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, 2017,

100,000

shares of preferred stock have been designated as Series A-

Convertible Preferred Stock, of which

62,596

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 outstanding.

Series A-

Convertible Preferred Stock

October 22

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 the 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. These provisions have been waived on

days’ written notice which have been received from Series A-

holder on

August 7, 2017.

The Series A-

Shares accrue 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 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

(

) days preceding the applicable dividend payment date. Commencing

January 1, 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 common stock on all matters presented to the Company

’s 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).

September 22, 2017,

the holder of the Series A-

Shares elected to convert

$540,000

in accrued dividends payable into

150,000

shares of common stock at a conversion price of

$3.60.

October 17, 2017, t

he holder of the Series A-

Shares converted

27,404

Series A-

Shares into

761,222

shares of common stock at a conversion price of

$3.60

As of

December 31, 2017,

36,658

was accrued for the holder of the Series A-

Shares, for

October 1, 2017

and

January 1, 2018

dividends.

As of

December 31, 2016,

$270,000

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

shares for

October 1, 2016

and

January 1, 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 Series A-

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 holders of a majority of the outstanding Series A-

Shares had the right to 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.

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 the 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 B-

Shares accrue 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 holders of a 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

(

) 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 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 the Company

not

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

December 31, 2017,

$393,750

was accrued for the holders of the Series A-

Shares, for

October 1, 2016,

January 1, 2017,

April 1, 2017,

July 1, 2017,

October 1, 2017

and

January 1, 2018

dividends.

As of

December 31, 2016

$131,250

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

shares for

October 1, 2016

and

January 1, 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,

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

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: The holders of the majority of the outstanding Series B-

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

(

) 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.

Stock Issuance Costs

Costs of approximately

0,000

were incurred during

2017

in relation to the issuance of common and preferred stock.

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.

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

Pursuant to a Securities Purchase Agreement, dated

November 11, 2016,

by and between the Company and Wong Kwok Fong the Company issued

516,667

shares of common stock for aggregate gross proceeds of

$1,860,000.

April 28, 2017,

the Company issued to Wong Kwok Fong,

a director, executive officer and principal stockholder of the Company,

277,778

shares of common stock at a purchase price of

$3.60

per share for gross cash proceeds of

$1,000,000.

May 2, 2017,

the Company entered into a committed equity facility pursuant to which it

may

issue and sell up to

$5.0

million worth of shares of common stock, subject to certain limitations and satisfaction of certain conditions, over a

-month term following the effectiveness of a registration statement covering the public resale of the shares of common stock issued under the facility.

As of

December 31, 2017,

the registration statement has

not

been filed. From time to time over the term of the facility, the Company

may

issue requests to the investor to purchase a specified dollar amount of shares up to a maximum of

$100,000

over a

five

trading day period based on the daily volume weighted average price of the Company’s common stock (VWAP) to the extent the VWAP equals or exceeds the greater of a formula amount or

$3.83

per share. The per share purchase price for the shares issued under the facility will be equal to

94%

of the lowest VWAP that equals or exceeds

$3.83

per share. Aggregate sales under the facility are limited to

19.99%

of the total outstanding shares of the Company’s common stock as of

May 2, 2017,

unless stockholder approval is obtained, and sales under the facility are prohibited if such a sale would result in beneficial ownership by the investor of more than

9.99%

of the Company’s common stock.

September 22, 2017,

the Company issued to Wong Kwok Fong,

a director, executive officer and principal stockholder of the Company,

427,778

shares of common stock and warrants to purchase

138,889

shares of common stock for an aggregate purchase price of

$1,540,000,

$3.60

per share. The purchase price was paid via a cash payment of

$1,000,000

for

277,778

shares and conversion of an accrued dividend payable on the Company’s Series A-

Convertible Preferred Stock of

$540,000

into

150,000

shares.

Also on

September 22, 2017,

Wong Kwok Fong converted

27,404

Series A-

Shares into

761,222

shares of common stock at a conversion price of

$3.60

Issuances to Directors, Executive Officers and Consultants

March 15, 2017,

the Company issued

1,895

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

$5,003.

May 11, 2017,

the Company issued

1,925

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

$5,005.

May 2017,

the Company issued

55,000

shares of common stock in payment of a commitment fee for the equity facility

$198,000.

The Company immediately expensed the fee as it relates to the contingent use of the equity committed equity facility.

May 2017,

the Company issued

61,667

shares of common stock to a consultancy firm in lieu of payment for services with respect to the equity facility agreement. The fair value at issuance averaged

$2.54

per share, with the total amount of

$156,584.

The Company deferred the cost to prepaid expense and is amortizing the expense over the length of the consultancy service agreement

which has been fully amortized as of

December 31, 2017.

August 9, 2017,

the Company issued

5,148

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

$18,

017.

November 13, 2017,

the Company issued

2,276

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

$4,

005.

During the year ended

December 31, 2016,

the Company issued

18,914

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

$45,000,

and issued

8,334

shares of common stock to the Chief Executive Officer as compensation, valued at

$17,000.

During the year ended

December 31, 2016

, the Company issued

41,667

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

$2.52

per share, with the total amount of

$105,000

to be expensed over the period of the services.

Employees

’ exercise options

During

2017,

4,167

employee stock options were exercised resulting in the cashless issuance of

1,610

shares of common stock. There were

stock options exercised during

2016.

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.

A) Securities Purchase Agreements dated

October 25, 2013

and

November 8, 2013

Pursuant to a series of Private Investors Securities Purchase Agreements, on

October 25, 2013

and

November 8, 2013,

the Company issued to certain private investors an aggregate of

1,026,972

units consisting of

1,026,972

shares of common stock and warrants to purchase an additional

1,026,972

shares of common stock 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 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 year ended

December 31, 2016,

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

$7,478.

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.

B) 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

had 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 sold or issued shares of common stock or securities that are convertible into common stock at a price lower than

$2.40

per share, the Company would have been required to issue additional shares of common stock for

additional consideration.

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 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 purchase price reset feature should be bifurcated from the common stock and accounted for as a derivative liability.

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

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

and

April 2017

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.

As a result of the early adoption of ASU

2017

referred to in Note A – Recently Issued Accounting Pronouncements, 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.

C) 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 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.

As a result of the early adoption of ASU

2017

referred to in Note

A – Recently Issued Accounting Pronouncements, 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.

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. 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. 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 the period. For the year ended

December 31, 2016

the Company recorded income of

$4,607

in order to reverse the net cumulative loss on the warrant liability that had been previously recorded.

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 January 1, 2016		1,704,628			4.40		3.02

Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired		(444,548	)		6.00
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		—
Vested or expected to vest at December 31, 2017		1,398,969			3.81		2.06		—
Exercisable at December 31, 2017		1,398,969			3.81		2.06		—

September 22, 2017,

the Company issued to Wong Kwok Fong, a director and executive officer of the Company, warrants to purchase

138,889

shares of Common Stock in connection with the purchase of

427,778

shares of common stock by Mr. Fong. The warrants are immediately exercisable at an exercise price of

$3.60

per share and have a term of

five

years.