NOTE

— EQUITY

Preferred Stock

Within the limits and restrictions provided in the Company’s Certificate of Incorporation, the Board of Directors has the authority, without further action by the shareholders, to issue up to

5,000,000

shares of preferred stock,

$.0001

par value per share, in

one

or more series, and to fix, as to any such series, any dividend rate, redemption price, preference on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special rights and qualifications. As of

December 31, 2018,

100,000

shares of preferred stock have been designated as Series A-

Convertible Preferred Stock, of which

90,000

were issued in

2015

and

remain outstanding as of

December 31, 2018,

and

105,000

shares of preferred stock have been designated as Series B-

Convertible Preferred Stock, of which

105,000

were issued in

2015

and

remain outstanding as of

December 31, 2018.

Series A-

Convertible Preferred Stock

October 22

and

29,

2015,

the Company issued

84,500

shares of Series A-

Convertible Preferred Stock (“Series A-

Stock”) at a purchase price of

$100.00

per share, for aggregate gross proceeds of

$8,450,000.

November 11, 2015,

5,500

additional shares of Series A-

Stock were issued at a purchase price of

$100.00

per share, for gross cash proceeds of

$550,000.

Shares of Series A-

Stock were convertible at any time at the option of the holder into shares of common stock by dividing the Series A-

Original Issue Price by an initial conversion price of

$3.60

per share, subject to adjustment for stock dividends, stock splits, combinations, and reclassifications of the Company’s capital stock, and subject to a “blocker provision” which prohibits conversion if such conversion would result in the holder being the beneficial owner of in excess of

9.99%

of the Company’s common stock. In connection with the request of the sole holder of the Series A-

Stock, on

August 7, 2017

the Company waived a standstill agreement to permit the holder to increase his conversion cap to

35%

effective

days after such waiver request. The Series A-

Stock accrued dividends at the rate of

per annum payable quarterly on

April 1,

July, 1,

October 1,

and

January 1

of each year. Until

October 1, 2017,

the dividends were payable in cash provided that if payment in cash would be prohibited under applicable Delaware corporation law or cause the Company to breach any agreement for borrowed money, such dividends would be payable in kind through the issuance of additional shares of common stock having a value equal to the volume weighted average trading price of the Company’s common stock for the

ten

(

) days preceding the applicable dividend payment date. Commencing

January 1, 2018,

dividends were payable at the option of the Company in cash or kind through the issuance of additional shares of common valued as described above.

The holders of the Series A-

Stock were entitled to designate

one

person to serve on the Board of Directors of the Company. The holders of the Series A-

Stock were entitled to vote on an as converted to common stock basis together with the holders of our common stock on all matters presented to our stockholders. Upon any liquidation or dissolution of the Company, any merger or consolidation involving the Company or any subsidiary of the Company in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation do

not

represent immediately following such merger or consolidation at least a majority of the voting power of the capital stock of the resulting or surviving corporation, or the sale of all or substantially all assets in a single transaction or a series of related transactions, unless the holders of at least a majority of the outstanding Series A-

Stock elected otherwise, holders of Series A-

Stock would have been entitled to receive prior to any payment to any holders of the Company’s common stock an amount per share equal to

$100.00

per share plus any declared and unpaid dividends (pari-passu with the Series B-

holders).

Between

September 22, 2017

and

May 31, 2018,

the holder of the Series A-

Stock converted all shares of Series A-

Stock into an aggregate of

2,500,000

shares of common stock and purchased an aggregate of

248,893

shares of common stock in consideration of the conversion of

$896,015

of accrued dividends payable on the Series A-

Stock

As a result of the forgoing conversions, there are

longer any issued and outstanding shares of Series A-

Stock as of

December 31, 2018.

Overall balances and conversion of Series A-

shares and accrued dividends into common stock has been as follows:

	Series A-1			Accrued Dividends

Balance – January 1, 2017		90,000		$	270,000
Accrual of dividends – Q1 2017					135,000
Accrual of dividends – Q2 2017					135,000
Accrual of dividends – Q3 2017					135,000
Conversion into common stock – September 2017		-			(540,000	)
Conversion into common stock – October 2017		(27,404	)		-
Accrual of dividends – Q4 2017					101,658
Balance – December 31, 2017		62,596		$	236,658
Accrual of dividends – Q1 2018					93,894
Conversion into common stock – April 2018		(39,088	)		(330,552	)
Accrual of dividends – Q2 2018 (until final conversion)					25,463
Conversion into common stock – May 2018		(23,508	)		(25,463	)
Balance – December 31, 2018		-		$	-

The Series A-

Stock contained options that based on an evaluation of FASB ASC

815

15,

“Embedded Derivatives” and FASB ASC

815

15,

“Contracts in Entity’s Own Equity - Scope and Scope Exceptions,” are considered embedded features: Preferred Stock’s conversion option: The Series A-

Stock was convertible at the holder’s option at any time at the fixed conversion price of

$3.60

per share; Quarterly Dividend Conversion Option: From issuance until

December 31, 2017,

the majority of holders could have elected to have the quarterly dividend payment made in shares of common stock, having a value equal to the volume weighted average trading price of the common stock during the

ten

(

) trading day period preceding the applicable dividend payment date. These features were analyzed by the Company and determined that they were

not

required to be bifurcated from the preferred stock and recorded as derivatives as they are clearly and closely related to an equity host.

Series B-

Convertible Preferred Stock

November 11, 2015,

the Company issued

105,000

shares of Series B-

Convertible Preferred Stock (the “Series B-

Stock”) at a purchase price of

$100.00

per share, for gross proceeds of

$10,500,000.

Shares of the Series B-

Stock were convertible at any time at the option of the holder into shares of common stock by dividing the Series B-

Original Issue Price by an initial conversion price of

$3.60

9.99%

of the Company’s common stock. During a conversion detailed in the table below, the Company waived a standstill provision to permit a holder of Series B-

Stock to increase its conversion limitation to

19.99%

of the Company's issued and outstanding shares of common stock to be effective

days after such waiver. The Series B-

Stock accrued dividends at the rate of

2.5%

per annum payable quarterly on

April 1,

July, 1,

October 1,

and

January 1

of each year payable in cash provided that if payment in cash would be prohibited under applicable Delaware corporation law or cause the Company to breach any agreement for borrowed money, or if the majority of the outstanding shares of the Series B-

Stock elected otherwise, such dividends were payable in kind through the issuance of additional shares of common stock having a value equal to the volume weighted average trading price of the Company’s common stock for the

ten

(

) days preceding the applicable dividend payment date.

The holders of the Series B-

Stock were entitled to designate

one

person to serve on the Board of Directors of the Company. The holders of the Series B-

not

Stock elected otherwise, holders of Series B-

Stock would have been be entitled to receive prior to any payment to any holders of the Company’s common stock an amount per share equal to

$100.00

per share plus any declared and unpaid dividends (pari-passu with the Series A-

holders).

Between

March 23, 2018

and

May 23, 2018,

holders of shares of Series B-

Stock converted all shares of Series B-

Stock into an aggregate of

2,916,668

shares of common stock and purchased an aggregate of

131,229

shares of common stock in consideration of the conversion of

$472,426

of accrued dividends payable on the Series B-

Stock.

As a result of the forgoing conversions, there are

longer any issued and outstanding shares of Series B-

Stock as of

December 31, 2018.

Overall balances and conversion of Series B-

shares and accrued dividends into common stock has been as follows:

	Series B-1			Accrued Dividends

Balance – January 1, 2017		105,000		$	131,250
Accrual of dividends – Q1 2017					65,625
Accrual of dividends – Q2 2017					65,625
Accrual of dividends – Q3 2017					65,625
Accrual of dividends – Q4 2017					65,625
Balance – December 31, 2017		105,000			393,750
Conversion into common stock – March 2018		(60,420	)		(417,084	)
Accrual of dividends – Q1 2018					62,268
Accrual of dividends – Q2 2018 (until final conversion)					16,408
Conversion into common stock – May 2018		(44,580	)		(55,342	)
Balance – December 31, 2018		-		$	-

The Series B-

Stock contained options that based on an evaluation of FASB ASC

815

15,

“Embedded Derivatives” and FASB ASC

815

15,

“Contracts in Entity’s Own Equity - Scope and Scope Exceptions,” are considered embedded features: Preferred Stock’s conversion option: The Series B-

Stock was convertible at the holder’s option at any time at the fixed conversion price of

$3.60

per share; Quarterly Dividend Conversion Option: The majority of holders could have elect to have the quarterly dividend payment made in shares of common stock, having a value equal to the volume weighted average trading price of the common stock during the

ten

(

) trading day period preceding the applicable dividend payment date. These features were analyzed by the Company and determined that they were

not

required to be bifurcated from the preferred stock and recorded as derivatives as they are clearly and closely related to an equity host.

Common Stock

Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of common stock have

one

vote for each share held of record and do

not

have cumulative voting rights.

Holders of common stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of common stock are

not

redeemable and have

preemptive or similar rights. All outstanding shares of common stock are fully paid and nonassessable.

Issuances of Common Stock

March 23, 2018,

the holders of Series B-

Stock converted shares and accrued dividends payable into a total of

1,794,190

shares of common stock.

April 3, 2018,

the holder of Series A-

Stock converted shares and accrued dividends payable into a total of

1,177,598

shares of common stock.

May 23, 2018,

the holders of Series B-

Stock converted shares and accrued dividends payable into a total of

1,253,707

shares of common stock.

May 31, 2018,

the holder of Series A-

Stock converted shares and accrued dividends payable into a total of

660,073

shares of common stock.

August 22, 2018,

the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC (the “Underwriter”) with respect to the issuance and sale of an aggregate of

1,200,000

units (“Units”) with each unit consisting of

one

share of common stock and a warrant to purchase

0.75

shares of common stock at an exercise price of

$1.50

per share, in an underwritten public offering pursuant to the Underwriting Agreement. Each Unit was sold for a price of

$1.50.

The Warrants have a term of

five

years and are immediately exercisable. Pursuant to the Underwriting Agreement, the Company granted the Underwriters a

-day option to purchase up to an additional

180,000

shares of Common Stock and/or

135,000

Warrants to cover over-allotments, if any (the “Over-Allotment”). On

August 22, 2018,

the Underwriter exercised its Over-Allotment option in full on both the Common Stock and the Warrants. Pursuant to this agreement,

1,380,000

shares of common stock and warrants to purchase

1,035,000

shares of stock were issued on

August 24, 2018

for aggregate gross proceeds of

$2,070,000.

The gross proceeds were reduced by a

commission (

$144,900

) and

$50,000

of underwriting expenses to net to

$1,875,100

cash received.

Costs of

$143,945

were incurred during

2018

in relation to the issuance of common stock.

Issuances to Directors, Executive Officers and Consultants

During the year ended

December 31, 2018,

the Company issued

20,976

shares of common stock to its directors in lieu of payment of board fees, valued at

$37,532.

During the year ended

December 31, 2017,

the Company issued

11,244

shares of common stock to its directors in lieu of payment of board fees, valued at

$32,030.

During the year ended

December 31, 2017,

the Company issued

117,849

shares of common stock to consultancy firms in lieu of payment for services. The fair value at issuance was

$354,585

and was expensed over the period of the services.

Employees’ exercise options

During

2018,

employee stock options were exercised. There were

4,167

employee stock options exercised resulting in the cashless issuance of

1,610

shares of common stock during

2017.

Derivative Liabilities

In connection with the issuances of equity instruments or debt, the Company

may

issue options or warrants to purchase common stock. In certain circumstances, these options or warrants

may

be classified as liabilities, rather than as equity. In addition, the equity instrument or debt

may

contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances

may

be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company early-adopted the new provisions issued

July 2017,

for derivative liability instruments under FASB ASU

2017

11,

Earnings Per Share (Topic

260

), Distinguishing Liabilities from Equity (Topic

480

) and Derivatives and Hedging (Topic

815

): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Under ASU

2017

11,

down round features do

not

meet the criteria for derivative accounting and

liability is to be recorded until an actual issuance of securities triggers the down-round feature. Prior to these provisions, the liabilities were recorded without the actual issuance of the securities triggering the down-round feature.

Securities Purchase Agreement dated

November 13, 2014

Pursuant to a Securities Purchase Agreement, dated

November 13, 2014,

by and between the Company and a number of private and institutional investors, the Company issued to certain private investors

664,584

shares of common stock and warrants to purchase an additional

996,877

shares of common stock for aggregate gross proceeds of

$1,595,000.

The warrants have a term of

five

years and an initial exercise price of

$3.60

per share, and have been fully exercisable since

February 2015.

The warrants have customary anti-dilution protections including a “full ratchet” anti-dilution adjustment provision which are triggered in the event the Company sells or grants any additional shares of common stock, options, warrants or other securities that are convertible into common stock at a price lower than

$3.60

per share, The anti-dilution adjustment provision is

not

triggered by certain “exempt issuances” which among other issuances, includes the issuance of shares of common stock, options or other securities to officers, employees, directors, consultants or service providers.

Pursuant to the Underwriting Agreement with Maxim Group, on

August 24, 2018

the Company issued Common Stock and Warrants to investors at a purchase price of

$1.50

per unit which triggered the anti-dilution protection provision under this Securities Purchase Agreement. Due to this provision, the total number of outstanding and fully vested warrants was increased from

996,877

2,392,502,

and the exercise price was reduced from

$3.60

$1.50

per share. The Company recognized a non-cash deemed dividend of

$1,288,139

in connection with these adjustments.

As a result of the early adoption of ASU

2017

11,

the “full ratchet” anti-dilution feature is

longer a determinant for derivative liability accounting. As the “full ratchet” anti-dilution feature was determined to have

value in the past, the adoption had

effect on the balance sheets or statements of operations.

Securities Purchase Agreement dated

September 23, 2015

September 23, 2015,

the Company issued a warrant to purchase

69,445

shares of common stock in connection with the issuance of a promissory note. The warrants are immediately exercisable at an initial exercise price of

$3.60

per share and have a term of

five

years.

The warrants have customary anti-dilution protections including a "full ratchet" anti-dilution adjustment provision which are triggered in the event the Company sells or

grants any additional shares of common stock, options, warrants or other securities that are convertible into common stock at a price lower than

$3.60

per share. The anti-dilution adjustment provision is

not

triggered by certain "exempt issuances" which among other issuances, includes the issuance of shares of common stock, options or other securities to officers, employees, directors, consultants or service providers.

Pursuant to the Underwriting Agreement with Maxim Group, on

August 24, 2018

the Company issued Common Stock and Warrants to the investors at a purchase price of

$1.50

69,445

166,668,

and the exercise price was reduced from

$3.60

$1.50

per share. The Company recognized a non-cash deemed dividend of

$140,827

in connection with these adjustments.

As a result of the early adoption of ASU

2017

11,

the “full ratchet” anti-dilution feature is

longer a determinant for derivative liability accounting. As the “full ratchet” anti-dilution feature was determined to have

value in the past, the adoption had

effect on the balance sheets or statements of operations.

Warrants

The Company has issued warrants to certain creditors, investors, investment bankers and consultants. A summary of warrant activity is as follows:

	Total Warrants			Weighted average exercise price		Weighted average remaining life (in years)		Aggregate intrinsic value

Outstanding, as of December 31, 2016		1,260,080			3.84		2.78

Granted		138,889			3.60
Exercised		—			—
Forfeited		—			—
Expired		—			—
Outstanding, as of December 31, 2017		1,398,969			3.81		2.06		—
Granted		1,035,000			1.50
Increase due to trigger of anti-dilution provision feature		1,492,848			1.50
Exercised		—			—
Forfeited		—			—
Expired		(145,841	)		6.00
Outstanding, as of December 31, 2018		3,780,976			1.59		2.05		—
Vested or expected to vest at December 31, 2018		3,780,976			1.59		2.05		—
Exercisable at December 31, 2018		3,780,976			1.59		2.05		—