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VERTICAL COMPUTER SYSTEMS INC
0001099509
10-Q
2017-06-30
false
--12-31
No
No
Yes
Smaller Reporting Company
Q2
2017
1150335201
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0in">Note 1. Organization,
Basis of Presentation and Significant Accounting Policies</p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The accompanying
unaudited interim consolidated financial statements of Vertical Computer Systems, Inc. (‘we”, “our”, the
“Company” or “Vertical”) have been prepared in accordance with accounting principles generally accepted
in the United States of America and rules of the Securities and Exchange Commission, and should be read in conjunction with
the audited consolidated financial statements and notes thereto contained in Vertical’s annual report on Form 10-K for the
year ended December 31, 2016. The consolidated financial statements include the accounts of the Company and its subsidiaries (collectively,
“our”, “we”, the “Company” or “VCSY”, as applicable). Vertical’s subsidiaries
which currently maintain daily business operations are NOW Solutions, a 75% owned subsidiary, and SnAPPnet, Inc. (“SnAPPnet”),
an 80% owned subsidiary of Vertical. Vertical’s subsidiaries which have minimal operations are Vertical do Brasil, Taladin,
Inc. (“Taladin"), and Vertical Healthcare Solutions, Inc. (“VHS”), each of which a wholly-owned subsidiary of
Vertical, as well as Priority Time Systems, Inc. (“Priority Time”) a 70% owned subsidiary, Ploinks, Inc. (“Ploinks”),
a 90% owned subsidiary and Government Internet Systems, Inc. (“GIS”), an 84.5% owned subsidiary. Vertical’s subsidiaries
which are inactive include EnFacet, Inc. (“ENF”), Globalfare.com, Inc. (“GFI”), Pointmail.com, Inc. and
Vertical Internet Solutions, Inc. (“VIS”), each of which is a wholly-owned subsidiary of Vertical.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In the opinion
of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements
which would substantially duplicate the disclosure contained in the audited financial statements as reported in the 2016 annual
report on Form 10-K have been omitted.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><b><i>Earnings per share</i></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Basic earnings
per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares
of the Company’s common stock outstanding during the period. “Diluted earnings per share” reflects the potential
dilution that could occur if our share-based awards and convertible securities were exercised or converted into common stock. The
dilutive effect of our share-based awards is computed using the treasury stock method, which assumes all share-based awards are
exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the
period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they would have
been dilutive, are included in the denominator of the diluted EPS calculation. The dilutive effect of our convertible preferred
stock and convertible debentures is computed using the if-converted method, which assumes conversion at the beginning of the year.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">For the six
months ended June 30, 2017 and 2016, common stock equivalents related to the convertible debentures, convertible debt and preferred
stock and stock derivative liability were not included in the calculation of the diluted earnings per share as their effect would
be anti-dilutive.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0in"><font style="font-weight: normal"><i>Capitalized
Software Costs</i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font-weight: normal">Software
costs incurred internally in creating computer software products are expensed until technological feasibility has been established
upon completion of a detailed program design. Thereafter, all software development costs are capitalized until the point that the
product is ready for sale, and are subsequently reported at the lower of unamortized cost or net realizable value. The Company
considers annual amortization of capitalized software costs based on the ratio of current year revenues by product to the total
estimated revenues by the product, subject to an annual minimum based on straight-line amortization over the product’s estimated
economic useful life, not to exceed five years. The Company periodically reviews capitalized software costs for impairment where
the fair value is less than the carrying value.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font-weight: normal">During
the six months ended June 30, 2017 and 2016, the Company capitalized an aggregate of $0 and $250,184 respectively, related to software
development.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0in"><i>Recently
Issued Accounting Pronouncements</i></p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Company
does not expect the adoption of any recently issued accounting pronouncements to have a material impact on the Company’s
financial position, operations or cash flows.</p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0in">Note 2. Going
Concern</p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The accompanying
unaudited consolidated financial statements for the six months ended June 30, 2017 and 2016 have been prepared assuming that we
will continue as a going concern, and accordingly realize our assets and satisfy our liabilities in the normal course of business.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The carrying
amounts of assets and liabilities presented in the consolidated financial statements do not purport to represent realizable or
settlement values. As of June 30, 2017, we had negative working capital of approximately <font style="font: 10pt Times New Roman, Times, Serif">$21.5
</font>million and defaulted on several of our debt obligations. These conditions raise substantial doubt about our ability to
continue as a going concern.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Our management
is continuing its efforts to attempt to secure funds through equity and/or debt instruments for our operations, expansion and
possible acquisitions, mergers, joint ventures, and/or other business combinations. The Company will require additional funds
to pay down its liabilities, as well as finance its expansion plans consistent with anticipated changes in operations and infrastructure.
However, there can be no assurance that the Company will be able to secure additional funds and that if such funds are available,
whether the terms or conditions would be acceptable to the Company and whether the Company will be able to turn into a profitable
position and generate positive operating cash flow. The consolidated financial statements contain no adjustment for the outcome
of this uncertainty.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Note
8. Legal Proceedings </b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">We
are involved in the following ongoing legal matters:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">On
December 31, 2011, the Company and InfiniTek corporation (“InfiniTek”) entered into a settlement agreement to dismiss
an action filed by the Company against InfiniTek in the Texas State District Court in Fort Worth, Texas, for breach of contract
and other claims, a counter claim filed by InfiniTek against the Company for non-payment of amounts claimed the Company owed to
InfiniTek, and an action filed by InfiniTek against the Company in California Superior Court in Riverside, California seeking
damages for breach of contract and lost profit. Pursuant to the terms of the settlement agreement, Vertical agreed to pay InfiniTek
$82,500 in three equal installments with the last payment due by or before August 5, 2012. Upon full payment, InfiniTek shall
transfer and assign ownership of the NAVPath software developed by InfiniTek for use with NOW Solutions emPath® software
application and Microsoft Dynamics NAV (formerly Navision) business solution platform. The amounts in dispute were included in
our accounts payable and accrued liabilities and have been adjusted to the settlement amount of $82,500 at December 31, 2011.
The Company has made $37,500 in payments due under the settlement agreement as of the date of this Report and each party is alleging
the other party is in breach of the settlement agreement. We intend to resolve all disputes with InfiniTek.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">On
February 13, 2017, the Company was served with a complaint filed by Parker Mills in the Superior Court of the State of California,
County of Los Angeles, Central District, for failure to make payment on the outstanding balance due under a $100,000 convertible
debenture issued by the Company to Parker Mills.  The plaintiff seeks payment of the principal balance due under the convertible
debenture of $100,000, interest at the rate of 12% per annum, attorney’s fees and court costs.  The Company has $112,985
of principal and interest accrued as of March 31, 2017. In June 2017, the court entered a default judgment against the Company.
We intend to resolve this matter with Parker Mills. This case is styled Parker Mills, LLP v. Vertical Computer Systems, Inc.,
No. <font style="color: rgb(34, 42, 53)">BC649122</font>. William Mills is a partner of Parker Mills and the Secretary and a Director
of the Company.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">On
April 12, 2017, NOW Solutions, Inc. was served with a Notice of Motion for Summary Judgment in Lieu of Complaint,  which
was filed by Derek Wolman in the Supreme Court of the State of New York in County of New York for failure to make outstanding
payments on the outstanding balance due under one promissory note in the principal amount of $150,000 (issued on November 17,
2009) and one promissory note in the principal amount of $50,000 (issued on August 28, 2014), both of which were issued by NOW
Solutions to Mr. Wolman.  The plaintiff seeks a judgment totaling $282,299 (which includes principal and accrued interest),
plus additional accrued interest from the date the complaint was filed, attorney’s fees and expenses. The Company has
$260,286 of principal and interest accrued as of June 30, 2017. We intend to resolve this matter with Mr. Wolman. This case is
styled Derek Wolman v. Now Solutions, Inc., No. 65/502/17.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b><i>Earnings
per share</i></b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">Basic
earnings per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number
of shares of the Company’s common stock outstanding during the period. “Diluted earnings per share” reflects
the potential dilution that could occur if our share-based awards and convertible securities were exercised or converted into
common stock. The dilutive effect of our share-based awards is computed using the treasury stock method, which assumes all share-based
awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price
during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they
would have been dilutive, are included in the denominator of the diluted EPS calculation. The dilutive effect of our convertible
preferred stock and convertible debentures is computed using the if-converted method, which assumes conversion at the beginning
of the year.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">For
the six months ended June 30, 2017 and 2016, common stock equivalents related to the convertible debentures, convertible debt
and preferred stock and stock derivative liability were not included in the calculation of the diluted earnings per share as their
effect would be anti-dilutive.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0in"><font style="font: normal 10pt Times New Roman, Times, Serif"><i>Capitalized
Software Costs</i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: normal 10pt Times New Roman, Times, Serif">Software
costs incurred internally in creating computer software products are expensed until technological feasibility has been established
upon completion of a detailed program design. Thereafter, all software development costs are capitalized until the point that
the product is ready for sale, and are subsequently reported at the lower of unamortized cost or net realizable value. The Company
considers annual amortization of capitalized software costs based on the ratio of current year revenues by product to the total
estimated revenues by the product, subject to an annual minimum based on straight-line amortization over the product’s estimated
economic useful life, not to exceed five years. The Company periodically reviews capitalized software costs for impairment where
the fair value is less than the carrying value.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: normal 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2017 and 2016, the Company capitalized an aggregate of $0 and $250,184 respectively, related to
software development.</font></p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0in"><font style="font: 10pt Times New Roman, Times, Serif"><i>Recently
Issued Accounting Pronouncements</i></font></p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
Company does not expect the adoption of any recently issued accounting pronouncements to have a material impact on the Company’s
financial position, operations or cash flows.</font></p>
295500
500000
30000
4500
60000
300000
14850000
15750000
600000
500000
900000
0.100
0.101
0.10
0.117
P1Y11M23D
0.0139
162500
139546
308242
308242
37500
72000
100000
30
71970
0.10
0.12
150000
50000
90000
1759150
1759150
60000
50000
15000
115000
90000
2009-11-17
2014-08-28
282299
112985
260286
82500
82500
0.75
0.80
0.70
0.90
0.845
0.20
P5Y
0
250184
250184
-21500000
5853145
6340953
240000
40000
44705
-19213
-21495
-31914
372210
372210
9916
31914
306064
-1
<p><font style="font: 10pt Times New Roman, Times, Serif">Beginning six months after issuance of the debenture
and provided that the lowest closing price of the common stock for each of the 5 trading days immediately preceding the conversion
date has been $0.03 or higher, the holder of the respective debenture may convert the debenture into shares of common stock at
a price per share of 80% of the average per share price of the Company’s common stock for the 5 trading days preceding the
notice of conversion date using the 3 lowest closing prices.</font></p>
<p style="margin-top: 0pt; margin-bottom: 0pt"><font style="font: 10pt Times New Roman, Times, Serif">Beginning
six months after issuance of the debenture and provided that the lowest closing price of the common stock for each of the 5 trading
days immediately preceding the conversion date has been $0.03 or higher, the holder of the debenture may convert the debenture
into shares of common stock at a price per share of 80% of the average per share price of the Company’s common stock for
the 5 trading days preceding the notice of conversion date using the 3 lowest closing prices.</font></p>
2000000
100000
3000000
550000
350001
600000
500000
300
600000
30000
P2Y
P2Y
P3Y
P2Y
P2Y
P3Y
0.10
54
22421
126500
1688762
1688762
80000
Monthly
24232
500000
P10Y
<p><font style="font: 10pt Times New Roman, Times, Serif">Secured by the assets of the Company’s subsidiaries,
NOW Solutions, Priority Time, SnAPPnet, Inc. (“<u>SnAPPnet</u>”) and the Company’s SiteFlash™ technology
and cross-collateralized. Upon the aggregate principal payment of $290,000 toward the Lakeshore Note, the Company has the option
to have Lakeshore release either the Priority Time collateral or the SiteFlash™ collateral. Upon payment of the aggregate
principal of $590,000 toward the Lakeshore Note, Lakeshore shall release either the Priority Time collateral or the SiteFlash™
collateral (whichever is remaining). Upon payment of the aggregate principal of $890,000 toward the Lakeshore Note, Lakeshore
shall release the SnAPPnet collateral and upon full payment of the Lakeshore Note, Lakeshore shall release the NOW Solutions collateral.</font></p>
290000
590000
890000
0.08
0.05
0.60
0.06
5000000
0.25
391920
99210
2500
40000
80000
7000000
13000000
3000000
2000000
2000000
175700
455000
54200
250
950000
65000
150000
15000
10000
0.0000
P0M25D
P3Y
1.03
1.18
0.0124
0.0155
396674
1014192
396674
1014192
21495
-19566
-619898
396674
619898
300000
50000
4200
4200
3
4197
6480
32400
5400
2208
2000000
200000
P3Y
150000
150000
45000
45000
36670
22800
1196
137500
<p><font style="font: 10pt Times New Roman, Times, Serif">Each share of VCSY Series A Preferred Stock is convertible
into 500 shares of the Company’s common stock.</font></p>
451
72000
200000
60000
90000
1035000
188786
67494
141306
11695000
16000000
<p><font style="font: 10pt Times New Roman, Times, Serif">Vest over a 30 month period in equal installments.</font></p>
<p><font style="font: 10pt Times New Roman, Times, Serif">150,000 shares vested immediately upon grant of the
shares (as noted below) and 150,000 shares will vest in 4 months from the date of grant.</font></p>
1167841439
1175980201
-40000000
-40000000
-31807194
-30865278
11679
11760
-400
-400
23672153
23863405
-55017675
-56331390
424996
389816
43969
259615
550000
5
-5
67494
67494
22421
17
22404
19566
19566
2000000
162879
20
164055
-1196
121292
123997
-2705
300000
-35180
-35180
-1350576
-1313715
-36861
-630840
-884639
-1428819
7074
6
7068
600000
31914
35441
-3527
79375
190448
37141
96437
239117
367278
14660
10355
333152
568081
4454
5097
6690
6690
7997
8064
352293
587932
13033408
12075298
1612517
1794264
396674
1014192
1261966
899428
5078987
4953717
308242
308242
21854294
21184687
21854294
21184687
10305193
10268523
10103169
246
200926
852
10066499
246
200926
852
11760
11679
400
400
23863405
23672153
-56331390
-55017675
389816
424996
-32066809
-30909247
259615
43969
352293
587932
75524
139705
1043962
1043397
319505
319513
43034
354785
0.00001
0.00001
2000000000
2000000000
1175980201
1167841439
1135980201
1127841439
40000000
40000000
0.04
0.10
0.04
0.15
0.04
0.10
0.04
0.15
0.001
0.001
100.00
0.001
0.001
0.001
100.00
0.001
250000
375000
200000
300000
250000
375000
200000
300000
52500
7200
50000
25000
51500
7200
50000
25000
52500
7200
50000
25000
51500
7200
50000
25000
517
517
12000
1596776
789264
821813
1629608
125667
65964
81183
124466
176492
103721
65943
147997
2897
140
720
8531
1902349
959606
969659
1922602
812795
439243
376308
764464
1089554
520363
593351
1158138
1979259
897074
808832
1476648
650
325
325
433
-64667
-13645
5789
11927
1915242
883754
814946
1489008
-825688
-363391
-221595
-330870
619898
280431
-139747
-111035
35969
35969
6000
3000
6000
17100
16
1
8
18
1018603
460592
526078
903045
-1230377
-546551
-857443
-1326063
120199
84289
27196
102756
-36861
-45532
20192
29340
-1313715
-585308
-904831
-1458159
306405
154933
147000
294000
-1620120
-740241
-1051831
-1752159
0
0
0
0
1132475119
1133335130
1100964575
1093322674
-35180
-11191
-56717
-174198
-1385756
-642031
-941356
-1603017
-36861
-45532
20192
29340
-1348895
-596499
-961548
-1632357
650
433
28900
-1145
72000
4200
66550
-196296
-259246
4418
-45516
887531
556147
22954
26634
-213270
-114705
-508202
-84680
3801
-253985
180000
61900
44705
63699
395295
483201
1834
-85240
-111073
59296
22759
172618
5
5
22421
146500
19566
26362
108539
18653
353885
9916
162651
65000
-7074
451
250000
80000
120000
VCSY
-65000
-65000
200000
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Note
3. Notes Payable</b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
following table reflects our third party debt activity, including our convertible debt, for the six months ended June 30, 2017:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table align="center" cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 80%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 86%; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">December
31, 2016</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 11%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">5,853,145</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Borrowings
from third parties</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">240,000</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Repayments
of third party notes</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(44,705</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Conversion
of convertible debt principal to common stock</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(19,213</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Debt
discounts due valuation of derivative liabilities</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(21,495</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Debt
discounts due to convertible debt extensions</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(31,914</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Debt
discounts due to issuance of warrants and common stock</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(7,074</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Amortization
of debt discounts</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">372,210</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-bottom: 1pt; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Effect
of currency exchange</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">(1</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 1pt; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">June
30, 2017</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">6,340,953</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2017, the Company borrowed $180,000 from a third party lender at 10% interest per annum of which
$40,000 was repaid.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2017, the Company issued a convertible debenture in the principal amount of $60,000 to a third party
lender for a loan made to the Company in the same amount. The debt accrues interest at 10% per annum and is due one year from
the date of issuance. Beginning six months after issuance of the debenture and provided that the lowest closing price of the common
stock for each of the 5 trading days immediately preceding the conversion date has been $0.03 or higher, the holder of the respective
debenture may convert the debenture into shares of common stock at a price per share of 80% of the average per share price of
the Company’s common stock for the 5 trading days preceding the notice of conversion date using the 3 lowest closing prices.
In connection with the loan, the Company also issued a total of 600,000 shares of common stock of the Company to the lender with
the Rule 144 restrictive legend and 3-year warrants under which each lender may purchase in aggregate a total of 600,000 unregistered
shares of common stock of the Company at a purchase price of $0.10 per share. In connection with the issuance of shares of common
stock and warrants, the Company recorded a discount of $9,916 against the face value of the loan based on the relative fair market
value of the common stock and full fair market value of the warrants. The warrants are accounted for as a derivative liability.
The discount is being amortized over twelve months and $54 of amortization expense was recognized for the six months ended June
30, 2017.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2017, $22,421 of principal, interest and legal fees under a convertible note issued in the principal
amount of $90,000 was converted into 1,688,762 common shares. In May 2017, the Company amended the convertible note originally
issued to a third party lender in the principal amount of $80,000 to $90,000 and cancelled a $10,000 note payable issued to the
third party lender. This convertible note has been paid in full.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"><i>Lakeshore
Financing</i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">On
January 9, 2013, NOW Solutions completed a financing transaction in the aggregate amount of $1,759,150, which amount was utilized
to pay off existing indebtedness of the Company and NOW Solutions to Tara Financial Services and Robert Farias, a former employee
of the Company, and all security interests granted to Tara Financial Services and Mr. Farias were cancelled.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
connection with this financing, the Company and several of its subsidiaries entered into a loan agreement (the “<u>Loan
Agreement</u>”), dated as of January 9, 2013 with Lakeshore Investment, LLC (“<u>Lakeshore</u>”) under which
NOW Solutions issued a secured 10-year promissory note (the “<u>Lakeshore Note</u>”) bearing interest at 11% per annum
to Lakeshore in the amount of $1,759,150 payable in equal monthly installments of $24,232 until January 31, 2022. Upon the payment
of any prepayment principal amounts, the monthly installment payments shall be proportionately adjusted proportionately on an
amortized rata basis. </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
Lakeshore Note is secured by the assets of the Company’s subsidiaries, NOW Solutions, Priority Time, SnAPPnet, Inc. (“<u>SnAPPnet</u>”)
and the Company’s SiteFlash™ technology and cross-collateralized. Upon the aggregate principal payment of $290,000
toward the Lakeshore Note, the Company has the option to have Lakeshore release either the Priority Time collateral or the SiteFlash™
collateral. Upon payment of the aggregate principal of $590,000 toward the Lakeshore Note, Lakeshore shall release either the
Priority Time collateral or the SiteFlash™ collateral (whichever is remaining). Upon payment of the aggregate principal
of $890,000 toward the Lakeshore Note, Lakeshore shall release the SnAPPnet collateral and upon full payment of the Lakeshore
Note, Lakeshore shall release the NOW Solutions collateral.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">As
additional consideration for the loan, the Company granted a 5% interest in Net Claim Proceeds (less any attorney’s fees
and direct costs) from any litigation or settlement proceeds related to the SiteFlash™ technology to Lakeshore which was
increased to 8% under an amendment to the Loan Agreement in 2013. In addition, until the Note is paid in full, NOW Solutions agreed
to pay a Lakeshore royalty of 6% of its annual gross revenues in excess of $5 million dollars up to a maximum of $1,759,150. Management
has estimated the fair value of the royalty to be nominal as of its issuance date and no royalty was owed as of September 30,
2015 or December 31, 2014.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
December 2014, the Company and Lakeshore entered into an amendment of the Lakeshore Note and the Loan Agreement. Under the terms
of the amendment, NOW Solutions agreed to make $2,500 weekly advance payments to Lakeshore to be applied to the 25% dividend of
NOW Solutions’ net income after taxes in connection with Lakeshore’s 25% minority ownership interest in NOW Solutions.
Within 10 business days after the Company files its periodic reports with the SEC, NOW Solutions will also make quarterly payment
advances to Lakeshore based on 60% of Lakeshore’s 25% share of NOW Solutions estimated quarterly net income after taxes,
less any weekly payment advances received by Lakeshore during the then-applicable quarter and the weekly $2,500 payments shall
be increased or decreased based only upon any increases or decreases of maintenance and cloud-based offering fees during the then-completed
quarter (but will not decrease below a minimum of $2,500 per week). NOW Solutions shall pay Lakeshore the balance of Lakeshore’s
25% of NOW’s yearly net income after taxes (less any advances) within 10 business days after the Company files it annual
10-K report with the SEC and any payments in excess of Lakeshore’s 25% of NOW yearly profit shall be credited towards future
weekly advance payments. The Company also agreed to pay attorney fees of $40,000 and paid fees of $80,000 to a former consultant
and employee of the Company who is a member of Lakeshore. In consideration of the extension to cure the default under the Lakeshore
Note and the Loan Agreement, the Company transferred a 20% ownership interest in two subsidiaries to Lakeshore: Priority Time
Systems, Inc., and in SnAPPnet, Inc.. This resulted in an additional non-controlling interest recognized in the equity of the
Company of $391,920 and $99,210 for Priority Time Systems, Inc. and SnAPPnet, Inc., respectively, during 2014. The Company had
an option to buy back Lakeshore’s ownership interest in NOW Solutions, Priority Time and SnAPPnet, Inc. (which expired on
January 31, 2015).</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
July 2015, we entered into an agreement with Lakeshore to amend the terms of the Loan Agreement and the Lakeshore Note. Under
the terms of the amendment, the Company issued 13,000,000 common shares with the Rule 144 restrictive legend, resulting in a forbearance
loss of $455,000 and Ploinks agreed to issue 3,000,000 common shares of its stock to Lakeshore. The fair value of the Ploinks
shares was determined to be nominal. Also in July 2015, the Company further amended the Lakeshore Note and the Loan Agreement
with Lakeshore. Pursuant to this Agreement, the Company issued 2,000,000 shares of its common stock with the Rule 144 restrictive
legend resulting in a forbearance loss of $54,200 and paid $15,000 to Lakeshore as forbearance fees.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
August 2015, we entered into an agreement with Lakeshore to amend the terms of the Loan Agreement and the Lakeshore Note. Under
the terms of the amendment, the Company issued 7,000,000 shares of its common stock with the Rule 144 restrictive legend resulting
in a forbearance loss of $175,700 and Ploinks agreed to issue 2,000,000 common shares of its stock to Lakeshore. The fair value
of the Ploinks shares was determined to be nominal.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">Under
the August 2015 agreement, the Company also agreed to make a $500,000 payment for amounts due to Lakeshore under the Lakeshore
Note and the Loan Agreement. In the event that the Company did not make the Lakeshore $500,000 payment on or before August 21,
2015, then Lakeshore in lieu of the $500,000 payment, would obtain a purchase option (the “2015 Purchase Option”)
to purchase an additional 250 shares of NOW Solutions common stock for a total purchase price of $950,000. In addition, since
the Company did not make the $500,000 payment to Lakeshore on or before August 21, 2015, no further payment on the Note was due
until January 1, 2016 at which time the Note plus all accrued interest were recalculated and the Note was re-amortized under the
same interest rate and terms as the Note and the maturity date of the Note was extended 10 years from January 1, 2016.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
Lakeshore note is in default and the Company is currently evaluating solutions to resolve all issues with Lakeshore.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2017, NOW Solutions, a subsidiary of the Company, accrued dividends to Lakeshore of $65,000.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">For
additional transactions after June 30, 2017 concerning notes payable, please see “Subsequent Events” in Note 9.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
following table reflects our third party debt activity, including our convertible debt, for the six months ended June 30, 2017:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table align="center" cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 80%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 86%; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">December
31, 2016</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 11%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">5,853,145</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Borrowings
from third parties</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">240,000</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Repayments
of third party notes</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(44,705</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Conversion
of convertible debt principal to common stock</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(19,213</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Debt
discounts due valuation of derivative liabilities</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(21,495</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Debt
discounts due to convertible debt extensions</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(31,914</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Debt
discounts due to issuance of warrants and common stock</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(7,074</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Amortization
of debt discounts</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">372,210</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-bottom: 1pt; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">Effect
of currency exchange</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">(1</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 1pt; padding-left: 5.4pt"><font style="font: 10pt Times New Roman, Times, Serif">June
30, 2017</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">6,340,953</font></td>
<td style="text-align: left; padding-bottom: 1pt"></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Note
4. Derivative liability and fair value measurements</b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><i>Derivative
liabilities</i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">As
of June 30, 2017, the Company has convertible notes and common stock warrants that qualify as derivative
liabilities under ASC 815.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">As
of June 30, 2017, the aggregate fair value of the outstanding derivative liabilities was $396,674. For the six months ended June
30, 2017, the net gain on the change in fair value of derivative liabilities was $619,898.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
Company estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model and the following
key assumptions during 2017:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table align="center" cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 70%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">2017</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 86%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Expected
dividends</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 11%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">%</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Expected terms (years)</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.07 - 3.00</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td><font style="font: 10pt Times New Roman, Times, Serif">Volatility</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">103% - 118</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">%</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><p style="margin-top: 0; margin-bottom: 0"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="margin-top: 0; margin-bottom: 0"> <font style="font: 10pt Times New Roman, Times, Serif">Risk-free
rate</font></p></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">1.24% - 1.55</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">%</font></td></tr>
</table>
<p style="margin-top: 0; margin-bottom: 0"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"><i>Fair
value measurements</i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><i></i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">FASB
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. FASB ASC 820 describes three levels of inputs that may be used to measure fair value:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><i>Level
1 </i>– Quoted prices in active markets for identical assets or liabilities.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><i>Level
2 </i>– Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><i>Level
3 </i>– Unobservable inputs that are supported by little or no market activity and that are financial instruments whose
values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments
for which the determination of fair value requires significant judgment or estimation.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">If
the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization
is based on the lowest level of input that is significant to the fair value measurement of the instrument.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
following table provides a summary of the fair value of our derivative liabilities as of June 30, 2017 and December 31, 2016:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 100%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom">
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="10" style="text-align: center; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">Fair
value measurements on a recurring basis</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">Level
1</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">Level
2</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">Level
3</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td><font style="font: 10pt Times New Roman, Times, Serif">As of June 30, 2017:</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font: 10pt Times New Roman, Times, Serif">Liabilities</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 58%; text-align: left; padding-left: 0.125in"><font style="font: 10pt Times New Roman, Times, Serif">Derivative
liabilities – convertible debt and warrants</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 11%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">—</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 11%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">—</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 11%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">396,674</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td><font style="font: 10pt Times New Roman, Times, Serif">As of December 31, 2016:</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font: 10pt Times New Roman, Times, Serif">Liabilities</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="padding-left: 0.125in"><font style="font: 10pt Times New Roman, Times, Serif">None</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">—</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">—</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">1,014,192</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
estimated fair value of short-term financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities
and deferred revenue approximates their carrying value due to their short-term nature. The Company uses Level 3 inputs to estimate
the fair value of its derivative liabilities.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
below table presents the change in the fair value of the derivative liabilities during the six months ended June 30, 2017:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<table align="center" cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 70%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 86%"><font style="font: 10pt Times New Roman, Times, Serif">Fair value as of December
31, 2016</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 11%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">1,014,192</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 0.125in"><font style="font: 10pt Times New Roman, Times, Serif">Additions
recognized as debt discounts</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">21,495</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-left: 0.125in"><font style="font: 10pt Times New Roman, Times, Serif">Additions
recognized in equity financing</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">451</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 0.125in"><font style="font: 10pt Times New Roman, Times, Serif">Reduction
due to settlement upon conversion</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(19,566</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-bottom: 1pt; padding-left: 0.125in"><font style="font: 10pt Times New Roman, Times, Serif">Gain
on change in fair value of derivatives</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">(619,898</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">Fair value as of
June 30, 2017</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">396,674</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Company
estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model and the following key assumptions
during 2017:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<table align="center" cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 70%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt"> </td>
<td style="padding-bottom: 1pt"> </td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid">2017</td>
<td style="padding-bottom: 1pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 86%; text-align: left">Expected dividends</td>
<td style="width: 1%"> </td>
<td style="width: 1%; text-align: left"> </td>
<td style="width: 11%; text-align: right">0</td>
<td style="width: 1%; text-align: left">%</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left">Expected terms (years)</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"><font style="font-size: 10pt">0.07 - 3.00</font></td>
<td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td>Volatility</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"><font style="font-size: 10pt">103% - 118</font></td>
<td style="text-align: left">%</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left">Risk-free rate</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1.24% - 1.55</font></td>
<td style="text-align: left">%</td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The following table provides a summary
of the fair value of our derivative liabilities as of June 30, 2017 and December 31, 2016:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 100%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom">
<td> </td>
<td style="padding-bottom: 1pt"> </td>
<td colspan="10" style="text-align: center; border-bottom: black 1pt solid">Fair value measurements on a recurring basis</td>
<td style="padding-bottom: 1pt"> </td></tr>
<tr style="vertical-align: bottom">
<td> </td>
<td style="padding-bottom: 1pt"> </td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid">Level 1</td>
<td style="padding-bottom: 1pt"> </td>
<td style="padding-bottom: 1pt"> </td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid">Level 2</td>
<td style="padding-bottom: 1pt"> </td>
<td style="padding-bottom: 1pt"> </td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid">Level 3</td>
<td style="padding-bottom: 1pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td>As of June 30, 2017:</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td>Liabilities</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 58%; text-align: left; padding-left: 0.125in">Derivative liabilities – convertible debt and warrants</td>
<td style="width: 1%"> </td>
<td style="width: 1%; text-align: left">$</td>
<td style="width: 11%; text-align: right">—</td>
<td style="width: 1%; text-align: left"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%; text-align: left">$</td>
<td style="width: 11%; text-align: right">—</td>
<td style="width: 1%; text-align: left"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%; text-align: left">$</td>
<td style="width: 11%; text-align: right">396,674</td>
<td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td>As of December 31, 2016:</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td>Liabilities</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right"> </td>
<td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="padding-left: 0.125in">None</td>
<td> </td>
<td style="text-align: left">$</td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left">$</td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left">$</td>
<td style="text-align: right">1,014,192</td>
<td style="text-align: left"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The below table
presents the change in the fair value of the derivative liabilities during the six months ended June 30, 2017:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<table align="center" cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 70%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 86%">Fair value as of December 31, 2016</td>
<td style="width: 1%"> </td>
<td style="width: 1%; text-align: left">$</td>
<td style="width: 11%; text-align: right">1,014,192</td>
<td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 0.125in">Additions recognized as debt discounts</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">21,495</td>
<td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-left: 0.125in">Additions recognized in equity financing</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">451</td>
<td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 0.125in">Reduction due to settlement upon conversion</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">(19,566</td>
<td style="text-align: left">)</td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-bottom: 1pt; padding-left: 0.125in">Gain on change in fair value of derivatives</td>
<td style="padding-bottom: 1pt"> </td>
<td style="text-align: left; border-bottom: black 1pt solid"> </td>
<td style="text-align: right; border-bottom: black 1pt solid">(619,898</td>
<td style="text-align: left; padding-bottom: 1pt">)</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 1pt">Fair value as of June 30, 2017</td>
<td style="padding-bottom: 1pt"> </td>
<td style="text-align: left; border-bottom: black 1pt solid">$</td>
<td style="text-align: right; border-bottom: black 1pt solid">396,674</td>
<td style="text-align: left; padding-bottom: 1pt"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><b>Note 5. Common and Preferred
Stock Transactions</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In May 2017,
the Company granted 300,000 unregistered shares of its common stock with the Rule 144 restrictive legend and 50,000 shares of Ploinks,
Inc. common stock to a consultant of the Company and its subsidiaries pursuant to a consulting agreement with the Company. The
aggregate fair market value of the VCSY common stock grant was determined to be $4,200 based on the quoted market price of VCSY
stock at date of grant and Ploinks, Inc. common stock grant was determined to be $5,400 based on a third party valuation of Ploinks
stock. In addition, the Company agreed to issue up to 2,000,000 common shares of the Company and 200,000 shares of Ploinks, Inc.
common stock pursuant to restricted performance stock agreements with the consultant. These shares may vest over a term of 3 years
and are based upon the Consultant achieving certain performance criteria.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the six
months ended June 30, 2017, the Company issued a convertible debenture in the principal amount of $60,000 to a third party lender
for a loan made to the Company in the same amount. The debt accrues interest at 10% per annum and is due one year from the date
of issuance. Beginning six months after issuance of the debenture and provided that the lowest closing price of the common stock
for each of the 5 trading days immediately preceding the conversion date has been $0.03 or higher, the holder of the respective
debenture may convert the debenture into shares of common stock at a price per share of 80% of the average per share price of the
Company’s common stock for the 5 trading days preceding the notice of conversion date using the 3 lowest closing prices.
In connection with the loan, the Company also issued a total of 600,000 shares of common stock of the Company to the lender with
the Rule 144 restrictive legend and 3-year warrants under which each lender may purchase in aggregate a total of 600,000 unregistered
shares of common stock of the Company at a purchase price of $0.10 per share. In connection with the issuance of shares of common
stock and warrants, the Company recorded a discount of $9,916 against the face value of the loan based on the relative fair market
value of the common stock and full fair market value of the warrants. The warrants are accounted for as a derivative liability.
The discount is being amortized over twelve months and $54 of amortization expense was recognized for the six months ended June
30, 2017.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the six
months ended June 30, 2017, the Company entered into a subscription agreement under which a third party subscriber purchased 1,000
shares of VCSY Series A Preferred Stock for $200,000. In connection with the purchase of the VCSY Series A Preferred Stock, the
subscribers also received a total of 2,000,000 shares of common stock of the Company with the Rule 144 restrictive legend, 100,000
shares of common stock of Ploinks, Inc., 2-year warrants under which the subscribers may purchase an aggregate total of 150,000
unregistered shares of common stock of the Company at a purchase price of $0.10 per share and 2-year warrants under which the subscribers
may purchase an aggregate total of 150,000 unregistered shares of common stock of the Company at a purchase price of $0.20 per
share. The allocated fair market value of the VCSY Series A Preferred Stock issued to the subscribers was $36,670. Each share of
VCSY Series A Preferred Stock is convertible into 500 shares of the Company’s common stock. The allocated fair market value
of all common shares of the Company issued to the subscribers was $22,800. The allocated fair market value of all common shares
of Ploinks, Inc. issued to the subscribers was $1,196. The fair market value of all warrants issued to the subscribers was $451
(which was calculated using the Black-Sholes model). The warrants were accounted for as derivative liabilities (see Note 4).</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the six
months ended June 30, 2017, the Company granted 295,500 shares of the common stock of Ploinks, Inc. to third party lenders in connection
with 3 to 6-month extensions of convertible debentures in the principal amount of $1,035,000 issued in 2015 and 2016. The aggregate
fair market value of the awards was determined to be $31,914 and was recorded as debt discount, and is being amortized through
the term of the convertible debenture.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">  </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the six
months ended June 30, 2017, the Company granted 3,000,000 VCSY common shares pursuant to a stock award to an employee of the Company
and its subsidiaries (at a fair market value of $72,000).</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the six
months ended June 30, 2017, $22,421 of principal, interest and legal fees under a convertible note issued in the principal amount
of $90,000 was converted into 1,688,762 common shares. In May 2017, the Company had amended this convertible note originally issued
to a third party lender in the principal amount of $80,000 to $90,000 and cancelled a $10,000 note payable issued to the third
party lender. This convertible note has been paid in full.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the six
months ended June 30, 2017, the Company entered into a restricted stock agreement to grant 120,000 shares of the Company’s
common stock with the Rule 144 restrictive legend with an employee of the Company under which the shares vest in equal installments
over a 30-month period. The fair value of the shares was $2,208 based on the quoted market price of VCSY stock on the grant date
and $368 was amortized to expense during the six months ended June 30, 2017.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the six
months ended June 30, 2017, 550,000 VCSY common shares vested under restricted stock agreements to employees and a consultant of
the Company.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the six
months ended June 30, 2017, Ploinks, Inc. entered into a restricted stock agreement to grant 60,000 unregistered shares of the
common stock of Ploinks, Inc. to an employee of the Company pursuant to a restricted stock agreement with Ploinks, Inc. These shares
typically vest over a 30-month period in equal installments and the fair value of the awards is being expensed over this vesting
period. The fair value of the shares was $6,480 based on a third party valuation of Ploinks stock and $1,082 was amortized to expense
during the six months ended June 30, 2017.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the six
months ended June 30, 2017, the Company granted 300,000 unregistered shares of the common stock of Ploinks, Inc. to an employee
of a subsidiary of the Company’s pursuant to a restricted stock agreement with the Company. 150,000 shares vested immediately
upon grant of the shares (as noted below) and 150,000 shares will vest in 4 months from the date of grant. The fair value of the
shares was $32,400 based on a third party valuation of Ploinks stock and $22,127 was amortized to expense during the six months
ended June 30, 2017.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the six
months ended June 30, 2017, 350,001 shares of the common stock of Ploinks, Inc. issued under restricted stock agreements to consultants
and employees of the Company and a subsidiary of the Company vested.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Stock compensation
expense for the amortization of restricted stock awards was $67,494 for the six months ended June 30, 2017. As of June 30, 2017,
there were 11,695,000 shares of unvested stock compensation awards to employees and 16,000,000 shares of unvested stock compensation
awards to non-employees.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We have evaluated
our convertible cumulative preferred stock under the guidance set out in FASB ASC 470-20 and accordingly classified these shares
as temporary equity in the consolidated balance sheets.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">For additional
transactions after June 30, 2017 concerning stock transactions, please see “Subsequent Events” in Note 9.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><b>Note 6. Option and Warrant Activity</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Option and warrant
activities during the six months ended June 30, 2017 is summarized as follows:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 100%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom">
<td> </td>
<td style="padding-bottom: 1pt"> </td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid">Incentive Stock Options</td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid">Non-Statutory <br /> Stock Options</td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid">Warrants</td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid">Weighted <br /> Average Exercise <br /> Price</td>
<td style="padding-bottom: 1pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 40%; padding-bottom: 1pt">Outstanding at December 31, 2016</td>
<td style="width: 1%; padding-bottom: 1pt"> </td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"> </td>
<td style="width: 12%; text-align: right; border-bottom: black 1pt solid">—</td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="width: 1%; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"> </td>
<td style="width: 12%; text-align: right; border-bottom: black 1pt solid">—</td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="width: 1%; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"> </td>
<td style="width: 12%; text-align: right; border-bottom: black 1pt solid">14,850,000</td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="width: 1%; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid">$</td>
<td style="width: 12%; text-align: right; border-bottom: black 1pt solid">0.100</td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left">Options/Warrants granted</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">900,000</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left">$</td>
<td style="text-align: right">0.117</td>
<td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left">Options/Warrants exercised</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-bottom: 1pt">Options/Warrants expired/cancelled</td>
<td style="padding-bottom: 1pt"> </td>
<td style="text-align: left; border-bottom: black 1pt solid"> </td>
<td style="text-align: right; border-bottom: black 1pt solid">—</td>
<td style="text-align: left; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="text-align: left; border-bottom: black 1pt solid"> </td>
<td style="text-align: right; border-bottom: black 1pt solid">—</td>
<td style="text-align: left; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="text-align: left; border-bottom: black 1pt solid"> </td>
<td style="text-align: right; border-bottom: black 1pt solid">—</td>
<td style="text-align: left; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="text-align: left; border-bottom: black 1pt solid"> </td>
<td style="text-align: right; border-bottom: black 1pt solid">—</td>
<td style="text-align: left; padding-bottom: 1pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="padding-bottom: 2.5pt">Outstanding at June 30, 2017</td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="text-align: left; border-bottom: black 2.5pt double"> </td>
<td style="text-align: right; border-bottom: black 2.5pt double">—</td>
<td style="text-align: left; padding-bottom: 2.5pt; border-bottom: black 2.5pt double"> </td>
<td style="padding-bottom: 2.5pt; border-bottom: black 2.5pt double"> </td>
<td style="text-align: left; border-bottom: black 2.5pt double"> </td>
<td style="text-align: right; border-bottom: black 2.5pt double">—</td>
<td style="text-align: left; padding-bottom: 2.5pt; border-bottom: black 2.5pt double"> </td>
<td style="padding-bottom: 2.5pt; border-bottom: black 2.5pt double"> </td>
<td style="text-align: left; border-bottom: black 2.5pt double"> </td>
<td style="text-align: right; border-bottom: black 2.5pt double">15,750,000</td>
<td style="text-align: left; padding-bottom: 2.5pt; border-bottom: black 2.5pt double"> </td>
<td style="padding-bottom: 2.5pt; border-bottom: black 2.5pt double"> </td>
<td style="text-align: left; border-bottom: black 2.5pt double">$</td>
<td style="text-align: right; border-bottom: black 2.5pt double">0.101</td>
<td style="text-align: left; padding-bottom: 2.5pt"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The weighted
average remaining life of the outstanding warrants as of June 30, 2017 was 1.98. The intrinsic value of the exercisable warrants
as of June 30, 2017 was $.0139.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">For additional
transactions after June 30, 2017 concerning warrants and stock options, please see Subsequent Events” in Note 9.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Option and warrant
activities during the six months ended June 30, 2017 is summarized as follows:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 100%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom">
<td> </td>
<td style="padding-bottom: 1pt"> </td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid">Incentive Stock Options</td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid">Non-Statutory <br /> Stock Options</td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid">Warrants</td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td colspan="2" style="text-align: center; border-bottom: black 1pt solid">Weighted <br /> Average Exercise <br /> Price</td>
<td style="padding-bottom: 1pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 40%; padding-bottom: 1pt">Outstanding at December 31, 2016</td>
<td style="width: 1%; padding-bottom: 1pt"> </td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"> </td>
<td style="width: 12%; text-align: right; border-bottom: black 1pt solid">—</td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="width: 1%; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"> </td>
<td style="width: 12%; text-align: right; border-bottom: black 1pt solid">—</td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="width: 1%; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"> </td>
<td style="width: 12%; text-align: right; border-bottom: black 1pt solid">14,850,000</td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="width: 1%; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid">$</td>
<td style="width: 12%; text-align: right; border-bottom: black 1pt solid">0.100</td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left">Options/Warrants granted</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">900,000</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left">$</td>
<td style="text-align: right">0.117</td>
<td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left">Options/Warrants exercised</td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td>
<td> </td>
<td style="text-align: left"> </td>
<td style="text-align: right">—</td>
<td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-bottom: 1pt">Options/Warrants expired/cancelled</td>
<td style="padding-bottom: 1pt"> </td>
<td style="text-align: left; border-bottom: black 1pt solid"> </td>
<td style="text-align: right; border-bottom: black 1pt solid">—</td>
<td style="text-align: left; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="text-align: left; border-bottom: black 1pt solid"> </td>
<td style="text-align: right; border-bottom: black 1pt solid">—</td>
<td style="text-align: left; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="text-align: left; border-bottom: black 1pt solid"> </td>
<td style="text-align: right; border-bottom: black 1pt solid">—</td>
<td style="text-align: left; padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="padding-bottom: 1pt; border-bottom: black 1pt solid"> </td>
<td style="text-align: left; border-bottom: black 1pt solid"> </td>
<td style="text-align: right; border-bottom: black 1pt solid">—</td>
<td style="text-align: left; padding-bottom: 1pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="padding-bottom: 2.5pt">Outstanding at June 30, 2017</td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="text-align: left; border-bottom: black 2.5pt double"> </td>
<td style="text-align: right; border-bottom: black 2.5pt double">—</td>
<td style="text-align: left; padding-bottom: 2.5pt; border-bottom: black 2.5pt double"> </td>
<td style="padding-bottom: 2.5pt; border-bottom: black 2.5pt double"> </td>
<td style="text-align: left; border-bottom: black 2.5pt double"> </td>
<td style="text-align: right; border-bottom: black 2.5pt double">—</td>
<td style="text-align: left; padding-bottom: 2.5pt; border-bottom: black 2.5pt double"> </td>
<td style="padding-bottom: 2.5pt; border-bottom: black 2.5pt double"> </td>
<td style="text-align: left; border-bottom: black 2.5pt double"> </td>
<td style="text-align: right; border-bottom: black 2.5pt double">15,750,000</td>
<td style="text-align: left; padding-bottom: 2.5pt; border-bottom: black 2.5pt double"> </td>
<td style="padding-bottom: 2.5pt; border-bottom: black 2.5pt double"> </td>
<td style="text-align: left; border-bottom: black 2.5pt double">$</td>
<td style="text-align: right; border-bottom: black 2.5pt double">0.101</td>
<td style="text-align: left; padding-bottom: 2.5pt"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><b>Note 7. Related Party Transactions</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Related party
debt, including our convertible debt was $308,242 as of June 30, 2017 and December 31, 2016.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">As of June 30,
2017 and December 31, 2016, the Company had accounts payable to employees for unreimbursed expenses and related party contractors
in an aggregate amount of $162,500 and $139,546, respectively. The payables are unsecured, non-interest bearing and due on demand.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><b>Note 9. Subsequent Events</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In July 2017,
the United States Patent and Trademark office issued a patent (Patent No. 9710425) for the invention titled “Mobile Proxy
Server for Internet Server Having a Dynamic IP Address” for Claims 1-20. The term “IP” stands for “Internet
Protocol,” which is the principal communications protocol for the Internet. This patented technology is incorporated in the
Ploinks SPC™ and the Company’s core communication platform.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In July 2017,
the Company granted 500,000 unregistered shares of its common stock with the Rule 144 restrictive legend and 30,000 shares of common
stock of Ploinks, Inc. to a consultant of the Company and its subsidiaries pursuant to a consulting agreement with the Company.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the period
that runs from July 1, 2017 through August 21, 2017, the Company issued a convertible debenture in the principal amount of $50,000
to a third party lender for a loan made to the Company in the same amount. The debt accrues interest at 10% per annum and is due
one year from the date of issuance. Beginning six months after issuance of the debenture and provided that the lowest closing price
of the common stock for each of the 5 trading days immediately preceding the conversion date has been $0.03 or higher, the holder
of the debenture may convert the debenture into shares of common stock at a price per share of 80% of the average per share price
of the Company’s common stock for the 5 trading days preceding the notice of conversion date using the 3 lowest closing prices.
In connection with the loan, the Company also issued a total of 500,000 shares of common stock of the Company to the lender with
the Rule 144 restrictive legend and 3-year warrants under which the lender may purchase up to 500,000 unregistered shares of common
stock of the Company at a purchase price of $0.10 per share.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the period
that runs from July 1, 2017 through August 21, 2017, the Company entered into a subscription agreement under which a third party
subscriber purchased 300 shares of VCSY Series A Preferred Stock for $60,000. In connection with the purchase of the VCSY Series
A Preferred Stock, the subscriber also received a total of 600,000 shares of common stock of the Company with the Rule 144 restrictive
legend, 30,000 shares of common stock of Ploinks, Inc., 2-year warrants under which the subscriber may purchase an aggregate total
of 45,000 unregistered shares of common stock of the Company at a purchase price of $0.10 per share and 2-year warrants under which
the subscriber may purchase an aggregate total of 45,000 unregistered shares of common stock of the Company at a purchase price
of $0.20 per share.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the period
that runs from July 1, 2017 through August 21, 2017, the Company granted 4,500 shares of common stock of Ploinks, Inc. to a third
party lender in connection with a 6-month extension of a convertible debenture in the principal amount of $15,000 issued in 2016.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the period
that runs from July 1, 2017 through August 21, 2017, the Company made payments of $126,500 of principal and interest due under
a convertible debenture in the principal amount of $115,000 issued by the Company to a third party lender. This convertible debenture
has been paid in full.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the period
that runs from July 1, 2017 through August 21, 2017, 250,000 VCSY common shares issued under restricted stock agreements to an
employee of the Company vested.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the
period that runs from July 1, 2017 through August 21, 2017, 80,000 common shares of stock of Ploinks, Inc. issued under restricted
stock agreements to an employee of the Company vested.</p>
1082
22127
368
31914
324935
60000
635000
1000
10000
-324935
324935