (*)		56.59		56.59
Risk free interest rate (%)		1.31		0.92
Expected term of options (years)		0.2 - 4.92		1.20 - 4.92
Exercise price (US dollars)		4.50 – 7.75		4.50 - 7.75
Share price (US dollars) (**)		2.45		2.38
Fair value (US dollars) (***)		0.002 - 0.81		0.16 – 0.75

(*)

Due to the low trading volume of the Company’s Common Stock, the expected volatility was based on a sample of 254 companies operating in the Healthcare Products industry.

(**)

The Common Stock price, per share reflects the Company’s management’s estimation of the fair value per share of Common Stock as of December 31, 2017, and 2016. In reaching its estimation for such periods, management considered, among other things, a valuation prepared by a third-party valuation firm following the issuance of the Series D Units at December 31, 2017, as applicable to each reporting period.

(***) The below chart reflects the Fair Value for each of the Warrants with down-round Protection that were outstanding as of December 31, 2017 in US dollars.

	Investors		AGI - Series A		AGI - Series B		AGI - Series C		AGI - Series D
Total quantity		126,935		364,071		566,897		844,605		37,777
Exercise price		4.5		4.5		4.5, 7.75		4.5, 7.75		4.5 5.75, 7.75
Fair value		0.31		0.12		0.12 – 0.34		0.29 – 0.76		0.5 – 0.81

Stock-based compensation

Grants to non-employees

In connection with the 2010 Offering, the Company issued to the Placement Agent warrants to purchase 45,097 and 84,459 shares, respectively, of the Company's Common Stock, with an exercise price of $6.25 per share, in 2011 and 2010, respectively. The warrants expire on the fifth anniversary of the date on which the shares of Common Stock underlying such warrants are fully registered with the SEC. The warrants include customary adjustment provisions for stock splits, reorganizations and other similar transactions and in addition a down-round protection provision. As a result of the issuance of the Series B Units, pursuant to the terms of the warrants, on August 29, 2014, the exercise price per share of the applicable warrants decreased from $6.25 per share to $5.80 per share and the number of shares of Common Stock issuable upon exercise of each such warrant, in the aggregate, increased to 139,608. As a result of the initial issuance and sale of the Series C Units, on April 8, 2016, the exercise price per share of the Warrants decreased again from $5.80 per share to $4.50 per share and the number of shares of Common Stock issuable upon exercise of each Warrants, in the aggregate, increased to 179,939.

In connection with the 2012 Offering, the Company issued to the Placement Agent (a) 5 year warrants to purchase up to 128,277 shares of Common Stock at an exercise price of $5.80 per share and (b) 5 year warrants to purchase up to 128,277 shares of Common Stock at an exercise price of $6.96 per share and (c) 5 year warrants to purchase up to 215 shares of Common Stock at an exercise price of $7.00 per share. Such warrants have substantially the same terms as those issued to the Series A Unit Purchasers except that the Placement Agent warrants may also be exercisable on a cashless basis at all times. As a result of the issuance of the Series B Units, pursuant to the terms of the warrants, on August 29, 2014, the exercise price per share of the applicable warrants decreased from $6.96 and $7.00 per share to $5.80 per share and the number of shares of Common Stock issuable upon exercise of each such warrant, in the aggregate, increased such that the aggregate exercise price payable thereunder, after taking into account the decrease in the exercise price, will be equal to the aggregate exercise price prior to such adjustment. As a result of the initial issuance and sale of the Series C Units, on April 8, 2016, the exercise price per share of the Warrants decreased again from $5.80 per share to $4.50 per share and the number of shares of Common Stock issuable upon exercise of each Warrants, in the aggregate, increased such that the aggregate exercise price payable thereunder, after taking into account the decrease in the exercise price, will be equal to the aggregate exercise price prior to such adjustment. As of December 31, 2017, and 2016 the Placement Agent was entitled to an aggregate of 364,071 shares of Common Stock, respectively, at an exercise price of $4.50 in connection with the 2012 Offering.

As of December 31, 2017 and 2016, The key inputs used in the fair value calculations of the Series A preferred warrant that were affected by the down-round protection were as follows:

	December 31, 2017				December 31, 2016
	Investors		Placement agent		Investors		Placement agent
Dividend yield (%)		0		0		0		0
Expected volatility (%)		56.69		56.69		56.69		56.69
Risk free interest rate (%)		1.31		1.31		0.92		0.92
Expected term of options (years)		0.2		2		1.2		3
Exercise price US dollars		4.5		4.5		4.5		4.5
Share price (US dollars)		2.45		2.45		2.38		2.38
Fair value (US dollars)		0.002		0.311		0.159		0.481

In connection with the 2016 Offering, the Company issued to the Placement Agent (a) 5-year warrants to purchase up to 555,733 shares of Common Stock at an exercise price of $4.50 per share and (b) 5-year warrants to purchase up to 288,977 shares of Common Stock at an exercise price of $7.75 per share. The terms of the Placement Agent warrants are substantially similar to the terms of the Series C Warrants except that the Placement Agent warrants may also be exercisable on a cashless basis at all times.

As of December 31, 2017, and 2016, The key inputs used in the fair value calculations of the Series C preferred warrant that were affected by the down-round protection were as follows:

	December 31, 2017		December 31, 2016
Dividend yield (%)		-		-
Expected volatility (%)		56.59		56.59
Risk free interest rate (%)		1.31		0.92
Expected term of options (years)		3.27 - 4.58		4.27 - 4.92
Exercise price (US dollars)		4.50, 7.75		4.50, 7.75
Share price (US dollars)		2.45		2.38
Fair value (US dollars)		0.29 - 0.76		0.39 – 0.75

In connection with the 2017 Offering, the Company issued to the Placement Agent (a) 5 year warrants to purchase up to 18,889 shares of Common Stock at an exercise price of $4.50 per share, (b) 5 year warrants to purchase up to 9,444 shares of Common Stock at an exercise price of $5.75 per share. and (c) 5-year warrants to purchase up to 9,444 shares of Common Stock at an exercise price of $7.75 per share. The terms of the Placement Agent warrants are substantially similar to the terms of the Series D Warrants except that the Placement Agent warrants may also be exercisable on a cashless basis at all times.

As of December 31, 2017, the key inputs used in the fair value calculations of the Series D preferred warrant that were affected by the down-round protection were as follows:

	December 31, 2017
Dividend yield (%)		-
Expected volatility (%)		56.59
Risk free interest rate (%)		1.31
Expected term of options (years)		4.92
Exercise price (US dollars)		4.50, 5.75, 7.75
Share price (US dollars)		2.45
Fair value (US dollars)		0.81, 0.66, 0.5

2. Grants to employees

In August 2007, Integrity Israel’s Board of Directors ("Integrity Israel's Board") approved a stock option plan ("Integrity Israel's plan") for the grant, without consideration of options exercisable into ordinary shares of NIS 0.01 par value of Integrity Israel to employees, officers and directors of Integrity Israel. The exercise price and vesting period for each grantee of options was determined by Integrity Israel's Board and specified in such grantee's option agreement. The options vested over a period of 1-12 quarters based on each grantee's option agreements. Any option not exercised within 10 years after the date of grant thereof will expire.

2. Grants to employees (cont.)

In July 2010, following the merger with Integrity Israel, the Company adopted the 2010 Share Incentive Plan (the "2010 Share Incentive Plan"), pursuant to which the Company's Board of Directors is authorized to grant options exercisable into Common Stock of the Company.

The purpose of the 2010 Share Incentive Plan is to offer an incentive to employees, directors, officers, consultants, advisors, suppliers and any other person or entity whose services are considered valuable to the Company, as well as to replace the Integrity Israel Plan and to replace all options granted in the past by Integrity Israel.

Upon the adoption of the 2010 Share Incentive Plan, all options granted under the Integrity Israel's Plan were replaced by options subject to the 2010 Share Incentive Plan on a 1 for 1 basis. As of December 31, 2017, there are 388,033 shares available for future grants under the 2010 Share Incentive Plan.

As of December 31, 2015, the Company had reserved 529,555 shares of Common Stock for issuance under the 2010 Share Incentive Plan. On March 17, 2016, the Company’s Board of Directors approved an amendment to the 2010 Share Incentive Plan to increase the number of shares of the Company’s Common Stock reserved for issuance under the 2010 Share Incentive Plan to 1,000,000 shares. On April 7, 2017, the Company’s Board of Directors approved an additional amendment to the 2010 Share Incentive Plan to increase the number of shares of the Company’s Common Stock reserved for issuance under the 2010 Share Incentive Plan to 5,625,000 shares.

Pursuant to the terms of their respective employment agreements with the Company, in March 2012, the Company issued to Avner Gal, which served on that date as the Company’s Chief Executive Officer, and David Malka, the Company’s Executive Vice President of Operations, options to purchase up to 264,778 and 79,434 shares of Common Stock, respectively. The Options are exercisable at an exercise price of $6.25 per share. The options vested or will vest (as applicable), in 3 equal parts, upon the achievement of each of the following milestones: (i) submission of clinical trials’ results to the Notified Body; (ii) receipt of CE mark approval; (iii) receipt of FDA approval. In the event of a merger and/or acquisition in which one or more of the abovementioned milestones have not yet been met, the options shall be deemed vested on the date of the merger and/or acquisition. All options granted as described above are subject to the terms of the 2010 Share Incentive Plan.

On January 1,2016, the Company granted its Chief Operations Officer options to purchase up to 16,000 shares of the Company’s common stock, at an exercise price of $4.75 per share. The Options will vest in eight equal quarterly installments, with the first such installment to vest on June 30, 2016.

On March 17, 2016, the Company granted each one of three of its director’s options to purchase up to an aggregate of 26,666 shares of the Company’s Common Stock, at an exercise price of $4.50 per share. Each director’s option grant will vest in eight equal quarterly increments of 3,333 each (subject to the director’s continued service as of each such date) commencing with the second quarter of 2016.

On November 15, 2016, the Company granted each one of its two other directors options to purchase up to an aggregate of 26,666 shares of the Company’s Common Stock, at an exercise price of $4.50 per share. Each director’s option grant will vest in eight equal quarterly increments of 3,333 each (subject to the director’s continued service as of each such date) commencing on February 15, 2017.

Effective April 7, 2017, the Company entered into an amendment to the employment agreement (the “Graham Employment Amendment”) with John Graham, whom the Company appointed as Chief Executive Officer on March 20, 2017, to modify the base compensation provision and the equity compensation provision under that certain Employment Agreement, dated March 20, 2017 (the “Graham Effective Date”), by and between the Company and Mr. Graham. Pursuant to the terms of the Graham Employment Amendment the Company agreed, among other things to, (a) grant Mr. Graham an option to purchase up to 1,673,996 shares of Common Stock of the Company having an exercise price per share equal to $4.50 (the “$4.50 Options”) whereby (1) 307,754 of the $4.50 Options will vested immediately, (2) 923,262 of the $4.50 Options will vest on the six month anniversary of the Graham Effective Date, and (3) the remaining 442,980 of the $4.50 Options will vest on the two year anniversary of the Graham Effective Date, (b) grant Mr. Graham an option to purchase up to 559,414 shares of Common Stock of the Company having an exercise price per share equal to $5.41 which shall vest in equal monthly installments over three year period following the Effective Date. And (c) grant Mr. Graham an option to purchase up to 844,130 shares of Common Stock of the Company having an exercise price per share equal to $7.75 which shall vest in equal monthly installments over three year period following the Effective Date.

Effective April 7, 2017, Integrity Israel entered into an amended and restated personal employment agreement (the “Malka Employment Agreement”) with David Malka for his continued service as Vice President of Operations of the Company and Integrity Israel, effective as of March 20, 2017 (the “Malka Effective Date”). Pursuant to the terms of the Malka Employment Agreement, the Company agreed, among other things to (a) modify the terms of 26,478 option to purchase Common Stock at an exercise price per share equal to $6.25 whereby the unvested portion of such options will accelerate and will be immediately exercisable, effective as of the Malka Effective Date (since the original performance conditions were not expected to be satisfied as of the date of the modification of the terms, the fair value of such grant was measured based on the fair value of the modified award at the modification date); and (b) grant Mr. Malka 361,875 additional option to purchase Common Stock at an exercise price per share equal to $4.50 which shall vest on the two year anniversary of the Malka Effective Date.

On June 7, 2017, the Board appointed David Podwalski as the Chief Commercial Officer of the Company, and approved a grant of stock option to purchase shares of Common Stock equal to 1% of the total fully diluted shares of Common Stock as of the Podwalski Effective Date (290,585 options) , with an exercise price of $4.50 per share or the fair market value of a share of Common Stock on the grant date, whichever is greater, vesting monthly over a three year period commencing on the Podwalski Effective Date, subject to his continued employment through and on each such vesting date.

In September 2017, the Compensation Committee and the Board of Directors approved a grant of stock options to Sami Sassoun the Company’s CFO and Eugene Naidis’s the Company’s VP of Research and Development equating to 1% of the fully diluted number of shares of the Company after the closing of the offering of Series C Units (292,924 options each), with a strike price of US$4.50, with three-year monthly vesting commencing on the first month after the effective date.

The aggregate intrinsic value of the awards outstanding as of December 31, 2017, 2016 and 2015 was $0, $14,368 and $12,845, respectively. Such amount represents the total intrinsic value based on the Company’s management’s estimation of the fair value per share of Common Stock based among other things, a valuation prepared by a third-party valuation firm following the issuance of the Series C Units and Series B Units, as applicable.

The following tables present a summary of the status of the grants to employees, officers and directors as of December 31, 2017, 2016 and 2015:

	Number			Weighted average exercise price (US$)
Balance outstanding as of December 31,2014		450,847			5.85
Exercised during 2015		(19,769	)		1.82
Forfeited during 2015		(17,605	)		6.01
Balance outstanding as of December 31,2015		413,473			6.04
Balance exercisable as of December 31,2015		293,736			5.95
Granted during 2016		149,330			4.53
Balance outstanding as of December 31,2016		562,803			5.64
Balance exercisable as of December 31,2016		334,735			5.81
Granted during 2017		4,740,318			5.22
Forfeited during 2017		(66,154	)		3.93
Balance outstanding as of December 31,2017		5,236,967			5.28
Balance exercisable of December 31,2017		2,428,716			5.28

The following tables summarize information about options outstanding at December 31, 2017:

Exercise price (US$)		Outstanding at December 31, 2017		Weighted average remaining contractual life (years)		Exercise price (US$)		Exercisable at December 31, 2017		Weighted average remaining contractual life (years)
	6.25		351,712		4.19		6.25		351,712		4.19
	6.02		4,273		0.03		6.02		4,273		0.03
	7.00		22,000		6.50		7.00		22,000		6.50
	4.75		12,000		8.01		4.75		12,000		8.01
	4.50		79,998		8.21		4.50		79,998		8.21
	4.50		26,666		8.88		4.50		22,793		8.88
	4.50		1,673,996		9.21		4.50		1,231,016		9.21
	5.41		559,414		9.21		5.41		0		0
	7.75		844,130		9.21		7.75		0		0
	4.50		661,875		9.26		4.50		304,615		9.26
	7.75		50,000		9.26		7.75		16,667		9.26
	4.50		74,470		9.41		4.50		65,709		9.41
	4.50		290,585		9.48		4.50		140,660		9.48
	4.50		585,848		9.71		4.50		177,273		9.71
			5,236,967						2,428,716

As of December 31, 2017, approximately $1,840,329 of unrecognized compensation costs are expected to be recognized during the year ending December 31, 2018, 2019 and 2020.

The fair value of options granted to employees was estimated at the dates of grant using the Black-Scholes option pricing model. The following are the data and assumptions used:

	2017		2016
Dividend yield (%)		0		0
Expected volatility (%) (*)		56.59		62.16
Risk free interest rate (%)		0.92		1.08
Expected term of options (years)		5-10.5		6
Exercise price (US dollars)		4.50 - 7.75		4.50, 4.75
Stock price (US dollars) (**)		2.38		2.38
Fair value (US dollars)		0.58-1.28		1.01, 098

(*)

Due to the low trading volume of the Company’s Common Stock, the expected volatility was based on a sample of 254 companies operating in the Healthcare Products industry.

(**)

The Common Stock price, per share for the year ended December 31, 2017 and 2016 reflects the Company’s management’s estimation of the fair value per share of Common Stock. In reaching its estimation for December 31, 2017, management considered, among other things, a valuation prepared by a third-party valuation firm following the issuance of the 2016 Offering. In reaching its estimation for December 31, 2017, management considered, among other things, a valuation prepared by a third-party valuation firm following the issuance of the Series C Units.