NOTE

– CONVERTIBLE DEBT (PIK NOTES)

The Company raised

$23

million of financing through the issuance of

two

series of Paid-In-Kind (“PIK”)-Election Convertible Notes in

2013

and

2014,

with key terms highlighted in the table below:

Key Terms	Series 2023 Notes	Series A Notes
Inception Date	08/05/2013	11/03/2014
Cash Received	$10,500,000	$12,500,000
Principal (Initial Liability)	$10,500,000	$19,848,486
Maturity (Term)	10 years, but convertible after 1 year based on the market price of the Company’s stock	4 years, but may range between 2 years to the full maturity of the Series 2023 Notes, depending on whether a Specified Event occurs and/or an Extension Option is elected (see below for further details)
Exercise Price	$1.40 at inception, adjusted downward based on anti-dilution provisions/down-round protection	$0.92 at inception, adjusted downward based on anti-dilution provisions/down-round protection; also may be reduced by $0.10 based if Extension Option is elected (see below)
Stated Interest	10% per annum, due semiannually	10% per annum, due semiannually, may be reduced to 1% if Specified Event (see below) occurs
Derivative Liability	$2,055,000 established at inception due to existence of anti-dilution provisions; revalued every quarter using Monte Carlo model	$9,212,285 established at inception due to existence of anti-dilution provisions; revalued every quarter using Monte Carlo model

As of

March

31,

2017,

the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table:

	Series 2023 Notes			Series A Notes			Total
PIK Note Payable, Gross	$	14,774,562		$	24,182,215		$	38,956,777
Less: Discount		(1,683,046	)		(12,415,839	)		(14,098,885	)
Less: Deferred Financing Cost		(4,373	)		(7,502	)		(11,875	)
PIK Note Payable, Net	$	13,087,143		$	11,758,874		$	24,846,017

PIK Note Derivative Liability	$	92,341		$	1,191,134		$	1,283,475

As of

December

31,

2016,

the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table:

	Series 2023 Notes			Series A Notes			Total
PIK Note Payable, Gross	$	14,071,008		$	24,125,958		$	38,196,966
Less: Discount		(1,721,898	)		(13,421,225	)		(15,143,123	)
Less: Deferred Financing Cost		(5,064	)		(8,686	)		(13,750	)
PIK Note Payable, Net	$	12,344,046		$	10,696,047		$	23,040,093

PIK Note Derivative Liability	$	142,909		$	2,033,643		$	2,176,552

Series A Notes

November

2014

(“Issue Date”), the Company issued, in a private placement pursuant to investment agreements,

$19,848,486

principal amount of

10%

PIK-Election Convertible Notes due

2018

("Series A Notes") in exchange for

$12,500,000

in cash and the cancellation of previously-issued warrants held by

one

investor.

Below are key terms of the Series A Notes:

●

Maturity

November

2018,

provided that the Stated Maturity Date

may

be extended to

November

2019

at the option of the Company (the “Extension Option”) if (i) the Company has delivered written notice of its exercise of the Extension Option to the Holder not more than

ninety

(90)

nor less than

thirty

(30)

days prior to

November

2018

and (ii) the Company has delivered a certificate, dated as of

November

2018,

certifying that no Default or Event of Default has occurred and is continuing; provided, further that the Stated Maturity Date shall be extended to the maturity date of the Series

2023

Notes or any Replacement Financing, as applicable, upon the occurrence of a Specified Event (“Specified Extension”).

●

Exercise Price

- initially

$0.92

per share (adjusted down to

$0.83

per share after the Company’s capital raise closed on

June

27,

2016)

and will be (i) adjusted from time to time pursuant anti-dilution provisions and (ii) reduced by

$0.10

per share if the Company elects to exercise its Extension Option.

●

Stated Interest

10%

payable semiannually in arrears,

provided

that the interest rate shall be reduced to

per annum on the principal amount of the Note upon the occurrence of the Specified Event, as defined below.

●

Specified Event

- means the event that

may

occur after the

second

anniversary

of the Issuer Date if: (i) any amounts under the Series

2023

Notes or any Replacement Financing are outstanding, (ii) the VWAP for the preceding

consecutive Trading Days as determined by the Board of Directors of the Issuer in good faith is in excess of the Exercise Price, (iii) the closing Market Price of the Common Stock is in excess of the Exercise Price on the date immediately preceding the date on which the Specified Event occurs, (iv) no Default or Event of Default has occurred and is continuing and (v) the Issuer has delivered a certificate to each holder of Series A Notes certifying that the conditions set forth in clauses (i) through (iv) above have been met.

●

Extension Option

- If stock price is lower than current exercise price

($0.92)

prior to the stated maturity

(November

2018),

then the Company can elect an Extension Option, whereby the maturity is extended by

one

year (see Maturity definition), but with a reduction in exercise price by

$0.10.

●

Liquidated Damages

- The company is required to pay the noteholders

of the principal amount of the Series A Notes if a Registration statement is not filed and effective within

days of the inception date (and further damages for every

days thereafter). The registration statement became effective on

July

2015.

Liquidation damages of

$541,011

and

$200,000

have been charged to Other Expenses during

2015

and

2014,

respectively, due to the delay of the effective date of the registration statement. During the

second

quarter of

2015,

the Company issued

1,015,086

shares, valued at

$741,011,

to Series A note holders as payment of liquidated damages.

●

The number of shares issuable under the Notes

may

be affected by the anti-dilution provisions of the Notes. The antidilition provisions adjust the Exercise Price of the Notes in the event of stock dividends and splits, issuance below the market price of the Common Stock, issuances below the conversion price of the Notes, pro rata distribution of assets, rights plans,

tender

offers, and exchange offers.

These Series A Notes were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. In addition to the customary anti-dilution provisions the notes contain a down-round provision whereby the conversion price would be adjusted downward in the event that additional shares of the Company’s common stock or securities exercisable, convertible or exchangeable for the Company’s common stock were issued for cash consideration (e.g. a capital raise) at a price less than the conversion price. Therefore, the estimated fair value of the conversion feature of

$9,212,285

(based on observable inputs using a Monte Carlo model) was bifurcated from the Series A Notes and accounted for as a separate derivative liability, which resulted in a corresponding amount of debt discount on the Series A Notes. In addition, an additional debt discount of

$7,348,486

was recorded as a result of the difference between the

$12,500,000

of cash received and the

$19,848,486

of principal on the Series A Notes. This combined debt discount of

$16,560,771

is being amortized using the effective interest method over the

-year term of the Notes as Interest Expense, while the PIK Note Derivative is carried at fair value (using a Monte Carlo model) until the Notes are converted or otherwise extinguished. Any changes in fair value are recognized in earnings.

March

31,

2017,

the fair value of the Series A PIK Note Derivative was estimated to be

$1,191,134,

which includes the value of the additional PIK Notes issued for the semi-annual interest payments due. The change in the fair value of the derivative represents a decrease in valuation of

$8,021,151

from the

November

2014

inception date.

Series

2023

Notes

August

2013,

the Company received

$10,500,000

of financing through the private placement of

10%

mandatory convertible Notes due

2023

("Series

2023

Notes"). The principal amount of the Notes is due on maturity. The Company can elect to pay semi-annual interest on the Series

2023

Notes with additional PIK Notes containing the same terms as the Series

2023

Notes, except interest will accrue from issuance of such notes. The Company can also elect to pay interest in cash.

The Series

2023

Notes convert into the Company’s common stock at a conversion price of

$1.40

per share, which is subject to customary anti-dilution adjustments; these anti-dilution adjustments reduced the conversion price to

$1.36

after the issuance of the Series A Notes and then adjusted further down to

$1.28

after the Company’s capital raise closed on

June

27,

2016.

As of issuance, principal amount of the Series

2023

Notes were convertible into

7,500,000

shares of the common stock and into

7,720,588

shares after the issuance of the Series A Notes and into

8,203,125

shares of common stock after the private placement in

June

2016..

The holders

may

convert the Series

2023

Notes at any time. The Series

2023

Notes are mandatorily convertible after

one

year when the weighted average trading price of a share of the common stock for the preceding

ten

trading days is in excess of the conversion price. The Series

2023

Notes contain customary representations and warranties and several covenants. The proceeds are being used for general corporate purposes. No broker was used and no commission was paid in connection with the sale of the Series

2023

Notes. As of

March

31,

2017,

the Company was in compliance with the covenants.

These Series

2023

Notes were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. In addition to the customary anti-dilution provisions the notes contain a down-round provision whereby the conversion price would be adjusted downward in the event that additional shares of the Company’s common stock or securities exercisable, convertible or exchangeable for the Company’s common stock were issued for cash consideration (e.g. a capital raise) at a price less than the conversion price. Therefore, the estimated fair value of the conversion feature of

$2,055,000

(based on observable inputs using a Monte Carlo model) was bifurcated from the Series

2023

Notes and accounted for as a separate derivative liability, which resulted in a corresponding amount of debt discount on the Series

2023

Notes. The debt discount is being amortized using the effective interest method over the

-year term of the Series

2023

Notes as Interest Expense, while the PIK Note Derivative is carried at fair value (using a Monte Carlo model) until the Series

2023

Notes are converted or otherwise extinguished. Any changes in fair value are recognized in earnings.

March

31,

2017,

the fair value of the PIK Note Derivative was estimated to be

$92,341,

which includes the value of the additional PIK Notes issued for the semi-annual interest payments due. The change in the fair value of the derivative represents a decrease in valuation of

$1,962,659

from the

August

2013

inception date.