RISK
FACTORS
Our
business faces many risks and an investment in our securities involves significant risks. Prospective investors are strongly encouraged
to consider carefully the risks described below, as well as other information contained herein, before investing in our securities.
Investors are further advised that the risks described below may not be the only risks we face. Additional risks that we do not
yet know of, or that we currently think are immaterial, may also negatively impact our business operations or financial results.
If any of the events or circumstances described in this section occurs, our business, financial condition or results of operations
could suffer. Prospective investors in our securities should consider the following risks before deciding whether to purchase
our securities.
Risks
Relating to the Company’s Business
We
are uncertain of our ability to generate sufficient revenue and profitability in the future.
We
continue to develop and refine our business model, but we can provide no assurance that we will be able to generate a sufficient
amount of revenue, from our business in order to achieve profitability. It is not possible for us to predict at this time the
potential success of our business. The revenue and income potential of our proposed business and operations are currently unknown.
If we cannot continue as a viable entity, you may lose some or all of your investment in our Company.
The
Company is an emerging growth company and has incurred net losses of $5,960,684 for the nine months ended September 30, 2017.
As of September 30, 2017, the Company had cash and stockholders’ equity of $514,602 and $6,835,893, respectively. At September
30, 2017, the Company had a working capital deficiency of $6,322,182 (including contingent consideration of $5,340,432). We cannot
provide any assurance that we will be able to raise additional cash from equity financings, secure debt financing, and/or generate
revenue from the sales of our products. If we are unable to secure additional capital, we may be required to curtail our research
and development initiatives and take additional measures to reduce costs in order to conserve our cash in amounts sufficient to
sustain operations and meet our obligations.
We
and the businesses we have recently acquired or propose to acquire have limited operating histories and we cannot offer any assurance
as to our future financial results, and you should not rely on the historical financial date included in this prospectus as an
indicator of our future financial performance. You may lose your entire investment.
We
and the businesses we have recently acquired or propose to acquire have limited operating histories upon which to base any assumption
as to the likelihood that we will be successful in implementing our business plan, and we may not be able to generate significant
revenues or achieve profitability. You should consider our business and prospects in light of the risks and difficulties we face
with our limited operating history and should not rely on our past results or the past results of any of such businesses as an
indication of our future performance. There is no assurance that the growth rate we or they have experienced to date will continue.
Even if we generate future revenues sufficient to expand operations, increased infrastructure costs and cost of goods sold and
marketing expenses could impair or prevent us from generating profitable returns. We recognize that if we are unable to generate
significant revenues from our business development, we will not be able to earn profits or potentially continue operations. If
we are unsuccessful in addressing these risks, our business will most likely fail.
If
we fail to keep pace with changing industry technology and consumer preferences, we will be at a competitive disadvantage.
The
industry segments in which we are operating are evolving rapidly. They are characterized by changing technology, budding industry
standards, frequent new and enhanced product introductions, rapidly changing end-user/consumer preferences and product obsolescence.
In order to continue to compete effectively in these markets, we need to respond quickly to technological changes and to understand
their impact on our customers’ preferences. It may take significant time and resources to respond to these technological
changes. If we fail to keep pace with these changes, our business may suffer. Moreover, developments by others may render our
technologies and intended products noncompetitive or obsolete, or we may be unable to keep pace with technological developments
or other market factors. If any of our competitors implement new technologies before we are able to implement them, those competitors
may be able to provide more effective products than ours. Any delay or failure in the introduction of new or enhanced products,
could have a material adverse effect on our business, results of operations and financial condition. Furthermore, our inability
to keep pace with changing industry technology and consumer preferences may cause our inventory to become obsolete at a rate faster
than anticipated, which may result in our taking goodwill impairment charges in past or future acquisitions that negatively impact
our results of operations.
We
have made a significant acquisition in each of 2016 and 2017, and we may encounter difficulties in integrating these acquisitions
and managing our growth, which would adversely affect our results of operations.
During
2016 and 2017, we completed the acquisitions of LogicMark and Fit Pay, respectively, and are considering other acquisitions to
improve our position in market segments that we consider to be significant and strategic. We may be unable to integrate the operations
of the acquired companies into our own in the manner we anticipated or at all, and such integration could be expensive. Moreover,
this significant expansion of our operations could put significant strain on our management and our operational and financial
resources. To manage future growth, we will need to hire, train, and manage additional employees, as well as properly integrate
personnel from acquired businesses. Concurrent with expanding our operational and marketing capabilities, we will also need to
increase our product development activities. We may not be able to support, financially or otherwise, future growth, or hire,
train, motivate, and manage the required personnel. Our failure to manage growth effectively could limit our ability to achieve
our goals.
Our
ability to integrate our acquisitions and manage our growth will depend in part on the ability of our executive officers to continue
to implement and improve our operational, management, information and financial control systems and to expand, train and manage
our employee base, and particularly to attract, expand, train, manage and retain a sales force to market our products on acceptable
terms. Our inability to manage growth effectively could cause us to fail to realize the anticipated benefits of our acquisitions
or could cause our operating costs to grow at a faster pace than we currently anticipate, any of which could have a material adverse
effect on our business, financial condition, results of operations and prospects.
Because
we are an emerging growth company, we expect to incur significant additional operating losses.
The
Company is an emerging growth company. The amount of future losses and when, if ever, we will achieve profitability are uncertain.
Our current products have not generated significant commercial revenue for the Company and there can be no guarantee that we can
generate sufficient revenues from the commercial sale of our products in the near future to fund our ongoing capital needs.
We
have a limited operating history upon which you can gauge our ability to obtain profitability.
We
have a limited operating history and our business and prospects must be considered in light of the risks and uncertainties to
which emerging growth companies are exposed. We cannot provide assurances that our business strategy will be successful or that
we will successfully address those risks and the risks described herein. Most important, if we are unable to secure future capital,
we may be unable to continue our operations. We may incur losses on a quarterly or annual basis for a number of reasons, some
of which may be outside our control.
If
we cannot obtain additional capital required to finance our research and development efforts, our business may suffer and you
may lose the value of your investment.
We
may require additional funds to further execute our business plan and expand our business. If we are unable to obtain additional
capital when needed, we may have to restructure our business or delay or abandon our development and expansion plans. If this
occurs, you may lose part or all of your investment. We will have ongoing capital needs as we expand our business. If we raise
additional funds through the sale of equity or convertible securities, your ownership percentage of our Common Stock will be reduced.
In addition, these transactions may dilute the value of our Common Stock. We may have to issue securities that have rights, preferences
and privileges senior to our Common Stock. The terms of any additional indebtedness may include restrictive financial and operating
covenants that would limit our ability to compete and expand. There can be no assurance that we will be able to obtain the additional
financing we may need to fund our business, or that such financing will be available on terms acceptable to us.
We
face intense competition in our market, especially from larger, well-established companies, and we may lack sufficient financial
or other resources to maintain or improve our competitive position.
A
number of other companies engage in the business of developing applications for facial recognition for access control. The market
for biometric security products is intensely competitive, and we expect competition to increase in the future from established
competitors and new market entrants. Our current competitors include both emerging or developmental stage companies, such as ourselves,
as well as larger companies. Many of our existing competitors have, and some of our potential competitors could have, substantial
competitive advantages such as:
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Greater
name recognition and longer operating histories;
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Larger
sales and marketing budgets and resources;
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Broader
distribution and established relationships with distribution partners and end-customers;
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Greater
customer support resources;
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Greater
resources to make acquisitions;
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Larger
and more mature intellectual property portfolios; and
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Substantially
greater financial, technical, and other resources.
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In
addition, some of our larger competitors have substantially broader product offerings and leverage their relationships based on
other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing
our products, including through selling at zero or negative margins, product bundling, or closed technology platforms. Conditions
in our market could change rapidly and significantly as a result of technological advancements, partnering by our competitors
or continuing market consolidation. New start-up companies that innovate and large competitors that are making significant investments
in research and development may invent similar or superior products and technologies that compete with our products and technology.
Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that
may further enhance their resources.
Our
markets are subject to technological change and our success depends on our ability to develop and introduce new products.
Each
of the governmental and commercial markets for our products is characterized by:
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Changing
technologies;
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Changing
customer needs;
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Frequent
new product introductions and enhancements;
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Increased
integration with other functions; and
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Product
obsolescence.
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Our
success will be dependent in part on the design and development of new products. To develop new products and designs for our target
markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to expand
our technical and design expertise. The product development process is time-consuming and costly, and there can be no assurance
that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted on
a timely basis, or at all, or that the potential products will achieve market acceptance. Our failure to develop, obtain necessary
regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on
our business, financial condition and results of operations.
Claims
by others that we infringe their intellectual property rights could increase our expenses and delay the development of our business.
As a result, our business and financial condition could be harmed.
Our
industries are characterized by the existence of a large number of patents as well as frequent claims and related litigation regarding
patent and other intellectual property rights. We cannot be certain that our products do not and will not infringe issued patents,
patents that may be issued in the future, or other intellectual property rights of others.
We
do not have the resources to conduct exhaustive patent searches to determine whether the technology used in our products infringe
patents held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological environment
in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar
technologies.
We
may face claims by third parties that our products or technology infringe their patents or other intellectual property rights.
Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid,
and could distract the attention of our management. If any of our products are found to violate third-party proprietary rights,
we may be required to pay substantial damages. In addition, we may be required to re-engineer our products or obtain licenses
from third parties to continue to offer our products. Any efforts to re-engineer our products or obtain licenses on commercially
reasonable terms may not be successful, which would prevent us from selling our products, and, in any case, could substantially
increase our costs and have a material adverse effect on our business, financial condition and results of operations.
We
may not be able to protect our intellectual property rights adequately.
Our
ability to compete for government contracts is affected, in part, by our ability to protect our intellectual property rights.
We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and
licensing arrangements to protect our intellectual property rights. Despite these efforts, we cannot be certain that the steps
we take to protect our proprietary information will be adequate to prevent misappropriation of our technology or protect that
proprietary information. The validity and breadth of claims in technology patents involve complex legal and factual questions
and, therefore, may be highly uncertain. Nor can we assure you that, if challenged, our patents will be found to be valid or enforceable,
or that the patents of others will not have an adverse effect on our ability to do business. In addition, the enforcement of laws
protecting intellectual property may be inadequate to protect our technology and proprietary information.
We
may not have the resources to assert or protect our rights to our patents and other intellectual property. Any litigation or proceedings
relating to our intellectual property, whether or not meritorious, will be costly and may divert the efforts and attention of
our management and technical personnel.
We
also rely on other unpatented proprietary technology, trade secrets and know-how and no assurance can be given that others will
not independently develop substantially equivalent proprietary technology, techniques or processes, that such technology or know-how
will not be disclosed or that we can meaningfully protect our rights to such unpatented proprietary technology, trade secrets,
or know-how. Although we intend to enter into non-disclosure agreements with our employees and consultants, there can be no assurance
that such non-disclosure agreements will provide adequate protection for our trade secrets or other proprietary know-how.
Our
success will depend, in part, on our ability to obtain new patents.
To
date, we have applied for 25 United States patents, one of which has been awarded and our success will depend, in part, on our
ability to obtain patent and trade secret protection for proprietary technology that we currently possess or that we may develop
in the future. No assurance can be given that any pending or future patent applications will issue as patents, that the scope
of any patent protection obtained will be sufficient to exclude competitors or provide competitive advantages to us, that any
of our patents will be held valid if subsequently challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held by us.
Furthermore,
there can be no assurance that our competitors have not or will not independently develop technology, processes or products that
are substantially similar or superior to ours, or that they will not duplicate any of our products or design around any patents
issued or that may be issued in the future to us. In addition, whether or not patents are issued to us, others may hold or receive
patents which contain claims having a scope that covers products or processes developed by us.
We
may not have the resources to adequately defend any patent infringement litigation or proceedings. Any such litigation or proceedings,
whether or not determined in our favor or settled by us, is costly and may divert the efforts and attention of our management
and technical personnel. In addition, we may be required to obtain licenses to patents or proprietary rights from third parties.
There can be no assurance that such licenses will be available on acceptable terms if at all. If we do not obtain required licenses,
we could encounter delays in product development or find that the development, manufacture or sale of products requiring such
licenses could be foreclosed. Accordingly, challenges to our intellectual property, whether or not ultimately successful, could
have a material adverse effect on our business and results of operations.
We
rely on a third party for licenses relating to a critical component of our technology. The failure of such licensor would materially
and adversely affect our business and product offerings.
We
currently license technology for a critical component of our current product offerings from a third party. The third party’s
independent registered public accounting firm included an explanatory paragraph in its audit report as it relates to the third
party’s ability to continue as a going concern in its recent financial statements. If our licensor were to fail, it could
impact our license arrangement and impede our ability to further commercialize our technology. In the event we were to lose our
license or our license were to be renegotiated as a result of our licensor’s failure, our ability to manage our business
would suffer and it would significantly harm our business, operating results and financial condition.
Our
future success depends on the continued service of management, engineering and sales personnel and our ability to identify, hire
and retain additional personnel.
Our
success depends, to a significant extent, upon the efforts and abilities of members of senior management. We have entered into
an employment agreement with our Chief Executive Officer, but have not entered into an employment agreement with our Chief Financial
Officer or Chief Technology Officer, and we have no current plans to use employment agreements as a tool to attract and retain
new hires of key personnel that we may make in the future. The loss of the services of one or more of our senior management or
other key employees could adversely affect our business. We currently maintain a key person life insurance policy on our Chief
Executive Officer only.
There
is intense competition for qualified employees in our industry, particularly for highly skilled design, applications, engineering
and sales people. We may not be able to continue to attract and retain developers, managers, or other qualified personnel necessary
for the development of our business or to replace qualified individuals who may leave us at any time in the future. Our anticipated
growth is expected to place increased demands on our resources, and will likely require the addition of new management and engineering
staff as well as the development of additional expertise by existing management employees. If we lose the services of or fail
to recruit engineers or other technical and management personnel, our business could be harmed.
The
requirements of being a public company may strain our resources and divert management’s attention.
As
a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank
Act and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal
and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems
and resources. The Exchange Act requires, among other things, that we file annual and current reports with respect to our business
and operating results.
As
a result of disclosure of information in this annual report and in filings required of a public company, our business and financial
condition is more visible, which we believe may result in threatened or actual litigation, including by competitors and other
third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not
result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert
resources of our management and harm our business and operating results.
Periods
of rapid growth and expansion could place a significant strain on our resources, including our employee base, which could negatively
impact our operating results.
We
may experience periods of rapid growth and expansion, which may place significant strain and demands on our management, our operational
and financial resources, customer operations, research and development, marketing and sales, administrative, and other resources.
To manage our possible future growth effectively, we will be required to continue to improve our management, operational and financial
systems. Future growth would also require us to successfully hire, train, motivate and manage our employees. In addition, our
continued growth and the evolution of our business plan will require significant additional management, technical and administrative
resources. If we are unable to manage our growth successfully we may not be able to effectively manage the growth and evolution
of our current business and our operating results could suffer.
We
depend on contract manufacturers, and our production and products could be harmed if it is unable to meet our volume and quality
requirements and alternative sources are not available.
We
rely on contract manufacturers to provide manufacturing services for our products. If these services become unavailable, we would
be required to identify and enter into an agreement with a new contract manufacturer or take the manufacturing in-house. The loss
of our contract manufacturers could significantly disrupt production as well as increase the cost of production, thereby increasing
the prices of our products. These changes could have a material adverse effect on our business and results of operations.
We
are presently a small company with too limited resources and personnel to establish a comprehensive system of internal controls.
If we fail to maintain an effective system of internal controls, we would not be able to accurately report our financial results
on a timely basis or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting,
which would harm our business and the trading price of our stock.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide
reliable financial reports or prevent fraud, our brand and operating results would be harmed. We may in the future discover areas
of our internal controls that need improvement. For example, because of size and limited resources, our external auditors may
determine that we lack the personnel and infrastructure necessary to properly carry out an independent audit function. Although
we believe that we have adequate internal controls for a company with our size and resources, we are not certain that the measures
that we have in place will ensure that we implement and maintain adequate controls over our financial processes and reporting
in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation,
would harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls would also
cause investors to lose confidence in our reported financial information, which would have a negative effect on our company and,
if a public market develops for our securities, the trading price of our stock.
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. A material weakness
is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely
basis.
As
of September 30, 2017, we have identified certain matters that constituted a material weakness in our internal controls over financial
reporting. Specifically, we have difficulty in accounting for complex accounting transactions due to an insufficient number of
accounting personnel with experience in that area and limited segregation of duties within our accounting and financial reporting
functions.
If
we do not effectively manage changes in our business, these changes could place a significant strain on our management and operations.
Our
ability to grow successfully requires an effective planning and management process. The expansion and growth of our business could
place a significant strain on our management systems, infrastructure and other resources. To manage our growth successfully, we
must continue to improve and expand our systems and infrastructure in a timely and efficient manner. Our controls, systems, procedures
and resources may not be adequate to support a changing and growing company. If our management fails to respond effectively to
changes and growth in our business, including acquisitions, this could have a material adverse effect on the Company’s business,
financial condition, results of operations and future prospects.
We
are an emerging growth company within the meaning of the Securities Act, and if we decide to take advantage of certain exemptions
from various reporting requirements applicable to emerging growth companies, our Common Stock could be less attractive to investors.
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long
as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that
are not applicable to other public companies that are not emerging growth companies, including not being required to comply with
the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be
an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1 billion,
if we issue more than $1 billion in non-convertible debt in a three-year period, or if the market value of our Common Stock held
by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, in which
case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find
our Common Stock less attractive because we may rely on these exemptions. If some investors find our Common Stock less attractive
as a result, there may be a less active trading market for our Common Stock and our stock price may be more volatile.
Under
the JOBS Act, emerging growth companies may also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting
standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not
emerging growth companies.
We
may not be able to access the equity or credit markets.
We
face the risk that we may not be able to access various capital sources including investors, lenders, or suppliers. Failure to
access the equity or credit markets from any of these sources could have a material adverse effect on the Company’s business,
financial condition, results of operations, and future prospects.
Persistent
global economic trends could adversely affect our business, liquidity and financial results.
Although
improving, persistent global economic conditions, particularly the scarcity of capital available to smaller businesses, could
adversely affect us, primarily through limiting our access to capital and disrupting our clients’ businesses. In addition,
continuation or worsening of general market conditions in economies important to our businesses may adversely affect our clients’
level of spending and ability to obtain financing, leading to us being unable to generate the levels of sales that we require.
Current and continued disruption of financial markets could have a material adverse effect on the Company’s business, financial
condition, results of operations and future prospects.
We
may seek or need to raise additional funds. Our ability to obtain financing for general corporate and commercial purposes or acquisitions
depends on operating and financial performance, and is also subject to prevailing economic conditions and to financial, business
and other factors beyond our control. The global credit markets and the financial services industry have been experiencing a period
of unprecedented turmoil characterized by the bankruptcy, failure or sale of various financial institutions. An unprecedented
level of intervention from the U.S. and other governments has been seen. As a result of such disruption, our ability to raise
capital may be severely restricted and the cost of raising capital through such markets or privately may increase significantly
at a time when we would like, or need, to do so. Either of these events could have an impact on our flexibility to fund our business
operations, make capital expenditures, pursue additional expansion or acquisition opportunities, or make another discretionary
use of cash and could adversely impact our financial results.
Although
recent trends point to continuing improvements, there is still lingering volatility and uncertainty. A change or disruption in
the global financial markets for any reason may cause consumers, businesses and governments to defer purchases in response to
tighter credit, decreased cash availability and declining consumer confidence. Accordingly, demand for our products could decrease
and differ materially from current expectations. Further, some of our customers may require substantial financing in order to
fund their operations and make purchases from us. The inability of these customers to obtain sufficient credit to finance purchases
of our products and meet their payment obligations to us or possible insolvencies of our customers could result in decreased customer
demand, an impaired ability for us to collect on outstanding accounts receivable, significant delays in accounts receivable payments,
and significant write-offs of accounts receivable, each of which could adversely impact our financial results.
Rising
interest rates could adversely impact our business.
Changes
in interest rates could have an adverse impact on our business by increasing our cost of capital. For example:
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rising
interest rates would increase our cost of capital; and
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rising
interest rates may negatively impact our ability to secure financing on favorable terms and may impact our ability to provide
cost-effective financing to our end-customers or end-users, where applicable.
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Rising
interest rates could generally harm our business and financial condition.
Risks
Related to our Securities
Our
insiders and affiliated parties beneficially own a significant portion of our stock.
As
of the date of this prospectus, our executive officers, directors, and affiliated parties beneficially own approximately 18.11%
of our Common Stock. As a result, our executive officers, directors and affiliated parties will have significant influence to:
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Elect
or defeat the election of our directors;
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Amend
or prevent amendment of our certificate of incorporation or bylaws;
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Effect
or prevent a merger, sale of assets or other corporate transaction; and
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Affect
the outcome of any other matter submitted to the stockholders for vote.
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In
addition, any sale of a significant amount of our Common Stock held by our directors and executive officers, or the possibility
of such sales, could adversely affect the market price of our Common Stock. Management’s stock ownership may discourage
a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing any gains from our Common Stock.
We
may not be able to maintain effectiveness of the registration statement of which this prospectus forms a part, which could impact
the liquidity of our Common Stock.
If
this registration statement is not effective, the selling stockholders’ ability to sell the shares of Common Stock underlying
the Warrants may be limited, which would have a material adverse effect on the liquidity of our Common Stock.
The
market price for our Common Stock is particularly volatile given our status as a relatively unknown company with a small and thinly
traded public float, and lack of profits, which could lead to wide fluctuations in our share price. You may be unable to sell
your common shares at or above your purchase price, which may result in substantial losses to you.
The
market for our Common Stock is characterized by significant price volatility when compared to the shares of larger, more established
companies that trade on a national securities exchange and have large public floats, and we expect that our share price will continue
to be more volatile than the shares of such larger, more established companies for the indefinite future. The volatility in our
share price is attributable to a number of factors. First, as noted above, our Common Stock is, compared to the shares of such
larger, more established companies, sporadically and thinly traded. The price for our shares could, for example, decline precipitously
in the event that a large number of our Common Stock is sold on the market without commensurate demand. Secondly, we are a speculative
or “risky” investment due to our lack of profits to date. As a consequence of this enhanced risk, more risk-adverse
investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be
more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of
a larger, more established company that trades on a national securities exchange and has a large public float. Many of these factors
are beyond our control and may decrease the market price of our Common Stock regardless of our operating performance.
If
we are not able to comply with the applicable continued listing requirements or standards of the NASDAQ Capital Market, NASDAQ
could delist our Common Stock.
Our
Common Stock is currently listed on the NASDAQ Capital Market (“NASDAQ”). In order to maintain that listing, we must
satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence
and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance
requirements. There can be no assurances that we will be able to comply with the applicable listing standards. Although we are
currently in compliance with our listing standards, we have, in the past, fallen out of compliance and may in the future fall
out of compliance. If we are unable to maintain compliance with these NASDAQ requirements, our Common Stock will be delisted from
NASDAQ.
In
the event that our Common Stock is delisted from the NASDAQ Capital Market and is not eligible for quotation on another market
or exchange, trading of our Common Stock could be conducted in the over-the-counter market or on an electronic bulletin board
established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult
to dispose of, or obtain accurate price quotations for, our Common Stock, and there would likely also be a reduction in our coverage
by securities analysts and the news media, which could cause the price of our Common Stock to decline further. Also, it may be
difficult for us to raise additional capital if we are not listed on a major exchange.
In
the event that our Common Stock is delisted from NASDAQ, U.S. broker-dealers may be discouraged from effecting transactions in
shares of our Common Stock because they may be considered penny stocks and thus be subject to the penny stock rules.
The
SEC has adopted a number of rules to regulate “penny stock” that restricts transactions involving stock which is deemed
to be penny stock. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Exchange
Act. These rules may have the effect of reducing the liquidity of penny stocks. “Penny stocks” generally are equity
securities with a price of less than $5.00 per share (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ Stock Market if current price and volume information with respect to transactions in such securities is
provided by the exchange or system). Our shares of Common Stock have in the past constituted, and may again in the future constitute,
“penny stock” within the meaning of the rules. The additional sales practice and disclosure requirements imposed upon
U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our Common Stock, which could
severely limit the market liquidity of such shares of Common Stock and impede their sale in the secondary market.
A
U.S. broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally,
an individual with a net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or
her spouse) must make a special suitability determination for the purchaser and must receive the purchaser’s written consent
to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the “penny
stock” regulations require the U.S. broker-dealer to deliver, prior to any transaction involving a “penny stock”,
a disclosure schedule prepared in accordance with SEC standards relating to the “penny stock” market, unless the broker-dealer
or the transaction is otherwise exempt. A U.S. broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer
and the registered representative and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit
monthly statements disclosing recent price information with respect to the “penny stock” held in a customer’s
account and information with respect to the limited market in “penny stocks”.
Stockholders
should be aware that, according to the SEC, the market for “penny stocks” has suffered in recent years from patterns
of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and
misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers;
and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired
level, resulting in investor losses. Our management is aware of the abuses that have occurred historically in the penny stock
market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate
in the market, management will strive within the confines of practical limitations to prevent the described patterns from being
established with respect to our securities.
Our
stockholders may experience significant dilution.
Although
certain exercise restrictions are placed upon the holders of the Warrants, the issuance of material amounts of Common Stock by
us would cause our existing stockholders to experience significant dilution in their investment in our company. In addition, if
we obtain additional financing involving the issuance of equity securities or securities convertible into equity securities, our
existing stockholders’ investment would be further diluted. Such dilution could cause the market price of our Common Stock
to decline, which could impair our ability to raise additional financing.
We
do not anticipate paying dividends in the foreseeable future; you should not buy our stock if you expect dividends.
The
payment of dividends on our Common Stock will depend on earnings, financial condition and other business and economic factors
affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our Common Stock may be
less valuable because a return on your investment will only occur if our stock price appreciates.
We
currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate
paying any cash dividends on our Common Stock in the foreseeable future.
You
may experience additional dilution or raise additional capital in the future.
We
may acquire other technologies or finance strategic alliances by issuing our equity or equity-linked securities, which may result
in additional dilution to our stockholders.
We
could issue “blank check” preferred stock without stockholder approval with the effect of diluting then current stockholder
interests and impairing their voting rights; and provisions in our charter documents could discourage a takeover that stockholders
may consider favorable.
Our
certificate of incorporation authorizes the issuance of up to 10,000,000 shares of “blank check” preferred stock with
designations, rights and preferences as may be determined from time to time by our board of directors. Our board of directors
is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion, voting
or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. The issuance of a
series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control. For example,
it would be possible for our board of directors to issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of our company.
Financial
Industry Regulatory Authority (“FINRA”) sales practice requirements may limit a stockholder’s ability to buy
and sell our Common Stock.
FINRA
has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds
for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial
status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there
is a high probability that speculative low-priced securities will not be suitable for certain customers. FINRA requirements will
likely make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may have the effect
of reducing the level of trading activity in our Common Stock. As a result, fewer broker-dealers may be willing to make a market
in our Common Stock, reducing a stockholder’s ability to resell shares of our Common Stock.
Sales
of a significant number of shares of our Common Stock in the public markets or significant short sales of our Common Stock, or
the perception that such sales could occur, could depress the market price of our Common Stock and impair our ability to raise
capital.
Sales
of a substantial number of shares of our Common Stock or other equity-related securities in the public markets, could depress
the market price of our Common Stock. If there are significant short sales of our Common Stock, the price decline that could result
from this activity may cause the share price to decline more so, which, in turn, may cause long holders of the Common Stock to
sell their shares, thereby contributing to sales of Common Stock in the market. Such sales also may impair our ability to raise
capital through the sale of additional equity securities in the future at a time and price that our management deems acceptable,
if at all.
We
have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
Our
management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes
described in the section of this prospectus supplement entitled “Use of Proceeds.” The failure by our management to
apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in
interest-bearing, investment-grade, securities. These investments may not yield a favorable return to our stockholders.
Exercise
of options or warrants or conversion of convertible securities may have a dilutive effect on your percentage ownership of Common
Stock and may result in a dilution of your voting power and an increase in the number of shares of common stock eligible for future
resale in the public market, which may negatively impact the trading price of our shares of Common Stock.
The
exercise or conversion of some or all of our outstanding warrants or convertible securities could result in significant dilution
in the percentage ownership interest of investors in this offering and in the percentage ownership interest of our existing common
stockholders and in a significant dilution of voting rights and earnings per share.
As
of the date of this prospectus supplement, we have warrants outstanding to purchase 5,777,650 shares of Common Stock. The
warrants have an average exercise price of $5.08 and a weighted average years to maturity of approximately 4.22 years.
In
addition to the dilutive effects described above, the exercise of those securities would lead to an increase in the number of
shares of Common Stock eligible for resale in the public market. Sales of substantial numbers of such shares of Common Stock in
the public market could adversely affect the market price of our shares of Common Stock. Substantial dilution and/or a substantial
increase in the number of shares of Common Stock available for future resale may negatively impact the trading price of our shares
of Common Stock.
We
may seek to raise additional funds, finance acquisitions or develop strategic relationships by issuing securities that would dilute
the ownership of the Common Stock. Depending on the terms available to us, if these activities result in significant dilution,
it may negatively impact the trading price of our shares of Common Stock.
We
have financed our operations, and we expect to continue to finance our operations, acquisitions, if any, and the development of
strategic relationships by issuing equity and/or convertible securities, which could significantly reduce the percentage ownership
of our existing stockholders. Further, any additional financing that we secure may require the granting of rights, preferences
or privileges senior to, or pari passu with, those of our Common Stock. Any issuances by us of equity securities may be at or
below the prevailing market price of our Common Stock and in any event may have a dilutive impact on your ownership interest,
which could cause the market price of our Common Stock to decline. We may also raise additional funds through the incurrence of
debt or the issuance or sale of other securities or instruments senior to our shares of Common Stock. The holders of any securities
or instruments we may issue may have rights superior to the rights of our common stockholders. If we experience dilution from
issuance of additional securities and we grant superior rights to new securities over common stockholders, it may negatively impact
the trading price of our shares of Common Stock.
Our
charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market
price of our Common Stock.
Our
certificate of incorporation, as amended, and our bylaws, as amended, contain provisions that could delay or prevent a change
in control of our Company. These provisions could also make it more difficult for stockholders to elect directors and take other
corporate actions. These provisions include:
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authorizing
the board of directors to issue, without stockholder approval, preferred stock with rights senior to those of our Common
Stock;
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limiting
the persons who may call special meetings of stockholders; and
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requiring
advance notification of stockholder nominations and proposals.
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In
addition, the provisions of Section 203 of the Delaware General Corporation Law govern us. These provisions may prohibit large
stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a
certain period of time without the consent of our board of directors.
These
and other provisions in our certificate of incorporation and our bylaws, as amended, and under Delaware law could discourage potential
takeover attempts, reduce the price that investors might be willing to pay in the future for shares of our Common Stock and result
in the market price of our Common Stock being lower than it would be without these provisions. See the section entitled “Description
of Capital Stock” in the accompanying base prospectus.
If
securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or
if they change their recommendations regarding our Common Stock adversely, our Common Stock price and trading volume could decline.
The
trading market for our shares of Common Stock will be influenced by the research and reports that industry or securities analysts
may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation
regarding our Common Stock adversely, or provide more favorable relative recommendations about our competitors, our share price
would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports
on us, we could lose visibility in the financial markets, which in turn could cause our Common Stock price or trading volume to
decline.
The
requirements of being a U.S. public company may strain our resources and divert management’s attention.
As
a U.S. public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank
Act, the listing requirements of NASDAQ, and other applicable securities rules and regulations. Compliance with these rules and
regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly,
and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual and current
reports with respect to our business and operating results.
As
a result of disclosure of information in this prospectus supplement and the accompanying base prospectus and in filings required
of a public company, our business and financial condition is more visible, which we believe may result in threatened or actual
litigation, including by competitors and other third parties. If such claims are successful, our business and operating results
could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and
resources necessary to resolve them, could divert resources of our management and harm our business and operating results.
An
active, liquid trading market for our Common Stock may not develop, which may cause our Common Stock to trade at a discount from
the initial offering price and make it difficult for you to sell the Common Stock you purchase.
Our
Common Stock is currently listed on the NASDAQ Capital Market. However, there can be no assurance that there will be an active
market for our Common Stock either now or in the future. If an active and liquid trading market does not develop or if developed
cannot be sustained, you may have difficulty selling any of our Common Stock that you purchase. The market price of our Common
Stock may decline below the initial offering price, and you may not be able to sell your shares of our Common Stock at or above
the price you paid, or at all.
USE
OF PROCEEDS
The
selling stockholders will receive all of the proceeds from the sale of shares of Common Stock under this prospectus. We will not
receive any proceeds from these sales. However, to the extent the Warrants are exercised for cash, as applicable, we will receive
up to $8,897,202. The selling stockholders will pay any agent’s commissions and expenses they incur for brokerage, accounting,
tax or legal services or any other expenses they incur in disposing of the shares of Common Stock. We will bear all other costs,
fees and expenses incurred in effecting the registration of the shares of Common Stock covered by this prospectus and any prospectus
supplement. These may include, without limitation, all registration and filing fees, SEC filing fees and expenses of compliance
with state securities or “blue sky” laws.
Issuance
of Warrants
The
shares of common stock offered by the selling stockholders pursuant to this prospectus were issued, or will be issuable, in connection
with the following transactions described below:
July
2017 Private Placement
On
July 10, 2017, we entered into a placement agency agreement (the “July Placement Agency Agreement”) with Aegis Capital
Corp. (the “July Placement Agent”) under which the July Placement Agent agreed to serve as the sole placement agent,
on a “reasonable best efforts” basis, in connection with the registered direct public offering (the “July Registered
Direct Offering”) of an aggregate of 2,170,000 shares of the Company’s common stock, par value $0.0001 per share (the
“July Shares”) and pre-funded warrants (the “Pre-Funded Warrants”) to purchase 230,000 shares of Common
Stock, for an aggregate purchase price of $3,432,000. Also on July 10, 2017, to effect the July Registered Direct Offering, the
Company entered into a securities purchase agreement (the “July Purchase Agreement”) with the July Investors under
which we agreed to issue and sell the July Shares and Pre-Funded Warrants directly to the July Investors.
The
July Shares were offered at a price of $1.43 per share. The Pre-Funded Warrants have an exercise price of $0.01 per share as the
Company already received $1.42 per Pre-Funded Warrant (the prefunded amount). The Pre-Funded Warrants are exercisable immediately
upon their issuance and expire five (5) years from the date of issuance. Subject to limited exceptions, a holder of the Pre-Funded
Warrants does not have the right to exercise any portion of its Pre-Funded Warrant if the holder, together with its affiliates,
would beneficially own over 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to such
exercise.
In
a concurrent private placement (the “July Private Placement”; together with the July Registered Direct Offering, the
“July Offering”), we also sold to the July Investors, for no additional consideration, the July Investor Warrants
to purchase 0.75 of a share of Common Stock for each July Share purchased for cash in the July Offering as well as each share
of Common Stock underlying the Pre-Funded Warrants. The July Investor Warrants are exercisable beginning on the six (6)-month
anniversary of the date of issuance (the “July Initial Exercise Date”), at an exercise price of $2.00 per share and
will expire on the fifth (5
th
) anniversary of the July Initial Exercise Date.
Subject
to limited exceptions, a holder of the July Investor Warrants will not have the right to exercise any portion of its July Investor
Warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our
common stock outstanding immediately after giving effect to such exercise, or the beneficial ownership limitation; provided, however,
that upon 61 days’ prior notice to the Company, the holder may increase or decrease the beneficial ownership limitation,
provided that in no event shall the beneficial ownership limitation exceed 9.99%.
The
exercise price and number of shares of common stock issuable upon the exercise of the July Investor Warrants is subject to adjustment
in the event of any stock dividend and split, reverse stock split, recapitalization, reorganization or similar transaction, as
described in the Investor Warrants.
If,
at any time while the July Investor Warrants are outstanding, (A) we, directly or indirectly, in one or more related transactions,
enters into a Fundamental Transaction (as defined in the July Investor Warrants), then each holder shall have the right thereafter
to receive, upon exercise of an Investor Warrant, the same amount and kind of securities, cash or property as such holder would
have been entitled to receive upon the occurrence of such Fundamental Transaction if the holder had been, immediately prior to
such Fundamental Transaction, the holder of the number of shares of common stock then issuable upon exercise of the July Investor
Warrants. Any successor to us, surviving entity or the corporation purchasing or otherwise acquiring such assets shall assume
the obligation to deliver to the holder such alternate consideration, and the other obligations, under the Warrants.
After
the July Initial Exercise Date, if and only if there is no effective registration statement registering, or no current prospectus
available for, the resale of the shares of Common Stock issuable upon exercise of the July Investor Warrants, the July Inventors
may exercise the July Investor Warrants by means of a “cashless exercise.”
The
July Offering closed on July 13, 2017.
July
2017 Exchange
On
July 19, 2017, certain investors (the “July Holders”) purchased from LogicMark Investment the $594,403 outstanding
balance on the Amended and Restated Secured Promissory Note, inclusive of accrued and unpaid interest. In connection therewith,
the Company, LogicMark Partners, and the July Holders entered into an Assignment and Assumption Agreement, dated July 19, 2017
(the “Assignment Agreement”), whereby LogicMark Partners assigned the Amended and Restated Promissory Note to the
July Holders.
Additionally,
on July 19, 2017, the Company and the July Holders entered into an exchange agreement (the “July Exchange
Agreement”) pursuant to which the Company exchanged with the July Holders the Amended and Restated Promissory Note held
by them in exchange for: (i) an aggregate principal amount of $594,403 of new secured subordinated promissory notes (the
“July Exchange Notes”); and (ii) common stock purchase warrants exercisable into 297,202 shares of Common Stock
(the “July Exchange Warrants”).
The
July Exchange Warrants are exercisable beginning on July 19, 2017, and are exercisable for a period of five (5) years. The exercise
price with respect to the July Exchange Warrants is $2.00 per share (the “July Exercise Price”). The July Exercise
Price and the amount of shares of Common Stock issuable upon exercise of the July Exchange Warrants are subject to adjustment
upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate
change and dilutive issuances.
November
2017 Private Placement
On
November 9, 2017, we entered into a placement agency agreement (the “November Placement Agency Agreement”) with Aegis
Capital Corp. (the “November Placement Agent”) under which the November Placement Agent agreed to serve as the sole
placement agent, on a “reasonable best efforts” basis, in connection with the registered direct public offering (the
“November Registered Direct Offering”) of an aggregate of 2,941,177 shares of the Company’s common stock, par
value $0.0001 per share (the “November Shares”). Also on November 9, 2017, to effect the November Registered Direct
Offering, the Company entered into a securities purchase agreement (the “November Purchase Agreement”) with the November
Investors under which we agreed to issue and sell the November Shares directly to the November Investors. The November Shares
were offered at a price of $1.36 per share.
In
a concurrent private placement (the “November Private Placement”; together with the November Registered Direct Offering,
the “November Offering”), we also sold to the November Investors, for no additional consideration, the November Investor
Warrants to purchase 0.85 of a share of Common Stock for each November Share purchased for cash in the November Offering. The
November Investor Warrants are exercisable beginning on the six (6)-month anniversary of the date of issuance (the “November
Initial Exercise Date”), at an exercise price of $2.00 per share and will expire on the fifth (5
th
) anniversary
of the November Initial Exercise Date.
Subject
to limited exceptions, a holder of November Investor Warrants will not have the right to exercise any portion of its November
Investor Warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares
of our common stock outstanding immediately after giving effect to such exercise, or the beneficial ownership limitation; provided,
however, that upon 61 days’ prior notice to us, the holder may increase or decrease the beneficial ownership limitation,
provided that in no event shall the beneficial ownership limitation exceed 9.99%.
The
exercise price and number of shares of common stock issuable upon the exercise of the November Investor Warrants is subject to
adjustment in the event of any stock dividend and split, reverse stock split, recapitalization, reorganization or similar transaction,
as described in the November Investor Warrants.
If,
at any time while the November Investor Warrants are outstanding, (A) we, directly or indirectly, in one or more related transactions,
enters into a Fundamental Transaction (as defined in the November Investor Warrants), then each holder shall have the right thereafter
to receive, upon exercise of an November Investor Warrant, the same amount and kind of securities, cash or property as such holder
would have been entitled to receive upon the occurrence of such Fundamental Transaction if the holder had been, immediately prior
to such Fundamental Transaction, the holder of the number of shares of common stock then issuable upon exercise of the Investor
Warrants. Any successor to us, surviving entity or the corporation purchasing or otherwise acquiring such assets shall assume
the obligation to deliver to the holder such alternate consideration, and the other obligations, under the November Investor Warrants.
After
the November Initial Exercise Date, if and only if there is no effective registration statement registering, or no current prospectus
available for, the resale of the shares of common stock issuable upon exercise of the Investor Warrants, the purchasers may exercise
the November Investor Warrants by means of a “cashless exercise.”
The
November Offering closed on November 13, 2017.