9.	STOCKHOLDERS’ 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

March

31,

2017,

100,000

shares of preferred stock have been designated as Series A-

Convertible Preferred Stock, of which

90,000

shares are issued and outstanding, and

105,000

shares of preferred stock have been designated as Series B-

Convertible Preferred Stock, all of which are issued and outstanding.

Series A-

Convertible Preferred Stock

October

and

29,

2015,

the Company issued

84,500

shares of Series A-

Convertible Preferred 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-

Convertible Preferred Stock were issued at a purchase price of

$100.00

per share, for gross cash proceeds of

$550,000.

Shares of the Series A-

Convertible Preferred Stock are 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. The Series A-

Shares accrue dividends at the rate of

per annum payable quarterly on

April

July,

October

and

January

of each year.

Unless holders of at least a majority of the outstanding shares of Series A-

Preferred Stock elect otherwise by written notice to the Company,

ntil

October

2017,

the dividends are 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 are 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

(10)

days preceding the applicable dividend payment date. Commencing

January

2018,

dividends are 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-

shares are entitled to designate

one

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

Shares are 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-

Shares elect otherwise, holders of Series A-

Shares shall 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 B-

holders). As of

March

31,

2017,

$405,000

was accrued for the holders of the Series A-

shares, for

October

2016,

January

2017

and

April

2017

dividends.

As of

December

31,

2016,

$270,000

of dividends were accrued for the holders of the Series A-

shares for

October

2016

and

January

2017

dividends.

The Series A-

Preferred Stock contains 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 Preferred Stock is 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

may

elect to have the Stock’s 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

(10)

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 at a purchase price of

$100.00

per share, for gross proceeds of

$10,500,000.

Shares of the Series B-

Convertible Preferred Stock are 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. The Series B-

Shares accrue dividends at the rate of

2.5%

per annum payable quarterly on

April

July,

October

and

January

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-

Shares elect otherwise, such dividends are 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

(10)

days preceding the applicable dividend payment date.

The holders of the Series B-

shares are entitled to designate

one

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

Shares elect otherwise, holders of Series B-

Shares shall 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). As of

March

31,

2017,

$196,875

was accrued for the holders of the Series B-

shares, for

October

2016,

January

2017

and

April

2017

dividends. As of

December

31,

2016,

$131,250

of dividends were accrued for the holders of the Series B-

shares for

October

2016

and

January

2017

dividends.

The Series B-

Preferred Stock contains options that based on an evaluation of FASB ASC

815

15,

“Embedded Derivatives” and FASB ASC

815

15,

$3.60

per share; Quarterly Dividend Conversion Option: The majority of Holders

may

elect to have the Stock’s 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

(10)

Common Stock

Effective

December

29,

2016,

the Company implemented a reverse stock split of its outstanding common stock at a ratio of

-for-

12.

The number of authorized shares and the par value of the Company's common stock and preferred stock were not affected by the reverse stock split. Stockholders who otherwise would be entitled to receive fractional shares were rounded up to the nearest whole share. The reverse stock split became effective on the OTCQB at the opening of trading on

December

29,

2016.

March

15,

2017,

the Company issued

1,895

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

$5,003.

March

2016,

the Company issued

8,333

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

$16,000.

Stock Issuance Costs

Costs of

$5,946

and

$31,704

were incurred during the

three

months ended

March

31,

2017

and

2016

in relation to the issuance of stock.

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 accounts for derivative liability instruments under the provisions of FASB ASC

815,

“Derivatives and Hedging.”

Securities Purchase Agreements dated

October

25,

2013

and

November

2013

Pursuant to a series of Private Investors Securities Purchase Agreements (the “PI SPA”), on

October

25,

2013

and

November

2013,

the Company issued to certain private investors an aggregate of

1,026,972

units consisting of

1,026,972

shares of common stock (the “Shares”) and warrants to purchase an additional

1,026,972

shares of common stock (the “Warrants”) for an aggregate purchase price of

$3,697,100.

The warrants were immediately exercisable at an exercise price of

$6.00

per share, and had a term of

three

years which expired in

2016.

In connection with the share issuances described above, and pursuant to a placement agency letter agreement, the Company paid the placement agent cash commissions equal to

of the gross proceeds of the offering, reimbursed the placement agent for its reasonable out of pocket expenses, and issued to the placement agent warrants (the “Placement Agent Warrants”) to purchase an aggregate of

82,158

shares of common stock. The Placement Agent Warrants have substantially the same terms as the warrants issued to the investors, except the Placement Agent Warrants were immediately exercisable on a cashless basis.

The cashless exercise features contained in the warrants were considered to be derivatives and the Company recorded warrant liabilities on the consolidated balance sheet. The Company initially recorded the warrant liabilities equal to their estimated fair value of

$325,891.

Such amount was also recorded as a reduction of additional paid-in capital. The Company is required to mark-to-market the warrant liabilities at the end of each reporting period. For the quarter ended

March

31,

2016,

the Company recorded a gain on the change in fair value of the cashless exercise features of

$2,337.

As of

December

31,

2016,

the fair value of the cashless exercise features was

as the underlying warrants expired during the

fourth

quarter of

2016.

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

“November

2014

Private Investor SPA”), 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 common stock has a purchase price reset feature. If at any time prior to the

two

year anniversary of the effective date of the registration statement covering the public resale of such shares

(January

29,

2015),

the Company sells or issues shares of common stock or securities that are convertible into common stock at a price lower than

$2.40

per share, the Company will be required to issue additional shares of common stock for no additional consideration.

The Company valued the purchase price reset feature using a Monte Carlo simulation at the date of issuance, and at quarterly reporting intervals until the expiration of the feature in

January

2017,

and determined that the purchase price reset feature had no value as the Company issued Series A-

and Series B-

preferred stock in

October

and

November

2015,

at a conversion price of

$3.60,

and issued common stock in

November

2016

also at a price of

$3.60.

The warrants have a term of

five

years and an 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.

Based on an evaluation as discussed in FASB ASC

815

15,

“Embedded Derivatives” and FASB ASC

815

15,

“Contracts in Entity’s Own Equity - Scope and Scope Exceptions,” the Company determined that the purchase price reset feature on the common stock and the full ratchet anti-dilution feature in the warrants issued were not considered indexed to its own stock because neither the occurrence of a sale of equity securities by the issuer at market nor the issuance of another equity contract with a lower strike price is an input to the fair value of a fixed-for-fixed option or forward on equity shares. As such, the purchase price reset feature and the full ratchet anti-dilution feature should be bifurcated from the common stock and warrants and accounted for as derivative liabilities.

The Company did not value the derivative liabilities. One of the key determinants of the Company’s decision to not value the derivative liability was the high likelihood that a future financing would not occur that would trigger the down round feature or the purchase price reset feature. Whether a future equity financing would occur would be determined by the cash needs of the Company and management’s willingness to trigger the down round feature or purchase price reset feature. The Company’s reason was based on the issuance of Series A-

and Series B-

preferred stock in

October

and

November

2015,

issued at a conversion price of

$3.60,

and the issuance of common stock in

November

2016,

at a price of

$3.60.

Under GAAP, the Company is required to mark-to-market the derivative liability at the end of each reporting period. The Company did not value the derivative liabilities at the dates of issuance through

March

31,

2017.

Such conclusion was based upon the discussion noted above.

Warrants

March

2015,

the Company issued a warrant to purchase

47,917

shares of common stock to a consultant which vested in equal quarterly installments over

one

year and is exercisable at

$2.52

per share through

March

2020.

For the

three

months ended

March

31,

2016,

the Company recorded an expense of

$11,625

related to the stock warrants, which completed the service period expense.

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 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.

Based on an evaluation as discussed in FASB ASC

815

15,

“Embedded Derivatives” and FASB ASC

815

15,

“Contracts in Entity’s Own Equity – Scope and Scope Exceptions,” the Company determined that the full ratchet anti-dilution feature in the warrants issued was not considered indexed to its own stock because neither the occurrence of a sale of equity securities by the issuer at market nor the issuance of another equity contract with a lower strike price is an input to the fair value of a fixed-for-fixed option or forward on equity shares. As such, the full ratchet anti-dilution feature should be bifurcated from the common stock and accounted for as a derivative liability.

The Company did not value the derivative liability. One of the key determinants of the Company’s decision to not value the derivative liability was the high likelihood that a future financing would not occur that would trigger the down round feature. Whether a future equity financing would occur would be determined by the cash needs of the Company and management’s willingness to trigger the down round feature. The Company’s reasons were based on the issuance of Series A-

and Series B-

preferred stock in

October

and

November

2015,

issued at a conversion price of

$3.60,

and the issuance of common stock in

November

2016,

at a price of

$3.60.

The cashless exercise features contained in the warrants were initially considered to be derivatives and the Company recorded a warrant liability of

$92,199

on the consolidated balance sheet in

2015.

The warrants issued by the Company were valued using an option-pricing model. The Company marked-to-market the warrant liabilities at the end of each reporting period. For the quarter ended

March

31,

2016

the Company recorded a loss on the change in fair value of the cashless exercise features of

$2,375.

During

2016,

the Company determined the cashless exercise features did not meet the criteria for recording a warrant liability. Accordingly, the grant date fair value of the warrant liability was transferred to additional paid-in capital and the cumulative loss due to change in the recorded fair value of the liability was reversed during

2016.

Issuances of Stock Options

March

15,

2017,

the Company issued options to purchase

40,000

shares of the Company’s common stock to

four

non-employee members of the Board of Directors. On

March

15,

2017,

the Company also issued options to purchase

4,167

shares of the Company’s common stock to an employee. The options have a

three

year vesting period,

seven

year term, and exercise price of

$2.64.

March

16,

2017,

the Board of Directors issued options to purchase

1,120,000

shares of the Company’s common stock to certain officers, employees, and contractors. The options have a

three

year vesting period,

seven

year term, and exercise price of

$2.65.

The fair value of the options issued during the

three

months ended

March

31,

2017

was estimated on the date of grant at

$2,660,122

using the Black-Scholes option-pricing model with the following assumptions: risk free interest rate:

1.93

%, expected life of options in years:

4.5,

expected dividends:

volatility of stock price:

137.8

During the

three

months ended

March

31,

2016,

the Company did not grant any stock options.