NOTE

7–

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

(“Series

2023

Notes”) and

2014

(“Series A Notes”). The original terms of the Series A Notes included among other things: (i) a maturity of

November 1, 2018

with an option to extend to

November 1, 2019, (

ii) a stated interest rate of

10%

paid semi-annually and (iii) a conversion price of

$0.90,

adjusted downward based on an anti-dilution provision. The original terms of the Series

2023

Notes included among other things: (i) a maturity of

August 1, 2023, (

ii) a stated interest rate of

10%

paid semi-annually and (iii) a conversion price of

$1.40,

adjusted downward based on an anti-dilution provision. On

December 14, 2017,

an amendment agreement, entered into between the Company and the holders of the Series A Notes and Series

2023

Notes, went into effect. The agreement resulted in changes to certain terms of the Series A and Series

2023

Notes. The key terms of the Series A and Series

2023

Notes, as amended, are highlighted in the table below:

Key Terms	Series 2023 Notes		Series A Notes
Inception Date	08/01/2013		11/03/2014
Cash Received		$10,500,000		$12,500,000
Principal (Initial Liability)		$10,500,000		$19,848,486
Maturity (Term)	Matures on August 1, 2023, but convertible into shares of the Company’s common stock at the discretion of the holder or by the Company based on the market price of the Company’s stock;		Matures on May 1, 2023 but extends to August 1, 2023 if the Series 2023 Notes are still outstanding. Convertible into shares of the Company’s common stock at the discretion of the holder or by the Company based on the market price of the Company’s stock;
Exercise Price	$0.59, adjusted downward based on anti-dilution provisions/downround protection		$0.40, adjusted downward based on anti-dilution provisions/down-round protection;
Stated Interest	10% per annum through December 14, 2017, 3% per annum thereafter, due semiannually;		10% per annum through December 14, 2017, 3% per annum thereafter, due semiannually;
Derivative Liability	$2,055,000 established at inception due to the existence of down-round protection; revalued every quarter using Monte Carlo model		$9,212,285 established at inception due to existence of down-round protection; revalued every quarter using a Monte Carlo model

As of

June 30, 2018,

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	$	16,152,402		$	27,214,693		$	43,367,095
Less: Discount		(1,453,542	)		(5,488,161	)		(6,941,703	)
Less: Deferred Financing Cost		(201,756	)		(268,436	)		(470,192	)
PIK Note Payable, Net	$	14,497,104		$	21,548,096		$	35,955,200

PIK Note Derivative Liability	$	748,417		$	8,000,101		$	8,748,518

As of

December 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	$	16,090,721		$	26,909,716		$	43,000,437
Less: Discount		(1,538,299	)		(7,701,839	)		(9,240,138	)
Less: Deferred Financing Cost		(221,280	)		(294,414	)		(515,694	)
PIK Note Payable, Net	$	14,331,142		$	18,913,463		$	33,244,605

PIK Note Derivative Liability	$	163,634		$	1,883,630		$	2,047,264

Series A Notes (Amended)

November 3, 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.

The original terms of the Series A Notes included among other things: (i) a maturity of

November 1, 2018

with an option to extend to

November 1, 2019, (

ii) a stated interest rate of

10%

paid semi-annually and (iii) a conversion price of

$0.90,

adjusted downward based on an anti-dilution provision.

June 30, 2018,

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

$8,000,101.

During the

three

and

six

months ended

June 30, 2018,

the Company amortized

$80,142

and

$2,239,656,

respectively of debt discount and deferred financing cost relating to the Series A Notes Payable and issued additional PIK Notes of

$304,977

in lieu of cash interest payments, increasing the Series A Notes Payable carrying value to

$21,458,096

as of

June 30, 2018.

December 31, 2017,

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

$1,883,630,

which includes the value of the derivative related to the additional PIK Notes issued in

May

and

November 2017

for the semi-annual interest payments due and the additional notes issued in

December, 2017.

During the year ended

December 31, 2017,

the Company amortized

$5,808,294

of debt discount and deferred financing cost relating to the Series A Notes Payable and issued additional PIK Notes in lieu of interest payments of

$2,797,836,

increasing the Series A Notes Payable carrying value to

$26,909,721

as of

December 31, 2017.

As of

June 30, 2018,

the Company was in compliance with the covenants of the Series A Notes.

Series

2023

Notes (Amended)

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. In

February, 2017

and

August, 2017,

the Company issued

$703,550

and

$738,728,

respectively, in additional Series

2023

Notes to the holders to pay the semi-annual interest. Additionally, on

December 14, 2017,

the Company issued

$577,439

of additional

2023

Notes, which represented the accrued interest of the Series

2023

Notes on the day on which the terms of the Series

2023

Notes were effectively amended.

The original terms of the Series

2023

Notes included among other things: (i) a maturity of

August 1, 2023, (

ii) a stated interest rate of

10%

paid semi-annually and (iii) a conversion price of

$1.40,

adjusted downward based on an anti-dilution provision.

June 30, 2018,

the fair value of the Series

2023

Note Derivative was estimated to be

$748,417,

which includes the value of the derivative related to additional PIK Notes issued in

February 2018.

During the

three

and

six

months ended

June 30, 2018,

the Company amortized

$50,115

and

$104,281,

respectively of debt discount and deferred financing cost relating to the Series

2023

Notes Payable and issued additional PIK Notes of

$61,681

in lieu of cash interest payments, increasing the Series

2023

Notes Payable carrying value to

$14,497,104

as of

June 30, 2018.

December 31, 2017,

the fair value of the Series

2023

Note Derivative was estimated to be

$163,634,

which includes the value of the derivative related to additional PIK Notes issued in

February

and

August 2016

for the semi-annual interest payments due and the additional notes issued in

December, 2017.

During the year ended

December 31, 2017,

the Company amortized

$200,360

of debt discount and deferred financing cost relating to the Series

2023

Notes Payable and issued additional PIK Notes of

$2,019,717

in lieu of cash interest payments, increasing the Series

2023

Notes Payable carrying value to

$16,090,721

as of

December 31, 2017.

As part of the amendment agreement, the holders of the Series

2023

Notes received warrants to purchase

3,720,000

million shares of common stock at

$0.10

per share. The Black Scholes value of these warrants totaled

$224,290.

As of

June 30, 2018,

the Company was in compliance with the covenants of the Series

2023

Notes.