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The 10-Q/A Filed This Morning

The 10-Q/A Filed This Morning

In light of the 10-Q/A that was filed today restating the 10-Q for the 3rd Quarter of 2016, a look back at our most recent 10-K is called for. In Management’s Discussion and Analysis under Recent Developments we noted the following:

We determined that as of September 30, 2016, we did not have sufficient authorized shares of our common stock available for issuance under our outstanding convertible notes, warrants, options and convertible preferred stock. As a result, the common share equivalents that exceeded our authorized but unissued shares of common stock were reclassified from equity to derivative liabilities.

This reclassification resulted in a $8,285,484 increase to our derivative liability and a corresponding reduction to our additional paid-in capital. The derivative liability was subsequently marked to fair value and we recorded a gain of $4,555,523 as of December 31, 2016. The Company amended its Articles of Incorporation, effective March 22, 2017, to increase the number of authorized shares of common stock from 140,000,000 to 350,000,000 shares. Consequently, the Company currently has sufficient authorized shares for issuance pursuant to its outstanding securities that were reclassified as derivative liabilities. We anticipate that the Company’s financial statements for the quarter ending March 31, 2017, will reflect common share equivalents as equity marked to fair value and reclassified as additional paid-in capital.

While we understand that these adjustments are required under current accounting guidance, nonetheless, we believe that the volatility they introduce to our financial statements does not fully reflect the underlying economics of the Company and its common share equivalents.

As of September 30, 2016 and December 31, 2016, a substantial portion of our common share equivalents were out of the money and accordingly, may not have been economically beneficial to exercise or convert. In addition, many of the common share equivalents that were in the money as of September 30, 2016 and December 31, 2016 were subject to contractual limitations regarding their exercisability or convertibility.

Under these circumstances, we do not believe that the Company was ever in a position where it would have been unable to settle its common share equivalents. To date, the Company has fulfilled all exercise and conversion requests it has received.

Nonetheless, a strictly quantitative (as opposed to qualitative) analysis required that the amendment be filed. We expect a complete reclassification to occur in the next 10-Q or to put it another away: a non-cash transaction from the left pocket back to the right one.