UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_______________________________

FORM 10-K

(Mark One)

X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, ~~2012~~2014

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number: 000-28238

APPLIED VISUAL SCIENCES, INC.

(Exact name of registrant as specified in its charter)


Delaware		54-1521616
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

525K East Market Street, # 116, Leesburg, VA 20176

(Address of principal executive offices and zip code)

(703) 539-6190

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __ No ü

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes __ No ü

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No __

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ü]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes __ No ü

The aggregate market value of the registrant’s voting common equity held by non-affiliates of the registrant was approximately $3,~~318~~620,~~556~~963 (the last business day of the registrant’s most recently completed second fiscal quarter), as quoted on the OTC ~~Bulletin~~Markets, ~~Board~~OTCQB for the registrant’s Common Stock, $0.001 par value, on June 30, ~~2012~~2014.

At ~~May~~July 817, ~~2013~~2015, ~~101~~106,~~026~~728,612 shares of the registrant’s Common Stock, $0.001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this Report contains forward-looking statements which provide our current expectations or forecasts of future events. Forward-looking statements in this Report include, without limitation:

information concerning possible or assumed future results of operations, trends in financial results and business plans, including those related to earnings, earnings growth, revenue and revenue growth;

statements about the level of our costs and operating expenses relative to our revenues, and about the expected composition of our revenues;

statements about expected future sales trends for our products;

statements about our future capital requirements and the sufficiency of our cash, cash equivalents, and available bank borrowings to meet these requirements;

information about the anticipated release dates of new products;

other statements about our plans, objectives, expectations and intentions;

and other statements that are not historical fact.

Forward-looking statements generally can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “intends, “plans,” “should,” “seeks,” “pro forma,” “anticipates,” “estimates,” “continues,” or other variations thereof (including their use in the negative), or by discussions of strategies, plans or intentions. Such statements include but are not limited to statements under Part I, Item 1A - Risk Factors, Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part I, Item 1 – Business and elsewhere in this Report. A number of factors could cause results to differ materially from those anticipated by such forward-looking statements, including those discussed under Part I, Item 1A - Risk Factors, and Part I, Item 1 – Business of this Report. The absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including factors described in Part I, Item 1A - Risk Factors of this Report. You should carefully consider the factors described in Part I, Item 1A - Risk Factors of this Report in evaluating our forward-looking statements.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this Report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Report, or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission (“SEC”).

APPLIED VISUAL SCIENCES, INC.

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

ITEM 1A. RISK FACTORS

2720

ITEM 1B. UNRESOLVED STAFF COMMENTS

4033

ITEM 2. PROPERTIES

4133

ITEM 3. LEGAL PROCEEDINGS

4133

PART II

4133

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 4133

ITEM 6. SELECTED FINANCIAL DATA

4234

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

4335

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

6453

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

6453

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

6453

ITEM 9A. CONTROLS AND PROCEDURES

6453

ITEM 9B. OTHER INFORMATION

6554

PART III

6555

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

6555

ITEM 11. EXECUTIVE COMPENSATION

7059

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 8472

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

8573

ITEM 14. PRINCIPAL ACCOUNTiNG FEES AND SERVICES

8674

PART IV

8775

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

8775

SIGNATURES

9178

CONSOLIDATED FINANCIAL STATEMENTS

9279

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

9380

CONSOLIDATED BALANCE SHEETS

9481

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME ~~(LOSS)~~

9582

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ ~~EQUITY~~ (DEFICIT) AND ACCUMULATED COMPREHENSIVE INCOME ~~(LOSS)~~ 83

CONSOLIDATED STATEMENTS OF CASH FLOWS

9784

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9885

NOTE 1. Basis of Presentation and Going Concern Considerations

9885

NOTE 2. Significant Accounting Policies

~~100~~87

NOTE 3. Accrued Liabilities

~~106~~93

NOTE 4. Financing Arrangements

~~107~~93

NOTE 5. Fair Value Measurement

~~112~~98

NOTE 6. Stockholders’ ~~Equity~~ (Deficit)

~~113~~99

NOTE 7. Goodwill and Intangible Assets

~~124~~108

NOTE 8. Income Taxes

~~124~~108

NOTE 9. Commitments and Contingencies

~~125~~109

NOTE 10. Employment Agreements With Executive Officers

~~126~~110

NOTE 11. Related Party Transactions

~~128~~111

NOTE 12. Operating Leases

~~129~~112

NOTE 13. Subsequent Events

~~129~~112

PART I

ITEM 1. BUSINESS

Overview

Applied Visual Sciences, Inc. was incorporated under the name Guardian Technologies International, Inc., in the Commonwealth of Virginia in 1989 and reincorporated in State of Delaware in February 1996. We changed our name to Applied Visual Sciences, Inc., on July 9, 2010. The Company, previously an operating stage company, became a development stage company on April 1, 2012, the date of inception as a development stage company for financial reporting. Applied Visual Sciences, Inc. and its subsidiaries are collectively referred to herein as the “Company,” “Applied Visual Sciences, Inc.,” “Applied Visual,” “us,” “we,” or “our.”

Applied Visual Sciences is a software technology company that designs and develops ~~imaging~~computer-vision ~~informatics~~detection solutions based on image processing science for delivery to its target markets, aviation/homeland security and healthcare. Our two product lines are offered through our two operating subsidiaries as follows: Guardian Technologies International, Inc. for aviation/homeland security products, ~~and~~ Signature Mapping Medical Sciences, Inc., for healthcare., Onand ~~March~~Instasis 23Imaging, ~~2012~~Inc., ~~the~~a ~~Company~~wholly ~~established~~owned asubsidiary ~~new~~of ~~entity;~~Signature ~~Instasis~~Mapping ~~Imaging~~Medical Sciences, Inc., for the development, marketing, and sales of a suite of ~~imaging~~computer-vision ~~analytic~~ applications for the automated detection of breast cancer. We may engage in one or more acquisitions of businesses that are complementary, and may form wholly-owned subsidiaries to operate within defined vertical markets products.

The Company utilizes imaging technologies and analytics to create integrated information management technology products and services that address critical problems experienced by corporations and governmental agencies in healthcare and homeland security. Each product and service can improve the quality and response time of decision-making, organizational productivity, and efficiency within the enterprise. Our product suite integrates, streamlines, and distributes business and clinical information and images across the enterprise.

Our Business Strategy

Our strategic vision is to position our core technology as the de facto standard for digital image analysis, knowledge extraction, and detection. Our strategy is based upon the following principal objectives:

Maintain product development and sales/marketing focus on large, underserved, and rapidly growing markets with a demonstrated need for intelligent ~~imaging~~computer-vision ~~informatics~~detection.

Leverage Applied Visual Sciences, Inc.’s technology, experienced management team, research and development infrastructure.

Focus our talents on solving highly challenging information problems associated with digital imaging analysis.

Establish an international market presence through the development of a significant OEM/Reseller network.

Build and maintain a strong balance sheet to ensure the availability of capital for product development, acquisitions, and growth.

Seek to broaden our investment appeal to large institutions.

To achieve our strategic vision, we are aware of the need to exercise the financial and operational discipline necessary to achieve the proper blend of resources, products and strategic partnerships. These efforts can accelerate our ability to develop, deploy and service a broad range of intelligent ~~imaging~~computer-vision ~~informatics~~detection solutions directly to our target markets and indirectly through OEM/value added reseller (“VAR”) partners. During ~~2012~~2014, we continued implementing changes across the spectrum of our business. We ~~refined~~conducted ~~our~~independent ~~marketing~~international ~~strategy~~clinical ~~for~~trials ~~PinPoint™~~ and ~~Signature~~scientific ~~Mapping™,~~validation ~~and~~of ~~enhanced~~ our ~~Signature Mapping~~TBDx™ ~~product~~tuberculosis ~~offerings~~detection technology.

We may engage in one or more acquisitions of businesses that are complementary, and may form wholly-owned subsidiaries to operate within defined vertical markets.

Our Core Technology

Our core technology is an “intelligent ~~imaging~~computer-vision ~~informatics~~detection” (“3i™”) engine that is capable of extracting embedded knowledge from digital images, and has the capacity to analyze and detect image anomalies. The technology is not limited by type of digital format. It can be deployed across divergent digital sources such as still images, x-ray images, video and hyper-spectral imagery. To date, the technology has been tested in the area of threat detection for baggage scanning at airports, for bomb squad applications and the detection of tuberculosis by analyzing digital images of stained sputum slides captured through a photo microscopy system. Varying degrees of research and development have been conducted in the areas of detection for cargo scanning, people scanning, military target acquisition in a hyper-spectral environment, satellite remote sensing ground surveys and mammography ~~CAD~~computer-aided-detection ~~products and radiologists’ diagnostic~~

(“CAD”) products and radiologists’ diagnostic imaging tools, and while product development in these areas is ongoing, there can be no assurance that we will successfully develop product offerings in these areas.

We are currently focused on providing software technology solutions and services in two primary markets - aviation/homeland security with PinPoint™ and healthcare technology with Signature Mapping™ solutions. However, as new or enhanced solutions are developed, we expect to expand into other markets such as military and defense utilizing hyper-spectral technology, and imaging diagnostics for the medical industry.

Financing Activities

~~2012~~2014 Short-Term Promissory Notes Outstanding

During ~~2012~~2014, the Company issued ~~six~~eight promissory notes to six accredited investors in the aggregate principal amount of $~~160~~68,000. ~~The~~ ~~twelve-month~~Although the notes ~~accrue~~are non-interest atbearing, as consideration to the note holders, the Company shall pay a ~~rate~~total premium of 1250% ~~per~~(total ~~annum~~payment due of 1.5 times principal) of such notes, and the entire unpaid principal and premium amounts shall become immediately due on or before September 30, 2014, and January 31, 2015. ~~The~~All ~~Company~~such ~~also~~notes ~~issued~~were subsequently amended to extend their maturity date to December 31, 2015. If such notes are not paid by their original maturity date, then the ~~note~~Company ~~holders~~shall anpay ~~aggregate~~a total premium of ~~285~~100% (total payment due of 2 times principal),~~000~~ ~~shares~~and such payments of ~~common~~total ~~stock. The~~principal ~~relative~~and ~~fair~~premium ~~value~~amounts shall be from net revenue of future TBDx™ sales. Of the ~~common~~initial ~~stock~~50% ofpremium, or $1134,~~715~~000, ~~will~~$23,020 bewas ~~amortized~~recorded ~~over~~as ~~the~~interest ~~term~~expense ofthrough the ~~notes~~period ending December 31, 2014, and $10,980 shall be recorded in fiscal 2015. The ~~Company~~additional ~~also~~50% ~~issued 10~~premium,~~800~~ ~~shares~~or of$34,000, ~~common~~shall ~~stock~~be recorded as ~~compensation~~interest inexpense ~~connection~~upon ~~with~~ the ~~financing~~Company ~~for~~achieving anet ~~fair~~revenue ~~value~~from future sales of ~~$2,700~~TBDx™.

~~2011~~2013 Short-Term Promissory Notes Outstanding

During ~~October and November 2011~~2013, the Company issued ~~twelve-month~~nine promissory notes to eight accredited investors in the aggregate principal amount of $~~400~~179,500 ($179,275, net of commissions and expenses in the amount of $225), of which five notes for an aggregate of $48,500 originally matured during 2013, $14,000 matured on April 25, 2014, $100,000 matured on September 21, 2014, and $17,000 matured on October 25, 2014. All such notes were subsequently amended to extend their maturity date to December 31, 2015. The ~~twelve~~terms of the notes are essentially the same as the 2011 and 2012 short-~~month~~term promissory notes, except that $40,000 of the notes accrue interest at a rate of 12% per annum~~. The~~, ~~Company~~one ~~also~~note ~~issued~~for to$8,500 ~~the~~was ~~two~~noninterest ~~note~~bearing ~~holders~~during an2013 ~~aggregate~~and accrues interest at a rate of ~~400~~10% effective January 1, 2014, one note for $14,000 ~~shares~~accrues interest at a rate of ~~common~~10% ~~stock~~per annum, one note for $8,500 accrues interest at a rate of 5.9%, with two notes for $108,500 being noninterest bearing. ~~The~~Consideration ~~relative~~for ~~fair~~one ~~value~~$8,500 ofnoninterest ~~the~~bearing ~~common~~note ~~stock~~during 2013 received a modification to 540,000 warrants to include a cashless provision, one note of $348,~~700~~500 ~~will~~received bean ~~amortized~~extension ~~over~~of ~~the~~4,632,725 ~~term~~warrants to December 31, 2018, and one for $100,000 received a 2% royalty payment of ~~the~~future ~~notes~~TBDx™ net revenue in South Africa up to $300,000. The Company ~~also~~ issued ~~250~~to six of the note holders an aggregate of 450,000 shares of common stock, asand ~~compensation~~the inrelative ~~connection~~fair ~~with~~value of the ~~financing~~common ~~for~~stock aof ~~fair~~$31,100 ~~value~~will be amortized over the term of ~~$25,000~~the notes.

~~2011~~2012 ~~Securities~~Short-Term ~~Purchase~~Promissory ~~Agreement~~Notes Outstanding

OnDuring ~~February 23~~2012, ~~2011,~~ the Company ~~entered~~issued ~~into~~six apromissory ~~Securities~~notes ~~Purchase~~to ~~Agreement~~four ~~(the “SPA”) with an institutional~~ accredited ~~investor~~investors ~~for~~in anthe ~~investment~~aggregate upprincipal toamount of $1160,000~~,000,~~. The ~~subject~~twelve-month tonotes ~~certain~~accrue ~~stock~~interest ~~price~~at ~~and~~a ~~volume~~rate ~~conditions~~of 12% per annum. Subsequently, onthe ~~February~~promissory ~~24,~~notes ~~2011,~~have webeen ~~sold~~amended to ~~the~~mature ~~institutional~~on ~~investor~~December at31, ~~the~~2015. The ~~first~~Company ~~closing~~also ofissued to the ~~private~~note ~~placement~~holders ~~of securities,~~ an aggregate of ~~600~~285,000 shares of common stock,. The ~~and~~relative ~~600,000~~fair ~~common~~value ~~stock purchase warrants to purchase an aggregate~~ of ~~600,000~~the ~~shares of~~ common stock, ~~for gross proceeds~~ of $~~150~~11,~~000~~715 ~~($136,000~~will ~~net~~be ofamortized ~~certain~~over ~~expenses and sales commissions in~~ the ~~amount~~term of ~~$14,000). The warrants are exercisable at a price of $0.25 per share for a period of five years after~~ the ~~date of issuance, contain a cashless exercise provision and other customary provisions~~notes. The ~~Also,~~Company wealso issued to10,800 ashares ~~broker an aggregate~~ of ~~72,000~~common ~~placement~~stock ~~agent’s warrants~~ as compensation in connection with the ~~offering.~~financing ~~The~~for ~~placement~~a ~~agent’s~~fair ~~warrants~~value ~~are~~of ~~under the same terms and conditions as those issued to the institutional investor~~$2,700.

In addition, under the SPA, the investor has agreed to provide additional financing to us by purchasing shares of our common stock at seven subsequent closings and subject to certain share price and volume requirements. However, the subsequent closings scheduled during March through September 2011, ~~did~~Short-Term ~~not~~Promissory ~~take~~Notes ~~place since the stock price and volume conditions were not met.~~Outstanding

WeDuring ~~granted~~October toand ~~the~~November ~~investor~~2011, ~~piggy~~the ~~back~~Company ~~registration~~issued ~~rights~~two ~~with~~promissory ~~regard~~notes to ~~the~~accredited ~~shares~~investors ~~issued~~ in the ~~financing,~~aggregate ~~including~~principal ~~the~~amount ~~shares~~of ~~underlying the Warrants~~$400,000. The ~~SPA~~twelve-month ~~contains~~notes ~~representations~~accrue ~~and~~interest ~~warranties~~at ofa ~~the~~rate ~~Company~~of ~~and~~12% ~~investor~~per annum. Subsequently, ~~certain~~the ~~indemnification~~promissory ~~provisions~~notes ~~and~~have ~~customary~~been ~~conditions~~amended to ~~each~~mature ~~closing~~on December 31, 2015. WeThe ~~may~~Company ~~terminate~~also issued to the ~~SPA~~two onnote ~~ten~~holders ~~days~~an ~~prior~~aggregate ~~written~~of ~~notice~~400,000 toshares ~~the~~of ~~investor,~~common ~~and~~stock. The ~~the~~relative ~~investor~~fair ~~may~~value ~~terminate~~of the ~~SPA~~common atstock ~~any~~of ~~time~~$34,700 ~~prior~~will tobe aamortized ~~subsequent~~over ~~financing~~the ~~upon~~term ~~written~~of ~~notice~~the tonotes. The usCompany ifalso weissued ~~consummate~~250,000 ashares ~~reverse~~of common stock ~~split~~as orcompensation ain ~~subsequent~~connection ~~financing~~with tothe ~~which~~financing ~~the~~for ~~investor~~a isfair ~~not~~value aof ~~party~~$25,000.

We2006 ~~agreed~~through to2013 pay the investor’s counsel with regard to the first closing in the amount of $25,000, $5,000 of which was paid at the first closing and $5,000 was to be paid at each of the first four subsequent closings. As mentioned above, the subsequent closings did not take place and the Company did not pay the four additional $5,000 payments to the investor’s counsel. We also agreed to pay additional fees for their counsel for each subsequent closing in the amount of $2,500. A broker acted as placement agent for the offering. Under the terms of a NonShort-~~Circumvention~~Term ~~and~~Promissory ~~Compensation Agreement~~Notes, ~~dated~~Related January 12, 2011, between the Company and the broker, in connection with the offering, we agreed to pay or issue the broker at each subsequent closing a placement fee equal to 6% of the proceeds received by us at each closing and placement agent’s warrants equal to 6% of the shares sold at the closing (including the shares underlying the Warrants). Party

dated effective April 21, 2006, to Mr. Trudnak in the principal amount of $200,000. The note is unsecured, non-negotiable and non-interest bearing. The note is repayable on the earlier of (i) six months after the date of issuance, (ii) the date the Company receives aggregate proceeds from the sale of its securities after the date of the issuance of the Note in an amount exceeding $2,000,000, or (iii) the occurrence of an event of default. The following constitute an event of default under the note: (a) the failure to pay when due any principal or interest or other liability under the loan agreement or under the note; (b) the material violation by us of any representation, warranty, covenant or agreement contained in the loan agreement, the note or any other loan document or any other document or agreement to which the Company is a party to or by which the Company or any of our properties, assets or outstanding securities are bound; (c) any event or circumstance shall occur that, in the reasonable opinion of the lender, has had or could reasonably be expected to have a material adverse effect; (d) an assignment for the benefit of our creditors; (e) the application for the appointment of a receiver or liquidator for us or our property; (f) the issuance of an attachment or the entry of a judgment against us in excess of $100,000; (g) a default with respect to any other obligation due to the lender; or (h) any voluntary or involuntary petition in bankruptcy or any petition for relief under the federal bankruptcy code or any other state or federal law for the relief of debtors by or with respect to us, provided however with respect to an involuntary petition in bankruptcy, such petition has not been dismissed within 30 days of the date of such petition. In the event of the occurrence of an event of default, the loan agreement and note shall be in default immediately and without notice, and the unpaid principal amount of the loan shall, at the option of the lender, become immediately due and payable in full. The Company agreed to pay the reasonable costs of collection and enforcement, including reasonable attorneys’ fees and interest from the date of default at the rate of 18% per annum. The note is not assignable by Mr. Trudnak without our prior consent. The Company may prepay the note in whole or in part upon ten days notice. On October 21, 2006, Mr. Trudnak extended the due date of the loan to December 31, 2006. Subsequently, on October 3 and October 18, 2006, Mr. Trudnak loaned the Company $102,000 and $100,000, respectively, on substantially the same terms as the April 21, 2006 loan, except that each loan is due six months after the date thereof. Accordingly, following such additional loans, the Company owed an aggregate of approximately $402,000 to Mr. Trudnak. On November 10, 2006, Mr. Trudnak extended the due ~~dates~~date of ~~such loans to May 31, 2007, except that $100,000 of~~ the ~~April~~note 21, 2006, loan becomes due upon the Company raising $2,500,000 in financing after November 6, 2006, and the remaining amount of $202,000 of such loans become due upon the Company raising an aggregate of $5,000,000 in financing after November 6, 2006, and prior to May 31, 2007. Following the first closing of our Debenture and Series D Warrant financing on November 8, 2006, the Company repaid $100,000 on November 20, 2006, in principal amount of the April 1, 2006 loan, and paid an additional $100,000 to Mr. Trudnak on April 17, 2007 upon the second closing of our Debenture and Series D Warrant financing. On May 31, 2007, Mr. Trudnak extended the due dates of the remaining loans to May 31, 2008. Although, the anticipated payment of $202,000 had not been made, ~~and Mr. Trudnak made~~ an additional $24,000 loan to the company on June 25, 2008, and $5,000 on September 14, 2011, for cumulative outstanding loans of $~~231~~129,000. The maturity date of the outstanding loans was extended tomultiple ~~May~~times ~~31,~~during 2009, ~~then~~through ~~to May 31, 2010 and June 30, 2011, and subsequently to December 31, 2011~~2014. On December 31, ~~2011~~2014, the outstanding loans were extended to ~~June 30, 2012, then to~~ December 3031, ~~2012, and subsequently to June 30, 2013~~2015. The Company repaid an aggregate of $~~108~~6,900 of the notes during 2010, ~~and repaid~~ an aggregate $33,100 during 2011, an aggregate of $8,500 during 2013, resulting in an outstanding balance at December 31, ~~2012~~2014 of $8980,~~000~~500. The terms of the above transaction were reviewed and approved by the Company’s audit committee and by the independent members of our Board of Directors. Upon the death of Mr. Trudnak on April 18, 2014, the notes became part of his estate and will be assigned to his spouse, Jean M. Trudnak.

2006 and 2007 Series A Debentures (as Amended on October 15, 2010)

Under a securities purchase agreement, dated November 3, 2006, between the Company and certain institutional accredited investors, the Company sold an aggregate of $5,150,000 in principal amount of our Series A Debentures and Series D Common Stock Purchase Warrants to purchase an aggregate of 4,453,709 shares of our common stock. On November 8, 2006, the Company issued to the institutional investors an aggregate of $2,575,000 in principal amount of Series A Debentures and 4,453,709 Series D Warrants. On April 12, 2007, the Company issued an additional $2,575,000 in principal amount of the Series A Debentures, which followed the effectiveness of a registration statement registering the shares of our common stock underlying the Series A Debentures and Series D Warrants. Proceeds of the two offerings were used for the purpose of new personnel, research and development, registration expenses, for general working capital purposes, and repaying $200,000 in loans made to us by Mr. Michael W. Trudnak, our Chairman and CEO. The Company allocated proceeds from each closing to the ~~embedded~~derivative ~~conversion~~liability features of the Series A Debentures and Series D Warrants that were recognizable as a liability under generally accepted accounting principles. We also issued at the first closing an aggregate of 623,520 common stock purchase warrants to the placement agent as compensation in the offering, which were upon terms substantially similar to the Series D Warrants. One-half of the Series D Warrants (2,226,854 warrants) and the placement agent warrants (311,760 warrants) became exercisable on November 8, 2006. The remaining one-half of the Series D Warrants (2,226,855 warrants) and the placement agent warrants (311,760 warrants) became exercisable on April 12, 2007. The Series D Warrants and the placement agent’s warrants may be exercised via a cashless exercise if certain conditions are met. Due to the potential of the milestone-related adjustments, the initial exercise price of $1.15634 may be reset and the maximum number of shares to be issued under the debentures was ~~indeterminable~~at asthat oftime ~~December 31~~indeterminable, ~~2007.~~and ~~The~~the Company considered ~~ASC~~the ~~815-40~~guidance ~~(formerly~~of ~~EITF~~ASC 00815-1940, ~~relating to the provisions for~~ “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock)”, whereby public companies that are or could be required to deliver shares of common stock as part of a physical settlement or a net-share settlement, under a freestanding financial instrument, are required to initially measure the contract at fair value, and concluded that ~~there~~the ~~were~~potential of the milestone-related adjustments at that time may cause insufficient shares to share settle the contracts. On April 1, 2007, due to the various milestone-related provisions, the conversion price of the Series A Debentures and the exercise price of the Series D Warrants and Placement Agent’s Warrants were reset to a price of $0.7453 per share, then to $0.6948 effective October 1, 2007, and the final milestone reset of $0.4089 effective April 1, 2008. The Series A Debentures and Series D Warrants also have a fully ratchet anti-dilution provision, whereby any subsequent equity transaction entitling a person to acquire shares of common stock at an effective price per share that is lower than the then conversion price, then the conversion price of the Debentures and Warrants shall be reduced to equal the lower subsequent equity transaction price. AsSubsequently, as a result of a June 2009 financing in which the Company ~~issued~~elected to issue shares of common stock and warrants at $0.25 per share, the conversion price of our debentures and the exercise price of the Series D Warrants was adjusted under the anti-dilution provisions of such instruments to a price of $0.25 per share, and the number of shares underlying the Series D Warrants (including the warrants the Company issued to the placement agent in the financing) were increased by an aggregate of 2,677,417 Series D warrants. On July 10, 2007, a debenture holder exercised 864,798 Series D Warrants for 864,798 shares of common stock, and 914,798 warrants were exercised during 2010 under the cashless provision for 420,166 shares of common stock. Of the remaining Series D Warrants and Placement Agent Warrants, 3,062,527 warrants expired on November 11, 2011, and 3,012,523 warrants expired on April 12, 2012.

As of December 31, 2014, an aggregate of $3,461,795 in principal amount of the Series A Debentures have been converted into 8,730,037 shares of common stock, an aggregate of $663,043 in interest amount have been converted into 2,675,576 shares of common

~~Warrants was adjusted under the anti-dilution provisions of such instruments to a price of $0.25 per share~~stock, and ~~the number of shares underlying the Series D Warrants (including the warrants the Company issued to the placement agent in the financing) were increased by~~ an aggregate of 21,~~677~~779,~~417~~596 Series D ~~warrants.~~Warrants Onhave ~~July~~been ~~10, 2007, a debenture holder~~ exercised ~~864,798~~resulting ~~Series~~in Dthe ~~Warrants~~issuance ~~for 864,798 shares~~ of ~~common stock~~1, ~~and 914~~284,~~798~~964 ~~warrants were exercised during 2010 under the cashless provision for 420,166~~ shares of common stock. OfAccordingly, ~~the~~as ~~remaining~~of ~~Series~~December ~~D Warrants and Placement Agent Warrants~~31, 32014,~~062,527~~ ~~warrants~~an ~~expired~~aggregate onof ~~November 11~~$1, ~~2011~~688,205 ~~and~~of ~~3,012,523~~principal ~~warrants~~amount ~~expired~~of onthe ~~April~~debentures ~~12,~~remain ~~2012~~unconverted.

AsOur outstanding Series A 10% Convertible Debentures originally became due on November 7, 2008. On October 15, 2010, we entered into an agreement with our two remaining Series A Debenture holders to amend and effect a restructuring of ~~December~~the 31debentures that originally became due on November 7, ~~2012~~2008. Under the amendment agreement, the Company and two debenture holders agreed: (i) to an ~~aggregate~~extension of the maturity date of the debentures to June 30, 2011, (ii) that the $31,~~461~~688,~~795~~205 inof outstanding principal amount ofwill ~~the~~not ~~Series~~bear Ainterest ~~Debentures~~from ~~have~~July ~~been~~1, ~~converted~~2010 ~~into~~through 8the new maturity date,~~730~~ (iii) that,~~037~~ ~~shares~~in exchange for the payment in cash of ~~common~~amounts ~~stock,~~of anaccrued ~~aggregate~~but unpaid regular interest of approximately $~~663~~638,~~043~~163, inand waived all additional interest ~~amount~~and ~~have~~late ~~been~~fees, ~~converted~~liquidated ~~into~~damages and certain other amounts due under the debentures (“Interest and Default Amounts”) the Company issued an aggregate of 2,~~675~~552,~~576~~653 shares of common stock, ~~and~~(iv) anthat ~~aggregate~~all claims with regard to the payment of ~~1,779,596~~the ~~Series~~Interest Dand ~~Warrants~~Default ~~have~~Amounts ~~been~~and ~~exercised~~all ~~resulting~~prior inevents of default under the ~~issuance~~Debentures and breaches of 1any covenant,~~284~~ agreement,~~964~~ ~~shares~~term ofor ~~common~~condition ~~stock.~~(“Defaults”) ~~Accordingly,~~under asour debentures and debenture transaction documents would be waived and the Company was released from any claims with respect to the Additional Interest and Late Fees of ~~December~~approximately 31$773, ~~2012~~314, anand ~~aggregate~~Default Amounts of approximately $12,~~688~~541,~~205~~739, ofand ~~principal~~prior ~~amount~~Defaults Events, (v) to terminate the registration rights agreements between the Company and each debenture holder, and (vi) that the Company may force a conversion of the debentures ~~remain~~if ~~unconverted~~our common stock equals or exceeds certain price and volume conditions. There were no conversions of our debentures during 2013 or 2014.

Our outstanding Series A 10% Convertible Debentures originally became due on November 7, 2008. On October 15, 2010, we entered into an agreement with our two remaining Series A Debenture holders to amend and effect a restructuring of the debentures that originally became due on November 7, 2008. Under the amendment agreement, the Company and two debenture holders agreed: (i) to an extension of the maturity date of the debentures to June 30, 2011, (ii) that the $1,688,205 of outstanding principal amount will not bear interest from July 1, 2010 through the new maturity date, (iii) that, in exchange for the payment in cash of amounts of accrued but unpaid regular interest of approximately $638,163, and waived all additional interest and late fees, liquidated damages and certain other amounts due under the debentures (“Interest and Default Amounts”) the Company issued an aggregate of 2,552,653 shares of common stock, (iv) that all claims with regard to the payment of the Interest and Default Amounts and all prior events of default under the Debentures and breaches of any covenant, agreement, term or condition (“Defaults”) under our debentures and debenture transaction documents would be waived and the Company was released from any claims with respect to the Additional Interest and Late Fees of approximately $773,314, and Default Amounts of approximately $2,541,739, and prior Defaults Events, (v) to terminate the registration rights agreements between the Company and each debenture holder, and (vi) that the Company may force a conversion of the debentures if our common stock equals or exceeds certain price and volume conditions. There were no conversions of our debentures during 2012.

Under the Debenture amendment agreement, the Debenture holders agreed, commencing March 3, 2011, that the Company may force a conversion of the Debentures. Such a forced conversion may only be effected once every 90 days and the ability of the Company to force any such conversion is subject to certain equity conditions, which conditions were amended under the terms of the Debenture Amendment Agreement in accordance with the following:

if the variable weighted average price for the Company’s common stock (“VWAP”) for any five consecutive trading days exceeds $0.50 and the average daily dollar trading volume for the Company’s common stock during such period equals or exceeds $50,000, the Company may require a Holder to convert up to 25% of the outstanding principal amount of its Debenture on September 3, 2010, plus any liquidated damages or other amounts owing under the Debenture;

if the VWAP for any five consecutive trading days exceeds $0.75 and the average daily dollar trading volume for the common stock during such period equals or exceeds $75,000, the Company may require a Holder to convert up to an additional 25% of the outstanding principal amount of its Debenture on September 3, 2010, plus any liquidated damages or other amounts owing under the Debenture;

if the VWAP for any five consecutive trading days exceeds $1.00 and the average daily dollar trading volume for the common stock during such period equals or exceeds $100,000, the Company may require a Holder to convert up to 100% of the outstanding principal amount of its Debenture on September 3, 2010, plus any liquidated damages or other amounts owing under the Debenture.

The principal amount of our outstanding Series A Debentures of $1,688,205 became due on July 1, 2011, and such amount was not paid. Therefore, the Company ~~may~~could be considered in default~~. The~~ debentures provide that any default in the payment of principal, which default is not cured within the five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default and may result in enforcement of the debenture holders’ rights and remedies under the debentures and applicable law. We ~~are~~have been in discussions with the debenture holders to re-negotiate the terms of the debentures, including the repayment or repurchase of the debentures and/or seek to extend their maturity date, although we have not reached any agreement with the debenture holders with regard to any such repayment, repurchase or extension. Our ability to repay or repurchase the debentures is contingent upon our ability to raise additional financing, of which there can be no assurance. Also, as a condition to any such extension, debenture holders may seek to amend or modify certain other terms of the debentures. If When an event of default occurs under the debentures, the debenture holders may elect to require us to make immediate repayment of the mandatory default amount, which equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, or (b) the outstanding principal amount unpaid divided by the conversion price on the date the mandatory default amount is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. In anticipation of such election by the debenture holders, due to the nonpayment of principal amount on the due date of July 1, 2011, we measured the mandatory default at approximately $337,641 and subsequently on each balance sheet date, which is reflected in the carrying value of the debentures and also recognized as interest expense. We remeasured the mandatory default amount as of December 31, 2014 at approximately $337,641. As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. The Company currently has insufficient funds to repay the outstanding amount in the event the debenture holders make a demand for payment.

Prior to the Debenture amendment agreement and absent a default, the Debentures bore interest at the rate of 10% per annum. The Debenture agreement, as amended on October 15, 2010, states no interest and that from July 1, 2010 through the maturity date of June 30, 2011, the principal amount of this Debenture shall bear no interest.” Any reference to the accrual of interest or late fees, beyond the maturity date, was specifically deleted from the Debenture agreement. If an Event of Default occurs, the outstanding principal amount

~~election~~of by the ~~debenture~~Debenture, ~~holders~~plus accrued but unpaid interest, ~~due~~liquidated todamages ~~the~~and ~~nonpayment~~other ofamounts ~~principal~~owing ~~amount~~in onrespect ~~the~~thereof ~~due~~through the date of ~~July~~acceleration, 1shall become, ~~2011~~at the holder’s election, weimmediately ~~measured~~due and payable in cash at the mandatory default atamount. ~~approximately~~Commencing ~~$337,641~~5 ~~and~~days ~~subsequently~~after onthe ~~each~~occurrence ~~balance~~of ~~sheet~~any ~~date,~~Event ~~which~~of isDefault ~~reflected~~that results in the ~~carrying~~eventual ~~value~~acceleration of the ~~debentures~~Debenture, ~~and~~the ~~also~~interest ~~recognized~~rate ason the Debenture shall accrue at an interest ~~expense~~rate equal to the lessor of 18% per annum or the maximum rate permitted under applicable law. We ~~remeasured~~In accordance with the ~~mandatory~~terms of the amendment agreement, management believes there is no legal requirement to continue the accrual of interest or late fees. Management also determined that there are two (2) events that must take place before the default ~~amount~~interest asrate of ~~December~~18% ~~31,~~takes ~~2012~~effect. atOne ~~approximately~~is ~~$337~~an event of default,~~641.~~ Aswhich occurred when the Company did not make payment of the outstanding principle amount on the amended due date of ~~this~~July ~~report~~1, 2011. The other event is an “eventual acceleration” of the ~~debenture~~mandatory ~~holders~~default ~~have~~amount, which did not ~~made~~take anplace ~~election~~since ~~requiring~~the ~~immediate~~default ~~repayment~~did ofnot occur before the ~~mandatory~~maturity ~~amount~~date of June 30, ~~although~~2011, ~~there~~and ~~can~~the beevent noof ~~assurance~~default ~~they~~occurred ~~will~~on the due date of July 1, 2011 when payment was not domade ~~so.~~by ~~The~~the Company. Since ~~currently~~the ~~has~~default ~~insufficient~~did ~~funds~~not totake ~~repay~~place before the maturity or due date, no acceleration of the payment for the outstanding principal amount inof the ~~event~~Debentures took place, and the ~~debenture~~18% ~~holders~~default ~~make~~interest aprovision ~~demand~~does ~~for~~not ~~payment~~apply.

~~Financial~~The ~~Condition~~Debenture agreement, ~~Going~~as ~~Concern~~amended ~~Uncertainties~~on October 15, 2010, continues to permit the payment of interest, if due, in cash or registered shares of our common stock. If we elected to pay the interest due in shares of our common stock, the number of shares to be issued in payment of interest is determined on the basis of 85% of the lesser of the daily volume weighted average price of our common stock as reported by Bloomberg LP (“VWAP”) for the five trading days ending on the date that is immediately prior to (a) date the interest is due or (b) the date such shares are issued and ~~Events~~delivered to the holder. We could pay interest in shares of ~~Default~~our common stock only if the equity conditions, described below, have been met during the 20 consecutive trading days prior to the date the interest is due and through the date the shares are issued. The payment of interest in shares of our stock, the redemption of the Debentures and the occurrence of certain other events, was subject to a requirement that certain equity conditions (“equity conditions”) were met, as follows: (i) we have honored all conversions and redemptions of a Debenture by the holder, (ii) we have paid all liquidated damages and other amounts due to the holder, (iii) the registration statement covering the resale of the shares underlying the Debentures and Series D Warrants is effective permitting a holder to utilize the registration statement to resell its shares, (iv) our stock is traded on the OTC Markets, OTCQB or other securities exchange and all of the shares upon conversion or exercise of the Debentures and Series D Warrants are listed for trading, (v) we have sufficient authorized but unreserved shares of our common stock to cover the issuance of the shares upon conversion or exercise of the Debentures and Series D Warrants, (vi) there is no event of default under the Debentures, (vii) the issuance of the shares would not violate a holder’s 4.99% or 9.99% ownership restriction cap, (viii) we have not made a public announcement of a pending merger, sale of all of our assets or similar transaction or a transaction in which a greater than 50% change in control of the Company may occur and the transaction has not been consummated, (ix) the holder is not in possession of material public information regarding us, and (x) the daily trading volume of our shares for 20 consecutive trading days prior to the applicable date exceeds 100,000 shares. Under the terms of the Debenture Amendment Agreement, (A) the equity condition in (iii) above was amended to provide that such condition is met if, in the alternative, the shares issuable upon conversion of the Debentures may then be resold pursuant to Rule 144 without restriction or limitation and the Company has delivered to a holder an opinion of the Company’s counsel that such resale may legally be made and provided the holder has furnished a representation letter reasonable acceptable to the Company’s counsel that the holder is not an “affiliate” for purposes of Rule 144; (B) the equity condition in (vi) above was amended to except an event of default that has previously been waived; and (C) the equity condition in (x) above was amended to except circumstances where another volume condition is applicable.

~~During~~The ~~the~~Debentures ~~year~~contain ~~ended~~a ~~December~~limitation ~~31,~~on ~~2012,~~the ~~Applied~~amount ~~Visual~~of ~~Sciences’~~Debenture ~~revenue~~that ~~generating~~may ~~activities~~be ~~have~~converted ~~not~~at ~~produced~~any ~~sufficient~~one ~~funds~~time ~~for~~in ~~profitable~~the ~~operations~~event ~~and~~the weholder ~~have~~owns ~~incurred~~beneficially ~~operating~~more ~~losses~~than ~~since inception~~4.99% ~~In view~~ of ~~these~~our ~~matters,~~common ~~realization~~stock ofwithout ~~certain~~regard ofto the ~~assets~~number inof ~~the~~shares ~~accompanying~~underlying ~~consolidated~~the ~~balance~~unconverted ~~sheet~~portion isof ~~dependent~~the ~~upon~~Debenture. ~~continued~~This ~~operations,~~limitation ~~which~~may inbe ~~turn~~waived ~~is dependent~~ upon ~~our~~61 ~~ability~~days’ notice to ~~meet~~us ~~our~~by ~~financial requirements, raise additional financing on acceptable terms, and~~ the ~~success~~holder of ~~future operations. Our independent registered public accounting firm’s report on~~ the ~~consolidated~~Debenture ~~financial~~permitting ~~statements included herein, and in our annual report on Form 10-K for~~ the ~~year~~holder ~~ended December 31, 2011 contains an explanatory paragraph wherein they expressed an opinion that there is substantial doubt about our ability~~ to ~~continue~~change ~~as a going concern. Accordingly, careful consideration of~~ such ~~opinions~~limitation ~~should be given in determining whether~~ to ~~continue or become our stockholder~~9. 99%.

AsAn event of ~~December~~default 31may occur under the Debentures if (a) the Company defaults in the payment of principal or, ~~2012~~liquidated damages , we(b) ~~have~~the ~~outstanding~~Company ~~trade~~fails ~~and~~to ~~accrued~~materially ~~payables~~observe or perform a covenant or agreement in the Debentures, (c) a default or event of $1default occurs under any other transaction document related to the financing or in any other material agreement to which the Company is a party that results in a material adverse effect on the Company,~~570~~ (d) any representation or warranty the Company made to investors in the transaction documents related to the financing is materially untrue or incorrect,~~639~~ (e) a bankruptcy event occurs with regard to the Company, (f) the Company defaults on any other ~~accrued~~loan, ~~liabilities~~mortgage, ofor credit arrangement that involves an amount greater than $~~621~~150,~~311,~~000 and ~~accrued~~results ~~salaries~~in the obligation becoming declared due prior to ~~our~~the ~~employees~~due ~~and~~date, ~~management~~(g) the Company’s common stock is not eligible for quotation on the OTC Markets or other exchange on which the Company’s shares are traded, (h) a transaction occurs in which the control of $6the Company changes,~~629~~ the Company effects a merger or consolidation,~~246.~~ ~~Also~~the Company sells substantially all of the assets, a tender offer is made for the Company’s ~~has~~shares, anthe ~~outstanding~~Company ~~noninterest-bearing~~reclassify ~~loan~~their ~~from~~shares ~~its~~or ~~Chief~~a ~~Executive~~compulsory ~~Officer~~share exchange, or the Company agrees to sell more than 33% of ~~$89~~the assets,~~000~~ unless the Company receives the consent of holders of 67% of then outstanding principal of the Company’s Debentures, ~~and~~(i) the Company fails to deliver certificates for shares to be issued on conversion within seven trading days, (j) the Company has a judgment against it for more than $~~560~~150,000. ~~short-tern~~We ~~notes~~have ~~from~~agreed ~~five~~to ~~investors~~compensate a holder of a Debenture in the event our transfer agent fails to deliver shares upon conversion of the Debentures within three trading days of the date of conversion, and the holder’s broker is required to purchase shares of our common stock in satisfaction of a sale by a holder.

The principal amount of our outstanding Series A Debentures of $1,688,205 became due on July 1, 2011, and such amount was not paid. Therefore, the Company may be considered in default. The debentures provide that any default in the payment of principal, which default is not cured within the five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default and may result in enforcement of the debenture holders’ rights and remedies under the debentures and applicable law. We are in discussions with the debenture holders to re-negotiate the terms of the debentures, including the repayment or repurchase of the debentures and/or seek to extend their maturity date, although we have not reached any agreement with the debenture holders with regard to any such repayment, repurchase or extension. Our ability to repay or repurchase the debentures is contingent upon our ability to raise additional financing, of which there can be no assurance. Also, as a condition to any such extension, debenture holders may seek to amend or modify certain other terms of the debentures. If an event of default occurs under the debentures, the debenture holders may elect to require us to make immediate repayment of the mandatory default amount, which equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, or (b) the outstanding principal amount unpaid divided by the conversion price on the date the mandatory default amount is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. In anticipation of such election by the debenture holders, due to the nonpayment of principal amount on the due date of July 1, 2011, we measured the mandatory default at approximately $337,641 and subsequently on each balance sheet date, which is reflected in the carrying value of the debentures and also recognized as interest expense. We remeasured the mandatory default amount as of December 31, 2012 at approximately $337,641. As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. The Company currently has insufficient funds to repay the outstanding amount in the event the debenture holders make a demand for payment.

During 2012, the Company issued promissory notes to four accredited investors in the aggregate principal amount of $160,000 ($157,300, net of accrued commissions and expenses in the amount of $2,700), of which $100,000 initially matured on December 31, 2012, and was subsequently extended to June 30, 2013, $50,000 matures on January 24, 2013, and $10,000 matures on April 11, 2013. The short-term notes accrue interest at a rate of 12% per annum. The Company also issued to the note holders an aggregate of 285,000 shares of common stock, and 10,800 shares of common stock to a placement agent in exchange for cash compensation of $2,700. On March 15, 2012, we received $25,000 from an accredited investor, and issued an aggregate of 100,000 shares of common stock and 300,000 Class Q Warrants. The Class Q Warrants are exercisable at a price of $0.25 per share; contain a conditional call provision if the market price of each share exceeds $3.00, certain anti-dilution and other customary provisions. The warrants expire three years after the date of issuance.

As of December 31, 2012, we had a cash balance of $3,445. Subsequently and through May 10, 2013, we received $135,000 from accredited investors upon the issuance of promissory notes, and the notes accrue interest at a rate of 12% per annum. Management believes these funds to be insufficient to fund our operations for the next twelve months absent any cash flow from operations or funds from the sale of our equity or debt securities. Currently, we are spending or incurring (and accruing) expenses of approximately $190,000 per month on operations and the continued research and development of our 3i technologies and products, including with regard to

~~salaries~~The ~~and~~conversion ~~consulting~~price ~~fees. Management~~of ~~believes~~the ~~that~~Debentures weor ~~will~~the ~~require~~number anof ~~aggregate~~shares ofto ~~approximately~~be ~~$2,280,000~~issued toupon ~~fund~~conversion ~~our~~or ~~operations~~exercise ~~for~~of the ~~next~~Debentures 12are ~~months~~subject ~~and~~ to ~~repay~~adjustment ~~certain~~in ~~outstanding~~the ~~trade~~event ~~payables~~of ~~and~~a ~~accrued~~stock ~~expenses. This~~dividend, ~~assumes~~stock ~~that~~split, ~~holders~~subdivision or combination of our ~~outstanding~~shares ~~debentures~~of ~~convert~~common ~~such~~stock, ~~debt~~reclassification, ~~into~~sales ~~shares~~ of our ~~common~~securities ~~stock~~below ortheir ~~that~~then weconversion ~~are~~or ~~able~~exercise toprice ~~extend~~(“subsequent ~~the~~equity ~~term~~sales ofanti-dilution ~~the~~adjustment ~~debentures~~provisions”), ofa ~~which~~subsequent ~~there~~rights ~~can~~offering, beor noa ~~assurance. In~~reclassification ~~the~~of ~~event~~our weshares. ~~are~~Also, ~~unable~~if towe ~~extend~~effect ~~the~~a ~~term~~merger ofor ~~the~~consolidation ~~debentures~~with ~~beyond~~another ~~their~~company, ~~new~~we ~~maturity~~sell ~~date,~~all ~~the~~or ~~debenture~~substantially ~~holders~~all doof ~~not~~our ~~convert~~assets, ~~such~~a ~~debt~~tender offer or ~~require~~exchange ~~payment~~offer ofis ~~principal,~~made ~~partially~~for ~~convert~~our ~~such debt~~shares, or we effect ~~the~~a ~~buy-in~~reclassification ~~provision~~of ~~related~~our toshares ~~the~~or ~~warrants~~a ~~and~~compulsory ~~the~~share ~~debentures~~exchange, wea ~~shall~~holder that subsequently converts its Debenture will be ~~required~~entitled to ~~raise~~receive ~~additional~~the ~~financing. Also,~~same ~~this~~kind ~~assumes~~and ~~that~~amount weof ~~are~~securities, ~~able~~cash toor ~~continue~~property toas ~~defer~~if the ~~amounts~~shares ~~due~~it is entitled to ~~our~~receive ~~employees~~on ~~for~~the ~~accrued~~conversion ~~and~~had ~~unpaid~~been ~~salaries~~issued and ~~that~~outstanding weon ~~are~~the ~~able~~date toimmediately ~~continue~~prior to ~~extend~~the ordate ~~defer~~any ~~payment~~such oftransaction ~~certain~~occurred. Except ~~amounts~~as ~~due~~discussed toabove, ~~our~~no ~~trade~~such ~~creditors,~~events ofhave ~~which~~occurred ~~there~~through ~~can~~the bedate noof ~~assurance.~~this report.

InWe ~~view~~were ofnot ~~our~~required ~~limited revenues~~ to ~~date,~~make ~~the~~an ~~Company~~adjustment ~~has relied and continues~~ to ~~rely~~the ~~substantially~~conversion ~~upon~~or ~~equity~~exercise ~~and~~price ~~debt~~or ~~financing to fund its ongoing operations, including~~ the ~~research~~number ~~and~~of ~~development~~shares ~~conducted~~to inbe ~~connection~~issued ~~with~~upon ~~its~~conversion ~~products~~or ~~and~~exercise ~~conversion~~ of ~~accounts~~the ~~payable~~Debentures ~~for~~pursuant ~~stock.~~to ~~The~~the ~~proceeds~~subsequent ~~from~~equity ~~our~~sales ~~financings~~anti-dilution ~~have~~adjustment ~~been~~provisions ~~and~~related ~~continue~~ to bean ~~insufficient~~“exempt ~~to fund our operations~~issuance,” ~~pay~~which ~~our~~is ~~trade~~defined ~~payables,~~as: ~~repayment~~(A) ofany ~~our~~stock ~~unconverted debentures,~~ or ~~accrued~~options ~~and~~that ~~unpaid~~are ~~wages~~issued tounder our ~~employees. Therefore,~~stock ~~the~~option ~~debentures~~plans ~~holders, our employees,~~ or ~~trade~~are ~~creditors~~approved ~~may~~by ~~seek~~a tomajority ~~enforce payment~~ of ~~amounts~~non-employee ~~due~~directors ~~to them,~~ and ~~our~~issued ~~results~~(i) ofto ~~operations~~employees, ~~and~~officers ~~financial~~or ~~condition~~directors ~~could~~or be(ii) ~~materially and adversely affected and we may be unable~~ to ~~continue~~consultants, ~~our~~but ~~operations. Also,~~only inif the ~~event~~amount weissued ~~continue~~ to beconsultants ~~unable~~does tonot ~~pay~~exceed ~~our employees~~400,000 weshares ~~may suffer further employee attrition. There can be no assurances that we will be successful~~ in ~~our~~a ~~efforts~~12 tomonth ~~raise any additional financing~~period, ~~any~~(B) ~~bank~~securities ~~borrowing,~~issued ~~and~~under ~~research~~the ~~or grant funding. Moreover~~Debentures, in(C) ~~view~~shares of ~~the~~common ~~current market price of our~~ stock, weissued ~~may~~upon ~~have~~conversion ~~limited~~ or noexercise ~~access~~of, toor ~~the~~in ~~capital~~exchange ~~markets. Furthermore~~for, ~~under~~securities ~~the~~outstanding ~~terms~~on ~~of our agreements with~~ the ~~debenture~~date ~~holders,~~ we ~~are~~entered ~~subject~~into tothe ~~restrictions~~securities onpurchase ~~our~~agreement, ~~ability~~or to(D) ~~engage~~the inissuance ~~any~~of ~~transactions in our~~ securities in ~~which~~an ~~the~~acquisition ~~conversion, exercise~~ or ~~exchange~~strategic ~~rate~~transaction orapproved ~~other~~by ~~price~~our ofdisinterested ~~such~~directors. ~~securities~~Under ~~is below~~ the ~~current~~Debenture ~~conversion~~Amendment ~~price~~Agreement, orcommencing isOctober ~~based~~15, ~~upon~~2010, ~~the~~Debenture ~~trading~~holders ~~price~~agreed ofthat ~~our~~an ~~securities~~“exempt ~~after initial~~ issuance” orshall ~~otherwise~~also ~~subject~~include tothe ~~re-set. In~~issuance ~~view~~ of ~~the~~stock ~~foregoing,~~or wecommon ~~may~~stock beequivalents ~~required~~authorized toand ~~curtail~~approved ~~operations~~in ~~significantly,~~advance orby ~~obtain~~the ~~funds~~Company’s ~~through~~disinterested ~~entering~~directors ~~into~~at ~~arrangements~~a ~~with~~price ~~collaborative~~per ~~partners~~share or ~~others~~at ~~that~~a ~~may~~conversion ~~require~~or usexercise toprice ~~relinquish~~per ~~rights~~share equal to ~~certain~~or ofgreater ~~our~~than ~~technologies or products~~$0.25.

~~During~~In ~~Fiscal~~connection ~~2012,~~with our ~~total~~Series ~~stockholders’~~A ~~deficit~~Debenture ~~increased~~financing, bywe ~~$1,409,544~~entered into a registration rights agreement with purchaser of our debentures pursuant to ~~$11,235,351,~~which we agreed we would use our ~~consolidated~~best ~~net~~efforts ~~loss~~to ~~for~~file a registration statement under the ~~period~~Securities ~~was~~Act ~~$1,804,101~~within or45 adays ~~$649,725~~of ~~increase~~the infirst ~~net~~closing ~~loss~~to ~~from~~permit ~~2011.~~the ~~Notwithstanding~~public resale by debenture holders of the ~~foregoing~~shares ~~discussion~~that may be issued upon conversion of ~~management’s~~the ~~expectations~~Debentures ~~regarding~~and ~~future~~upon ~~cash~~exercise ~~flows~~of the Series D Warrants, ~~Applied~~including ~~Visual~~the ~~Sciences’~~shares ~~insolvency~~of ~~continues~~our common stock underlying the Debentures to ~~increase~~be issued at the ~~uncertainties~~second ~~related~~closing. Pursuant to ~~its~~the ~~continued~~amendments ~~existence. Both~~we ~~management~~entered ~~and~~into with the ~~Board~~current ofdebenture ~~Directors~~holders ~~are~~on ~~carefully~~October ~~monitoring~~15, 2010, the ~~Company’s~~debenture ~~cash~~holders ~~flows~~agreed ~~and~~to ~~financial~~terminate ~~position~~their inregistration ~~consideration~~rights agreements with us. Accordingly, we are not required to register or maintain the registration of ~~these~~the ~~increasing~~shares ~~uncertainties~~underlying ~~and~~the Series A Debentures, however, the ~~needs~~Company was obligated under the terms of ~~both~~the ~~creditors~~Registration ~~and~~Rights ~~stockholders~~Agreement that the Company entered into with each purchaser that has fully converted its Debenture.

~~Our~~We ~~Business~~also granted to each purchaser of the Debentures the right to participate in any offering by us of common stock or common stock equivalents until the later of (i) 12 months after the effective date of the registration statement and (ii) the date a purchaser holds less than 20% of the principal amount of the Debenture the purchaser originally agreed to purchase, except for an exempt issuance or an underwritten public offering of our common stock. Purchasers may participate in such an offering up to the lesser of 100% of the future offering or the aggregate amount subscribed for under the securities purchase agreement by all purchasers. Although such common stock offerings have occurred, the Debenture holders have notified the Company that they do not want to participate in any future financings.

~~Applied~~The ~~Visual~~securities ~~Sciences~~purchase isagreement aalso ~~software~~contained ~~technology~~representations ~~company that designs~~ and ~~develops~~warranties ~~imaging~~of ~~informatics~~both ~~solutions~~us ~~for~~and ~~delivery~~purchasers, conditions to ~~its~~closing, ~~target~~certain ~~markets~~indemnification provisions, ~~aviation/homeland~~and ~~security~~other ~~and~~customary ~~healthcare~~provisions. ~~Our~~Also ~~two~~the ~~product~~Debenture ~~lines~~Amendment ~~are~~Agreement ~~offered~~amended ~~through~~certain ~~our~~provisions ~~two~~covering ~~operating~~events ~~subsidiaries~~of asdefault ~~follows:~~under ~~Guardian~~the ~~Technologies International~~Debentures, ~~Inc.~~contained ~~for~~certain ~~aviation/homeland~~representations ~~security products~~ and ~~Signature~~warranties ~~Mapping~~of ~~Medical~~the ~~Sciences~~Company, ~~Inc.,~~a ~~for~~reaffirmation ~~healthcare.~~of Oncertain ~~March~~of ~~23, 2012,~~ the ~~Company~~representations ~~established~~and awarranties ~~new~~in ~~entity;~~the ~~Instasis~~securities ~~Imaging,~~purchase ~~Inc.~~agreement, ~~for~~contained ~~the~~certain ~~development,~~conditions ~~marketing~~to closing, and ~~sales~~certain ofother acustomary ~~suite~~provisions. We ofwere ~~imaging~~prohibited ~~analytic~~from ~~applications~~effecting ~~for~~a ~~the~~reverse ~~automated~~or ~~detection~~forward ofstock ~~breast~~split ~~cancer. We may engage in one~~ or ~~more~~reclassification ~~acquisitions~~ of ~~businesses~~our ~~that~~common ~~are~~stock ~~complementary,~~except ~~and~~as may ~~form~~be ~~wholly-owned~~required ~~subsidiaries~~ to ~~operate~~comply ~~within~~with ~~defined~~the ~~vertical~~listing ~~markets~~standards ~~products~~of any national securities exchange.

The Company ~~utilizes~~had ~~imaging~~interest ~~technologies~~expense ~~and~~of ~~analytics~~$97,825, ~~to create integrated information management technology products~~ and ~~services~~$71,775, ~~that~~during ~~address~~2014, ~~critical problems experienced by corporations~~ and ~~governmental~~the ~~agencies~~same period in ~~healthcare~~2013, ~~and homeland security~~respectively. ~~Each~~ ~~product~~Debt ~~and~~discount ~~service~~amortization ~~can~~costs ~~improve the quality and response time~~ of ~~decision-making~~$20, ~~organizational productivity~~570, and ~~efficiency within the enterprise. Our product suite integrates~~$10, ~~streamlines~~826, ~~and~~for ~~distributes~~2014, ~~business~~ and ~~clinical~~the ~~information~~same ~~and~~period ~~images~~in ~~across~~2013, ~~the enterprise.~~ respectively

~~Our~~Financial ~~Business~~Condition, ~~Strategy~~Going Concern Uncertainties and Events of Default

~~Our~~The ~~strategic~~Company, ~~vision~~previously an operating stage company, became a development stage company on April 1, 2012. A development stage company, as defined by ASC-915-10 “Accounting and Reporting by Development Stage Enterprise”, is an entity that devotes substantially all of its efforts to ~~position~~establish ~~our~~a ~~core~~business ~~technology~~and aseither of the defollowing ~~facto~~conditions ~~standard~~exists: ~~for~~1) ~~digital~~the ~~image~~principal ~~analysis~~operations have not commenced, ~~knowledge~~or ~~extraction~~2) the principal operations have commenced, but there has been no significant revenue therefrom. During 2014, Applied Visual Sciences’ revenue generating activities have not produced sufficient funds for profitable operations and ~~detection~~we have incurred operating losses since inception. ~~Our~~In ~~strategy~~view of these matters, realization of certain of the assets in the accompanying consolidated balance sheet is ~~based~~dependent upon continued operations, which in turn is dependent upon our ability to meet our financial requirements, raise additional financing on acceptable terms, and the ~~following~~success ~~principal~~of ~~objectives:~~future operations. Our independent registered public accounting firm’s report on the consolidated financial statements included herein, and in this Annual Report on Form 10-K for the year ended December 31, 2014, contains an explanatory paragraph wherein they expressed an opinion that there is substantial doubt about our ability to continue as a

Maintain product development and sales/marketing focus on large, underserved, and rapidly growing markets with a demonstrated need for intelligent imaging informatics.

Leverage Applied Visual Sciences, Inc.’s technology, experienced management team, research and development infrastructure.

Focus our talents on solving highly challenging information problems associated with digital imaging analysis.

Establish an international market presence through the development of a significant OEM/Reseller network.

Build and maintain a strong balance sheet to ensure the availability of capital for product development, acquisitions, and growth.

·going concern. Accordingly, careful consideration of such opinion should be given in determining whether to continue or become our stockholder. In addition, the Company is currently evaluating the impact of ASU No. 2014-15, Presentation of Financial Statements—Going Concern, on its disclosures regarding the Company’s ability to continue as a going concern.

~~Seek~~As toof ~~broaden~~December ~~our~~31, ~~investment~~2014, ~~appeal~~the Company has outstanding trade and accrued payables of $1,792,192, other accrued liabilities of $242,404, and accrued salaries and related expenses due to ~~large~~our ~~institutions~~employees and management of $8,792,108. Also, the Company has an outstanding noninterest-bearing loan from its previous Chief Executive Officer of $80,500, and $807,500 short-term notes from a total of twenty (20) investors.

ToThe ~~achieve~~principal amount of our ~~strategic~~outstanding ~~vision~~Series A Debentures of $1,688,205 webecame ~~are~~due ~~aware~~on July 1, 2011, and such amount was not paid. Therefore, the Company could be considered in default and may result in enforcement of the ~~need~~debenture toholders’ ~~exercise~~rights and remedies under the ~~financial~~debentures and ~~operational~~applicable ~~discipline~~law. We ~~necessary~~have tobeen ~~achieve~~in discussions with the ~~proper~~debenture ~~blend~~holders to re-negotiate the terms of ~~resources~~the debentures, ~~products~~including the repayment or repurchase of the debentures and/or ~~strategic~~seek ~~partnerships~~to extend their maturity date, although we have not reached any agreement with the debenture holders with regard to any such repayment, repurchase or extension. ~~These~~Our ~~efforts~~ability ~~can~~to ~~accelerate~~repay or repurchase the debentures is contingent upon our ability to ~~develop~~raise additional financing, ~~deploy~~of ~~and~~which ~~service~~there can be no assurance. Also, as a ~~broad~~condition ~~range~~to any such extension, debenture holders may seek to amend or modify certain other terms of ~~intelligent~~the ~~imaging~~debentures. ~~informatics~~When ~~solutions~~an ~~directly~~event of default occurs under the debentures, the debenture holders may elect to ~~our~~require ~~target~~us ~~markets~~to ~~and~~make ~~indirectly~~immediate ~~through~~repayment ~~OEM/value~~of ~~added~~the ~~reseller~~mandatory default amount, which equals the sum of (~~“VAR”~~i) ~~partners~~the greater of either (a) 120% of the outstanding principal amount of the debentures, or (b) the outstanding principal amount unpaid divided by the conversion price on the date the mandatory default amount is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. ~~During~~In ~~2012~~anticipation of such election by the debenture holders, wedue ~~continued~~to ~~implementing~~the ~~changes~~nonpayment ~~across~~of principal amount on the ~~spectrum~~due date of ~~our~~July ~~business.~~1, We2011, ~~refined~~we ~~our~~measured ~~marketing~~the ~~strategy~~mandatory ~~for~~default ~~PinPoint™~~at approximately $337,641 and ~~Signature~~subsequently ~~Mapping™~~on each balance sheet date, which is reflected in the carrying value of the debentures and ~~enhanced~~also ~~our~~recognized ~~Signature~~as ~~Mapping™~~interest ~~product~~expense. We ~~offerings~~remeasured the mandatory default amount as of December 31, 2014 at approximately $337,641. As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. The Company currently has insufficient funds to repay the outstanding amount in the event the debenture holders make a demand for payment.

WeAs ~~may~~of ~~engage~~December in31, ~~one~~2014, we had a cash balance of $33,961. Subsequently and through the date of this report, Company sold to accredited investor an aggregate of 2,000,000 shares of common stock upon the exercise of 2,000,000 warrants for gross proceeds of $60,000. Management believes these funds to be insufficient to fund our operations for the next twelve months absent any cash flow from operations or ~~more~~funds ~~acquisitions~~from the sale of ~~businesses~~our ~~that~~equity or debt securities. Currently, will require an aggregate of approximately we are ~~complementary~~spending or incurring (and accruing) expenses of approximately $150,000 per month on operations and ~~may~~the ~~form~~continued ~~wholly~~research and development of our 3i technologies and products, including with regard to salaries and consulting fees. Management believes that we will require an aggregate of approximately $1,800,000 to fund our operations for the next 12 months and to repay certain outstanding trade payables and accrued expenses. This assumes that holders of our outstanding debentures convert such debt into shares of our common stock or that we are able to extend the term of the debentures, of which there can be no assurance. In the event we are unable to extend the term of the debentures beyond their new maturity date, the debenture holders do not convert such debt or require payment of principal, partially convert such debt, or effect the buy-~~owned~~in ~~subsidiaries~~provision related to ~~operate~~the ~~within~~debentures, ~~defined~~we ~~vertical~~shall ~~markets~~be required to raise additional financing. Also, this assumes that we are able to continue to defer the amounts due to our employees for accrued and unpaid salaries and that we are able to continue to extend or defer payment of certain amounts due to our trade creditors, of which there can be no assurance.

~~Our~~The ~~Core~~Company ~~Technology~~has relied and continues to rely substantially upon equity and debt financing to fund its ongoing operations, including the research and development conducted in connection with its products and conversion of accounts payable for stock. The proceeds from our financings have been and continue to be insufficient to fund our operations, pay our trade payables, and repay our unconverted debentures or accrued and unpaid wages to our employees. Therefore, the debentures holders, our employees, or trade creditors may seek to enforce payment of amounts due to them, and our results of operations and financial condition could be materially and adversely affected and we may be unable to continue our operations. Also, in the event we continue to be unable to pay our employees, we may suffer further employee attrition. There can be no assurances that we will be successful in our efforts to raise any additional financing, any bank borrowing, and research or grant funding. Moreover, in view of the current market price of and limited trading volume in our stock, we may have limited or no access to the capital markets. Furthermore, under the terms of our agreements with the debenture holders, we are subject to restrictions on our ability to engage in any transactions in our securities in which the conversion, exercise or exchange rate or other price of such securities is below the current conversion price or is based upon the trading price of our securities after initial issuance or otherwise subject to re-set. In view of the foregoing, we may be required to curtail operations significantly, or obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products.

Our core technology is an “intelligent imaging informatics” (“3i™”) engine that is capable of extracting embedded knowledge from digital images, and has the capacity to analyze and detect image anomalies. The technology is not limited by type of digital format. It can be deployed across divergent digital sources such as still images, x-ray images, video and hyper-spectral imagery. To date, the technology has been tested in the area of threat detection for baggage scanning at airports, for bomb squad applications and the detection of tuberculosis by analyzing digital images of stained sputum slides captured through a photo microscopy system. Varying degrees of research and development have been conducted in the areas of detection for cargo scanning, people scanning, military target acquisition in a hyper-spectral environment, satellite remote sensing ground surveys and mammography CAD products and radiologists’ diagnostic imaging tools, and while product development in these areas is ongoing, there can be no assurance that we will successfully develop product offerings in these areas.

Aviation/Homeland Security Technology Solution - PinPoint™

Through our wholly-owned subsidiary, Guardian Technologies, we market our PinPoint™ product, which is an “intelligent imaging informatics” (3i™) technology for the detection of guns, explosives, and other threat items contained in baggage in the airport environment or for building security applications. PinPoint™ can identify threat items, notify screeners of the existence of threat items, and speed the security process by eliminating unnecessary baggage checks, provide the screener with an instantaneous second opinion, and reduce processing time spent on false positives (baggage selected for security review that contains no threat items). We market and seek to license the PinPoint™ product primarily to the United States Transportation Services Administration (TSA) for use in airports, the Federal Protection Services for use in federal buildings and to foreign governments and airport authorities. We compete with manufacturers of baggage screening, luggage and large parcel screening, people screening for weapons and explosive detection, container and vehicle screening, and cargo screening equipment and certain software companies and academic institutions that are developing solutions to detect threat items. It is also our intent to distribute the product through various distribution methods.

The market for contraband detection systems has become intensely competitive and many of our competitors are better capitalized and have greater marketing and other resources than Applied Visual Sciences, Inc. PinPoint™ continues to be developed to address the market for contraband detection. The extended alpha version of PinPoint™ has been tested successfully at live carry-on baggage checkpoints in three international airports. Integration within currently deployed manufacturers’ scanning equipment is a requisite to anticipated sales, and is considered a significant development risk. PinPoint™ is available for sale to customers; however no sales are anticipated until we are able to seamlessly integrate with the manufacturers’ scanning equipment.

To date the marketplace has placed a premium on the newest innovations in hardware technology and has failed to grasp how a threat detection software solution can succeed. It was expected that a major joint initiative between the Department of Homeland Security (DHS) and the National Electrical Manufacturers Association (NEMA) would open a path to both increase the interoperability of security equipment as well as provide a mechanism to use third party threat detection software as part of the screening solution. This enabling initiative is the Digital Imaging and Communications in Security (DICOS) standard, similar to the Digital Imaging and Communications in Medicine (DICOM) standard. With a defined standard for the output of each screening device, complimentary automated threat detection software can be appended to any x-ray equipment. Applied Visual Sciences, Inc co-chaired one of the three NEMA working groups drafting the DICOS standard, and the DICOS standard was published in October 2010. To date DHS has not made this standard a mandatory requirement for proposals or procurements which, as a result, has not enabled third party detection software providers the ability to enter the marketplace which has given an undue advantage to the existing security equipment providers.

AsDuring ~~highlighted below in the NEMA article~~2014, ~~“DICOS~~our -total ~~Homeland~~stockholders’ ~~Security~~deficit ~~Spending~~increased ~~Keeps~~by on$644,719 ~~Growing”~~to ~~- Published by HYPE~~$13,570,796, ~~expenditures~~and ~~for~~our ~~security~~consolidated ~~solutions~~net ~~are~~loss ~~increasing. Management~~for ~~believes~~the ~~Applied~~period ~~Visual~~was ~~Sciences~~$783,378, ~~Inc.~~compared ~~is well positioned~~ to be a ~~third~~net ~~party~~loss ~~solution~~for ~~provider leveraging~~ the ~~standard~~same ~~output~~period ~~of all future security equipment procured by the US Government. “Global homeland security spending has received a major boost~~ in ~~light~~2013 of ~~recent international terrorist events~~$2,437,304, asor ~~countries~~a ~~look~~decrease atof ~~new ways to thwart terrorists and secure borders. Spending in the industry is expected to triple to~~ $~~178~~1,653,926 ~~billion by 2015~~(67.9%). ~~Security-related~~Notwithstanding ~~spending will include more sophisticated information technology and~~ the ~~protection~~foregoing discussion of ~~other~~management’s ~~vulnerable~~expectations ~~terrorist~~regarding ~~targets. With~~future ~~the~~cash ~~initial focus on airport security~~flows, ~~NEMA~~Applied ~~has~~Visual ~~stepped~~Sciences’ upinsolvency ~~its~~continues ~~outreach~~ to ~~DHS~~increase ~~and TSA. Currently developing DICOS,~~ the ~~new~~uncertainties ~~NEMA~~related ~~standard~~to ~~will~~its ~~capture~~continued ~~scans of checked baggage so that scans can be read by threat detection software~~existence. ~~The~~Both ~~new~~management ~~standard~~and ~~will facilitate interoperability of security-imaging equipment. With DHS/TSA expected to purchase new equipment for over 400 U.S. airports, NEMA members have joined with DHS to develop~~ the ~~standard. Phase~~Board II of ~~DICOS,~~Directors ~~for~~are ~~the~~carefully ~~testing~~monitoring of the ~~new~~Company’s ~~NEMA~~cash ~~standards,~~flows ~~began in April 2011,~~ and ~~NEMA~~financial ~~has~~position ~~begun~~in ~~looking~~consideration atof ~~other~~these ~~modalities. The~~increasing ~~security~~uncertainties ~~industry~~and isthe ~~looking~~needs atof ~~border,~~both ~~rail,~~creditors ~~seaport, industrial~~ and ~~nuclear plant security~~stockholders.

WeAviation/Homeland ~~have~~Security ~~been~~Technology ~~involved~~Solution ~~in a number of wide ranging U.S. Government proposals since 2011. We have teamed on a few of the proposals with large, well~~-~~known~~ defense contractors, a federally funded research laboratory and directly. The proposals were submitted to various U.S. Government agencies. Unfortunately, most of the projects were deferred due to the ongoing federal budget discussions in Congress and operational uncertainties within the funding agencies. At this point in time, we have no indication that any of these projects will be funded this fiscal year or the next budget cycle. We will continue to pursue opportunities for the deployment of our PinPoint™ product as opportunities develop. With these uncertainties and our ability to manage with limited cash resources during 2012, we have focused on the marketing and sale of our healthcare products, as better discussed below.

Through our wholly-owned subsidiary, Guardian Technologies, we market our PinPoint™ product, which is an intelligent computer-vision automated target recognition technology for the detection and identification of guns, explosives, and other threat items contained in baggage, whether in the airport environment or for building security applications. PinPoint™ can identify threat items, notify screeners of the existence of threat items, and speed the security process by eliminating unnecessary baggage checks, provide the screener with an instantaneous second opinion, and reduce processing time spent on false positives (baggage selected for security review that contains no threat items). We market and seek to license the PinPoint™ product primarily to the United States Transportation Services Administration (TSA) for use in airports, the Federal Protection Services for use in federal buildings and to foreign governments and airport authorities. We compete with manufacturers of baggage screening, luggage and large parcel screening, people screening for weapons and explosive detection, container and vehicle screening, and cargo screening equipment and certain software companies and academic institutions that are developing solutions to detect threat items. It is also our intent to distribute the product through various distribution methods.

The market for contraband detection systems has become intensely competitive and many of our competitors are better capitalized and have greater marketing and other resources than Applied Visual Sciences, Inc. Integration within currently deployed manufacturers’ scanning equipment is a requisite to anticipated sales, and is considered a significant development risk. PinPoint™ is available for sale to customers; however no sales are anticipated until we are able to seamlessly integrate with the manufacturers’ scanning equipment.

We will continue to pursue opportunities for the deployment of our PinPoint™ product as opportunities develop. With these uncertainties and our ability to manage with limited cash resources during 2014, we have focused on the development of our TBDx™ product, as better discussed below.

Healthcare Technology Solutions - Signature Mapping™

In an effort to expand upon the use of our core technology 3i™ “intelligent ~~imaging informatics~~computer-vision,” we have modified our threat detection algorithms and quantitative imaging capabilities for use in the imaging field of diagnostic radiology and pathology. The technology is called Signature Mapping™. Our Signature Mapping™ platform technology represents the technological basis upon which our computer vision diagnostic radiology and pathology applications are being developed. Any Signature Mapping™ product introduced in the United States may be subject to Food and Drug Administration (“FDA”) review and approval, including with regard to its safety and effectiveness before we may begin marketing and selling any such product in the U.S. Such approval may require us to obtain extensive data from clinical studies to demonstrate such safety or effectiveness. ~~Within~~The ~~the~~primary ~~international~~ markets ~~the~~for ~~regulatory~~our ~~requirements~~TBDx™ ~~differ,~~TB ~~specifically~~detection inproduct ~~South~~are ~~Africa,~~defined ~~where~~by wethe ~~have~~World ~~been~~Health ~~testing~~Organization ~~our~~(“WHO”) ~~TBDx™~~as ~~application~~the ~~for~~twenty-two (22) nations with the ~~detection~~highest burden of tuberculosis bydisease. These ~~analyzing~~emerging ~~digital~~nations, ~~images~~where the availability of ~~auramine~~capital ~~stained~~may ~~sputum~~be ~~slides~~limited, ~~captured~~rely ~~through~~heavily aon ~~photo~~grant ~~microscopy~~funding ~~system~~from international organizations such as The Global Fund, The Gates Foundation, PEPFAR and others. ~~There~~Those ~~may~~international befunding ~~similar~~agencies ~~regulatory~~provide ~~requirements~~funding infor ~~foreign~~the ~~countries~~acquisition inof ~~which~~technology, but only for technologies that have received WHO endorsement. During 2014 we ~~seek~~completed toclinical ~~market~~evaluations in South Africa and ~~sell~~Nigeria, ~~our~~and ~~healthcare~~commenced ~~CAD~~trials ~~products~~in Peru and Vietnam. AsThe oflater ~~the~~trials ~~date~~were undertaken as part of ~~this~~our ~~report,~~collaborative weagreement ~~have~~with ~~developed~~the ~~and~~Foundation ~~continue~~for toInnovative ~~develop~~New ~~two~~Diagnostics TB(“FIND”). Data ~~diagnostic~~collected ~~products,~~from ~~TBDx™~~the ~~and~~clinical ~~TBDxV™~~trials ~~and~~will form the basis of our ~~SMDS™~~application ~~product,~~to anWHO ~~automated~~for ~~hardware-software~~endorsement ~~laboratory~~of ~~solution.~~our TBDx™ product.

Laboratory Pathology: SMDS™

Signature Mapping Detection System (“SMDS™”) is an automated hardware-software laboratory solution designed to operate one or multiple infectious disease applications via multi-threaded detection algorithms. SMDS™ automation software controls every movement of the integrated hardware components from slide management to image capture. Where SMDS™ is integrated with a specific infectious disease detection application; the solution is capable of automatically analyzing each field-of-view for the presence of specific characteristics of the targeted disease. The detection algorithms will perform with high sensitivity without sacrificing specificity. The end product is a flexible; user defined diagnostic patient report that can be integrated to a laboratory information system. Standard information includes patient information, processing date, field-of-view diagnostic findings and overall case severity or diagnostic finding.

In laboratory environments that use the image capture and visualization capabilities of Signature Mapping™ without specific infectious disease algorithms or in situations where the interface of the laboratory technician with the computer-aided identification software is a desired procedure, the SMDS™ laboratory platform includes the Decision Support Quick View (“DSQV”) module. DSQV has been designed for rapid review of captured images and increased speed in diagnostic decision-making. DSQV includes post-processing image tools to magnify, zoom or review images in alternative formats. Using a high-resolution touch-screen monitor and an icon-driven menu system facilitates ease of use for even the most computer challenged individuals. Signature Mapping SMDS™ includes built-in networking support to allow DICOM images to be transmitted for remote diagnosis or to be interfaced with an enterprise network.

When SMDS™ is integrated with a disease specific automated detection algorithm, such as Signature Mapping Tuberculosis Detection (“TBDx™”), the solution expands to a fully automated diagnostic system. For high volume diagnostic laboratories, automation begins with a slide loader capable of processing up to 200 slides without human intervention. At system initialization the slide loader automatically inventories every patient slide to be processed. One-by-one the slides are moved from the holding cassettes onto the automated stage of the microscope. A barcode reader collects information about the patient just prior to the slide being placed on the

~~stage. Information~~TBDx™ ~~captured by the barcode reader can be automatically transferred to a laboratory information system along with the captured digital images and diagnostic case findings.~~

~~Once~~TBDx™ ~~the~~is ~~slide~~a ~~has~~fully-automated ~~been~~hardware ~~positioned~~and onsoftware ~~the~~technology ~~microscope~~platform ~~stage,~~that ~~the~~is ~~automation~~capable ~~software initiates the process~~ of: ~~focusing~~(i) ~~the~~automatically ~~microscope~~managing ~~system~~1-200 toslides ~~maximize~~without ~~the~~human ~~quality~~intervention, of(ii) ~~images~~digitally tocapturing bepatient ~~captured. Because~~information ~~the~~(eliminates ~~specimen~~human onrecordation ~~the~~errors), ~~slide~~(iii) ~~may~~adjusting befocus ~~topographical~~for ~~and/or~~variances ~~the~~in ~~z-axis~~sputum oflocation, ~~the~~quality ~~slide~~and ~~may require compensation~~topology, ~~the~~(iv) ~~automation~~capturing ~~software calculates the required adjustments to ensure~~ high -quality digital images ~~are~~(standard ~~captured. Further,~~100 ~~the~~images ~~automation~~per ~~software~~slide isor ~~easily configured to capture fields~~user-~~of-view~~defined), in(v) ~~any~~automated ~~quantity~~identification ~~using a user established pattern~~ of ~~image~~M ~~capture. The~~Tuberculosis ~~automation~~bacilli ~~software~~if ~~can~~present, ~~focus~~and ~~the~~(vi) ~~microscope~~robust ~~stage~~user-defined inreporting ~~approximately one minute~~ and ~~requires~~communication anof ~~additional~~diagnostic ~~minute per each one hundred high quality digital images to be captured~~results.

Design initiatives have been discussed that would allow TBDx™ to be deployed at the point-of-care, ~~TBDxV™~~a major strategic initiative of The World Health Organization. To advance these design ideas from concepts - to proof of concept - to working models ready for clinical evaluation, the company will need to develop strategic partnerships with academic institutions capable of providing targeted technological input and research capabilities. The company has begun the process of reaching out to academic institutions.

The Company has developed two fully-automated, computer-vision diagnostic products for the detection of tuberculosis (“TB”). Both Signature Mapping TBDx™ for use in laboratory environments using Auramine-O staining protocols and Signature Mapping TBDxV™, a decision support visualization technology, for use in laboratory environments using Ziehl-Neelsen staining protocols can address the approximately 80 million diagnostic slides analyzed by clinical lab technicians each year. Both products are targeted to government and private institutions that diagnose tuberculosis patients.

TBDx™ is a fully-automated hardware and software technology platform that is capable of: (i) automatically managing 1-200 slides without human intervention, (ii) digitally capturing patient information (eliminates human recordation errors), (iii) adjusting focus for variances in sputum location, quality and topology, (iv) capturing high-quality digital images (standard 100 images per slide or user-defined), (v) automated identification of M Tuberculosis bacilli if present, and (vi) robust user-defined reporting and communication of diagnostic results. Phase II clinical trials were undertaken and completed in South Africa during 2011. Slides used in the clinical trial were provided from the international Thibela TB Study trial conducted by The Aurum Institute for Health Research.

TBDxV™, the precursor to TBDx™, is a fully-automated visualization technology that maintains the same slide capacity range and digital image quality as TBDx™. TBDxV™, using high-resolution touch-screen monitors, provides the microscopist with a fast, easy-to-use system for the analysis of high-quality images, thereby alleviating the tedious and error prone diagnosis using a microscope. TBDxV™ assists microscopists in decision-making, specifically on the most difficult scanty cases, through access to advanced visualization tools. The visualization tools are applicable to both Auramine-O and Ziehl-Neelsen staining processes.

The Company believes that the performance of both products could be further enhanced through the exploration of new staining techniques. Further, design initiatives have been discussed that would allow the products to be deployed at the point-of-care, a major strategic initiative of The World Health Organization. To advance these design ideas from concepts - to proof of concept - to working models ready for clinical evaluation, the company will need to develop strategic partnerships with academic institutions capable of providing targeted technological input and research capabilities. The company has begun the process of reaching out to academic institutions. One such potential institution is the Clinical Microbiology Laboratory at the Stanford University Medical Center. The Medical Center has extensive expertise in infectious diseases and has expressed a willingness to assist the Company in planning and executing technology research and development. A formal business relationship is under development.

India processes more tuberculosis diagnostic cases than anywhere in the world and the workload continues to overwhelm the country's monetary and laboratory resources. The Company has been working closely with the Indian Government and other private organizations to provide the requisite slides, culture confirmed diagnostic results, and the domain knowledge to transition TBDx™ for fully-automated slide management and TB detection under Ziehl-Neelsen staining protocols.

The Aurum Institute presented an update on the latest TBDx™ performance metrics and algorithm improvements during the 43rd Union World Conference on Lung Health in Kuala Lumpur on November 14, 2012. Dr. David Clark, Deputy CEO for The Aurum Institute, made the poster presentation.

London in the United Kingdom; Infectious Diseases Institute in Kampala, Uganda; Boston Medical Center, University of Cape Town, South Africa; Universidade Federal do Espirito Santo in Vitoria, Brazil; University of Medicine and Dentistry of New Jersey – New Jersey Medical School; National Masan Tuberculosis Hospital-Yonsei University College of Medicine in the Republic of Korea; Foundation for Innovative New Diagnostics (FIND), and Westat Inc.

The Joint Clinical Research Center in Kampala, Uganda has approved a research protocol for the evaluation of the TBDx™ technology. It is likely that the evaluation will begin in June/July, 2013.

Dr. Luis Cuevas of the Liverpool School of Tropical Medicine has receive funding from the European and Developing Countries Clinical Trials Partnership (EDCTP) to conduct a tuberculosis research project in Abuja, Nigeria, and a portion of this project funding will be used to evaluate the TBDx™ technology. A protocol for the evaluation has been approved and finalized. It is expected that the evaluation will begin in May/June 2013.

The Company has been in contact with a Chinese Government tuberculosis hospital in Tsingtao. Preliminary protocols are being exchanged to establish R&D for TB detection under Ziehl-Neelsen staining and then to conduct a clinical blind study with the intent to evaluate the product for commercialization in China. Though a start date has not been established yet, it is expected that the evaluation will begin in late 2013.

Radiology: BCDx™

The Company is adding vision to breast cancer diagnosis by developing a radiological suite of products, a breast cancer detection solution to be known as Signature Mapping™ Breast Cancer Detection (“BCDx™”). Annual estimates of breast cancer diagnostic activity within the U.S are: 35 million mammograms performed; 1.5 million biopsies performed; 87% of biopsies return a negative finding (mammogram ‘false positive’); 200,000 confirmed cancer cases; and immeasurable emotional, mental, and physical pain for the individuals and families of biopsy patients. The 1.3 million biopsies undertaken that resulted in negative findings can be directly attributed to an inability to resolve areas of concern due to the limited information provided in the mammography images. In addition, approximately 10% of cancerous lesions are missed – partly due to dense tissue obscuring the cancer or the appearance of cancer having common characteristics with the appearance of normal tissue. The goal of BCDx™ is to deliver sophisticated image analysis processes that provide enhanced visualization capabilities and automated detection algorithms to help prevent unnecessary biopsies, while flagging previously unseen lesions for additional review.

Similar to a person’s fingerprint, each tissue has a unique structure. Each structure creates a unique pattern or “signature” that can be extracted from an image to differentiate, locate, identify, and classify by using our Signature Mapping™ technology. Management anticipates BCDx™ to further help radiologists by visualizing the various structures within a particular tissue so they can be examined and quantified. This capability is expected to provide a next-generation image analysis, clarification, visualization and Signature Mapped™ “tissue characterization” and detection. Management believes that it will add significant clinical value to a wide range of difficult to detect diseases in diagnostic radiology by distinguishing and characterizing different tissue types in images regardless of the modality that generated the image.

Based on its unique properties, Signature Mapping™ is expected to be capable of being used to analyze images generated across all imaging modalities without the need for new image capture hardware costs. It will serve as a software-based, multi-modality approach to image analysis when combined with Signature Mapping’s™ unique” tissue characterization” and detection. As a result, Signature Mapping™ is expected to differentiate the contrast resolution between different tissue types, even when the material or tissue in the image is very diffuse or obscured by other objects, such as is the case where diseased lung tissue is located behind a rib in an x-ray chest examination. It is capable of displaying these ‘signatures’ in a way that empowers radiologists to make a more informed and confident diagnosis, even for hard to distinguish structures such as masses in dense breast tissue.

Signature Mapping™ appears to provide advantages for providing the knowledge for automatic detection. The development of a “tissue characterization” and detection model employs the use of supervised machine learning and contextual image analysis to analyze and classify the features associated with the newly created “signatures.” ~~The fusion of these three technologies is known as Applied Visual Sciences, Inc.’s Intelligent Imaging Informatics 3i™.~~ Unlike other pattern recognition methodologies, the 3i™ solution can reveal and differentiate inherent structures for all materials in an image regardless of: the imaging modality used to create the image, location within the image, shape or texture, and object orientation even if obscured by its relationship to other materials.

The Company has been engaged in discussions, negotiations, and due diligence on the formation of a strategic partnership focused exclusively on breast cancer computer vision detection technology. Our subsidiary, Instasis Imaging, would license Applied Visual’s core analysis technology platform for research and development, as well as for inclusion in the diagnostic products to be commercialized. Applied Visual would contribute its intellectual property, including patents, which are specific to the area of breast cancer detection. There can be no assurances that we will be successful in our efforts to establish a strategic partnership.

cancer detection. In support of such negotiations, the Company paid a $400,000 non-refundable formation fee, of which $300,000 was paid in October 2011, and $100,000 in January 2012. The formation fee was funded by promissory notes with interest at a rate of twelve percent (12%) per annum, which have been extended as indicated above. There can be no assurances that we will be successful in our efforts to establish a strategic partnership.

Clinical Experience and Medical Accomplishments

While Signature Mapping™ is expected to be capable of use in a wide range of medical image analysis applications, our initial application product development efforts are focused in four areas:

detection of tuberculosis by analyzing digital images of stained sputum slides captured through a photo microscopy system;

breast cancer detection using x-ray mammography, MRI and ultrasound;

neurological imaging analysis through the detection and quantification of acute intracranial hemorrhage using non-contrast CT, normal pressure hydrocephalus,

multiple sclerosis using MRI; and

chest radiography targeted at tuberculosis and silicosis detection using digital x-ray.

Development continues in the refinement of TBDx™ and its detection algorithms. Additional classifiers have been created to improve sensitivity, which is the measurement of correctly identifying positive cases, and specificity, which is the measurement of correctly identifying negative cases. The underlying scripting language has been re-written to enable laboratories to either use TBDx™ as a diagnostic tool or as a pre-screening technology that identifies probable candidate TB cases that are confirmed by a secondary technology. The ability to communicate to and from the camera and TBDx™ technology will permit the system to acquire a pre-set number of images, then move to another location on the slide and capture additional images. Also, the system can monitor the acquisition of the images and stop the acquisition process once the algorithms have determined that a case is severely infected. Internal testing continues to validate the progress of algorithm improvements.

Laboratory Pathology: TBDx™

~~First~~In ~~clinical~~December ~~evaluation~~2014, ofthe ~~Signature~~Company ~~Mapping™~~attended ~~Tuberculosis~~a ~~Detection~~five day TB conference held by The National Institute for Research in Tuberculosis (~~“TBDx™”~~NIRT) ~~product~~Workshop -in anChennai, ~~automated~~India. ~~tuberculosis~~The ~~detection~~meeting ~~sputum~~was ~~smear~~also ~~microscopy~~attended ~~system~~by representatives from Advenio, inAlere, ~~cooperation~~GBD ~~with~~Bio, GeneDrive, ReaMatrix, and TB Biosciences. The primary objective of the ~~South~~workshop ~~African~~is ~~National~~was ~~Health~~to ~~Laboratory~~introduce ~~Services~~NIRT, The All India Institute of Medical Sciences (~~“NHLS”~~AIIMS), and other medical and laboratory directors overseeing Indian TB labs to companies possessing TB diagnostic technologies that could potentially be integrated into a laboratory diagnostic algorithm to help in the ~~Aurum~~fight ~~Institute~~against ~~for~~TB ~~Health~~in ~~Research~~India. ~~Principal~~ ~~investigators~~Catherina ~~included~~Boehme, ~~James~~CEO Jof the Foundation for Innovative New Diagnostics (FIND) providing a pipeline overview of new diagnostic technologies emerging from the market. ~~Lewis,~~Afterwards ~~Violet~~she Ndrew on years of experience in technology evaluations to present the FIND approach to developing study protocols and evaluating new diagnostic tests. There ~~Chihota,~~was ~~Minty~~continued ~~van~~emphasis ~~der~~on ~~Meulen,~~the ~~Bernard~~World ~~Fourie,~~Health ~~Gerrit~~Organization’s ~~Coetzee,~~(WHO) ~~Katherine~~Target LProduct Profiles. ~~Fielding~~The highest priority interest is in a screening or triage test, ~~Alison~~one Dthat rules out the possibility of TB. ~~Grant~~This would require an affordable diagnostic test that has a high sensitivity and a lower specificity, ~~Susan~~but Ecan be confirmed by a more specific diagnostic test. In ~~Dorman~~presenting information about the Company’s TBDx™ automated system, ~~and~~it ~~Gavin~~became Jevident that smear microscopy remains a routine diagnostic approach. It ~~Churchyard~~is the Company’s hope that TBDx™ will be included in the process to develop a protocol to evaluate our technology.

~~Background:~~On ~~Smear~~November ~~microscopy~~18, ~~remains~~2014, the ~~most~~Company ~~common~~participated ~~method~~in ofan ~~diagnosing~~invitation ~~tuberculosis~~only inconference ~~many~~to ~~high-burden~~launch ~~countries~~the Nigerian National TB Prevalence Survey Report & National Strategic Plan for TB (2015 – 2020). The conference took place for three days and was held in Abuja, Nigeria. This iswas ~~despite~~a ~~numerous~~significant ~~limitations~~event given the announcement that for every 100,000 ~~including~~persons living in Nigeria – 338 persons developed TB, that Nigeria accounted for 15% (about half a ~~lack~~million) of ~~well-trained~~the ~~microscopists~~global ~~and~~gap ~~reduced~~in ~~performance~~TB ~~resulting~~case ~~from~~notification, which equates to approximately 83% of the ~~substantial~~estimated ~~work~~total ~~load~~TB ~~and~~positive ~~poor~~cases ~~ergonomics~~in Nigeria (2014 WHO Global TB Report for 2013). Much of the ~~process~~reporting gap can be attributed to the passive nature of TB case detection around the world. An ~~automated~~Patients ~~microscopy~~must come to the diagnostic health facilities. In an active diagnostic program the healthcare diagnostic applications would be targeted and delivered proactively to the source of the disease, generally economically distressed areas of big cities or very remote villages. TBDx™ ~~system~~ has been ~~developed~~clinically evaluated and proven as a cost-effective screening or triage device that ~~presents~~can be easily incorporated into an ~~innovative~~active case finding initiative. Furthermore, ~~multi-potential~~combining ~~technology~~TBDx™ ~~platform~~with ~~for~~a ~~automatically~~confirming ~~detecting~~molecular TBtest ~~from~~can ~~sputum~~potentially ~~slides~~result in cost reductions of up to 75%. ~~The~~Those ~~system~~cost ~~loads~~savings ~~slides~~could ~~onto~~be aused ~~conventional~~to ~~microscope,~~offset ~~automatically~~the ~~focuses~~costs ~~and~~to ~~digitally~~paradigm ~~captures~~shift ~~images~~to active case detection, and ~~then~~to ~~uses~~positively ~~Signature~~impact ~~Mapping™~~the transmission rate of TB. While at the conference, aThe ~~set~~Company’s Director of ~~specially~~Engineering, ~~developed~~Tosh ~~image~~Sondh, demonstrate the 200-~~analysis~~slide ~~algorithms~~auto-loading, high-volume edition of TBDx™. He also had the opportunity to ~~classify~~conduct ~~slides~~one-on-one asdemonstrations and technology discussions with each of the Nigerian State TB ~~positive~~program ormanagers. ~~negative~~It was a unique opportunity for the managers to see TBDx™ as they rarely see and experience new technologies.

~~Objectives:~~On ToMarch ~~compare~~19, 2014, the ~~diagnostic~~Company signed a collaboration agreement with the Foundation for Innovative New Diagnostics (FIND) to evaluate the performance characteristics of the TBDx™ inautomated ~~identifying~~slide management and tuberculosis ~~from~~detection ~~sputum~~platform ~~smear~~in ~~microscopy~~a ~~slides~~field ~~stained~~setting. The ~~with~~mission ~~Auramine~~of the FIND is to aassist ~~human~~in ~~microscopist,~~the development and deployment of accurate and affordable diagnostic tests for poverty-related diseases in developing countries. The primary objectives of the study are to: ~~evaluate~~(i) determine the ~~effect~~sensitivity, specificity, and predictive values of TBDx™ onamong ~~the~~adult ~~microscopist’s~~TB ~~workload. Culture~~suspects, isusing ~~used~~culture as the gold standard, (ii) compare the performance of TBDx™ to routine laboratory LED Fluorescent Microscopy (LED/FM), and (iii) determine the feasibility of using the TBDx™ system at a high workload reference laboratory. The studies with take place at two locations chosen by FIND.

~~Methods: This study is nested within a cross-sectional study of South African gold miners with suspected pulmonary TB~~1. All TB suspects had one sputum sample collected for smear microscopy, MGIT culture and MPB64 organism identification. All slides were read by a research and two routine microscopists, and then independently by TBDx™, each classifying slides based on the World Health Organization (“WHO”) classification standard of 100 fields of view (“FoV”) at 400x magnification. For slides adjudged scanty by TBDx™, the digital FoV with suspected acid-fast bacilli (“AFB”) were reviewed by the research microscopist, using TBDx™ in decision support system mode (TBDx™-DSS), a mode presenting digital images of slides assisted by image enhancement tools. The diagnostic performance of three algorithms was evaluated: TBDx™ alone; TBDx™ with review of scanty positive FoV images by the microscopist (TBDx™-DSS mode); TBDx™ with research microscopist’s readings substituted for slides judged by TBDx™ to be scanty positive.

~~Results:~~The Offirst ~~981~~clinical ~~participants,~~evaluation ~~269~~was ~~were~~performed ~~culture~~at ~~positive~~the ~~for~~Instituto ~~Mycobacterium~~de ~~tuberculosis~~Medicina ~~(27.4%)~~Tropical ~~and~~Alexander ~~712~~von ~~were culture negative (72.6%). TBDx™ alone had higher sensitivity (75.8%) than the research microscopist~~Humboldt, ~~but~~Universidad ~~greatly~~Peruana ~~reduced~~Cayetano ~~specificity (Table 1). TBDx™ classified 520/981 slides (53.0%) as scanty~~Heredia, ~~with~~in ~~the majority of these slides having only 1-2 AFBs detected (371/520=71.3%). Of these~~Lima, ~~only 68/371 (18~~Peru.~~3%)~~ ~~were~~The ~~culture~~principal ~~positive,~~investigator ~~which~~is ~~was similar to TBDx™ negative slides (17~~Dr.~~3%).~~ ~~Changing~~Eduardo ~~the algorithm to classify 0-2 AFBs on TBDx™ as negative gave improved specificity~~Gotuzzo. ~~Combining~~ ~~this~~Managing ~~algorithm with an image review of positive FoV on TBDx™-DSS, scanty positive (3-9 AFBs) slides gave similar performance to that of~~ the ~~routine~~project ~~microscopists~~study ~~and~~for ~~reduced~~FIND ~~the~~will ~~number of FoV to~~ be ~~read~~Dr. byPamela ~~a microscopist by 99~~Nabeta.~~7%.~~ ~~Finally,~~The anstudy ~~algorithm~~began in ~~which~~October ~~slides~~2014 ~~with 3-9 AFB on TBDx™ were replaced with the original research microscopist’s read gave sensitivity of 42.0%, specificity of 99.2%~~ and ~~resulted~~was incompleted anFebruary 842015.~~8% reduction in the number of slides to be read by the research microscopist. The negative predictive value (“NPV”) for all methods was similar.~~

Conclusion: The automated microscopy TBDx™ system has comparable performance to routine microscopy in this study and could greatly reduce the work load of microscopists in many high-burden settings as a Decision Support System (“DSS”). Further optimization of the TBDx™ system and training of microscopists in digital microscopy is required and is ongoing. Opportunities for further research include the tuning of the present algorithms for LED-based light sources and the development of algorithms for Ziehl-Nielsen stained slides.15

162.

~~Table~~The 1:second ~~performance~~clinical ~~characteristics~~evaluation ofwill ~~human~~take ~~microscopist~~place ~~versus~~at the ~~TBDx™~~Pham ~~automated~~Ngoc ~~microscopy~~Thach ~~system,~~Tuberculosis ~~using~~and ~~culture~~Lung asDisease Hospital in Ho Chi Minh City, Vietnam, where the ~~gold~~laboratory ~~standard~~conducts an approximately 700 to 1,000 cases daily. The study began in March 2015 and was completed in May 2015.

					FoV requiring
Diagnostic method	Sensitivity	Specificity	PPV	NPV	human review
Protocol specified (0 AFB = negative; 1-9 AFB = scanty)
Research microscopist	52.8%	98.6%	93.4%	84.7%	98,100
Consensus of two routine microscopists	48.3%	95.8%	81.3%	83.1%	196,200
TBDx™ alone	75.8%	43.5%	33.7%	82.7%	0
Algorithm optimization (0-1 AFB = negative; 2-9 AFB = scanty)
TBDx™ alone	59.5%	71.8%	44.3%	82.4%	0
TBDx™ with research microscopist reviewing
TBDx™ scanty positive FoV images (TBDx™-DSS)	56.1%	83.7%	56.6%	83.5%	847
TBDx™ with research microscopist’s readings for
slides judged by TBDx™ to be scanty positive	45.0%	99.2%	95.3%	82.7%	27,500
Algorithm optimization (0-2 AFB = negative; 3-9 AFB = scanty)
TBDx™ alone	50.6%	86.1%	57.9%	82.2%	0
TBDx™ with research microscopist reviewing
TBDx™ scanty positive FoV images (TBDx™-DSS)	48.0%	91.4%	67.9%	82.3%	597
TBDx™ with research microscopist’s readings for
slides judged by TBDx™ to be scanty positive	42.0%	99.2%	95.0%	81.9%	14,900

In February 2014, the Company began a research study in Abuja, Nigeria. The study, funded by the European and Developing Countries Clinical Trial Partnership (EDCTP), involved the Liverpool School of Tropical Medicine, both the Federal and State Tuberculosis and Leprosy Control Programs, and the Zankli Medical Center. The purpose of the study was to evaluate the performance of TBDx™ in a typical laboratory environment. However, there are important differences from the previous South Africa trial in 2013. The study involved microscopy smears that are direct, rather than concentrated. The majority of global labs evaluate direct smears so it’s important to understand whether or not there are performance differences in the analysis of these images. TBDx™ was evaluated as a “screening” technology for two different molecular tests. In the South Africa trial a molecular test was used to confirm all TBDx™ positive cases, and a second molecular test manufacturer was added to the trial, and performance comparisons were made between them. The study was completed in July 2014 and included approximately 1,200 cases being evaluated.

AFB = acid-fast bacilli; PPV = positive predictive value; NPV = negative predictive value; FoV = fields of view.

Sensitivity = measures the proportion of actual positive which are correctly identified as having that condition.

Specificity = measures the proportion of negatives which are correctly identified.

Competition: There is no current computer-aided-detection for TB sputum microscopy analysis that can be identified as competition to Signature Mapping™. Although, there are substitute technologies that compete for sputum specimen analysis, such as the Cepheid Systems GeneXpert® System, a dip-stick or biomarker approach that is considered a competitor to Signature Mapping™. Ultimately, competition to our approach will be driven by its cost per procedure, ease-of-use, sensitivity and specificity, and ability to be used by non-trained or lightly trained personnel in the point of care environment. These emerging tests are Polymerase Chain Reaction, TB Breathalyzer, Q-Beta Replicase Assay, Transcription-Medicated Amplification, Ligase Chain Reaction, Strand Displacement Amplification, Nucleic Acid Sequence-Based Amplification and Branched DNA.

Breast Cancer Detection: BCDx™

Our research to-date includes five programs and studies conducted under the direction of the Image Processing and Informatics Laboratory at the University of Southern California (“USC”) using clinical data and images provided by: the Image Processing and Informatics Laboratory at USC, Howard University, and the South Florida Clinical Mammography Data Base. Competition is expected with existing computer-aided-detection (“CAD”) manufactures such as iCAD, Hologic, ~~Medipatten, Confirma,~~ Siemens, or Carestream Health. We may partner with one or more of these existing CAD manufacturers, or with an emerging company with new technology for the CAD arena. Once our products are commercially viable, we anticipate marketing and selling our products through original equipment manufacturers (“OEM”), or system integrators.

The Disease

Breast cancer is the second leading cause of cancer deaths in women (after lung cancer) and is the most common cancer among women, excluding skin cancers, accounting for 1 of every 3 cancers diagnosed. The lifetime probability of developing invasive breast cancer is approximately 1 in 8 (12%). Annual estimates from the American Cancer Society (ACS) indicate that 1.5 million women will develop breast cancer worldwide and 460,000 will die from the disease. In the U.S. the mortality rate is about 1 in 35 women. Ineffective workflow, poor communications and decision-support tools cost over $8.5 billion per year.

Breast imaging procedures	About 35 million screening exams
Biopsy procedures	About 1.5 million biopsies conducted
12% - 15% of biopsies are positive	168,000 detected cancers
Mortality rate	About 40,950 women
Biopsy per procedure cost	$1,000 - $3,000 dollars
Annual gross national biopsy cost	$1.5 - $4.5 billion dollars
A 10% reduction in biopsies would save approximately	$150 - $500 million dollars

12% - 15% of biopsies are positive	168,000 detected cancers
Mortality rate	About 40,950 women
Biopsy per procedure cost	$1,000 - $3,000 dollars
Annual gross national biopsy cost	$1.5 - $4.5 billion dollars
A 10% reduction in biopsies would save approximately	$150 - $500 million dollars

Source: NIH, Annual breast exams in the U.S. 2011.

Detection

Early detection is a critical factor for controlling survival. Early detection provides increased therapeutic options and improved probability of survival. Mammography is a reliable and cost-effective screening technology. When properly conducted, mammography has been estimated to reduce breast cancer mortality by 20-30%. Currently, ductal carcinoma-in-situ (DCIS) represents 25%-30% of all reported breast cancers. Approximately 95% of all DCIS are diagnosed because radiologists identify them in mammograms. However, reading mammograms is difficult and prone to misinterpretation, subjectivity, and misreads. Studies have found that screening x-ray exams are about 80% accurate at best and that lesions are simply not detected 10% to 15% of the time. The National Cancer Institute reported that 25% of breast tumors are missed in women in their forties. (See Liu B, Z. M., Document J (2005, "Utilizing data grid architecture for the backup and recovery of clinical image data." Comput Med Imaging Graph. 29(2-3): 95-102, and National Cancer Institute, "Cancer in African American Women.")

Dense breasts pose a greater challenge to cancer detection using mammograms, especially early-stage breast cancers. Approximately 25% of women have dense breasts; thus a large number of mammograms, especially in AAW, are more difficult to clinically interpret. The risk of breast cancer associated with the highest category of density is estimated to be two to six times greater than for women with the lowest category of breast density.

Clinical Value of Signature Mapping™

On the basis of our initial studies, the signatures of malignant tumors in mammograms exhibit significant differences when compared with cysts, benign lesions, or dense breast tissue after being processed with Signature Mapping™. Measurable differences exist among different breast structures in both the spatial and frequency domains. Signatures of different tissues vary in their entropy, linearity, boundary gradients, and homogeneity. As a result, the internal structure of masses in dense breast tissue can be characterized and identified and displayed radiographically to the clinician. Signature Mapping™ is expected to visually display levels within the tumor and distortions in the breast geometry outside the tumor.

The effectiveness of these algorithms was evaluated through a pilot study conducted with the Norris Cancer Center at the University of Southern California. The study consisted of two sets of mammographic cases, a training set and a testing set. Both sets contained 40 normal and 40 confirmed solid cancer masses and were matched for levels of interpretation difficulty and patient age, variations in breast density, and types of tumors. Applied Visual used the training set for the development of its algorithms and for training the participating radiologists in the study. The test set was used in the pilot study to gain clinical feedback and determine the effectiveness of the radiologist’s interpretations using Signature Mapping™. Preliminary clinical results based on the visual performance of five highly-skilled and experienced mammographers using the mammography-specific Signature Mapping™ process demonstrated improved accuracy and ease of use in the study.

Clustered micro-calcifications may be the only visually detectable manifestation of early breast cancer. Mammography is very responsive to the presence of micro-calcifications, however, the specificity of mammography remains low. Benign calcifications cannot always be distinguished from those indicating malignancy resulting in a large population of women who do not have cancer, but are subjected to biopsy. Using Signature Mapping™ we expect that the miniscule structures within micro-calcifications can be characterized and their potential for pathology identified by the radiologists.

While carcinomas are rarely found in cysts, they are difficult to accurately diagnose through the use of mammography because they cannot be distinguished from other well circumscribed solid masses unless they display several characteristic patterns of calcification. Applied Visual is optimizing Signature Mapping™ for the accurate characterization of cysts as part of ongoing development that includes an early-onset cancer detection model.

Recent Developments - Signature Mapping™

Development continues in the refinement of TBDx™ and its detection algorithms. Additional classifiers have been created to improve both sensitivity and specificity. The underlying scripting language has been re-written to enable laboratories to either use TBDx™ as a diagnostic tool or as a pre-screening technology that identifies probable candidate TB cases that are confirmed by a

secondary technology. The ability to communicate to and from the camera and TBDx™ technology will permit the system to acquire a pre-set number of images, then move to another location on the slide and capture additional images. Also, the system can monitor the acquisition of the images and stop the acquisition process once the algorithms have determined that a case is severely infected. Internal testing continues to validate the progress of algorithm improvements. Sensitivity has improved to 89% and specificity has climbed to 70%. These results best illustrate how the technology can be used in tandem with a secondary diagnostic technology such as PCR. Furthermore, significant improvements have been achieved in specificity where TBDx™ can achieve the same performance level (98%) as a microscopist, with better sensitivity (62%)

On April 25, 2013, The Joint Clinical Research Center in Kampala, Uganda has approved a research protocol for the evaluation of the TBDx™ technology. It is likely that the evaluation will begin in June/July, 2013.

On April 21, 2013, Dr. Luis Cuevas of the Liverpool School of Tropical Medicine has receive funding from the European and Developing Countries Clinical Trials Partnership (EDCTP) to conduct a tuberculosis research project in Abuja, Nigeria, and a portion of this project funding will be used to evaluate the TBDx™ technology. A protocol for the evaluation has been approved and finalized. Itis expected that the evaluation will begin in May/June 2013.

On March 15, 2013, TBDx Computer Vision Technology Excelled In Johns Hopkins Slide Challenge. The TB Clinical Diagnostic Research Consortium (CDRC), an organization funded by the National Institute for Allergy and Infectious Diseases of the National Institutes of Health and managed by Johns Hopkins University, recently challenged the company to correctly identify 60 patient slides prepared from cases gathered from their work in Uganda. The diagnosis, unknown to the company, was independently verified by two sets of 3 microscopists in two laboratories in Uganda. The CDRC conducts feasibility studies of new diagnostic technologies. Members include the Johns Hopkins University; Imperial College of London in the United Kingdom; Infectious Diseases Institute in Kampala, Uganda; Boston Medical Center, University of Cape Town, South Africa; Universidade Federal do Espirito Santo in Vitoria, Brazil; University of Medicine and Dentistry of New Jersey – New Jersey Medical School; National Masan Tuberculosis Hospital-Yonsei University College of Medicine in the Republic of Korea; Foundation for Innovative New Diagnostics (FIND), and Westat Inc.

On November 29, 2012, TBDx “Proof of Concept” Evaluation Is Published In PLoS One. The initial evaluation of TBDx TM, “Proof-of-Concept” Evaluation of an Automated Sputum Smear Microscopy System for Tuberculosis Diagnosis, undertaken by The Aurum Institute, was published in the Public Library of Science (PLoS) One. PLoS One is a highly regarded and open source of scientific research in the TB community.This peer-reviewed evaluation represents the state of the TBDxTM technology development as it existed in May, 2011.

On November 14, 2012, The Aurum Institute presented an update on the latest TBDx™ performance metrics and algorithm improvements during the 43rd Union World Conference on Lung Health in Kuala Lumpur. Dr. David Clark, Deputy CEO for The Aurum Institute, made the poster presentation.

On April 26, 2012, the Company held a meeting in New Delhi, India, at the LRS Institute of Tuberculosis and Respiratory Disease to finalize the technical components and operating budget of a multi-site, nine-month project. The proposed project contains three phases: (i) clinical evaluation of TBDxV™ (tuberculosis visualization software), (ii) development of automated detection algorithms for use in Ziehl-Neelsen (ZN) laboratory settings; and, (iii) clinical evaluation of TBDx™ for the automated detection of TB in ZN stained sputum slides. The grant funding proposal was submitted to the Department of Biotechnology (“DBT”) on April 30, 2012. The Company received notification that DBT and its affiliates would participate in a clinical study upon the Company funding the program. The company is working towards an equitable solution.

On March 28, 2012, the Company held a demonstration of TBDx™ at the National Health Laboratory Services (“NHLS”) in Johannesburg, South Africa. The attendees included Dr. Michael Kimerling, Senior Program Officer in Tuberculosis for the Bill & Melinda Gates Foundation, Dr. Ishmail, Director of the Center for Tuberculosis (National Institute for Infectious Diseases), and Dr. David Clark, Deputy CEO of The Aurum Institute. The demonstration was at the request of Dr. Kimerling following a presentation he attended at the 2012 Conference on Retrovirals and other Opportunistic Infections (“CROI”) where results of our TBDx™ clinical trial were presented. Dr. Kimerling was especially interested in the results of our recent internal testing and a presentation illustrating the per-positive case cost advantages of using TBDx™.

On March 8, 2012, Dr. Gavin Churchyard, CEO of The Aurum Institute presented the first summary analysis of our initial clinical evaluation of TBDx™ conducted in South Africa, at the 2012 Conference on Retrovirals and other Opportunistic Infections held in Seattle, Washington. The presentation entitled “Automated AFB Microscopy Substantially Reduces Microscopists Work Load” was followed by a panel discussion on our technology and infectious diseases. The TBDx™ presentation was focused on the productivity gains to be realized as a result of automating smear microscopy and using detection algorithms to diagnose patient sputum specimens. TBDx™ automated detection increases the sensitivity of smear microscopy while reducing the reliance on human visual inspection. In a single laboratory shift, TBDx™ can handle the diagnostic workload of four microscopists while reducing errors that normally occur due

to human factors. In a global environment of increasing growth in TB diagnostic needs to maintain status quo, resource challenged countries will need less capital investment to build new laboratories, with less stress on the human resource requirements for hiring, training and retaining laboratory technicians.

On February 4, 2012, Dr. Fleming Lure, VP for Signature Mapping, presented an abstract at the SPIE Medical Imaging Conference in San Diego, CA. SPIE is an international society for optics and photonics. The abstract presented by Dr. Lure is entitled “Automated Detection Of Tuberculosis On Sputum Smeared Slides Using Stepwise Classification.”

Markets and Competition

Aviation/Homeland Security Technology Solution - PinPoint™

Market

Initially, management has focused its principal development and marketing efforts for its PinPoint™ product on the market for airport baggage screening technology solutions. However, as discussed further below, and although there can be no assurance, management believes that its PinPoint™ solution is also capable of being adapted for use in the people portal and cargo screening markets. The following discussion focuses on the market for baggage screening solutions; however, we have also provided an overview of the potential market for people portal and cargo screening technology solutions, potential future markets for our PinPoint™ product.

Baggage Screening Market

Security oversight of airports in the United States is overseen by the Transportation Safety Administration (“TSA”) with an annual operating budget in excess of $5 billion. TSA has the responsibility for over 480 U.S. airports with a combined inventory of baggage scanning equipment (checked baggage area and the carry-on baggage area) in excess of 6,000 scanners. While exact statistics on the number of scanners deployed in the rest of the world are not readily available, management estimates that the market is four times greater than the U.S. In addition to baggage scanners, airports worldwide are faced with replacing or supplementing existing metal detectors for passenger processing.

Currently, there are limited standards within the aviation security marketplace for the testing and validation of software technology solutions. To date the marketplace has placed a premium on the newest innovations in hardware technology and has failed to grasp how a threat detection software solution can succeed.

As highlighted below, in a recent NEMA article, “DICOS - Homeland Security Spending Keeps on Growing” - Published by, U.S. government expenditure for security solutions is expected to increase. Management believes that Applied Visual Sciences, Inc. is positioned to be a third-party solution provider leveraging the standard output of all future security equipment procured by the US Government. NEMA stated “Global homeland security spending has received a major boost in light of recent international terrorist events, as countries look at new ways to thwart terrorists and secure borders. Spending in the industry is expected to triple to $178 billion by 2015. Security-related spending will include more sophisticated information technology and the protection of other vulnerable terrorist targets. With the initial focus on airport security, NEMA has stepped up its outreach to DHS and TSA. Currently developing DICOS, the new NEMA standard will capture scans of checked baggage so that scans can be read by threat detection software. The new standard is expected to facilitate interoperability of security-imaging equipment. With DHS/TSA expected to purchase new equipment for over 400 U.S. airports, NEMA members have joined with DHS to develop the standard. With Phase 1 of DICOS expected to be completed this year, NEMA has begun looking at other modalities. The security industry is looking at border, rail, seaport, industrial and nuclear plant security.”

Management believes that international market acceptance of PinPoint™ as a viable threat detection solution will not only enhance our ability to sell worldwide, but it will open additional opportunities for the development of PinPoint™ as the “intelligent image” analysis solution for areas such as military target acquisition, satellite remote sensing, and additional opportunities within aviation security such as people portals and cargo scanning. Additionally, we will seek support of the U.S. Congress and the equipment manufacturers through lobbying and other efforts. We continue the ongoing development of PinPoint™. This focus must be even sharper when we enter the pilot test arena where the duration of the pilot test, the conditions under which the pilot test is conducted, and the definition of success and failure will vary country-by-country.

Information regarding the amount of the TSA’s annual budget allocated for the purchase of software solutions that are able to detect threat items at U.S. airports and other similar facilities, such as PinPoint™, is not readily discernible from publicly available information or independent research reports. However, management estimates, based upon information derived from the FY 2006 and requested FY 2007 United States Department of Homeland Security (DHS) budget, that the DHS budget allocation for FY 2006 for software solutions that are able to detect threat items at U.S. airports and other facilities, such as PinPoint™, was approximately .77% of the DHS’ $41.1B budget, and that the budget allocation for the proposed FY 2007 DHS budget will be approximately 2.25%. In addition, management estimates that the worldwide market for solutions such as PinPoint™ is estimated to be approximately twice the United States’ Homeland Security budget. These estimates have been prepared by Applied Visual’s management and reflect certain assumptions of such management. There can be no assurance that these estimates are or will prove to be accurate or that budget allocations or these estimates may not change, based upon changes in government’s budget priorities and other factors.

In addition to the baggage screening market, management expects to target the following additional markets for PinPoint™. Further evaluation and market studies are required in order for a business plan to be developed and the assessment of development efforts necessary before entering the “People Portal” (whole body imagers) and “Cargo Scanning” markets.

Whole Body Imagers

Almost every threat that requires people screening is currently monitored by a different system (explosives, weapons, biological, chemical, and nuclear/radiological). Management believes that today's people screening systems deliver unacceptable performance (high ‘false alarm’ rates, slow processing throughput, continued dependence on human detection, and high transaction costs). Over a period of 10 years (2001-2010) the total U.S. annual people screening outlay is expected to grow to over 15 times its current size. Sales of $590 million in 2001 are forecasted to grow to $3.5 billion in 2006 and to $9.9 billion in 2010. The compound annual growth rate was expected to be over 50% for the 2003-2010 periods. Management believes that the market for people portals that utilize imaging as its detection methodology is a sub-set, and is estimated at 50% of the entire forecasted market of which management believes PinPoint™ can address. See HSRC report, “2003-2010 People Screening Weapon & Explosives Detection Market Report.”

It is management’s belief that the current people portal technology fails to meet the post-9/11 requirements. It is management’s belief that the technology will undergo dramatic technological changes when the multiple-threats "checkpoint of the future" is introduced. The accumulated U.S. investment in people screening during the 2003-2010 period is expected to be over $50 billion. During the 2006-2011 periods, over 80% of sales of people portal systems in the US are expected to be for technologies that were not in existence in 2003.

Competition

The competition between the manufacturers of baggage (hand-held and small parcel) screening, luggage and large parcel screening, people screening for weapons and explosives detection, container and vehicle screening, and cargo screening is intense. These same equipment manufacturers represent Applied Visual Sciences, Inc.’s major competition, and include: AS&E, Smiths-Detection, OSI Rapiscan and L3, each of which is better capitalized and has greater marketing and other resources than Applied Visual Sciences, Inc. The competition between manufacturers is intense in view of amounts appropriated by the U.S. Government for threat detection technologies. What is not so obvious is that the manufacturers that once held the largest share of installed base are at risk due to aging and inadequate technology. Due to the agnostic nature of PinPoint™, we believe we can integrate PinPoint™ with any manufacturer’s scanning equipment. We believe our technology improves the efficiency of the underperforming hardware and extends the obsolescence of the existing scanning equipment. Funds previously appropriated for the upgrade or replacement of the in-place scanners could then be redeployed for the acquisition of required technologies such as body scanners or cargo scanners.

The equipment manufacturers in conjunction with software companies and academic institutions are attempting to develop sophisticated solutions to aid in the detection of contraband substances. To date there has been no known solution developed. We believe that Applied Visual Sciences, Inc.’s approach is unique in that it is a non-intrusive adjunct to the current manufacturers’ products. The enhancement identifies contraband at an accuracy level that is higher than the methodology used today by TSA.

companies introduce additional and more competitive products in the aviation security market and as we develop additional capabilities and enhancements for PinPoint™ and new applications for our technology. Historically, the principal competitors in the market for explosive detection systems have been GE-InVision, Vivid Technologies, Inc., EG&G Astrophysics, Smiths-Detection, Thermedics Detection Inc., and Barringer Technologies Inc. Each of these competitors provides aviation security solutions and products for use in the inspection of checked and carry-on luggage. We expect certain major corporations competing in other markets to enter the aviation security market.

Applied Visual Sciences, Inc. believes that its ability to compete in the aviation security market is based upon such factors as: product performance, functionality, quality and features; quality of customer support services, documentation and training; and the capability of the technology to appeal to broader applications beyond the inspection of checked and carry-on baggage. Although we believe that PinPoint™ is superior to our competitors’ products in its detection capability and accuracy, PinPoint™ must also compete on the basis of price, throughput, and the ease of integration into existing baggage handling systems. Certain of our competitors may have an advantage over our existing technology with respect to these factors.

Healthcare Technology Solutions - Signature Mapping™

Market

CAD vendors today have developed and sold clinical products in three major applications segments; mammography as a second look for the screening and early detection of breast cancer; chest CT for the early detection of nodules and CT of the colon for the non-endoscope screening of polyps.

In 2006, an analyst at Frost & Sullivan stated "Early introduction of integrated CAD solutions is critical for gaining market share and may lead to higher profits…These new systems will enable workflow improvements while providing a smooth migration to the digital solution. This will increase the viability and broaden the appeal of these systems, and is likely to result in increased sales and revenues." These are new markets with new applications. The market is shifting towards CAD as physicians’ confidence levels continue to grow. For example, the radiologist who uses CAD for Mammography (one of the most prevalent today) would most likely be very willing to trying new clinical applications. This is true for general radiologists and specialty radiologists. Frost and Sullivan studies published in 2006 estimated world wide radiology imaging procedures for all modalities at slightly a billion procedures per year and estimated that approximately 300 million to 350 million procedures were attributed to the USA.

Frost & Sullivan projected CAD sales to reach $600 million by 2009 with a Compound Annual Growth Rate (“CAGR”) of +18% by 2010. With replacement expected in full force in the two segments with the most demand by that point, namely, the breast MRI CAD segment and the mammography CAD segment, overall replacement in the total CAD market is expected to reach almost 50 percent of demand by 2012. With each new CAD technology introduced to the market, the potential size of this new market grows exponentially “Given the myriad of body parts and systems that CAD technology could be applied to in the future, as well as the different imaging modalities associated with each, growth in this market could be virtually unstoppable.” Such as, new technology introduced for CT would be applicable to the brain, chest, neck, abdominal and other areas of the body; and new technology for Ultrasound would be applicable for the breast, liver, prostate and abdominal.

Shalom S. Buchbinder, M.D., FACR, Chairman, Department of Radiology, Staten Island University Hospital, and Clinical Associate Professor of Radiology, Obstetrics, Gynecology and Women’s Health, Albert-Einstein College of Medicine of Yeshiva University, New York, U.S.A. (Changing the Way Healthcare is Delivered, RSNA 2004, p89) states “This relatively new technology improves the decision making compatibilities of clinicians…In my opinion mammography CAD has proven its clinical value and the future is about more robust and sophisticated tools that can, in addition to detection, help in the analysis of lesions. Innovative technologies can provide valuable information to support lesion classification.”

Financial support to fight TB comes from multiple sources world leaders, public health officials and international donors have taken action against TB and financial resources for control and research have increased dramatically in recent years. Public-private partnerships like the Foundation for Innovative New Diagnostics (“FIND”) have emerged to bring together key players in these sectors to move research and development forward for the needs of patients. Primarily, the government of each country is financially responsible for fighting TB with outside support of international organizations.

Market Conditions

Management’s review of current market conditions has identified the following trends:

TB is becoming a worldwide epidemic

Automatic differentiation of TB bacilli is a very challenging issue

Currently no such CAD product exists

Steady adoption of digital microscopy

Need for higher throughput and continued cost reduction without sacrificing quality

CAD is evolving as a clinical tool and physicians are adopting it

Current graphics cards and computational processing power are sufficient

Retiring workforce and the current prediction that there will be a shortage of pathologists

Economic pressures and increasing clinical demands

Facilitates productivity gains with inclusion of CAD

Pathologist can performs diagnosis on digital images and monitor

PMA FDA approvals of digital pathology tests is increasing

Facilitates improved workflow efficiency and enhances patient management practices

Pathology lab is poised for digital revolution

Pressures on the anatomical pathology sciences will drive change

STOP TB has stated they want “effective, efficient and validated clinical algorithms”

Potential Market For New TB Diagnostics

The persistent TB epidemic and expanding global population ensure that the total market for a range of TB diagnostic products is likely to increase yearly over the next decade by approximately 16%. The current international policy on TB case detection recommends the examination of three sputum smears for the diagnosis of pulmonary tuberculosis (PTB). The present definition of a smear-positive case states "Tuberculosis in a patient with at least two initial sputum smear examinations (direct smear microscopy) positive for acid fast bacilli (AFB+)".

Worldwide, WHO estimates that the largest potential available market for a new TB diagnostic would be for a test that both detects latent infection and predicts progression to active disease (767 million patient evaluations/year). Such a test, if widely implemented and accompanied by successful treatment, has the potential to revolutionize TB control. The infrastructure to achieve this globally is not available at this moment. (See “Global Tuberculosis Control- surveillance, planning and financing,” WHO Reports: 2005 through 2008.)

The next largest total available market is for a point-of-care screening test, which is estimated to be 193 million patient’s evaluations/year, of which approximately 70%, or 137 million patient’s evaluations/year is concentrated in the 22 high-burden countries. Substantial markets also exist for less revolutionary replacement technologies. Specifically, the total available markets for smear, culture, and monitoring and DST replacement tests are 83 million, 57 million, 40 million, and 6 million patient evaluations, respectively in 2005. We estimate that replacement technologies could capture a greater proportion of the market by 2020: smear 59% (49 million), culture 35% (20 million), monitoring 58% (23 million) and DST 45% (3 million). Without exception, between 70%–90% of the potential available markets for these replacement technologies are in the 22 high-burden countries. The continued emphasis on improving market conditions will encourage market growth in the high-burden countries and increase the accessibility to new products. (See “Global Tuberculosis Control - surveillance, planning and financing,” WHO Report 2008.)

Competition

We expect to compete with existing CAD manufactures such as iCAD, Hologic, Medipatten, Confirma, Siemens, or Carestream Health and manufacturers of dipstick or biomarker manufacturers, including SPAN Diagnostics Ltd., India, Yayasan Hati Sehat (YHS), Indonesia and Wiener Laboratorios, Argentina. We may also partner with one or more of these existing CAD manufacturers, or an emerging company with new technology for the CAD arena. Once our products are commercially viable, we anticipate marketing and selling our products through original equipment manufacturers (“OEM”), or system integrators.

While we are unaware of any computer-aided-detection for TB sputum microscopy analysis that can be identified that competes with our Signature Mapping™ products, there are substitute technologies that compete with sputum specimen analysis, such as the Cepheid Systems GeneXpert® System, a dip-stick or biomarker approach. Management believes that competition will be driven by cost per procedure, ease-of-use, sensitivity and specificity, and the ability to be used by non-trained or lightly trained personnel in the point of care environment. These emerging tests include: Polymerase Chain Reaction, TB Breathalyzer, Q-Beta Replicase Assay, Transcription-Medicated Amplification, Ligase Chain Reaction, Strand Displacement Amplification, Nucleic Acid Sequence-Based Amplification and Branched DNA.

Sales, Marketing, and Distribution

Sales

Sales for products within our specific markets are conducted through both direct sales and indirect distribution channels worldwide.

Product Distribution and Marketing

We have entered into the following distributor, strategic partnership, development, and consulting agreements with regard to our products, although they have not produced revenue for the Company:

Preferred International Distributor Agreement with Rodash 136 (Pty) Ltd, of South Africa

On May 25, 2010, the Company and Rodash 136 (Pty) Ltd, of South Africa, entered into a Preferred International Distributor Agreement. Under the agreement, Rodash has agreed to promote the licensing and distribution of Applied Visual Sciences’ PinPoint™ suite of software. Rodash will also provide support to licensees of the products. The three year agreement provides for automatic successive one year renewal periods, unless either party provides written notice to the other of its intention to terminate or to re-negotiate the agreement no less then one hundred and twenty days prior to the end of the then-current period. The Company appointed Rodash as the exclusive distributor for such products in Africa, Brazil, Argentina, Indonesia and Australia, although the agreement permits Applied Visual Sciences to enter into business relationships with original equipment manufactures for the licensing, distribution, or resale of PinPoint™ products.

Preferred International Distributor Agreement Romador 168 (Pty) Ltd, of South Africa

On May 25, 2010, the Company and Romador 168 (Pty) Ltd, of South Africa, entered into a Preferred International Distributor Agreement. Under the agreement, Romador has agreed to promote the licensing and distribution of Applied Visual Sciences’ Signature Mapping™ suite of software. Romador will also provide support to licensees of the products. The three year agreement provides for automatic successive one year renewal periods, unless either party provides written notice to the other of its intention to terminate or to re-negotiate the agreement no less then one hundred and twenty days prior to the then-current period. The Company appointed Romador as the exclusive distributor for such products in Africa, Brazil, Argentina, Indonesia and Australia, although the agreement permits Applied Visual Sciences to enter into business relationships with original equipment manufactures for the licensing, distribution, or resale of Signature Mapping™ products.

Memorandum of Understanding with Aurum Innova (Pty) Limited and the National Health Laboratory Services of South Africa

On March 24, 2009, Applied Visual Sciences, Inc. signed a Memorandum of Understanding (“MOU”) with Aurum Innova (Pty) Limited (“Innova”) and the National Health Laboratory Services of South Africa (“NHLS”). The purpose of the agreement is for the parties to jointly undertake activities for the completion of our Signature Mapping™ Tuberculosis (“TBDx™”) product for deployment in the NHLS laboratories. The parties will collaborate to enhance TBDx™’s overall performance, customize its use for application in the National Health Laboratory Services tuberculosis diagnosis and quality management program, and clinically evaluate, measure, and test TBDx™ performance. The collaboration includes conducting the clinical evaluation at selected NHLS laboratories that conduct sputum slide tuberculosis analysis and diagnosis.

Master Development Agreement with Aurum Innova (Pty), Ltd.

On February 4, 2009, Applied Visual Sciences, Inc. signed a Master Development Agreement Aurum Innova (Pty), Ltd., a company related to the Aurum Institute for Health Research, and installed in February 2009 an alpha product of Signature Mapping™ tuberculosis (“TBDx™”) software in a “retrofit configuration” for an evaluation by the National Health Laboratory Services (“NHLS”) in South Africa. This agreement extends the Company’s contractual relationship with Aurum that was first established with the signing of a Memorandum of Understanding on July 25, 2008. The new agreement provides for the joint development of products and services aimed at the screening, early detection and staging of diseases including TB, silicosis, and malaria. Each product will be the subject of a separate project specifications and the MDA included project specifications for our joint development of an automated TB sputum detection product. Aurum has agreed to clinically evaluate the products, and the parties agreed to jointly market and sell, initially in South Africa but eventually in sub-Saharan Africa, the jointly developed products, including our Signature Mapping™ TBDx™ product, through third parties and/or through Aurum. The Company agreed to pay Aurum a royalty on a product by products basis, based on the net revenue received by us through our distributors, and to be delineated by the parties. Also, the Company agreed to pay Aurum a commission with regard to sales of the products by Aurum. Further, Aurum has agreed to use every reasonable effort to raise funding to complete the development of a product following completion of the initial proof of concept. Any intellectual property jointly developed by us and Aurum will be jointly owned. The agreement may be terminated on one year’s prior written notice by either party, automatically terminates upon completion of project specifications and if no products are being marketed under the agreement, or for cause. The agreement also contains certain confidentiality and indemnification provisions.

Patents and Proprietary Rights

We rely on a combination of common law trademark, service mark, copyright and trade secret law and contractual restrictions to establish and protect our proprietary rights and promote our reputation and the growth of our business. We do not own any patents that would prevent or inhibit our competitors from using our technology or entering our market, although we intend to seek such protection as appropriate. It is our practice to require all of our employees, consultants and independent contractors to enter into agreements containing non-disclosure, non-competition and non-solicitation restrictions and covenants, and while our agreements with some of our customers and suppliers include provisions prohibiting or restricting the disclosure of proprietary information, we can not assure you that these contractual arrangements or the other steps taken by us to protect our proprietary rights will prove sufficient protection to prevent misappropriation of our proprietary rights or to deter independent, third-party development of similar proprietary assets.

The United States Patent & Trademark Office (“USPTO”) has granted the Company six patents, and we were granted one foreign patent, all of which are related to our underlying 3i™ technology. We also have ~~nine~~three pending patents applications (U.S. and foreign) that further cover the implementation of our core 3i™ technology. We cannot provide assurance that any or all of the remaining patent applications or ~~the~~ provisional ~~application~~applications will be issued patents, or that they will not be challenged, or that rights granted to us would actually provide us with an advantage over our competitors. Prior art searches have been conducted and, based on the results of these searches; we believe that we do not infringe any third party patents identified in the searches.

Date Granted	Patent No.	Patent Description
February 17, 2009	7,492,937	System and Method for Identifying Objects of Interest in Image Data
February 24, 2009	7,496,218	System and Method for Identifying Objects of Interest in Image Data
December 31, 2009	MY-140267-A7,907,762	System and Method for Identifying Objects of Interest in Image Data (Malaysian)
October 19, 2010	7,817,833	System and Method for Identifying Feature of Interest in Hyperspectral Data
November 23, 2010	7,840,048	System and Method for Determining Whether There is an Anomaly in Data
March 15, 2011	7,907,762	Method of Creating a Divergence Transform for Identifying a Feature of Interest in Hyperspectral Data
October 25, 2011	8,045,805	Method for Determining Whether a Feature of Interest Anomaly is Present in an Image

Due to the rapid pace of technological change in the software industry, we believe patent, trade secret and copyright protection are less significant to our competitive edge than factors such as the knowledge, ability and experience of our personnel, new product development, frequent product enhancements, name recognition and the ongoing reliability of our products.

Research and Development

Under United States’ generally accepted accounting principles, until technology is determined to be feasible, all related research and development expenditures must be expensed rather than capitalized. When a determination is made that software is feasible (commercially viable), then expenditures may be capitalized, as long as there are no high-risk development issues. We determined that a high-risk development issue existed for integrating PinPoint™ into already existing scanning equipment. Therefore, we have concluded that capitalizing such expenditures for PinPoint™ is currently inappropriate and have expensed all research and development costs to date. The PinPoint™ research and development costs for the years ended December 31, ~~2012~~2014 and ~~2011~~2013 were $0 and $0, respectively. We also expense the research and development costs for our Signature Mapping™ (Medical Computer Aided Diagnosis) projects as these projects are not considered to be ready for commercial distribution as we need to complete the demonstration (workflow) phase of development and perform various clinical trial requirements in South Africa, Nigeria, Peru, Vietnam, and other countries as may be required for certification ~~requirement~~by inthe ~~India~~Foundation for Innovative New Diagnostics and World Health Organization. The Signature Mapping™ research and development costs for the years ended December 31, ~~2012~~2014 and ~~2011~~2013 were $8262,~~300~~990 and $~~233~~80,~~330,~~094 respectively. Our research and development costs are comprised of staff and consultancy expenses on our core technology in intelligent ~~imaging~~computer-vision ~~informatics~~detection (“3i™”) engine that is capable of extracting embedded knowledge from digital images, as well as the capacity to analyze and detect image anomalies for our development of our PinPoint™ and Signature Mapping™.

Governmental Regulation

Government authorities in the United States (including federal, state and local authorities) and in other countries, extensively regulate, among other things, the manufacturing, research and clinical development, marketing, labeling and packaging, distribution, post-approval monitoring and reporting, advertising and promotion, and export and import of security and healthcare products, such as those we are developing. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources.

Many of our prospective customers and the other entities with which we may develop a business relationship operate in the healthcare industry and, as a result, are also subject to governmental regulation. Because our healthcare products and services are designed to function within the structure of the healthcare financing and reimbursement systems currently in place in the United States, and because we are pursuing a strategy of developing and marketing products and services that support our customers' regulatory and compliance efforts, we may become subject to the reach of, and liability under, these regulations.

The federal Anti-Kickback Law, among other things, prohibits the direct or indirect payment or receipt of any remuneration for Medicare, Medicaid and certain other federal or state healthcare program patient referrals, or arranging for or recommending referrals or other business paid for in whole or in part by the federal health care programs. Violations of the federal Anti-Kickback Law may result in civil and criminal sanction and liability, including the temporary or permanent exclusion of the violator from government health programs, treble damages and imprisonment for up to five years for each violation. If the activities of a customer or other entity with which we have a business relationship were found to constitute a violation of the federal Anti-Kickback Law and we, as a result of the provision of products or services to such customer or entity, were found to have knowingly participated in such activities, we could be subject to sanction or liability under such laws, including exclusion from government health programs. As a result of exclusion from government health programs, our customers would not be permitted to make any payments to us.

The federal Civil False Claims Act and the Medicare/Medicaid Civil Money Penalties regulations prohibit, among other things, the filing of claims for services that were not provided as claimed, which were for services that were not medically necessary, or which were otherwise false or fraudulent. Violations of these laws may result in civil damages, including treble and civil penalties. In addition the Medicare/Medicaid and other federal statutes provide for criminal penalties for such false claims. If, as a result of the provision by us of products or services to our customers or other entities with which we have a business relationship, we provide assistance with the provision of inaccurate financial reports to the government under these regulations, or we are found to have knowingly recorded or reported data relating to inappropriate payments made to a healthcare provider, we could be subject to liability under these laws.

The United States Food and Drug Administration (“FDA”) promulgated a draft policy for the regulation of computer software products as medical devices under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. To the extent that computer software is a medical device under the policy, we, as a manufacturer of such products, could be required, depending on the product, to:

notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products; or

obtain FDA approval by demonstrating safety and effectiveness before marketing a product.

Depending on the intended use of a device, the FDA could require us to obtain extensive data from clinical studies to demonstrate safety or effectiveness, or substantial equivalence. If the FDA requires this data, we would be required to obtain approval of an investigational device exemption before undertaking clinical trials. Clinical trials can take extended periods of time to complete. We cannot provide assurances that the FDA will approve or clear a device after the completion of such trials. In addition, these products would be subject to the Federal Food, Drug and Cosmetic Act's general controls, including those relating to good manufacturing practices and adverse experience reporting. Although it is not possible to anticipate the final form of the FDA's policy with regard to computer software, we expect that the FDA is likely to become increasingly active in regulating computer software intended for use in healthcare settings regardless of whether the draft is finalized or changed. The FDA can impose extensive requirements governing pre- and post-market conditions like service investigation, approval, labeling and manufacturing. In addition, the FDA can impose extensive requirements governing development controls and quality assurance processes.

Employees

As of December 31, ~~2012~~2014, we employed ~~five~~three full-time employees, and one part time employee~~, and one employee on a temporary leave of absence who assists the Company upon request~~. As of December 31, ~~2012~~2014, we had accrued and unpaid salaries due to our employees and management in the amount of $68,~~629~~152,~~246~~396, as well as accrued related payroll liabilities of $639,712. Due to our continued limited cash resource, we have not been able to pay our employees salaries and other compensation on a regular basis or at all, and there is substantial uncertainty that we will be able to do so in the foreseeable future unless we raise additional financing, or we are able to generate revenue from the sale of our products, of which there can be no assurance. None of our employees is a party to a collective bargaining agreement and we believe our relationship with our current employees is good. We may also employ certain consultants and independent contractors from time to time to assist in the completion of projects. It is our practice to require all our employees, consultants, and independent contractors to enter into proprietary information and inventions agreements containing non-disclosure, non-compete, and non-solicitation restrictions or covenants.

Principal Offices

We maintain our principal office at 525K East Market Street, # 116, Leesburg, Virginia, 20176. Our telephone number in the U.S. is (703) 539-6190. Our Internet address is www.appliedvs.com, and the Company also disseminates information on Facebook at https://www.facebook.com/appliedvs and Twitter at https://mobile.twitter.com/appliedvs. Such information on our website, Facebook and Twitter is not deemed to be part of this Annual Report on Form 10-K.

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https://www.facebook.com/appliedvs and Twitter at https://mobile.twitter.com/appliedvs. Such information on our website, Facebook and Twitter is not deemed to be part of this Annual Report on Form 10-K.

ITEM 1A. RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and other information contained in this report before deciding to invest in our common stock. The risks described below are not the only ones facing our company. Additional risks not presently known to us or which we currently consider immaterial may also adversely affect our company. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected. In such case, the trading price of our common stock could decline, and you could lose a part or all of your investment.

Risks Related to Our Company and Our Operations

We did not make timely payment of outstanding principal when due under our Series A Debentures, and failure to make such payment is an event of default under the debentures. We have insufficient cash resources to repay the amounts due to our debenture holders.

The principal amount of our outstanding Series A Debentures of $1,688,205 became due on July 1, 2011, and such amount was not paid. Therefore, the Company ~~may~~could be considered in default~~. The~~ debentures provide that any default in the payment of principal, which default is not cured within the five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default and may result in enforcement of the debenture holders’ rights and remedies under the debentures and applicable law. We are in discussions with the debenture holders to re-negotiate the terms of the debentures, including the repayment or repurchase of the debentures and/or seek to extend their maturity date, although we have not reached any agreement with the debenture holders with regard to any such repayment, repurchase or extension. Our ability to repay or repurchase the debentures is contingent upon our ability to raise additional financing, of which there can be no assurance. Also, as a condition to any such extension, debenture holders may seek to amend or modify certain other terms of the debentures. If When an event of default occurs under the debentures, the debenture holders may elect to require us to make immediate repayment of the mandatory default amount, which equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, or (b) the outstanding principal amount unpaid divided by the conversion price on the date the mandatory default amount is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. In anticipation of such election by the debenture holders, due to the nonpayment of principal amount on the due date of July 1, 2011, we measured the mandatory default at approximately $337,641 and subsequently on each balance sheet date, which is reflected in the carrying value of the debentures and also recognized as interest expense. We remeasured the mandatory default amount as of December 31, ~~2012~~2014 at approximately $337,641. As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. The Company currently has insufficient funds to repay the outstanding amount in the event the debenture holders make a demand for payment.

Our business plan and technologies are unproven. We have generated minimal revenues from our operation, and incurred substantial operating losses since our inception. We have very limited cash resources and we are reliant on external sources of financing to fund our operations, including our ongoing product development.

As of December 31, ~~2012~~2014, our revenue generating activities have not produced sufficient funds for profitable operations and we have incurred operating losses since inception. In view of these matters, realization of certain of the assets in the accompanying consolidated balance sheet is dependent upon continued operations, which in turn is dependent upon our ability to meet our financial requirements, raise additional financing on acceptable terms, and the success of future operations. The principal amount due to our debenture holders as of December 31, ~~2012~~2014, was ~~approximately~~ $1,688,205, which matured on June 30, 2011, and was not paid. Also, we have outstanding trade and accrued payables of $81,~~821~~792,~~196~~192, ~~including~~other accrued liabilities of $242,404, and accrued salaries and related due to our employees and management of $68,~~629~~792,~~246~~108. Also, our previous Chief Executive Officer’s net outstanding noninterest-bearing loans were $8980,~~000~~500.

As of December 31, ~~2012~~2014, we had a cash balance of $333,~~445~~961. ~~Subsequently~~ ~~and through May 10, 2013, we received $135,000 from accredited investors upon the issuance of promissory notes, and the notes accrue interest at a rate of 12% per annum.~~ Management believes these funds to be insufficient to fund our operations for the next twelve months absent any cash flow from operations or funds from the sale of our equity or debt securities. Currently, we are spending or incurring (and accruing) expenses of approximately $~~190~~150,000 per month on operations and the continued research and development of our 3i technologies and products, including with regard to salaries and consulting fees. Management believes that we will require an aggregate of approximately $21,~~280~~800,000 to fund our operations for the next 12 months and to repay certain outstanding trade payables and accrued expenses. This assumes that holders of our outstanding debentures convert such debt into shares of our common stock or that we are able to extend the term of the debentures, of which there can be no assurance. In the event we are unable to extend the term of the debentures beyond their new maturity date, the debenture holders do not convert such debt or require payment of principal, partially convert such debt, or effect the buy-in provision related to the warrants and the debentures, we shall be required to raise additional financing. Also, this assumes that we are able to

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payment of principal, partially convert such debt, or effect the buy-in provision related to the warrants and the debentures, we shall be required to raise additional financing. Also, this assumes that we are able to continue to defer the amounts due to our employees for accrued and unpaid salaries and that we are able to continue to extend or defer payment of certain amounts due to our trade creditors, of which there can be no assurance.

InThe ~~view of our limited revenues to date, the~~ Company has relied and continues to rely substantially upon equity and debt financing to fund its ongoing operations, including the research and development conducted in connection with its products and conversion of accounts payable for stock. The proceeds from our financings have been and continue to be insufficient to fund our operations, pay our trade payables, repayment of our unconverted debentures, or accrued and unpaid wages to our employees. Therefore, the debentures holders, our employees, or trade creditors may seek to enforce payment of amounts due to them, and our results of operations and financial condition could be materially and adversely affected and we may be unable to continue our operations. Also, in the event we continue to be unable to pay our employees, we may suffer further employee attrition. There can be no assurances that we will be successful in our efforts to raise any additional financing, any bank borrowing, and research or grant funding. Moreover, in view of the current market price of our stock, we may have limited or no access to the capital markets. Furthermore, under the terms of our agreements with the debenture holders, we are subject to restrictions on our ability to engage in any transactions in our securities in which the conversion, exercise or exchange rate or other price of such securities is below the current conversion price or is based upon the trading price of our securities after initial issuance or otherwise subject to re-set. In view of the foregoing, we may be required to curtail operations significantly, or obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products.

During Fiscal 2012, our total stockholders’ deficit increased by $1,409,544 to $11,235,351, and our consolidated net loss for the period was $1,804,101 or a $649,725 increase in net loss from 2011. Notwithstanding the foregoing discussion of management’s expectations regarding future cash flows, Applied Visual Sciences’ insolvency continues to increase the uncertainties related to its continued existence. Both management and the Board of Directors are carefully monitoring the Company’s cash flows and financial position in consideration of these increasing uncertainties and the needs of both creditors and stockholders.

Our independent registered public accounting firm has expressed uncertainty regarding our ability to continue as a going concern.

Our independent registered public accounting firm has expressed uncertainty regarding our ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on recoverability and classification of assets or the amounts and classification of liabilities that might occur if we are unable to continue in business as a going concern.

We have generated limited revenue from our PinPoint™ and Signature Mapping™ products.

We have generated limited revenue from the sale of our aviation and healthcare products. WeThere ~~anticipate launching our TBDx™ and TBDxV™ products in late 2013; however, there~~ can be no assurance we will be successful in ~~such~~generating ~~launches or that we will generate~~ revenue from our products. We expect to incur additional product development costs to complete our Signature Mapping™ Tuberculosis projects and other proof of concept projects asif outside partners are solidified. We ~~completed~~may aalso ~~proof~~incur ofadditional ~~concept~~product ~~project~~development cost for ~~the U.S. Department of Homeland Security (“DHS”) with regard to our~~ PinPoint™ ~~product~~if inoutside ~~2009,~~partnership ~~and~~or wealliances ~~may~~are ~~incur additional product development cost for PinPoint™~~established. Although, there can be no assurance that we will be successful in launching the foregoing products in accordance with the timelines outlined, or that we will be successful in marketing and selling such products or generating significant revenue from such product.

We have a severe working capital deficit and, in addition to proceeds from financings, we continue to have outstanding loans from our chief executive officer and deferrals of salaries by our executive officer, employees and a consultant/director. In the event we are unable to pay our employees salaries, we may experience employee attrition which could materially and adversely affect our business and operations.

During ~~Fiscal 2012~~2014, our total stockholders’ deficit increased by $1644,~~409,544~~719 to $1113,~~235~~570,~~351~~796, and our consolidated net loss for the period was $1783,~~804~~378,~~101,~~ orcompared to a ~~$649,725~~net ~~increase~~loss for the same period in ~~net~~2013 ~~loss~~of ~~from~~$2,437,304, ~~2011.~~or ~~During~~a ~~2012~~decrease of $1,653,926 ~~our~~(67.9%). Our revenue generating activities had not produced sufficient funds for profitable operations and we have incurred operating losses since inception. Although we have obtained limited cash from certain financings, we continue to have outstanding loans from our previous chief executive officer of approximately $8980,~~000~~500, accrued and unpaid salaries of our two named executive officers and previous chief executive officer in the amount of $34,~~437~~747,~~143~~782, and to other employees of $3,~~192~~406,~~103~~614, and outstanding accounts payable to a previous consultant/director of the Company in the amount of $~~662~~854,~~589~~248. The Company currently employs three full-time, one part-time employee, and during 2013 employed five full-time, one part-time employee, and one employee on a temporary leave of absence who assisted the Company upon request. The Company’s insolvency continues to increase the uncertainties related to its continued existence. Also, in the event we are unable to pay our employees, we may continue to experience further employee attrition which could materially adversely affect our business and operations, including our ongoing research and development activities. AsBoth ofmanagement ~~December~~and ~~31,~~the ~~2012,~~Board weof ~~employed~~Directors ~~six~~are ~~full-time~~carefully ~~employees,~~monitoring ~~and~~the ~~one~~Company’s ~~part-time~~cash ~~employee. We~~flows ~~also~~and ~~have~~financial ~~seven~~position ~~employees~~in ~~that~~consideration ~~are~~of onthese aincreasing ~~temporary~~uncertainties ~~leave~~and ofthe ~~absence,~~needs ~~and~~of ~~their~~both ~~return~~creditors isand ~~uncertain~~stockholders.

28Dilutive effect of conversion of Series A Senior Convertible Debentures, and the exercise of outstanding common stock purchase warrants, of which some carry a cashless exercise provision.

~~Dilutive effect of conversion of Series A Senior Convertible Debentures, exercise of Series D Warrants and Midtown placement agent’s warrants, and other warrants.~~ 21

~~Under~~At aDecember ~~securities purchase agreement~~31, ~~dated November 3~~2014, ~~2006, between the Company and certain institutional accredited investors, the Company sold~~ an aggregate of $56,~~150~~752,~~000~~820 ~~in principal amount~~ of our ~~Series A Debentures and Series D Common Stock Purchase Warrants to purchase an aggregate of 4,453,709~~ shares of our common stock~~. On~~ ~~November~~issuable 8,upon ~~2006,~~full ~~the~~conversion ~~Company issued to the institutional investors an aggregate~~ of ~~$2,575,000~~our inoutstanding ~~principal amount of~~ Series A Debentures ~~and 4,453,709 Series D Warrants~~. OnThe ~~April 12, 2007, the~~ Company ~~issued~~also athas ~~a second closing,~~ an ~~additional~~aggregate ~~$2,575,000 in principal amount~~ of ~~the Series A Debentures~~19,645,528 ~~which followed the effectiveness~~ of aour ~~registration statement registering the~~ shares ofissuable ~~our~~upon ~~common~~exercise ~~stock underlying the Series A Debentures and Series D Warrants. The Company allocated proceeds from each closing to the embedded conversion features~~ of ~~the~~outstanding ~~Series A Debentures and Series D Warrants that were recognizable as a liability under generally accepted accounting principles. We also issued during the first closing an aggregate of 623,520~~ common stock purchase warrants tothat ~~the~~have ~~placement~~an ~~agent~~average asexercise ~~compensation~~price ~~in the offering, which were upon terms substantially similar to the Series D Warrants. One-half~~ of ~~the Series D Warrants (2~~$0.26,~~226,854~~ ~~warrants) and the placement agent warrants (311,760 warrants) became exercisable on November 8, 2006. The remaining one-half~~ of ~~the~~which ~~Series~~approximately ~~D Warrants (2~~5,~~226~~143,~~855~~973 warrants) ~~and the placement agent warrants (311,760 warrants) became exercisable on April 12, 2007 and expire on April 12, 2012. The Series D Warrants and the placement agent’s warrants~~ may be exercised ~~via~~pursuant ~~a cashless exercise if certain conditions are met. Due~~ to ~~milestone-related adjustments,~~ the ~~initial~~cashless exercise ~~price~~provisions of ~~$1.15634~~such ~~may~~warrants ~~be reset~~ and ~~the~~may ~~maximum number of shares to~~ be ~~issued~~subsequently ~~under~~resold ~~the debentures was indeterminable~~ as of“restricted ~~December~~securities” ~~31,~~under ~~2007. The Company considered ASC 815-40 (formerly EITF 00-19, relating to~~ the provisions for Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock), and concluded that there were insufficient shares to share settle the contracts. On April 1, 2007, due to the milestone-related provisions, the conversion price of ~~the~~Rule ~~Series~~144 Aunder ~~Debentures and~~ the ~~exercise~~Securities ~~price of the Series D Warrants and Placement Agent’s Warrants were reset to a price $0~~Act.~~7453 per share, to $0.6948 effective October 1, 2007, and the final milestone reset of $0.4089 effective April 1, 2008.~~ AsIncreased asales ~~result~~volume of ~~a June 2009 financing in which~~ the Company’s ~~issued shares of~~ common stock ~~and~~could ~~warrants,~~cause the ~~conversion~~market price of ~~our debentures and~~ the ~~exercise~~Company’s ~~price~~common ofstock ~~the~~to ~~Series~~drop. Sales ~~D Warrants was adjusted under the anti-dilution provisions~~ of ~~such instruments to~~ a ~~price~~substantial ~~of $0.25 per share, and the~~ number of shares ~~underlying the Series D Warrants (including the warrants the Company issued to the placement agent in the financing) were increased by an aggregate~~ of ~~2,677,417~~our ~~Series D warrants. On July 10, 2007, a debenture holder exercised 864,798 Series D Warrants for 864,798 shares of~~ common stock, ~~and~~in ~~914,798 warrants were exercised during 2010 under~~ the ~~cashless~~public ~~provision for 420~~market,~~166~~ ~~shares~~or of common stock. On November 8, 2011, an aggregate of 2,962,527 Series D Warrants expired. Our outstanding Series A 10% Convertible Debentures originally became due on November 7, 2008. On October 15, 2010, we entered into an agreement with our two remaining Series A Convertible Debenture holders to extend the ~~maturity~~perception ~~date~~that ofthese ~~the~~sales ~~debentures~~might ~~to June 30~~occur, ~~2011,~~could ~~and~~depress the ~~outstanding~~market ~~amount~~price of ~~$1,688,205~~our ~~was not paid. As of December 31, 2012, an aggregate of $3,461,795 in principal amount of the Series A Debentures have been converted into 8,730,037 shares of~~ common stock, ~~an aggregate of $663,043 in interest amount have been converted into 2,675,576 shares of common stock,~~ and ancould ~~aggregate~~impair ofour ~~1,779,596~~ability ~~Series~~to Draise ~~Warrants~~capital ~~have~~through ~~been exercised resulting in~~ the ~~issuance~~sale of ~~1,284,964~~additional ~~shares~~equity ~~of common stock~~securities. Accordingly, as of December 31, 2012, an aggregate of $1,688,205 of principal amount of the debentures remain unconverted, and 3,012,523 Series D Warrants remain unexercised. Proceeds of the two offerings were used for the purpose of hiring new personnel, research and development, registration expenses, for general working capital purposes, and repaying $200,000 in loans made to us by Mr. Michael W. Trudnak, our Chairman and CEO.

As of December 31, 2012, approximately 11,296,906 warrants (including the warrants exercisable by the debenture holders) may be exercised pursuant to the cashless exercise provisions of such warrants, which may be subsequently resold as “restricted securities” under the provisions of Rule 144 under the Securities Act. Increased sales volume of the Company’s common stock could cause the market price of the Company’s common stock to drop.

We have incurred substantial debt which could affect our ability to obtain additional financing and may increase our vulnerability to business downturns. We may be unable to repay our Series A Debentures that matured on June 30, 2011.

As of December 31, ~~2012~~2014, the aggregate principal under our outstanding Series A Debentures was $1,688,205, which matured on June 30, 2011. Also, we have outstanding trade and accrued payables of $1,~~570~~792,~~639~~192, other accrued liabilities of $~~621~~242,~~311~~404, and accrued salaries due to our employees and management of $68,~~629~~152,~~246~~396, as well as accrued related payroll liabilities of $639,712. Also, the Company has an outstanding noninterest-bearing loan from its previous Chief Executive Officer of $8980,~~000~~500, and $~~560~~807,~~000~~500 short-~~tern~~term notes from ~~five~~twenty ~~investors. Subsequently through the date of this report, we issued an additional eighteen~~ (1820) ~~month note in the amount of $100,000~~investors. We are subject to the risks associated with substantial indebtedness, including insufficient funds to repay the outstanding principal in the event the debenture holders make a demand for payment; it may be more expensive and difficult to obtain additional financing; and we are more vulnerable to economic downturns.

Our certifying officers evaluated the effectiveness of our disclosure controls and procedures, and concluded that our disclosure controls were not effective for ~~2012~~the ~~and~~period ~~2011. Although~~ending December 31, ~~management~~2014 ~~cannot~~and ~~assure~~June ~~you~~30, 2013, and that ~~measures~~we ~~taken~~had ~~will~~certain ~~enable~~weaknesses ~~the~~during ~~Company~~those toperiods ~~provide~~in ~~accurate~~our ~~and~~internal controls over timely ~~financial~~reporting. ~~information~~Therefore, internal controls over timely reporting were ineffective as of the period covered by this Report.

29Our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”) are responsible for establishing and maintaining our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). The Certifying Officers designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under their supervision, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms, and is made known to management (including the Certifying Officers) by others within the Company, including its subsidiaries. We regularly evaluate the effectiveness of our disclosure controls and procedures and report our conclusions about the effectiveness of the disclosure controls quarterly in our Forms 10-Q and annually in our Forms 10-K. In completing such reporting, we disclose, as appropriate, any significant change in our internal control over financial reporting that occurred during our most recent fiscal period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. On November 6, 2013, the Company filed its June 30, 2013 Form 10-Q, which was due on August 14, 2013, and this Annual Report on Form 10-K for the year ended December 31, 2014, was due on March 31, 2015. Our Certifying Officers concluded that our disclosure controls and procedures were not effective as of the end of the period covered by such reports. Although the Certifying Officers have determined that our disclosure controls and procedures were not effective, management continues to believe that refinement to our disclosure controls and procedures is an ongoing progress. The Audit Committee believes the Company should continue the following activities: (a) additional education and professional development for the Company’s accounting and other staff on new and existing applicable SEC filing requirements, certain applicable SEC disclosure requirements, and the timing of the filing thereof, and (b) reviewing disclosure requirements, including Form 10-K and Regulation S-K disclosure requirements, SEC staff guidance and interpretations related thereto. While management is responsible for establishing and maintaining our disclosure controls and procedures and has taken steps to ensure that the disclosure controls are effective and free of “significant deficiencies” and/or “material weaknesses,” the ability of management to implement the remediation of such weaknesses and deficiencies and the inherent nature of our business and rapidly changing environment may affect management’s ability to be successful with this initiative.

Our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”) are responsible for establishing and maintaining our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). The Certifying Officers designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under their supervision, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms, and is made known to management (including the Certifying Officers) by others within the Company, including its subsidiaries. We regularly evaluate the effectiveness of our disclosure controls and procedures and report our conclusions about the effectiveness of the disclosure controls quarterly in our Forms 10-Q and annually in our Forms 10-K. Although the Certifying Officers have determined that our disclosure controls and procedures were effective during 2012 and 2011, management continues to believe that refinement to our disclosure controls and procedures is an ongoing progress. We cannot assure you that measures already taken, or any future measures, will enable us to provide accurate and timely financial reports, particularly if we are unable to hire additional personnel in our accounting and financial department, or if we lose personnel in this area. Any failure to improve our internal controls or other problems with our financial systems or internal controls could result in delays or inaccuracies in reporting financial information, or non-compliance with SEC reporting and other regulatory requirements, any of which could adversely affect our business and stock price. The Audit Committee believes the Company should continue the following activities: (a) additional education and professional development for the Company’s accounting and other staff on new and existing applicable SEC filing requirements, certain applicable SEC disclosure requirements, and the timing of the filing thereof, and (b) reviewing disclosure requirements, including Form 8-K and Regulation S-K disclosure requirements, SEC staff guidance and interpretations related thereto. While management is responsible for establishing and maintaining our disclosure controls and procedures and has taken steps to ensure that the disclosure controls are effective and free of “significant deficiencies” and/or “material weaknesses,” the ability of management to implement the remediation of such weaknesses and deficiencies and the inherent nature of our business and rapidly changing environment may affect management’s ability to be successful with this initiative.

Current shareholdings may be diluted if we make future equity issuances or if outstanding debentures, warrants, and options are exercised for or converted into shares of common stock.

“Dilution” refers to the reduction in the voting effect and proportionate ownership interest of a given number of shares of common stock as the total number of shares increases. Our issuance of additional stock, convertible preferred stock and convertible debt may result in dilution to the interests of shareholders and may also result in the reduction of your stock price. The sale of a substantial number of shares into the market, or even the perception that sales could occur, could depress the price of the common stock. Also, the exercise of warrants and options may result in additional dilution.

The holders of outstanding options, warrants and convertible securities have the opportunity to profit from a rise in the market price of the common stock, if any, without assuming the risk of ownership, with a resulting dilution in the interests of other shareholders. We may find it more difficult to raise additional equity capital if it should be needed for our business while the options, warrants and convertible securities are outstanding. At any time at which the holders of the options, warrants or convertible securities might be expected to exercise or convert them, we would probably be able to obtain additional capital on terms more favorable than those provided by those securities. Also, some holders of our warrants have piggy back registration rights requiring us to register their shares underlying such options and warrants in any registration statement we file under the Securities Act. The cost to us for such required registration may be substantial.

We may find it more difficult to raise additional equity capital if it should be needed for our business while the options, warrants and convertible securities are outstanding. At any time at which the holders of the options, warrants or convertible securities might be expected to exercise or convert them, we would probably be able to obtain additional capital on terms more favorable than those provided by those securities. Also, some holders of our warrants have piggy back registration rights requiring us to register their shares underlying such options and warrants in any registration statement we file under the Securities Act. The cost to us for such required registration may be substantial.

We may undertake acquisitions which pose risks to our business.

As part of our growth strategy, we have and may in the future acquire or enter into joint venture arrangements with, or form strategic alliances with ~~complimentary~~complementary businesses. Any such acquisition, investment, strategic alliance or related effort will be accompanied by the risks commonly encountered in such transactions. These risks may include:

Difficulty of identifying appropriate acquisition candidates;

Paying more than the acquired company is worth;

Difficulty in assimilating the operations of the new business;

Costs associated with the development and integration of the operations of the new entity;

Existing business may be disrupted;

Entering markets in which we have little or no experience;

Accounting for acquisitions could require us to amortize substantial intangible assets (goodwill), adversely affecting our results of operations;

Inability to retain the management and key personnel of the acquired business;

Inability to maintain uniform standards, controls, policies and procedures; or

Customer attrition with respect to customers acquired through the acquisition.

We cannot assure you that we would successfully overcome these risks or any other problems associated with any acquisition, investment, strategic alliances, or related efforts. Also, if we use our common stock in connection with an acquisition, your percentage ownership in us will be reduced and you may experience additional dilution.

Investor confidence in the price of our stock may be adversely affected if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

As an SEC registrant, we are subject to the rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, which require us to include in our annual report on Form 10-K our management’s report on, and assessment of the effectiveness of, our internal control over financial reporting (“management’s report”). If we fail to achieve and maintain the adequacy of our internal control over financial reporting, there is a risk that we will not comply with all of the requirements imposed by Section 404. Moreover, effective internal control over financial reporting, particularly that relating to revenue recognition, is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss in investor confidence in the reliability of our financial statements, which ultimately could harm our business and could negatively impact the market price of our common stock. Investor confidence and the price of our common stock may be adversely affected if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

In order to comply with public reporting requirements, we must continue to strengthen our financial systems and controls, and failure to do so could adversely affect our ability to provide timely and accurate financial statements.

Refinement of our internal controls and procedures will be required as we manage future growth successfully and operate effectively as a public company. Such refinement of our internal controls, as well as compliance with the Sarbanes-Oxley Act of 2002 and related requirements, will be costly and will place a significant burden on management. We cannot assure you that measures already taken, or any future measures, will enable us to provide accurate and timely financial reports, particularly if we are unable to hire additional personnel in our accounting and financial department, or if we lose personnel in this area. Any failure to improve our internal controls or other problems with our financial systems or internal controls could result in delays or inaccuracies in reporting financial information, or non-compliance with SEC reporting and other regulatory requirements, any of which could adversely affect our business and stock price.

Our stock price is volatile.

The stock market from time to time experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may cause the market price of our common stock to drop. In addition, the market price of our common stock is highly volatile. Factors that may cause the market price of our common stock to drop include:

Fluctuations in our results of operations;

Timing and announcements of new customer orders, new products, or those of our competitors;

Any acquisitions that we make or joint venture arrangements we enter into with third parties;

Changes in stock market analyst recommendations regarding our common stock;

Failure of our results of operations to meet the expectations of stock market analysts and investors;

Increases in the number of outstanding shares of our common stock resulting from sales of new shares, or the exercise of warrants, stock options or convertible securities;

Reluctance of any market maker to make a market in our common stock;

Changes in investors’ perception of the transportation security scanning and healthcare information technology industries generally; and

General stock market conditions.

There is a limited market for our common stock.

Our common stock is quoted on OTC ~~Bulletin~~Markets, ~~Board~~OTCQB under the symbol “APVS.” As a result, relatively small trades in our stock could have disproportionate effect on our stock prices. No assurance can be made that an active market for our common stock will continue.

31The OTC Markets is a regulated quotation service that displays real-time quotes, last-sale prices and volume information for shares of stock that are not designated for quotation on a national securities exchange. Trades in OTC Markets, OTCQB quoted stocks will be displayed only if the trade is processed by an institution acting as a market maker for those shares. Although there are approximately 12 market makers for our stock, these institutions are not obligated to continue making a market for any specific period of time. Thus, there can be no assurance that any institution will be acting as a market maker for our common stock at any time. If there is no market maker for our stock and no trades in those shares are reported, it may be difficult for you to dispose of your shares or even to obtain accurate quotations as to the market price for your shares. Moreover, because the order handling rules adopted by the SEC that apply to other listed stocks do not apply to OTC Markets, OTCQB quoted stock, no market maker is required to maintain an orderly market in our common stock. Accordingly, an order to sell our stock placed with a market maker may not be processed until a buyer for the shares is readily available, if at all, which may further limit your ability to sell your shares at prevailing market prices.

The OTC Bulletin Board is a regulated quotation service that displays real-time quotes, last-sale prices and volume information for shares of stock that are not designated for quotation on a national securities exchange. Trades in OTC Bulletin Board quoted stocks will be displayed only if the trade is processed by an institution acting as a market maker for those shares. Although there are approximately 12 market makers for our stock, these institutions are not obligated to continue making a market for any specific period of time. Thus, there can be no assurance that any institution will be acting as a market maker for our common stock at any time. If there is no market maker for our stock and no trades in those shares are reported, it may be difficult for you to dispose of your shares or even to obtain accurate quotations as to the market price for your shares. Moreover, because the order handling rules adopted by the SEC that apply to other listed stocks do not apply to OTC Bulletin Board quoted stock, no market maker is required to maintain an orderly market in our common stock. Accordingly, an order to sell our stock placed with a market maker may not be processed until a buyer for the shares is readily available, if at all, which may further limit your ability to sell your shares at prevailing market prices.

Because we became public through a reverse acquisition, we may not be able to attract the attention of major brokerage firms or institutional investors.

We became a public company through a reverse acquisition in June 2003. Accordingly, securities analysts and major brokerage firms and securities institutions may not cover our common stock since there is no incentive to recommend the purchase of our common stock. No assurance can be given that established brokerage firms will want to conduct any financing for us in the future.

Our common stock is subject to the SEC’s Penny Stock Regulations.

Our common stock is subject to the SEC’s “penny stock” rules. These regulations define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, these rules require the delivery, prior to the transaction, of a disclosure schedule prepared by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to the broker-dealer and the registered underwriter, current quotations for the securities, information on the limited market in penny stocks and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealers’ presumed control over the market. In addition, the broker-dealer must obtain a written statement from the customer that such disclosure information was provided and must retain such acknowledgment for at least three years. Further, monthly statements must be sent disclosing current price information for the penny stock held in the account. The penny stock rules also require that broker-dealers engaging in a transaction in a penny stock make a special suitability determination for the purchaser and receive the purchaser's written consent to the transaction prior to the purchase. The foregoing rules may materially and adversely affect the liquidity for the market of our common stock. Such rules may also affect the ability of broker-dealers to sell our common stock, the ability of holders of such securities to obtain accurate price quotations and may therefore impede the ability of holders of our common stock to sell such securities in the secondary market.

ability of broker-dealers to sell our common stock, the ability of holders of such securities to obtain accurate price quotations and may therefore impede the ability of holders of our common stock to sell such securities in the secondary market.

Certain provisions of our charter and bylaws may discourage mergers and other transactions.

Certain provisions of our certificate of incorporation and bylaws may make it more difficult for someone to acquire control of us. These provisions may make it more difficult for stockholders to take certain corporate actions and could delay or prevent someone from acquiring our business. These provisions could limit the price that certain investors might be willing to pay for shares of our common stock. The use of a staggered board of directors and the ability to issue “blank check” preferred stock are traditional anti-takeover measures. These provisions may be beneficial to our management and the board of directors in a hostile tender offer, and may have an adverse impact on stockholders who may want to participate in such tender offer, or who may want to replace some or all of the members of the board of directors.

Our board of directors may issue additional shares of preferred stock without stockholder approval.

Our certificate of incorporation authorizes the issuance of up to 1,000,000 shares of preferred stock of which 6,000 have been designated as Series A Convertible Preferred Stock, 6,000 shares as Series B Convertible Preferred Stock, and 1,000 shares as Class C Convertible Preferred Stock, none of which shares are outstanding on the date of the filing of this report. Accordingly, our board of directors may, without shareholder approval, issue one or more new series of preferred stock with rights which could adversely affect the voting power or other rights of the holders of outstanding shares of common stock. In addition, the issuance of additional shares of preferred stock may have the effect of rendering more difficult or discouraging, an acquisition or change of control of Applied Visual Sciences, Inc. Although we do not have any current plans to issue any shares of preferred stock, we may do so in the future.

We depend on key personnel.

Our success depends of the contributions of our key management personnel, including Mr. ~~Michael~~William WJ. ~~Trudnak~~Donovan, Chairman, Chief Executive Officer, and Secretary, and Mr. ~~William~~Gregory JE. ~~Donovan~~Hare, ~~President~~our ~~and~~ Chief ~~Operating~~Financial Officer, and MrTreasurer. If ~~Gregory~~we Elose the services of any of such personnel we could be delayed in or precluded from achieving our business objectives. We ~~Hare,~~do not have key man life insurance on any of our officers.

Chief Financial Officer and Treasurer. If we lose the services of any of such personnel we could be delayed in or precluded from achieving our business objectives. We do not have key man life insurance on any of our officers.

In addition, the loss of key members of our sales and marketing teams or key technical service personnel could jeopardize our positive relations with our customers. Any loss of key technical personnel would jeopardize the stability of our infrastructure and our ability to provide the service levels our customers expect. The loss of any of our key officers or personnel could impair our ability to successfully execute our business strategy, because we substantially rely on their experience and management skills.

Our directors and named executive officers own a substantial percentage of our common stock.

As of ~~May~~July 1017, ~~2013~~2015, our directors, executive officers and the estate of our previous chief executive ~~officers~~officer beneficially owned approximately 2327.48% of our shares of common stock. Accordingly, our directors, executive officers, ~~and~~the aestate of our previous chief executive officer, and most highly compensated employee are entitled to cast an aggregate of 1312,~~628~~713,~~811~~534 votes on matters submitted to our stockholders for a vote or approximately 1311.69% of the total number of votes entitled to be cast at a meeting of our stockholders. These stockholders, if they acted together, could exert substantial control over matters requiring approval by our stockholders. These matters would include the election of directors and the approval of mergers or other business combination transactions. This concentration of ownership may discourage or prevent someone from acquiring our business.

Our ability to attract and retain additional skilled personnel may impact our ability to develop our technology and attract customers in growing our business. However, we have limited cash resources to hire additional personnel and have experienced employee attrition due to our inability to pay our employees.

We believe that our ability to attract, train, motivate and retain additional highly skilled technical, managerial and sales personnel, particularly in the areas of technology-based application development, business intelligence, knowledge extraction, management, product development, healthcare economics, radiology, integration and technical support, is essential to our future success. Our business requires individuals with significant levels of expertise in knowledge extraction, business operations, mathematics, quantitative analysis, and machine learning. Competition for such personnel is intense, and qualified technical personnel are likely to remain a limited resource for the foreseeable future. Locating candidates with the appropriate qualifications, particularly in the desired geographic location, can be costly and difficult. We may not be able to hire the necessary personnel to implement our business strategy, or we may need to provide higher compensation to such personnel than we currently anticipate. Also, due to our limited cash resources, we have not been able to pay our employees and have accrued and unpaid wages and ~~other~~related ~~perquisites~~costs due to our current and certain former employees of approximately $68,~~629~~792,~~246. Accordingly~~108, wewhich ~~have~~includes ~~experienced~~accrued ~~employee attrition~~ and ~~may~~unpaid ~~not~~salaries bedue ~~able~~all tosuch ~~attract new~~ employees ~~when we need to do so. If we fail to attract and retain sufficient numbers~~ of ~~highly skilled employees~~$8, ~~our ability to provide the necessary products~~152,396 ~~technologies,~~ and ~~services~~accrued ~~may be limited, and as a result, we may be unable to attract customers and grow our business.~~

~~Our lease expired in January 2013 and we may not be able to extend our existing lease or obtain a lease for new office space because of our financial condition and limited cash resources.~~25

~~The~~related ~~Company’s~~payroll ~~office~~liabilities ~~lease~~of ~~for~~$639,712. ~~our~~Accordingly, ~~principal~~we ~~executive~~have ~~offices~~experienced ~~expired~~employee onattrition ~~January~~and ~~31,~~may ~~2013. The~~not ~~lease~~be ~~does~~able ~~not~~to ~~contain~~attract anew ~~renewal~~employees ~~provision,~~when ~~and~~we ~~due~~need to ~~our~~do ~~financial~~so. ~~condition~~If we fail to attract and ~~limited~~retain ~~cash,~~sufficient ~~the~~numbers ~~Company~~of ~~may~~highly beskilled ~~not~~employees, beour ~~able~~ability to ~~renew~~provide the ~~lease~~necessary orproducts, ~~obtain~~technologies, aand ~~lease~~services ~~for~~may ~~office~~be ~~space~~limited, orand onas ~~terms~~a ~~that~~result, ~~are~~we ~~acceptable~~may be unable to usattract customers and grow our business.

Our lease expired in January 2013 and was not be able to extend our existing lease, and elected not to obtain a lease for new office space because of our financial condition and limited cash resources.

The Company’s office lease for our principal executive offices expired on January 31, 2013. The lease did include a renewal provision, and due to our financial condition and limited cash, the Company was not able to renew the lease, and elected to not obtain a lease for office space due to terms that are unacceptable to us.

We have never paid a cash dividend

We have not declared a cash dividend and we do not anticipate declaring or paying such dividends in the foreseeable future.

Risks Related to Our Industries

Changes may take place in funding for healthcare.

We expect to derive a substantial portion of our revenues from sales of clinical healthcare information systems, and other related services within the healthcare industry. As a result, our success is dependent in part on political and economic conditions as they relate to the healthcare industry.

Virtually all of our prospective customers in the healthcare industry are subject to governmental regulation, including Medicare and Medicaid regulation.

Accordingly, our prospective customers and other entities with which we may develop a business relationship are affected by changes in such regulations and limitations in governmental spending for Medicare and Medicaid programs. Recent actions by Congress have limited governmental spending for the Medicare and Medicaid programs, limited payments to hospitals and other providers under such programs, and increased emphasis on competition and other programs that potentially could have an adverse effect on our customers and the other entities with which we have a business relationship. In addition, federal and state legislatures have considered proposals to reform the U.S. healthcare system at both the federal and state level. If enacted, these proposals could increase government involvement in healthcare, lower reimbursement rates and otherwise change the business environment of our prospective customers and other entities with which we may develop a business relationship. Our prospective customers and other entities with which we may develop a business relationship could react to these proposals and the uncertainty surrounding these proposals by curtailing or deferring investments, including those for our products and services.

have limited governmental spending for the Medicare and Medicaid programs, limited payments to hospitals and other providers under such programs, and increased emphasis on competition and other programs that potentially could have an adverse effect on our customers and the other entities with which we have a business relationship. In addition, federal and state legislatures have considered proposals to reform the U.S. healthcare system at both the federal and state level. If enacted, these proposals could increase government involvement in healthcare, lower reimbursement rates and otherwise change the business environment of our prospective customers and other entities with which we may develop a business relationship. Our prospective customers and other entities with which we may develop a business relationship could react to these proposals and the uncertainty surrounding these proposals by curtailing or deferring investments, including those for our products and services.

In addition, many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for our anticipated products and services, which would negatively impact our expected operating margins. As the healthcare industry consolidates, competition for customers will become more intense and the importance of acquiring each customer will become greater.

Product liability and other claims may occur.

Any failure by our products that provide applications relating to patient diagnostic procedures, and treatment plans could expose us to product liability claims for personal injury and wrongful death. Unsuccessful claims could be costly to defend and divert management time and resources. In addition, we have not been able to maintain general liability, or directors and officers coverage, and cannot make assurances that we will have appropriate insurance available to us in the future at commercially reasonable and affordable rates. We expect to seek general liability and directors and officers coverage upon securing adequate financing, and product liability and other customary coverage upon the commercialization of our intelligent ~~imaging~~computer-vision ~~informatics~~detection (“3i™”) technology.

Specific government regulations relating to Medicare and Medicaid may impinge on us.

Many of our prospective customers and the other entities with which we may develop a business relationship operate in the healthcare industry and, as a result, are subject to governmental regulation. Because our healthcare products and services are designed to function within the structure of the healthcare financing and reimbursement systems currently in place in the United States, and because we are pursuing a strategy of developing and marketing products and services that support our customers' regulatory and compliance efforts, we may become subject to the reach of, and liability under, these regulations.

Medical device regulation may require us to obtain approval for our products.

The United States Food and Drug Administration (“FDA”) have promulgated a policy for the regulation of computer software products as medical devices under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. To the extent that computer software is a medical device under the policy, we, as a manufacturer of such products, could be required, depending on the product, to:

notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products; or

obtain FDA approval by demonstrating safety and effectiveness before marketing a product.

Depending on the intended use of a device, the FDA could require us to obtain extensive data from clinical studies to demonstrate safety or effectiveness, or substantial equivalence. If the FDA requires this data, we would be required to obtain approval of an investigational device exemption before undertaking clinical trials. Clinical trials can take extended periods of time and substantial funds to complete. We cannot provide assurances that the FDA will approve or clear a device after the completion of such trials. In addition, these products would be subject to the Federal Food, Drug and Cosmetic Act's general controls, including those relating to good manufacturing practices and adverse experience reporting. Although it is not possible to anticipate the final form of the FDA's policy with regard to computer software, we expect that the FDA is likely to become increasingly active in regulating computer software intended for use in healthcare settings regardless of whether the draft is finalized or changed. The FDA can impose extensive requirements governing pre- and post-market conditions like service investigation, approval, labeling and manufacturing. In addition, the FDA can impose extensive requirements governing development controls and quality assurance processes.

System errors and warranties may subject us to liability.

Our technology is very complex. As is the case with all complex and new systems, our product may contain errors especially when first introduced. Our technology is intended to provide information to security agencies for threat detection, and to healthcare providers for use in medical diagnosis. Therefore, users of our products may have a greater sensitivity to system errors than the market for software products generally. Failure of a system to perform in accordance with its documentation could constitute a breach of warranty and require us to incur additional expenses in order to make the system comply with the documentation. If such failure is not timely remedied, it could constitute a material breach under a contract allowing the client to cancel the contract and subject us to liability.

We retain and transmit confidential information; including patient health information. A security breach could damage our reputation or result in liability. It is critical that these facilities and infrastructure remain secure and be perceived by the marketplace as secure. We may be required to expend significant capital and other resources to protect against security breaches and hackers or to alleviate problems caused by breaches. Despite the implementation of security measures, this infrastructure or other systems that we interface with, including the Internet and related systems, may be vulnerable to physical break-ins, hackers, improper employee or contractor access, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any compromise of our security, whether as a result of our own systems or systems that they interface with, could reduce demand for our services and products.

Customer satisfaction and our business could be harmed if our business experiences delays, failures or loss of data in its systems. The occurrence of a major catastrophic event or other system failure at any of our facilities, or at any third party facility, including telecommunications provider facilities, could interrupt data processing or result in the loss of stored data, which could harm our business.

We may infringe the proprietary rights of others.

If any of our products violate third party proprietary rights, we may be required to reengineer our products or seek to obtain licenses from third parties to continue offering our products without substantial reengineering. Any efforts to reengineer our products or obtain licenses from third parties may not be successful, in which case we may be forced to stop selling the infringing product or remove the infringing functionality or feature. We may also become subject to damage awards as a result of infringing the proprietary rights of others, which could cause us to incur additional losses and have an adverse impact on our financial position. We do not conduct comprehensive patent searches to determine whether the technologies used in our products infringe patents held by others. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pending; many of which are confidential when filed, with regard to similar technologies.

Unforeseeable disruption in the economy may take place consequent to terrorism or other international events.

The terrorist events of September 11, 2001, as well as new terrorists threats, the war in Iraq and Afghanistan, and the possibility of war in other areas of the Middle East, have sensitized us and many other businesses to the potential disruption that such activities can have on the economy, the business cycle and, ultimately on the financial performance of these organizations. It is impossible to know whether such terrorist or military activities will continue, and whether, and to what extent, they may cause a disruption that may have a material adverse effect on our business and financial condition.

We may face competition from other developers or sellers of imaging and radiology technology and baggage screening technology.

While the market for imaging and radiology technology is highly fragmented, we face competition from other companies which are developing products that are expected to be competitive with our healthcare products. We also face potential competition from other companies developing baggage screening technology and from baggage scanner manufacturers. Business in general is highly competitive, and we compete with both large multinational solution providers and smaller companies. Some of our competitors have more capital, longer operating and market histories, and greater resources than we have, and may offer a broader range of products and at lower prices than we offer.

capital, longer operating and market histories, and greater resources than we have, and may offer a broader range of products and at lower prices than we offer.

A number of factors that will affect our revenues will make our future results difficult to predict, and therefore we may not meet expectations for a particular period.

We believe that our future revenues when it occurs may have the potential to vary significantly from time to time. We believe that these variations may result from many factors, including:

the timing, size and mix of orders from our major customers including, in particular, the Department of Homeland Security and agencies of foreign governments;

legislative or other government actions driven, in part, by the public’s perception of the threats facing commercial aviation, leading to fluctuations in demand for transportation security scanning products and services;

delays in product shipments caused by the inability of airports to install or integrate our products in a timely fashion;

the availability and cost of key components;

the timing of completion of acceptance testing for some of our products by various U.S. agencies and foreign governments;

the introduction and acceptance of new products or enhancements to existing products offered by us or our competitors;

changes in pricing policies by us, our competitors or our suppliers, including possible decreases in average selling prices of our products caused by customer volume orders or in response to competitive pressures; and

our sales mix to domestic and international customers.

We expect to depend on a small number of customers for a substantial portion of our future revenues.

A significant portion of our quarterly and annual operating expenses is expected to be relatively fixed in nature. This means that future revenue fluctuations will cause our quarterly and annual operating results to vary substantially. We also may choose to increase spending to pursue new market opportunities, which may negatively affect our financial results. We cannot assure investors that our PinPoint™ product will be selected by the U.S. DHS or other countries’ security departments or address their solutions needs for threat detection, or that our Signature Mapping™ product will be accepted in the healthcare arena.

Governmental agencies, the primary customers for our PinPoint™ products are subject to budget processes which could limit the demand for these products.

Substantially all of the potential customers for our PinPoint™ products under development to date have been public agencies or quasi-public agencies, such as the FAA, the TSA, airport authorities and manufactures of threat detection devices. Public agencies are subject to budgetary processes and expenditure constraints.

The funding of government programs is subject to legislative appropriation. Budgetary allocations for PinPoint™ depend, in part, upon governmental policies, which fluctuate from time to time in response to political and other factors, including the public’s perception of the threat of commercial airline bombings. For example, the terrorist attacks of September 11, 2001 resulted in the passage of the Aviation and Transportation Security Act of 2001, or Transportation Security Act, mandating a small surcharge on each airline ticket purchase to fund airline security. This surcharge was suspended from June 1, 2003 to September 30, 2003. We cannot assure investors that the surcharge will not again be suspended or that the funds generated by these surcharges will be used to purchase our PinPoint™ products. We cannot assure investors that funds will continue to be appropriated by Congress or allocated by the TSA or other agencies for the purchase of PinPoint™ product or any other such product we develop and market. Moreover, we expect that similar funding and appropriations issues will affect our ability to market and sell our PinPoint™ product outside the United States.

Legislative actions could lead to fluctuations in demand for transportation security scanning products and services.

In addition to the Congressional budgetary process, other legislation could be introduced that would impact demand for transportation security scanning products and services. In response to fluctuation in concern on the part of voters about transportation security scanning and competing homeland security demands, or for other reasons, the plans for deployment of our PinPoint™ product to screen baggage could be changed. Budgetary debates and delays could result in fewer PinPoint™ products being sold to the TSA.

Governmental agencies have special contracting requirements, which create additional risks.

In contracting with public agencies, we are subject to public agency contract requirements that vary from jurisdiction to jurisdiction. Future sales to public agencies will depend, in part, on our ability to meet public agency contract requirements, certain of which may be onerous or even impossible for us to satisfy. Government contracts typically contain termination provisions unfavorable to us and are subject to audit and modification by the government at its sole discretion, which subject us to additional risks. These risks include the ability of the U.S. government to unilaterally:

us and are subject to audit and modification by the government at its sole discretion, which subject us to additional risks. These risks include the ability of the U.S. government to unilaterally:

suspend or prevent us for a set period of time from receiving new contracts or extending existing contracts based on violations or suspected violations of laws or regulations;

terminate of future contracts;

reduce the scope and value of our future contracts;

audit and object to our contract-related costs and fees, including allocated indirect costs;

control and potentially prohibit the export of our products, and

change certain terms and conditions in our contracts.

The U.S. government or foreign governments can terminate any of its contracts with us either for its convenience or if we default by failing to perform in accordance with the contract schedule and terms. Termination for convenience provisions generally enable us to recover only our costs incurred or committed, and settlement expenses and profit on the work completed prior to termination. Termination for default provisions do not permit these recoveries and make us liable for excess costs incurred by the U.S. government in procuring undelivered items from another source. Our contracts with foreign governments may contain similar provisions. In the event we enter into one or more government contracts for PinPoint™, the government’s termination of any such contracts for our PinPoint™ product under development would harm our business.

In addition, U.S. government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds annually for a given program on a September 30 fiscal year-end basis, even though contract performance may take years. Consequently, our future contracts with the Department of Homeland Security (“DHS”) may only be partially funded at the outset, and additional monies are normally committed to the contract by DHS only as appropriations are made by Congress for future periods. The government’s failure to fully fund one or more of the contracts for our PinPoint™ product under development would harm our business.

Because we expect to contract with the U.S. government, we will be subject to periodic audits and reviews. Based on the results of its audits, the U.S. government may adjust our contract-related costs and fees, including allocated indirect costs. In the future, government audits and reviews could result in adjustments to our revenues and cause other adverse effects, particularly to our relationship with the TSA. In addition, under U.S. government purchasing regulations, some of our costs, including most financing costs, amortization of intangible assets, portions of our research and development costs, and some marketing expenses may not be reimbursable or allowed in our negotiation of fixed-price contracts. Further, because we expect to contract with the U.S. government, we will be subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which purely private sector companies are not.

with the TSA. In addition, under U.S. government purchasing regulations, some of our costs, including most financing costs, amortization of intangible assets, portions of our research and development costs, and some marketing expenses may not be reimbursable or allowed in our negotiation of fixed-price contracts. Further, because we expect to contract with the U.S. government, we will be subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which purely private sector companies are not.

In addition, public agency contracts are frequently awarded only after formal competitive bidding processes, which are often protracted and typically contain provisions that permit cancellation in the event that funds are unavailable to the public agency. We may not be awarded any of the contracts for which we submit a bid. Even if we are awarded contracts, substantial delays or cancellations of purchases could result from protests initiated by losing bidders.

Our growth depends on our introduction of new products and services, which may be costly to develop and may not achieve market acceptance.

As part of our strategy for growth, we intend to develop products to address additional transportation security scanning opportunities, such as passenger, carry-on baggage and air cargo screening. We also intend to address homeland security requirements beyond aviation, such as screening at border checkpoints, government offices and transportation terminals and ports. We will be required to spend funds to develop or acquire technologies and products for these initiatives and these initiatives may divert our development and management resources away from our core PinPoint™ product. In addition, we have acquired, rather than developed internally, some of our technologies in connection with our acquisitions of companies and businesses, and these technologies may not perform as we expect. The development of new products may require greater time and financial resources than we currently anticipate and, despite significant investments in research and development, may not yield commercially successful products.

The development of our products for explosives and weapons detection is highly complex. Successful product development and market acceptance of any new products and services that we develop depends on a number of factors, including:

our timely completion and introduction of new products;

our accurate prediction of the demand for homeland security products and the changing requirements of the homeland security industry, including certification or other required performance standards;

the availability of key components of our products;

the quality, price and operating performance of our products and those of our competitors;

our customer service capabilities and responsiveness; and

the success of our relationships with potential customers.

Our PinPoint™ product may fail to obtain certification by the Transportation Safety Administration.

New products for transportation security scanning applications may require certification or approval by the Transportation Safety Administration (“TSA”), and we believe that the TSA does not currently have standards for the certification of transportation security scanning products other than bulk explosives detection systems and explosives trace detectors, or ETD. Other products, such as metal detectors, are subject to TSA testing prior to approval. Market acceptance of new products may be limited if the TSA has not developed standards for certification or approval of such products, and even if it does develop such standards, we may be unable to obtain any such certification or approval, which could materially limit market acceptance of such products. If we fail to timely introduce new products or if these products fail to gain market acceptance, our results of operations would be harmed.

In addition, even if successful in the United States, new products that we develop may not achieve market acceptance outside of the United States. Foreign governments may be unwilling to commit financial resources to purchase our new products, which would reduce our potential revenues and harm our business.

Our existing PinPoint™ product may fail to obtain re-certification by the TSA for changes in the PinPoint™ system.

Our existing PinPoint™ product can be required to be re-certified by the TSA. This can happen when a critical component is changed, or we wish to make other changes to the PinPoint™ systems. When this happens, the affected PinPoint™ model requires re-certification by the TSA. The failure or delay in gaining re-certification for an existing PinPoint™ product could harm our ability to continue to sell the product and recognize associated revenues.

Our major potential customer, the TSA, is a part of the Department of Homeland Security, an agency that has experienced, and may continue to experience, delays in its operations, which may cause delays in our receiving orders for our products from the TSA.

The TSA has experienced, and may continue to experience, delays in fulfilling its mandate as a result of ongoing restructuring and establishing necessary infrastructure to operate in an efficient manner. This may result in delays in our receiving orders for our PinPoint™ product. Further, the TSA, being an agency under the Department of Homeland Security, may experience changes in direction from DHS in performing their responsibilities or changes in responsibilities, which may further create delays in doing business with the TSA or DHS.

Future sales of our PinPoint™ products will depend on the ability of airports to secure funding to build baggage handling systems and to integrate our PinPoint™ product into such systems, which they may not be able to do.

Future sales will depend on integrating PinPoint™ into existing baggage and luggage handling systems within airports. If an airport is not configured for these systems, deployment of our PinPoint™ products may require changes in the airport infrastructure. If our PinPoint™ product cannot easily be integrated into existing baggage handling systems, we may experience reduced sales of our PinPoint™ products or these sales may be delayed. There can be no assurance that the government will continue to fund installations, integrations and reimbursements at the current level or at all. If there is a reduction in funding, we may experience reduced sales of our PinPoint™ products or these sales may be delayed.

We believe that a substantial opportunity exists for our PinPoint™ system to be integrated into baggage handling systems. If airports determine, in conjunction with governmental authorities, that they will be unable or unwilling to modify or finance baggage handling systems, this opportunity may be limited.

If our PinPoint™ product fails to detect explosives, we could be exposed to product liability and related claims for which we may not have adequate insurance coverage, and we may lose current and potential customers.

Our transportation security scanning business exposes us to potential product liability risks, which are inherent in the development, sale and maintenance of transportation security scanning products. Our software is not designed to detect, and FAA/TSA certification does not require, 100% detection of any and all explosives contained in scanned baggage. For this reason, or if our products malfunction, it is possible that explosive material could pass undetected utilizing our product, which could lead to product liability claims. There are also many other factors beyond our control that could lead to liability claims, such as the reliability and competence of the customer’s operators and the training of the operators. Such liability claims are likely to exceed any product liability insurance that we may have obtained.

In addition, the failure of any PinPoint™ product to detect explosives, even if due to operator error and not to the mechanical failure of a PinPoint™ product, could result in public and customer perception that our products do not work effectively, which may cause potential customers to not place orders and current customers to cancel orders already placed or to not place additional orders, any of which would harm our business and financial results.

We expect to substantially depend on large orders from a limited number of customers. As a result, order cancellations from any of our customers or the failure of these customers to continue to purchase PinPoint™ products could have a material negative impact on our business and financial results.

In any given fiscal quarter or year, our revenues may be derived from orders of multiple units of our PinPoint™ product from a limited number of customers. The failure of these customers, particularly the U.S. government, to purchase our PinPoint™ products or the cancellation of future orders would harm our business.

The sales cycle for our PinPoint™ product is lengthy and we may expend a significant amount of effort in obtaining sales orders and not receive them.

The sales cycle of our PinPoint™ product is expected to be lengthy due to the protracted approval process that typically accompanies large capital expenditures and the time required to install our PinPoint™ product. In addition, in the United States, the creation of the TSA and formation of a Department of Homeland Security, as well as budgetary debates in Congress, may result in additional delays in the purchase of our PinPoint™ products. During the sales cycle we may expend substantial funds and management resources but recognize no associated revenue.

Our future international sales subject us to risks that could materially harm our business.

It is part of our growth strategy to establish international sales. A number of factors related to our international sales and operations could adversely affect our business, including:

changes in domestic and foreign regulatory requirements;

political instability in the countries where we sell products;

possible foreign currency controls;

fluctuations in currency exchange rates;

our ability to protect and utilize our intellectual property in foreign jurisdictions;

tariffs, embargoes or other barriers;

difficulties in staffing and managing foreign operations;

difficulties in obtaining and managing distributors; and

potentially negative tax consequences.

Our failure to obtain the requisite licenses, meet registration standards or comply with other government export regulations, may affect our ability to generate revenues from the sale of our products outside the United States, which could harm our business. In particular, our PinPoint™ product may be deemed regulated and subject to export restrictions under the U.S. Department of State regulations. Consequently, these regulations may make the product more difficult to sell to a number of countries. Compliance with government regulations may also subject us to additional fees and costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position.

Exchange rate fluctuations could cause a decline in our financial condition and results of operations.

In ~~2012~~2014, the cost of certain international currencies has decreased, yet such costs may later increase, due to fluctuations in the exchange rate of the U.S. dollar against the Euro or other currencies. Future fluctuations in this exchange rate or other currencies could adversely affect our results in the event we make foreign sales of our products. From time to time, as and when we determine it is appropriate and advisable to do so, we will seek to mitigate the effect of exchange rate fluctuations through the use of derivative financial instruments. We cannot assure you, however, that we will continue this practice or be successful in these efforts.

Our inability to adapt to rapid technological change could impair our ability to remain competitive.

The transportation security scanning industry may undergo significant technological development in response to increased demand for transportation security scanning products. A fundamental shift in technology in our product markets could harm our ability to generate revenues from sales of PinPoint™ product and services.

We anticipate that we will incur expenses in the design and initial development and marketing of new products and services. Our competitors may implement new technologies before we are able to, allowing them to provide more effective products at more competitive prices. Future technological developments could:

adversely impact our competitive position;

require write-downs of obsolete technology;

require us to discontinue production of obsolete products before we can recover any or all of our related research, development and commercialization expenses; or

require significant capital expenditures beyond those currently contemplated.

We cannot assure investors that we will be able to achieve the technological advances to remain competitive and profitable, that new products and services will be developed and developed on schedule or on a cost-effective basis that anticipated markets will exist or develop for new products or services, or that our existing product and services will not become technologically obsolete.

The transportation security scanning industry is highly competitive. Given the anticipated continuing demand for airport security products, competition may increase.

The transportation security scanning industry is intensely competitive and we may not compete successfully. As a result of increased demand for security systems, additional companies may enter the industry. Some of our competitors, and many of the potential new entrants into the transportation security scanning industry, have financial, technical, production and other resources substantially greater than ours. We believe that some of our competitors have products undergoing TSA certification. Our failure to compete successfully could result in lost sales and could hamper our financial results.

We expect to become reliant upon third party distributors for the distribution and licensing of our PinPoint™ and Signature Mapping™ products in several domestic or foreign jurisdictions, and have reduced our reliance upon our own internal sales force.

We have established and continue to seek to establish a network of distributors, sales representatives and consultants to assist us in the distribution and licensing of our products domestically and in certain foreign countries, including those business relationships established prior to 2012. Such distributors, sales representatives and consultants have not effected any sales of our PinPoint™, or Signature Mapping™ products to date and we have no assurance they will be able to effect any such sales in the future. We continue to review sales activities under certain of such arrangements and, as our agreements with such third parties expire, we may determine not to renew or we may terminate such agreements, or establish new relationships.

established prior to 2013. Such distributors, sales representatives and consultants have not effected any sales of our PinPoint™, or Signature Mapping™ products to date and we have no assurance they will be able to effect any such sales in the future. We continue to review sales activities under certain of such arrangements and, as our agreements with such third parties expire, we may determine not to renew or we may terminate such agreements, or establish new relationships.

Litigation may be necessary to enforce or defend against claims of intellectual property infringement, which could be expensive and, if we lose, could prevent us from selling our products.

Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Any litigation, regardless of the outcome, could be costly and require significant time and attention of key members of our management and technical personnel.

Our domestic and international competitors, many of whom have substantially greater resources and have made substantial investments in competing technologies, may have patents that will prevent, limit or interfere with our ability to manufacture and sell our products. We have not conducted an independent review of patents issued to third parties. Because of the perceived market opportunity we face, companies possessing technology rights that they believe we might be infringing will now be much more motivated to assert infringement of their rights. These third parties may assert infringement or invalidity claims against us and litigation may be necessary to defend against these claims. An adverse outcome in the defense of a patent suit could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease selling our products. Even successful defenses of patent suits can be costly and time-consuming.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable to Registrant as Registrant is not an “accelerated filer” or “large accelerated filer” as such terms are defined in Rule 12b-2 under the Exchange Act.

ITEM 2. PROPERTIES

The Company’s ~~leased~~office ~~3,269~~lease ~~square~~for ~~feet~~our ~~for~~principal ~~its~~executive ~~headquarters~~offices ~~building~~expired inon ~~Herndon,~~January ~~Virginia~~31, ~~pursuant~~2013. The tolease did include a 1renewal ~~year~~provision, ~~commercial~~and ~~lease~~due ~~that~~to ~~expired~~our onfinancial ~~January~~condition 31and limited cash, ~~2013.~~the ~~The~~Company ~~monthly~~was ~~base~~not ~~rental~~able ~~rate~~to ofrenew the lease, ~~was~~and ~~approximately~~elected ~~$5,864. The~~to ~~security~~not ~~deposit~~obtain a lease for ~~the~~office ~~lease~~space isdue ~~$11,122.~~to terms that are unacceptable to us. We maintain our principal office at 525K East Market Street, # 116, Leesburg, Virginia 20176. Our telephone number at such address is (703) 539-6190.

ITEM 3. LEGAL PROCEEDINGS

None.

PART II

Our common stock is quoted on the OTC ~~Bulletin~~Markets, ~~Board~~OTCQB. Since, July 9, 2010, our stock has been quoted under the symbol “APVS,” and prior to such time our stock was quoted under the symbol “GDTI.” The following table sets forth the high and low bid prices for each quarter during ~~2012~~the six months ended June 30, 2015, and ~~2011~~fiscal years 2014 and 2013.

Fiscal Year Ended December 31, 2012:	High	Low
First Quarter	$0.06	$0.03
Second Quarter	$0.05	$0.03
Third Quarter	$0.07	$0.03
Fourth Quarter	$0.06	$0.03
Fiscal Year Ended December 31, 2011:
First Quarter	$0.38	$0.17
Second Quarter	$0.25	$0.13
Third Quarter	$0.19	$0.08
Fourth Quarter	$0.12	$0.03

These quotations reflect interdealer prices, without retail markup, markdown, or commission and may not represent actual transactions. As of May 8, 2013, there were approximately 271 holders of record of our common stock. This amount does not include beneficial owners of our common stock held in “street name.” Our stock and warrant transfer agent is Signature Stock Transfer, Inc., 2632 Coachlight Court, Plano, Texas. Signature’s telephone number in the U.S. is (972) 612-4120, and their Internet address is www.signaturestocktransfer@msn.com.


Six Months Ended June 30, 2015:	High	Low
First Quarter	$0.04	$0.01
Second Quarter	$0.04	$0.02

Fiscal Year Ended December 31, 2014:
First Quarter	$0.10	$0.05
Second Quarter	$0.08	$0.04
Third Quarter	$0.05	$0.03
Fourth Quarter	$0.06	$0.02

Fiscal Year Ended December 31, 2013:
First Quarter	$0.04	$0.03
Second Quarter	$0.15	$0.03
Third Quarter	$0.08	$0.04
Fourth Quarter	$0.10	$0.04

These quotations reflect interdealer prices, without retail markup, markdown, or commission and may not represent actual transactions. As of July 12, 2015 there were approximately 245 holders of record of our common stock. This amount does not include beneficial owners of our common stock held in “street name.” Our stock and warrant transfer agent is Signature Stock Transfer, Inc., 2632 Coachlight Court, Plano, Texas. Signature’s telephone number in the U.S. is (972) 612-4120, and their Internet address is www.signaturestocktransfer@msn.com.

Dividends

We have never declared or paid cash dividends on our common stock. Currently, we intend to retain earnings, if any, to support our growth strategies and do not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth, as of December 31, ~~2012~~2014, information with regard to equity compensation plans (including individual compensation arrangements) under which our securities are authorized for issuance.


Plan Category	Number of Securities to be issued upon exercise of outstanding options and rights	Weighted-average exercise price of outstanding options and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))






Equity compensation plans approved by stockholders (1)	22,056,992	$0.14	0
Equity compensation plans not approved by stockholders	0	0	0
Total	22,056,992	$0.14	0

(1) The plan expired on August 29, 2013, upon which 2,033,353 incentive stock options became unavailable.

Plan Category	Number of Securities to be issued upon exercise of outstanding options and rights	Weighted-average exercise price of outstanding options and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by stockholders	9,509,347	$0.34	18,186,353
Equity compensation plans not approved by stockholders	0	0	6,668,333
Total	9,509,347	$0.32	24,854,686

RECENT SALES OF UNREGISTERED SECURITIES

On ~~January~~April 1710, ~~2012~~2015, the Company ~~issued~~sold to aaccredited ~~consultant~~investor an aggregate of ~~280~~2,000,000 shares of common stock asupon ~~compensation~~the inexercise ~~lieu~~ of ~~cash~~2,000,000 warrants for ~~services~~gross ~~rendered~~proceeds of $60,000. The common stock was issued in reliance upon the ~~exception~~exemption from the registration requirements set forth in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder.

During January, the Company issued three promissory notes to accredited investors in the aggregate principal amount of $35,000 ($34,775, net of accrued commissions and expenses in the amount of $225). $30,000 mature on March 31, 2013, and $5,000 mature in January 2014. The short-term notes also accrue interest at a rate of 12% per annum. The Company issued to the three note holders an aggregate of 95,000 shares of common stock, and the relative fair value of the common stock of $2,850 will be amortized over the term of the notes. A placement agent fee of $225 was expensed as financing costs. The common stock was issued in reliance upon the exception from the registration requirements set forth in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below for Applied Visual Sciences, Inc. for the years ended December 31, ~~2012~~2014, and ~~2011~~2013, are derived from the audited consolidated financial statements and related notes included in this report. Historical results are not necessarily indicative of the results of operations for future periods. The data set forth below is qualified in its entirety by and should be read in conjunction with Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements set forth in full elsewhere in this report.

4234

Selected Financial Date	Year Ended December 31
	2012	2011
Statement of Earnings Data:
Revenue	$ -	$ 6,589
Operating loss	(1,752,254)	(2,735,189)
Net loss	(1,804,101)	(1,154,376)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	91,763	93,419
Amortization of debt discounts	40,006	6,113
Stock-based compensation expense (1)	85,125	451,613
Fair value of warrants issued - derivative instruments (2)	-	-
Revaluation of derivative instruments expense (income) (3)	(67,528)	(1,958,318)
Revaluation of debenture default provision expense (income) (4)	-	337,641
Gain on settlement of debt (5)	-	-
Noncash broker compensation expense	2,700	25,000
Other noncash - stock issued in lieu of interest paid	-	-
Per Share Data:
Basic and Diluted Loss Per Share	$ (0.02)	$ (0.01)
Cash Flow Data:
Net cash provided (used) in operating activities	$ (223,220)	$ (686,287)
Net cash provided (used) in investing activities	35,175	(27,997)
Net cash provided by financing activities	185,000	715,900
Effect of exchange rates on cash and cash equivalents	-	-
Balance Sheet Data:
Cash and Cash Equivalents	$ 3,445	$ 6,490
Total Assets	462,980	606,745
Total Liabilities	11,698,331	10,432,552
Common Shares Subject to Repurchase	-	-
Stockholders' Equity (Deficit)	(11,235,351)	(9,825,807)
(1) Stock-based compensation expense represents the estimated fair value of stock-based compensation to employees and consultants in lieu of cash compensation.
(2) Represents non-cash expense for issuance of warrants measured at fair value in consideration of ASC 815-40 (formerly EITF 00-19) relating to provisions for Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company*s Own Stock.
(3) Represents non-cash expense (income) from the revaluation of embedded derivative feature of the outstanding convertible debentures issued in November 2006 and April 2007. This reflects the conclusion that convertible note contracts should be analyzed under the provisions of ASC 815-10 (formerly SFAS 133) relating to Accounting for Derivative Instruments and Hedging Activities, and the embedded derivative features should be bifurcated and separately measured at fair value. We also considered ASC 815-40 (formerly EITF 00-19) relating to the provisions for Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company*s Own Stock.
(4) Represents non-cash expense (income) from the revaluation of a default provisions for a contingency due to an event of default on the convertible debentures and in considering FASB No. 5, "Accounting for Contingencies"
(5) Represents non-cash income from the elimination of the beneficial conversion feature upon conversion of the debt related to the convertible debentures issued in November 2006 and April 2007. We considered ASC 815-40 (formerly EITF 00-19) relating to the provisions for Accounting for Derivative Financial Instruments Indexed to, and Potentially settled in, a Company's own Stock.

read in conjunction with Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements set forth in full elsewhere in this report.


Selected Financial Data	Year Ended December 31
	2014	2013
Statement of Earnings Data:
Revenue	$ -	$ -
Operating loss	(1,002,624)	(2,025,175)
Net loss	(783,378)	(2,437,304)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	55,144	55,139
Amortization of debt discounts	20,570	10,826
Stock-based compensation expense (1)	18,279	640,329
Fair value of warrants issued - derivative instruments (2)	-	-
Revaluation of derivative instruments expense (income) (2)	(337,641)	337,641
Revaluation of debenture default provision expense (income) (4)	-	-
Gain on settlement of debt (5)	-	-
Noncash broker compensation expense	-	-
Other noncash - stock issued in lieu of interest paid	-	-
Per Share Data:
Basic Loss Per Share	$ (0.01)	$ (0.02)
Cash Flow Data:
Net cash (used) in operating activities	$ (79,822)	$ (202,961)
Net cash provided by (used in) investing activities	(20,325)	29,624
Net cash provided by financing activities	133,000	171,000
Effect of exchange rates on cash and cash equivalents	-	-
Balance Sheet Data:
Cash	$ 33,961	$ 1,108
Total Assets	372,339	373,096
Total Liabilities	13,943,135	13,299,173
Stockholders' (Deficit)	(13,570,796)	(12,926,077)

(1) Stock-based compensation expense represents the estimated fair value of stock-based compensation to employees and consultants in lieu of cash compensation.

(2) Represents non-cash expense for issuance of warrants measured at fair value in consideration of ASC 815-40 (formerly EITF 00-19) relating to provisions for Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company*s Own Stock.

(2) Represents non-cash expense (income) from the revaluation of the derivative liability feature of the outstanding convertible debentures issued in November 2006 and April 2007. This reflects the conclusion that convertible note contracts should be analyzed under the provisions of ASC 815-10 (formerly SFAS 133) relating to Accounting for Derivative Instruments and Hedging Activities, and the derivative liability features should be bifurcated and separately measured at fair value. We also considered ASC 815-40 relating to the provisions for "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company*s Own Stock".




(4) Represents non-cash expense (income) from the revaluation of a default provisions for a contingency due to an event of default on the convertible debentures and in considering FASB No. 5, "Accounting for Contingencies"

(5) Represents non-cash income from the elimination of the beneficial conversion feature upon conversion of the debt related to the convertible debentures issued in November 2006 and April 2007. We considered ASC 815-40 (formerly EITF 00-19) relating to the provisions for Accounting for Derivative Financial Instruments Indexed to, and Potentially settled in, a Company's own Stock.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

You should read the following summary together with the more detailed information and consolidated financial statements and notes thereto and schedules appearing elsewhere in this report. Throughout this report when we refer to the “Company,” “Applied Visual Sciences,” “we,” “our” or “us,” we mean Applied Visual Sciences, Inc., and its subsidiaries.

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, intangible assets, and contingencies. We base our estimates on historical experience, where available, and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

43Except for historical information, the statements and other information contained in this Management’s Discussion and Analysis is forward-looking. Our actual results could differ materially from the results discussed in the forward-looking statements, which include certain risks and uncertainties. These risks and uncertainties include the rate of market development and acceptance of our “intelligent computer-vision detection” (“3i™”) technology (particularly for our PinPoint™ and Signature Mapping™ products), the unpredictability of our sales cycle, the limited revenues and significant operating losses generated to date, and the possibility of significant ongoing capital requirements.

experience, where available, and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.35

~~Except~~Our ~~for~~independent ~~historical~~registered ~~information,~~public ~~the~~accounting ~~statements and other information contained in this Management~~firm’s ~~Discussion~~report ~~and~~on ~~Analysis~~the isconsolidated ~~forward-looking. Our~~financial ~~actual~~statements ~~results~~included ~~could~~herein ~~differ~~for ~~materially from~~ the ~~results~~years ~~discussed~~ended inDecember ~~the forward-looking statements~~31, ~~which~~2014 ~~include~~and ~~certain~~2013 ~~risks~~contains ~~and~~an ~~uncertainties. These~~explanatory ~~risks~~paragraph ~~and~~wherein ~~uncertainties~~they ~~include~~expressed ~~the~~an ~~rate~~opinion ofthat ~~market~~there ~~development~~is ~~and~~substantial ~~acceptance~~doubt ofabout our ~~“intelligent~~ability ~~imaging~~to ~~informatics”~~continue ~~(“3i™”)~~as ~~technology~~a ~~(particularly~~going ~~for~~concern. ~~our PinPoint™ and Signature Mapping™ products)~~Accordingly, ~~the~~careful ~~unpredictability~~consideration of ~~our~~such ~~sales~~opinions ~~cycle,~~should ~~the~~be ~~limited~~given ~~revenues~~in ~~and~~determining ~~significant~~whether ~~operating losses generated~~ to ~~date,~~continue ~~and~~or ~~the~~become ~~possibility~~our ~~of significant ongoing capital requirements~~stockholder.

Our independent registered public accounting firm’s report on the consolidated financial statements included herein for the years ended December 31, 2012 and 2011 contains an explanatory paragraph wherein they expressed an opinion that there is substantial doubt about our ability to continue as a going concern. Accordingly, careful consideration of such opinions should be given in determining whether to continue or become our stockholder.

OVERVIEW

Applied Visual Sciences is a software technology company that designs and develops ~~imaging~~computer-vision ~~informatics~~detection solutions for delivery to its target markets, aviation/homeland security and healthcare. Our two product lines are offered through our two operating subsidiaries as follows: Guardian Technologies International, Inc. for aviation/homeland security products and Signature Mapping Medical Sciences, Inc., for healthcare. On March 23, 2012, the Company established a new entity; Instasis Imaging, Inc., for the development, marketing, and sales of a suite of imaging analytic applications for the automated detection of breast cancer. We may engage in one or more acquisitions of businesses that are complementary, and may form wholly-owned subsidiaries to operate within defined vertical markets products.

Please refer to Item 1A – Risk Factors, above for certain risks related to us and our business.

Our Business Strategy

Maintain product development and sales/marketing focus on large, underserved, and rapidly growing markets with a demonstrated need for intelligent ~~imaging~~computer-vision ~~informatics~~detection.

Leverage Applied Visual Sciences, Inc.’s technology, experienced management team, research and development infrastructure.

Focus our talents on solving highly challenging information problems associated with digital imaging analysis.

Establish an international market presence through the development of a significant OEM/Reseller network.

Build and maintain a strong balance sheet to ensure the availability of capital for product development, acquisitions, and growth.

Seek to broaden our investment appeal to large institutions.

To achieve our strategic vision, we are aware of the need to exercise the financial and operational discipline necessary to achieve the proper blend of resources, products and strategic partnerships. These efforts can accelerate our ability to develop, deploy and service a broad range of intelligent ~~imaging~~computer-vision ~~informatics~~detection solutions directly to our target markets and indirectly through OEM/value added reseller (“VAR”) partners. During 2013, we continued implementing changes across the spectrum of our business. We refined our marketing strategy for PinPoint™ and Signature Mapping™, and enhanced our Signature Mapping™ product offerings.

(“VAR”) partners. During 2012, we continued implementing changes across the spectrum of our business. We refined our marketing strategy for PinPoint™ and Signature Mapping™, and enhanced our Signature Mapping™ product offerings.

We may engage in one or more acquisitions of businesses that are complementary, and may form wholly-owned subsidiaries to operate within defined vertical markets.

Our Core Technology

Our core technology is an “intelligent ~~imaging~~computer-vision ~~informatics~~detection” (“3i™”) engine that is capable of extracting embedded knowledge from digital images, and has the capacity to analyze and detect image anomalies. The technology is not limited by type of digital format. It can be deployed across divergent digital sources such as still images, x-ray images, video and hyper-spectral imagery. To date, the technology has been tested in the area of threat detection for baggage scanning at airports, for bomb squad applications and the detection of tuberculosis by analyzing digital images of stained sputum slides captured through a photo microscopy system. Varying degrees of research and development have been conducted in the areas of detection for cargo scanning, people scanning, military target acquisition in a hyper-spectral environment, satellite remote sensing ground surveys and mammography CAD products and radiologists’ diagnostic imaging tools, and while product development in these areas is ongoing, there can be no assurance that we will successfully develop product offerings in these areas.

degrees of research and development have been conducted in the areas of detection for cargo scanning, people scanning, military target acquisition in a hyper-spectral environment, satellite remote sensing ground surveys and mammography CAD products and radiologists’ diagnostic imaging tools, and while product development in these areas is ongoing, there can be no assurance that we will successfully develop product offerings in these areas.

Patents and Proprietary Rights

We rely on a combination of common law trademark, service mark, copyright and trade secret law and contractual restrictions to establish and protect our proprietary rights and promote our reputation and the growth of our business. We do not own any patents that would prevent or inhibit our competitors from using our technology or entering our market, although we intend to seek such protection as appropriate. It is our practice to require all of our employees, consultants and independent contractors to enter into agreements containing non-disclosure, non-competition and non-solicitation restrictions and covenants, and while our agreements with some of our customers and suppliers include provisions prohibiting or restricting the disclosure of proprietary information, we ~~can~~cannot ~~not~~ assure you that these contractual arrangements or the other steps taken by us to protect our proprietary rights will prove sufficient protection to prevent misappropriation of our proprietary rights or to deter independent, third-party development of similar proprietary assets.

Date Granted	Patent No.	Patent Description
February 17, 2009	7,492,937	System and Method for Identifying Objects of Interest in Image Data
February 24, 2009	7,496,218	System and Method for Identifying Objects of Interest in Image Data
December 31, 2009	MY-140267-A7,907,762	System and Method for Identifying Objects of Interest in Image Data (Malaysian)
October 19, 2010	7,817,833	System and Method for Identifying Feature of Interest in Hyperspectral Data
November 23, 2010	7,840,048	System and Method for Determining Whether There is an Anomaly in Data
March 15, 2011	7,907,762	Method of Creating a Divergence Transform for Identifying a Feature of Interest in Hyperspectral Data
October 25, 2011	8,045,805	Method for Determining Whether a Feature of Interest Anomaly is Present in an Image

Aviation/Homeland Security Technology Solution - PinPoint™

Market

management believes that its PinPoint™ solution is also capable of being adapted for use in the people portal and cargo screening markets. The following discussion focuses on the market for baggage screening solutions; however, we have also provided an overview of the potential market for people portal and cargo screening technology solutions, potential future markets for our PinPoint™ product.

Baggage Screening Market

the number of scanners deployed in the rest of the world are not readily available, management estimates that the market is four times greater than the U.S. In addition to baggage scanners, airports worldwide are faced with replacing or supplementing existing metal detectors for passenger processing.

ToAs ~~date~~highlighted ~~the~~below, ~~marketplace~~in ~~has~~a ~~placed~~recent aNEMA ~~premium~~article, on“DICOS ~~the~~- ~~newest~~Homeland ~~innovations~~Security inSpending ~~hardware~~Keeps ~~technology~~on ~~and~~Growing” ~~has~~- ~~failed~~Published toby, ~~grasp~~U.S. ~~how~~government aexpenditure ~~threat~~for ~~detection~~security ~~software~~solutions ~~solution~~is ~~can~~expected ~~succeed~~to increase. ItManagement ~~was~~believes ~~expected~~ that aApplied ~~major~~Visual ~~joint~~Sciences, ~~initiative~~Inc. ~~between~~is ~~the~~positioned ~~Department~~to ofbe ~~Homeland~~a ~~Security~~third-party ~~(DHS)~~solution ~~and~~provider leveraging the ~~National~~standard ~~Electrical~~output ~~Manufacturers~~of ~~Association~~all ~~(NEMA)~~future ~~would~~security ~~open~~equipment aprocured ~~path~~by tothe ~~both~~US ~~increase~~Government. NEMA ~~the~~stated ~~interoperability~~“Global ofhomeland security ~~equipment~~spending ashas ~~well~~received ~~as provide~~ a ~~mechanism~~major toboost ~~use~~in ~~third~~light ~~party~~of ~~threat~~recent ~~detection~~international ~~software~~terrorist events, as ~~part~~countries oflook ~~the~~at ~~screening~~new ~~solution. This~~ways ~~enabling~~to ~~initiative~~thwart isterrorists ~~the~~and ~~Digital~~secure ~~Imaging~~borders. ~~and~~Spending ~~Communications~~ in ~~Security~~the ~~(DICOS)~~industry ~~standard,~~is ~~similar~~expected to ~~the~~triple ~~Digital~~to ~~Imaging~~$178 ~~and~~billion ~~Communications~~by in2015. Security-related ~~Medicine~~spending ~~(DICOM)~~will ~~standard. With~~include amore ~~defined~~sophisticated ~~standard~~information ~~for~~technology and the ~~output~~protection of ~~each~~other ~~screening~~vulnerable ~~device,~~terrorist ~~complimentary~~targets. With ~~automated~~the ~~threat~~initial ~~detection~~focus ~~software~~on ~~can~~airport besecurity, ~~appended~~NEMA tohas ~~any~~stepped ~~x-ray~~up ~~equipment. Applied~~its ~~Visual~~outreach ~~Sciences,~~to ~~Inc~~DHS ~~co-chaired~~and ~~one~~TSA. ofCurrently developing DICOS, the ~~three~~new NEMA ~~working~~standard ~~groups~~will ~~drafting~~capture ~~the~~scans ~~DICOS~~of ~~standard,~~checked ~~and~~baggage ~~the~~so ~~DICOS~~that ~~standard~~scans ~~was~~can ~~published~~be inread ~~October~~by ~~2010~~threat detection software. To ~~date~~The ~~DHS~~new ~~has~~standard ~~not~~is ~~made~~expected ~~this~~to ~~standard~~facilitate ainteroperability ~~mandatory~~of ~~requirement~~security-imaging ~~for~~equipment. With ~~proposals~~DHS/TSA orexpected ~~procurements~~to ~~which,~~purchase asnew aequipment ~~result,~~for ~~has~~over ~~not~~400 ~~enabled~~U.S. ~~third~~airports, ~~party~~NEMA ~~detection~~members ~~software~~have ~~providers~~joined ~~the~~with ~~ability~~DHS to ~~enter~~develop the ~~marketplace~~standard. . ~~which~~The ~~has~~security ~~given~~industry anis ~~undue~~looking ~~advantage~~at toborder, ~~the~~rail, ~~existing~~seaport, ~~security~~industrial ~~equipment~~and ~~providers~~nuclear plant security. ”

of such management. There can be no assurance that these estimates are or will prove to be accurate or that budget allocations or these estimates may not change, based upon changes in government’s budget priorities and other factors.

Whole Body Imagers

Competition

The equipment manufacturers in conjunction with software companies and academic institutions are attempting to develop sophisticated solutions to aid in the detection of contraband substances. To date there has been no known solution developed~~. We~~ ~~believe~~ that ~~Applied~~has Visual Sciences, Inc.’s approach is unique in that it is a non-intrusive adjunct to the current manufacturers’ products. The enhancement identifies contraband at an accuracy level that is higher than the methodology used today by TSA.

been deployed. We believe that Applied Visual Sciences, Inc.’s approach is unique in that it is a non-intrusive adjunct to the current manufacturers’ products. The enhancement identifies contraband at an accuracy level that is higher than the methodology used today by TSA.

The market for contraband detection systems software is anticipated to become intensely competitive and is characterized by continuously developing technology and frequent introductions of new products and features. We expect competition to increase as other companies introduce additional and more competitive products in the aviation security market and as we develop additional capabilities and enhancements for PinPoint™ and new applications for our technology. Historically, the principal competitors in the market for explosive detection systems have been GE-InVision, Vivid Technologies, Inc., EG&G Astrophysics, Smiths-Detection, Thermedics Detection Inc., and Barringer Technologies Inc. Each of these competitors provides aviation security solutions and products for use in the inspection of checked and carry-on luggage. We expect certain major corporations competing in other markets to enter the aviation security market.

Healthcare Technology Solutions - Signature Mapping™

Market

In 2006, an analyst at Frost & Sullivan stated "Early introduction of integrated CAD solutions is critical for gaining market share and may lead to higher profits…These new systems will enable workflow improvements while providing a smooth migration to the digital solution. This will increase the viability and broaden the appeal of these systems, and is likely to result in increased sales and revenues." These are new markets with new applications. The market is shifting towards CAD as physicians’ confidence levels continue to grow. For example, the radiologist who uses CAD for Mammography (one of the most prevalent today) would most likely be very willing to trying new clinical applications. This is true for general radiologists and specialty radiologists. Frost and Sullivan studies published in 2006 estimated ~~world~~worldwide ~~wide~~ radiology imaging procedures for all modalities at slightly a billion procedures per year and estimated that approximately 300 million to 350 million procedures were attributed to the USA.

Market Conditions

Management’s review of current market conditions has identified the following trends:

TB is becoming a worldwide epidemic

Automatic differentiation of TB bacilli is a very challenging issue

Currently no such CAD product exists

Steady adoption of digital microscopy

Need for higher throughput and continued cost reduction without sacrificing quality

CAD is evolving as a clinical tool and physicians are adopting it

Current graphics cards and computational processing power are sufficient

Retiring workforce and the current prediction that there will be a shortage of pathologists

Economic pressures and increasing clinical demands

Facilitates productivity gains with inclusion of CAD

Pathologist can performs diagnosis on digital images and monitor

PMA FDA approvals of digital pathology tests is increasing

Facilitates improved workflow efficiency and enhances patient management practices

Pathology lab is poised for digital revolution

Pressures on the anatomical pathology sciences will drive change

STOP TB has stated they want “effective, efficient and validated clinical algorithms”

Potential Market For New TB Diagnostics

Competition

While we are unaware of any computer-aided-detection for TB sputum microscopy analysis that can be identified that competes with our Signature Mapping™ products, there are substitute technologies that compete with sputum specimen analysis, such as the Cepheid Systems GeneXpert® System, a dip-stick or biomarker approach. Management believes that competition will be driven by cost per procedure, ease-of-use, sensitivity and specificity, and the ability to be used by non-trained or lightly trained personnel in the point of care environment. These emerging tests include: Polymerase Chain Reaction, TB Breathalyzer, Q-Beta Replicase Assay, Transcription-~~Medicated Amplification, Ligase Chain Reaction, Strand Displacement Amplification, Nucleic Acid Sequence-Based Amplification and Branched DNA.~~

Medicated Amplification, Ligase Chain Reaction, Strand Displacement Amplification, Nucleic Acid Sequence-Based Amplification and Branched DNA.

Sales, Marketing, and Distribution

Sales

Sales for products within our specific markets are conducted through both direct sales and indirect distribution channels worldwide.

Product Distribution and Marketing

We have entered into the following distributor, strategic partnership, development, and consulting agreements with regard to our products, although they have not produced revenue for the Company:

Preferred International Distributor Agreement with Rodash 136 (Pty) Ltd, of South Africa

Visual Sciences to enter into business relationships with original equipment manufactures for the licensing, distribution, or resale of PinPoint™ products.

Preferred International Distributor Agreement Romador 168 (Pty) Ltd, of South Africa

Memorandum of Understanding with Aurum Innova (Pty) Limited and the National Health Laboratory Services of South Africa

Master Development Agreement with Aurum Innova (Pty), Ltd.

Breast Cancer Detection: BCDx™

Our research to-date includes five programs and studies conducted under the direction of the Image Processing and Informatics Laboratory at the University of Southern California (“USC”) using clinical data and images provided by: the Image Processing and Informatics Laboratory at USC, Howard University, and the South Florida Clinical Mammography Data Base. Competition is expected with existing computer-aided-detection (“CAD”) manufactures such as iCAD, Hologic, Medipatten, Confirma, Siemens, or Carestream Health. We may partner with one or more of these existing CAD manufacturers, or with an emerging company with new technology for the CAD arena. Once our products are commercially viable, we anticipate marketing and selling our products through original equipment manufacturers (“OEM”), or system integrators.

The Disease

develop breast cancer worldwide and 460,000 will die from the disease. In the U.S. the mortality rate is about 1 in 35 women. Ineffective workflow, poor communications and decision-support tools cost over $8.5 billion per year.

Breast imaging procedures	About 35 million screening exams
Biopsy procedures	About 1.5 million biopsies conducted
12% - 15% of biopsies are positive	168,000 detected cancers
Mortality rate	About 40,950 women
Biopsy per procedure cost	$1,000 - $3,000 dollars
Annual gross national biopsy cost	$1.5 - $4.5 billion dollars
A 10% reduction in biopsies would save approximately	$150 - $500 million dollars

Source: NIH, Annual breast exams in the U.S. 2011.

Detection

Clinical Value of Signature Mapping™

calcification. Applied Visual is optimizing Signature Mapping™ for the accurate characterization of cysts as part of ongoing development that includes an early-onset cancer detection model.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities:

	Year Ended December 31
Category	~~2012~~2014	~~2011~~2013
Net cash (used) in operating activities	$ (~~223~~79,~~220~~822)	$ (~~686~~202,~~287~~961)
Net cash provided (used) in investing activities	35,175	(27,997)
Net cash provided by (used in) investing activities	(20,325)	29,624
Net cash provided by financing activities	~~185~~133,000	~~715~~171,~~900~~000
Effect of exchange rates on cash and cash equivalents	-	-
Net increase (decrease) in cash	$ (332,~~045)~~853	$ 1(2,~~616~~337)

Net Cash Used in Operations

Net cash used in operating activities for the fiscal year ended December 31, ~~2012~~2014, was $~~223~~79,~~220~~822, compared with net cash used in operating activities of $~~686~~202,~~287~~961 during the same period for ~~2011~~2013, or a decrease in the use of cash for operating activities of $~~463~~123,~~067~~139 (6760.57%). The decrease in the use of cash is due to: (i) lower operating costs ~~of $559~~including,~~159~~ ~~(25.4%), including~~ but not limited to a decrease in ~~revenue of $6,589 (100.0%), decreases in~~ selling, general and administrative costs (other than depreciation and amortization, and stock based compensation) of $~~621~~400,~~379~~506 (2830.31%), and an increase in ~~net~~ non-operating expense (other than noncash items) of $5525,~~631~~825 (~~635~~35.79%); and (ii) offset by a net decrease in components of operating assets and liabilities of $96251,~~092~~542 (621.40%).

Net Cash Used in Investing Activities

Net cash ~~provided~~used in investing activities of $3520,~~175~~325 ~~was~~ for the ~~net~~fiscal ~~purchase~~year ofended ~~equipment~~December ~~and~~31, ~~costs~~2014, ~~for~~was ~~patent applications~~ for the ~~year~~purchase ~~ended~~of ~~December 31, 2012~~equipment. This compares with net cash ~~used~~provided ~~for~~by ~~the~~investing ~~same~~ activities ~~of $27,997~~ for the same period ~~for 2011, or an increase~~ in ~~cash~~2013 ~~provided~~ of $6329,~~172~~624, orfor ~~225.6%. The net increase is comprised of proceeds from~~ the sale of furniture of $3528,~~650,~~934 lower equipment costs for the TBDx™ project of 5,970 (100.0%), and an decrease in patent costs of $21,552 (97.8%). The Company anticipates it will continue to incur equipment costs during the fiscal year ending December 31, 2013, as we design add-on features that extend our current products into other areas, and ongoing patent costs related to further protection of our PinPoint™ and Signature Mapping™ products.

and for elimination of patent costs of $690, or a net increase in cash used in investing activities of $49,949 (168.6%). The Company anticipates it will incur equipment costs during the next fiscal year ending December 31, 2015, as we design add-on features that extend our current products into other areas, and ongoing patent costs related to further protection of our PinPoint™ and Signature Mapping™ products.

Net Cash Provided by Financing Activities

Net proceeds from financing activities were $~~185~~133,000 for the fiscal year ended December 31, ~~2012~~2014, compared with $~~715~~177,~~900~~000 for the same period in ~~2011~~2013, or a decrease of $~~530~~38,~~900~~000 (7422.2%). Of the ~~2012~~2014 net proceeds from financing activities, $2568,000 (1351.51%) was from the issuance of a new ~~equity~~short-term ~~financing~~promissory notes, and $~~160~~65,000 (8648.59%) ~~from~~for ~~the~~ issuance of ~~short-term~~common ~~promissory note~~stock. The decrease in the net cash provided by financing activities of $38,000 is due to (i), a decrease in use of funds of $~~319~~8,~~000~~500 ~~(92.7%)~~to ~~from~~reduce ~~the~~short-term ~~issuance~~note ofpayable ~~new~~to ~~equity~~an ~~financings~~executive of the Company, (ii) a decrease ~~in funds~~ of $~~240~~111,~~000~~500 ~~(60.0%)~~ from the issuance of short-term notes ~~payable~~, and (iii) aan ~~decrease~~increase ~~in use~~ of ~~funds of~~ $2865,~~100~~000 tofrom ~~reduce~~the ~~short-term~~sale ~~note payable to an executive~~ of ~~the~~common ~~Company in 2011~~stock. Management is seeking, and expects to continue to seek to raise additional capital through equity or debt financings or bank borrowings, including through one or more equity or debt financings or bank borrowings to fund its operations, repay or repurchase its debentures, and pay amounts due to its creditors and employees. However, there can be no assurance that the Company will be able to raise such additional equity or debt financing or obtain such bank borrowings on terms satisfactory to the Company or at all.

Cash ~~and Cash Equivalents~~

Our cash ~~and~~increased ~~cash equivalents decreased~~ during the fiscal year ended December 31, ~~2012~~2014 by $332,~~045~~853, compared to ana ~~increase~~decrease in cash ~~and cash equivalents~~ during the same period in ~~2011~~2013 of $12,~~616~~337. As outlined above, the ~~decrease~~increase in cash ~~and cash equivalents~~ for the current period in 2014 was the result of; (i) cash used in operating activities of $~~223~~79,~~220~~822, (ii) cash ~~provided~~used byin investing activities ~~for~~of ~~equipment~~$20,325, and ~~patent~~(iii) ~~costs~~an increase in cash by $133,000 from financing activities. The decrease in cash for fiscal 2013 of $352,~~175,~~337 ~~and~~was the result of; (~~iii~~i) cash ~~from~~used ~~financing~~in operating activities of $~~185~~202,961, (ii) cash provided by investing activities of $29,624, and (iii) an increase in cash by $171,000 from financing activities. The net change in cash ~~and cash equivalents~~ for the twelve months ended December 31, ~~2012~~2014, as compared to the same period in ~~2011~~2013, was $435,~~661 (288.4%)~~190, and is the result of (i) a decrease in cash used in operating activities of $~~463~~123,~~067~~139 (6760.57%), (ii) an increase in ~~cash~~investing ~~from~~activities ~~the net sale~~ of ~~equipment and patent costs incurred of~~ $6349,~~172~~949 (~~225~~168.6%), and (iii) ana ~~offset~~decrease byin afinancing ~~reduction~~activities of $~~530~~38,~~900~~000 (7422.2%) ~~from financing activities~~.

Working Capital Information - The following table presents a summary of our working capital at the end of each fiscal year:

	As of December 31
Category	~~2012~~2014	~~2011~~2013
Cash and cash equivalents	$ 3,445	$ 6,490
Cash	$ 33,961	$ 1,108
Current assets	436,~~560~~285	92,~~100~~223
Current liabilities	1113,~~698~~943,~~331~~135	1013,~~432~~299,~~552~~173
Working capital (deficit)	$ (1113,~~693~~906,~~771~~850)	$ (1013,~~423~~296,~~452~~950)

As of December 31, ~~2012~~2014, the Company had ~~cash~~a ~~and~~working ~~cash~~capital ~~equivalents~~deficit of $313,~~445~~906,850, compared to $613,~~490~~296,950 onat December 31, ~~2011~~2013, or aan ~~decrease~~increase in ~~cash~~working ~~and~~capital ~~cash~~deficit ~~equivalents~~ of $3609,~~045~~900 (464.96%). ~~The~~As ~~decrease in cash is the net result~~ of ~~our operating, investing and financing activities outlined above. At~~ December 31, ~~2012~~2014, wethe Company had acash ~~working capital deficit~~ of $1133,~~693,771,~~961 as compared ~~with~~to a$1,108 ~~working~~on ~~capital deficit at~~ December 31, ~~2011~~2013. ofThe ~~$10,423,452, or an~~ increase in ~~working~~cash ~~capital deficit~~ of $132,~~270,219~~853 ~~(12.2%).~~is ~~For~~the ~~2012,~~net ~~overall~~result ~~current~~of ~~assets~~our ~~decreased $4~~operating,~~540~~ ~~(49.9%),~~investing ~~including (i) a decrease in cash~~ and ~~cash~~financing ~~equivalents~~activities ofoutlined ~~$3,045 (46~~above.~~9%),~~ ~~and~~For ~~(ii) a decrease in prepaid expenses of $1~~2014,~~495~~ ~~(57.3%).~~current ~~Current~~ liabilities increased $1643,~~265,779~~962 (124.18%), with specific decreases in liabilities of $~~337~~393,~~545~~021, including: (i) $~~170~~55,~~017~~380 for conversion of accrued wages for stock, ~~(ii) $100,000 for conversion of accounts payable for stock,~~ and (~~iii~~ii) $67337,~~528~~641 for the ~~reduction of derivative liabilities due to the~~ revaluation of ~~the~~ beneficial conversion feature of the outstanding debentures, and specific increases in current liabilities of $1,~~603~~036,~~324~~983, including: (i) $6488,~~382~~570 inshort-term ~~accrued~~note ~~interest~~payable, net of debt discount, (ii) $~~314~~97,~~235~~825 ~~trade~~in ~~and~~ accrued ~~payables~~interest, (iii) $~~188~~103,~~291~~045 ~~short-term~~in ~~notes~~trade ~~payable,~~and ~~net~~accrued ~~of discounts~~payables, and (iv) $1747,~~036,416~~543 for the continued accrual of unpaid wages and related expenses for all employees.

Our revenue generating activities during the period, as in previous years, have not produced sufficient funds for profitable operations, and we have incurred operating losses since inception. Accordingly, we have continued to utilize the cash raised in our financing activities to fund our operations. In addition to raising cash through additional financing activities, we may supplement our future working capital needs through the extension of trade payables and increases in accrued expenses. In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon our continued operations, which in turn is dependent upon our ability to meet our financial requirements, raise additional financing, and the success of our future operations.

Other Liabilities

~~2012~~2014 Short-Term Promissory Notes Outstanding

During 2012, the Company issued six promissory notes to accredited investors in the aggregate principal amount of $160,000. The notes, as amended, mature on June 30, 2013. The notes accrue interest at a rate of 12% per annum. The Company also issued to the note holders an aggregate of 285,000 shares of common stock. The relative fair value of the common stock of $11,715 will be amortized over the term of the notes. The Company also issued 10,800 shares of common stock as compensation in connection with the financing for a fair value of $2,700.42

~~2011~~During ~~Short~~2014, the Company issued eight promissory notes to six accredited investors in the aggregate principal amount of $68,000. Although the notes are non-~~Term~~interest ~~Promissory~~bearing, ~~Notes~~as consideration to the note holders, the Company shall pay a total premium of 50% (total payment due of 1.5 times principal) of such notes, and the entire unpaid principal and premium amounts shall become immediately due on or before September 30, 2014, and January 31, 2015. All such notes were subsequently amended to extend their maturity date to December 31, 2015. If such notes are not paid by their original maturity date, then the Company shall pay a total premium of 100% (total payment due of 2 times principal), and such payments of total principal and premium amounts shall be from net revenue of future TBDx™ sales. Of the initial 50% premium, or $34,000, $23,020 was recorded as interest expense through the period ending December 31, 2014, and $10,980 shall be recorded in fiscal 2015. The additional 50% premium, or $34,000, shall be recorded as interest expense upon the Company achieving net revenue from future sales of TBDx™.

~~During~~2013 ~~the October and November 2011, the Company issued twelve~~Short-~~month~~Term ~~promissory~~Promissory ~~notes~~Notes to accredited investors in the aggregate principal amount of $400,000. The twelve-month notes accrue interest at a rate of 12% per annum. The Company also issued to the two note holders an aggregate of 400,000 shares of common stock. The relative fair value of the common stock of $34,700 will be amortized over the term of the notes. The Company also issued 250,000 shares of common stock as compensation in connection with the financing for a fair value of $25,000.Outstanding

During 2013, the Company issued nine promissory notes to eight accredited investors in the aggregate principal amount of $179,500 ($179,275, net of commissions and expenses in the amount of $225), of which five notes for an aggregate of $48,500 originally matured during 2013, $14,000 matured on April 25, 2014, $100,000 matured on September 21, 2014, and $17,000 matured on October 25, 2014. All such notes were subsequently amended to extend their maturity date to December 31, 2015. The terms of the notes are essentially the same as the 2011 ~~Securities~~and ~~Purchase~~2012 ~~Agreement~~short-term promissory notes, except that $40,000 of the notes accrue interest at a rate of 12% per annum, one note for $8,500 was noninterest bearing during 2013 and accrues interest at a rate of 10% effective January 1, 2014, one note for $14,000 accrues interest at a rate of 10% per annum, one note for $8,500 accrues interest at a rate of 5.9%, with two notes for $108,500 being noninterest bearing. Consideration for one $8,500 noninterest bearing note during 2013 received a modification to 540,000 warrants to include a cashless provision, one note of $8,500 received an extension of 4,632,725 warrants to December 31, 2018, and one for $100,000 received a 2% royalty payment of future TBDx™ net revenue in South Africa up to $300,000. The Company issued to six of the note holders an aggregate of 450,000 shares of common stock, and the relative fair value of the common stock of $31,100 will be amortized over the term of the notes.

On2012 ~~February~~Short-Term ~~23,~~Promissory ~~2011,~~Notes the Company entered into a Securities Purchase Agreement (the “SPA”) with an institutional accredited investor for an investment up to $1,000,000, subject to certain stock price and volume conditions. Subsequently on February 24, 2011, we sold to the institutional investor at the first closing of the private placement of securities, an aggregate of 600,000 shares of common stock, and 600,000 common stock purchase warrants to purchase an aggregate of 600,000 shares of common stock, for gross proceeds of $150,000 ($136,000 net of certain expenses and sales commissions in the amount of $14,000). The warrants are exercisable at a price of $0.25 per share for a period of five years after the date of issuance, contain a cashless exercise provision and other customary provisions. Also, we issued to a broker an aggregate of 72,000 placement agent’s warrants as compensation in connection with the offering. The placement agent’s warrants are under the same terms and conditions as those issued to the institutional investor.Outstanding

53During 2012, the Company issued six promissory notes to four accredited investors in the aggregate principal amount of $160,000. The twelve-month notes accrue interest at a rate of 12% per annum. Subsequently, the promissory notes have been amended to mature on December 31, 2015. The Company also issued to the note holders an aggregate of 285,000 shares of common stock. The relative fair value of the common stock of $11,715 will be amortized over the term of the notes. The Company also issued 10,800 shares of common stock as compensation in connection with the financing for a fair value of $2,700.

In addition, under the SPA, the investor has agreed to provide additional financing to us by purchasing shares of our common stock at seven subsequent closings and subject to certain share price and volume requirements. However, the seven subsequent closings scheduled during March through September 2011, ~~did~~Short-Term ~~not~~Promissory ~~take~~Notes ~~place since the stock price and volume conditions were not met.~~Outstanding

WeDuring ~~granted~~October toand ~~the~~November ~~investor~~2011, ~~piggy~~the ~~back~~Company ~~registration~~issued ~~right~~two ~~with~~promissory ~~regard~~notes to ~~the~~accredited ~~shares~~investors ~~issued~~ in the ~~financing,~~aggregate ~~including~~principal ~~the~~amount ~~shares~~of ~~underlying the Warrants~~$400,000. The ~~SPA~~twelve-month ~~contains~~notes ~~representations~~accrue ~~and~~interest ~~warranties~~at ofa ~~the~~rate ~~Company~~of ~~and~~12% ~~investor~~per annum. Subsequently, ~~certain~~the ~~indemnification~~promissory ~~provisions~~notes ~~and~~have ~~customary~~been ~~conditions~~amended to ~~each~~mature ~~closing~~on December 31, 2015. WeThe ~~may~~Company ~~terminate~~also issued to the ~~SPA~~two onnote ~~ten~~holders ~~days~~an ~~prior~~aggregate ~~written~~of ~~notice~~400,000 toshares ~~the~~of ~~investor,~~common ~~and~~stock. The ~~the~~relative ~~investor~~fair ~~may~~value ~~terminate~~of the ~~SPA~~common atstock ~~any~~of ~~time~~$34,700 ~~prior~~will tobe aamortized ~~subsequent~~over ~~financing~~the ~~upon~~term ~~written~~of ~~notice~~the tonotes. The usCompany ifalso weissued ~~consummate~~250,000 ashares ~~reverse~~of common stock ~~split~~as orcompensation ain ~~subsequent~~connection ~~financing~~with tothe ~~which~~financing ~~the~~for ~~investor~~a isfair ~~not~~value aof ~~party~~$25,000.

On October 18, 2006, ~~through~~the ~~2011~~Company ~~Short~~entered into a Loan Agreement with Mr. Michael W. Trudnak, our Chairman and Chief Executive Officer pursuant to which Mr. Trudnak loaned the Company $100,000. The Company issued a non-~~Term~~negotiable ~~Promissory~~promissory ~~Notes~~note, ~~Related~~dated ~~Party~~effective October 18, 2006, to Mr. Trudnak in the principal amount of $100,000. The note is unsecured, non-negotiable and non-interest bearing. The note is repayable on the earlier of (i) six months after the date of issuance, (ii) the date the Company receives aggregate proceeds from the sale of its securities after the date of the issuance of the Note in an amount exceeding $2,000,000, or (iii) the occurrence of an event of default. The following constitute an event of default under the note: (a) the failure to pay when due any principal or interest or other liability under the loan agreement or under the note; (b) the material violation by us of any representation, warranty, covenant or agreement contained in the loan agreement, the note or any other loan document or any other document or agreement to which the Company is a party to or by which the Company or any of our properties, assets or outstanding securities are bound; (c) any event or circumstance shall occur that, in the reasonable opinion of the lender, has had or could reasonably be expected to have a material adverse effect; (d) an assignment for the benefit of our creditors; (e) the application for the appointment of a receiver or liquidator for us or our property; (f) the issuance of an attachment or the entry of a judgment against us in excess of $100,000; (g) a default with respect to any other obligation due to the lender; or (h) any voluntary or involuntary petition in bankruptcy or any petition for relief under the federal bankruptcy code or any other state or federal law for the relief of debtors by or with respect to us, provided however with respect to an involuntary petition in bankruptcy, such petition has not been dismissed within 30 days of the date of such petition. In the event of the occurrence of an event of default, the loan agreement and note shall be in default immediately and without

On April 21, 2006, the Company entered into a Loan Agreement with Mr. Michael W. Trudnak, our Chairman and Chief Executive Officer pursuant to which Mr. Trudnak loaned the Company $200,000. The Company issued a non-negotiable promissory note, dated effective April 21, 2006, to Mr. Trudnak in the principal amount of $200,000. The note is unsecured, non-negotiable and non-interest bearing. The note is repayable on the earlier of (i) six months after the date of issuance, (ii) the date the Company receives aggregate proceeds from the sale of its securities after the date of the issuance of the Note in an amount exceeding $2,000,000, or (iii) the occurrence of an event of default. The following constitute an event of default under the note: (a) the failure to pay when due any principal or interest or other liability under the loan agreement or under the note; (b) the material violation by us of any representation, warranty, covenant or agreement contained in the loan agreement, the note or any other loan document or any other document or agreement to which the Company is a party to or by which the Company or any of our properties, assets or outstanding securities are bound; (c) any event or circumstance shall occur that, in the reasonable opinion of the lender, has had or could reasonably be expected to have a material adverse effect; (d) an assignment for the benefit of our creditors; (e) the application for the appointment of a receiver or liquidator for us or our property; (f) the issuance of an attachment or the entry of a judgment against us in excess of $100,000; (g) a default with respect to any other obligation due to the lender; or (h) any voluntary or involuntary petition in bankruptcy or any petition for relief under the federal bankruptcy code or any other state or federal law for the relief of debtors by or with respect to us, provided however with respect to an involuntary petition in bankruptcy, such petition has not been dismissed within 30 days of the date of such petition. In the event of the occurrence of an event of default, the loan agreement and note shall be in default immediately and without notice, and the unpaid principal amount of the loan shall, at the option of the lender, become immediately due and payable in full. The Company agreed to pay the reasonable costs of collection and enforcement, including reasonable attorneys’ fees and interest from the date of default at the rate of 18% per annum. The note is not assignable by Mr. Trudnak without our prior consent. The Company may prepay the note in whole or in part upon ten days notice. On October 21, 2006, Mr. Trudnak extended the due date of the loan to December 31, 2006. Subsequently, on October 3 and October 18, 2006, Mr. Trudnak loaned the Company $102,000 and $100,000, respectively, on substantially the same terms as the April 21, 2006 loan, except that each loan is due six months after the date thereof. Accordingly, following such additional loans, the Company owed an aggregate of approximately $402,000 to Mr. Trudnak. On November 10, 2006, Mr. Trudnak extended the due dates of such loans to May 31, 2007, except that $100,000 of the April 21, 2006, loan becomes due upon the Company raising $2,500,000 in financing after November 6, 2006, and the remaining amount of $202,000 of such loans become due upon the Company raising an aggregate of $5,000,000 in financing after November 6, 2006, and prior to May 31, 2007. Following the first closing of our Debenture and Series D Warrant financing on November 8, 2006, the Company repaid $100,000 on November 20, 2006, in principal amount of the April 1, 2006 loan, and paid an additional $100,000 to Mr. Trudnak on April 17, 2007 upon the second closing of our Debenture and Series D Warrant financing. On May 31, 2007, Mr. Trudnak extended the due dates of the remaining loans to May 31, 2008. Although, the anticipated payment of $202,000 had not been made, and Mr. Trudnak made an additional $24,000 loan to the company on June 25, 2008, and $5,000 on September 14, 2011, for cumulative loans of $231,000. The maturity date of the outstanding loans was extended to May 31, 2009, then to May 31, 2010 and June 30, 2011, and subsequently to December 31, 2011. On December 31, 2011, the outstanding loans were extended to June 30, 2012, then to December 30, 2012, and subsequently to June 30, 2013. The Company repaid an aggregate of $108,900 of the notes during 2010, and repaid an aggregate $33,100 during 2011, resulting in an outstanding balance at December 31, 2012 of $89,000. The terms of the above transaction were reviewed and approved by the Company’s audit committee and by the independent members of our Board of Directors.43

~~2006~~notice, and the unpaid principal amount of the loan shall, at the option of the lender, become immediately due and payable in full. The Company agreed to pay the reasonable costs of collection and enforcement, including reasonable attorneys’ fees and interest from the date of default at the rate of 18% per annum. The note is not assignable by Mr. Trudnak without our prior consent. The Company may prepay the note in whole or in part upon ten days notice. On November 10, 2006, Mr. Trudnak extended the due date of the note to May 31, 2007. Mr. ~~Series~~Trudnak Amade ~~Debentures~~an ~~(as~~additional ~~Amended~~$24,000 loan to the company on ~~October~~June 1525, 2008, and $5,000 on September 14, 2011, for cumulative outstanding loans of $129,000. The maturity date of the outstanding loans was extended multiple times during 2009 through 2014. On December 31, 2014, the outstanding loans were extended to December 31, 2015. The Company repaid an aggregate of $6,900 of the notes during 2010), an aggregate $33,100 during 2011, an aggregate of $8,500 during 2013, resulting in an outstanding balance at December 31, 2014 of $80,500. The terms of the above transaction were reviewed and ~~Series~~approved Dby ~~Common~~the ~~Stock~~Company’s ~~Purchase~~audit ~~Warrants~~committee and by the independent members of our Board of Directors. Upon the death of Mr. Trudnak on April 18, 2014, the notes became part of his estate and will be assigned to his spouse, Jean M. Trudnak.

542006 and 2007 Series A Debentures (as Amended on October 15, 2010)

As of December 31, ~~2012~~2014, an aggregate of $3,461,795 in principal amount of the Series A Debentures have been converted into 8,730,037 shares of common stock, an aggregate of $663,043 in interest amount have been converted into 2,675,576 shares of common stock, and an aggregate of 1,779,596 Series D Warrants have been exercised resulting in the issuance of 1,284,964 shares of common stock. Accordingly, as of December 31, ~~2012~~2014, an aggregate of $1,688,205 of principal amount of the debentures remain unconverted.

due under the debentures (“Interest and Default Amounts”) the Company issued an aggregate of 2,552,653 shares of common stock, (iv) that all claims with regard to the payment of the Interest and Default Amounts and all prior events of default under the Debentures and breaches of any covenant, agreement, term or condition (“Defaults”) under our debentures and debenture transaction documents would be waived and the Company was released from any claims with respect to the Additional Interest and Late Fees of approximately $773,314, and Default Amounts of approximately $2,541,739, and prior Defaults Events, (v) to terminate the registration rights agreements between the Company and each debenture holder, and (vi) that the Company may force a conversion of the debentures if our common stock equals or exceeds certain price and volume conditions. There were no conversions of our debentures during 2013 or 2014.

The principal amount of our outstanding Series A Debentures of $1,688,205 became due on July 1, 2011, and such amount was not paid. Therefore, the Company ~~may~~could be considered in default~~. The~~ debentures provide that any default in the payment of principal, which default is not cured within the five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default and may result in enforcement of the debenture holders’ rights and remedies under the debentures and applicable law. We ~~are~~have been in discussions with the debenture holders to re-negotiate the terms of the debentures, including the repayment or repurchase of the debentures and/or seek to extend their maturity date, although we have not reached any agreement with the debenture holders with regard to any such repayment, repurchase or extension. Our ability to repay or repurchase the debentures is contingent upon our ability to raise additional financing, of which there can be no assurance. Also, as a condition to any such extension, debenture holders may seek to amend or modify certain other terms of the debentures. If When an event of default occurs under the debentures, the debenture holders may elect to require us to make immediate repayment of the mandatory default amount, which equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, or (b) the outstanding principal amount unpaid divided by the conversion price on the date the mandatory default amount is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. In anticipation of such election by the debenture holders, due to the nonpayment of principal amount on the due date of July 1, 2011, we measured the mandatory default at approximately $337,641 and subsequently on each balance sheet date, which is reflected in the carrying value of the debentures and also recognized as interest expense. We remeasured the mandatory default amount as of December 31, ~~2012~~2014 at approximately $337,641. As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. The Company currently has insufficient funds to repay the outstanding amount in the event the debenture holders make a demand for payment.

Prior to the Debenture amendment agreement and absent a default, the Debentures bore interest at the rate of 10% per annum. The Debenture agreement, as amended on October 15, 2010, ~~continues~~states tono ~~permit the payment of~~ interest ~~due~~and ~~under~~that ~~the~~from ~~Debentures~~July in1, ~~cash~~2010 orthrough ~~registered shares of our common stock. If we elected to pay~~ the ~~interest~~maturity ~~due~~date ~~in shares~~ of ~~our~~June ~~common~~30, ~~stock~~2011, the ~~number~~principal amount of ~~shares~~this toDebenture beshall ~~issued~~bear inno ~~payment of~~ interest.” isAny ~~determined~~reference onto the ~~basis~~accrual of ~~85%~~interest ofor ~~the~~late ~~lesser~~fees, ofbeyond the ~~daily~~maturity ~~volume~~date, ~~weighted~~was ~~average~~specifically ~~price~~deleted offrom ~~our~~the ~~common~~Debenture ~~stock~~agreement. asIf ~~reported~~an byEvent ~~Bloomberg~~of LPDefault ~~(“VWAP”)~~occurs, ~~for~~ the ~~five~~outstanding ~~trading~~principal ~~days~~amount ~~ending~~of on the ~~date~~Debentures, ~~that~~plus isaccrued ~~immediately~~but ~~prior~~unpaid ~~to (a) date the~~ interest, isliquidated ~~due~~damages ~~or (b) the date such shares are issued~~ and ~~delivered~~other toamounts ~~the~~owing ~~holder. We could pay interest~~ in ~~shares~~respect ofthereof ~~our~~through ~~common stock only if~~ the ~~equity~~date ~~conditions~~of acceleration, ~~described~~shall ~~below~~become, ~~have~~at ~~been met during~~ the 20holder’s ~~consecutive~~election, ~~trading~~immediately ~~days prior to the date the interest is~~ due and ~~through~~payable ~~the~~in ~~date~~cash at the ~~shares~~mandatory ~~are~~default ~~issued~~amount. ~~The~~Commencing ~~payment~~5 ofdays ~~interest~~after ~~in shares of our stock,~~ the ~~redemption~~occurrence of ~~the~~any ~~Debentures~~Event ~~and the occurrence~~ of ~~certain~~Default ~~other events, was subject to a requirement~~ that ~~certain~~results ~~equity~~in ~~conditions~~the ~~(“equity~~eventual ~~conditions”)~~acceleration ~~were met, as follows: (i) we have honored all conversions and redemptions~~ of ~~a Debenture by~~ the ~~holder~~Debenture, ~~(ii) we have paid all liquidated damages and other amounts due to~~ the ~~holder,~~interest ~~(iii)~~rate ~~the~~on ~~registration statement covering~~ the ~~resale~~Debenture ofshall ~~the~~accrue ~~shares~~at ~~underlying~~an ~~the~~interest ~~Debentures~~rate ~~and~~equal ~~Series D Warrants is effective permitting a holder~~ to ~~utilize~~ the ~~registration~~lessor ~~statement~~of to18% ~~resell~~per ~~its~~annum ~~shares,~~or ~~(iv) our stock is traded on~~ the ~~OTC~~maximum ~~Bulletin~~rate ~~Board~~permitted orunder ~~other~~applicable ~~securities~~law. ~~exchange~~In ~~and~~accordance ~~all~~with of the ~~shares~~terms ~~upon conversion or exercise~~ of the ~~Debentures~~amendment ~~and Series D Warrants are listed for trading~~agreement, ~~(v)~~management webelieves ~~have~~there ~~sufficient~~is ~~authorized~~no ~~but~~legal ~~unreserved~~requirement ~~shares of our common stock~~ to ~~cover~~continue the ~~issuance~~accrual of ~~the~~interest ~~shares upon conversion~~ or ~~exercise~~late offees. ~~the~~Management ~~Debentures~~also ~~and~~determined ~~Series~~that Dthere ~~Warrants,~~are two (vi2) ~~there~~events isthat nomust ~~event~~take ofplace ~~default~~before ~~under~~ the ~~Debentures,~~default ~~(vii)~~interest ~~the~~rate ~~issuance~~ of ~~the shares would not violate a holder’s 4.99~~18% ortakes 9effect.~~99%~~ ~~ownership~~One ~~restriction~~is ~~cap,~~an ~~(viii)~~event ~~we have not made a public announcement~~ of ~~a pending merger~~default, ~~sale of all of our assets or similar transaction or a transaction in~~ which aoccurred ~~greater~~when ~~than 50% change in control of~~ the Company ~~may~~did ~~occur and the transaction has~~ not ~~been~~make ~~consummated,~~payment ~~(ix)~~of the ~~holder~~outstanding isprinciple ~~not~~amount inon ~~possession of material public information regarding us, and (x)~~ the ~~daily~~amended ~~trading~~due ~~volume~~date of ~~our~~July ~~shares for 20 consecutive trading days prior to the applicable date exceeds 100~~1,~~000~~ ~~shares~~2011. ~~Under~~The ~~the~~other ~~terms~~event ofis ~~the~~an ~~Debenture~~“eventual ~~Amendment~~acceleration” ~~Agreement,~~of ~~(A)~~ the ~~equity~~mandatory ~~condition~~default ~~in (iii) above was amended to provide that such condition is met if~~amount, inwhich ~~the~~did ~~alternative,~~not ~~the~~take ~~shares~~place ~~issuable~~since ~~upon conversion of~~ the ~~Debentures~~default ~~may~~did ~~then~~not beoccur ~~resold~~before ~~pursuant to Rule 144 without restriction or limitation and~~ the ~~Company~~maturity ~~has~~date ~~delivered to a holder an opinion~~ of ~~the~~June ~~Company’s~~30, ~~counsel~~2011, ~~that such resale may legally be made~~ and ~~provided~~ the holder has furnished a representation letter reasonable acceptable to the Company’s counsel that the holder is not an “affiliate” for purposes of Rule 144; (B) the equity condition in (vi) above was amended to except an event of default ~~that~~occurred ~~has~~on ~~previously been waived; and (C)~~ the ~~equity~~due ~~condition~~date inof ~~(x)~~July ~~above~~1, ~~was amended to except circumstances where another volume condition is applicable.~~

5645

2011 when payment was not made by the Company. Since the default did not take place before the maturity or due date, no acceleration of the payment for the outstanding principal amount of the Debentures took place, and the 18% default interest provision does not apply.

The Debenture agreement, as amended on October 15, 2010, continues to permit the payment of interest, if due, in cash or registered shares of our common stock. If we elected to pay the interest due in shares of our common stock, the number of shares to be issued in payment of interest is determined on the basis of 85% of the lesser of the daily volume weighted average price of our common stock as reported by Bloomberg LP (“VWAP”) for the five trading days ending on the date that is immediately prior to (a) date the interest is due or (b) the date such shares are issued and delivered to the holder. We could pay interest in shares of our common stock only if the equity conditions, described below, have been met during the 20 consecutive trading days prior to the date the interest is due and through the date the shares are issued. The payment of interest in shares of our stock, the redemption of the Debentures and the occurrence of certain other events, was subject to a requirement that certain equity conditions (“equity conditions”) were met, as follows: (i) we have honored all conversions and redemptions of a Debenture by the holder, (ii) we have paid all liquidated damages and other amounts due to the holder, (iii) the registration statement covering the resale of the shares underlying the Debentures and Series D Warrants is effective permitting a holder to utilize the registration statement to resell its shares, (iv) our stock is traded on the OTC Markets, OTCQB or other securities exchange and all of the shares upon conversion or exercise of the Debentures and Series D Warrants are listed for trading, (v) we have sufficient authorized but unreserved shares of our common stock to cover the issuance of the shares upon conversion or exercise of the Debentures and Series D Warrants, (vi) there is no event of default under the Debentures, (vii) the issuance of the shares would not violate a holder’s 4.99% or 9.99% ownership restriction cap, (viii) we have not made a public announcement of a pending merger, sale of all of our assets or similar transaction or a transaction in which a greater than 50% change in control of the Company may occur and the transaction has not been consummated, (ix) the holder is not in possession of material public information regarding us, and (x) the daily trading volume of our shares for 20 consecutive trading days prior to the applicable date exceeds 100,000 shares. Under the terms of the Debenture Amendment Agreement, (A) the equity condition in (iii) above was amended to provide that such condition is met if, in the alternative, the shares issuable upon conversion of the Debentures may then be resold pursuant to Rule 144 without restriction or limitation and the Company has delivered to a holder an opinion of the Company’s counsel that such resale may legally be made and provided the holder has furnished a representation letter reasonable acceptable to the Company’s counsel that the holder is not an “affiliate” for purposes of Rule 144; (B) the equity condition in (vi) above was amended to except an event of default that has previously been waived; and (C) the equity condition in (x) above was amended to except circumstances where another volume condition is applicable.

The Debentures contain a limitation on the amount of Debenture that may be converted at any one time in the event the holder owns beneficially more than 4.99% of our common stock without regard to the number of shares underlying the unconverted portion of the Debenture. This limitation may be waived upon 61 days’ notice to us by the holder of the Debenture permitting the holder to change such limitation to 9.99%.

An event of default may occur under the Debentures if (a) the Company defaults in the payment of principal or, liquidated damages , (b) the Company fails to materially observe or perform a covenant or agreement in the Debentures, (c) a default or event of default occurs under any other transaction document related to the financing or in any other material agreement to which the Company is a party that results in a material adverse effect on the Company, (d) any representation or warranty the Company made to investors in the transaction documents related to the financing is materially untrue or incorrect, (e) a bankruptcy event occurs with regard to the Company, (f) the Company defaults on any other loan, mortgage, or credit arrangement that involves an amount greater than $150,000 and results in the obligation becoming declared due prior to the due date, (g) the Company’s common stock is not eligible for quotation on the OTC ~~Bulletin~~Markets ~~Board~~ or other exchange on which the Company’s shares are traded, (h) a transaction occurs in which the control of the Company changes, the Company effects a merger or consolidation, the Company sells substantially all of the assets, a tender offer is made for the Company’s shares, the Company reclassify their shares or a compulsory share exchange, or the Company agrees to sell more than 33% of the assets, unless the Company receives the consent of holders of 67% of then outstanding principal of the Company’s Debentures, (i) the Company fails to deliver certificates for shares to be issued on conversion within seven trading days, (j) the Company has a judgment against it for more than $150,000. We have agreed to compensate a holder of a Debenture in the event our transfer agent fails to deliver shares upon conversion of the Debentures within three trading days of the date of conversion, and the holder’s broker is required to purchase shares of our common stock in satisfaction of a sale by a holder.

AsThe ~~outlined~~conversion ~~above,~~price of the ~~Series~~Debentures Dor ~~Warrants~~the ~~and~~number ~~placement~~of ~~agent~~shares ~~warrants~~to ~~were~~be ~~exercisable~~issued atupon ~~the same price as the~~ conversion ~~price~~or exercise of the ~~debentures.~~Debentures Ifare ~~certain~~subject ~~milestones~~to ~~are~~adjustment ~~not~~in ~~met,~~ the ~~exercise~~event ~~price~~ of ~~such~~a ~~warrants~~stock ~~may~~dividend, bestock ~~reset. Also~~split, ~~the~~subdivision ~~exercise~~or ~~price~~combination ~~may~~of beour ~~adjusted~~shares ~~under~~of ~~anti-dilution~~common ~~and~~stock, ~~other~~reclassification, ~~price~~sales ~~reset~~of ~~provisions~~our ~~contained~~securities inbelow ~~the~~their ~~warrants.~~then ~~The~~conversion ~~warrants~~or ~~initial~~ exercise price of(“subsequent ~~$1.15634~~equity ~~was~~sales ~~reset~~anti-dilution toadjustment ~~$0.7453~~provisions”), ona ~~April~~subsequent 1,rights ~~2007~~offering, ~~due~~or toa ~~the~~reclassification ~~milestone-related~~of ~~provisions,~~our ~~to $0~~shares.~~6948~~ ~~effective October 1~~Also, ~~2007,~~if ~~and~~we ~~the~~effect ~~final~~a ~~milestone~~merger ~~reset~~or ofconsolidation ~~$0.4089~~with ~~effective~~another ~~April 1~~company, ~~2008.~~we Assell aall ~~result~~or ofsubstantially aall ~~June~~of ~~2009~~our ~~financing~~assets, ina ~~which~~tender ~~the~~offer ~~Company~~or ~~issued~~exchange ~~shares~~offer ofis ~~common~~made ~~stock~~for ~~and~~our ~~warrants~~shares, ~~below~~or ~~the~~we ~~then~~effect ~~current~~a ~~exercise~~reclassification ~~price~~ of ~~the~~our ~~Series~~shares Dor ~~Warrants,~~a ~~the~~compulsory ~~exercise~~share ~~price~~exchange, ofa ~~the~~holder ~~outstanding~~that ~~Series~~subsequently Dconverts ~~Warrants~~its ~~and~~Debenture ~~placement~~will ~~agent~~be ~~warrants~~entitled ~~were~~to ~~adjusted~~receive ~~under~~ the ~~anti-dilution~~same ~~provisions~~kind ofand ~~such~~amount ~~instruments~~of tosecurities, acash ~~price~~or ofproperty ~~$0.25~~as ~~per~~if ~~share, and~~ the ~~number of~~ shares ~~underlying~~it ~~the~~is ~~outstanding~~entitled ~~Series~~to Dreceive ~~Warrants~~on ~~and~~ the ~~placement~~conversion ~~agent~~had ~~warrants,~~been issued ~~under~~and ~~the~~outstanding ~~Debenture~~on ~~agreement,~~the ~~were~~date ~~increased~~immediately prior to anthe ~~aggregate~~date ofany ~~6,889,848~~such ~~shares~~transaction occurred. Except Asas ~~disclosed~~discussed above, ~~1,779,596~~no ~~Series~~such Devents ~~warrants~~have ~~were~~occurred ~~exercised,~~through ~~and~~ the ~~remaining~~date ~~4,955,222~~of ~~Series~~this ~~D warrants and 1,019,828 related placement agent warrants expired April 12, 2012~~report.

The Series D Warrants contained a cashless exercise provision in the event (i) at any time after one year following the date the Series D Warrants are first exercisable there is no registration statement effective covering the resale of the shares underlying the Series D Warrants or (ii) at any time after four years following the date the Series D Warrants were issued.46

~~The~~We ~~Series~~were Dnot ~~Warrants~~required ~~contained~~to amake ~~limitation~~an onadjustment to the ~~amount~~conversion ofor ~~Series~~exercise Dprice ~~Warrants~~or ~~that~~the ~~may~~number of shares to be ~~exercised~~issued atupon ~~any~~conversion ~~one~~or ~~time~~exercise inof the ~~event~~Debentures pursuant to the ~~holder~~subsequent ~~owns~~equity ~~beneficially~~sales ~~more~~anti-dilution ~~than~~adjustment ~~4.99%~~provisions ofrelated ~~our~~to ~~common~~an “exempt issuance,” which is defined as: (A) any stock ~~without~~or ~~regard~~options that are issued under our stock option plans or are approved by a majority of non-employee directors and issued (i) to employees, officers or directors or (ii) to consultants, but only if the ~~number~~amount ofissued to consultants does not exceed 400,000 shares ~~underlying~~in a 12 month period, (B) securities issued under the ~~unconverted~~Debentures, ~~portion~~(C) shares of common stock issued upon conversion or exercise of, or in exchange for, securities outstanding on the ~~warrants.~~date ~~This~~we ~~limitation~~entered ~~may~~into bethe ~~waived~~securities ~~upon~~purchase 61agreement, ~~days’~~or ~~notice~~(D) tothe usissuance of securities in an acquisition or strategic transaction approved by our disinterested directors. Under the ~~holder~~Debenture ofAmendment Agreement, commencing October 15, 2010, Debenture holders agreed that an “exempt issuance” shall also include the ~~Series~~issuance Dof ~~Warrants~~stock ~~permitting~~or common stock equivalents authorized and approved in advance by the ~~holder~~Company’s todisinterested ~~change~~directors ~~such~~at ~~limitation~~a price per share or at a conversion or exercise price per share equal to 9or greater than $0.~~99%~~25.

~~The~~In ~~conversion~~connection ~~price~~with ofour ~~the~~Series ~~Debentures~~A ~~and~~Debenture ~~the~~financing, ~~exercise~~we ~~price~~entered ofinto ~~the~~a ~~Series~~registration Drights ~~Warrants~~agreement orwith ~~the~~purchaser ~~number~~ of ~~shares~~our todebentures bepursuant ~~issued~~to ~~upon~~which ~~conversion~~we oragreed ~~exercise~~we ofwould ~~the~~use ~~Debentures~~our ~~and~~best ~~Series~~efforts Dto ~~Warrants~~file ~~are~~a ~~subject~~registration tostatement ~~adjustment~~under in the ~~event~~Securities ofAct awithin ~~stock~~45 ~~dividend,~~days ~~stock~~of ~~split,~~the ~~subdivision~~first orclosing ~~combination~~to ofpermit ~~our~~the ~~shares~~public ofresale ~~common~~by ~~stock,~~debenture ~~reclassification,~~holders ~~sales~~ of ~~our~~the ~~securities~~shares ~~below~~that ~~their~~may ~~then~~be ~~conversion~~issued orupon ~~exercise~~conversion ~~price~~of ~~(“subsequent~~the ~~equity~~Debentures ~~sales~~and ~~anti-dilution~~upon ~~adjustment~~exercise ~~provisions”),~~of athe ~~subsequent~~Series ~~rights~~D ~~offering~~Warrants, orincluding athe ~~reclassification~~shares of our ~~shares.~~common ~~Also,~~stock ifunderlying wethe ~~effect~~Debentures ato ~~merger~~be orissued ~~consolidation~~at ~~with~~the ~~another~~second ~~company,~~closing. wePursuant ~~sell~~to ~~all~~the oramendments ~~substantially~~we ~~all~~entered ofinto ~~our~~with ~~assets,~~the acurrent ~~tender~~debenture ~~offer~~holders oron ~~exchange~~October ~~offer~~15, ~~is made for our shares~~2010, orthe wedebenture ~~effect~~holders aagreed ~~reclassification~~to ofterminate ~~our~~their ~~shares~~registration orrights aagreements ~~compulsory~~with ~~share~~us. ~~exchange~~Accordingly, awe ~~holder~~are ~~that~~not ~~subsequently~~required ~~converts~~to ~~its~~register ~~Debenture~~or ~~will~~maintain ~~be entitled to receive~~ the ~~same~~registration ~~kind and amount~~ of ~~securities, cash or property as if~~ the shares itunderlying isthe ~~entitled~~Series toA ~~receive~~Debentures, onhowever, the ~~conversion~~Company ~~had~~was ~~been~~obligated ~~issued~~under ~~and~~the ~~outstanding~~terms onof the ~~date~~Registration ~~immediately~~Rights ~~prior~~Agreement tothat the ~~date~~Company ~~any~~entered ~~such~~into ~~transaction~~with ~~occurred. Except~~each aspurchaser ~~discussed~~that ~~above,~~has nofully ~~such~~converted ~~events~~its ~~have occurred through the date of this report~~Debenture.

We ~~were~~also ~~not~~granted ~~required~~ to ~~make~~each anpurchaser ~~adjustment~~of to the ~~conversion~~Debentures ~~or exercise price or~~ the ~~number~~right ~~of shares~~ to beparticipate ~~issued~~in ~~upon~~any ~~conversion~~offering orby ~~exercise~~us of ~~the~~common ~~Debentures~~stock ~~and~~or ~~Series~~common Dstock ~~Warrants~~equivalents ~~pursuant~~until to the ~~subsequent~~later ~~equity~~of ~~sales~~(i) ~~anti-dilution~~12 ~~adjustment~~months ~~provisions~~after ~~related~~the toeffective andate ~~“exempt~~of ~~issuance,”~~the ~~which~~registration isstatement ~~defined~~and ~~as:~~ (Aii) ~~any~~the ~~stock~~date ora ~~options~~purchaser ~~that~~holds ~~are~~less ~~issued~~than ~~under~~20% ~~our~~of ~~stock~~the ~~option~~principal ~~plans~~amount ~~or are approved by a majority~~ of ~~non-employee~~the ~~directors~~Debenture ~~and~~the ~~issued~~purchaser ~~(i)~~originally agreed to ~~employees~~purchase, ~~officers~~except orfor ~~directors~~an orexempt ~~(ii)~~issuance toor ~~consultants,~~an ~~but~~underwritten ~~only~~public ifoffering ~~the~~of ~~amount~~our ~~issued~~common tostock. Purchasers ~~consultants~~may ~~does~~participate ~~not exceed 400,000 shares~~ in asuch 12an ~~month~~offering ~~period,~~up ~~(B)~~to ~~securities issued under~~ the ~~Debentures~~lesser orof ~~Series~~100% ~~D Warrants, (C) shares~~ of ~~common~~the ~~stock~~future ~~issued~~offering ~~upon conversion~~ or ~~exercise~~the ~~of,~~aggregate oramount insubscribed ~~exchange~~ for, ~~securities~~under ~~outstanding on~~ the ~~date we entered into the~~ securities purchase agreement, ~~(D)~~by ~~the~~all ~~issuance~~purchasers. ofAlthough ~~the~~such ~~Midtown~~common ~~placement~~stock ~~agent’s~~offerings ~~warrants~~have oroccurred, the ~~shares~~Debenture ~~underlying~~holders ~~the~~have ~~placement~~notified ~~agent’s warrants, or (E)~~ the ~~issuance~~Company ofthat ~~securities~~they indo annot ~~acquisition~~want orto ~~strategic~~participate ~~transaction~~in ~~approved~~any byfuture ~~our~~ financings.

57The securities purchase agreement also contained representations and warranties of both us and purchasers, conditions to closing, certain indemnification provisions, and other customary provisions. Also the Debenture Amendment Agreement amended certain provisions covering events of default under the Debentures, contained certain representations and warranties of the Company, a reaffirmation of certain of the representations and warranties in the securities purchase agreement, contained certain conditions to closing, and certain other customary provisions. We were prohibited from effecting a reverse or forward stock split or reclassification of our common stock except as may be required to comply with the listing standards of any national securities exchange.

disinterested directors. Under the Debenture Amendment Agreement, commencing October 15, 2010, Debenture holders agreed that an “exempt issuance” shall also include the issuance of stock or common stock equivalents authorized and approved in advance by the Company’s disinterested directors at a price per share or at a conversion or exercise price per share equal to or greater than $0.25.

In connection with our Series A Debenture financing, we entered into a registration rights agreement with purchaser of our debentures pursuant to which we agreed we would use our best efforts to file a registration statement under the Securities Act within 45 days of the first closing to permit the public resale by debenture holders of the shares that may be issued upon conversion of the Debentures and upon exercise of the Series D Warrants, including the shares of our common stock underlying the Debentures to be issued at the second closing. Pursuant to the amendments we entered into with the current debenture holders on October 15, 2010, the debenture holders agreed to terminate their registration rights agreements with us. Accordingly, we are not required to register or maintain the registration of the shares underlying the Series A Debentures and Series D warrants held be such debenture holders; however, the Company was obligated under the terms of the Registration Rights Agreement that the Company entered into with each purchaser that has fully converted its Debenture. As outlined above, the related Series D Warrants that continued to be held by the debenture holders have expired.

We also granted to each purchaser of the Debentures and Series D Warrants the right to participate in any offering by us of common stock or common stock equivalents until the later of (i) 12 months after the effective date of the registration statement and (ii) the date a purchaser holds less than 20% of the principal amount of the Debenture the purchaser originally agreed to purchase, except for an exempt issuance or an underwritten public offering of our common stock. Purchasers may participate in such an offering up to the lesser of 100% of the future offering or the aggregate amount subscribed for under the securities purchase agreement by all purchasers. Although such common stock offerings have occurred, the Debenture holders have notified the Company that they do not want to participate in any future financings.

The securities purchase agreement also contained representations and warranties of both us and purchasers, conditions to closing, certain indemnification provisions, and other customary provisions. Also the Debenture Amendment Agreement amended certain provisions covering events of default under the Debentures, contained certain representations and warranties of the Company, a reaffirmation of certain of the representations and warranties in the securities purchase agreement, contained certain conditions to closing, and certain other customary provisions.

We were prohibited from effecting a reverse or forward stock split or reclassification of our common stock except as may be required to comply with the listing standards of any national securities exchange.

Midtown Partners & Co., LLC acted as placement agent for the financing pursuant to the terms of a Placement Agent Agreement, dated July 14, 2006, between us and Midtown. At the first closing, we paid or issued the following compensation to Midtown for its services as placement agent in connection with the offering: (i) sales commissions in the amount of $180,250; (ii) non-accountable expense reimbursement and legal fees of $30,000 of which $10,000 was paid prior to closing, (iii) placement agent’s warrants to purchase an aggregate of 623,520 shares (one half of the placement agent warrants were exercisable on November 6, 2006 and the remaining one-half became exercisable on April 12, 2007). The second closing took place on April 12, 2007, at which time we paid the following compensation to Midtown for its services as placement agent in connection with the offering: (i) sales commissions in the amount of $180,250; (ii) non-accountable expense reimbursement and legal fees equal to 1% of the second closing or $25,750, (iii) the remaining one-half of the placement agent’s warrants to purchase an aggregate of 311,760 shares. The Midtown placement agent’s warrants were initially exercisable at a price of $1.15634 per share for a period of five years from the date they become exercisable, the exercise price was reset as disclosed above for the convertible debentures, contain a piggyback registration right, a cashless exercise provision and are substantially identical to the warrants issued to purchasers in the Debenture and Warrant offering. As a result of the June 2009 financing, the exercise price of the placement agent’s warrants were adjusted under the anti-dilution provisions of such warrants to a price of $0.25 per share and the number of shares underlying the placement agent’s warrants would be increased to an aggregate of 1,019,828 shares. As disclosed above, an aggregate of 509,914 of the placement agent warrants expired on November 8, 2011, and the remaining 509,914 of the placement agent warrants expired on April 12, 2012.

The securities, including certain securities issued to Midtown, were not registered under the Securities Act of 1933 or any state laws and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Additional Capital

To the extent that additional capital is raised through the sale of our equity or equity-related securities of our subsidiaries, the issuance of our securities could result in dilution to our stockholders. No assurance can be given that we will have access to the capital markets in the future, or that financing will be available on terms acceptable to satisfy our cash requirements, implement our business strategies, and meet the restrictive requirements of the debenture financing described above. If we are unable to access the capital markets or obtain acceptable financing, our results of operations and financial condition could be materially and adversely affected. We may be required to raise substantial additional funds through other means. We have not begun to receive material revenues from our commercial operations associated with the software products. Management may seek to raise additional capital through one or more equity or debt financings or have discussions with certain investors with regard thereto. We cannot assure our stockholders that our technology and products will be commercially accepted or that revenues will be sufficient to fund our operations. If adequate funds are not available to us, we may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products.

may be required to raise substantial additional funds through other means. We have not begun to receive material revenues from our commercial operations associated with the software products. Management may seek to raise additional capital through one or more equity or debt financings or have discussions with certain investors with regard thereto. We cannot assure our stockholders that our technology and products will be commercially accepted or that revenues will be sufficient to fund our operations. If adequate funds are not available to us, we may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products.

Financial Condition, Going Concern Uncertainties and Events of Default

~~During~~The ~~the~~Company, ~~year~~previously ~~ended~~an ~~December~~operating 31stage company, became a development stage company on April 1, 2012. A development stage company, as defined by ASC-915-10 “Accounting and Reporting by Development Stage Enterprise”, is an entity that devotes substantially all of its efforts to establish a business and either of the following conditions exists: 1) the principal operations have not commenced, or 2) the principal operations have commenced, but there has been no significant revenue therefrom. During 2014, Applied Visual Sciences’ revenue generating activities have not produced sufficient funds for profitable operations and we have incurred operating losses since inception. In view of these matters, realization of certain of the assets in the accompanying consolidated balance sheet is dependent upon continued operations, which in turn is dependent upon our ability to meet our financial requirements, raise additional financing on acceptable terms, and the success of future operations. Our independent registered public accounting firm’s report on the consolidated financial statements included herein, and in our annual report on Form 10-K for the year ended December 31, 2010, contains an explanatory paragraph wherein they expressed an opinion that there is substantial doubt about our ability to continue as a going concern. Accordingly, careful consideration of such opinions should be given in determining whether to continue or become our stockholder.

As of December 31, 2012, we have outstanding trade and accrued payables of $1,570,639, other accrued liabilities of $621,311, and accrued salaries due to our employees and management of $6,629,246. Also, the Company has an outstanding noninterest-bearing loan from its Chief Executive Officer of $89,000, and $560,000 short-tern notes from five investors.47

~~The~~consolidated ~~principal~~financial ~~amount~~statements ofincluded ~~our outstanding Series A Debentures of $1~~herein,~~688,205~~ ~~became due on July 1, 2011,~~ and ~~such amount was not paid. Therefore, the Company may be considered~~ in ~~default. The~~this ~~debentures~~Annual ~~provide~~Report ~~that~~on ~~any~~Form default in the payment of principal, which default is not cured within the five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default and may result in enforcement of the debenture holders’ rights and remedies under the debentures and applicable law. We are in discussions with the debenture holders to re10-~~negotiate~~K ~~the~~for ~~terms of~~ the ~~debentures,~~year ~~including~~ended ~~the~~December ~~repayment or repurchase of the debentures and/or seek to extend their maturity date~~31, ~~although we have not reached any agreement with the debenture holders with regard to any such repayment~~2014, ~~repurchase~~contains oran ~~extension. Our~~explanatory ~~ability~~paragraph towherein ~~repay~~they orexpressed ~~repurchase~~an ~~the~~opinion ~~debentures~~that there is ~~contingent~~substantial ~~upon~~doubt about our ability to ~~raise~~continue ~~additional financing, of which there can be no assurance. Also,~~ as a ~~condition~~going ~~to any such extension, debenture holders may seek to amend or modify certain other terms of the debentures~~concern. If ~~an event of default occurs under the debentures~~Accordingly, ~~the~~careful ~~debenture~~consideration ~~holders may elect to require us to make immediate repayment~~ of ~~the~~such ~~mandatory~~opinion ~~default~~should ~~amount,~~be ~~which~~given equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, or (b) the outstanding principal amount unpaid divided by the conversion price on the date the mandatory default amount is either (1) demanded or otherwise due or (2) paid in ~~full,~~determining ~~whichever~~whether ~~has~~to ~~the~~continue ~~lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded~~ or ~~otherwise~~become ~~due,~~our ~~whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures~~stockholder. In ~~anticipation of such election by the debenture holders~~addition, ~~due to~~ the ~~nonpayment~~Company ~~of principal amount on the due date of July 1, 2011, we measured the mandatory default amount at approximately $337,641 and subsequently on each balance sheet date, which~~ is ~~reflected~~currently inevaluating the ~~carrying~~impact ~~value~~ of ~~the~~ASU ~~debentures and also recognized as interest expense~~No. We ~~remeasured the mandatory default amount as of December 31~~2014-15, ~~2012~~Presentation ~~at approximately $337,641. As~~ of ~~the~~Financial ~~date~~Statements—Going ~~of this report~~Concern, ~~the~~on ~~debenture~~its ~~holders~~disclosures ~~have~~regarding ~~not made an election requiring immediate repayment of~~ the ~~mandatory amount, although there can be no assurance they will not do so. The~~ Company’s ~~currently~~ability ~~has insufficient funds~~ to ~~repay~~continue ~~the~~as ~~outstanding amount in the event the debenture holders make~~ a ~~demand~~going ~~for payment~~concern.

~~During~~As ~~2012~~of December 31, 2014, the Company ~~issued~~has ~~promissory~~outstanding ~~notes~~trade toand ~~four~~accrued ~~accredited~~payables ~~investors in the aggregate principal amount~~ of $~~160~~1,~~000 ($157~~792,~~300~~192, ~~net~~other of accrued ~~commissions~~liabilities ~~and expenses in the amount~~ of $2242,~~700)~~404, ofand ~~which~~accrued ~~$100,000~~salaries ~~initially matured on December 31, 2012,~~ and ~~was~~related ~~subsequently~~expenses ~~extended~~due to ~~June~~our ~~30,~~employees ~~2013,~~and ~~$50,000~~management ~~matures~~of ~~on January 24, 2013, and~~ $108,~~000 matures on April 11~~792, ~~2013~~108. ~~The~~ ~~short-term~~Also, ~~notes~~the ~~accrue interest at a rate of 12% per annum. The~~ Company ~~also~~has ~~issued to the note holders~~ an ~~aggregate~~outstanding ofnoninterest-bearing ~~285,000~~loan ~~shares~~from ofits ~~common~~previous ~~stock,~~Chief ~~and~~Executive ~~10,800~~Officer ~~shares~~ of ~~common stock to a placement agent in exchange for cash compensation of~~ $280,~~700. On March 15~~500, ~~2012,~~and ~~we received~~ $25807,~~000~~500 ~~from~~short-term annotes ~~accredited~~from ~~investor, and issued an aggregate of 100,000 shares of common stock and 300,000 Class Q Warrants. The Class Q Warrants are exercisable at~~ a ~~price~~total of ~~$0.25~~twenty ~~per~~(20) ~~share; contain a conditional call provision if the market price of each share exceeds $3~~investors.~~00, certain anti-dilution and other customary provisions. The warrants expire three years after the date of issuance.~~

AsThe principal amount of ~~December~~our 31outstanding Series A Debentures of $1,688,205 ~~2012~~became due on July 1, we2011, ~~had~~and asuch ~~cash~~amount ~~balance~~was ofnot $3paid. Therefore,~~445~~ the Company could be considered in default and may result in enforcement of the debenture holders’ rights and remedies under the debentures and applicable law. ~~Subsequently~~We ~~and~~have ~~through~~been ~~May~~in 10discussions with the debenture holders to re-negotiate the terms of the debentures, ~~2013~~including the repayment or repurchase of the debentures and/or seek to extend their maturity date, although we ~~received~~have ~~$135,000~~not ~~from~~reached ~~accredited~~any ~~investors~~agreement ~~upon~~with the ~~issuance~~debenture ofholders ~~promissory~~with ~~notes~~regard to any such repayment, ~~and~~repurchase or extension. Our ability to repay or repurchase the ~~notes~~debentures ~~accrue~~is ~~interest~~contingent atupon aour ~~rate~~ability to raise additional financing, of ~~12%~~which ~~per~~there ~~annum~~can be no assurance. ~~Management~~Also, ~~believes~~as ~~these~~a ~~funds~~condition to beany ~~insufficient~~such extension, debenture holders may seek to ~~fund~~amend ~~our~~or ~~operations~~modify ~~for~~certain other terms of the ~~next~~debentures. ~~twelve~~When ~~months~~an ~~absent~~event ~~any~~of ~~cash~~default ~~flow~~occurs ~~from~~under ~~operations~~the ordebentures, ~~funds~~the ~~from~~debenture holders may elect to require us to make immediate repayment of the ~~sale~~mandatory default amount, which equals the sum of ~~our~~(i) ~~equity~~the orgreater ~~debt~~of ~~securities. Currently~~either (a) 120% of the outstanding principal amount of the debentures, weor ~~are~~(b) ~~spending~~the outstanding principal amount unpaid divided by the conversion price on the date the mandatory default amount is either (1) demanded or ~~incurring~~otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and ~~accruing~~(ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. In anticipation of such election by the debenture holders, due to the nonpayment of principal amount on the due date of July 1, 2011, we measured the mandatory default at approximately $~~190~~337,~~000~~641 ~~per~~and ~~month~~subsequently on ~~operations~~each ~~and~~balance sheet date, which is reflected in the ~~continued~~carrying ~~research~~value of the debentures and ~~development~~also recognized as interest expense. We remeasured the mandatory default amount as of ~~our~~December 3i31, ~~technologies~~2014 ~~and~~at ~~products~~approximately $337,641. ~~including~~As ~~with~~of ~~regard~~the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. The Company currently has insufficient funds to repay the outstanding amount in the event the debenture holders make a demand for payment.

59As of December 31, 2014, we had a cash balance of $33,961. Subsequently and through the date of this report, Company sold to accredited investor an aggregate of 2,000,000 shares of common stock upon the exercise of 2,000,000 warrants for gross proceeds of $60,000. Management believes these funds to be insufficient to fund our operations for the next twelve months absent any cash flow from operations or funds from the sale of our equity or debt securities. Currently, will require an aggregate of approximately we are spending or incurring (and accruing) expenses of approximately $150,000 per month on operations and the continued research and development of our 3i technologies and products, including with regard to salaries and consulting fees. Management believes that we will require an aggregate of approximately $1,800,000 to fund our operations for the next 12 months and to repay certain outstanding trade payables and accrued expenses. This assumes that holders of our outstanding debentures convert such debt into shares of our common stock or that we are able to extend the term of the debentures, of which there can be no assurance. In the event we are unable to extend the term of the debentures beyond their new maturity date, the debenture holders do not convert such debt or require payment of principal, partially convert such debt, or effect the buy-in provision related to the debentures, we shall be required to raise additional financing. Also, this assumes that we are able to continue to defer the amounts due to our employees for accrued and unpaid salaries and that we are able to continue to extend or defer payment of certain amounts due to our trade creditors, of which there can be no assurance.

~~salaries~~The ~~and~~Company ~~consulting~~has ~~fees. Management~~relied ~~believes~~and ~~that~~continues weto ~~will~~rely ~~require~~substantially anupon ~~aggregate~~equity ofand ~~approximately~~debt ~~$2,280,000~~financing to fund ~~our~~its ongoing operations, ~~for~~including the ~~next~~research 12and ~~months~~development conducted in connection with its products and conversion of accounts payable for stock. The proceeds from our financings have been and continue to ~~repay~~be ~~certain~~insufficient ~~outstanding~~to fund our operations, pay our trade payables, and repay our unconverted debentures or accrued ~~expenses~~and unpaid wages to our employees. ~~This~~Therefore, ~~assumes~~the ~~that~~debentures holders, of our ~~outstanding~~employees, ~~debentures~~or ~~convert~~trade ~~such~~creditors ~~debt~~may ~~into~~seek ~~shares~~to enforce payment of ~~our~~amounts ~~common~~due ~~stock~~to orthem, ~~that~~and weour ~~are~~results ~~able~~of tooperations ~~extend~~and ~~the~~financial ~~term~~condition ofcould ~~the~~be ~~debentures,~~materially ofand ~~which~~adversely ~~there~~affected ~~can~~and we may be nounable ~~assurance~~to continue our operations. InAlso, in the event we ~~are~~continue to be unable to ~~extend~~pay ~~the~~our ~~term~~employees, ofwe ~~the~~may ~~debentures~~suffer ~~beyond~~further ~~their~~employee ~~new~~attrition. There ~~maturity~~can ~~date,~~be ~~the~~no ~~debenture~~assurances ~~holders~~that dowe ~~not~~will ~~convert~~be ~~such~~successful ~~debt~~in orour ~~require~~efforts ~~payment~~to ofraise ~~principal,~~any ~~partially~~additional ~~convert~~financing, ~~such~~any ~~debt~~bank borrowing, and research or ~~effect~~grant ~~the~~funding. Moreover, ~~buy-~~in ~~provision~~view ~~related~~of to the ~~warrants~~current market price of and ~~the~~limited ~~debentures~~trading volume in our stock, we ~~shall~~may behave ~~required~~limited or no access to ~~raise~~the ~~additional~~capital ~~financing~~markets. ~~Also~~Furthermore, ~~this~~under ~~assumes~~the ~~that~~terms of our agreements with the debenture holders, we are ~~able~~subject to ~~continue~~restrictions on our ability to ~~defer~~engage ~~the~~in ~~amounts~~any ~~due~~transactions toin our ~~employees~~securities ~~for~~in ~~accrued~~which ~~and~~the ~~unpaid~~conversion, ~~salaries~~exercise ~~and~~or ~~that~~exchange werate ~~are~~or ~~able~~other toprice ~~continue~~of tosuch ~~extend~~securities is below the current conversion price or ~~defer~~is ~~payment~~based ofupon ~~certain~~the ~~amounts~~trading ~~due~~price toof our ~~trade~~securities ~~creditors,~~after initial issuance or otherwise subject to re-set. In view of ~~which~~the ~~there~~foregoing, ~~can~~we may be norequired ~~assurance.~~to curtail operations significantly, or obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products.

In view of our limited revenues to date, the Company has relied and continues to rely substantially upon equity and debt financing to fund its ongoing operations, including the research and development conducted in connection with its products and conversion of accounts payable for stock. The proceeds from our financings have been and continue to be insufficient to fund our operations, pay our trade payables, repayment of our unconverted debentures, or accrued and unpaid wages to our employees. Therefore, the debentures holders, our employees, or trade creditors may seek to enforce payment of amounts due to them, and our results of operations and financial condition could be materially and adversely affected and we may be unable to continue our operations. Also, in the event we continue to be unable to pay our employees, we may suffer further employee attrition. There can be no assurances that we will be successful in our efforts to raise any additional financing, any bank borrowing, and research or grant funding. Moreover, in view of the current market price of our stock, we may have limited or no access to the capital markets. Furthermore, under the terms of our agreements with the debenture holders, we are subject to restrictions on our ability to engage in any transactions in our securities in which the conversion, exercise or exchange rate or other price of such securities is below the current conversion price or is based upon the trading price of our securities after initial issuance or otherwise subject to re-set. In view of the foregoing, we may be required to curtail operations significantly, or obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products.48

During ~~Fiscal 2012~~2014, our total stockholders’ deficit increased by $1644,~~409,544~~719 to $1113,~~235~~570,~~351~~796, and our consolidated net loss for the period was $1783,~~804~~378,~~101~~ orcompared to a net loss for the same period in 2013 of $~~649~~2,~~725~~437,304, ~~increase~~or ina ~~net~~decrease ~~loss~~of ~~from~~$1,653,926 ~~2011~~(67. 9%). Notwithstanding the foregoing discussion of management’s expectations regarding future cash flows, Applied Visual Sciences’ insolvency continues to increase the uncertainties related to its continued existence. Both management and the Board of Directors are carefully monitoring the Company’s cash flows and financial position in consideration of these increasing uncertainties and the needs of both creditors and stockholders.

CONSOLIDATED RESULTS OF OPERATIONS

The following analysis reflects the consolidated results of operations of Applied Visual Sciences, Inc. and its subsidiaries.

Fiscal ~~2012~~2014 as Compared with Fiscal ~~2011~~2013

Net Revenues. There were no revenues for fiscal ~~2012. Net revenue for the same~~ period inended ~~2011~~December ~~of $6~~31,~~589~~ ~~was from the sale of hardware and related~~2014, ~~specifically~~or ~~freight, duty and taxes reimbursed by the customer~~ for the ~~shipment~~same ofperiod ~~TBDx™~~in 2013.

Cost of Sales. There was no cost of sales for fiscal ~~2012, and the same~~ period inended ~~2011.~~December ~~The~~31, ~~freight~~2014, ~~duty~~ and ~~taxes~~the ~~billed~~same ~~during~~period ~~2011 were expensed~~ in ~~December 2010~~2013.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal ~~2012~~2014 of $1,~~752~~002,~~254~~624, decreased by $~~809~~1,~~295~~022,551 (3650.15%), as compared to $2,~~741~~025,~~778~~175 for the same period in ~~2011~~2013. The table below details the components of selling, general and administrative expense, as well as the dollar and percentage changes for the ~~fiscal~~twelve ~~years~~month ~~ended December 31~~period.

					Cumulative From
	Years Ended December 31
					April 1, 2012
	2014	2013	$ Change	% Change
	Twelve Months Ended December 31				(date of inception) To
Payroll and related costs	$ 690,846	$ 946,674	$ (255,828)	(27.0)
	2012	2011	$ Change	% Change	December 31, 2012
Professional fees	121,671	214,352	(92,681)	(43.2)
Payroll and related costs	$ 984,482	$ 1,073,527	$ (89,045)	(8.3)	$ 718,995
Research and development costs	62,990	80,094	(17,104)	(21.4)
Professional fees	368,171	630,953	(262,782)	(41.6)	190,869
Other operating expenses	53,694	88,587	(34,893)	(39.4)
Research and development costs	82,300	233,330	(151,030)	(64.7)	64,288
Depreciation and amortization	55,144	55,139	5	0.0
Other operating expenses	140,414	258,936	(118,522)	(45.8)	106,077
Stock-based compensation	18,279	640,329	(622,050)	(97.1)
Depreciation and amortization	91,763	93,419	(1,656)	(1.8)	67,082
Total	$ 1,002,624	$ 2,025,175	$ (1,022,551)	(50.5)
Stock-based compensation	85,124	451,613	(366,489)	(81.2)	84,291
Total	$ 1,752,254	$ 2,741,778	$ (989,524)	(36.1)	$ 1,231,602

60Payroll and related costs, which includes salaries, commissions, taxes and benefits, decreased $255,828 (27.0%), due to a reduction in full-time staff. During 2014, the Company employed three full-time and one part-time employee, and during 2013, five full-time, one part-time employee.

~~Payroll~~Professional ~~and~~fees ~~related~~include ~~costs~~legal, ~~which~~accounting, ~~includes~~stock ~~salaries,~~transfer ~~commissions~~agent, ~~taxes~~SEC ~~and benefits~~filing, ~~decreased~~and ~~$89,045~~general (8consulting fees.~~3%),~~ ~~due~~Professional tofees ~~two~~decreased ~~employees~~for ~~being~~the onyear aended ~~leave~~December of31, ~~absence~~2014 ~~effective~~versus ~~April~~the 1,same ~~2011~~period ~~and~~last ~~cancellation~~year ofby ~~some~~$92,681 ~~employee benefits~~(43.2%) ~~The~~due ~~Company~~to: ~~currently~~(i) ~~employs~~a ~~five~~decrease ~~full-time~~of ~~and~~$1,018 ~~one~~for ~~part-time~~general ~~employee~~consultants, ~~compared~~legal tocounsel, ~~six~~and ~~full-time~~miscellaneous services and ~~one~~fees, ~~part-time~~and ~~employee~~(ii) ~~for~~a ~~the~~decrease ~~same~~in ~~period~~information intechnology ~~2011~~consulting fees of $91,663.

~~Professional~~Research ~~fees include legal, accounting, stock transfer agent, SEC filing,~~ and ~~general~~development ~~consulting~~(“R&D”) ~~fees.~~costs ~~Professional fees~~ decreased for ~~the~~fiscal ~~twelve months ended December 31~~2014, ~~2012~~compared ~~versus~~to the same period last year by $~~262~~17,~~782~~101 (4121.64%). During ~~due to: (i) a decrease in legal fees of $217~~2014,~~408~~ ~~for services related to financing activities not incurred during~~ the ~~same~~staff ~~period~~focused inon ~~2011,~~performance ~~including~~metrics ~~legal~~and ~~fees~~algorithm improvements for ~~SEC~~Signature ~~compliance~~Mapping ~~reporting of $14,348, non-refundable formation fee of $200,000 related to negotiations of a strategic partnership for BCDx~~TBDx™, ~~and~~that ~~3,060~~were ~~various~~used ~~legal services, (ii) decrease~~ in ~~general~~the ~~consultants~~clinical ~~of $37,966, and (iii) a net decrease of $7,408 for various miscellaneous services and fees~~evaluations.

~~Research~~Depreciation and ~~development~~amortization ~~(“R&D”)~~expense ~~costs~~is ~~decreased~~determined ~~for~~on ~~fiscal~~the ~~2012,~~straight-line ~~compared~~method toover the ~~same~~estimated ~~period~~useful ~~last~~life ~~year~~of bythe ~~$151~~asset,~~030~~ ~~(64.7%),~~which ~~due~~for equipment and furniture ranges from 3 to ~~redirecting~~10 ~~R&D~~years, ~~activities~~and for ~~Signature~~intangible ~~Mapping~~assets ~~TBDx™~~(patent ~~and~~acquisition ~~TBDxV™~~costs ~~projects~~capitalized) are being amortized over the 20-year legal life of the patents.

Other operating expenses decreased by $~~118~~34,~~522~~893 (4539.84%) to $~~140~~53,~~414~~694 for fiscal ~~2012~~2014, as compared to $~~258~~88,~~936~~587 for the same period in ~~2011~~2013. The decrease is attributed to: ~~reduced~~(i) ~~insurance~~lower administrative costs byof $697,~~756 in not renewing various business policies~~472, a(ii) ~~decrease~~decreased intrade ~~travel~~conference costs of $4210,~~034~~317, and ~~administrative~~(iii) ~~expenses~~reduced rent costs of $617,~~732~~104.

~~Depreciation~~Stock-based ~~and~~compensation, ~~amortization~~which represents a noncash expense incategory, ~~selling~~is the amortization of the estimated fair value of stock-based compensation to employees, ~~general~~non-employee members of our Board of Directors, and ~~administrative~~consultants in lieu of cash compensation. Employee stock option expense for the ~~twelve~~years ~~months~~ ended December 31, ~~2012,~~2014 isand ~~$91,763,~~2013 ~~compared~~represents tothe amortization of the ~~same~~Black-Scholes ~~period~~fair ~~for~~value ~~2011~~as outlined above in accordance with ASC 718-10. ASC 718-10 requires the recognition of ~~$93,419,~~all share-based payments to employees or ato ~~decrease~~non-employee directors, as compensation for service on the Board of $1Directors,~~656~~ (1as compensation expense in the consolidated financial statements.~~8%).~~ The amount of compensation is measured based on the estimated fair values of such stock-based payments on their

Stock-based compensation, which represents a noncash expense category, is the amortization of the estimated fair value of stock-based compensation to employees, non-employee members of our Board of Directors, and consultants in lieu of cash compensation. During the twelve months ended December 31, 2012, the Company recognized an expense of $74,000 associated with employees and directors stock-based compensation, and recognized $11,124 of consulting expense. During the same period of 2011, the Company recognized stock-based compensation expense for employees and directors of $164,241 and consultants of $287,372. The decrease in stock-based compensation for employees and non-employee directors of $90,241 (54.9%) is due to no issuance of incentive stock options to: (i) employees in 2010 through 2012, whereas stock options were issued to employees during prior years and amortized over the two year vesting period, and (ii) non-employee directors during 2011 through 2012, whereas such stock options were issued in 2010 and amortized over the one year vesting period. Stock-based compensation expense for consultants decreased $276,248 (96.1%) during 2012 as a result of reduced use of stock-based compensation versus cash compensation for consultants.49

~~Employee~~grant ~~stock~~dates, ~~option expense in 2012~~ and ~~2011~~is ~~represents~~amortized ~~the~~over ~~amortization of~~ the ~~Black-Scholes~~estimated ~~fair~~service ~~value~~period asto ~~outlined above in accordance with ASC 718-10~~vesting. The ~~ASC~~Company ~~718-10~~issued ~~requires the recognition of all share~~stock-based ~~payments~~compensation to ~~employees,~~management orand toother ~~non-employee~~employees ~~directors~~during ~~for service on the Board of Directors~~2013, asand ~~compensation~~none ~~expense~~during in2014. During the ~~consolidated~~year ~~financial~~ended ~~statements.~~December ~~The~~31, ~~amount~~2014, ofthe ~~compensation~~Company isrecognized ~~measured~~an ~~based~~expense onassociated ~~the~~with ~~estimated~~employees, ~~fair~~including ~~values~~its ofnamed ~~such~~executives, for stock-based ~~payments~~compensation onof ~~their~~$10,279, ~~grant~~and ~~dates~~$634,829 ~~and~~for isthe ~~amortized~~same ~~over~~period ~~the~~in ~~estimated~~2013, ~~service~~or ~~period~~a todecrease ~~vesting~~of $624,550 (98.4%). Consulting expense for stock-based payments to consultants is based on the fair value of the stock-based compensation at inception and amortized over the estimated service period but, in accordance with ASC 505-50, is remeasured on each reporting date until the performance commitment is complete. During 2014, the Company recognized an expense for stock-based compensation to consultants of $8,000, compared to $5,500 during 2013, or an increase of $2,500 (45.4%).

Other Income (Expense). Other income (expense) includes interest income, interest expense and other non-operating income and expense. ~~Other~~Net ~~expense~~other income for fiscal ~~2012~~2014 was $51219,~~847~~246, compared to ~~other~~an ~~income~~expense in 2013 of $1412,~~508,813~~129 for the same period last year, for aan ~~net~~increase ~~decrease~~ in other income of $1631,~~620,373~~375 (~~102~~153.52%).

There was no interest income from interest bearing accounts for ~~the~~ fiscal ~~2012~~2014, or for the same period in ~~2011~~2013, due to low average daily cash balances in interest bearing accounts during the periods.

~~For~~The ~~the~~components ~~twelve~~of ~~months~~non-operating ~~ended~~items ~~December~~for ~~31,~~the ~~2012~~2014 and 2013, and the ~~Company~~variances ~~had~~include: ~~other~~(i) ~~non-operating~~financing ~~expense~~costs offor ~~$51,847,~~commissions ~~compared~~on ~~to non~~short-~~operating~~term ~~income~~notes of $~~1,580,813~~0 in 2014 versus $225 for the same period in ~~2011~~2013, or a decrease ~~in other non-operating income~~ of $~~1,620,373~~225 (~~102~~100.50%)~~. The~~, ~~components of 2012 and the variances to the same period in 2011 include:~~ (iii) ~~financing~~no ~~costs~~sale inof ~~2012~~furniture ofin $22014,~~700~~ ~~for~~and ~~placement~~a ~~agent~~gain ~~commission~~from ~~related to~~ the ~~2012~~sale ~~promissory~~of ~~notes~~furniture orin a2013 ~~reduction~~ of $228,~~300 from the same period in 2011~~338, (iiiii) debt discount amortization costs in ~~2012~~2014 of $4020,~~006~~570 and $10,826 in 2013, or an increase ~~from~~in ~~2011~~expense of $339,~~893~~744 (90.0%), (~~iii~~iv) interest expense ~~for~~in ~~2012~~2014 offor ~~$64,382 as a result of additional~~ short-term notes ~~during~~of ~~2012~~$97,825, ~~compared~~whereby to $871,~~751~~775 ~~during~~for the same period in ~~2011~~2013, or an increase in expense of $26,050 (iv36.3%), (v) income of $67337,~~528~~641 in ~~2012~~2014 for the revaluation of beneficial conversion feature of the outstanding debentures, compared to ~~$1,958,318 in 2011, (v) no expense in 2012 for~~ an ~~event of default related to the convertible debentures, whereas an~~ expense of $337,641 ~~for the same period~~ in ~~2011~~2013, ~~and~~or ~~(vi)~~an aincrease ~~loss on sale of fixed assets~~ in ~~2012~~income of $12675,~~287~~282 ~~with no such expense in 2011~~(200. 0%). Non-cash non-operating income included above for fiscal ~~2012~~2014 was $24317,~~822~~071, compared to non-operating expense of $348,467 for the same period in ~~2011~~2013, or an increase in non-cash non-operating income of $1665,~~589,564~~538 (191.0%).

61Net Loss and Net Loss per Common Share. Net loss for fiscal 2014 was $783,378, compared to $2,437,304 for the same period in 2013, for a decrease in net loss of $1,653,926 (67.9%). Net loss for the Company per common share (“basic EPS”) is computed by dividing net income (loss) by the weighted average number of shares outstanding. Net loss per common share assuming dilution (“diluted EPS”) is computed by reflecting potential dilution from contingently issuable shares (i.e. common stock purchase warrants and stock options issued and outstanding).

~~Net~~Reconciliation ~~Income~~between ~~(Loss) and Net Income (Loss) per Common Share. Net loss for fiscal 2012 was $1,804,101, compared to~~ the ~~same~~numerators ~~period~~and indenominators ~~2011~~ of ~~$1,154,376, for an increase in net loss of $649,275 (56.3%). Net income (loss) for~~ the ~~Company per common share (“~~basic EPS”) iscomputations ~~computed by dividing net income (loss) by the weighted average number of shares outstanding. Net income (loss) per common share assuming dilution (“diluted EPS”)~~ is ~~computed~~as ~~by reflecting potential dilution from contingently issuable shares (i.e. common stock purchase warrants and stock options issued and outstanding).~~follows:

Reconciliation between the numerators and denominators of the basic and diluted EPS computations is as follows:


	Year Ended December 31
	2014	2013
Numerator:
Net loss	$ (783,378)	$ (2,437,304)

Denominator:
Weighted average common shares outstanding - basic	103,536,220	101,107,202

Net loss per common share:
Basic	($0.01)	($0.02)

	Year Ended December 31
	2012	2011
Numerator:
Net loss	$ (1,804,101)	$ (1,154,376)
Denominator:
Weighted average common shares outstanding - basic & diluted	94,486,673	85,456,082
Weighted average common shares outstanding - Diluted	139,246,542	110,690,895
Net loss per common share:
Basic & diluted	$ (0.02)	$ (0.01)
Diluted	(0.01)	(0.01)

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table summarizes scheduled maturities of our contractual obligations extending beyond one year for which cash flows are fixed and determinable as of December 31, ~~2012~~2014.

Category	Payments Due in Fiscal
	Total	2013	2014	2015	2016	2017	Thereafter
Short-term convertible debentures (1)	$ 1,688,205	$ 1,688,205	$ -	$ -	$ -	$ -	$ -
Interest payments (2)	-	-	-	-	-	-	-
Operating lease commitments (3)	5,864	5,864	-	-	-	-	-
Unconditional purchase obligations (4)	-	-	-	-	-	-	-
Total contractual obligations	$ 1,694,069	$ 1,694,069	$ -	$ -	$ -	$ -	$ -
(1) Represents the outstanding Series A Convertible Debentures that originally matured November 8, 2008, and were amended October 15, 2010. Under terms of the amendment, the Company and the debenture holders agreed to an extension of the maturity date to June 30, 2011. The Company is currently in default under the amendment agreement and is negotiating with the debenture holders to extend the maturity date. Commencing March 3, 2011, the Company may force a conversion of the debentures if certain trading price and volume conditions are met.
(2) The outstanding Series A convertible debentures, under the October 15, 2010 amendment, did not bear interest through the new maturity date of June 30, 2011, and the amendment agreement does not require interest after the maturity date. The Company is in negotiations with the debenture holders to extend the maturity date of the convertible debentures, and the holders may require interest to be paid for such extension.
(3) Represents projected rent cost for the existing office lease, which expires on January 31, 2013. Total rental expense included in the accompanying consolidated statements of earnings was $71,738 in fiscal 2012, and $70,160 in fiscal 2011.
(4) The company currently does not have any outstanding unconditional purchase obligations. They would though include inventory commitments, future royalty, consulting agreements, other than month-to-month arrangements or those that expire in less then one year, or commitments pursuant to executive compensation arrangements.


Category	Payments Due in Fiscal
Category	Total	2015	2016	2017	2018	2019	Thereafter
Convertible debentures (1)	$ 1,688,205	$ 1,688,205	$ -	$ -	$ -	$ -	$ -
Notes payable (2)	807,500	807,500	-	-	-	-	-
Notes payable and advances, related parties (3)	80,500	80,500	-	-	-	-	-
Interest payments (4)	242,404	242,404	-	-	-	-	-
Operating lease commitments (5)	-	-	-	-	-	-	-
Unconditional purchase obligations (6)	-	-	-	-	-	-	-
Total contractual obligations	$ 2,818,609	$ 2,818,609	$ -	$ -	$ -	$ -	$ -

(1) Represents the outstanding Series A Convertible Debentures that originally matured November 8, 2008, and were amended October 15, 2010. Under terms of the amendment, the Company and the debenture holders agreed to an extension of the maturity date to June 30, 2011. The Company is currently in default under the amendment agreement and is negotiating with the debenture holders to extend the maturity date. Commencing March 3, 2011, the Company may force a conversion of the debentures if certain trading price and volume conditions are met.
(2) Represents outstanding notes payable issued in 2011 of $400,000, in 2012 of $160,000, in 2013 of $179,500, and $68,000 in 2014. The original term of the notes varried from three (3) months to 18 months, with interest rates from noninterest bearing to 12% per annum. The notes have subsequently been extended and they mature on December 31, 2015. See Other Liabilities above for further information on the 2011 through 2014 Short-Term Promissory Notes.
(3) Represents outstanding notes payable from our previous chief executive officer. The notes are non-negotiable, unsecured, and non-interest bearing. The term of the original note was six (6) months, and all notes were subsequently amended to extend the maturity date to December 31, 2015. See Other Liabilities above for further information on the 2006 through 2011 Short-Term Promissory Notes, Related Party.
(4) The outstanding Series A convertible debentures, under the October 15, 2010 amendment, did not bear interest through the new maturity date of June 30, 2011, and the amendment agreement does not require interest after the maturity date. The Company is in negotiations with the debenture holders to extend the maturity date of the convertible debentures, and the holders may require interest to be paid for such extension. Interest reflected represents accrued interest on the outstanding notes payable from the date of note to their current maturity date during 2014. See Other Liabilities above for further information on the 2011, 2012 and 2013 Short-Term Promissory Notes.
(5) The Company's office lease expired on January 31, 2013, and was not renewed. Total rental expense included in the accompanying consolidated statements of earnings was $5,860 in fiscal 2014, and $22,745 in fiscal 2013.

(6) The company currently does not have any outstanding unconditional purchase obligations. They would though include inventory commitments, future royalty, consulting agreements, other than month-to-month arrangements or those that expire in less then one year, or commitments pursuant to executive compensation arrangements.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition at December 31, ~~2012~~2014 and our results of operations for the two fiscal years ended December 31, ~~2012~~2014, are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements. These estimates and assumptions can be subjective and complex and, consequently, actual results could differ from those estimates. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition. Revenues are derived primarily from the sublicensing and licensing of computer software, installations, training, consulting, ~~software maintenance~~ and ~~sales~~software ~~of PACS, RIS and RIS/PACS solutions~~maintenance. Inherent in the revenue recognition process are significant management estimates and judgments, which influence the timing and amount of revenue recognized.

For software arrangements, we recognize revenue according to the ASC 985-605, “Software Revenue Recognition,” and related amendments. ASC 985-605 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements. Revenue from multiple-element software arrangements is recognized using the residual method. Under the residual method, revenue is recognized in a multiple element arrangement when vendor-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. We allocate revenue to each undelivered element in a multiple element arrangement based on its respective fair value, with the fair value determined by the price charged when that element is sold separately. Specifically, we determine the fair value of the maintenance portion of the arrangement based on the renewal price of the maintenance offered to customers, which is stated in the contract, and fair value of the installation based upon the price charged when the services are sold separately. If evidence of the fair value cannot be established for undelivered elements of a software sale, the entire amount of revenue under the arrangement is deferred until these elements have been delivered or vendor-specific objective evidence of fair value can be established.

Revenue from sublicenses sold on an individual basis and computer software licenses is recognized upon shipment provided that evidence of an arrangement exists, delivery has occurred and risk of loss has passed to the customer, fees are fixed or determinable and collection of the related receivable is reasonably assured.

Revenue from software usage sublicenses sold through annual contracts and software maintenance is deferred and recognized ratably over the contract period. Revenue from installation, training, and consulting services is recognized as services are performed.

Cost of goods sold incorporates our direct costs of raw materials, consumables, staff costs associated with installation and training services, and the amortization of the intangible assets (developed software) related to products sold.

Segment Information. ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company’s chief operating decision-maker is considered to be the Company’s chief executive officer (“CEO”). The CEO reviews financial information presented on an entity level basis accompanied by disaggregated information about revenues by product type and certain information about geographic regions for purposes of making operating decisions and assessing financial performance. The entity level financial information is identical to the information presented in the accompanying consolidated statements of operations.

The Company has two groups of products and services - Security (PinPoint™) and Healthcare (Signature Mapping™ Medical Computer Aided Detection (“Medical CAD”)). The Company has determined that as a result of no revenue generated for the two years ending December 31, 2014, we operate under one business unit in The America’s, and have pursued one product line, Healthcare’s Tuberculosis Detection (“TBDx™”) software in South Africa, India, Nigeria, and Peru.

Research and Development. Costs incurred in connection with the development of software products that are intended for sale are accounted for in accordance with ASC 985-20, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Costs incurred prior to technological feasibility being established for the product are expensed as incurred. Technological feasibility is established upon completion of a detail program design or, in the absence, completion of a working model. Thereafter, as long as no high-risk development issues exist, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product. Amortization commences when the product is available for general release to customers.

Stock-Based Compensation. We adopted on January 1, 2006, the provisions of ASC 718-10, which requires recognition of stock-based compensation expense for all share-based payments based on fair value. ASC 718-10, “Share-Based Payment” defines fair value-based methods of accounting for stock options and other equity instruments. This method measures compensation costs based on the estimated fair value of the award and recognizes that cost over the service period. We also consider ASC 505-50, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services” (“ASC 505-50”), establishes the measurement principles for transactions in which equity instruments are issued in exchange for the receipt of goods or services. We relied upon the guidance provided under ASC 505-50 to determine the measurement date and the fair value re-measurement principles to be applied. Based on these findings, we determined that the unamortized portion of the stock compensation should be re-measured on each interim reporting date and proportionately amortized to stock-based compensation expense for the succeeding interim reporting period until goods are received or services are performed. We recognize compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. We consider voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.

Valuation of Long-Lived Assets Including Acquired Intangibles. We evaluate the carrying value of long-lived assets for impairment, whenever events or changes in circumstances indicate that the carrying value of an asset within the scope of ASC 360-10, “Accounting of the Impairment or Disposal of Long-Lived Assets” may not be recoverable. Our assessment for impairment of assets involves estimating the undiscounted cash flows expected to result from use of the asset and its eventual disposition. An impairment loss recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset, and considers year-end the date for its annual impairment testing. The Company prepared this analysis asfor each of the ~~year~~years ended December 31, ~~2012,~~2014 and ~~2011~~2013, and concluded that the intangible assets are not impaired. Therefore, there was no impairment expense during Fiscal ~~2012~~2014 and ~~2011~~2013

Impairment of Excess of Purchase Price Over Net Assets Acquired. We follow the provisions of ASC 805-10, “Business Combinations” and ASC 350-10, “Goodwill and Other Intangible Assets.” These statements establish financial accounting and reporting standards for acquired goodwill. Specifically, the standards address how acquired intangible assets should be accounted for both at the time of acquisition and after they have been recognized in the financial statements. Effective January 1, 2002, with the adoption of ASC 350-10, goodwill must be evaluated for impairment and is no longer amortized. Excess of purchase price over net assets acquired (“goodwill”) represents the excess of acquisition purchase price over the fair value of the net assets acquired. To the extent possible, a portion of the excess purchase price is assigned to identifiable intangible assets. We determine impairment by comparing the fair value of

6352

350-10, goodwill must be evaluated for impairment and is no longer amortized. Excess of purchase price over net assets acquired (“goodwill”) represents the excess of acquisition purchase price over the fair value of the net assets acquired. To the extent possible, a portion of the excess purchase price is assigned to identifiable intangible assets. We determine impairment by comparing the fair value of the goodwill, using the undiscounted cash flow method, with the carrying amount of that goodwill. Impairment is tested annually or whenever indicators of impairment arise. There was no goodwill on the consolidated balance sheet of the Company during Fiscal ~~2012~~2014 and ~~2011~~2013, as a net realizable value analysis was made for goodwill in prior years during the Company’s operating stage and such asset was ~~considered~~ fully impaired during those prior years. ~~Therefore, there was no amortization expense of goodwill during Fiscal 2012 and 2011.~~

OFF-BALANCE SHEET ARRANGEMENTS

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition, or results of operations as of December 31, 2014 and December 31, 2013.

RECENTLY ISSUED ACCOUNTING STANDARDS

Refer to “Notes to Consolidated Financial Statements, Note 2 - Significant Accounting Policies” for discussion regarding the impact of Accounting Standards that were recently issued but not yet effective, on our Consolidated Financial Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk is confined to changes in foreign currency exchange rates and potentially adverse effects of differing tax structures. There were no international revenues subject to such market risks during fiscal ~~2012~~2014. International activities were mostly from our Signature Mapping™ revenue opportunities in South Africa and India. Therefore, we may be exposed to foreign exchange rate fluctuations as the Company continues to pursue the revenue opportunities outside the United States. As exchange rates vary, results when translated may vary from expectations and adversely impact overall expected profitability. As of December 31, ~~2012~~2014, the Company’s foreign currency exposure is related to accounts payable trade in the amount of $30,371.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item appears beginning on page 9179 of this Annual Report on Form 10-K and is incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The Audit Committee of the Board of Directors of the Company has appointed the firm of KBL, LLP, to serve as Applied Visual Sciences, Inc.'s independent registered public accountants and to be the principal registered public accountants to conduct the audit of Applied Visual Sciences, Inc.'s financial statements. KBL, LLP was first appointed on February 23, 2009 for the fiscal year ending December 31, 2008 audit. On April 1115, ~~2013~~2015, KBL, LLP was reaffirmed by the Audit Committee as Applied Visual Sciences, Inc.'s independent registered public accountants and to be the principal registered public accountants to conduct the audit of Applied Visual Sciences, Inc.'s financial statements for the fiscal year ended December 31, ~~2012~~2014.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Report, the Chief Executive Officer and Chief Financial Officer of the Company (the “Certifying Officers”) conducted evaluations of the Company’s disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure the information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure.

Based on this evaluation, the Certifying Officers determined that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by the Company in the Reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal 53

64Based on this evaluation, and for reasons discussed below, the Certifying Officers determined that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were not effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by the Company in the Reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosure. On November 6, 2013, the Company filed its June 30, 2013 Form 10-Q, which was due on August 14, 2013, and this Annual Report on Form 10-K for the year ended December 31, 2014, was due on March 31, 2015.

~~executive~~Although the Certifying Officers have determined that our disclosure controls and ~~principal~~procedures ~~financial~~were ~~officers~~not effective, ormanagement ~~persons~~continues ~~performing~~to ~~similar~~believe ~~functions~~that a refinement to our disclosure controls is an ongoing process. The Audit Committee believes the Company should continue the following activities: (a) additional education and professional development for the Company’s accounting and other staff on new and existing applicable SEC filing requirements, ascertain ~~appropriate~~applicable SEC disclosure requirements, toand ~~allow~~the ~~timely~~timing ~~decisions~~of ~~regarding~~the filing thereof, and (b) reviewing disclosure requirements, including Form 10-K and Regulation S-K disclosure requirements, SEC staff guidance and interpretations related thereof, as well as Accounting Standards Codification (“ASCs”) and updates.

Although the Certifying Officers have determined that our disclosure controls and procedures were effective, management continues to believe that a refinement to our disclosure controls is an ongoing process. The Audit Committee believes the Company should continue the following activities: (a) additional education and professional development for the Company’s accounting and other staff on new and existing applicable SEC filing requirements, certain applicable SEC disclosure requirements, and the timing of the filing thereof, and (b) reviewing disclosure requirements, including Form 8-K and Regulation S-K disclosure requirements, SEC staff guidance and interpretations related thereof, as well as Accounting Standards Codification (“ASCs”) and updates.

Management’s Annual Report on Internal Control Over Financial Reporting

Management of Applied Visual Sciences, Inc. (including its subsidiaries) (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules13a-15(f) of the Securities Exchange Act of 1934, as amended). There were no changes in the Company’s internal controls over financial reporting during the period covered by the Report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

The Company’s internal control over financial reporting is a process designed by, and under the supervision of, its principal executive and principal financial officers, or person performing similar functions, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, the Company’s management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, the Company’s management has concluded that, as of December 31, ~~2012~~2014, the Company’s internal control over financial reporting was not effective.

This annual report does not include an attestation report of the Company’s registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered independent public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

Changes in Internal Controls

There were no changes in the Company’s internal controls over financial reporting during the period covered by the Report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION

None

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth the ~~current~~ directors and executive officers of Applied Visual Sciences, Inc. during 2014, and current as noted:


Name	Age	Title
William J. Donovan (1)	63	Chairman of the Board, Chief Executive Officer, Secretary, Director - Class III
Gregory E. Hare	61	Chief Financial Officer, Treasurer
Sean W. Kennedy	65	Director - Class II, Consultant to the Company (resigned on February 15, 2014)
Charles T. Nash	64	Director - Class I
Michael W. Trudnak (2)	--	Previous Chairman of the Board, Chief Executive Officer, Secretary, Director - Class III

(1) Mr. Donovan was elected as Chairman of the Board, Chief Executive Officer, and Secretary on April 21, 2014. On April 7, 2014, upon the medical leave of absence of Mr. Trudnak and in keeping with the Company's Certificate of Incorporation, Mr. Donovan assumed these responsibilities on a temporary basis. Mr. Donovan was previously the Company's President and Chief Operating Officer.
(2) Mr. Trudnak was Chairman of the Board, Chief Executive Officer, Secretary, and Director - Class III until his death on April 18, 2014. He took a medical leave of absence on April 7, 2014, and was 62 years old at the time of his death.

Name	Age	Title
William J. Donovan	61	President, Chief Operating Officer, Director - Class III
Gregory E. Hare	59	Chief Financial Officer, Treasurer
Keith S. Kelly	49	Director - Class I
Sean W. Kennedy	63	Director - Class II, Consultant to the Company
Charles T. Nash	62	Director - Class I
Michael W. Trudnak	60	Chairman of the Board, Chief Executive Officer, Secretary, Director - Class III

Under Applied Visual Sciences, Inc.’s Certificate of Incorporation, the board of directors is divided into three classes and, if the board consists of seven directors, the first class shall consist of three directors to hold office for a term of one year from the date of the ratification of their election by stockholders at the next meeting of stockholders held to consider such matter, the second class shall consist of two directors to hold office for a term of two years from the date of the ratification of his election by stockholders at the next meeting of stockholders held to consider such matter, and the third class shall consist of two directors to hold office for a term of three years from the date of the ratification of their election by stockholders at the next meeting of stockholders held to consider such matter. At each succeeding annual meeting of stockholders, the successors to the class of directors whose terms shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting.

Biographical information with respect to ~~the~~our ~~present~~fiscal 2014 executive officers and directors of Applied Visual Sciences, Inc. are set forth below. There are no family relationships between any present executive officers or directors.

William J. Donovan, ~~President~~Chairman of the Board, Chief ~~Operating~~Executive Officer, Secretary, and Director. Mr. Donovan became a Class III director in August 2006. Mr. Donovan has been ~~President~~Chairman of the Board and Chief ~~Operating~~Executive Officer since ~~November~~April 21, ~~2005. Also~~2014, ~~from~~and ~~August~~was ~~18,~~previously ~~2003,~~the ~~until~~President and Chief Operating Officer since January 3031, 2006. Also, Mr. Donovan ~~was~~held the position of Chief Financial Officer. from August 18, 2003, until January 30, 2006. From January 2003 until August 2003, Mr. Donovan was an independent consultant to an affiliate of American Express Small Business Services. From September 1999 through December 2002, Mr. Donovan was CFO of Streampipe.com, Inc., a privately held streaming communications media company. From October 1996 to August 1999, Mr. Donovan was Chief Operating and Financial Officer for TDI, Inc., a privately held international wireless telecommunications services company. From October 1986 to October 1996, Mr. Donovan was Chief Financial Officer, Secretary, Treasurer and a director at Riparius Corporation, a privately held holding company with operating subsidiaries in the areas of real estate development, property management, general contracting, government contracting, and telecommunications engineering. From October 1980 to October 1986, Mr. Donovan was the Controller for McCormick Properties, Inc., a publicly held commercial real estate subsidiary of McCormick & Company. From July 1973 to October 1980, Mr. Donovan was the Controller for AMF Head Sports Wear, Inc., a privately held international sporting goods manufacturer and a subsidiary of AMF, Inc., a publicly held company. Mr. Donovan received a Bachelor of Arts in History in 1973 and a Certificate in Accounting in 1978 from the University of Maryland. In 1982, he received an MBA from the Sellinger School of Business, Loyola University Maryland. Mr. Donovan has been a Certified Public Accountant since 1982. He is also a Certified Business Valuation & Transfer Agent, Business Brokers Network, 2002. He has been on the Advisory Board for Nogika Corporation, a privately held software company, since 2001.

Gregory E. Hare, Chief Financial Officer, and Treasurer. Mr. Hare was appointed Chief Financial Officer on January 30, 2006. From May 2001 through January 2006, Mr. Hare served as a financial executive of Jane Cosmetics, a national mass market cosmetics manufacturing and distribution company headquartered in Baltimore, Maryland. There he served three years as Director of Finance for the wholly owned subsidiary of The Estee Lauder Companies, Inc. and the last two years as CFO/Controller of the privately held Jane & Company, LLC. Prior to that, Mr. Hare held positions including CFO/Controller for a privately held hospitality company LFB Enterprises, with locations in and around Baltimore and Washington, DC; Manager, Pricing Group for the Industrial Division of McCormick & Company, a publicly held international spice company headquartered in Hunt Valley, Maryland; and CFO/Controller for Acordia Collegiate Benefits, Inc., a for-profit subsidiary of Anthem (formerly Blue Cross and Blue Shield of Indiana). Mr. Hare received a Bachelor of Science in Accounting from the University of Baltimore, and an MBA from the Sellinger School of Business of Loyola University Maryland in 1984. Mr. Hare has been a Certified Public Accountant since 1979.

Keith S. Kelly, Director. Mr. Kelly became a Class I director of Applied Visual Sciences, Inc. on April 26, 2010. Since December 2008, has been Chairman and CEO of Mortgage Harmony Corporation (formerly, Lending Annuity Group), a privately-held financial engineering company, where he developed patented mortgage compensation systems and methods, including the introduction of the Harmony Loan, a closing-cost savings platform. From August 2006 to December 2008, Mr. Kelly was President of Modified Lending, Inc., a privately-held marketing company. From May 1999 to August 2006, Mr. Kelly was Division Manager of National City Mortgage, a publicly-held mortgage company. During these periods, Mr. Kelly also held loan officer positions with MetLife Home Loans, SunTrust Mortgage, National City, and manager positions with Megastar Financial, Access National Bank and Flagstar Bank. Mr. Kelly is an entrepreneur in the mortgage industry who has created and patented certain mortgage compensation systems and methods, including the platform that enabled the introduction of the Harmony Loan. As a seasoned retail mortgage banking executive, Mr. Kelly has been an advocate for proper homeowner education for nearly two decades, focusing on strategies to avoid paying closing costs and his closing-55

66McCormick & Company, a publicly held international spice company headquartered in Hunt Valley, Maryland; and CFO/Controller for Acordia Collegiate Benefits, Inc., a for-profit subsidiary of Anthem (formerly Blue Cross and Blue Shield of Indiana). Mr. Hare received a Bachelor of Science in Accounting from the University of Baltimore, and an MBA from the Sellinger School of Business of Loyola University Maryland in 1984. Mr. Hare has been a Certified Public Accountant since 1979.

~~cost~~Sean ~~savings~~W. ~~platform~~Kennedy, ~~has~~Director. Mr. ~~been~~Kennedy ~~featured~~became a Class II director in ~~Money~~July 2003 and a consultant to the Company since May 27, ~~The~~2008. On ~~Washington~~February ~~Post~~15, ~~Time~~2014, ~~New~~Mr. ~~York~~Kennedy ~~Times,~~resigned ~~Woman’s~~from ~~World,~~the ~~CNBC~~Board and as a ~~host~~consultant to the Company. Mr. Kennedy does occasionally consult with the Company on information technology matters. From January 2001 to the present, Mr. Kennedy has been President and Chief Executive Officer of ~~other~~BND ~~national~~Software, ~~publications~~Inc. Hea isprivately ~~also~~held software development company. On May 27, 2008, the Company entered into a ~~host~~consulting agreement with BND Software pursuant to which it agreed to provide certain consulting services to the Company including managing the research, development and information systems activities of ~~MyMortgageWatchDog~~the (Company. From October 1999 to December 2000, Mr. Kennedy was divisional Vice President of Votenet Solutions, a ~~mortgage~~Web ~~educational~~development ~~talk~~and ~~show)~~consultant infor ~~Washington~~trade associations, Dpolitical parties and related organizations.C. From April 1994 to October 1999, Mr. ~~Kelly~~Kennedy ~~received~~was President and CEO of Raintree Communications Corporation, a ~~Bachelor~~privately held telecommunications services company, focused on providing technology tools for legislative lobbying to Trade Associations and Fortune 500 companies. From June 1989 to April 1994, Mr. Kennedy was President and CEO of ~~Science~~Electronic ~~Degree~~Funds ~~from~~Transfer ~~James~~Association, ~~Madison~~a ~~University~~trade association for the electronic payments systems industry. Mr. Kennedy is a graduate of Mount Saint Mary’s College in ~~1985~~Emmitsburg, Maryland.

~~Sean~~Charles WT. ~~Kennedy~~Nash, Director. Mr. ~~Kennedy~~Nash became a Class III director of Applied Visual Sciences, Inc. in ~~July~~June ~~2003~~2004. Mr. ~~and~~Nash ahas ~~consultant~~over to25 ~~the~~years ~~Company~~of ~~since~~military ~~May~~experience ~~27,~~and ~~2008. From~~more ~~January~~than ~~2001~~16 toyears of leadership experience in emerging technology in the ~~present~~private sector. Since October 2000, Mr. ~~Kennedy~~Nash has been President ~~and Chief Executive Officer~~ of ~~BND~~Emerging ~~Software~~Technologies International, Inc. (“ETII”), a privately held ~~software~~consulting ~~development~~ company. On ~~May~~ETII ~~27,~~works ~~2008,~~to ~~the~~get ~~Company~~high ~~entered~~level ~~into~~technologies athat ~~consulting~~are ~~agreement~~developed ~~with~~by ~~BND~~small ~~Software~~commercial ~~pursuant~~companies toinserted ~~which~~quickly, itefficiently ~~agreed~~and toinexpensively ~~provide~~into ~~certain~~applications/tools ~~consulting~~for ~~services~~immediate tomilitary ~~the~~use. ~~Company~~The ~~including~~company ~~managing~~also ~~the~~works ~~research,~~with ~~development~~government laboratories and ~~information~~acquisition ~~systems~~agencies ~~activities~~to ofassist ~~the~~in ~~Company~~speedy and effective technology transition. From ~~October~~April ~~1999~~1998 to ~~December~~October 2000, Mr. ~~Kennedy~~Nash was ~~divisional~~vice ~~Vice~~president ~~President~~ of ~~Votenet~~the ~~Solutions,~~Emerging aTechnology ~~Web~~Group ~~development~~of ~~and~~Santa ~~consultant~~Barbara ~~for~~Applied ~~trade~~Research, ~~associations~~Inc., ~~political~~a ~~parties~~privately held defense consulting and ~~related~~emerging ~~organizations~~technology marketing company. ~~From~~Prior ~~April 1994~~ to ~~October 1999~~that, Mr. ~~Kennedy~~Nash ~~was~~served ~~President~~in ~~and~~various ~~CEO~~military leadership positions, including: head of ~~Raintree~~Strike/Anti-Surface ~~Communications~~Unit ~~Corporation,~~Warfare aand ~~privately~~Air ~~held~~to ~~telecommunications~~Air/Strike ~~services~~Support ~~company~~section on the staff of the Chief of Naval Operations, ~~focused~~overseeing onbudget ~~providing~~planning ~~technology~~of ~~tools~~approximately ~~for~~$18 ~~legislative~~billion; ~~lobbying~~executive assistant to ~~Trade~~the ~~Associations~~Deputy ~~and~~Commander ~~Fortune~~in ~~500~~Chief, ~~companies~~U. ~~From~~S. ~~June~~Naval ~~1989~~Forces toEurope; ~~April~~and ~~1994~~as the Commanding Officer, Strike Fighter Squadron 137. Mr. ~~Kennedy~~Nash ~~was~~retired ~~President~~from ~~and~~the ~~CEO~~U.S. Navy in 1998 with the rank of ~~Electronic~~Captain. He ~~Funds~~is ~~Transfer~~a ~~Association,~~Fox News Channel military and aviation Contributor and a ~~trade~~frequent ~~association~~guest ~~for~~on both the ~~electronic~~Main ~~payments~~Street ~~systems~~Radio ~~industry~~and Radio America networks. Mr. ~~Kennedy~~Nash isearned a ~~graduate~~BS Aeronautics degree in 1973 from the Parks College of ~~Mount~~Aeronautical Technology, Saint ~~Mary’s~~Louis ~~College~~University, inCahokia, ~~Emmitsburg~~Illinois, ~~Maryland~~and is a graduate of the National War College.

~~Charles~~Michael TW. ~~Nash~~Trudnak, ~~Director. Mr.~~Previous ~~Nash~~Chairman ~~became~~of athe ~~Class~~Board, IChief ~~director~~Executive ofOfficer, ~~Applied Visual Sciences~~Secretary, ~~Inc.~~and ~~in June 2004~~Director. Mr. ~~Nash~~Trudnak ~~has~~was ~~over~~the 25Company’s ~~years~~previous Chairman of ~~military~~the ~~experience~~Board, ~~and~~Secretary, ~~more~~Chief ~~than~~Executive 14Officer, ~~years~~and ofClass ~~leadership~~III ~~experience~~director since in ~~emerging~~June ~~technology~~2003, inand ~~the~~held ~~private~~those ~~sector. Since~~positions ~~October~~until ~~2000,~~he ~~Mr.~~took ~~Nash~~a ~~has~~medical ~~been~~leave ~~President~~ of ~~Emerging~~absence ~~Technologies~~on ~~International~~April 7, ~~Inc. (“ETII”)~~2014, aand ~~privately~~passed ~~held~~away ~~consulting~~on ~~company~~April 18, 2014. From ~~ETII~~October ~~works~~2002 to ~~get~~March ~~high~~2003, ~~level~~Mr. ~~technologies~~Trudnak ~~developed~~was bya ~~small~~consultant ~~commercial~~to certain telecommunications services companies. ~~inserted~~From ~~quickly,~~April ~~efficiently~~2002 ~~and~~to ~~inexpensively~~October ~~into~~2002, ~~applications/tools~~Mr. ~~for~~Trudnak ~~immediate~~was ~~military~~Chief ~~use.~~Operating ~~The~~Officer ~~company~~and ~~also~~subsequently ~~works~~President, ~~with~~Chief ~~government~~Executive ~~laboratories~~Officer and ~~acquisition~~a ~~agencies~~director toof ~~facilitate~~Advanced ~~speedy~~Data ~~and~~Centers, ~~effective~~Inc., ~~“lab~~a toprivately ~~fleet”~~held ~~technology~~telecommunications ~~interchanges~~services ~~and discussions~~company. From ~~April~~July ~~1998~~2001 to ~~October~~March ~~2000~~2002, Mr. ~~Nash~~Trudnak ~~was~~served ~~vice~~as ~~president~~Vice ofPresident ~~Emerging Technology Group~~ of ~~Santa~~Mid-Atlantic ~~Barbara~~Sales ~~Applied~~for ~~Research,~~Equant ~~Inc~~N.V, a ~~privately~~leading ~~held~~provider ~~defense~~of ~~consulting~~global IP and ~~emerging~~data ~~technology~~services ~~marketing~~to ~~company~~multinational companies. Prior to ~~that,~~Equant's ~~Mr.~~acquisition ~~Nash~~of ~~served~~Global inOne, ~~various~~Inc., ~~military~~in ~~leadership~~July ~~positions~~2001, ~~including:~~Mr. ~~head~~Trudnak ofserved ~~Strike/Anti-Surface~~as ~~Unit~~an ~~Warfare~~Executive ~~and~~Director ~~Air~~for toSouth ~~Air/Strike~~East ~~Support~~Region ~~section~~Sales onfor ~~the~~Global ~~staff~~One offrom ~~the~~June ~~Chief~~1998 ofto ~~Naval~~July ~~Operations~~2001, ~~overseeing~~and ~~budget~~from ~~planning~~January of1996 ~~approximately~~to ~~$18~~June ~~billion;~~1998, ~~executive~~served ~~assistant~~as toManaging ~~the~~Director ~~Deputy~~of ~~Commander~~Global inOne's ~~Chief,~~sales ~~U.S.~~and ~~Naval~~operations ~~Forces~~in ~~Europe;~~France and ~~executive~~Germany. ~~and~~From ~~commanding~~November ~~officer,~~1989 ~~Strike~~through ~~Fighter~~December ~~Squadron~~1995, ~~137.~~ Mr. ~~Nash~~Trudnak ~~retired~~served ~~from~~as ~~the~~director ~~U.S.~~of ~~Navy~~facilities inengineering ~~1998~~and ~~with~~then ~~the~~Senior ~~rank~~Group ofManager ~~Captain. Mr.~~for ~~Nash~~Sprint isInternational, a ~~frequent~~global ~~guest~~telecommunications ~~military~~services ~~and~~provider. ~~aviation~~Mr. ~~analyst~~Trudnak ~~for~~had ~~Fox~~over ~~News~~twenty-five ~~Channel,~~years ~~and~~of ~~several~~diversified ~~regional~~executive ~~radio~~management, ~~stations. Mr.~~sales, ~~Nash~~business ~~earned~~operations, atechnical BSand ~~Aeronautics~~administrative ~~degree~~experience in ~~1973 from~~ the ~~Parks~~telecommunications ~~College~~industry. Mr. ofTrudnak ~~Aeronautical~~served ~~Technology,~~in ~~Saint~~the ~~Louis~~Marine ~~University,~~Corps ~~Cahokia,~~from ~~Illinois,~~April ~~and~~1972 isthrough aJanuary ~~graduate of the National War College~~1976.

Michael W. Trudnak, Chairman of the Board, Chief Executive Officer, Secretary, and Director. Mr. Trudnak was appointed Chairman of the Board, Secretary, and Chief Executive Officer and became a Class III director in June 2003. From March 2003 and until the present, Mr. Trudnak has been Chairman of the Board, Chief Executive Officer, Secretary, Treasurer and a director of RJL. From October 2002 to March 2003, Mr. Trudnak was a consultant to certain telecommunications services companies. From April 2002 to October 2002, Mr. Trudnak was Chief Operating Officer and subsequently President, Chief Executive Officer and a director of Advanced Data Centers, Inc., a privately held telecommunications services company. From July 2001 to March 2002, Mr. Trudnak served as Vice President of Mid-Atlantic Sales for Equant N.V, a leading provider of global IP and data services to multinational companies. Prior to Equant's acquisition of Global One, Inc., in July 2001, Mr. Trudnak served as an Executive Director for South East Region Sales for Global One from June 1998 to July 2001, and from January 1996 to June 1998, served as Managing Director of Global One's sales and operations in France and Germany. From November 1989 through December 1995, Mr. Trudnak served as director of facilities engineering and then Senior Group Manager for Sprint International, a global telecommunications services provider. Mr. Trudnak has over twenty-five years of diversified executive management, sales, business operations, technical and administrative experience in the telecommunications industry. Mr. Trudnak served in the Marine Corps from April 1972 through January 1976.

Each officer is appointed by the board of directors and holds his office at the pleasure and discretion of the board of directors or until his earlier resignation, removal or death.

There are no material proceedings to which any director, officer or affiliate of Applied Visual Sciences, Inc., any owner of record or beneficially of more than five percent of any class of voting securities of Applied Visual Sciences, Inc., or any associate of any such director, officer, affiliate of Applied Visual Sciences, Inc. or security holder is a party adverse to Applied Visual Sciences, Inc. or any of its subsidiaries or has a material interest adverse to Applied Visual Sciences, Inc. or any of its subsidiaries.

Independent Directors

Our board of directors has adopted the definition of independence as defined in Section 803A of the NYSE Amex LLC Company Guide. Based upon such definition, the board of directors has determined that the following directors are independent: Charles T. Nash, ~~and Keith S. Kelly~~although, ~~that~~ a majority of our directors are not “independent.” The board of directors maintains an audit committee, compensation committee, and nominating committee. We may also establish special or other committees from time to time to consider matters at the request of the Board. The current members of such committees as of the date of the filing of this report are as follows:

6756

committee, and nominating committee. We may also establish special or other committees from time to time to consider matters at the request of the Board. The current members of such committees as of the date of the filing of this report are as follows:

Audit

Charles T. Nash, Chairman

Keith S. Kelly

Compensation

Charles T. Nash, Chairman

Keith S. Kelly

Nominating

Charles T. Nash, Chairman

The Board of Directors

The Board oversees the business affairs of Applied Visual Sciences, Inc. and monitors the performance of management. During the year ended December 31, ~~2012~~2014, the Board ~~held~~did ~~four~~not ~~(4)~~hold meetings and handled certain other business through unanimous written consents of its board in accordance with its by-laws and applicable Delaware law. Therefore, Messrs. Donovan, Kennedy, Nash and Trudnak ~~attended~~did ~~all~~not ofattend such meetings of the Board~~, Mr~~. ~~Brothers who attended three (3) of such meetings died on August 29, 2012, and Mr. Kelly did not attend any of such meetings.~~ Applied Visual Sciences, Inc. has a policy of requesting all directors to attend annual meetings of stockholders. On April 24, 2010, the Company reduced the number of members required for the board of directors from nine to seven members. Currently, the Board has four committees, an Audit, Compensation, Nominating, and Special Committee. The membership and functions of such committees are described below.

Currently, Mr. ~~Trudnak~~Donovan serves as our Chairman and Chief Executive Officer. Mr. Donovan ~~serves~~previously served as our President and Chief Operating Officer until his appointment as Chairman and Chief Executive Officer on April 21, 2014. At ~~Dec~~December ~~ember~~ 31, ~~2012~~2014, the Company had one (1) independent Board member, and each of our Board committees consists of independent directors, including each of the Chairs of such committees. We do not have a lead independent director to preside at our Board meetings, but may do so in the future. For a company of our size, we believe that the CEO is in the best position to focus the independent directors’ attention on the issues of greatest importance to the company and its stockholders, and we believe that splitting such roles may have the consequence of making our management and governance processes less effective than they are today through duplication and a blurring of the lines of accountability and responsibility for matters.

Our senior management is responsible for overseeing, assessing and managing our exposures to risk on a day-to-day basis, including the creation of appropriate management programs and policies. We do not maintain a separate committee of our Board responsible for managing and overseeing our exposure to risk. Our Board is responsible for overseeing management in the execution of this responsibility and for assessing our approach to risk management. Our Board exercises this responsibility at its periodic Board meetings and at meetings of our Board committees, each of which has a defined area of responsibility. Our Board’s role in risk management is consistent with our leadership structure, with our CEO and President having responsibility for assessing and managing our risk exposure and the Board and its committees providing oversight in connection with those efforts.

Audit Committee

The Audit Committee consists of ~~two~~one ~~members~~member, ~~Keith S. Kelly, and~~ Charles T. Nash. Mr. Nash was appointed as chairman of the committee on August 29, 2012~~, upon the death of Mr~~. ~~Joseph C. Brothers.~~ Mr. Nash was also appointed a member to the committee on October 27, 2011. ~~The Audit Committee held four meetings during 2012, and~~ Mr. Nash ~~attended~~was ~~four~~also ~~(4)~~a member of the audit committee ~~meetings,~~from ~~Mr.~~September ~~Brothers~~2005 ~~attended~~through ~~three~~May ~~(3)~~2010. The ofAudit ~~such~~Committee ~~committee~~held four meetings during 2014, and Mr. ~~Kelly~~Nash ~~did~~attended ~~not~~four ~~attend~~(4) ~~any~~ of ~~such~~the committee meetings. The board of directors determined that ~~Messrs~~Mr. ~~Kelly and~~ Nash ~~are~~is deemed independent within the definition of “independence” set forth in Section 803A of the NYSE Amex LLC Company Guide~~, as was Mr~~. ~~Brothers during his tenure on the committee.~~

The board of directors has adopted a written charter for the Audit Committee which provides that the Audit Committee's primary functions are to (a) oversee the integrity of Applied Visual Sciences, Inc.’s financial statements and Applied Visual Sciences, Inc.’s compliance with legal and regulatory reporting requirements, (b) appoint a firm of certified public accountants whose duty it is to audit Applied Visual Sciences, Inc.’s financial records for the fiscal year for which it is appointed, (c) evaluate the qualifications and independence of the independent auditors, (d) oversee the performance of Applied Visual Sciences, Inc.’s internal audit function and independent auditors, and (e) determine the compensation and oversee the work of the independent auditors. It is not the duty of the Audit Committee to plan or conduct audits or to determine that Applied Visual Sciences, Inc.’s financial statements are complete and accurate and are prepared in accordance with generally accepted accounting principles in the United States. Management is responsible for preparing Applied Visual Sciences, Inc.’s financial statements, and the independent auditors are responsible for auditing those financial statements.

Compensation Committee

The Compensation Committee consists of ~~two~~one ~~members~~member, ~~including~~ Charles T. Nash~~, and Keith S~~. ~~Kelly.~~ Mr. Nash was appointed chairman of the committee on April 21, 2009, and has been a member since September 2005. The Compensation Committee did not hold committee meetings during ~~2012~~2014.

The Compensation Committee's primary functions are to:

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evaluate the performance of the CEO and determine the CEO’s total compensation and individual elements thereof;

determine the compensation level of the CEO and President and review and approve corporate goals and objectives relevant to senior executive compensation (including that of the CEO), evaluate senior management's performance in light of those goals and objectives, and determine and approve senior management's compensation levels based on their evaluation;

evaluate the performance of other executive officers and determine their total compensation and individual elements thereof;

make all grants of restricted stock or other equity based compensation to executive officers;

administer Applied Visual Sciences, Inc.'s compensation plans and programs;

recommend to the board for approval equity based plans and incentive compensation plans;

review management development and succession programs; and

review appropriate structure and amount of compensation for board members.

The board of directors has determined that all members of the Compensation Committee currently are independent within the meaning of “independence” set forth in Section 803A of the NYSE Amex LLC Company Guide.

Nominating Committee

The Nominating Committee consists of one member, Charles T. Nash. Mr. Nash was elected chairman of the committee ~~upon~~on ~~the~~April ~~death~~29, ~~of Mr. Brothers~~2012, ~~who~~and ~~served~~has asbeen ~~chairman~~a ~~during~~member ~~his~~since ~~tenure.~~September 2005. The Nominating Committee did not hold committee meetings during ~~2012~~2014. The board has adopted a written charter for the Nominating Committee.

The Nominating Committee's primary functions are to:

consider, recommend and recruit candidates to serve on the board and to recommend the director nominees selected by the Committee for approval by the board and the stockholders of Applied Visual Sciences, Inc.;

recommend to the board when new members should be added to the board;

recommend to the board the director nominees for the next annual meeting;

when vacancies occur or otherwise at the direction of board, actively seek individuals whom the Committee determines meet the criteria and standards for recommendation to the board;

consider recommendations of director nominees by stockholders and establish procedures for shareholders to submit recommendations to the Committee in accordance with applicable SEC rules and applicable listing standards;

report, on a periodic basis, to the board regarding compliance with the Committee’s Charter, the activities of the Committee and any issues with respect to the duties and responsibilities of the Committee;

establish a process for interviewing and considering a director candidate for nomination to the board;

recommend to the board guidelines and criteria as to the desired qualifications of potential board members;

provide comments and suggestions to the board concerning board committee structure, committee operations, committee member qualifications, and committee member appointment;

review and update the Committee’s charter at least annually, or more frequently as may be necessary or appropriate; and

perform such other activities and functions related to the selection and nomination of directors as may be assigned from time to time by the board of directors including, but not limited to, preparing or causing to be prepared any reports or other disclosure required with respect to the Committee by any applicable proxy or other rules of the SEC or as required by the rules and regulations of any exchange or over-the-counter market on which our securities may then be listed or quoted.

The Committee will consider all stockholder recommendations for candidates for the Board, which should be sent to the Nominating Committee, c/o ~~Michael~~Mr. WWilliam J. ~~Trudnak~~Donovan, Secretary, 525K East Market Street, # 116, Leesburg, VA 20176. The information required to be included is set forth in Article III, Section 2 of our Bylaws. We believe that directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of stockholders. We believe that the following attributes are important to board membership: experience as a leader of a business firm or institution; mature and practical judgment; the ability to comprehend and analyze complex matters; objectivity and perspective; effective communications skills; and strong character and integrity. The Committee’s evaluation of director nominees takes into account their ability to contribute to the diversity of background and experience represented on the Board, and the Committee reviews its effectiveness in balancing these considerations when assessing the composition of the Board. The Board also considers candidates recommended by current directors, company officers, employees and others. The Committee evaluates all nominees for director in the same manner regardless of the source of the recommendation.

Director Communication Policy

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We have established a policy whereby anyone who has a concern about our conduct or about our accounting, internal accounting controls, or auditing matters, may communicate that concern directly to the Board of Directors, the Chairman of our Audit Committee or any other non-employee director or the Audit Committee. All such concerns will be forwarded to the appropriate directors for their review, and all concerns related to audit or accounting matters will be forwarded to the Audit Committee. All reported concerns will be simultaneously reviewed and addressed by our CEO or his designee (unless he or she is alleged to be involved in the matter at issue). The status of all outstanding concerns addressed to the Board, the non-employee directors, or the Audit Committee will be reported to the Board or the Audit Committee (as applicable) on a quarterly basis. The Board or any Board committee may direct special treatment, including the retention of outside advisors or counsel, for any concern addressed to them. Our corporate policies prohibit retaliatory action against any employee who raises concerns or questions in good faith about these matters.

Stockholders wishing to communicate with the board of directors, any non-employee director, or the Audit Committee may do so by writing to the Company's Corporate Secretary at 525K East Market Street, # 116, Leesburg, VA 20176. Our Secretary will forward any communications as directed by the stockholder.

ADVISORY BOARD

On November 7, 2007, we established an advisory board to advise and make non-binding recommendations to our board of directors and management regarding the strategic positioning of our new products, future product development, industry trends, and potential research collaborations with third parties. Members serve for a term of one year. The advisory board is currently inactive with no members, and the Company ~~anticipates~~may ~~reestablishing~~reestablish the Advisory Board inat ~~2013~~any time.

Each member of the Advisory Board of the Corporation (other than the Chairman of the Advisory Board) to be paid or provided as annual compensation an aggregate of 15,000 non-qualified stock options to purchase common stock, $.001 par value per share, of the Corporation pursuant to the Plan, each such option to be exercisable at a price equal to the fair market value of the Common Stock on the date of grant, such options to be exercisable immediately following the date of grant and for a term of ten (10) years thereafter (unless terminated earlier in accordance with the terms of the Plan). Such compensation was recommended by the compensation committee, and approved by the board of directors of the Company.

AUDIT COMMITTEE EXPERT

WeThe ~~have~~Company has not designated ~~Mr.~~a ~~Charles~~member T.of ~~Nash~~the Audit Committee as ~~our~~an “audit committee financial expert.” ~~Mr.~~ ~~Joseph~~since C.such ~~Brothers~~member(s) ~~was~~of the audit committee does not fulfill one or more of the requirements to be designated as ~~our~~such. The ~~audit~~nominating ~~committee~~Committee ~~financial~~of ~~expert,~~the ~~until~~Board ~~his~~is ~~death~~responsible onfor ~~August~~investigating ~~29,~~potential ~~2012~~new members to the Board with specific background and experience as an audit committee financial expert.

CODE OF ETHICS

On August 29, 2003, we adopted a Code of Ethics for our chief executive officer, chief financial officer, principal accounting officer or controller, and persons performing similar functions. A copy of the Code of Ethics has been posted to our website. Our website address is www.appliedvs.com.

SECTION 16(a) COMPLIANCE AND REPORTING

Under the securities laws of the United States, the Company’s directors, executive officers, and certain securities holders of the Company’s common stock are required to report their initial ownership of the Company’s common stock and any subsequent changes in that ownership to the SEC. Specific due dates for these reports have been established and the Company is required to disclose any failure to file by these dates.

Based on our review of Forms 3, 4 and 5 submitted to us pursuant to Rule 16a-3 under the Exchange Act by our executive officers and directors with respect to our most recent fiscal year ended December 31, ~~2012~~2014, there were no known (1) late reports, (2) transactions that were not reported, or (3) known failures to file a required report by such executives officers and directors.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview

The material principles underlying our goals for executive compensation policies and decisions are intended to:

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implement compensation packages, which are competitive with comparable organizations and allow us to attract and retain the best possible executive talent;

relate annual and long-term and stock incentives to achievement of measurable corporate and individual performance objectives;

appropriately balance mix of cash and noncash short and long-term compensation;

encourage integrity in business dealings through the discretionary portion of our compensation package; and

align executive’s incentives with long-term stockholder value creation.

We determine the appropriate levels of total executive compensation, including for our named executive officers, and each compensation element, based on several factors, such as an informal benchmarking of our compensation levels to those paid by comparable companies, our overall performance, each individual executive officer’s performance, the desire to maintain level equity and consistency among our executive officers, and other considerations that we deem to be relevant.

In an effort to assist the Compensation Committee in the evaluation process, in August 2005, we engaged an independent compensation consultant to evaluate certain aspects of our compensation practices and to assist in developing our executive compensation program. To this end, the consultant developed a competitive peer group and performed benchmarking analyses of competitive compensation levels, and used the following companies as a source of the analysis: Merge eFilm, IDX Systems Corporation, DexCom, Inc, NeuStar Inc, Sybari Software, Inc, Technology Spectrum, Inc, Optio Software, Inc, and RadView Software, Ltd. However, we have not implemented any formal or informal policy for allocating compensation between long-term and short-term, between cash and noncash or among the different forms of noncash compensation. We did not engage a compensation consultant during fiscal years subsequent to 2005.

Our Compensation Committee reviews and approves all of our compensation policies. Our Compensation Committee is responsible for evaluating the performance of all our named executive officers, their compensation levels, criteria for grants of stock options, and reviewing and evaluating the terms of their employment agreements. Our Compensation Committee performs such tasks periodically and solicits the input of our executive officers. The compensation levels for our named executive officers are based upon management recommendations, including the recommendations of our CEO.

Our executive compensation program during ~~2012~~2014 consisted of three principal elements: base salary, stock options, and severance and change in control benefits. We also provided to two employees a car allowance. Our ability to provide any cash incentive compensation, plan or non-plan has been constrained by our limited cash resources. Accordingly, our executive compensation arrangements have been relatively straight forward.

Moreover, due to our limited available cash, during 2006, a significant portion of the ~~three~~four named executive officers base salaries were and continue to be unpaid. During 2007, three of our named executives had a small portion of their base salaries unpaid and the amount continued to be unpaid during ~~2012~~2014. Additionally, during 2009 through ~~2012~~2014, significant portions of our three named executive officers base salaries were unpaid. As of December 31, ~~2012~~2014, the Company has an aggregate unpaid salary of its current two named executives of approximately $32,~~437~~896,~~143~~848, and $1,850.934 to the estate of our previous Chairman. We continue to accrue the salaries for our Principal Executive Officers and named executive officers, however, there is substantial uncertainty that we will be able to pay such amounts to our officers.

Elements of Compensation

The principal elements of our compensation package for our named executive officers, may include following, although we have not provided cash based compensation other than for base salary. We may consider in the future other cash based compensation once we become able to do so.

base salary;

annual cash incentive bonuses;

long-term incentive plan awards using stock options;

severance benefits;

change in control benefits;

401(k) savings plans;

retirement benefits; and

perquisites and other compensation.

Base Salary

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The amount of base salary paid or payable to our named executive officers is used to recognize the experience, skills, knowledge and responsibilities required of all our employees, including our named executive officers. When establishing base salaries for the executives, the Compensation Committee and management consider a number of factors, including the seniority of the individual, the functional role of the position, the level of the individual’s responsibility, the ability to replace the individual, the base salary of the individual at his prior employment and various qualified candidates to assume the individual’s role. Generally, we believe our executive’s base salaries should be targeted near the median of the range of salaries for executives in similar positions at comparable companies.

The base salary of each of our named executive officers is determined on the basis of such officer’s employment agreement with us. Our Compensation Committee is to review annually each executive officer’s base salary during our performance review. Base salaries may be adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance, experience and the our cash position. During ~~2012~~2014, we did not increase the base salary of any of Messrs. ~~Trudnak,~~ Donovan, or Hare, and the Committee has not made a determination for ~~2013~~2015.

Also, as discussed above, and due to our limited available cash, during 2006, a significant portion of four of our then named executive officers base salaries were and continue to be unpaid. During 2007, three of our named executives had a small portion of their base salaries unpaid and the amount continued to be unpaid during 2012. Additionally, during 2009 through ~~2012~~2014, significant portions of our named executive officers base salaries were unpaid. As of December 31, ~~2012~~2014, the Company had an aggregate accrued but unpaid salary due to its current two named executives of approximately $32,~~437~~896,~~143~~848, and $1,850.934 to the estate of our previous Chairman.

Annual Cash Incentive Bonus

Due to the limited cash available to us, we currently do not have a bonus plan and, during ~~2012~~2014, we did not make any annual cash incentive award to our employees, including our named executive officers.

Long-Term Incentive Plan Awards

We believe our long-term performance is fostered by a compensation methodology which compensates all employees, including our named executive officers, through the use of stock-based awards that foster a continuing stake of each employee in our long-term success. We currently utilize stock options, restricted stock rights or other awards and other rights to receive compensation based on the value of our stock. Currently, we do not have a plan requiring us to make any grant or award of stock options or other equity based awards, except for certain annual awards to members of our board of directors who are also independent, discussed under “Director Compensation and Benefits,” below.

Amended and Restated 2003 Stock Incentive Plan

The Board of Directors adopted the 2003 Stock Incentive Plan on August 29, 2003 and terminated on August 29, 2013. The termination of the plan does not affect the outstanding options without the consent of the optionee. The Board of Directors amended and restated the plan on December 2, 2003. The Amended and Restated 2003 Stock Incentive Plan (“2003 Plan”) was approved by the shareholders on February 13, 2004~~. Under~~, ~~the~~pursuant ~~2003~~to ~~Plan,~~which weit ~~may~~grants ~~grant~~ stock-based compensation in the form of options~~. The~~, ~~2003~~which ~~Plan~~could ~~authorizes~~result in the issuance of up to an aggregate of 30,000,000 shares of the Company’s common stock. The 2003 Plan terminates on August 29, 2013. The plan may be modified or terminated at any time, and any such amendment or termination will not affect outstanding options without the consent of the optionee. The aggregate number of shares and the number of shares in an award (as well as the option price) may be adjusted if ~~our~~the outstanding shares of the Company are increased, decreased or exchanged through merger or ~~similar~~other stock transaction. The Plan provides for options which qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code of 1986, as well as the issuance of Non-Qualified Options, which do not so qualify. Pursuant to the terms of the 2003 Plan, the Company, as determined by the Board of Directors or a committee appointed by the Board, may grant Non-Qualified Stock Options (“NQSOs”) to its executive officers, non-employee directors, or consultants of the Company and its subsidiaries at any time, and from time to time. The 2003 Plan also provides for Incentive Stock Options (“ISOs”) to be granted to any officer or other employee of the Company or its subsidiaries at any time, and from time to time, as determined by the ~~Board~~Compensation ~~or selected by the committee appointed by the Board~~Committee. Such stock options granted allow a grantee to purchase a fixed number of shares of the Company’s common stock at a fixed exercise price ~~provided that such price may~~ not be less than the ~~fair~~quoted market ~~value~~price (or 110% thereof for Incentive Stock Options issued to a holder of 10% or greater beneficial ownership) of the shares on the date granted. The options may vest on a single date or over a period of time, but normally they do not vest unless the grantee is still employed by, or a director of, the Company on the vesting date. Generally for all employees, the options vest 50% after the first year from the date of grant and the remaining 50% after the second year from the date of grant. Stock options granted to independent board of directors vest 100% after the service period, which generally is one year from the date of grant.

Factors considered in granting stock options included: (i) the general policy during the past five, and in the foreseeable future, of not increasing base salaries of all employees, (ii) the performance of employees, (iii) the employees’ increasing responsibilities in a dynamic, and shrinking organization, and (iv) the accomplishments achieved by the Company during the prior year. The 2003 Plan has been the principal method for our employees and executive officers to acquire equity interests in the Company. We believe that the annual aggregate value of these awards should be set near competitive median levels for comparable companies. We may provide a greater

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~~aggregate value of these awards should be set near competitive median levels for comparable companies. We may provide a greater~~ portion of total compensation to our executives and employees through stock options given the general policy of not increasing base salaries in the foreseeable future. Our Compensation Committee administers the 2003 Plan based on the above factors, and the Committee approved the grant of stock options to all current employees, including its named executives, during 2007 through 2009 as an incentive for continued contributions in moving our product development efforts forward. Also, the Compensation Committee, based on management’s recommendation and discussions with the Committee, may grant stock options to new employees. ~~New~~There ~~employees~~ were ~~granted~~no stock options ingranted ~~prior~~to ~~years,~~new ~~but~~employees noduring ~~such~~fiscal ~~stock~~2014 ~~options~~and ~~were~~2013, ~~issued during 2012~~ since there were no new employees hired during ~~the~~this ~~year~~period.

Options granted under the Plan must be evidenced by a stock option agreement in a form consistent with the provisions of the 2003 Plan. Each option shall expire on the earliest of (a) ten (10) years from the date it is granted, (b) sixty (60) days after the optionee dies or becomes disabled, (c) immediately upon the optionee's termination of employment or service or cessation of Board service, whichever is applicable, or (d) such date as the Committee shall determine, as set forth in the relevant option agreement; provided, however, that no ISO which is granted to an optionee who, at the time such option is granted, owns stock possessing more than ten (10) percent of the total combined voting power of all classes of stock of the Company or any of its subsidiaries, shall be exercisable after the expiration of five (5) years from the date such option is granted.

To exercise an option, the 2003 Plan participant, in accordance with the relevant option agreement, must provide the Company a written notice setting forth the number of options being exercised and their underlying shares, and tender an amount equal to the total exercise value of the options being exercised. The right to purchase shares is cumulative so that once the right to purchase any shares has vested; those shares or any portion of those shares may be purchased at any time thereafter until the expiration or termination of the option. ISOs and NQSOs that are not exercised in accordance with the terms and provisions of the stock option agreement, or as amended, will expire as to any then unexercised portion. Stock options that expire, are cancelled, or forfeited will again become available for issuance under the 2003 Plan as described below. The aggregate number of shares and the number of shares in an award (as well as the option price) may be adjusted if the outstanding shares of ~~Applied~~the ~~Visual~~Company ~~Sciences, Inc.~~ are increased, decreased or exchanged through merger or other stock transaction. The shares issued by the Company under the 2003 Plan may be either treasury shares or authorized but unissued shares as the Company’s board of directors or the Compensation Committee may determine from time to time. Except as specifically provided in an option agreement, options granted under the 2003 Plan may not be sold, pledged, transferred or assigned in any way, except by will or by the laws of descent and distribution, and during the lifetime of a participant to whom the ISOs is granted, and the ISOs may only be exercised by the participant.

During ~~2012~~2014, ~~the~~stock ~~Compensation~~options ~~Committee~~were not granted to employees, including its named executives, as the Company did not ~~grant~~achieve the desired results for the year. During 2013, the Board of Directors granted 16,353,000 stock options to all employees, including its named executives, under the 2003 Plan. AsThe stock options were granted in consideration for the continued deferral of salaries during 2012 and 2013, as well as for the incentive for ongoing contributions in moving our product development efforts forward. The fair value of the options was $507,620 ($456,858 net of estimated forfeiture value), of which $446,579 was recognized as stock-based compensation expense during the year ended December 31, ~~2012~~2013, ~~the~~and $10,279 in 2014. The Company ~~has~~cumulatively reserved under the ~~2003~~plan ~~Plan~~26,338,292 9net shares to be issued upon exercise of outstanding options,~~509~~ including 4,~~347~~281,300 options that were subsequently exercised, with 22,056,992 shares to be issued upon exercise of outstanding options. In addition, 2,033,353 unissued options were cancelled upon termination of the 2003 Plan on August 29, 2013, and 181,~~186~~628,~~353~~355 ~~shares~~options were forfeited during 2014. Therefore, there are no shares of common stock that remain available for future awards. Compensation expense for stock options granted is recognized over the requisite service period, which is typically the period over which the stock-based compensation awards vest. In anticipation of implementation of ~~SFAS~~ASC ~~123R~~718-10, we accelerated the vesting of the outstanding options in December 2005, prior to adopting ~~SFAS~~ASC ~~123R~~718-10. We applied the guidance of ~~SAB~~ASC ~~107~~718-10 in conjunction with the adoption of ~~SFAS~~ASC ~~123R~~718-10. This acceleration was for all employees, including the named executive officers.

The following is a brief summary of the principal income tax consequences of awards under the 2003 Plan. This summary is based on current federal income tax laws and interpretations thereof, all of which are subject to change at any time, possibly with retroactive effect. This summary is not intended to be exhaustive.

Non-Qualified Options. A participant who receives Non-Qualified Stock Options does not recognize taxable income upon the grant of an option, and Applied Visual Sciences, Inc. is not entitled to a tax deduction. Applied Visual Sciences, Inc. is generally entitled to tax a deduction in an amount equal to the amount taxable to the participant as ordinary income in the year the income is taxable to the participant (generally when the option is exercised). Any appreciation in value after the time of exercise will be taxable to the participant as capital gain (assuming it is a capital asset) and will not result in a deduction by Applied Visual Sciences, Inc.

Incentive Options. A participant who receives an Incentive Stock Option does not recognize taxable income upon the grant or exercise of the option and Applied Visual Sciences, Inc. is not entitled to a tax deduction. The difference between the option price and the fair market value of the option shares on the date of exercise, however, will be treated as an item of adjustment for purposes of determining the alternative minimum tax liability, if any, of the participant in the year of exercise.

A participant will recognize gain or loss upon the disposition of shares acquired from the exercise of ISOs. The nature of the gain or loss depends on how long the option shares were held. If the option shares are not disposed of pursuant to a “disqualifying disposition” (i.e., no disposition occurs within two years from the date the option was granted or one year from the date of exercise), the participant will recognize long-term capital gain or capital loss depending on the selling price of the shares. If the option shares are sold or disposed of as part of a disqualifying disposition, the participant must recognize ordinary income in an amount equal to the lesser of the amount of gain recognized on the sale or the difference between the fair market value of the option shares on the date of exercise and the option price. Any additional gain will be taxable to the participant as a long-term or short term capital gain, depending on how long the option shares were held. Applied Visual Sciences, Inc. is generally entitled to a deduction in computing its federal income taxes for the year of disposition in an amount equal to any amount taxable to the participant as ordinary income.

the selling price of the shares. If the option shares are sold or disposed of as part of a disqualifying disposition, the participant must recognize ordinary income in an amount equal to the lesser of the amount of gain recognized on the sale or the difference between the fair market value of the option shares on the date of exercise and the option price. Any additional gain will be taxable to the participant as a long-term or short term capital gain, depending on how long the option shares were held. Applied Visual Sciences, Inc. is generally entitled to a deduction in computing its federal income taxes for the year of disposition in an amount equal to any amount taxable to the participant as ordinary income.

2009 Stock Compensation Plan

On June 4, 2009, the Board of Directors adopted the 2009 Stock Compensation Plan (“2009 Plan) which provides for the grant or issuance of up to an aggregate of 20,000,000 shares of the Company’s common stock pursuant to non-qualified stock options (“NQSOs”), restricted stock awards (“RSAs”), restricted stock rights (“RSRs”), or common stock awards (“Common Stock Awards”) (a NQSO, RSA, RSR or Common Stock Award, individually, an “Award;” collectively, “Awards”). The exercise price of NQSOs may not be less than 100% of the fair market value of the stock on the date of the option grant, and may only be exercised at such times as may be specified by the Committee and provided for in an award agreement, but may not be exercised after ten years from the date on which it was granted. RSAs and RSRs consist of a specified number of shares of the Company’s Common Stock that are, or may be, subject to restrictions on transfer, conditions of forfeiture, and any other terms and conditions for periods determined by the Committee. Generally, unless the Committee determines otherwise, once the restricted stock vests, the shares of Common Stock specified in the Award will be free of restriction, subject to any applicable lock up period. Prior to the termination of the restrictions, under a RSA (but not a RSR), a participant may vote and receive dividends on the restricted stock unless the Committee determines otherwise, but may not sell or otherwise transfer the shares. Common Stock Awards under the plan may be issued free of restriction and may vest immediately; however, the Committee may impose vesting and other restrictions related to the grant of such common stock Awards. Compensation expense for these Awards is recognized over the period they vest, although generally Common Stock Awards vest immediately, while the RSAs, RSRs and NQSOs will have a vesting period.

~~During~~The ~~2012,~~purpose weof ~~issued~~the 62009 Plan is to foster our success and the success of our subsidiaries and affiliates by providing incentives to employees,~~666~~ directors,~~174~~ ~~stock~~officers ~~awards~~and ~~under~~consultants ~~the~~to ~~2009~~promote our long-term financial success. The Plan complements our 2003 Amended and Restated Stock ~~Compensation~~Incentive Plan, of(the ~~which~~“2003 ~~400,000~~Plan”) ~~stock~~and ~~awards~~provides ~~were~~greater ~~issued~~flexibility to aus ~~vendor~~in ~~for~~that it permits us to compensate and award employees, directors, officers and consultants through the ~~conversion~~issuance of ~~outstanding~~certain ~~trade~~options, ~~payables~~RSAs, ~~496~~RSRs,~~749~~ and stock awards toin ~~consultants~~addition, or as ~~compensation~~an inalternative, ~~lieu~~to ofthe ~~cash~~incentive ~~payments~~and ~~for~~non-qualified ~~services~~stock ~~rendered~~options that may be awarded under the 2003 Plan. The 2009 Plan terminates on June 4, 12019,~~850~~ and no award may be made after that date,~~000~~ ~~stock~~however, awards ~~were~~made ~~issued~~before tothat ~~employees~~date asmay ~~additional~~extend ~~compensation~~beyond that date. If an award under the 2009 Plan is cancelled, ~~and~~expires, 3forfeited,~~919~~ settled in cash or otherwise terminates without being exercised in full,~~425~~ ~~were~~the ~~issued~~shares of common stock not acquired pursuant to ~~employees~~the ~~upon~~award ~~conversion~~will ofagain ~~accrued~~become ~~and~~available ~~unpaid~~for ~~wages~~issuance under the 2009 Plan. AsThe ofBoard ~~December~~may 31amend, ~~2012~~terminate, ~~there~~or ~~were~~modify 6the 2009 Plan at any time,~~668~~ without shareholder approval,~~333~~ ~~shares~~unless ~~available~~required ~~for~~by ~~future~~the ~~awards~~Internal Revenue Code of 1986, pursuant to Section 16 under the ~~2009~~Securities ~~Stock~~Exchange ~~Compensation~~Act ~~Plan.~~of 1934, as amended, or by any national securities exchange or system on which our common stock is then listed or reported, or by any regulatory body.

The purpose of the 2009 Plan is to foster our success and the success of our subsidiaries and affiliates by providing incentives to employees, directors, officers and consultants to promote our long-term financial success. The Plan complements our 2003 Amended and Restated Stock Incentive Plan (the “2003 Plan”) and provides greater flexibility to us in that it permits us to compensate and award employees, directors, officers and consultants through the issuance of certain options, RSAs, RSRs, and stock awards in addition, or as an alternative, to the incentive and non-qualified stock options that may be awarded under the 2003 Plan. The 2009 Plan terminates on June 4, 2019, and no award may be made after that date, however, awards made before that date may extend beyond that date. If an award under the 2009 Plan is cancelled, expires, forfeited, settled in cash or otherwise terminates without being exercised in full, the shares of common stock not acquired pursuant to the award will again become available for issuance under the 2009 Plan.

Our Board of Directors has delegated its authority to administer the 2009 Plan to the Compensation Committee. Subject to the provisions of the 2009 Plan, the committee has the power to:

Prescribe, amend, and rescind rules and regulations relating to the 2009 Plan and to define terms not otherwise defined therein;

Determine which persons are eligible to participate, to which of such participants, if any, awards shall be granted, and the timing of any such awards;

Grant awards to participants and determine the terms and conditions thereof, including the number of shares subject to awards and the exercise or purchase price of such shares and the circumstances under which awards become exercisable or vested or are forfeited or expire;

Establish any performance goals or other conditions applicable to the grant, issuance, exercisability, vesting and/or ability to retain any award;

Prescribe and amend the terms of the agreements or other communications evidencing awards made under the 2009 Plan (which need not be identical) and the terms or form of any document or notice required to be delivered to us by participants under the 2009 Plan;

Determine the appropriate adjustment, if any, required as a result of any reorganization, reclassification, combination of shares, stock split, reverse stock split, spin-off or dividend (other than regular, quarterly cash dividends), or other changes in the number or kind of outstanding shares or any stock or other securities into which such shares shall have been exchanged;

changes in the number or kind of outstanding shares or any stock or other securities into which such shares shall have been exchanged;

Interpret and construe the 2009 Plan, any rules and regulations under the 2009 Plan and the terms and conditions of any award granted thereunder, and to make exceptions to any such provisions in good faith and for the benefit of the Company; and

Make all other determinations deemed necessary or advisable for the administration of the 2009 Plan.

Unless the Board expressly provides otherwise prior to a change of control or in an award agreement, in the event of a change of control of the Company, all outstanding options under the 2009 Plan vest and become exercisable on the date immediately before the change of control and all restrictions under RSAs and RSRs shall lapse or be deemed satisfied on the date immediately prior to the change of control. A change of control is deemed to have occurred upon the occurrence of one of the following events: (i) any person or group of persons becomes the beneficial owner of shares of the Company to which 50% or more of the total number of votes for the election of directors may be cast; (ii) as a result of a cash tender offer, exchange offer, merger or other business combination, sale of assets or contested election, persons who were directors immediately prior to the event cease to constitute a majority of the board; (iii) stockholders approve an agreement providing either that the Company will cease to be an independent publicly owned corporation or for sale or other disposition of all or substantially all the assets of the Company; or (iv) a tender offer or exchange offer is made for shares of our common stock (other than one made by us) and shares of common stock are acquired.

The Compensation Committee determines all awards to non-employee directors and such awards are not subject to management’s discretion. From time to time, the committee will set the amount and the type of award that will be granted to non-employee directors on a periodic, nondiscriminatory basis, including pursuant to any plan adopted by the Compensation Committee or Board for the compensation of non-employee directors. The committee may set additional awards to be granted to non-employee directors also on a periodic, nondiscriminatory basis based on one or more of the following criteria: (i) service as the chair of a Board committee; (ii) service as chairman of the Board; (iii) the number or type of Board committees on which a director serves; or (iv) the first selection or appointment of an individual to the Board.

Non-qualified stock options may be granted pursuant to non-qualified stock option award agreements and certificates adopted by the Board, as amended by the Compensation Committee. The Compensation Committee determines the terms of each stock option granted under the 2009 Plan, including the number of shares covered by an option, exercise price and means of payment, the vesting and exercisability of the option, and restrictions on transfer and the term. The exercise price of an option granted under the Plan may not be less than the fair market value on the date of grant. The options expire on the earliest of ten years after the date of grant, 90 days after the death or disability of the recipient, immediately upon termination of employment or service other than by death or disability, or such date as the Compensation Committee determines. The Compensation Committee, in its sole discretion, may change by agreement the post-termination rights of a recipient, including accelerating the date or dates on which the option becomes vested and is exercisable following termination of employment or service, or extend the period. Options granted under the plan may be exercised by delivering cash, a cashless exercise, or by delivering to us the proceeds of shares of our common stock issuable under an option.

An award of restricted stock consists of a specified number of shares of our common stock that are subject to restrictions on transfer, conditions of forfeiture, and any other terms and conditions for periods determined by the Compensation Committee. Prior to the termination of the restrictions, a participant may vote and receive dividends on the restricted stock unless the committee determines otherwise, but may not sell or otherwise transfer the shares.

An award of RSRs entitles a participant to receive a specified number of shares of our common stock upon the expiration of a stated vesting period. It may also include the right to dividend equivalents if and as so determined by the committee. Unless the committee determines otherwise, once a RSR vests, the shares of common stock specified in the award will be issued to the participant. A participant who has been awarded RSRs may not vote the shares of common stock subject to the rights until the shares are issued. Until the vesting period applicable to a RSRs award expires and the shares are issued, the participant also may not transfer or encumber any interest in the RSRs or in any related dividend equivalents.

The Compensation Committee may also make stock awards of common stock without restrictions, except that if the award is in lieu of salary, service fee, cash bonus or other cash compensation, the number of shares covered by an award shall be based on the fair market value of such shares on the date of grant. The Compensation Committee has discretion to determine the terms of any award of restricted stock or RSRs, including the number of shares subject to the award, and the minimum period over which the award may vest, and the acceleration of any vesting in the event of death, disability or change of control, as discussed above with regard to options. Awards are not transferable or assignable unless provided otherwise by the Compensation Committee with respect to certain specified family-related transfers.

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The Board may amend, terminate, or modify the 2009 Plan at any time, without shareholder approval, unless required by the Internal Revenue Code of 1986, pursuant to Section 16 under the Securities Exchange Act of 1934, as amended, or by any national securities exchange or system on which our common stock is then listed or reported, or by any regulatory body.

During 2014, the Company issued 185,000 stock awards under the 2009 Stock Compensation Plan to a consultant of the Company, and during 2013, issued 6,483,333 stock awards, of which 150,000 stock awards were issued as an inducement for the issuance of a short-term promissory note, 1,500,000 stock awards were issued to a consultant/director of the Company as additional compensation, 2,133,333 stock awards were issued to employees upon conversion of accrued and unpaid wages, and 3,000,000 stock awards were issued to two of the Company’s named executives as additional compensation. As of December 31, 2014, there are no shares available for future awards under the 2009 Stock Compensation Plan.

Severance and Change in Control Benefits

~~Three~~Two of our ~~four~~ named executive officers are covered by employment agreements which specify payments in the event the executive’s employment is terminated. The type and amount of payments vary by executive level and the nature of the termination. These termination benefits are payable if and only if the executive’s employment terminates as specified in the applicable employment agreement. Also, ~~two of~~ our two named executive officers, Mr. Donovan and Mr. Hare, have employment agreements that require us to make certain payments in the event of a change in control and upon the occurrence of certain other material events.

Our primary reason for including termination and change in control benefits in compensation packages is to attract and retain the best possible executive talent. We believe our termination benefits are competitive with general industry packages. For a further description of these severance benefits, see “Employment Agreements” and “Severance and Change in Control Benefits” below.

In addition, our 2003 Stock Incentive Plan provides that in the event of our “change in control,” the Compensation Committee may otherwise determine the status of unvested options or restricted stock, including, without limitation, whether the successor corporation will assume or substitute an equivalent award, or portion thereof, for each outstanding award under the plan or, if there is no assumption or substitution of unvested outstanding awards, such unvested awards may be canceled.

401(k) Savings Plan

We maintain a tax-qualified retirement plan that provides eligible employees with an opportunity to save for retirement on a tax advantaged basis. Eligible employees are able to participate in the 401(k) plan as of the first day of the month following 90 days of employment. The 401(k) plan permits us to make profit sharing contributions to eligible participants, although we currently do not match contributions. Pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. All employee contributions are 100% vested. The 401(k) plan is intended to qualify under Sections 401(a) and 501(a) of the Internal Revenue Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan. We believe that offering a 401(k) retirement plan fosters our ability to attract and retain the best possible executive talent.

Pension and Deferred Compensation Plans

Currently, we do not have a company sponsored pension or deferred compensation plans for any or all employees, including our named executive officers, or directors.

Perquisites and Other Compensation

During the each of the two fiscal years ended December 31, ~~2012~~2014, ~~two~~our ofcurrent ~~our~~named executive officer and previously named executive ~~officers~~officer received reimbursement of up to $6,000 annually for automobile expenses as required under the terms of their employment agreements. See below “Employment, Severance and Change in Control Arrangements.” Currently, we do not provide short or long term disability or life insurance coverage for employees, including our named executive officers, as a result of our current cash position. We do provide health care benefits to all employees including our named executive officers, and such benefits are contributory.

We intend to continue to maintain executive benefits and perquisites for officers, however, the Compensation Committee may in its discretion revise, amend or increase named executive officers’ perquisites as it deems advisable. We believe these benefits and perquisites are currently not above median competitive levels for comparable companies and are beneficial in attracting and retaining executive talent.

Equity Ownership Guidelines

Currently, we do not have any equity ownership guidelines for our executive officers or directors.

Role of Executive Officers in Executive Compensation

The Compensation Committee considers management’s recommendation and other factors mentioned above in determining the compensation payable to each of the named executive officers as well as the compensation of the members of the board of directors.

Executive Officers Compensation:

Summary Compensation Table

The following Summary Compensation Table sets forth the compensation earned or awarded to our CEO, President and COO, CFO and other named executive officers during each of the two fiscal years ended December 31, ~~2012~~2014:

		Compensation
Name and principal position	Year	Salary	Bonus	Stock awards (1)	Options awards (1)	All other compensation (2)	Total
Michael W. Trudnak (3)	~~2011~~2014	$ ~~275~~82,~~000~~518	$ -	$ -	$ -	$ 61,~~000~~800	$ ~~281~~84,~~000~~318
Chairman, CEO	~~2012~~2013	275,000	-	-	-138,400	6,000	~~281~~419,~~000~~400
William J. Donovan (4)	~~2011~~2014	265,000	-	-	-	6,000	271,000
President, COO	~~2012~~2013	265,000	-	-45,000	-137,400	6,000	~~271~~453,~~000~~400
Gregory E. Hare (5)	~~2011~~2014	200,000	-	-	-	-	200,000
Chief Financial Officer	~~2012~~2013	200,000	-	-45,000	-45,000	-	~~200~~290,000
Richard F. Borrelli (6)	2011	36,922	-	-	-	-	36,922
Vice President	2012	-	-	-	-	-	-

(1) Reflects the grant date fair value ~~on April 26, 2010~~ of stock and/or options estimated using option-pricing models calculated in accordance with ASC 718-10. See Note 2 "Significant Accounting Policies" to the Consolidated Financial Statements for a discussion of the relevant assumptions used in calculating the grant date fair value pursuant to ASC 718-10. For 2010, the amount reflects the incremental fair value for repricing of previously issued options to $0.30, which was the market price on the date repriced. See Grants of Plan-Based Awards disclosure below for additional information related to the repricing of stock options. (2) All Other Compensation consists of monthly automobile allowance expenses of $6,000 annually, prorated during employment, for Messrs. Trudnak and Donovan. (3) For Mr. Trudnak, and on behalf of his estate, includes accrued and unpaid salary of $~~282~~84,~~139~~318 in ~~2012~~2014, and $~~281~~283,~~047~~220 in ~~2011~~2013, for a cumulative deferral as of December 31, ~~2012~~2014 of $1,~~485~~850,~~477~~934. (4) For Mr. Donovan, includes accrued and unpaid salary of $272,~~038~~037 in ~~2012~~2014, and $~~239~~273,~~497~~081 in ~~2011~~2013, for a cumulative deferral as of December 31, ~~2012~~2014 $1,~~082~~624,~~668~~586. (5) For Mr. Hare, includes accrued and unpaid salary of $200,~~769~~770 in ~~2012~~2014, and $~~174~~201,~~499~~538 in ~~2011~~2013, for a cumulative deferral as of December 31, ~~2012~~2014 of $~~870~~1,~~723. (6) For Mr. Borrelli~~272, ~~includes accrued and unpaid salary of $0 in 2012, and $32,922 in 2011, for a cumulative deferral as of December 31, 2012 of $348,247~~262. ~~Mr. Borrelli was an officer of the Company through January 10, 2011, and Vice President of Business Development, Healthcare until March 31, 2011, when Mr Borrelli took a leave of absence.~~

Grants of Plan-Based Awards Table

The following table sets forth information regarding stock option awards to our named executive officers under our 2003 Stock Incentive Plan during the fiscal year ended December 31, ~~2012~~2014:

77Name Grant Date Estimated future payouts under non-equity incentive plan awards Estimated future payouts under equity incentive plan awards (#) All other stock awards: Number of shares of stock or units (#) All other option awards: Number of securities underlying options (#) Exercise or base price of option awards ($/Share) Grant date fair value of stock and option awards Michael W. Trudnak None $ - - - - $ - $ - William J. Donovan None - - - - - - Gregory E. Hare None - - - - - - -

Name

Grant Date (1)

Estimated future payouts under non-equity incentive plan awards

Estimated future payouts under equity incentive plan awards (#)

All other stock awards: Number of shares of stock or units (#)

All other option awards: Number of securities underlying options (#)

Exercise or base price of option awards ($/Share)

Grant date fair value of stock and option awards

Michael W. Trudnak

$ -

William J. Donovan

Gregory E. Hare

Richard F. Borrelli

(1) No stock options or other awards were granted during 2012.

Outstanding Equity Awards at Fiscal Year-End Table

~~The following table sets forth information for each named executive officer regarding the number of shares subject to exercisable and unexercisable stock options as of December 31, 2012.~~66

78The following table sets forth information for each named executive officer regarding the number of shares subject to exercisable and unexercisable stock options as of December 31, 2014.

Name	Option awards (1)						Stock awards
	Number of securities underlying unexercised options (#)		Equity incentive plan awards: number of securities underlying unexercised unearned options (#)	Option exercise price (1)		Option Expiration Date	Number of shares or units of stock that have not vested (#)	Market value of shares or units of stock that have not vested (#)	Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#)	Equity incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested
	Exercisable	Unexercisable
Michael W. Trudnak
	450,000	-	-	$ 0.30	(2)	2/18/2014	-	-	-	$ -
	125,000	-	-	$ 0.30	(2)	1/14/2017	-	-	-	-
	10,000	-	-	0.30	(2)	2/18/2014	-	-	-	-
	125,000	-	-	0.30	(2)	1/14/2017	-	-	-	-
	707,530	-	-	0.30	(2)	10/8/2017	-	-	-	-
	334,900	-	-	0.30	(2)	1/8/2018	-	-	-	-
	357,900	-	-	0.30		4/21/2019	-	-	-	-
	4,000,000	-	-	0.03	(3)	1/17/2023	-	-	-	-
	460,000	-	-	0.04	(3)	8/1/2023	-	-	-	-
William J. Donovan
	200,000	-	-	0.30	(2)	8/18/2013	-	-	-	-
	600,000	-	-	0.30	(2)	2/18/2014	-	-	-	-
	10,000	-	-	0.30	(2)	2/18/2014	-	-	-	-
	200,000	-	-	0.30	(2)	11/21/2015	-	-	-	-
	125,000	-	-	0.30	(2)	1/14/2017	-	-	-	-
	353,372	-	-	0.30	(2)	10/8/2017	-	-	-	-
	322,600	-	-	0.30	(2)	1/8/2018	-	-	-	-
	344,800	-	-	0.30		4/21/2019	-	-	-	-
	3,500,000	-	-	0.03	(3)	1/17/2023	-	-	-	-
	810,000	-	-	0.04	(3)	8/1/2023	-	-	-	-
Gregory E. Hare
	200,000	-	-	0.30	(2)	1/16/2016	-	-	-	-
	125,000	-	-	0.30	(2)	1/14/2017	-	-	-	-
	312,840	-	-	0.30	(2)	10/8/2017	-	-	-	-
	243,500	-	-	0.30	(2)	1/08/2018	-	-	-	-
	260,200	-	-	0.30		4/21/2019	-	-	-	-
Richard F. Borrelli
	1,500,000	-	-	0.03	(3)	1/17/2023	-	-	-	-
	100,000	-	-	0.30	(2)	9/3/2014	-	-	-	-
(1) Two year vesting periods with 50% vested after year one, and 50% after year two. Unless otherwise noted.
	20,000	-	-	0.30	(2)	10/3/2015	-	-	-	-
	112,000	-	-	0.30	(2)	1/14/2017	-	-	-	-
	136,300	-	-	0.30	(2)	1/8/2018	-	-	-	-
	208,100	-	-	0.30		4/21/2019	-	-	-	-
(1) Two year vesting periods with 50% vested after year one, and 50% after year two.
(2) On April 24, 2010, the Companys Compensation Committee approved the repricing of fully vested outstanding incentive and non-qualified stock options previously granted to officers, directors, employees and consultants of the Company, pursuant to the Companys Amended and Restated 2003 Stock Incentive Plan. The Committee repriced the outstanding options to a price equal to the mean between the closing bid and asked quotations for the Company*s Common Stock on April 26, 2010, as reported on the OTC Bulletin Board, namely, $0.30 per share. The outstanding options for the above named officers were issued with exercise prices ranging from $0.36 to $4.10 per share, which prices represented the fair market value of a share of Common Stock on the date of each such grant. The Compensation Committee repriced the outstanding options as compensation for the hardship of each optionee not regularly receiving his or her salary, wages, or other compensation due during the period April 6, 2006, through and including April 26, 2010, and the continued non-payment of such amounts by the Company. The Committee determined that such action was in the best interest of the Company and its stockholders.
(3) Six month vesting period.

Option Exercises and Stock Vested Table

The following table sets forth information for each named executive officer regarding the number of shares acquired upon the exercise of stock options and stock awards granted during the year ended December 31, ~~2012~~2014, and the aggregate dollar value realized upon the exercise of the stock option and stock awards. We have not issued stock appreciation rights (SAR’s) or restricted stock awards (RSA’s) under our 2009 Stock Compensation Plan.

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option. We have not issued stock appreciation rights (SAR’s) or restricted stock awards (RSA’s) under our 2009 Stock Compensation Plan.


Name	Option awards		Stock awards (2)
	Number of shares acquired on exercise	Value realized on exercise (1)	Number of shares acquired on vesting	Value realized on vesting (3)


Michael W. Trudnak	-	$ -	-	$ -
William J. Donovan	-	-	-	-
Gregory E. Hare	-	-	-	-

(1) Represents the difference between the market price on date of exercise and the exercise price.
(2) Includes stock awards, restricted stock, restricted stock rights and similar instruments.
(3) Represents the market price on date of grant.

Name	Option awards		Stock awards (2)
	Number of shares acquired on exercise	Value realized on exercise (1)	Number of shares acquired on vesting	Value realized on vesting (1)
Michael W. Trudnak	-	$ -	-	$ -
William J. Donovan	-	-	-	-
Gregory E. Hare	-	-	-	-
Richard F. Borrelli	-	-	-	-
(1) Represents the difference between the market price on date of exercise and the exercise price.
(2) Includes stock awards, restricted stock, restricted stock rights and similar instruments.

Pension Benefits

None of our named executive officers participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us.

Nonqualified Deferred Compensation

None of our named executive officers participate in or have account balances in non-qualified defined contribution plans or other deferred compensation plans by us. The Compensation Committee may elect to provide our officers and other employees with non-qualified defined contribution or deferred compensation benefits if the Compensation Committee determines that doing so is in our best interests.

Employment, Severance and Change in Control Arrangements

The employment agreements for each named executive officer ~~(except for Mr. Borrelli with whom we have not entered into any employment agreement)~~ are multiple years in duration and automatically renew unless terminated by either party in accordance with its terms. Each of the named executive officers employment agreement provides for an annual base salary and a discretionary annual incentive cash bonus and/or equity awards. In subsequent years, the amount of annual incentive cash and/or equity award bonus is subject to determination by our board of directors without limitation on the amount of the award. Each of the agreements provides for a severance payment over a prescribed term in the event the named executive is terminated without cause, including for Mr. Donovan and Mr. Hare, if their duties are materially changed in connection with a change in control. Each agreement also provides that no severance payment is due in the event of termination for cause, which includes termination for willful misconduct, conviction of a felony, dishonesty or fraud. Each agreement further contains an agreement by the named executive officer not to compete with us for a defined term equal in length to the applicable severance payment in the respective employment agreement, which we feel is reasonable and consistent with industry guidelines.

Michael W. Trudnak. Mr. Trudnak ~~serves~~served as our Chairman of the Board, Secretary, ~~and~~ Chief Executive Officer and a Class III director until his death on April 18, 2014. The Company entered into an employment agreement with Mr. Trudnak, which commenced on January 1, 2003. The Company amended his agreement effective December 10, 2004. The amended agreement iswas for a three year term commencing June 26, 2003, and iswas renewable for one year terms. The employment agreement ~~provides~~provided for annual compensation to Mr. Trudnak of $275,000 and a monthly automobile allowance of $500. The agreement ~~provides~~provided for incentive compensation and/or bonuses as determined by Applied Visual Sciences, Inc., participation in the Company’s stock option plan, and participation in any of its employee benefit policies or plans. The employment agreement ~~may~~was be terminated upon the death ~~or disability~~ of the employee ~~or for cause~~, inand ~~which event~~ Applied Visual Sciences, Inc.’s obligation to pay compensation ~~shall~~terminated ~~terminate~~ immediately. In the event the agreement iswas terminated by us other than by reason of the death or disability of the employee or for cause, the employee iswas entitled to payment of his base salary for one year following termination. ~~The~~There was a provision by which the employee ~~may~~could terminate the agreement on 30 days’ prior notice to Applied Visual Sciences, Inc. The employee ~~has~~ entered into an employee proprietary information, invention assignment and non-competition agreement, pursuant to which the employee ~~agrees~~agreed not to disclose confidential information regarding Applied Visual Sciences, Inc., agrees that inventions conceived during his employment become the property of Applied Visual Sciences, Inc., ~~agrees~~agreed not to compete with the business of Applied Visual Sciences, Inc. for a period of one year following termination of employment, and ~~agrees~~agreed not to solicit employees or customers of the Company following termination of employment.

80William J. Donovan. Mr. Donovan was appointed Chairman of the Board and Chief Executive Officer on April 21, 2014, and previously served as President and Chief Operating Officer, and prior to that served as Chief Financial Officer of Applied Visual Sciences, Inc. The Company entered into a new employment agreement with Mr. Donovan on November 18, 2005, which superseded his previous employment agreement with Applied Visual Sciences, Inc., dated effective August 18, 2003. The new employment agreement is for a term of three years unless earlier terminated, and is automatically renewable for one year terms. The employment agreement provides for

William J. Donovan. Mr. Donovan serves as President and Chief Operating Officer of Applied Visual Sciences, Inc., and previously served as Chief Financial Officer. The Company entered into a new employment agreement with Mr. Donovan on November 18, 2005, which superseded his previous employment agreement with Applied Visual Sciences, Inc., dated effective August 18, 2003. The new employment agreement is for a term of three years unless earlier terminated, and is automatically renewable for one year terms. The employment agreement provides for an annual salary of $265,000. The agreement provides for annual performance bonuses based on goals established by Applied Visual Sciences, Inc. and agreed to by Mr. Donovan, a monthly automobile allowance of $500, participation in our stock option and other award plans (which options or awards shall immediately vest upon a “change in control”), and participation in any benefit policies or plans adopted by us on the same basis as other employees at Mr. Donovan’s level.68

an annual salary of $265,000. The agreement provides for annual performance bonuses based on goals established by Applied Visual Sciences, Inc. and agreed to by Mr. Donovan, a monthly automobile allowance of $500, participation in our stock option and other award plans (which options or awards shall immediately vest upon a “change in control”), and participation in any benefit policies or plans adopted by us on the same basis as other employees at Mr. Donovan’s level.

The employment agreement may be terminated by Mr. Donovan on 30 days’ prior written notice. The employment agreement may be terminated by us by reason of death, disability or for cause. In the event the agreement is terminated for death or disability of the employee, our obligation to pay compensation to the employee shall terminate immediately; provided that if the Company does not maintain disability insurance for the employee, he is entitled to be paid his base salary for one year following his disability. In the event that he is terminated other than by reason of his death, disability, for cause, or change in control, Mr. Donovan is entitled to payment of his base salary for one year following termination. Further if Mr. Donovan terminates his employment for the following material reasons (each a “material reason”): written demand by us to change the principal workplace of the employee to a location outside of a 50-mile radius from the current principal address of Applied Visual Sciences, Inc.; a material reduction in the number or seniority of personnel reporting to employee or a material reduction in the frequency or in nature of matters with respect to which such personnel are to report to employee, other than as part of a company-wide reduction in staff; an adverse change in employee’s title; a material decrease in employee’s responsibilities; or a material demotion, Mr. Donovan is entitled to be paid the greater of the base salary remaining under the employment agreement or twelve months base salary.

In the event of a “change in control” of Applied Visual Sciences, Inc. and, within 12 months of such change of control, employee’s employment is terminated or one of the events in the immediately preceding sentence occurs, Mr. Donovan is entitled to be paid his base salary for 18 months following such termination or event. A “change in control” would include the occurrence of one of the following events:

the approval of the stockholders for a complete liquidation or dissolution of Applied Visual Sciences, Inc.;

the acquisition of 20% or more of the outstanding common stock of Applied Visual Sciences, Inc. or of voting power by any person, except for purchases directly from Applied Visual Sciences, Inc., any acquisition by Applied Visual Sciences, Inc., any acquisition by a Applied Visual Sciences, Inc. employee benefit plan, or a permitted business combination;

if two-thirds of the incumbent board members as of the date of the agreement cease to be board members, unless the nomination of any such additional board member was approved by three-quarters of the incumbent board members;

upon the consummation of a reorganization, merger, consolidation, or sale or other disposition of all or substantially all of the assets of Applied Visual Sciences, Inc., except if (i) all of the beneficial owners of Applied Visual Sciences, Inc.’s outstanding common stock or voting securities who were beneficial owners before such transaction own more than 50% of the outstanding common stock or voting power entitled to vote in the election of directors resulting from such transaction in substantially the same proportions, (ii) no person owns more than 20% of the outstanding common stock of Applied Visual Sciences, Inc. or the combined voting power of voting securities except to the extent it existed before such transaction, and (iii) at least a majority of the members of the board before such transaction were members of the board at the time the employment agreement was executed or the action providing for the transaction.

Also, Mr. Donovan has entered into a proprietary information, invention assignment and non-competition agreement (“non-competition agreement”), pursuant to which he has agreed not to disclose confidential information regarding us, agrees that inventions conceived during his employment become our property, agrees not to compete with our business for a period of one year following termination or expiration of his employment, and agrees not to solicit our employees or customers following termination of his employment. The employment agreement provides for arbitration in the event of any dispute arising out of the agreement or his employment, other than disputes arising under the non-competition agreement.

Gregory E. Hare. Mr. Hare serves as our Chief Financial Officer, and Treasurer. The Company entered into an employment agreement with Mr. Hare commencing on January 30, 2006. The employment agreement is essentially the same as the agreement the Company entered into with Mr. Donovan, except that the agreement is for a term of two years unless earlier terminated and shall automatically renew for successive one year terms unless terminated prior thereto. The employment agreement provides for a base salary of $200,000 per annum and no automobile allowances. The agreement provides for annual performance bonuses based on goals established by the Company and agreed to by Mr. Hare, participation in the Company’s stock option and other award plans, and participation in any company benefit policies or plans adopted by us on the same basis as other employees at Mr. Hare’s level. The Company agreed to grant to Mr. Hare, subject to approval of our Compensation Committee, stock options to purchase 200,000 shares of our common stock pursuant to our 2003 Stock Incentive Plan, one-half of which options will vest on the one year anniversary of the commencement of his employment and the remaining options vesting on the two year anniversary of the commencement of his employment.

81Also, Mr. Hare has entered into a proprietary information, invention assignment and non-competition agreement (“non-competition agreement”), pursuant to which he has agreed not to disclose confidential information regarding us, agrees that inventions conceived during his employment become our property, agrees not to compete with our business for a period of one year following termination or expiration of his employment, and agrees not to solicit our employees or customers following termination of his

Also, Mr. Hare has entered into a proprietary information, invention assignment and non-competition agreement (“non-competition agreement”), pursuant to which he has agreed not to disclose confidential information regarding us, agrees that inventions conceived during his employment become our property, agrees not to compete with our business for a period of one year following termination or expiration of his employment, and agrees not to solicit our employees or customers following termination of his employment. The employment agreement provides for arbitration in the event of any dispute arising out of the agreement or his employment, other than disputes arising under the non-competition agreement.69

~~Richard F~~employment. The ~~Borrelli. Mr. Borrelli’s~~ employment asagreement ~~Vice~~provides ~~President~~for ~~and~~arbitration ~~Officer~~in ~~for~~ the ~~Company~~event ~~is at-will, and thus has not entered into employment agreements. Therefore, there is no employment, severance or change~~ of ~~control~~any ~~arrangements. Mr.~~dispute ~~Borrelli~~arising ~~was~~out ~~an officer~~ of the ~~Company~~agreement ~~through~~or ~~January~~his 10employment, ~~2011,~~other ~~and~~than ~~Vice~~disputes ~~President~~arising ofunder ~~Business~~the ~~Development,~~non-competition ~~Healthcare until March 31, 2011, when Mr Borrelli took a leave of absence~~agreement.

Potential Payments upon Termination or Change in Control

As described under “Employment, Severance and Change in Control,” above, we are required to make certain severance payments to all of our named executive officers and provide certain change in control benefits to Mr. Donovan and Mr. Hare. In the event of the occurrence of such events, such named executive officer, as applicable, would be entitled to (a) cash payments of any unpaid base salary through the date of termination and any accrued vacation pay and severance pay and (b) in certain cases, the accelerated vesting of outstanding stock options and restricted stock. Healthcare benefits would be continued at the individuals’ election and cost through the COBRA plan. Perquisites would be discontinued upon termination.

Cash Severance and Change in Control Payments

The following table summarizes the potential payments and benefits payable to each of our current named executive officer upon termination of employment or change in our control assuming our named executive officers were terminated on December 31, ~~2012~~2014:

Name	Other Than Death, Disability, or Cause (1)	Disability (1)	Material Reason (1)	Change in Control (2)
Michael W. Trudnak	$ 275,000	$ -	$ -	$ -
William J. Donovan	$ 265,000	$ 265,000	$ 265,000	$ 397,500
William J. Donovan	265,000	265,000	265,000	397,500
Gregory E. Hare	200,000	200,000	200,000	300,000
(1) Represent 12 months salary, and does not include accrued and unpaid salary, nor earned and unused vacation.
(2) Represent 18 months salary, and does not include accrued and unpaid salary, nor earned and unused vacation.

Acceleration oof f Vesting of Option Awards

If our current named executive officers were terminated on December 31, ~~2012~~2014, the applicable officer is entitled to automatically and immediately vest in his or her outstanding stock options, as described in the table below:

Name/Circumstances Description of Equity Awards ~~Michael W. Trudnak (Change of Control) None. All outstanding options are exercisable.~~ William J. Donovan (Change of Control, Death, or Disability) ~~None.~~ All outstanding options that are exercisable or unexercisable. Gregory E. Hare (Change of Control, Death, or Disability) ~~None.~~ All outstanding options that are exercisable or unexercisable.

Directors Compensation:

Compensation Discussion and Analysis

On December 6, 2007, based upon the recommendation of the Compensation Committee, the Board adopted an “Amended Policy Regarding Compensation of Independent Directors,” pursuant to which we will furnish the following compensation to our independent directors effective July 1, 2009. The Board did not grant compensation to the independent directors during 2014, as outlined below. Although, the Company generally furnishes compensation to our independent directors in accordance with the following policy:

independent directors effective July 1, 2009. The Board did not grant compensation to the independent directors during 2012. Although, the Company generally furnishes compensation to our independent directors in accordance with the following policy:

At the beginning of each calendar year, each independent director will receive annual compensation in the form an award of non-qualified options to purchase 150,000 shares of common stock, an annual retainer for attending Board meetings of non-qualified options to purchase 24,000 shares of common stock, non-qualified options to purchase 3,000 shares of common stock for each board committee of which he or she is a member, and non-qualified options to purchase 2,000 shares of common stock for each board committee of which he or she is a chairperson of the Compensation, Nominating, and Special Committees, and non-qualified options to purchase 70,000 shares of common stock for the Audit Committee chairperson, or a pro rata portion of such number if a director is elected after the beginning of the year.

We reimburse our independent directors for out of pocket expenses in connection with travel to and attending board and committee meetings.

All of the options we issue to independent directors are pursuant to our 2003 Stock Incentive Plan. The options are exercisable for a period of ten years and at a price equal to the fair market value of Applied Visual Sciences, Inc.’s common stock on the date of ~~grant. The board, at its discretion, may grant additional awards of options, restricted stock and/or cash compensation to its independent directors as it may determine from time to time.~~

grant. The board, at its discretion, may grant additional awards of options, restricted stock and/or cash compensation to its independent directors as it may determine from time to time.

Our Policy may be amended, altered or terminated at the election of the board, provided no amendment, alteration or terminations shall have a retroactive effect or impair the rights of an independent director under any option grant theretofore granted. Our directors who are also officers of or employed or engaged as consultants by Applied Visual Sciences, Inc. or any of its subsidiaries are not additionally compensated for their board activities.

Director Compensation Table

The following table sets forth compensation to our independent directors for the fiscal year ended December 31, ~~2012~~2014. Currently, our independent directors as a group only receive stock option awards as compensation for their services on the Board and do not receive any cash compensation other than reimbursement of expenses for such activities.

Name	Fiscal Year (1)	Fees Earned or Paid in Cash	Stock Awards Value		Option Awards Value (1)	Non-Equity Incentive Plan Compensation	Change in Pension Value and Nonqualified Deferred Compensation Earnings	All Other Compensation	Total
Joseph C. Brothers	2012	$ -	$ -	-	$ -	$ -	$ -	$ -	$ -
Charles T. Nash	2014	$ -	$ -		$ -	$ -	$ -	$ -	$ -
Keith S. Kelly	2012	-	-		-	-	-	-	-
(1) The Company did not grant options as permitted in the "Policy Regarding Compensation of Independent Directors" outlined above. The Options are generally issued in the same year as the Board activities, which is permitted by the current "Policy Regarding Compensation of Independent Directors". Such issuances would reflect the grant date fair value estimated using option-pricing models calculated in accordance with ASC 718-10. See Note 2 "Significant Accounting Policies" to the Consolidated Financial Statements for a discussion of the relevant assumptions used in calculating the grant date fair value pursuant to ASC 718-10.
Charles T. Nash	2012	-	-		-	-	-	-	-
(1) There were no options granted during 2012. Options are generally issued in the same year as the Board activities, which is permitted by the current "Policy Regarding Compensation of Independent Directors" outlined above. Such issuances would reflect the grant date fair value estimated using option-pricing models calculated in accordance with ASC 718-10. See Note 2 "Significant Accounting Policies" to the Consolidated Financial Statements for a discussion of the relevant assumptions used in calculating the grant date fair value pursuant to ASC 718-10.

Outstanding Equity Awards at Fiscal Year-End Table

The following table sets forth information for each of our independent directors regarding the number of shares subject to exercisable and unexercisable stock options as of December 31, ~~2012~~2014.

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Name	Option awards (1)						Stock awards
	Number of securities underlying unexercised options (#)		Equity incentive plan awards: number of securities underlying unexercised unearned options (#)	Option exercise price (1)		Option Expiration Date	Number of shares or units of stock that have not vested (#)	Market value of shares or units of stock that have not vested (#)	Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#)	Equity incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested
	Exercisable	Unexercisable
Joseph C. Brothers
	126,725	-	-	0.30		5/24/20	-	-	-	$ -
Keith S. Kelly
	125,355	-	-	0.30		5/24/20	-	-	-	-
Charles T. Nash
	6,000	-	-	0.30	(2)	6/18/2014	-	-	-	-
	12,500	-	-	0.30	(2)	9/21/2015	-	-	-	-
	12,500	-	-	0.30	(2)	1/11/2017	-	-	-	-
	22,500	-	-	0.30	(2)	1/14/2017	-	-	-	-
	60,000	-	-	0.30	(2)	1/14/2018	-	-	-	-
	35,000	-	-	0.30		4/21/2019	-	-	-	-
	150,000	-	-	0.22		7/6/2019	-	-	-	-
	185,000	-	-	0.15		2/1/2020	-	-	-	-
	3,425	-	-	0.30		5/24/20	-	-	-	-
(1) One year vesting period.
	6,000	-	-	0.04	(3)	8/1/2023	-	-	-	-
(1) One year vesting period, unless otherwise noted.
(2) On April 24, 2010, the Companys Compensation Committee approved the repricing of fully vested outstanding incentive and non-qualified stock options previously granted to officers, directors, employees and consultants of the Company, pursuant to the Companys Amended and Restated 2003 Stock Incentive Plan. The Committee repriced the outstanding options to a price equal to the mean between the closing bid and asked quotations for the Company*s Common Stock on April 26, 2010, as reported on the OTC Bulletin Board, namely, $0.30 per share. The outstanding options for the above named officers were issued with exercise prices ranging from $0.36 to $4.10 per share, which prices represented the fair market value of a share of Common Stock on the date of each such grant. The Compensation Committee repriced the outstanding options as compensation for the hardship of each optionee not regularly receiving his or her salary, wages, or other compensation due during the period April 6, 2006, through and including April 26, 2010, and the continued non-payment of such amounts by the Company. The Committee determined that such action was in the best interest of the Company and its stockholders.
(3) Nine month vesting period.

Other Arrangements

Our by-laws permit the Company to provide officers and directors liability insurance. Such coverage was provided by the Company through October 19, 2011, with coverage limits of $5,000,000 and a maximum $200,000 deductible amount for each claim. The Company anticipates providing such coverage upon approval of the Board.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table shows, as of ~~February~~July 2817, ~~2013~~2015, the beneficial ownership of our common stock by (i) any person we know who is the beneficial owner of more than 5% of our common stock, (ii) each of our directors and executive officers, and (iii) all of our directors and executive officers as a group. As of ~~February~~July 2817, ~~2013~~2015 there were ~~100~~106,~~193~~728,~~279~~612 shares of our common stock issued and outstanding.

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Name of Beneficial Owner (1)	Number of Shares Beneficially Owned (1)		% of Common Stock Beneficial Qwnership
Michael W. Trudnak	10,369,938	(2)	0.1%
The Estate of Michael W. Trudnak (former Chairman/CEO)	14,202,938	(2)	0.1%
William J. Donovan	69,~~165~~465,~~772~~972	(3)	0.1%
Gregory E. Hare	35,~~898~~170,~~244~~744	(4)	0.0%
Sean W. Kennedy	3,554,274	(5)	0.0%
Sean W. Kennedy (resigned from the board and as consultant on February 15, 2014)	5,054,274	(5)	0.0%
Charles T. Nash	493,925	(6)	*
Keith S. Kelly	446,112	(7)	*
All executive officers and directors as a group (5 individuals)	34,387,853	(7)	0.3%
All executive officers and directors as a group (6 individuals)	24,928,265	(8)	0.2%
* Represents less than 1%

(1)	Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act, and is generally determined by voting powers and/or investment powers with respect to securities. Unless otherwise noted, all shares of common stock listed above are owned of record by each individual named as beneficial owner and such individual has sole voting and dispositive power with respect to the shares of common stock owned by each of them. Such person or entity’s percentage of ownership is determined by assuming that any options or convertible securities held by such person or entity which are exercisable within 60 days from the date hereof have been exercised or converted as the case may be. All addresses, except as noted, are c/o Applied Visual Sciences, Inc., 525K East Market Street, Leesburg, VA 20176.
(2)	Estate of Mr. Trudnak – includes 15,985,330 shares underlying options and 1,~~166~~666,804 warrants to purchase shares of common stock which are exercisable.
(3)	Mr. Donovan - includes ~~1,500,000~~ shares ~~that vest 50% on April 17, 2013 and 50% on July 17, 2013, shares~~ underlying options of 25,~~155~~655,772, and 1,600,000 warrants to purchase shares of common stock which are exercisable. Includes 700,000 shares of common stock owned by Mr. Donovan’s wife with respect to which Mr. Donovan claims beneficial ownership
(4)	Mr. Hare – includes ~~1,500,000~~ shares ~~that vest 50% on April 17, 2013 and 50% on July 17, 2013, shares~~ underlying options of 12,~~141~~641,540 and 900,136 warrants to purchase shares of common stock which are exercisable. Excludes 356,568 shares of common stock owned by Mr. Hare’s wife, which Mr. Hare disclaims beneficial ownership.
(5)	Mr. Kennedy -– includes ~~1,500,000~~ shares ~~that vest 50% on April 17, 2013 and 50% on July 17, 2013, shares~~ underlying options of ~~649~~2,~~400~~149,400 and 588,412 warrants to purchase shares of common stock which are exercisable. Includes 10210,550 shares of common stock owned by Mr. Kennedy’s wife with respect to which Mr. Kennedy ~~disclaims~~claims beneficial ownership.
(6)	Mr. Nash - includes 486,925 shares underlying options to purchase shares of common stock which are exercisable.
(7)	All executive officers and directors as a group (5 individuals) - includes shares underlying options to purchase an aggregate of 5,985,330, 5,655,772, 2,641,540, 2,149,400, and 486,925 shares of common stock which are currently exercisable that have been granted to The Estate of Mr. ~~Kelly~~Trudnak –and ~~includes~~Messrs. ~~125~~Donovan,~~355~~ Hare, Kennedy, and Nash, respectively. Also includes shares underlying ~~options~~warrants to purchase an aggregate of 1,666,804, 1,600,000, 900,136, 588,412, and 0 shares of common stock which are currently exercisable that have been issued to The Estate pf Mr. Trudnak, and Messrs. Donovan, Hare, Kennedy, and Nash respectively.
(8)	All executive officers and directors as a group (6 individuals) - includes shares underlying options to purchase an aggregate of 1,985,330, 2,155,772, 1,141,540, 649,400, 486,925, and 125,355 shares of common stock which are currently exercisable that have been granted to Messrs. Trudnak, Donovan, Hare, Kennedy, Nash, and Kelly, respectively. Also includes shares underlying warrants to purchase an aggregate of 1,666,804, 1,600,000, 900,136, 588,412, 0, and 0 shares of common stock which are currently exercisable that have been issued to Messrs. Trudnak, Donovan, Hare, Kennedy, Nash, and Kelly, respectively.

In addition to the executive and director compensation arrangements, including employment and change in control arrangements discussed above under Item 11 - Executive Compensation, the following is a description of transactions since January 1, 2008, to which we have been a party in which the amount involved in the transaction exceeded or will exceed the lesser of $120,000 or one percent of the average of our total assets as at the year -end for the last two completed fiscal years, and in which any of our directors, executive officers or beneficial holders of more than 5% of our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest.

Loans from Our Chief Executive Officer

On ~~April~~October 2118, 2006, the Company entered into a Loan Agreement with Mr. Michael W. Trudnak, our previous Chairman and Chief Executive Officer pursuant to which Mr. Trudnak loaned the Company $~~200~~100,000. The Company issued a non-negotiable promissory note, dated effective ~~April~~October 2118, 2006, to Mr. Trudnak in the principal amount of $~~200~~100,000. The note is unsecured, non-negotiable and non-interest bearing. The note is repayable on the earlier of (i) six months after the date of issuance, (ii) the date the Company receives aggregate proceeds from the sale of its securities after the date of the issuance of the Note in an amount exceeding $2,000,000, or (iii) the occurrence of an event of default. The following constitute an event of default under the note: (a) the failure to pay when due any principal or interest or other liability under the loan agreement or under the note; (b) the material violation by us of any representation, warranty, covenant or agreement contained in the loan agreement, the note or any other loan document or any other document or agreement to which the Company is a party to or by which the Company or any of our properties, assets or outstanding securities are bound; (c) any event or circumstance shall occur that, in the reasonable opinion of the lender, has had or could reasonably be expected to have a material adverse effect; (d) an assignment for the benefit of our creditors; (e) the application for the appointment of a receiver or liquidator for us or our property; (f) the issuance of an attachment or the entry of a judgment against us in excess of

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warranty, covenant or agreement contained in the loan agreement, the note or any other loan document or any other document or agreement to which the Company is a party to or by which the Company or any of our properties, assets or outstanding securities are bound; (c) any event or circumstance shall occur that, in the reasonable opinion of the lender, has had or could reasonably be expected to have a material adverse effect; (d) an assignment for the benefit of our creditors; (e) the application for the appointment of a receiver or liquidator for us or our property; (f) the issuance of an attachment or the entry of a judgment against us in excess of $100,000; (g) a default with respect to any other obligation due to the lender; or (h) any voluntary or involuntary petition in bankruptcy or any petition for relief under the federal bankruptcy code or any other state or federal law for the relief of debtors by or with respect to us, provided however with respect to an involuntary petition in bankruptcy, such petition has not been dismissed within 30 days of the date of such petition. In the event of the occurrence of an event of default, the loan agreement and note shall be in default immediately and without notice, and the unpaid principal amount of the loan shall, at the option of the lender, become immediately due and payable in full. The Company agreed to pay the reasonable costs of collection and enforcement, including reasonable attorneys’ fees and interest from the date of default at the rate of 18% per annum. The note is not assignable by Mr. Trudnak without our prior consent. The Company may prepay the note in whole or in part upon ten days notice. On October 21, 2006, Mr. Trudnak extended the due date of the loan to December 31, 2006. Subsequently, on October 3 and October 18, 2006, Mr. Trudnak loaned the Company $102,000 and $100,000, respectively, on substantially the same terms as the April 21, 2006 loan, except that each loan is due six months after the date thereof. Accordingly, following such additional loans, the Company owed an aggregate of approximately $402,000 to Mr. Trudnak. On November 10, 2006, Mr. Trudnak extended the due ~~dates~~date of ~~such loans to May 31, 2007, except that $100,000 of~~ the ~~April~~note 21, 2006, loan becomes due upon the Company raising $2,500,000 in financing after November 6, 2006, and the remaining amount of $202,000 of such loans become due upon the Company raising an aggregate of $5,000,000 in financing after November 6, 2006, and prior to May 31, 2007. Following the first closing of our Debenture and Series D Warrant financing on November 8, 2006, the Company repaid $100,000 on November 20, 2006, in principal amount of the April 1, 2006 loan, and paid an additional $100,000 to Mr. Trudnak on April 17, 2007 upon the second closing of our Debenture and Series D Warrant financing. On May 31, 2007, Mr. Trudnak extended the due dates of the remaining loans to May 31, 2008. Although, the anticipated payment of $202,000 had not been made, ~~and Mr. Trudnak made~~ an additional $24,000 loan to the company on June 25, 2008, and $5,000 on September 14, 2011, for cumulative outstanding loans of $~~231~~129,000. The maturity date of the outstanding loans was extended to May 31, 2009, then to May 31, 2010 and June 30, 2011, and subsequently to December 31, 2011. and then to June 30, 2012. On ~~December~~June 3130, ~~2011~~2012, the outstanding loans were extended to ~~June~~December 30, 2012, and then to ~~December~~June 30, ~~2012~~2013, and subsequently to December 31, 2013. On December 31, 2013, the outstanding loans were extended to June 30, ~~2013~~2014. The Company repaid an aggregate of $~~108~~6,900 of the notes during 2010, ~~and repaid~~ an aggregate $33,100 during 2011, an aggregate of $8,500 during 2013, resulting in an outstanding balance at December 31, ~~2012~~2014 of $8980,~~000~~500. The terms of the above transaction were reviewed and approved by the Company’s audit committee and by the independent members of our Board of Directors. Upon the death of Mr. Trudnak on April 18, 2014, the notes became part of his estate and will be assigned to his spouse, Jean M. Trudnak.

Consulting Agreement with BND Software, Principal Owner Sean Kennedy, a Director of the Company

On July 15, 2008, Applied Visual Sciences, Inc. entered into a consulting agreement with BND Software, Inc. (“BND”), a corporation that is owned and controlled by Mr. Sean W. Kennedy, a director of the Company. BND agreed to provide certain consulting services to the Applied Visual including managing the research, development and information systems activities of the Company. The agreement is for a term of one year commencing on May 27, 2008, and on May 31, 2009. The agreement provided for an extension of a twelve (12) month period upon mutual agreement by both parties. The agreement may be terminated upon 60 days prior written notice by one party to the other party. The agreement provided for an annual compensation of $216,000. The Company did not renew the agreement with BND, although Mr. Kennedy ~~continues~~continued to provide management services for the research, development and information systems activities. We paid or agreed to pay BND an aggregate of $~~168~~49,~~663~~998 during ~~2012~~2014, and $~~200~~141,~~000~~661 during ~~2011~~2013. As of December 31, ~~2012~~2014, the Company has accrued and unpaid fees payable to BND Software of $~~662~~854,~~589~~248. On February 15, 2014, Mr. Kennedy resigned as a director and consultant to the Company.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

To ensure the independence of Applied Visual Sciences, Inc.’s independent auditor and to comply with applicable securities laws, the Audit Committee is responsible for reviewing, deliberating and, if appropriate, pre-approving all audit, audit-related, and non-audit services to be performed by Applied Visual Sciences, Inc.’s independent registered public accountants. For that purpose, the Audit Committee has established a policy and related procedures regarding the pre-approval of all audits, audit-related, and non-audit services to be performed by Applied Visual Sciences, Inc.’s independent accountants (the "Policy").

The Policy provides that Applied Visual Sciences, Inc.’s independent accountant may not perform any audit, audit-related, or non-audit service for Applied Visual Sciences, Inc., subject to those exceptions that may be permitted by applicable law, unless (1) the service has been pre-approved by the Audit Committee, or (2) Applied Visual Sciences, Inc. engaged the independent registered public accountant to perform the service pursuant to the pre-approval provisions of the Policy. In addition, the Policy prohibits the Audit Committee from pre-approving certain non-audit services that are prohibited from being performed by Applied Visual Sciences, Inc.’s independent accountant by applicable securities laws. The Policy also provides that the Chief Financial Officer will periodically update the Audit Committee as to services provided by the independent auditor. With respect to each such service, the independent registered public accountant provides detailed back-up documentation to the board and the Chief Financial Officer.

the Audit Committee as to services provided by the independent auditor. With respect to each such service, the independent registered public accountant provides detailed back-up documentation to the board and the Chief Financial Officer.

Pursuant to its Policy, the Audit Committee has pre-approved certain categories of services to be performed by the independent registered public accountant and a maximum amount of fees for each category. The Board annually re-assesses these service categories and the associated fees. Individual projects within the approved service categories have been pre-approved only to the extent that the fees for each individual project do not exceed a specified dollar limit, which amount is re-assessed annually. Projects within a pre-approved service category with fees in excess of the specified fee limit for individual projects may not proceed without the specific prior approval of the Audit Committee. In addition, no project within a pre-approved service category will be considered to have been pre-approved by the Board if the project causes the maximum amount of fees for the service category to be exceeded, and the project may only proceed with the prior approval of the Audit Committee to increase the aggregate amount of fees for the service category.

The Audit Committee of the Board of Directors of the Company has appointed the firm of KBL, LLP, to serve as independent auditors of the Company for the fiscal year ending December 31, 2012. KBL, LLP was first appointed on February 23, 2009 for the fiscal year ending December 31, 2008 audit.74

~~For~~The Audit Committee of the ~~fiscal~~Board ~~years~~of ~~ended~~Directors ~~December~~of 31the Company has appointed the firm of KBL, ~~2012~~LLP, ~~and~~to ~~2011,~~serve as independent auditors of the Company ~~paid~~for ~~(or~~the ~~will~~fiscal ~~pay)~~year ~~the~~ending ~~following~~December ~~fees~~31, ~~for~~2014. KBL, ~~services~~LLP ~~rendered~~was ~~during~~first ~~the~~appointed ~~year~~on orFebruary 23, 2009 for the ~~audit~~fiscal inyear ~~respect~~ending ofDecember ~~those~~31, ~~years:~~2008 audit.

Fee Type	2012	2011
Audit Fees (1)	$ 63,500	$ 63,500
Audit Related Fees (2)	-	-
Tax Fees (3)	2,500	2,500
All Other Fees (4)	-	-
Total	$ 66,000	$ 66,000
(1) Represents fees for professional services rendered in connection with the audit of the annual financial statements, and review of the quarterly financial statements for each fiscal year. Fees for fiscal 2012 and 2011 are for such services provided by KBL, LLP.
(2) Represents fees for professional services that principally include due diligence in connection with acquisitions or dispositions, accounting consultantations, and assistance with internal control documentation and information systems audits. The assurance and related services reasonably related to the performance of the audit or review of the Company's financial statements, such as SEC filings. No such services for Fiscal 2012 and 2011 were approved nor rendered.
(3) Represents fees for tax compliance services. Fees for fiscal 2012 and 2011 represent amounts for service provided by KBL, LLP.
(4) Represents fees for professional services other than those described above. No other such services for fiscal 2012 and 2011 were approved nor rendered pursuant to the de minimis exception provided in Rule 2-01 (7) (i)(C) of Regulation S-X.

For the fiscal years ended December 31, 2014, and 2013, the Company paid (or will pay) the following fees for services rendered during the year or for the audit in respect of those years:


Fee Type	2014	2013
Audit Fees (1)	$ 35,000	$ 35,000
Audit Related Fees (2)	-	-
Tax Fees (3)	2,500	2,500
All Other Fees (4)	-	-
Total	$ 37,500	$ 37,500

(1) Represents fees for professional services rendered in connection with the audit of the annual financial statements, and review of the quarterly financial statements for each fiscal year. Fees for fiscal 2014 and 2013 are for such services provided by KBL, LLP.


(2) Represents fees for professional services that principally include due diligence in connection with acquisitions or dispositions, accounting consultantations, and assistance with internal control documentation and information systems audits. The assurance and related services reasonably related to the performance of the audit or review of the Company's financial statements, such as SEC filings. No such services for Fiscal 2014 and 2013 were approved nor rendered.




(3) Represents fees for tax compliance services. Fees for fiscal 2014 and 2013 represent amounts for service provided by KBL, LLP.

(4) Represents fees for professional services other than those described above. No other such services for fiscal 2014 and 2013 were approved nor rendered pursuant to the de minimis exception provided in Rule 2-01 (7) (i)(C) of Regulation S-X.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial statements:

The information required by this item appears beginning on page 9179 of this Annual Report on Form 10-K. The following financial statements of the Company and those financial statement schedules required are incorporated herein by reference.

Financial Statements

Report of Independent Registered Public Accounting Firm,

Consolidated Balance Sheets as of December 31, ~~2012~~2014 and ~~2011~~2013,

Consolidated Statements of Operations and Comprehensive Income ~~(Loss)~~ for the years ended December 31, ~~2012,~~2014 and ~~2011 and development stage period April 1~~2013, ~~2012 through December 31, 2012,~~

Consolidated ~~Statements~~Statement of Changes in Stockholders’ ~~Equity~~ (Deficit) and Accumulated Comprehensive Income ~~(Loss)~~ for the years ended December 31, ~~2012,~~2014 and ~~2011(which includes the development period April 1~~2013, ~~2012 through December 31, 2012),~~

Consolidated Statements of Cash Flows for the years ended December 31, ~~2012,~~2014 and ~~2011 and development stage period April 1~~2013, ~~2012 through December 31, 2012,~~

Notes to Consolidated Financial Statements.

2. Financial Statement Schedules:

Exhibits:

The following exhibits are filed as part of this Annual Report on Form 10-K:

		Incorporated by Reference From
Exhibit No.	Exhibit Description	Form	Filing Date	Filed Herewith
2.1	Amended and Restated Agreement and Plan of Reorganization dated effective June 12, 2003, by and among the Company, RJL Marketing Services, Inc., and the shareholders of RJL Marketing Services, Inc.	8-K	06/27/2003
3.1	Certificate of Incorporation	10-KSB	04/15/2004
3.2	Articles of Amendment to Certificate of Incorporation	10-KSB	04/15/2004
3.3	Certificate of Designation of Rights and Preferences of Series A Convertible Preferred Stock.	10-QSB	08/15/2003
3.4	Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock.	10-QSB	08/15/2003
3.5	Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock, dated September 24, 2003.	10-QSB	11/14/2003
3.6	Certificate of Amendment to Certificate of Designation of Preferences and Rights of Series B Convertible Preferred Stock, dated October 27, 2003.	10-QSB	11/14/2003
3.7	Certificate of Amendment to Certificate of Designations of Rights and Preferences of Series A Convertible Preferred Stock, dated November 24, 2004
3.8	By-Laws	10-KSB	04/15/2004
4.1	Form of Common Stock Certificate, on file at company
10.1	Employment Agreement, dated August 18, 2003, between the Registrant and William J. Donovan.	10-QSB	11/14/2003
10.2	Asset Purchase Agreement, dated October 23, 2003, between the Registrant, Difference Engines Corporation and Certain Stockholders.	10-QSB	11/14/2003
10.3	Amended And Restated 2003 Stock Incentive Plan.	10-KSB	04/15/2004
10.4	Amended Employment Agreement, dated December 10, 2004, between the Registrant and Michael W. Trudnak.	8-K	12/20/2004
10.5	Form of Incentive Stock Option Award Agreement.	10-Q	08/12/2005
10.6	Form of Non-Qualified Stock Option Award Agreement.	10-Q	08/12/2005
10.7	Form of Systems Implementation Agreement.	10-Q	11/14/2005
10.8	Employment Agreement, dated December 21, 2005, between the Registrant and Mr. Gregory E. Hare	8-K	01/31/2006
10.9	Loan Agreement, dated April 21, 2006, by and between the Registrant and Mr. Michael W. Trudnak.	8-K/A	5/25/06
10.10	Securities Purchase Agreement, dated November 3, 2006, by and among Registrant and Certain purchasers.	8-K	11/8/06


		Incorporated by Reference From
Exhibit No.	Exhibit Description	Form	Filing Date	Filed Herewith

8875

2.1	Amended and Restated Agreement and Plan of Reorganization dated effective June 12, 2003, by and among the Company, RJL Marketing Services, Inc., and the shareholders of RJL Marketing Services, Inc.	8-K	06/27/2003
3.1	Certificate of Incorporation	10-KSB	04/15/2004
3.2	Articles of Amendment to Certificate of Incorporation	10-KSB	04/15/2004
3.3	Certificate of Designation of Rights and Preferences of Series A Convertible Preferred Stock.	10-QSB	08/15/2003
3.4	Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock.	10-QSB	08/15/2003
3.5	Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock, dated September 24, 2003.	10-QSB	11/14/2003
3.6	Certificate of Amendment to Certificate of Designation of Preferences and Rights of Series B Convertible Preferred Stock, dated October 27, 2003.	10-QSB	11/14/2003
3.7	Certificate of Amendment to Certificate of Designations of Rights and Preferences of Series A Convertible Preferred Stock, dated November 24, 2004
3.8	By-Laws	10-KSB	04/15/2004
4.1	Form of Common Stock Certificate, on file at company
10.1	Employment Agreement, dated August 18, 2003, between the Registrant and William J. Donovan.	10-QSB	11/14/2003
10.2	Asset Purchase Agreement, dated October 23, 2003, between the Registrant, Difference Engines Corporation and Certain Stockholders.	10-QSB	11/14/2003
10.3	Amended And Restated 2003 Stock Incentive Plan.	10-KSB	04/15/2004
10.4	Amended Employment Agreement, dated December 10, 2004, between the Registrant and Michael W. Trudnak.	8-K	12/20/2004
10.5	Form of Incentive Stock Option Award Agreement.	10-Q	08/12/2005
10.6	Form of Non-Qualified Stock Option Award Agreement.	10-Q	08/12/2005
10.7	Form of Systems Implementation Agreement.	10-Q	11/14/2005
10.8	Employment Agreement, dated December 21, 2005, between the Registrant and Mr. Gregory E. Hare	8-K	01/31/2006
10.9	Loan Agreement, dated April 21, 2006, by and between the Registrant and Mr. Michael W. Trudnak.	8-K/A	5/25/06
10.10	Securities Purchase Agreement, dated November 3, 2006, by and among Registrant and Certain purchasers.	8-K	11/8/06
10.11	Form of Series A 10% Senior Convertible Debenture, due November 8, 2008.	8-K	11/8/06
10.12	Form of Registration Rights Agreement by and among Registrant and Certain Purchasers.	8-K	11/8/06
10.13	Form of Series D Common Stock Purchase Warrant Issued to Certain Purchasers.	8-K	11/8/06
10.14	Placement Agent Agreement, dated July 14, 2006, by and between Registrant and Midtown Partners & Co., LLC.	8-K	11/8/06
10.15	Form of Placement Agent’s Warrant issued to Midtown Partners & Co., LLC and its designees	8-K	11/8/06
10.16	Distribution Agreement, dated August 20, 2006, by and between Registrant and MTS Delft.	10-Q	11/14/06
10.17	Distribution Agreement, dated August 20, 2006, by and between Registrant and Calyx (UK) Limited.	10-Q	11/14/06
10.18	Securities Purchase Agreement, dated August 6, 2007, by and among Registrant and Certain purchasers.	8-K	8/7/07
10.19	Form of Series F and G Common Stock Purchase Warrant Issued to Certain Purchasers.	8-K	8/7/07
10.20	Form of Non-Qualified Stock Option Award Agreement Issued to Certain Executive Officers Related to Continued Deferral of Salary	10-Q	11/13/07
10.21	2009 Stock Compensation Plan, amended and effective on July 24, 2009	8-K	8/4/09
10.22	Form of Non-Qualified Stock Option Award Agreement, 2009 Stock Compensation Plan	8-K	6/22/09
10.23	Form of Restricted Stock Award Agreement, 2009 Stock Compensation Plan	8-K	6/22/09
10.24	Amended Policy Independent Director Compensation, effective July 1, 2009	8-K	6/25/09
10.25	Form of Independent Director Non-Qualified Stock Option Award Agreement	8-K	6/25/09
10.26	2009 Stock Compensation Plan, amended and effective on July 24, 2009	8-K	8/4/09
10.27	Certificate of Ownership and Merger, and Name Change	8-K	7/15/10
10.28	Amendment and Waiver Agreement, dated October 15, 2010, by and between Registrant and Certain Purchasers	8-K	10/20/10
10.29	Securities Purchase Agreement, dated February 23, 2011, by and among Registrant and Seaside 88, L.P.	8-K	3/2/11
10.30	Amendment Agreement, dated June 30, 2012, by and between Registrant and Mr. Michael W. Trudnak.			X
10.31	Amendment Agreement, dated December 30, 2012, by and between Registrant and Mr. Michael W. Trudnak.			X
14.1	Code of Ethics for Chief Executive Officer and Senior Financial Officers	10-KSB	4/15/04
21	List of Subsidiaries.			X
23.1	Consent of KBL, LLP			X
31.1	Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO)			X
31.2	Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO)			X
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO)			X
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO)			X
101.INS	XBRL Instance Document			X

8976

10.18	Securities Purchase Agreement, dated August 6, 2007, by and among Registrant and Certain purchasers.	8-K	8/7/07
10.19	Form of Series F and G Common Stock Purchase Warrant Issued to Certain Purchasers.	8-K	8/7/07
10.20	Form of Non-Qualified Stock Option Award Agreement Issued to Certain Executive Officers Related to Continued Deferral of Salary	10-Q	11/13/07
10.21	2009 Stock Compensation Plan, amended and effective on July 24, 2009	8-K	8/4/09
10.22	Form of Non-Qualified Stock Option Award Agreement, 2009 Stock Compensation Plan	8-K	6/22/09
10.23	Form of Restricted Stock Award Agreement, 2009 Stock Compensation Plan	8-K	6/22/09
10.24	Amended Policy Independent Director Compensation, effective July 1, 2009	8-K	6/25/09
10.25	Form of Independent Director Non-Qualified Stock Option Award Agreement	8-K	6/25/09
10.26	2009 Stock Compensation Plan, amended and effective on July 24, 2009	8-K	8/4/09
10.27	Certificate of Ownership and Merger, and Name Change	8-K	7/15/10
10.28	Amendment and Waiver Agreement, dated October 15, 2010, by and between Registrant and Certain Purchasers	8-K	10/20/10
10.29	Securities Purchase Agreement, dated February 23, 2011, by and among Registrant and Seaside 88, L.P.	8-K	3/2/11
10.30	Amendment Agreement, dated December 31, 2013, by and between Registrant and Mr. Michael W. Trudnak.	10-K	3/31/14
14.1	Code of Ethics for Chief Executive Officer and Senior Financial Officers	10-KSB	4/15/04
21	List of Subsidiaries.			X
23.1	Consent of KBL, LLP			X
31.1	Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (President)			X
31.2	Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO)			X
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (President)			X
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO)			X
101.INS	XBRL Instance Document			X
101.SCH	XBRL Taxonomy Extension Schema Document			X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document			X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document			X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document			X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document			X

9077

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

APPLIED VISUAL SCIENCES, INC. By: /s/ ~~Michael~~William WJ. ~~Trudnak~~Donovan ~~Michael~~William WJ. ~~Trudnak~~Donovan Chief Executive Officer (Principal Executive Officer) By: /s/ Gregory E. Hare Gregory E. Hare Chief Financial Officer (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Michael W. Trudnak Michael W. Trudnak	Chairman of the Board, Chief Executive Officer and Secretary, Director (Principal Executive Officer)	May 13, 2013
/s/ William J. Donovan William J. Donovan	Chairman of the Board, Chief Executive Officer, Secretary, Director	July 17, 2015
/s/ William J. Donovan William J. Donovan	President and Chief Operating Officer, Director	May 13, 2013
/s/ Gregory E. Hare Gregory E. Hare	Chief Financial Officer, Treasurer (Principal Financial and Accounting Officer)	July 17, 2015
/s/ Gregory E. Hare Gregory E. Hare	Chief Financial Officer, Treasurer (Principal Financial and Accounting Officer)	May 13, 2013
/s/ Charles T. Nash Charles T. Nash	Director	July 17, 2015
/s/ Keith S. Kelly Keith S. Kelly	Director	May 13, 2013
/s/ Sean W. Kennedy Sean W. Kennedy	Director	May 13, 2013
/s/ Charles T. Nash Charles T. Nash	Director	May 13, 2013

9178

APPLIED VISUAL SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

TOGETHER WITH THE REPORT OF THE INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Applied Visual Sciences, Inc.

Leesburg, Virginia

We have audited the accompanying consolidated balance sheets of Applied Visual Sciences, Inc. (the “Company”) as of December 31, ~~2012~~2014 and ~~2011~~2013 and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years ended December 31, ~~2012~~2014 and ~~2011~~2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Applied Visual Sciences, Inc. as of December 31, ~~2012~~2014 and ~~2011~~2013, and the results of its consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years ended December 31, ~~2012~~2014 and ~~2011~~2013 in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has sustained significant operating losses and needs to obtain additional financing or restructure its current obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ KBL, LLP

New York, NY

~~May~~July 1017, ~~2013~~2015

CONSOLIDATED BALANCE SHEETS

APPLIED VISUAL SCIENCES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
		December 31
		2012	2011
		2014	2013
ASSETS
Current Assets
	Cash and cash equivalents	$ 3,445	$ 6,490
	Cash	$ 33,961	$ 1,108
	Prepaid expenses	12,~~115~~324	21,~~610~~115
	Total current assets	436,~~560~~285	92,~~100~~223
Equipment, net		116,135	222,924
Fixed Assets, net		44,329	55,018
Other Assets
	Other noncurrent assets	11,122	11,122
	Intangible assets, net	291,725	315,855
	Intangible assets, net	331,163	363,599
	Total assets	$ 372,339	$ 373,096
	Total assets	$ 462,980	$ 606,745
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
	Accounts payable	$ 1,~~570~~792,~~639~~192	$ 1,~~356~~689,~~404~~147
	Accrued wages and related	78,~~177~~792,~~753~~108	68,~~311~~099,~~354~~945
	Other accrued liabilities	72242,~~804~~404	8144,~~422~~579
	Notes payable and advances, related parties	8980,~~000~~500	8980,~~000~~500
	Notes payable, net of discount	~~559~~807,~~704~~500	~~371~~718,~~413~~930
	Convertible debentures	2,025,846	2,025,846
	Derivative liabilities - embedded conversion feature of debentures	202,585	270,113
	Derivative liabilities	202,585	540,226
	Total current liabilities	1113,~~698~~943,~~331~~135	1013,~~432~~299,~~552~~173
Stockholders' Equity (Deficit)
Stockholders' (Deficit)
	Convertible preferred stock, $0.20 par value; authorized 1,000,000 shares
	Shares issued and outstanding at December 31, 2012 - none
	Shares issued and outstanding at December 31, 2014 - none
	Shares issued and outstanding at December 31, 2011 - none	-	-
	Shares issued and outstanding at December 31, 2013 - none	-	-
	Common stock, $0.001 par value; authorized 200,000,000 shares
	Shares issued and outstanding at December 31, 2012 - 95,318,279
	Shares issued and outstanding at December 31, 2014 - 104,728,612
	Shares issued and outstanding at December 31, 2011 - 88,506,305	95,318	88,506
	Shares issued and outstanding at December 31, 2013 - 102,531,612	104,729	102,532
	Additional paid-in capital	82,~~117~~993,~~522~~348	8182,~~729~~856,~~777~~886
	Accumulated comprehensive income	63,354	63,354
	Deficit accumulated during operating stage	(92,323,180)	(91,707,444)
	Deficit accumulated	(96,732,227)	(95,948,849)
	Deficit accumulated during development stage	(1,188,365)	-
	Total stockholders' (deficit)	(13,570,796)	(12,926,077)
	Total stockholders' equity (deficit)	(11,235,351)	(9,825,807)
	Total liabilities and stockholders' (deficit)	$ 372,339	$ 373,096
	Total liabilities and stockholders' equity (deficit)	$ 462,980	$ 606,745
See notes to consolidated financial statements.
See notes to condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME ~~(LOSS)~~

APPLIED VISUAL SCIENCES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
	Year Ended December 31
			Cumulative From
	2014	2013
			April, 1, 2012
Net revenues	$ -	$ -
	Year Ended December 31		(date of inception) To
Cost of sales	-	-
	2012	2011	December 31, 2012
Gross profit	-	-
Net revenues	$ -	$ 6,589	$ -
Selling, general and administrative expense	1,002,624	2,025,175
Cost of sales	-	-	-
Operating loss	(1,002,624)	(2,025,175)
Gross profit	-	6,589	-
Other income (expense)
Selling, general and administrative expense	1,752,254	2,741,778	1,231,102
Gain (loss) on disposal of fixed asset	-	8,338
Operating loss	(1,752,254)	(2,735,189)	(1,231,102)
Interest expense	(97,825)	(71,775)
Other income (expense)	(51,847)	1,580,813	42,737
Debt discount amortization	(20,570)	(10,826)
Net loss	$ (1,804,101)	$ (1,154,376)	$ (1,188,365)
Financing costs	-	(225)
Net loss per common share
Reevaluation of derivative liabilities	337,641	(337,641)
Basic & Diluted	$ (0.02)	$ (0.01)
Other income (expense)	219,246	(412,129)
Weighted average common shares outstanding
Net loss before income taxes	(783,378)	(2,437,304)
Basic & Diluted	94,486,673	85,456,082
Provision for income taxes	-	-
Other comprehensive income
Net loss	$ (783,378)	$ (2,437,304)
Comprehensive income - beginning of period	$ 63,354	$ 63,354	$ 63,354
Net loss per common share
Cumulative translation adjustments	-	-	-
Basic	$ (0.01)	$ (0.02)
Comprehensive income - end of period	$ 63,354	$ 63,354	$ 63,354
Weighted average common shares outstanding
See notes to condensed consolidated financial statements.
Basic	103,536,220	101,107,202
Comprehensive income
Comprehensive income - beginning of period	$ 63,354	$ 63,354
Cumulative translation adjustments	-	-
Comprehensive income - end of period	$ 63,354	$ 63,354
See notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ ~~EQUITY~~ (DEFICIT) AND ACCUMULATED COMPREHENSIVE INCOME ~~(LOSS)~~

APPLIED VISUAL SCIENSES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) AND ACCUMULATED COMPREHENSIVE INCOME
								Total Accumulated Comprehensive Loss
				Deferred Stock Compensation	~~Other~~ Comprehensive Income ~~(Loss)~~	Accumulated (Deficit)	Total Stockholders' ~~Equity~~ (Deficit)
	Common Stock		Additional			~~Accumulated Deficit~~
	Shares	Amount	Paid-In Capital
Balance, December 31, 2010	82,212,233	$ 82,212	$ 80,313,127	$ (70,140)	$ 63,354	$ (90,553,068)	$ (10,164,515)	$ (90,489,714)
Balance, December 31, 2012	95,318,279	$ 95,318	$ 82,117,522	$ -	$ 63,354	$(93,511,545)	$(11,235,351)	$ (93,448,191)
Proceeds from sale of common stock for cash, net	1,444,000	1,444	342,556	-	-	-	344,000	-
Common stock issued to short-term note holders	450,000	450	30,650	-	-	-	31,100	-
Exchange commission for common stock	250,000	250	24,750	-	-	-	25,000	-
Conversion of accounts payable to common stock	280,000	280	10,370	-	-	-	10,650	-
Common stock and/or warrants issued for consulting services	1,549,044	1,549	233,186	(17,500)	-	-	217,235	-
Conversion of accrued wages to common stock	1,833,333	1,834	68,167	-	-	-	70,001	-
Common stock issued to short-term note holders	400,000	400	34,300	-	-	-	34,700	-
Exercise of stock options under cashless provision	150,000	150	11,850	-	-	-	12,000	-
Conversion of accounts payable to common stock	968,216	968	291,682	-	-	-	292,650	-
Amortization of employees deferred stock based compensation	4,500,000	4,500	161,118	(15,000)	-	-	150,618	-
Conversion of accrued wages to common stock	1,171,012	1,171	91,464	-	-	-	92,635	-
Remeasurement of stock issued to employees pursuant to vesting	-	-	41,249	15,000	-	-	56,249	-
Conversion of accrued wages for exercise of employee stock options	511,800	512	153,028	-	-	-	153,540	-
Amortization of employee stock options	-	-	415,960	-	-	-	415,960	-
Reclassification of common shares previously subject to repurchase	-	-	98,946	-	-	-	98,946	-
Net loss	-	-	-	-	-	(2,437,304)	(2,437,304)	(2,437,304)
Remeasurement of stock issued pursuant to consulting agreements	-	-	(16,670)	16,670	-	-	-	-
Total comprehensive loss	-	-	-	-	-	-	-	(2,437,304)
Amortization of consultants deferred stock based compensation	-	-	-	70,137	-	-	70,137	-
Balance, December 31, 2013	102,531,612	$ 102,532	$ 82,856,886	$ -	$ 63,354	$(95,948,849)	$(12,926,077)	$ (95,885,495)
Amortization of employee stock options	-	-	164,241	-	-	-	164,241	-
Proceeds from sale of common stock for cash, net	260,000	260	64,740	-	-	-	65,000	-
Net loss	-	-	-	-	-	(1,154,376)	(1,154,376)	(1,154,376)
Common stock and/or warrants issued for consulting services	200,000	200	7,800	-	-	-	8,000	-
Total comprehensive loss	-	-	-	-	-	-	-	(1,154,376)
Conversion of accrued wages for exercise of employee stock options	1,737,000	1,737	53,643	-	-	-	55,380	-
Balance, December 31, 2011	88,506,305	$ 88,506	$ 81,730,610	$ (833)	$ 63,354	$ (91,707,444)	$ (9,825,807)	$ (91,644,090)
Amortization of employee stock options	-	-	10,279	-	-	-	10,279	-
Proceeds from sale of common stock for cash, net	100,000	100	24,900	-	-	-	25,000	-
Net loss	-	-	-	-	-	(783,378)	(783,378)	(783,378)
Common stock issued to short-term note holders	150,000	150	5,550	-	-	-	5,700	-
Total comprehensive loss	-	-	-	-	-	-	-	(783,378)
Conversion of accounts payable to common stock	400,000	400	99,600	-	-	-	100,000	-
Balance, December 31, 2014	104,728,612	$ 104,729	$ 82,993,348	$ -	$ 63,354	$(96,732,227)	$(13,570,796)	$ (96,668,873)
Conversion of accrued wages to common stock	1,767,925	1,768	68,650	-	-	-	70,418	-
Amortization of consultants deferred stock based compensation	-	-	-	833	-	-	833	-
Net loss	-	-	-	-	-	(615,736)	(615,736)	(615,736)
Total comprehensive loss	-	-	-	-	-	-	-	(615,736)
Balance, March 31, 2012	90,924,230	$ 90,924	$ 81,929,310	$ -	$ 63,354	$ (92,323,180)	$ (10,239,592)	$ (92,259,826)
Development Stage Company (date of inception April 1, 2012)
Exchange commission for common stock	10,800	11	2,689	-	-	-	2,700	-
Common stock and/or warrants issued for consulting services	246,749	247	10,044	-	-	-	10,291	-
Common stock issued to short-term note holders	135,000	135	5,880	-	-	-	6,015	-
Common stock issued to employees or consultant	1,850,000	1,850	72,150	-	-	-	74,000	-
Conversion of accrued wages to common stock	2,151,500	2,151	97,449	-	-	-	99,600	-
Net loss	-	-	-	-	-	(1,188,365)	(1,188,365)	(1,188,365)
Total comprehensive loss	-	-	-	-	-	-	-	(1,188,365)
Balance, December 31, 2012	95,318,279	$ 95,318	$ 82,117,522	$ -	$ 63,354	$ (93,511,545)	$ (11,235,351)	$ (93,448,191)
Balance, December 31, 2012 (as development stage co)	4,394,049	$ 4,394	$ 188,212	$ -	$ -	$ (1,188,365)	$ (995,759)	$ (1,188,365)
See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

APPLIED VISUAL SCIENCES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
	Year Ended December 31
			Cumulative From
	2014	2013
			April, 1, 2012
CASH FLOWS FROM OPERATING ACTIVITIES
	Year Ended December 31		(date of inception) To
Net loss	$ (783,378)	$ (2,437,304)
	2012	2011	December 31, 2012
Adjustments to reconcile net loss to net cash used in operating activities:
CASH FLOWS FROM OPERATING ACTIVITIES
Depreciation and amortization	55,144	55,139
Net loss	$(1,804,101)	$(1,154,376)	$ (1,188,365)
Amortization of debt discounts	20,570	10,826
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	18,279	640,329
Depreciation and amortization	91,763	93,419	67,082
Revaluation derivative instrument (income) expense	(337,641)	337,641
Amortization of debt discounts	40,006	6,113	30,169
Gain on disposal of fixed assets	-	(8,338)
Stock-based compensation expense	85,125	451,613	84,292
Changes in operating assets and liabilities:
Revaluation of derivative instrument income	(67,528)	(1,958,318)	(135,056)
Decrease (increase) in prepaid expenses	(1,209)	-
Revaluation of debenture default provision expense	-	337,641	-
Decrease in other noncurrent assets	-	11,122
Noncash broker compensation expense	2,700	25,000	2,700
Increase in accounts payable	103,045	123,658
Loss on disposal of fixed assets	12,287	-	-
Increase in accrued wages and related	747,543	992,191
Changes in operating assets and liabilities:
Increase in other accrued liabilities	97,825	71,775
Decrease in accounts receivable	-	69,527	-
Net cash flows used in operating activities	(79,822)	(202,961)
Increase in prepaid expenses	1,495	16,671	1,495
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in accounts payable	314,235	242,148	220,359
Purchase of equipment	(20,325)	-
Increase in accrued wages and related	1,036,416	1,175,853	758,655
Investment in patents	-	690
Increase in other accrued liabilities	64,382	8,422	49,412
Proceeds from sale of fixed assets and intangible assets, net of additions	-	28,934
Net cash flows used in operating activities	(223,220)	(686,287)	(109,257)
Net cash provided by (used in) investing activities	(20,325)	29,624
CASH FLOWS FROM INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of equipment	-	(5,970)	-
Proceeds from issuance of common stock, net	65,000	-
Investment in patents	(475)	(22,027)	-
Proceeds from short-term notes payable, net	68,000	179,500
Proceeds from sale of fixed assets	35,650	-	35,650
Reduction of short-term notes payable, net of additional notes, related party	-	(8,500)
Net cash flows used in investing activities	35,175	(27,997)	35,650
Net cash flows provided by financing activities	133,000	171,000
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in cash	32,853	(2,337)
Proceeds from issuance of common stock, net	25,000	344,000	-
Cash at beginning of the year	1,108	3,445
Proceeds from short-term notes payable, net	160,000	400,000	60,000
Cash at end of the year	$ 33,961	$ 1,108
Reduction of short-term notes payable, net of additional notes, related party	-	(28,100)	-
Supplemental disclosure of cash flow information:
Net cash flows provided by financing activities	185,000	715,900	60,000
Cash items paid during the period:
Net increase (decrease) in cash and cash equivalents	(3,045)	1,616	(13,607)
Interest expense	$ -	$ -
Cash and cash equivalents at beginning of the year	6,490	4,874	4,765
Income taxes	-	-
Cash and cash equivalents at end of the year	$ 3,445	$ 6,490	$ (8,842)
Noncash items during the period:
Supplemental disclosure of cash flow information:
Conversion of accounts payable to common stock	-	5,150
Conversion of accounts payable and other accrued liability to common stock	$ 100,000	$ 292,650	$ -
Conversion of accrued wages to common stock	-	70,000
Conversion of accrued wages to common stock	170,017	92,635	99,600
Conversion of accrued wages for exercise of employee stock options	55,380	-
Conversion of accrued wages for exercise of employee stock options	-	153,540	-
Exercise of stock options under cashless provision	-	12,000
Reclassification of common stock previously subject to repurchase	-	98,946	-
See notes to consolidated financial statements.
See notes to condensed consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Basis of Presentation and Going Concern Considerations

Basis of Presentation

The consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The preparation of financial statements in conformity with United States (U.S.) generally accepted accounting principles requires management to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities. Actual results could differ from those estimates and assumptions. The Company maintains a web site at www.appliedvs.com, which makes available free of charge our recent annual report and other filings with the SEC.

Description of Business

Applied Visual Sciences is a software technology company that designs and develops ~~imaging~~computer-vision ~~informatics~~detection solutions for delivery to its target markets, aviation/homeland security and healthcare. Our two product lines are offered through our two operating subsidiaries as follows: Guardian Technologies International, Inc. for aviation/homeland security products and Signature Mapping Medical Sciences, Inc., for healthcare~~. On March 23~~, ~~2012,~~and ~~the Company established a new entity;~~ Instasis Imaging, Inc., for the development, marketing, and sales of a suite of imaging analytic applications for the automated detection of breast cancer. We may engage in one or more acquisitions of businesses that are complementary, and may form wholly-owned subsidiaries to operate within defined vertical markets products.

Our Business Strategy

Maintain product development and sales/marketing focus on large, underserved, and rapidly growing markets with a demonstrated need for intelligent ~~imaging~~computer-vision ~~informatics~~detection.

Leverage Applied Visual Sciences, Inc.’s technology, experienced management team, research and development infrastructure.

Focus our talents on solving highly challenging information problems associated with digital imaging analysis.

Establish an international market presence through the development of a significant OEM/Reseller network.

Build and maintain a strong balance sheet to ensure the availability of capital for product development, acquisitions, and growth.

Seek to broaden our investment appeal to large institutions.

To achieve our strategic vision, we are aware of the need to exercise the financial and operational discipline necessary to achieve the proper blend of resources, products and strategic partnerships. These efforts can accelerate our ability to develop, deploy and service a broad range of intelligent ~~imaging~~computer-vision ~~informatics~~detection solutions directly to our target markets and indirectly through OEM/value added reseller (“VAR”) partners. During ~~2012~~2014, we continued implementing changes across the spectrum of our business. We refined our marketing strategy for PinPoint™ and Signature Mapping™, and enhanced our Signature Mapping™ product offerings.

We may engage in one or more acquisitions of businesses that are complementary, and may form wholly-owned subsidiaries to operate within defined vertical markets.

Our Core Technology

Our core technology is an “intelligent ~~imaging~~computer-vision ~~informatics~~detection” (“3i™”) engine that is capable of extracting embedded knowledge from digital images, and has the capacity to analyze and detect image anomalies. The technology is not limited by type of digital format. It can be deployed across divergent digital sources such as still images, x-ray images, video and hyper-spectral imagery. To date, the technology has been tested in the area of threat detection for baggage scanning at airports, for bomb squad applications and the detection of tuberculosis by analyzing digital images of stained sputum slides captured through a photo microscopy system. Varying degrees of research and development have been conducted in the areas of detection for cargo scanning, people scanning, military target acquisition in a hyper-spectral environment, satellite remote sensing ground surveys and mammography CAD products and radiologists’ diagnostic imaging tools, and while product development in these areas is ongoing, there can be no assurance that we will successfully develop product offerings in these areas.

Financial Condition, Going Concern Considerations and Events of Default

~~During~~The ~~the~~Company, ~~year~~previously ~~ended~~an ~~December~~operating 31stage company, became a development stage company on April 1, 2012. A development stage company, as defined by ASC-915-10 “Accounting and Reporting by Development Stage Enterprise”, is an entity that devotes substantially all of its efforts to establish a business and either of the following conditions exists: 1) the principal operations have not commenced, or 2) the principal operations have commenced, but there has been no significant revenue therefrom. During 2014, Applied Visual Sciences’ revenue generating activities have not produced sufficient funds for profitable operations and ~~the~~we ~~Company~~have ~~has~~ incurred operating losses since inception. In view of these matters, realization of certain of the assets in the accompanying consolidated balance sheet is dependent upon continued operations, which in turn is dependent upon our ability to meet our financial requirements, raise additional financing on acceptable terms, and the success of future operations. Our independent registered public accounting firm’s report on the consolidated financial statements included herein, and in ~~our~~this ~~annual~~Annual ~~report~~Report on Form 10-K for the year ended December 31, ~~2011~~2014, contains an explanatory paragraph wherein they expressed an opinion that there is substantial doubt about our ability to continue as a going concern. Accordingly, careful consideration of such ~~opinions~~opinion should be given in determining whether to continue or become our stockholder. In addition, the Company is currently evaluating the impact of ASU No. 2014-15, Presentation of Financial Statements—Going Concern, on its disclosures regarding the Company’s ability to continue as a going concern.

As of December 31, ~~2012~~2014, the Company has outstanding trade and accrued payables of $1,~~570~~792,~~639~~192, other accrued liabilities of $~~621~~242,~~311~~404, and accrued salaries and related expenses due to our employees and management of $68,~~629~~792,~~246~~108. Also, the Company has an outstanding noninterest-bearing loan from its previous Chief Executive Officer of $8980,~~000~~500, and $~~560~~807,~~000~~500 short-~~tern~~term notes from ~~five~~a total of twenty (20) investors.

The principal amount of our outstanding Series A Debentures of $1,688,205 became due on July 1, 2011, and such amount was not paid. Therefore, the Company ~~may~~could be considered in default~~. The~~ debentures provide that any default in the payment of principal, which default is not cured within the five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default and may result in enforcement of the debenture holders’ rights and remedies under the debentures and applicable law. ~~The~~We ~~Company~~have isbeen in discussions with the debenture holders to re-negotiate the terms of the debentures, including the repayment or repurchase of the debentures and/or seek to extend their maturity date, although ~~the~~we ~~Company~~have ~~has~~ not reached any agreement with the debenture holders with regard to any such repayment, repurchase or extension. Our ability to repay or repurchase the debentures is contingent upon our ability to raise additional financing, of which there can be no assurance. Also, as a condition to any such extension, debenture holders may seek to amend or modify certain other terms of the debentures. If When an event of default occurs under the debentures, the debenture holders may elect to require us to make immediate repayment of the mandatory default amount, which equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, or (b) the outstanding principal amount unpaid divided by the conversion price on the date the mandatory default amount is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. In anticipation of such election by the debenture holders, due to the nonpayment of principal amount on the due date of July 1, 2011, ~~the~~we ~~Company~~ measured the mandatory default at approximately $337,641 and subsequently on each balance sheet date, which is reflected in the carrying value of the debentures and also recognized as interest expense. ~~The~~We ~~Company~~ remeasured the mandatory default amount as of December 31, ~~2012~~2014 at approximately $337,641. As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. The Company currently has insufficient funds to repay the outstanding amount in the event the debenture holders make a demand for payment.

~~During~~As ~~2012~~of December 31, ~~the~~2014, ~~Company~~we ~~issued~~had ~~promissory~~a ~~notes~~cash tobalance ~~four~~of ~~accredited~~$33,961. ~~investors~~Subsequently inand through the ~~aggregate~~date ~~principal~~of ~~amount~~this report, Company sold to accredited investor an aggregate of ~~$160~~2,000,000 ~~($157~~shares of common stock upon the exercise of 2,~~300~~000,000 ~~net~~warrants for gross proceeds of ~~accrued~~$60,000. Management ~~commissions~~believes ~~and~~these ~~expenses~~funds into be insufficient to fund our operations for the ~~amount~~next twelve months absent any cash flow from operations or funds from the sale of $2our equity or debt securities. Currently,~~700~~ will require an aggregate of approximately we are spending or incurring (and accruing), expenses of ~~which~~approximately $~~100~~150,000 ~~initially~~per ~~matured~~month on ~~December~~operations 31and the continued research and development of our 3i technologies and products, ~~2012~~including with regard to salaries and consulting fees. Management believes that we will require an aggregate of approximately $1,800,000 to fund our operations for the next 12 months and ~~was~~to ~~subsequently~~repay ~~extended~~certain outstanding trade payables and accrued expenses. This assumes that holders of our outstanding debentures convert such debt into shares of our common stock or that we are able to ~~June~~extend 30the term of the debentures, ~~2013~~of which there can be no assurance. In the event we are unable to extend the term of the debentures beyond their new maturity date, ~~$50~~the debenture holders do not convert such debt or require payment of principal,~~000~~ ~~matures~~partially onconvert ~~January~~such 24debt, ~~2013~~or effect the buy-in provision related to the debentures, ~~and~~we ~~$10~~shall be required to raise additional financing. Also,~~000~~ ~~matures~~this onassumes ~~April~~that 11we are able to continue to defer the amounts due to our employees for accrued and unpaid salaries and that we are able to continue to extend or defer payment of certain amounts due to our trade creditors, ~~2013~~of which there can be no assurance.

The ~~short-term~~Company ~~notes~~has ~~accrue~~relied ~~interest~~and atcontinues ato ~~rate~~rely substantially upon equity and debt financing to fund its ongoing operations, including the research and development conducted in connection with its products and conversion of ~~12%~~accounts ~~per~~payable ~~annum~~for stock. The ~~Company~~proceeds ~~also~~from ~~issued~~our financings have been and continue to be insufficient to fund our operations, pay our trade payables, and repay our unconverted debentures or accrued and unpaid wages to our employees. Therefore, the ~~note~~debentures holders, anour ~~aggregate~~employees, ofor ~~285,000~~trade ~~shares~~creditors may seek to enforce payment of ~~common~~amounts ~~stock~~due to them, and ~~10,800~~our ~~shares~~results of ~~common~~operations ~~stock~~and financial condition could be materially and adversely affected and we may be unable to acontinue ~~placement~~our ~~agent~~operations. Also, in ~~exchange~~the ~~for~~event ~~cash~~we ~~compensation~~continue ofto $2be unable to pay our employees,~~700~~ we may suffer further employee attrition. There Oncan ~~March~~be ~~15,~~no ~~2012,~~assurances that we ~~received~~will ~~$25,000~~be ~~from~~successful anin ~~accredited~~our ~~investor~~efforts to raise any additional financing, ~~and~~any ~~issued~~bank anborrowing, ~~aggregate~~and ofresearch ~~100~~or grant funding. Moreover,~~000~~ ~~shares~~in view of ~~common~~the ~~stock~~current market price of and ~~300~~limited trading volume in our stock,~~000~~ ~~Class~~we Qmay ~~Warrants~~have limited or no access to the capital markets. Furthermore, ~~The~~under ~~Class~~the Qterms ~~Warrants~~of our agreements with the debenture holders, we are ~~exercisable~~subject atto arestrictions on our ability to engage in any transactions in our securities in which the conversion, exercise or exchange rate or other price of ~~$0.25~~such ~~per~~securities ~~share;~~is ~~contain~~below athe ~~conditional~~current ~~call~~conversion ~~provision~~price ifor is based upon the ~~market~~trading price of ~~each~~our ~~share~~securities ~~exceeds~~after ~~$3.00,~~initial ~~certain~~issuance ~~anti-dilution~~or ~~and~~otherwise ~~other~~subject ~~customary~~to ~~provisions~~re-set. ~~The~~In ~~warrants~~view ~~expire~~of ~~three~~the ~~years~~foregoing, ~~after~~we ~~the~~may ~~date~~be required to curtail operations significantly, or obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of ~~issuance~~our technologies or products.

AsDuring ~~of December 31~~2014, ~~2012,~~our wetotal ~~had~~stockholders’ adeficit ~~cash~~increased ~~balance~~by of $3644,~~445. Subsequently~~719 ~~and~~to ~~through May 10~~$13, ~~2013~~570, ~~we received $135~~796,~~000~~ ~~from accredited investors upon the issuance of promissory notes,~~ and ~~the~~our ~~notes~~consolidated ~~accrue~~net ~~interest~~loss ~~at a rate of 12% per annum. Management believes these funds to be insufficient to fund our operations~~ for the ~~next~~period ~~twelve~~was ~~months absent any cash flow from operations or funds from the sale of our equity or debt securities. Currently, we are spending or incurring (and accruing) expenses of approximately~~ $~~190~~783,~~000 per month on operations and the continued research and development of our 3i technologies and products~~378, ~~including~~compared ~~with regard~~ to ~~salaries~~a ~~and~~net ~~consulting~~loss ~~fees. Management~~for ~~believes~~the ~~that~~same weperiod ~~will~~in ~~require~~2013 ~~an aggregate~~ of ~~approximately~~ $2,~~280~~437,~~000~~304, to fund our operations for the next 12 months and to repay certain outstanding trade payables and accrued expenses. This assumes that holders of our outstanding debentures convert such debt into shares of our common stock or ~~that~~a wedecrease ~~are able to extend the term~~ of ~~the debentures~~$1,653,926 ~~of which there can be no assurance~~(67.9%). InNotwithstanding the ~~event~~foregoing wediscussion ~~are unable to extend the term~~ of ~~the~~management’s ~~debentures~~expectations ~~beyond~~regarding ~~their~~future ~~new~~cash ~~maturity date~~flows, ~~the~~Applied ~~debenture~~Visual ~~holders~~Sciences’ doinsolvency ~~not~~continues ~~convert~~to ~~such~~increase ~~debt or require payment of principal, partially convert such debt, or effect~~ the ~~buy-in~~uncertainties ~~provision~~ related to ~~the~~its ~~warrants~~continued ~~and the debentures, we shall be required to raise additional financing~~existence. ~~Also,~~Both ~~this~~management ~~assumes~~and ~~that~~the weBoard ~~are~~of ~~able~~Directors toare ~~continue~~carefully tomonitoring ~~defer~~ the ~~amounts~~Company’s ~~due~~cash toflows ~~our employees for accrued~~ and ~~unpaid~~financial ~~salaries~~position ~~and~~in ~~that~~consideration weof ~~are~~these ~~able~~increasing touncertainties ~~continue~~and tothe ~~extend~~needs ~~or defer payment~~ of ~~certain~~both ~~amounts due to our trade~~ creditors, ofand ~~which there can be no assurance~~stockholders.

During Fiscal 2012, our total stockholders’ deficit increased by $1,409,544 to $11,235,351, our consolidated net loss for the period was $1,804,101 or a $649,725 increase in net loss from 2011. Notwithstanding the foregoing discussion of management’s expectations regarding future cash flows, Applied Visual Sciences’ insolvency continues to increase the uncertainties related to its continued existence. Both management and the Board of Directors are carefully monitoring the Company’s cash flows and financial position in consideration of these increasing uncertainties and the needs of both creditors and stockholders.

NOTE 2. Significant Accounting Policies

~~Principles~~Development ofStage ~~Consolidation~~Company – The ~~accompanying~~Company, ~~consolidated~~previously ~~financial~~an ~~statements~~operating ~~include~~stage ~~the~~company, ~~accounts~~became ofa ~~The~~development ~~Company~~stage ~~and~~company ~~its~~on ~~subsidiaries~~April 1, ~~Guardian~~2012. A ~~Technologies~~development ~~International,~~stage ~~Inc.~~company, ~~Signature~~as ~~Mapping~~defined ~~Medical~~by ~~Sciences,~~ASC-915-10 ~~Inc.,~~“Accounting ~~RJL~~and ~~Marketing~~Reporting ~~Services,~~by ~~Guardian~~Development ~~Healthcare~~Stage ~~Systems UK~~Enterprise”, ~~Ltd.,~~is ~~and~~an ~~Wise~~entity ~~Systems~~that ~~Ltd.,~~devotes insubstantially ~~which~~all itof ~~has~~its ~~the~~efforts ~~controlling~~to ~~interest. Subsidiaries~~establish ~~acquired~~a ~~are~~business ~~consolidated~~and ~~from~~either of the ~~date~~following ofconditions ~~acquisition. All~~exists: ~~significant~~1) ~~intercompany~~the ~~balances~~principal ~~and~~operations ~~transactions~~ have ~~been~~not ~~eliminated.~~commenced, Onor ~~March~~2) ~~23,~~the ~~2012,~~principal ~~the~~operations ~~Company~~have ~~established~~commenced, abut ~~new~~there ~~entity;~~has ~~Instasis~~been ~~Imaging,~~no ~~Inc~~significant revenue therefrom., ~~for~~The ~~the~~Company ~~development,~~has ~~marketing,~~elected ~~and~~early ~~sales~~adoption of aASU ~~suite~~2014-10 ofwhereby ~~imaging~~the ~~analytic~~Company ~~applications~~has ~~for~~removed ~~the~~all ~~automated~~amounts ~~detection~~and ofdisclosures ~~breast~~related ~~cancer~~to the development stage.

Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, Guardian Technologies International, Inc., Signature Mapping Medical Sciences, Inc., Instasis Imaging, Inc., RJL Marketing Services, Guardian Healthcare Systems UK, Ltd., and Wise Systems Ltd., in which it has the controlling interest. Subsidiaries acquired are consolidated from the date of acquisition. All significant intercompany balances and transactions have been eliminated. Certain amounts in the consolidated financial statements of prior periods have been reclassified to conform to current period presentation.

Fair Value of Financial Instruments – The carrying value of cash ~~and cash equivalents~~, accounts receivable, accounts payable, and ~~embedded~~derivative ~~conversion~~liability features and detachable warrants approximates fair value based on the liquidity of these financial instruments and their short-term nature.

Convertible Instruments – The Company reviews the terms of convertible debt and equity securities for indications requiring bifurcation, and separate accounting, for the ~~embedded~~derivative ~~conversion~~liability feature. Under guidelines of ASC 815-40, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” public companies that are required, or that could be required, to deliver shares of common stock as part of a physical settlement or a net-share settlement, under a freestanding financial instrument, are required to initially measure the contract at fair value (or allocate on a fair value basis if issued as part of a debt financing), and report the value in permanent equity. However, in certain circumstances (e.g. the company could not ascertain whether sufficient authorized shares exist to settle the contract), permanent equity classification should be reassessed. The classification of the contract as permanent equity should be reassessed at each balance sheet date and, if necessary, reclassified as a liability on the date of the event causing the reclassification. If a reclassification occurs from permanent equity to a liability, the fair value of the financial instrument should be removed from permanent equity as an adjustment to stockholders’ equity. Any portion of the contract that could be net-share settled as of the balance sheet date would remain classified in permanent equity. Subsequent to the initial reclassification event, changes in fair value of the instrument are charged to expense until the conditions giving rise to the reclassification are resolved. When a company has more than one contract subject to reclassification, it must determine a method of reclassification that is systematic, rational, and consistently applied. The Company adopted a reclassification policy that reclassifies contracts with the latest inception date first. To the extent that changes in fair value of equity instruments relates to financings since November 8, 2006 (the date of first closing under the debenture financing with reset provisions that made the number of potentially issuable shares indeterminable), the increase or decrease in the fair value of the warrants is charged or credited to interest expense. To the extent the equity instruments relate to other transactions (e.g. consulting expense), the increases or decreases are charged or credited based on the nature of the transaction. The number of additional shares potentially issuable under the November 8, 2006, outstanding convertible debentures and related outstanding warrants and other subsequent warrants issued was determinable as of the debentures’ final milestone reset date on May 20, 2008, and, therefore, the outstanding fair value of the warrants issued to the debenture holders, other subsequent warrants issued through May 20, 2008, and the warrants’ related beneficial conversion feature were reclassified as stockholders’ equity in accordance with currently effective generally accepted accounting principles.

~~Cash~~instrument, ~~Equivalents~~are –required ~~Cash~~to ~~and~~initially ~~cash~~measure ~~equivalents~~the ~~are~~contract ~~stated~~ at ~~cost,~~fair ~~which~~value ~~approximates~~(or allocate on a fair value basis if issued as part of a debt financing), and ~~consists~~report the value in permanent equity. However, in certain circumstances (e.g. the company could not ascertain whether sufficient authorized shares exist to settle the contract), permanent equity classification should be reassessed. The classification of ~~interest~~the ~~and~~contract ~~noninterest~~as ~~bearing~~permanent ~~accounts~~equity should be reassessed at each balance sheet date and, if necessary, reclassified as a ~~bank~~liability on the date of the event causing the reclassification. ~~Balances~~ ~~may~~If ~~periodically~~a ~~exceed~~reclassification ~~federal~~occurs ~~insurance~~from ~~limits~~permanent equity to a liability, the fair value of the financial instrument should be removed from permanent equity as an adjustment to stockholders’ deficit. Any portion of the contract that could be net-share settled as of the balance sheet date would remain classified in permanent equity. Subsequent to the initial reclassification event, changes in fair value of the instrument are charged to expense until the conditions giving rise to the reclassification are resolved. ~~The~~When ~~Company~~a ~~does~~company ~~not~~has ~~consider~~more ~~this~~than one contract subject to bereclassification, it must determine a ~~significant~~method ~~risk~~of reclassification that is systematic, rational, and consistently applied. The Company ~~considers~~adopted ~~all~~a ~~highly~~reclassification ~~liquid~~policy ~~debt~~that reclassifies contracts with the latest inception date first. To the extent that changes in fair value of equity instruments relates to financings since November 8, 2006 (the date of first closing under the debenture financing with ~~initial~~reset ~~maturities~~provisions that made the number of 90potentially ~~days~~issuable shares indeterminable), the increase or ~~less~~decrease in the fair value of the warrants is charged or credited to beinterest ~~cash~~expense. ~~equivalents~~To the extent the equity instruments relate to other transactions (e.g. consulting expense), the increases or decreases are charged or credited based on the nature of the transaction. The number of additional shares potentially issuable under the November 8, 2006, outstanding convertible debentures and related outstanding warrants and other subsequent warrants issued was determinable as of the debentures’ final milestone reset date on May 20, 2008, and, therefore, the outstanding fair value of the warrants issued to the debenture holders, other subsequent warrants issued through May 20, 2008, and the warrants’ related beneficial conversion feature were reclassified as stockholders’ deficit in accordance with currently effective generally accepted accounting principles.

~~Accounts~~Cash ~~Receivable~~ – ~~Accounts~~Cash ~~receivable~~is ~~are~~stated ~~customer~~at ~~obligations~~cost, ~~due~~which ~~under~~approximates ~~normal~~fair ~~trade~~value, ~~terms~~and consists of interest and isnoninterest ~~stated~~bearing ~~net~~accounts ofat ~~the~~a ~~allowance~~bank. Balances ~~for~~may ~~doubtful~~periodically ~~accounts~~exceed federal insurance limits. The Company ~~records~~does annot ~~allowance~~consider ~~for~~this ~~doubtful~~to ~~accounts~~be ~~based~~a onsignificant ~~specifically~~risk. The ~~identified~~Company ~~amounts~~considers ~~that~~all ~~the~~highly ~~Company~~liquid ~~believes~~debt instruments with initial maturities of 90 days or less to be ~~uncollectible~~cash equivalents. ~~The~~ ~~outstanding~~There ~~allowance~~were ~~for~~no ~~doubtful~~cash ~~accounts~~equivalents as of December 31, ~~2012~~2014 and ~~2011 was $0 and $0~~2013, respectively.

~~Customer~~Accounts ~~Concentration~~Receivable ~~Risks~~ – ~~The~~Accounts ~~Company~~receivable ~~did~~are ~~not~~customer ~~have~~obligations ~~revenue~~due ~~during~~under ~~fiscal~~normal ~~2012. Approximately~~trade ~~100%~~terms and is stated net of the allowance for doubtful accounts. The Company’s ~~revenue~~records an allowance for ~~the~~doubtful ~~year~~accounts ~~ended~~based ~~December~~on ~~31,~~specifically ~~2011~~identified ~~was~~amounts ~~comprised~~that ofthe ~~one~~Company ~~customer. These~~believes ~~represent~~to ~~major~~be ~~customers~~uncollectible. The Company ~~does~~did not ~~consider~~record ~~this~~accounts ~~risk~~receivable toor bean ~~material~~allowance for doubtful accounts as of December 31, 2014 and 2013, respectively.

Customer Concentration Risks – The Company did not have revenue during fiscal 2014 or 2013. Although, the Company may be subject to a material customer concentration risk if a customer comprises a large percentage of our revenue, which may occur as the Company produces revenue.

Straight Line Lease – For consolidated financial statement purposes, rent expense is recorded on a straight-line basis over the term of the lease term. The difference between the rent expense incurred and the amount paid is recorded as deferred rent and is being amortized over the term of the lease.

~~Property~~Fixed ~~and~~Assets ~~Equipment~~ – Property and equipment are carried at cost less accumulated depreciation and amortization. For financial statement purposes, depreciation and amortization is provided on the straight-line method over the estimated useful live of the asset ranging from 3 to 10 years.

	December 31
Asset (Useful Life)	~~2012~~2014	~~2011~~2013
Software (3 years)	$ 84,224	$ 84,224
Computer equipment (3 - 5 years)	329,861	329,861
Furniture and fixtures (7 - 10 years)	~~323~~231,~~639~~033	~~488~~231,~~239~~033
Equipment (7 - 10 years)	80101,~~727~~052	80,727
Equipment, Gross	818,451	983,051
Fixed assets, gross	746,170	725,845
Less accumulated depreciation and amortization	702,316	760,127
Less accumulated depreciation	701,841	670,827
Equipment, Net	$ 116,135	$ 222,924
Fixed assets, net	$ 44,329	$ 55,018

Depreciation ~~and~~expense ~~amortization~~ for property and equipment was $6931,~~818~~014 and $8740,~~903~~521 infor the ~~years~~year ended December 31, ~~2012~~2014, and ~~2011~~the same period in 2013, respectively, and is reflected in selling, general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income.

During ~~2012~~fiscal 2013, the Company received proceeds in the amount of $3528,~~650~~934 ~~for~~from the sale of furniture,. The ~~with a net~~ book value of the assets sold during this period was $4720,~~937~~596 (gross cost of $~~164~~92,~~600~~606 and accumulated ~~depreciations~~depreciation of $~~116~~72,~~663~~010), resulting isin a ~~loss~~gain on the sale of fixed assets during the period of $128,~~287~~338. There was no such sale of furniture during fiscal 2014.

Intangible Assets – Intangible assets consist of acquired software and patents. Under ASC 350, “Goodwill and Other Intangible Assets,” such assets acquired including software technology is considered to have a finite life. Management has estimated the useful life to be 5 years and amortized such costs on a straight-line basis over this period. In addition, ASC 985-20, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,” requires the Company to consider whether or not the software technology is impaired using a net realizable value analysis based on projected discounted cash flows. The Company prepared this analysis as of December 31, ~~2012~~2014 and 2013, and concluded that the intangible assets are not impaired. Patent acquisition costs pertaining to the Company’s 3i technology that covers its PinPoint™ and Signature Mapping™ intellectual property (technology not acquired through acquisition), have been capitalized and are being amortized over the 20-year legal life of the patents. The Company has been granted by the United States Patent & Trademark Office (“USPTO”) six patents related to its 3i technology. The Company evaluates the periods of amortization continually to determine whether later events or circumstances require revised estimates of useful lives. The Company’s intangible acquired software technology was fully amortized as of December 31, 2009. Therefore, there was no amortization costs associated with acquired software during the fiscal year ~~2012~~2014 and ~~2011~~2013, respectively. Amortization expense for patent acquisition costs was $2324,~~601~~130 and $2214,~~181~~618 in fiscal year ~~2012~~2014, and ~~2011~~2013, respectively, and is reflected in selling, general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income. The Company anticipates incurring additional patent acquisition costs during Fiscal Year ~~2012~~2015.

Excess of Purchase Price over Net Assets Acquired (Goodwill) – The Company follows the provisions of ASC 805-10, “Business Combinations” and ASC 350-10, “Goodwill and Other Intangible Assets.” These statements establish financial accounting and reporting standards for acquired goodwill. Specifically, the standards address how acquired intangible assets should be accounted for both at the time of acquisition and after they have been recognized in the financial statements. Effective January 1, 2002, with the adoption of ASC 350-10, goodwill must be evaluated for impairment and is no longer amortized. Excess of purchase price over net assets acquired (“goodwill”) represents the excess of acquisition purchase price over the fair value of the net assets acquired. To the extent possible, a portion of the excess purchase price is assigned to identifiable intangible assets. There was no goodwill on the consolidated balance sheet of the Company during Fiscal ~~2012~~2014 and ~~2011~~2013, as a net realizable value analysis was made for goodwill in prior years during the Company’s operating stage and such asset was ~~considered~~ fully impaired during those prior years. ~~Therefore, there was no amortization expense of goodwill during Fiscal 2012 and 2011.~~

Impairment of Excess Purchase Price over Net Assets Acquired – The Company follows the provisions of ASC 350-10 “Goodwill and Other Intangible Assets” for the impairment of goodwill. The Company determines impairment by comparing the fair value of the goodwill, using the undiscounted cash flow method, with the carrying amount of that goodwill. Impairment is tested annually or whenever indicators of impairment arise. There was no goodwill on the consolidated balance sheet of the Company during Fiscal ~~2012~~2014 and ~~2011~~2013, as a net realizable value analysis was made for goodwill in prior years and such asset was considered fully impaired during those prior years.

Impairment of Long-Lived Assets – The Company evaluates the carrying value of long-lived assets for impairment, whenever events or changes in circumstances indicate that the carrying value of an asset within the scope of ASC 360-10, “Accounting of the Impairment or Disposal of Long-Lived Assets” may not be recoverable. The Company’s assessment for impairment of assets involves estimating the undiscounted cash flows expected to result from use of the asset and its eventual disposition. An impairment loss recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset, and considers year-end the date for its annual impairment testing.

Foreign Currency Translation – The accounts of the Company’s foreign subsidiary are maintained using the local currency as the functional currency. For the subsidiary, assets and liabilities are translated into U.S. dollars at the period end exchange rates, and income and expense accounts are translated at average monthly exchange rates. Net gains or losses from foreign currency translation are excluded from operating results and are accumulated as a separate component of stockholders’ ~~equity~~deficit.

Comprehensive ~~Loss~~Income – The Company adopted ASC 220-10, “Reporting Comprehensive Income,” (“ASC 220-10”). ASC 220-10 requires the reporting of comprehensive income in addition to net income from operations. The comprehensive loss reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss is comprised of net loss and foreign currency translation adjustments.

Revenue Recognition - Revenues are derived primarily from the research activities, and sublicensing and licensing of computer software, installations, training, consulting, third party hardware, and software maintenance. Inherent in the revenue recognition process are significant management estimates and judgments, which influence the timing and amount of revenue recognized. For software arrangements, the Company recognizes revenue according to ASC 985-605, “Software Revenue Recognition,” and related amendments. ASC 985-605 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element

~~For~~based on the relative fair values of those elements. Revenue from multiple-element software arrangements is recognized using the residual method. Under the residual method, revenue is recognized in a multiple element arrangement when vendor-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. The Company ~~recognizes~~allocated revenue ~~according~~ to ~~ASC~~each ~~985-605~~undelivered element in a multiple element arrangement based on its respective fair value, ~~“Software~~with ~~Revenue~~the ~~Recognition~~fair value determined by the price charged when that element is sold separately. Specifically,” the Company determines the fair value of the maintenance portion of the arrangement based on the renewal price of the maintenance offered to customers, which is stated in the contract, and ~~related~~fair ~~amendments~~value of the installation based upon the price charged when those services are sold separately. ~~ASC~~If ~~985-605~~evidence ~~generally~~of ~~requires~~the ~~revenue~~fair ~~earned~~value oncannot be established for undelivered elements of a software ~~arrangements~~sale, ~~involving~~the ~~multiple~~entire amount of revenue under the arrangement is deferred until these elements tohave bebeen ~~allocated~~delivered toor vendor-specific objective evidence of fair value can be established.

each element based on the relative fair values of those elements. Revenue from multiple-element software arrangements is recognized using the residual method. Under the residual method, revenue is recognized in a multiple element arrangement when vendor-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. The Company allocated revenue to each undelivered element in a multiple element arrangement based on its respective fair value, with the fair value determined by the price charged when that element is sold separately. Specifically, the Company determines the fair value of the maintenance portion of the arrangement based on the renewal price of the maintenance offered to customers, which is stated in the contract, and fair value of the installation based upon the price charged when those services are sold separately. If evidence of the fair value cannot be established for undelivered elements of a software sale, the entire amount of revenue under the arrangement is deferred until these elements have been delivered or vendor-specific objective evidence of fair value can be established.

Revenue from sublicenses sold on an individual basis and computer software licenses are recognized upon shipment, provided that evidence of an arrangement exists, delivery has occurred and risk of loss has passed to the customer, fees are fixed or determinable and collection of the related receivable is reasonably assured. Revenue from software usage sublicenses sold through annual contracts and software maintenance is deferred and recognized ratably over the contract period. Revenue from installation, training, and consulting services is recognized as services are performed. Revenue from research activities, if a fixed price contract, is based on the percentage of completion method.

Cost of goods sold incorporates direct costs of raw materials, consumables, staff costs associated with installation and training services, and the amortization of the intangible assets (developed software) related to products sold.

Research and Development – The Company accounts for its software and solutions research and development costs in accordance with ASC 985-20, “Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed.” During the years ended December 31, ~~2012,~~2014 and ~~2011~~2013, the Company expensed $8262,~~300~~990, and $~~233~~80,~~330~~094, respectively for such costs. No amounts were capitalized in these years.

Loss per Common Share - Basic net loss per share is calculated using the weighted-average number of shares of common stock outstanding, including restricted shares of common stock. The effect of common stock equivalents is not considered as it would be anti-dilutive.

Use of Estimates – The preparation of these consolidated financial statements in conformity with ~~accounting~~U.S. ~~principles~~ generally accepted inaccounting ~~the~~principles ~~United States~~ requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Changes in these estimates and assumptions may have a material impact on the consolidated financial statements. Certain estimates and assumptions are particularly sensitive to change in the near term, and include estimates of net realizable value for long-lived and intangible assets, the valuation allowance for deferred tax assets and the assumptions used for measuring stock-based payments and derivative liabilities.

Income Taxes – The Company accounts for income taxes under the liability method. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce tax assets to the amounts more likely than not to be realized.

Uncertainty in Income Taxes – In June 2006, ASC 740-10 was established regarding the uncertainty in income taxes. ASC 740-10 establishes a recognition threshold and measurement for income tax positions recognized in an enterprise’s financial statements in accordance with accounting for income taxes. ASC 740-10 also prescribes a two-step evaluation process for tax positions. The first step is recognition and the second step is measurement. For recognition, an enterprise judgmentally determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, it is measured and recognized in the financial statements as the largest amount of tax benefit that is greater than 50% likely of being realized. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of the position is not recognized in the financial statements.

Tax positions that meet the more-likely-than-not recognition threshold, at the effective date of ASC 740-10, may be recognized or, continued to be recognized, upon adoption of ASC 740-10. The cumulative effect of applying the provision of ASC 740-10 shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year. ASC 740-10 applies to fiscal years beginning after December 15, 2006 with earlier adoption permitted. The Company has determined that as of December 31, ~~2012~~2014 and 2013, no additional accrual for income taxes is necessary.

Segment Information – ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company’s chief operating decision-maker is considered to be the Company’s chief executive officer (“CEO”). The CEO reviews financial information presented on an entity level basis accompanied by disaggregated information about revenues by product type and certain information about geographic regions for purposes of making operating decisions and assessing financial performance. The entity level financial information is identical to the information presented in the accompanying consolidated statements of operations.

~~The~~establishes ~~Company~~standards ~~has~~for ~~two~~related ~~groups~~disclosures ofabout products and services, -geographic ~~Security~~areas, ~~(PinPoint™)~~and major customers. The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and ~~Healthcare~~assessing ~~(Signature~~financial ~~Mapping™~~performance. The ~~Medical~~Company’s ~~Computer~~chief ~~Aided~~operating ~~Detection~~decision-maker is considered to be the Company’s chief executive officer (“~~Medical CAD~~CEO”)),. ~~and~~The ~~operates~~CEO inreviews ~~three~~financial ~~geographic~~information ~~markets.~~presented ~~The~~on ~~Company~~an ~~has~~entity ~~determined~~level ~~that~~basis asaccompanied ofby ~~the~~disaggregated ~~balance~~information ~~sheet~~about ~~date,~~revenues itby ~~operates~~product astype aand ~~single~~certain information about geographic regions for purposes of making operating ~~unit~~decisions ~~since~~and ~~the~~assessing ~~two~~financial ~~products~~performance. ~~make~~The upentity alevel ~~slight~~financial ~~revenue~~information ~~stream~~is identical to the ~~Company~~information presented in the accompanying consolidated statements of operations.

The Company ~~operates~~has intwo ~~North~~groups ~~America,~~of products and ~~the~~services ~~United~~- ~~Kingdom,~~Security ~~Africa,~~(PinPoint™) and ~~Asia. In~~Healthcare ~~general,~~(Signature ~~revenues~~Mapping™ ~~are~~Medical ~~attributed~~Computer toAided ~~the~~Detection ~~country~~(“Medical inCAD”)). The ~~which~~Company ~~the~~has ~~contract~~determined ~~originates.~~that ~~Revenues~~as ~~for~~a ~~Fiscal~~result ~~2012~~of ~~and~~no ~~2011~~revenue ~~were~~generated $0for ~~and~~the ~~$6,589,~~year ~~respectively. Fiscal~~ended ~~2011~~December ~~revenues~~31, ~~were~~2014 ~~from~~and ~~our~~2013, ~~healthcare~~we ~~product,~~operate ~~which~~under ~~was~~one ~~from~~business ~~the~~unit ~~sale~~in ofThe ~~hardware~~America’s, and ~~related,~~have ~~specifically~~pursued ~~freight,~~one ~~duty~~product ~~and~~line, ~~taxes~~Healthcare’s ~~reimbursed~~Tuberculosis byDetection ~~the~~(“TBDx™”) ~~customer~~software ~~for~~in aSouth ~~2010~~Africa, ~~shipment~~India, ofNigeria, ~~TBDx™.~~and Peru.

The Company continues to focus efforts in developing the Signature Mapping™ imaging technologies, while at the same time pursuing opportunities for our security product/services.

			Cumulative From
			April, 1, 2012
GEOGRAPHIC DATA	Year Ended December 31		(date of inception) To
	2012	2011	December 31, 2013
Net revenues
The Americas	$ -	$ 6,589	$ -
Africa and Asia	-	-	-
Total net revenue	$ -	$ 6,589	$ -
Cost of sales
The Americas	$ -	$ -	$ -
Africa and Asia	-	-	-
Total cost of sales	$ -	$ -	$ -
Operating (loss)
The Americas	$ (1,752,254)	$ (2,735,189)	$ 1,231,102)
Africa and Asia	-	-	-
Total operating loss	$ (1,752,254)	$ (2,735,189)	$ (1,231,102)
Depreciation and amortization
The Americas	$ 91,763	$ 93,419	$ 67,082
Africa and Asia	-	-	-
Total depreciation and amortization	$ 91,763	$ 93,419	$ 67,082
Total assets
The Americas	$ 462,980	$ 606,745
Africa and Asia	-	-
Total assets	$ 462,980	$ 606,745
Long-lived assets, net
The Americas	$ 447,298	$ 586,523
Africa and Asia	-	-
Total long-lived assets, net	$ 447,298	$ 586,523
Long-lived assets, net: Consists of software, goodwill, patents, property and equipment, and other noncurrent assets.

Stock-Based Compensation – On January 1, 2006, the Company adopted the provisions of ASC 718-10, which requires recognition of stock-based compensation expense for all share-based payments based on fair value. Prior to January 1, 2006, the Company measured compensation expense for its employee stock based compensation plans using the intrinsic value method. Under ASC 718-10, when the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company applied the disclosure provisions of ASC 718-10 as if the fair value-based method had been applied in measuring compensation expense for those years. ASC 718-10 required that the Company provide pro forma information regarding net earnings and net earnings per common share as if compensation expense for its employee stock-based awards had been determined in accordance with the fair value method prescribed therein.

ASC 718-10, “Share-Based Payment” defines fair value-based methods of accounting for stock options and other equity instruments. The Company has adopted the method, which measures compensation costs based on the estimated fair value of the award and recognizes that cost over the service period. ASC 505-50, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services” (“ASC 505-50”), establishes the measurement principles for transactions in which equity instruments are issued in exchange for the receipt of goods or services. The Company has relied upon the guidance provided under ASC 505-50 to determine the measurement date and the fair value re-measurement principles to be applied. Based on these findings, the Company determined that the unamortized portion of the stock compensation should be re-measured on each interim reporting date and proportionately amortized to stock-based compensation expense for the succeeding interim reporting period until goods are received or services are performed. The Company recognizes compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are not transferable. The fair value of each option granted was estimated on the date of grant using the Black-Scholes Merton option pricing model (Black-Scholes model) with the following weighted-average assumptions ~~used for the years ended December 31, 2012 and 2011:~~.

Black-Scholes Model Assumptions		~~2012~~2014	~~2011~~2013
Risk-free interest rate (1)		02.9948%	20.2766%
Expected volatility (2)		~~163~~1.68%	~~136~~1.79%
Dividend yield (3)		0.0%	0.0%
Expected life (4)		57.42 years	64.5 years
(1)	The risk-free interest rate is based on US Treasury debt securities with maturities similar to the expected term of the ~~option~~options.
(2)	Expected volatility is based on historical volatility of the Company*'s common stock factoring in daily share price observations.
(3)	No cash dividends have been declared on the Company's common stock since the Company's inception, and the Company ~~currently~~ does not currently anticipate paying cash dividends over the expected term of the option.
(4)	The expected term of stock option awards granted is derived from historical exercise experience under the Company*'s stock option plan and represents the period of time that the stock option ~~awards~~ granted are expected to be outstanding. The expected term assumption incorporates the contractual term of an option grant, which is usually ten years, as well as the vesting period of an award, which is generally pro rata vesting over two years.

Recently Adopted Accounting Standards

In ~~September 2011~~June 2014, the Financial Accounting Standards Board (“FASB”) ~~amended~~issued ~~its~~ authoritative guidance ~~related~~which toeliminated ~~testing~~the ~~goodwill~~requirements for ~~impairment. Under~~development ~~the~~stage ~~revised~~entities ~~guidance,~~(ASU ~~entities~~2014-10) ~~testing~~to ~~goodwill~~(1) ~~for~~present ~~impairment~~inception-to-date ~~have~~information in the ~~option~~statements of ~~performing~~income, acash ~~qualitative~~flows, ~~assessment~~and ~~before~~shareholders’ ~~performing~~equity, ~~Step~~(2) 1label of the ~~goodwill~~financial ~~impairment~~statements ~~test. If~~as ~~entities~~those ~~determine,~~of ona ~~the~~development ~~basis~~stage ~~of qualitative factors~~entity, ~~that~~(3) ~~the~~disclose ~~fair~~a ~~value~~description of the ~~reporting~~development ~~unit~~stage isactivities ~~more-likely-than-not~~in ~~less~~which ~~than~~ the ~~carrying~~entity ~~amount~~is engaged, ~~the~~and ~~two-step~~(4) ~~impairment~~disclose ~~test~~in ~~would~~the befirst ~~required. This~~year ~~guidance became effective~~ in ~~the~~which ~~beginning of~~ the ~~Company’s~~entity ~~fiscal~~is ~~2012,~~no ~~and~~longer ~~did not have~~ a ~~material impact on the Company’s consolidated financial statements.~~

Indevelopment ~~May 2011,~~stage ~~the~~entity ~~FASB~~that ~~amended~~in ~~its~~prior ~~authoritative~~years ~~guidance~~it ~~related~~had tobeen ~~fair~~in ~~value~~the ~~measurements~~development tostage. ~~provide~~The aeffective ~~consistent~~date ~~definition~~for ~~and~~public ~~measurement~~entities ofis ~~fair~~for ~~value,~~annual asreporting ~~well~~periods asbeginning ~~similar~~after ~~disclosure~~December ~~requirements~~15, ~~between~~2014, ~~U.S. GAAP~~ and ~~International~~interim ~~Financial~~periods ~~Reporting Standards (“IFRS”)~~therein. ~~This~~ ~~guidance~~The ~~clarifies~~public ~~the~~entity ~~application~~may ofadopt ~~existing~~the ~~fair~~guidance ~~value~~early ~~measurement~~for ~~and~~those ~~expands~~financial ~~the~~statements ~~existing~~not ~~disclosure~~yet ~~requirements~~issued. ~~This~~ ~~guidance~~The ~~became~~Company ~~effective~~adopted in the ~~beginning of the Company’s fiscal 2012. This~~ guidance ~~did~~with ~~not have an impact on~~ the ~~Company’s~~issuance ~~results~~ of ~~operations,~~its ~~financial~~fiscal ~~position~~2014 orsecond ~~cash~~quarter ~~flows. As~~and ~~a result of~~ the adoption of this disclosure-only guidance, ~~the~~is ~~Company did~~ not ~~change~~expected ~~its~~to ~~valuation~~have ~~techniques,~~an ~~but~~impact ~~may~~on ~~make~~the ~~additional~~Company's ~~disclosures~~consolidated asfinancial ~~needed~~statements.

In ~~December~~February ~~2010~~2013, the FASB ~~amended~~issued ~~its~~ authoritative guidance ~~related~~requiring toan ~~business~~entity ~~combinations~~to ~~entered~~present, ~~into~~in bya ansingle ~~entity~~location ~~that~~either ~~are~~parenthetically ~~material~~ on anthe ~~individual~~face orof ~~aggregate~~the ~~basis. These~~financial ~~amendments~~statements ~~clarify~~or ~~existing~~in ~~guidance~~a ~~that~~separate ifnote, ansignificant ~~entity~~amounts ~~presents~~reclassified ~~comparative~~from ~~financial~~each ~~statements~~component ~~that~~of ~~include~~accumulated aother ~~material~~comprehensive ~~business~~income ~~combination,~~(loss) ~~the~~(“AOCI”) ~~entity~~and ~~should~~the ~~disclose~~income ~~revenue~~statement ~~and~~line ~~earnings~~items ofaffected by the ~~combined~~reclassification. An entity asis ~~though~~not ~~the~~permitted ~~business~~to ~~combination~~provide ~~that~~this ~~occurred~~information ~~during~~parenthetically on the ~~current~~face ~~year had occurred as~~ of the ~~beginning~~income ofstatement ~~the~~if ~~comparable~~it ~~prior~~has ~~annual~~items ~~reporting~~that ~~period. The~~are ~~amendments~~not ~~also~~required ~~expand~~to ~~the~~be ~~supplemental~~reclassified ~~pro~~in ~~forma~~their ~~disclosures~~entirety to ~~include~~net aincome. Instead ~~description~~ of disclosing the ~~nature~~income ~~and~~statement ~~amount~~line ~~of material~~affected, ~~nonrecurring~~a ~~pro~~cross ~~forma~~reference ~~adjustments directly attributable~~ to ~~the~~other ~~business~~disclosures ~~combination~~that ~~included~~provide inadditional ~~the~~details ~~reported~~on ~~pro~~these ~~forma~~items ~~revenue~~is ~~and earnings~~required. This guidance became effective prospectively for ~~business combinations for which~~ the ~~acquisition~~Company’s ~~date~~fiscal is2014 onfirst orquarter ~~after~~and the ~~first~~adoption ~~day~~ of ~~the~~this ~~Company’s fiscal 2012. This~~ disclosure-only guidance ~~did~~is not ~~have~~expected ato ~~material~~have an impact on the Company’'s ~~results~~consolidated ~~of operations,~~ financial ~~position or cash flows~~statements.

Recently Issued Accounting Standards

In ~~July 2012~~June 2014, the FASB amended its authoritative guidance ~~related~~on toaccounting ~~testing~~for ~~indefinite~~certain share-~~lived~~based ~~intangible~~payment ~~assets for impairment~~awards. ~~Under~~The ~~the~~amended ~~revised~~ guidance, ~~entities~~requires ~~testing~~that ~~their~~if ~~indefinite~~share-~~lived~~based ~~intangible~~compensation ~~assets~~awards ~~for~~have ~~impairment~~terms ~~have~~of a performance target that affect vesting and that could be achieved after the ~~option~~requisite ofservice ~~performing~~period, asuch ~~qualitative~~performance ~~assessment~~target ~~before~~should ~~performing~~be ~~further~~treated ~~impairment~~as ~~testing~~a performance condition. IfAs ~~entities determine~~such, onthe performance target should not be reflected in estimating the ~~basis~~grant-date

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