NOTE

STOCKHOLDERS’ (DEFICIT)

Our authorized capital stock consists of

500,000,000

shares of common stock,

$.001

par value per share, and

10,000,000

shares of preferred stock, par value

$.001

per share, of which

5,000,000

shares have been designated as

Series A Preferred,

230,000

shares have been designated as Series B Preferred Stock,

747,500

shares have been designated as Series C Preferred Stock and

250,000

shares have been designated as Series D Preferred Stock.

As of

December

31,

2016

we had the following outstanding securities:

●

47,786,917

shares of common stock issued and outstanding;

●

,86

0,000

warrants issued and outstanding to purchase shares of our common stock;

●

shares of our Series A Preferred Stock issued and outstanding;

●

- shares of our Series B

Preferred Stock issued and outstanding;

●

- shares of our Series C

Preferred Stock issued and outstanding;

●

250,000

Series D Preferred Stock issued and outstanding; and

●

,05

0,000

principal amount Convertible Debentures convertible into

15,490,000

shares of common stock.

Common Stock

Holders of common stock are entitled to

one

vote for each share on all matters submitted to a stockholder vote.

Holders of our voting securities do not have cumulative voting rights. Holders of common stock are entitled to share in all dividends that the Board of Directors, in its discretion, declares from legally available funds. In the event of our liquidation, dissolution or winding up each outstanding share of common stock entitles its holder to participate in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock.

Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions for the common stock.

The rights of the holders of common stock are subject to any rights that

may

be fixed for holders of preferred stock, when and if any preferred stock is outstanding. All outstanding shares of common stock are duly authorized, validly issued, fully paid and non-assessable.

March

20,

2015

the Company issued

665,000

restricted shares of our common stock to our executive management team under the

2009

Plan. The restrictions on the shares lapse ratably over a

year period.

March

23,

2015

a former employee exercised stock options granted to the employee during their employment. As a result of the exercise,

7,500

common shares were issued to the individual.

April

29,

2015

an employee exercised stock options granted to the employee. As a result of the exercise,

5,800

common shares were issued to the individual.

June

11,

2015

the Company issued

360,000

restricted shares of our common stock to our Board of Directors under the

2009

Plan. The restrictions on the shares lapse ratably over a

year period.

June

15,

2015

an employee exercised stock options granted to the employee. As a result of the exercise,

225,000

common shares were issued to the individual.

June

30,

2015

a former employee exercised stock options granted to the employee during their employment. As a result of the exercise,

20,000

common shares were issued to the individual.

July

17,

2015

66,668

restricted shares were forfeited by a former employee as the restrictions had not lapsed prior to the end of the employee

’s service.

August

21,

2015

an employee exercised stock options granted to the employee. As a result of the exercise,

1,628

common shares were issued to the individual.

October

16,

2015

50,002

restricted shares were forfeited by a former employee as the restrictions had not lapsed prior to the end of the employee’s service.

November

19,

2015

the Company issued

37,023,517

restricted shares of our common stock to

Cornelis F. Wit, our Chief Executive Officer and Director. The shares were issued in exchange (i) for the cancellation of

$6,919,000

of outstanding

12%

promissory notes,

$420,000

of outstanding

12%

convertible notes payable and

29,363,517

outstanding warrants to purchase shares of our common stock at

$0.25

per share and (ii) the conversion of

$1,915,000

of convertible notes payable with a conversion price of

$0.25

per share.

December

31,

2015

four

Series A Preferred Stock Shareholders accepted the Exchange Offer and converted a total of

487,500

Series A shares into

1,950,000

common shares.

During the

first

four

months of

2016

14,615,696

common shares were issued to the Series A Preferred Shareholders who accepted the Series A Preferred Share Exchange Offer.

On A

pril

13,

2016

an employee exercised stock options granted to the employee. As a result of the exercise,

3,012

common shares were issued to the individual.

On A

pril

25,

2016

an employee exercised stock options granted to the employee. As a result of the exercise,

1,000,000

common shares were issued to the individual.

On A

pril

26,

2016

an employee exercised stock options granted to the employee. As a result of the exercise,

1,594

common shares were issued to the individual.

June

2016

the Company issued

360,000

restricted shares of our common stock to our Board of Directors under the

2009

Plan. The restrictions on the shares lapse ratably over a

year period.

July

20,

2016

an employee exercised stock options granted to the employee. As a result of the exercise,

3,038

common shares were issued to the individual.

December

30,

2016

Thomas E. Vickers, our Chief Financial Officer, exercised stock options granted to him in

2011.

As a result of the exercise,

100,000

common shares were issued to him.

The

2009

Plan is more fully described in “Note

Employee Equity Incentive Plans”.

Preferred stock

Our Board of Directors, without further stockholder approval,

may

issue preferred stock in

one

or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series. In addition, the Board of Directors

may

fix and determine all privileges and rights of the authorized preferred stock series including:

●

dividend and liquidation preferences,

●

voting rights,

●

conversion privileges, and

●

redemption terms.

Our Board of Directors

may

authorize the issuance of preferred stock which ranks senior to our common stock for the payment of dividends and the distribution of assets on liquidation.

In addition, our Board of Directors can fix limitations and restrictions, if any, upon the payment of dividends on our common stock to be effective while any shares of preferred stock are outstanding.

The following table presents the cumulative arrearage of undeclared dividends by class of preferred stock as of

December

31,

2016

and

December

31,

2015

and the per share amount by class of preferred stock.

	Cumulative arrearage as of				Cumulative arrearage per share as of
	December 31,				December 31,
Series of preferred stock	2016		2015		2016		2015

Series A	$	-0-	$	2,465,830	$	-0-	$	0.68
Series B		609,887		609,887	$	3.05	$	3.05
Series C		1,472,093		1,472,093	$	4.37	$	4.37
Total preferred stock arrearage	$	2,081,980	$	4,547,810

Series A Preferred Stock

1999,

our Board of Directors designated

5,000,000

shares of our preferred stock as

Series A Convertible Preferred Stock (“Series A Preferred Stock”), of which

- shares are issued and outstanding.

The designations, rights and preferences of the Series A Preferred include:

●

the shares are not redeemable,

●

each share of Series A Preferred Stock is convertible into shares of our common stock at any time at the option of the holder at a conversion price of

$1.

per share, or if not so converted after

one

year from issuance, at any time at our option if the closing bid price of our common stock has exceeded

$3.00

for

consecutive trading days, our common stock is listed on The NASDAQ Stock Market or other national stock exchange, and the shares of common stock issuable upon conversion of the Series A Preferred Stock are registered under a registration statement,

●

the conversion price has certain anti-dilution protections for any stock splits, stock dividends, and corporate reorganizations, and certain other corporate transactions and issuances of securities at below the applicable conversion price per share.

The Series A Preferred Stockholders have waived their rights to an anti-dilution adjustment reducing their conversion price as a result of the issuance of the Series B Preferred Stock and Series C Preferred Stock,

●

the shares of Series A Preferred Stock pay a cumulative dividend at a rate of

per annum based on the stated value of

$1.00

per share, payable when and as declared by the Board of Directors, or upon conversion or liquidation. Dividends on the Series A Preferred Stock have priority to our common stock and are junior to Series B Preferred Stock and Series C Preferred Stock.

At our option, dividends can be paid in cash or shares of common stock valued at the conversion price of the Series A Preferred Stock,

●

in the event of our liquidation or winding up, each share of Series A Preferred Stock has a liquidation preference equal to

$1.00

per share,

and

●

the holders of the Series A Preferred Stock are entitled to vote together with the holders of our common stock, on the basis of

one

vote for each share of common stock issuable upon the conversion of the Series A Preferred Stock.

In addition, the holders of the Series A Preferred Stock were granted certain demand and piggy-back registration rights for the shares of our common stock issuable upon the conversion of the Series A Preferred Stock.

There were cumulative arrearages of $

- and

$2,465,830,

$0.00

and

$0.68

per share, on the Series A Preferred Stock for undeclared dividends as of

December

31,

2016

and

December

31,

2015

respectively.

Prior to

2015

the Company had

235,000

shares of its

Series A Preferred stock that have been converted by the shareholders into shares of our common stock. Pursuant to Delaware General Corporate Law, once the Company has a positive net worth, the cumulative dividends would be payable in either cash or in shares of our common stock upon the declaration of dividends by our board of directors.

December

2015

the Company initiated an Exchange Offer to the remaining

Series A Preferred Shareholders. The terms of the exchange offer were

shares of our common stock in exchange for each share of Series A Preferred stock and the waiver of the accrued and unpaid dividends on the Series A Preferred shares exchanged. On

December

31,

2015

four

Series A Preferred Stock Shareholders accepted the Exchange Offer and converted a total of

487,500

Series A shares into

1,950,000

common shares. During the

first

months of

2016,

the remaining Series A Preferred Shareholders accepted the Exchange Offer and converted a total of

3,637,724

Series A shares into

14,615,696

common shares.

Series B Preferred Stock

August

2001,

our Board of Directors designated

200,000

shares of our preferred stock as Series B Convertible Preferred Stock (“Series B Preferred Stock”). A Corrected Certificate of Designations was filed on

February

2002

with the Delaware Secretary of State increasing the number of shares authorized as Series B Preferred Stock to

230,000

shares, of which -

- shares are issued and outstanding.

The designations, rights and preferences of the Series B Preferred Stock include:

●

the stated value of each share is

$10.00

per share,

●

the shares are not redeemable,

●

each share of Series B Preferred Stock is convertible into shares of our common stock at the option of the holder at any time commencing

January

31,

2002

at the option of the holder at

$0.25

per share, as adjusted, and the shares automatically convert, subject to limitations based on trading volume, into shares of our common stock at

$0.25

per share at such time as we complete a public offering raising proceeds in excess of

$25

million at an offering price of at least

$0.75

per share.

may

require all outstanding shares of the Series B Preferred Stock to convert in the event the closing bid price of our common stock exceeds

$0.50

for

consecutive trading days, and our common stock has been listed on The NASDAQ Stock Market or other comparable national stock exchange or an OTC Marketplace and a registration statement registering the shares of common stock issuable upon conversion of the Series B Preferred Stock has been declared effective,

●

the shares of Series B Preferred Stock pay a cumulative dividend at a rate of

per annum based on the stated value of

$10.00

per share, payable when and as declared by the Board of Directors, or upon conversion or liquidation.

At our option, dividends can be paid in cash or shares of common stock valued at the conversion price of the Series B Preferred Stock,

●

each share of Series B Preferred Stock will rank senior to our Series A Preferred and pari passu with our Series C Preferred Stock,

●

in the event of our liquidation or winding up, each share of Series B Preferred Stock has a liquidation preference equal to

$10.00

per share plus accrued and unpaid dividends, and

●

the holders of the Series B Preferred Stock are entitled to vote, together with the holders of our common stock, on the basis of

one

vote for each share of common stock issuable upon the conversion of the Series B Preferred Stock,

There were cumulative arrearages of

$609,887

and

$609,887,

$3.05

and

$3.05

per share, on the Series B Preferred Stock dividends as of

December

31,

2016

and

December

31,

2015,

respectively.

The Company has

200,000

shares of its Series B Preferred stock that have been converted by the shareholders into shares of our common stock.

Pursuant to Delaware General Corporate Law, once the Company has a positive net worth, the cumulative dividends would be payable in either cash or in shares of our common stock upon the declaration of dividends by our board of directors.

In addition, the holders of the Series B Preferred Stock were granted certain mandatory and piggy-back registration rights for the shares of our common stock issuable upon the conversion of the Series B Preferred Stock and are entitled to vote

one

member to our Board of Directors.

Series C Preferred Stock

March

2002,

our Board of Directors designated

747,500

shares of our preferred stock as Series C Convertible Preferred Stock of which -

- shares are issued and outstanding.

The designations, rights and preferences of the Series C Preferred Stock include:

●

the stated value of each share is

$10.00

per share,

●

the shares are not redeemable,

●

each share of Series C Preferred Stock is convertible at any time, at the option of the holder, into a number of shares of common stock determined by dividing the stated value per share of the Series C Preferred Stock by

$0.25,

which is the Series C Conversion Price.

The Series C Preferred Stock will automatically convert, subject to limitations based on trading volume, into shares of our common stock upon a public offering of our securities raising gross proceeds in excess of

$25,000,000

at a per share price greater than

2.5

times the Series C Conversion Price per share, as adjusted for any stock split, stock dividend, recapitalization, or other similar transaction. In addition, the Series C Preferred Stock will automatically convert into shares of our common stock at the Series C Conversion Price at such time as the closing bid price for our common stock has traded at

two

times the then prevailing Series C Conversion Price for a period of

consecutive trading days, provided that (i) a public trading market exists for our common stock on a national securities exchange, the NASDAQ Stock Market, or the over the counter market; and (ii) the Conversion Shares have been registered for resale and are not subject to any lock-up and the number of shares of the Series C Preferred Stock which can be converted in any

-day period will be limited to the number of shares of common stock underlying the Series C Preferred Stock equal to

times the average daily trading volume during the

-day look-back period set forth above,

●

the conversion price

has certain anti-dilution protections for any stock splits, stock dividends, and corporate reorganizations, and certain other corporate transactions and issuances of securities at below the applicable conversion price per share or market value of the common stock,

●

the shares of Series C Preferred Stock pay a cumulative dividend at a rate of

per annum based on the stated value of

$10.00

per share, payable when and as declared by the Board of Directors, or upon conversion or liquidation.

At our option, dividends can be paid in cash or shares of common stock valued at the conversion price of the Series C Preferred Stock,

●

each share of Series C Preferred Stock will rank pari passu with our Series B

Preferred Stock and senior to our Series A Preferred Stock,

●

in the event of our liquidation or winding up, each share of Series C Preferred Stock

has a liquidation preference equal to

$10.00

per share plus accrued and unpaid dividends, and

●

the holders of the Series C Preferred Stock are entitled to vote, together with the holders of our common stock, on the basis of

one

vote for each share of common stock issuable upon the conversion of the Series C Preferred Stock.

There were cumulative arrearages of

$1,472,093

and

$1,472,093,

$4.3

and

$4.37

per share, on the Series C Preferred Stock for undeclared dividends as of

December

31,

2016

and

December

31,

2015,

respectively.

The Company has

337,150

shares of its Series C Preferred stock that have been converted by the shareholders into shares of our common stock.

In addition, the holders of the Series C Preferred Stock were granted certain mandatory and piggy-back registration rights covering the shares of our common stock issuable upon the conversion of the Series C Preferred Stock and are entitled to vote

two

members to our Board of Directors.

Series D Preferred Stock

November

2010,

our Board of Directors designated

250,000

shares of our preferred stock as Series D Convertible Preferred Stock of which

250,000

shares are issued and outstanding.

The designations, rights and preferences of the Series D Preferred Stock include:

●

the stated value of the Series

D Preferred is

$0.001

per share,

●

the Series D Preferred has no rights to receive dividend distributions or to participate in any dividends declared by the Corporation to or for the benefit of

the holders of its common stock,

●

the shares of Series D Preferred are not convertible into or exchangeable for any ot

her security of the Corporation,

●

except as provided in Series D Preferred Designation, in the case of the death or disability of Series D Preferred holder, the Series D Preferred is not redeemable without the prior express written consent of the holders of the majority of the voting power of all then outstanding shares of such Series D Preferred. In the event any shares of Series D Preferred are redeemed pursuant, the shares redeemed will automatically be canceled and returned to the status of authorized but uni

ssued shares of preferred stock,

●

each share of Series D Preferred entitles the holder to

four

hundred

(400)

votes. With respect to such vote, the holder is entitled to notice of any stockholders' meeting in accordance with the bylaws of the Company, and is entitled to vote, together as a single class with holders of common stock and any other series of preferred stock then outstanding, with respect to any question or matter upon which holders of common stock have the right to vote. The Series D Preferred will also entitle the holders to vote the shares as a separate class as set forth herein and as required by law. In the event of any stock split, stock dividend or reclassification of the Corporation's common stock, the number of votes which attach to each share of Series D Preferred shall be adjusted in the same proportion as any adjustment to the number of outstanding shares of common stock. The shares of Series D Preferred present at a meeting of the Company’s stockholders shall vote in the same percentage as all voting shares voted for each director at the Company’s stockholder meeting in connection with the election or removal of directors to or from the Corporation’s Board of Directors,

●

in the event of the liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the holders of shares of the Series D Preferred then outstanding are entitled to receive before holders of shares of common stock receive any amounts, out of the remaining assets of the Corporation available for distribution to its stockholders, an amount equal to

$0.001

r share,

●

so long as any shares of Series D Preferred are outstanding, the Company cannot without

first

obtaining the written approval of the holders of at least a majority of the voting power of the then outstanding shares of such Series D Preferred Stock (i) alter or change the rights, preferences or privileges of the Series D Preferred, or (ii) increase or decrease the total number of authorized sha

res of Series D Preferred Stock,

●

the holders of the Series D Preferred are not entitled to rights to subscribe for, purchase or receive any part of any new or additional shares of any class, whether now or hereinafter authorized, or of bonds or debentures, or other evidences of indebtedness convertible into or exchangeable for shares of

any class,

●

the Company has a

thirty

(30)

day “right of

first

refusal” in which to match the terms and conditions set forth in any bona fide offer received by holders of the Series D Preferred Stock.

The Company must purchase all of those shares of Series D Preferred offered by the holder of the Series D Preferred Stock, and

●

the holders of Series D Preferred cannot, directly or indirectly, transfer any shares of Series D Preferred.

Any such purported transfer shall be of no force or effect and shall not be recognized by the Company.

The following table presents preferred dividends accreted for the years ended

December

31,

2016

and

December

31,

2015,

respectively, and the per share effect of the preferred dividends if their effect was not anti-dilutive.

	Dividends accreted				Dividends per share
	For the year ended				For the year ended
	December 31,				December 31,
	2016		2015		2016		2015
Preferred stock dividends in arrears Series A	$	-0-	$	181,886	$	-0-	$	0.050
Preferred stock dividends in arrears Series B	$	-0-	$	-0-	$	-0-	$	-0-
Preferred stock dividends in arrears Series C	$	-0-	$	-0-	$	-0-	$	-0-

Warrants Issued for Services and in Capital Transactions

The following tables summarize all warrants issued as part of debt transactions for the year ended

December

31,

2016

and

December

31,

2015,

and the related changes during these years.

December 31, 2016									December 31, 2016
Warrants outstanding									Warrants exercisable
					Weighted average		Weighted average				Weighted average
Range of exercise price			Number outstanding		remaining contractual life		exercise price		Number exercisable		exercise price
$0.25	-	$0.60		27,860,000		2.71	$	0.42		27,860,000	$	0.42

December 31, 2015									December 31, 2015
Warrants outstanding									Warrants exercisable
					Weighted average		Weighted average				Weighted average
Range of exercise price			Number outstanding		remaining contractual life		exercise price		Number exercisable		exercise price
$0.25	-	$0.60		22,900,000		1.76	$	0.46		22,900,000	$	0.46

Warrants
Balance at December 31, 2014		48,463,517
Issued		3,800,000
Exercised		-0-
Cancelled		(29,363,517	)
Expired/forfeited		-0-
Balance at December 31, 2015		22,900,000
Issued		4,970,000
Exercised		-0-
Expired/forfeited		(10,000	)
Balance at December 31, 2016		27,860,000
Warrants exercisable at December 31, 2016		27,860,000

Weighted average fair value of warrants granted during 2016	$	0.16

Other Comprehensive (Loss)

Due to the availability of net operating losses and related deferred tax valuations, there is no tax effect associated with any component of other comprehensive (loss).

The following table lists the beginning balance, yearly activity and ending balance of the components of accumulated other comprehensive (loss).

	Foreign currency translation			Accumulated other comprehensive (loss)
Balance at December 31, 2014	$	(243,827	)	$	(243,827	)
2015 Activity		(122,528	)		(122,528	)
Balance at December 31, 2015		(366,355	)		(366,355	)
2016 Activity		(44,150	)		(44,150	)
Balance at December 31, 2016	$	(410,505	)	$	(410,505	)