SEC Info - Gyrotron Technology Inc - ‘10-12G’ on 10/15/14

NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description - Gyrotron Technology, Inc. (the "Company") is incorporated under the business laws of Delaware. The Company develops and seeks to license unique industrial technologies primarily to the glass, semiconductor, food, footwear, adhesives and plastics industries, providing a novel method for heating for industrial processing. It also develops, licenses, and sells autoclave-free laminating systems. The Company is organized and managed as a single operating segment.

Liquidity and Management Plans - As shown in the accompanying financial statements, the Company incurred a net loss for the years ended December 31, 2012 and 2011 of $639,016 and $562,224, respectively, had negative working capital of $643,107 and stockholders' deficiency of $575,262 at December 31, 2012. Further, cash used in operating activities during the year ended December 31, 2012 amounted to $293,571. The Company is expected to continue to incur losses throughout 2013.

The Company's business strategy is to overcome these losses through commercialization and continued development of (i) applications for the gyrotron beam which will be marketed and monetized through licensing, engineering consulting and servicing and (ii) the lamination system.

The Company's management and Board of Directors have obtained additional funding in 2013 (see Note 14) and intend to obtain additional funding for general working capital needs and professional fees through private placement of its equity securities. The Company will continually evaluate funding options including additional offerings of its securities to investors. There can be no assurance as to the availability or terms upon which such financing alternatives might be available.

Accounts Receivable - The Company grants credit to substantially all of its customers and carries its accounts receivable at original invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on history of past write-offs, collections, and current credit conditions. The allowance for doubtful accounts amounted to $3,218 and $0 at December 31, 2012 and 2011, respectively.

Finance Receivables and Allowance for Credit Losses - Finance receivables are composed of non-interest bearing sales-type lease receivables from customers. The Company estimates finance receivable risks and provide an allowance for credit losses accordingly. The Company evaluates the adequacy of the allowance for credit losses based on adverse situations that may affect a customer's ability to pay and prevailing economic conditions and record an allowance if necessary. The Company believes that the sales-type lease contains only normal collection risk. Management determined no allowance for credit losses was necessary at December 31, 2012.

Machinery and Equipment -Machinery and equipment are stated at cost net of accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets using straight-line and accelerated methods for both financial statement and income tax reporting purposes. Maintenance and repairs are charged to operations as incurred; significant betterments are capitalized. Depreciation expense for the years ended December 31, 2012 and 2011 amounted to $82,116 and $82,114, respectively and is included within operating expenses in the accompanying statements of operations.

F-8

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Patents - The Company capitalizes costs relative to patent applications. Patents are recorded at acquired cost and amortized over their estimated useful economic life of 15 years, beginning at the date of issuance. Costs incurred to renew or extend the term of recognized patents, including annuities and fees, are expensed as incurred.

Impairment of Long-Lived Assets - Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future cash flows of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flow or appraised values, depending on the nature of the assets. There was no impairment of long-lived assets during the years ending December 31, 2012 and 2011.

Income Taxes - The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized.

Share-Based Payments - The Corporation accounts for stock option awards granted in accordance with Share-Based Payments Topic of the FASB Accounting Standards Codification (ASC) 718. Under ASC 718, compensation expense related to stock based payments is recorded over the requisite service period based on the grant date fair value of the awards. The Corporation uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards, including the option's expected term and the price volatility of the underlying stock.

Treasury Stock - The Company accounts for treasury stock under the cost method, which requires the Company to record the shares as a reduction to equity at the purchased amount.

Revenue Recognition -In accordance with Revenue Recognition Topic of the FASB Accounting Standards Codification (ASC) 805, the Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the Company's price to the customer is fixed or determinate, and collectability is reasonably assured.

F-9

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Multiple-Element Arrangements - The Company enters into multiple-element contractual arrangements with customers including the technology license, delivery of equipment, installation, consulting, testing and training. Elements under such contracts are considered separate units of accounting if both of the following criteria are met: i) the delivered item(s) have value to the customer on a standalone basis and ii) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance is considered probable and substantially in control of the Company. For deliverables not meeting the criteria for being a separate unit of accounting, the appropriate allocation of arrangement consideration and recognition of revenue is then determined for the combined unit of accounting. Revenue is allocated amongst deliverables in a multiple-element revenue arrangement according to fair value with an allocation based on selling price. The selling price used for each deliverable will be based on vendor-specific objective evidence ("VSOE") if available, third-party evidence if VSOE is not available, or management's estimate of an element's stand-alone selling price if neither VSOE nor third-party evidence is available. The selling price is allocated amongst deliverables based upon each deliverable's relative selling price to total revenue consideration. The amount allocable to the delivered unit or units of accounting is limited to the amount that is not contingent upon the delivery of additional items or meeting other specified performance conditions.

Sales-Type Leases - The Company provides lease financing through sales-type leases. Leases qualify as sales-type leases using the present value of minimum lease payments classification criteria. The Company believes that the sales-type lease contains only normal collection risk. Accordingly, the Company records the fair value of equipment as revenue, the cost of equipment as cost of goods sold and the minimum lease payments plus the estimated residual value as finance receivables.

Research and Development Expenses - Research and development expenses are charged to operations as incurred.

Loss Per Common Share - Basic loss per common share is computed using the weighted average number of common shares outstanding. Diluted loss per common share gives effect to dilutive convertible preferred stock, options and warrants outstanding during the period. Shares to be issued upon the exercise of these instruments have not been included in the computation of diluted loss per share as their effect is anti-dilutive based on the net loss incurred.

As of December 31, 2012, there were 1,541,556, 218,505, 1,198,105, and 29,400 common shares underlying Series A, A-1, B and B-1 convertible preferred stock, respectively, 199,992 common shares underlying outstanding options and 1,044,864 and 28,600 common shares underlying outstanding Series B and B-1 warrants that could potentially dilute future earnings.

Accounting Estimates -The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results may differ from estimated amounts.

F-10

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Advertising - The Company expenses advertising as incurred. Advertising expense for the year ended December 31, 2012 amounted to $63,351 ($365 – 2011).

Fair Value of Financial Instruments - The carrying amount of cash, receivables, accounts payable and accrued expenses and other liabilities are reasonable estimates of their fair value due to their short maturity.

The estimated fair value of note payable is summarized as follows:

December 31, 2012				December 31, 2011
Carrying		Estimated		Carrying		Estimated
Amount		Fair Value		Amount		Fair Value

$	49,383	$	39,000	$	50,682	$	42,000

The estimated fair value was based on the present value of the expected future cash flows. The measurement of estimated fair value is a level 3 input under Fair Value Measurements Topic of FASB ASC. Considerable judgment is required in developing estimates of fair value. Therefore, the estimates presented herein are not necessarily indicative of the amounts that the Company would realize in a current market exchange.

Reclassification – Certain 2011 amounts were reclassified to conform to the 2012 presentation.

NOTE 2. - LOAN RECEIVABLE, OFFICER

The Company has a non-interest bearing loan to an officer that is due December 31, 2013.

NOTE 3. - MACHINERY AND EQUIPMENT

The components of machinery and equipment are as follows:

	Estimated	December 31,			December 31,
	Useful Life	2012			2011

Machinery and equipment	5 to 7 years	$	882,338		$	882,338
Furniture and fixtures	5 to 7 years		25,874			25,874
			908,212			908,212
Less accumulated depreciation			(736,622	)		(654,506	)

		$	171,590		$	253,706

F-11

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 4. - PATENTS

The components of patents are as follows:

	December 31,			December 31,
	2012			2011

Patents	$	146,423		$	146,423
Less accumulated amortization		(82,303	)		(72,542	)

	$	64,120		$	73,881

The Company amortizes patent costs on a straight-line basis over the expected period of benefit of the related capitalized expenditures. Amortization expense amounted to $9,760 and $9,762 for the years ended December 31, 2012 and 2011. Amortization expense for the next five years is expected to be approximately $10,000 per year for 2013 through 2016 and approximately $6,000 in 2017.

NOTE 5. - NOTE PAYABLE

The Company has a note payable due to Ben Franklin Technology Center of Southeastern Pennsylvania (the Center). The terms of the note stated the Company is required to pay a maximum of 150% times the $50,000 borrowed amount. The rate of repayment is 3% of all Company revenues. Payments are due within thirty days after the end of each quarter. Amounts due which are not paid within 10 days after the due date bear interest at 15% per year. The note payable is secured by substantially all assets of the Company. In accordance with the loan agreement, the Company is required to comply with various terms and conditions. As of December 31, 2012 and 2011, the Company was not in compliance with certain provisions. As a result, the Center has the option to demand payment of the entire amount outstanding immediately and charge interest at 15% per year on the entire balance. Accordingly, the balance has been classified as current in the accompanying balance sheets.

NOTE 6. - ADVANCES FROM STOCKHOLDERS

As of December 31, 2012, the Company had $130,118 of non-interest bearing advances from a director and stockholders. There were no formal repayment terms. Subsequent to December 31, 2012, approximately $96,000 of these advances were converted into Series B-1 preferred stock and warrants and $10,000 was repaid.

NOTE 7. - INCOME TAXES

The components of the income tax provision (benefit) are as follows:

	December 31,			December 31,
	2012			2011
Current:
Federal	$	-		$	-
State		-			-
		-			-
Deferred:
Federal		(94,496	)		28,156
State		(29,421	)		12,295
		(123,917	)		40,451
Increase (decrease) in valuation allowance		123,917			(40,451	)

Provision for income taxes	$	-		$	-

F-12

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 7. - INCOME TAXES (CONTINUED)

At December 31, 2012 and 2011, the Company recorded deferred income tax and liabilities, which were attributed to the following temporary differences:

	December 31,			December 31,
	2012			2011
Deferred tax assets/(liabilities)
Net operating loss carry-forwards	$	2,852,570		$	2,790,392
Tax benefit carry-forwards		160,441			156,075
Depreciation and amortization		(4,715	)		(19,720	)
Accrued payroll		41,062			-
Other		1,306			-
Stock based compensation		68,736			68,736

Total gross deferred tax assets		3,119,400			2,995,483

Less valuation allowance		(3,119,400	)		(2,995,483	)

Net deferred tax assets	$	-		$	-

The Company has approximately $7,027,000 ($6,874,000 - 2011) in federal and state net operating loss carryforwards ("NOL's") as of December 31, 2012 available to reduce future taxable income which begin to expire in 2019. Due to the uncertainty of the Company's ability to generate sufficient taxable income in the future to utilize the NOL's before they expire, the Company has recorded a valuation allowance to reduce the gross deferred tax asset to zero. The Company also has approximately $160,000 of tax benefit carryforwards as of December 31, 2012 and 2011 related to research and development credits that expire at various dates through 2032.

Internal Revenue Code Section 382 ("Section 382") imposes limitations on the availability of a company's net operating losses and other corporate tax attributes as ownership changes occur. As a result of the historical equity instruments issued by the Company, a Section 382 ownership change may have occurred and a study will be required to determine the date of the ownership change, if any. The amount of the Company's net operating losses and other tax attributes incurred prior to the ownership change may be limited based on the Company's value. A full valuation allowance has been established for the gross deferred tax asset related to the net operating losses and other corporate tax attributes available. Accordingly, any limitation resulting from Section 382 application is not expected to have a material effect on the balance sheets or statements of operations of the Company.

F-13

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 7. - INCOME TAXES (CONTINUED)

The differences between the United States statutory federal income tax rate and the effective income tax rate in the accompanying statements of operations are as follows:

	December 31,			December 31,
	2012			2011

Statutory United States federal rate		34.0	%		34.0	%
State taxes, net of federal effect		5.7			6.6
Permanent differences		(4.6	)		(0.3	)
Change in valuation allowance		(19.4	)		7.2
Deferred tax true-up adjustments		(16.5	)		(48.4	)
Other		0.8			0.9

Effective tax rate		-	%		-	%

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2012 and 2011, the Company recognized no interest and penalties related to unrecognized tax benefits.

The Company files income tax returns in the U.S. federal jurisdiction and Pennsylvania. The tax years 2009 through 2012 generally remain open to examination by major taxing jurisdictions to which the Company is subject.

NOTE 8. - SERIES A & A-1 CONVERTIBLE PREFERRED STOCK

Prior to December 31, 2010, the offering of Series A par value $.001 convertible redeemable preferred stock resulted in 413,913 preferred shares sold for net proceeds of $2,480,681. In addition, $137,166 of dividends were reinvested into 22,861 shares of Series A preferred stock.

Prior to December 31, 2010, the offering of Series A-1 par value $.001 convertible redeemable preferred stock and warrants resulted in the sale of 61,910 preferred shares and warrants. The proceeds from the offering amounted to $372,170, net of costs related to the offering of $27,801.

Under both the Series A and Series A-1 certificates of designation, the holder has the right, at any time, to convert each share of preferred stock into common stock at a conversion ratio of one to one. The conversion ratio is subject to adjustment when the Company declares or pays dividends, makes a distribution on common stock payable in common shares, or affects a subdivision, split, consolidation, combination, or reverse split of outstanding common shares into a greater or lesser number of common shares. The original conversion price of $6 is adjusted based on changes in the conversion ratio. Due to the uncertainty surrounding redemption as a result of the conversion feature, the Series A and A-1 preferred stock is classified as equity in the accompanying financial statements. As a result of the split (see Note 11), the original conversion price was reduced from $6 per common share to $2 per post-split common share. As a result of a prior default, the conversion price was further reduced to $1.70, resulting in each share being convertible into 3.53 shares of common stock.

F-14

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 8. - SERIES A & A-1 CONVERTIBLE PREFERRED STOCK (CONTINUED)

The Company, at its option, may redeem all shares of Series A and A-1 preferred stock outstanding for cash for $6 per share if at any time i) the common stock is listed for trading on a national securities exchange or an inter-dealer automated quotation system, ii) during any preceding period of twenty consecutive trading days the average daily volume of shares of common stock traded equals or exceeds the product of 25,000 multiplied by the conversion ratio then in effect and the closing price equals or exceeds the product of $9 divided by the conversion ratio then in effect. Original mandatory redemption provisions were retroactively removed in the amendments entered into during the year ended December 31, 2011.

Each share of Series A and A-1 preferred stock shall have a liquidation preference equal to $6 per share plus any accrued or declared and unpaid dividends owed to holders of shares. In the event of a liquidation, winding up, or dissolution of the Company, no distribution shall be made to holders of shares of common stock ranking junior to Series A and A-1 preferred stock. Series A and A-1 preferred stock rank equal for all purposes.

The holders of preferred stock have the right to one vote for each share of common stock into which such share of preferred stock could then be converted.

In accordance with Series A and A-1 certificates of designation above, cumulative dividends on each share of Series A and A-1 preferred stock accrue at a rate of 10% of the $6 liquidation amount. After May 31, 2011, the dividend rate increased from 10% to 18%. Dividends are payable quarterly in cash when and if declared by the Board of Directors. The dividends accrue and accumulate whether or not they have been declared by the board of directors and whether or not there are profits or other funds legally available. There were no dividends declared as of December 31, 2012 and 2011. During the years ended December 31, 2012 and 2011, there were $471,716 and $384,361, respectively, of preferred stock dividends accumulated for Series A preferred stock. At December 31, 2012 and 2011, there were cumulative unpaid dividends of $1,559,780 and $1,088,064, respectively, of preferred stock dividends accumulated for Series A preferred stock. During the years ended December 31, 2012 and 2011, there were $66,862 and $54,481 respectively, of preferred stock dividends accumulated for Series A-1 preferred stock. At December 31, 2012 and 2011, there were cumulative unpaid dividends of $176,577 and $109,715, respectively, of preferred stock dividends accumulated for Series A-1 preferred stock.

On or after April 30, 2012, a holder can request the Company repurchase on the date which is 31 calendar days thereafter, all shares of Series A or A-1 preferred stock held by the holder for cash equal to $6 per share plus accrued and declared but unpaid dividends as of the repurchase date. The Company has the option whether or not to agree to the repurchase. If the Company fails to repurchase the shares, the majority holders of Series A and A-1 stock have the right to elect the majority of the board of directors. During the year ended December 31, 2012, no such holder requested the Company repurchase all shares of Series A or A-1 preferred. Majority holders have not exercised the right to elect the majority of the board of directors. The Company can accelerate the April 30, 2012 date to a date no earlier than April 30, 2011. There was no such acceleration during the year ended December 31, 2012 or 2011.

The Company, at its option, may require conversion of all or any pro-rata portion of shares of Series A or A-1 preferred stock outstanding into common stock for $1.70 per post-split share if at any time i) the common stock is listed for trading on a national securities exchange, an inter-dealer automated quotation system, or over the counter bulletin board, ii) the Company shall have prepared and filed with the Securities and Exchange Commission a registration statement covering the shares of common stock to be issued upon due conversion of preferred stock, and such registration statement shall have been declared effective under the Securities Act of 1933 iii) during any preceding period of twenty consecutive trading days (while i) and ii) are fulfilled) the closing price equals or exceeds the quotient of $9 divided by the conversion ratio then in effect, and iv) the Company is current on its dividends on the Series A or A-1 preferred stock.

F-15

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 8. - SERIES A & A-1 CONVERTIBLE PREFERRED STOCK (CONTINUED)

Registration Rights - In connection with the Series A-1 preferred stock subscription agreements, the Company agreed to pay the various subscribers 1/2% of the aggregate purchase price of shares acquired each month beginning on various dates between December 1, 2009 and July 1, 2010 until i) the Company has prepared and filed a registration statement with the Securities and Exchange Commission which has been declared effective under the Securities Act or the holder is then able to sell the underlying common shares under Rule 144 promulgated pursuant to the Securities Act and ii) the Company has obtained a ticker symbol and common shares are eligible to trade on the OTCBB. At December 31, 2009, the estimated liability related to this obligation amounted to $39,078 and was included as a liability and a reduction of additional paid-in capital. At December 31, 2012 and 2011, the estimated liability amounted to $94,268 and $71,368, respectively, and the resulting change for the years ended December 31, 2012 and 2011 amounting to $22,630 and $27,912, respectively, is included as other expense in the accompanying statements of operations. The arrangement provides for no limitation as to the maximum potential consideration to be transferred.

Warrants - In connection with the Series A-1 preferred stock offering during 2009, purchasers’ acquired one detachable warrant for each share of purchased Series A-1 preferred. The warrants expired on March 31, 2012, prior to the 3-for-1 split. Each warrant had a pre-split exercise price of $6 to acquire one share of common stock. There were no warrants exercised prior to expiration.

NOTE 9. - SERIES B CONVERTIBLE PREFERRED STOCK

The Board of Directors designated 125,000 shares of 10% convertible Series B par value $.001 preferred stock. In July 2011, the Company amended and restated the certificate of designation to reduce the number of shares designated from 125,000 to 40,000. During the year ended December 31, 2011, the offering resulted in 15,534 Series B preferred shares and 155,340 warrants for proceeds of $466,020 as well as the issuance of 15,195 Series B preferred shares and 151,950 warrants for stockholders that converted $455,884 advances during a prior year. For each $30 of advances, the Company issued one unit consisting of one share of Series B convertible preferred stock and ten warrants.

During the year ended December 31, 2012 the Company sold additional units and thereby issued 4,100 shares and 41,000 warrants for proceeds of $123,000.

The holder of Series B preferred stock has the right, at any time, to convert each share into common stock at a conversion ratio of one share of Series B preferred stock to 30 post-split shares of common stock (i.e. at a post-split conversion price of $1 per common share). Each share of Series B preferred stock has a liquidation preference equal to $30 per share plus any accrued or declared and unpaid dividends owed to holders of shares. In the event of a liquidation, winding up, or dissolution of the Company, the Series B ranks senior to the common stock and junior to the Series A and A-1 preferred stock.

F-16

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 9. - SERIES B CONVERTIBLE PREFERRED STOCK (CONTINUED)

Commencing on July 1, 2011, cumulative dividends on each share accrue at a rate of 10% of the $30 liquidation amount. Dividends are payable quarterly in cash when and if declared by the Board of Directors. The dividends accrue whether or not they have been declared by the board of directors and whether or not there are profits or other funds legally available. During the years ended December 31, 2012 and 2011, $110,944 and $42,297, respectively of preferred stock dividends accumulated for Series B preferred stock. Through December 31, 2012, in the event dividends are not declared by the board of directors prior to the relevant dividend payment dates, such dividends shall be payable in shares of Series B preferred stock. As the $110,944 and $42,297 of accumulated dividends during the years ended December 31, 2012 and 2011 were not declared as of the dividend payment dates, such dividends were paid by the issuance of 3,698 and 1,410 shares of Series B preferred stock, during the year ended December 31, 2012 and 2011, respectively. Since there are not profits to distribute, these dividends have been recorded as a reduction of additional paid-in capital offsetting the increase to preferred stock.

The conversion ratio is subject to adjustment when the Company declares or pays dividends, makes a distribution on common stock payable in common shares, or affects a subdivision, split, consolidation, combination, or reverse split of outstanding common shares into a greater or lesser number of common shares. The original conversion price of $3 per common share is adjusted based on changes in the conversion ratio. The Series B holder would be entitled to receive the number of common stock or securities or property that such holder would have owned or been entitled to receive upon the happening of such event had the Series B preferred been converted immediately prior to the record or effective date of such event. As a result of the split (see Note 11), the original conversion price was reduced from $3 per common share to $1 per post-split common share.

The Company, at its option, may require conversion of all or any pro-rata portion of shares of Series B preferred stock outstanding into common stock if at any time i) the common stock is listed for trading on a national securities exchange, an inter-dealer automated quotation system, or over the counter bulletin board, ii) the Company shall have prepared and filed with the Securities and Exchange Commission a registration statement covering the shares of common stock to be issued upon due conversion of preferred stock, and such registration statement shall have been declared effective under the Securities Act of 1933, iii) during any preceding period of twenty consecutive trading days (while i) and ii) are fulfilled) the closing price equals or exceeds the quotient of $50 divided by the conversion ratio then in effect, and iv) the Company is current on its dividends on the Series B preferred stock. The holders of Series B preferred stock have the right to one vote for each share of common stock into which such share of preferred stock could then be converted.

On or after May 31, 2016, a holder can request the Company repurchase on the date which is 30 calendar days thereafter, all shares of Series B preferred stock held by the holder for cash equal to $30 per share plus accrued and unpaid dividends as of the repurchase date. The Company has the option whether or not to agree to the repurchase. In the event the Company fails to repurchase or payment of Series B dividends is six quarters in arrears, the dividend rate will increase to 18%, the majority holders of Series B preferred stock have the right to elect the majority of the board of directors, and the post-split conversion price shall decrease to $0.85.

F-17

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 9. - SERIES B CONVERTIBLE PREFERRED STOCK (CONTINUED)

Warrants - In connections with the Series B preferred stock subscription agreements, purchasers’ acquired ten detachable warrants for each share of purchased Series B preferred. Each warrant entitles the holder to acquire three shares of $.001 par value common stock at a post-split exercise price of $1 per common share, and expires on the earlier of March 31, 2015 or such date after June 30, 2012 at which i) the common stock is listed on the OTCBB and ii) the shares to be acquired by exercise of the warrants have been registered under the Securities Act of 1933, for 60 consecutive days. If the Company subdivides or combines its common stock, issues or pays the holders of common stock, or take a record of the holders of common stock for the purpose of entitling them to receive a dividend payable in or distribution of common stock, the number of shares of common stock purchasable upon exercise of the warrant and the warrant price shall be proportionally adjusted.

Because the warrants were issued in conjunction with the Series B preferred stock, the proceeds of the offering were allocated between the Series B preferred and the warrants based on the relative fair value of each instrument. The assumed value of the Series B preferred was determined based on the fair value of the underlying common shares and the fair value of the warrants was valued using the Black-Scholes option pricing model. During the year ended December 31, 2011, conversion of advances and gross proceeds from the Series B preferred amounted to $921,863, of which $122,884 were allocated to the warrants. During the year ended December 31, 2012, gross proceeds from the Series B preferred amounted to $123,000, of which $22,939 were allocated to the warrants. The amount allocated to warrants represents an additional dividend on the preferred shares and, due to the Company's accumulated deficit, the allocation results in an increase and decrease to additional paid-in capital and as such, there is no impact on the accompanying financial statements.

Registration rights -In connection with the Series B preferred stock subscription agreement, the Company agreed to pay subscribers 1/2% of the liquidation preference of shares held by subscribers each month beginning on dates varying from January 1, 2012 to September 1, 2012 until i) the common shares are eligible for trading on the OTCBB and ii) the common shares issuable upon conversion of the shares shall be registered under the Securities Act of 1933 or the subscriber is able to sell such common shares under Rule 144. Because the transfer of consideration is probable and reasonably estimable at inception of the arrangement, the contingent liability related to registration rights were included in the allocation of proceeds in accordance with GAAP. During the year ended December 31, 2011, conversion of advances and gross proceeds from the Series B preferred amounted to $921,864, of which $39,503 were allocated to registration rights as a liability and a reduction of additional paid-in capital on the accompanying balance sheets. During the year ended December 31, 2012, the gross proceeds from the Series B preferred amounted to $123,000, of which $6,810 were allocated to registration rights as a liability and a reduction of additional paid-in capital on the accompanying balance sheets. As of December 31, 2012 and 2011, the estimated liability amounted to $134,816 and $67,159, respectively, and the resulting change from the allocation proceeds amounting to $60,846 and $27,657, respectively, is included in other expense of the accompanying statements of operations. The arrangement provides for no limitation as to the maximum potential consideration to be transferred.

F-18

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 10. - SERIES B-1 CONVERTIBLE PREFERRED STOCK

The holder of Series B-1 preferred stock has the right, at any time, to convert each share into common stock at a conversion ratio of one share of Series B-1 preferred stock to 50 shares of common stock at a conversion price of $.70 per common share. Each share of Series B-1 preferred stock has a liquidation preference equal to $35 per share plus any accrued or declared and unpaid dividends owed to holders of shares. In the event of a liquidation, winding up, or dissolution of the Company, the Series B-1 ranks senior to the common stock, junior to the Series A and A-1 preferred stock, and equal to the Series B preferred stock.

Commencing December 31, 2012, cumulative dividends on each share accrue at a rate of 10% of the $35 liquidation amount. Dividends are payable quarterly in cash when and if declared by the Board of Directors. The dividends accrue whether or not they have been declared by the board of directors and whether or not there are profits or other funds legally available. Through March 31, 2014, in the event that dividends have not been declared by the board of directors prior to the relevant dividend payment date, such dividends shall be payable in shares of Series B-1 preferred stock. During the year ended December 31, 2012, there were $555 dividends paid by the issuance of 16 shares of Series B-1 preferred.

The conversion ratio is subject to adjustment when the Company declares or pays dividends, makes a distribution on common stock payable in common shares, or affects a subdivision, split, consolidation, combination, or reverse split of outstanding common shares into a greater or lesser number of common shares. The conversion price of $.70 is adjusted based on changes in the conversion ratio. The Series B-1 holder would be entitled to receive the number of common stock or securities or property that such holder would have owned or been entitled to receive upon the happening of such event had the Series B-1 preferred been converted immediately prior to the record or effective date of such event.

The Company, at its option, may require conversion of all or any prorata portion of shares of Series B-1 preferred stock outstanding into common stock if at any time i) the common stock is listed for trading on a national securities exchange, an inter-dealer automated quotation system, or over the counter bulletin board, ii) the Company shall have prepared and filed with the Securities and Exchange Commission a registration statement covering the shares of common stock to be issued upon due conversion of preferred stock, and such registration statement shall have been declared effective under the Securities Act of 1933, iii) during any preceding period of twenty consecutive trading days (while i) and ii) are fulfilled) the closing price equals or exceeds the quotient of $55 divided by the conversion ratio then in effect, and iv) the Company is current on its dividends on the Series B-1 preferred stock. The holders of Series B-1 preferred stock have the right to one vote for each share of common stock into which such share of preferred stock could then be converted.

On or after August 31, 2017, a holder can request the Company repurchase on the date which is 30 calendar days thereafter, all shares of Series B-1 preferred stock held by the holder for cash equal to $35 per share plus accrued and unpaid dividends as of the repurchase date. The Company has the option whether or not to agree to the repurchase. In the event the Company fails to repurchase or payment of Series B-1 dividends is six quarters in arrears, the dividend rate will increase to 18%, the majority holders of Series B-1 preferred stock have the right to elect the majority of the board of directors, and the conversion price shall decrease to $.595.

F-19

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 10. - SERIES B-1 CONVERTIBLE PREFERRED STOCK (CONTINUED)

Warrants - Each warrant entitles the holder to acquire one share of $.001 par value common stock at a post-split exercise price of $1 per common share, and expires on the earlier of March 31, 2016 or such date after September 30, 2013 at which i) the common stock is listed on the OTCBB and ii) the shares to be acquired by exercise of the warrants have been registered under the Securities Act of 1933, for 60 consecutive days. If the Company subdivides or combines its common stock, issues or pays the holders of common stock, or take a record of the holders of common stock for the purpose of entitling them to receive a dividend payable in or distribution of common stock, the number of shares of common stock purchasable upon exercise of the warrant and the warrant price shall be proportionally adjusted.

Because the warrants were issued in conjunction with the Series B-1 preferred stock, the proceeds of the offering will be allocated between the Series B-1 preferred and the warrants based on the relative fair value of each instrument. The assumed value of the Series B preferred was determined based on the fair value of the underlying common shares and the fair value of the warrants was valued using the Black-Scholes option pricing model. As of December 31, 2012, the gross proceeds from the Series B-1 preferred amounted to $20,000, of which $4,002 were allocated to the warrants. The amount allocated to warrants represents an additional dividend on the preferred shares and, due to the Company's accumulated deficit, the allocation results in an increase and decrease to additional paid-in capital and as such, there is no impact on the accompanying financial statements.

NOTE 11. COMMON STOCK

In July 2012, the total number of common shares authorized for issuance was increased from 10,000,000 to 25,000,000. On July 5, 2012, the Company’s Board of Directors authorized and declared a 200% common stock dividend, resulting in a three-for-one forward split of the Company’s common stock. The split was effective in the form of a stock dividend distribution on August 10, 2012 to stockholders of record on the close of business on July 5, 2012. The accompanying financial statements and related notes thereto have been retroactively adjusted to reflect the split.

F-20

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 11. COMMON STOCK (CONTINUED)

The following is a summary of warrants outstanding and exercisable at December 31, 2012 and 2011 and activity during the years then ended:

	2012					2011
				Weighted				Weighted
				Average				Average
				Exercise				Exercise
	Warrants			Price		Warrants		Price

Outstanding January 1		369,200		$	1.17		61,910	$	2.00
Granted during the year		69,600			1.00		307,290		1.00
Exercised		-			-		-		-
Expired		(61,910	)		2.00		-		-

Outstanding at December 31		376,890		$	1.00		369,200	$	1.17

Exercisable at December 31		376,890		$	1.00		369,200	$	1.17

Weighted average months remaining					28.26				33.41

NOTE 12. - STOCK BASED COMPENSATION

During 2006, the Board of Directors authorized the creation of a pool of 400,000 stock options to purchase shares of the Company's common stock to officers and salaried employees of the Company, member of the Board of Directors, consultants, and any other key employees as determined by the Board of Directors as an incentive to remain in the service of the Company, enhance the long-term performance of the Company, and to acquire a proprietary interest in the success of the Company. Awards of these options shall be determined by the Board of Directors or an authorized committee thereof.

During the year ended December 31, 2008, the Board of Directors authorized the grant of stock options to an employee to purchase 199,992 post-split shares of the Company's common stock at an exercise price of $2 which would vest 25% at date of grant and 25% annually thereafter and expire on March 1, 2013. The grant date fair value of this award is being recognized over the requisite service period resulting in stock based compensation of $0 and $7,056 during the years ended December 31, 2012 and 2011, respectively. There were no options granted, forfeited, or exercised during the years ended December 31, 2012 and 2011.

As of December 31, 2012, there were 199,992 options outstanding and exercisable with no intrinsic value. Also, as of December 31, 2012, there was no unrecognized compensation costs relating to stock options granted. The options expired unexercised on March 1, 2013.

F-21

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 13. - COMMITMENTS AND CONTINGENCIES

Leases - The Company leases office and warehouse space under an operating lease which expires on July 31, 2014. Rent expense for the lease for the years ended December 31, 2012 and 2011 amounted to $91,001 and $85,448, respectively. Aggregate future minimum lease payments under the non-cancelable operating lease are $65,542 for the year ended December 31, 2013 and $40,374 for the year ended December 31, 2014. The Company has made a $12,253 security deposit included within other assets in the accompanying balance sheets as of December 31, 2012 and 2011.

Claims - The Company is subject to a claim arising in the normal course of business. In the opinion of management, the amount of the ultimate liability, if any, with respect this action will not have a material adverse effect on the financial position, results of operation or cash flow of the Company.

Revenue Arrangements - During 2011, the Company leased equipment from a vendor under a capital lease for 3 years, which was delivered during the year ended December 31, 2012. The lease requires payments aggregating $200,000, of which $45,000 were made during the year ended December 31, 2012, is assignable, and contains a bargain purchase option of $1 following the completion of the payments required by the Company. As of December 31, 2012, the Company has a remaining obligation under this lease agreement in the amount of $115,000. In accordance with the lease agreement, future commitments of $65,000 due one year after launching the equipment are included in current capital lease liability and $50,000 due two years after launching the equipment are included in long-term capital lease liability on the accompanying balance sheet. Also, during 2011, the Company purchased additional equipment from a different vendor, which was delivered during the year ended December 31, 2011.

The Company entered into an agreement to lease both pieces of equipment to a customer for aggregate consideration of $360,000, of which $270,000 has been received as of December 31, 2012. Following the final lease payment, ownership of the equipment will transfer to the customer. Accordingly, the cost related to the above capital lease and other equipment acquired is either included in cost of goods sold if related revenue is recognized or customer contracts in progress. The terms of the agreement with the customer also involve the sale of non-leased equipment and allow for additional billings related to installation, integration, and training, as well as future royalties related to usage of the equipment. The amount included in financing receivables on the accompanying balance sheet represents the third year lease payment from the customer due two years after completion of training or July 2014; however, the amount was collected during the year ended December 31, 2013.

As of December 31, 2012 and 2011, deposits received from this customer related to an equipment lease prior to the Company meeting the revenue recognition policies amounted to $210,000 and $229,280, respectively, and is included as unearned revenue in the accompanying balance sheets. Costs incurred related to the same customer contract prior to the Company meeting revenue recognition policies amounted to $200,000 and $277,275 as of December 31, 2012 and 2011, respectively, and are included as customer contracts in progress in the accompanying balance sheets.

F-22

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 13. - COMMITMENTS AND CONTINGENCIES (CONTINUED)

In accordance with Accounting for Multiple-Deliverable Revenue Arrangements (ASC 805), the significant deliverables qualify as separate units of accounting. In conjunction with the agreement, the customer can return the equipment if acceptance criteria is not met for a partial refund. ASC 805 states the amount of revenue allocable to the delivered unit or units of accounting is limited to the amount that is not contingent upon the delivery of additional items or meeting other specified performance conditions. As there is an amount of $200,000 contingent upon customer acceptance, revenue related to the customer agreement during the year ended December 31, 2012 and 2011 was limited to approximately $298,000 and $85,000, respectively. All of the equipment under this agreement was delivered during the year ended December 31, 2012. Management believes customer acceptance has occurred in the first quarter of 2013.

During the year ended December 31, 2012, sales related to this customer represented approximately 96% of total revenue (93% - 2011).

NOTE 14. – SUBSEQUENT EVENTS

Subsequent to December 31, 2012, the Company has raised approximately $343,000 from the sale of Series B-1 preferred units at $35 per unit. In addition, stockholder advances amounting to approximately $96,000 were converted into Series B-1 preferred units. As a result, the Company issued 12,801 Series B-1 preferred shares and 627,300 warrants.

The Board of Directors is currently seeking the approval of two-thirds of the Series A Convertible Preferred shareholders to an amendment of the certificate of designation of the Preferred A that would have the effect of satisfying accrued but unpaid dividends through September 30, 2013 with common stock at the rate of one common share per $0.65 of dividends, and reducing the dividend rate to 10% from 18% as of October 1, 2013.

F-23

FINANCIAL STATEMENTS

GYROTRON TECHNOLOGY, INC.

December 31, 2013

with

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

F-24

GYROTRON TECHNOLOGY, INC.

CONTENTS

	Page

Report of Independent Registered Public Accounting Firm		F-26

Audited Financial Statements:
Balance Sheets as of December 31, 2013 and 2012		F-27
Statements of Operations for the years ended December 31, 2013 and 2012		F-28
Statements of Changes in Stockholders’ Deficiency for the years ended December 31, 2013 and 2012		F-29
Statements of Cash Flows for the years ended December 31, 2013 and 2012		F-30

Notes to the Financial Statements		F-31

F-25

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Gyrotron Technology, Inc.

We have audited the accompanying balance sheets of Gyrotron Technology, Inc. (the Company) as of December 31, 2013 and 2012, and the related statements of operations, changes in stockholders' deficiency, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gyrotron Technology, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has a net stockholders’ deficiency and its current liabilities exceed its current assets. This raises 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ FREED MAXICK CPAs, P.C.

Buffalo, New York

April 17, 2014

F-26

GYROTRON TECHNOLOGY, INC.

BALANCE SHEETS

December 31,

	2013			2012
ASSETS
Current assets:
Cash	$	60,082		$	8,219
Accounts receivable, net		-			9,700
Prepaid expenses and other current assets		25,347			4,040
Loan receivable, director		8,973			-
Loan receivable, officer		24,155			24,155
Customer contracts in progress		-			200,000
Financing receivable		-			90,000
Total current assets		118,557			336,114

Machinery and equipment, net		89,476			171,590
Patents, net		54,358			64,120
Other assets		12,253			12,253

Total assets	$	274,644		$	584,077

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Note payable	$	46,784		$	49,383
Accounts payable		28,413			12,892
Accrued expenses and other liabilities		55,757			110,298
Accrued employee compensation		363,864			301,364
Registration rights obligation		260,136			230,284
Capital lease liability		-			65,000
Unearned revenues		-			210,000
Total current liabilities		754,954			979,221

Capital lease liability		-			50,000

Advances from stockholders		-			130,118

Stockholders' deficiency:
Preferred stock, 1,000,000 shares authorized, $0.001 par value:
Series A - 450,000 shares designated		437			437
Series A-1 - 125,000 shares designated		62			62
Series B - 40,000 shares designated		40			40
Series B-1 - 80,000 shares designated		22			1
Common stock, 25,000,000 shares authorized, $0.01 par value,
11,903,664 shares issued and 11,095,698 shares outstanding		119,037			119,037
Additional paid-in capital		8,690,818			7,977,007
Accumulated deficit		(8,900,023	)		(8,281,143	)
		(89,607	)		(184,559	)
Treasury stock, 807,966 common shares, at cost		(390,703	)		(390,703	)
Total stockholders' deficiency		(480,310	)		(575,262	)

Total liabilities and stockholders' deficiency	$	274,644		$	584,077

See accompanying notes.

F-27

GYROTRON TECHNOLOGY, INC.

STATEMENTS OF OPERATIONS

For the Years Ended December 31,

	2013			2012

Revenue	$	270,795		$	309,142

Cost of revenue		236,646			293,022

Gross profit		34,149			16,120

Operating expenses:
Selling, general and administrative expenses		584,930			517,056
Research and development expenses		42,108			57,808
Total operating expenses		627,038			574,864

Operating loss		(592,889	)		(558,744	)

Other income (expense):
Other income		4,526			7,247
Registration rights obligation		(25,452	)		(84,830	)
Interest and penalties expense		(5,065	)		(2,689	)

Net loss		(618,880	)		(639,016	)

Preferred stock dividends - accumulated, paid-in kind, warrants, and beneficial conversion feature		(836,790	)		(677,019	)

Net loss attributable to common stockholders	$	(1,455,670	)	$	(1,316,035	)

Loss per common share - basic and diluted	$	(0.12	)	$	(0.11	)

Weighted average shares outstanding - basic and diluted		11,903,664			11,903,664

See accompanying notes.

F-28

GYROTRON TECHNOLOGY, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY

Years Ended December 31, 2013 and 2012

	Preferred Series A				Preferred Series A-1				Preferred Series B					Preferred Series B-1				Common Stock				Additional Paid-in			Accumulated			Treasury
	Shares		Amount		Shares		Amount		Shares			Amount		Shares		Amount		Shares		Amount		Capital			Deficit			Stock			Total

Balance, December 31, 2011		436,774	$	437		61,910	$	62		32,139		$	32		-	$	-		11,903,664	$	119,037	$	7,840,826		$	(7,642,127	)	$	(390,703	)	$	(72,436	)

Issuance of Series B convertible preferred stock, 10% cumulative dividend		-		-		-		-		4,100			4		-		-		-		-		122,996			-			-			123,000

Issuance of Series B-1 convertible preferred stock, 10% cumulative dividend		-		-		-		-		-			-		572		1		-		-		19,999			-			-			20,000

Series B registration rights obligation		-		-		-		-		-			-		-		-		-		-		(6,810	)		-			-			(6,810	)

Reinvestment of Series B and B-1 preferred stock dividends		-		-		-		-		3,688			4		16		-		-		-		(4	)		-			-			-

Net loss		-		-		-		-		-			-		-		-		-		-		-			(639,016	)		-			(639,016	)

Balance, December 31, 2012		436,774		437		61,910		62		39,927			40		588		1		11,903,664		119,037		7,977,007			(8,281,143	)		(390,703	)		(575,262	)

Settlement of liability with Series B preferred stock, 10%		-		-		-		-		332			-		-		-		-		-		9,986			-			-			9,986

Issuance of Series B-1 convertible preferred stock, 10% cumulative dividend		-		-		-		-		-			-		19,518		20		-		-		683,085			-			-			683,105

Series B-1 registration rights obligation		-		-		-		-		-			-		-		-		-		-		(4,401	)		-			-			(4,401	)

Reinvestment of Series B-1 preferred stock dividends		-		-		-		-		-			-		982		1		-		-		(1	)		-			-			-

Conversion of Series B for Series B-1		-		-		-		-		(300	)		-		255		-		-		-		-			-			-			-

Issuance of common stock warrants for services performed		-		-		-		-		-			-		-		-		-		-		25,142			-			-			25,142

Net loss		-		-		-		-		-			-		-		-		-		-		-			(618,880	)		-			(618,880	)

Balance, December 31, 2013		436,774	$	437		61,910	$	62		39,959		$	40		21,343	$	22		11,903,664	$	119,037	$	8,690,818		$	(8,900,023	)	$	(390,703	)	$	(480,310	)

See accompanying notes.

F-29

GYROTRON TECHNOLOGY, INC.

STATEMENTS OF CASH FLOWS

For the Years Ended December 31,

	2013			2012

Cash flows from operating activities:
Net loss	$	(618,880	)	$	(639,016	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		91,876			91,875
Increase in allowance for doubtful accounts		-			3,218
(Increase) decrease in assets:
Accounts receivable		9,700			(9,700	)
Prepaid expenses		3,835			7,373
Customer contracts in progress		200,000			192,275
Financing receivable		90,000			(90,000	)
Increase (decrease) in liabilities:
Accounts payable		15,520			(10,651	)
Accrued expenses and other liabilities		(44,555	)		5,957
Accrued employee compensation		62,500			89,702
Unearned revenues		(210,000	)		(19,280	)
Registration rights obligation		25,452			84,676
Net cash used in operating activities		(374,552	)		(293,571	)

Cash flows from financing activities:
Repayments on long-term debt		(2,599	)		(1,299	)
Repayments of advances to (advances from) stockholders		(34,078	)		130,118
Repayment of capital lease liability		(115,000	)		-
Proceeds from sale of preferred stock		587,065			143,000
Advances to director		(8,973	)		-
Net cash provided by financing activities		426,415			271,819

Net increase (decrease) in cash		51,863			(21,752	)

Cash - beginning of year		8,219			29,971

Cash - end of year	$	60,082		$	8,219

Supplemental disclosure of non-cash financing activities:
Conversion of advances into Series B-1 Preferred	$	96,040		$	-
Registration rights obligation offsetting additional paid-in capital	$	4,401		$	6,810
Settlement of liability with issuance of Series B Preferred	$	9,986		$	-
Issuance of common stock warrants for prepaid expenses	$	25,142		$	-
Capital lease liability in customer contracts in progress	$	-		$	115,000

See accompanying notes.

F-30

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Liquidity and Management Plans - As shown in the accompanying financial statements, the Company incurred a net loss for the years ended December 31, 2013 and 2012 of $618,880 and $639,016, respectively, had negative working capital of $636,397 and stockholders' deficiency of $480,310 at December 31, 2013. Further, cash used in operating activities during the year ended December 31, 2013 amounted to $374,552. The Company is expected to continue to incur losses throughout 2014.

The Company's management and Board of Directors have obtained additional funding in 2014 (see Note 14) and intend to obtain additional funding for general working capital needs and professional fees through private placement of its equity securities. The Company will continually evaluate funding options including additional offerings of its securities to investors. There can be no assurance as to the availability or terms upon which such financing alternatives might be available.

Accounts Receivable - The Company grants credit to substantially all of its customers, and carries its accounts receivable at original invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on history of past write-offs, collections, and current credit conditions. The allowance for doubtful accounts amounted to $3,218 at December 31, 2013 and 2012.

Finance Receivables and Allowance for Credit Losses - Finance receivables are composed of non-interest bearing sales-type lease receivables from customers. The Company estimates finance receivable risks and provides an allowance for credit losses accordingly. The Company evaluates the adequacy of the allowance for credit losses based on adverse situations that may affect a customer's ability to pay and prevailing economic conditions and records an allowance if necessary. The Company believes that the sales-type lease contains only normal collection risk. Management determined no allowance for credit losses was necessary at December 31, 2012. There were no financing receivables as of December 31, 2013.

Machinery and Equipment -Machinery and equipment are stated at cost net of accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets using straight-line and accelerated methods for both financial statement and income tax reporting purposes. Maintenance and repairs are charged to operations as incurred; significant betterments are capitalized. Depreciation expense for the years ended December 31, 2013 and 2012 amounted to $82,114 and $82,116, respectively and is included within operating expenses in the accompanying statements of operations.

F-31

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Impairment of Long-Lived Assets - Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future cash flows of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flow or appraised values, depending on the nature of the assets. There was no impairment of long-lived assets during the years ending December 31, 2013 and 2012.

Treasury Stock - The Company accounts for treasury stock under the cost method, which requires the Company to record the shares as a reduction to equity at the purchased amount.

Revenue Recognition -In accordance with Revenue Recognition Topic of the FASB Accounting Standards Codification (ASC) 805, the Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the Company's price to the customer is fixed or determinate, and collectability is reasonably assured.

F-32

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Sales-Type Leases - The Company provides lease financing through sales-type leases. Leases qualify as sales-type leases using the present value of minimum lease payments classification criteria. The Company believes that the sales-type lease contains only normal collection risk. Accordingly, the Company records the fair value of equipment as revenue, the cost of equipment as cost of revenues and the minimum lease payments plus the estimated residual value as finance receivables.

Research and Development Expenses - Research and development expenses are charged to operations as incurred.

As of December 31, 2013, there were the following common shares underlying securities that could potentially dilute future earnings:

Preferred A stock	1,541,556
Preferred A-1 stock		218,505
Preferred B stock		1,198,768
Preferred B warrants		1,044,864
Preferred B-1 stock		1,067,154
Preferred B-1 warrants		1,004,500
Other warrants		60,000
		6,135,347

F-33

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Accounting Estimates - The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results may differ from estimated amounts.

The estimated fair value of note payable is summarized as follows:

December 31, 2013				December 31, 2012
Carrying		Estimated		Carrying		Estimated
Amount		Fair Value		Amount		Fair Value

$	46,784	$	40,000	$	49,383	$	39,000

Reclassification – Certain 2012 amounts were reclassified to conform to the 2013 presentation.

NOTE 2. - LOAN RECEIVABLES, OFFICER AND DIRECTOR

The Company has non-interest bearing loans to an officer and director that are due on demand.

NOTE 3. - MACHINERY AND EQUIPMENT

The components of machinery and equipment are as follows:

	Estimated	December 31,			December 31,
	Useful Life	2013			2012

Machinery and equipment	5 to 7 years	$	882,338		$	882,338
Furniture and fixtures	5 to 7 years		25,874			25,874
			908,212			908,212
Less accumulated depreciation			(818,736	)		(736,622	)
		$	89,476		$	171,590

F-34

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 4. - PATENTS

The components of patents are as follows:

	December 31,		December 31,
	2013		2012

Patents	$	146,423	$	146,423
Less accumulated amortization		(92,065)		(82,303	)

	$	54,358	$	64,120

The Company amortizes patent costs on a straight-line basis over the expected period of benefit of the related capitalized expenditures. Amortization expense included in operating expenses on the statement of operations amounted to $9,762 and $9,760 for the years ended December 31, 2013 and 2012, respectively. Amortization expense for the next five years is expected to be approximately $10,000 per year for 2014 through 2016, approximately $6,000 in 2017, and approximately $18,000 thereafter.

NOTE 5. - NOTE PAYABLE

The Company has a note payable due to Ben Franklin Technology Center of Southeastern Pennsylvania (the Center). The terms of the note stated the Company is required to pay a maximum of 150% times the $50,000 borrowed amount. The rate of repayment is 3% of all Company revenues. Payments are due within thirty days after the end of each quarter. Amounts due which are not paid within 10 days after the due date bear interest at 15% per year. The note payable is secured by substantially all assets of the Company. In accordance with the loan agreement, the Company is required to comply with various terms and conditions. As of December 31, 2013 and 2012, the Company was not in compliance with certain provisions. As a result, the Center has the option to demand payment of the entire amount outstanding immediately and charge interest at 15% per year on the entire balance. Accordingly, the balance has been classified as current in the accompanying balance sheets.

NOTE 6. - ADVANCES FROM STOCKHOLDERS

As of December 31, 2012, the Company had $130,118 of non-interest bearing advances from a director and stockholders. There were no formal repayment terms. In 2013, approximately $96,000 of these advances were converted into Series B-1 preferred stock and warrants and the balance was repaid.

NOTE 7. - INCOME TAXES

The components of the income tax provision (benefit) are as follows:

	December 31,			December 31,
	2013			2012
Current:
Federal	$	-		$	-
State		-			-
		-			-
Deferred:
Federal		(182,713	)		(94,496	)
State		(59,210	)		(29,421	)
		(241,923	)		(123,917	)
Increase in valuation allowance		241,923			123,917

Provision for income taxes	$	-		$	-

F-35

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 7. - INCOME TAXES (CONTINUED)

At December 31, 2013 and 2012, the Company recorded deferred income tax and liabilities, which were attributed to the following temporary differences:

	December 31,			December 31,
	2013			2012
Deferred tax assets/(liabilities)
Net operating loss carry-forwards	$	3,032,492		$	2,852,570
Tax benefit carry-forwards		161,770			160,441
Depreciation and amortization		10,290			(4,715	)
Accrued employee compensation		66,433			41,062
Other		21,603			1,306
Stock based compensation		68,736			68,736

Total gross deferred tax assets		3,361,324			3,119,400

Less valuation allowance		(3,361,324	)		(3,119,400	)

Net deferred tax assets	$	-		$	-

The Company has approximately $7,470,000 ($7,027,000 - 2012) in federal and state net operating loss carryforwards ("NOL's") as of December 31, 2013 available to reduce future taxable income which begin to expire in 2018. Due to the uncertainty of the Company's ability to generate sufficient taxable income in the future to utilize the NOL's before they expire, the Company has recorded a valuation allowance to reduce the gross deferred tax asset to zero. The Company also has approximately $162,000 ($160,000 – 2012) of tax benefit carryforwards as of December 31, 2013 related to research and development credits that expire at various dates through 2033.

F-36

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 7. - INCOME TAXES (CONTINUED)

The differences between the United States statutory federal income tax rate and the effective income tax rate in the accompanying statements of operations are as follows:

	December 31,			December 31,
	2013			2012

Statutory United States federal rate		34.0	%		34.0	%
State taxes, net of federal effect		6.3			5.7
Permanent differences		(1.4	)		(4.6	)
Change in valuation allowance		(39.1	)		(19.4	)
Deferred tax true-up adjustments		(0.3	)		(16.5	)
Other		0.5			0.8

Effective tax rate		-	%		-	%

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2013 and 2012, the Company recognized no interest and penalties related to unrecognized tax benefits and has no unrecognized tax benefits.

The Company files income tax returns in the U.S. federal jurisdiction and Pennsylvania. The tax years 2010 through 2013 generally remain open to examination by major taxing jurisdictions to which the Company is subject.

NOTE 8. - SERIES A & A-1 CONVERTIBLE PREFERRED STOCK

Prior to December 31, 2011, the offering of Series A par value $.001 convertible preferred stock resulted in 413,913 preferred shares sold for net proceeds of $2,480,681. In addition, $137,166 of dividends were reinvested into 22,861 shares of Series A preferred stock.

Prior to December 31, 2011, the offering of Series A-1 par value $.001 convertible preferred stock and warrants resulted in the sale of 61,910 preferred shares and warrants. The proceeds from the offering amounted to $372,170, net of costs related to the offering of $27,801.

The holders of preferred stock have the right to one vote for each share of common stock into which such share of preferred stock could then be converted.

F-37

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 8. - SERIES A & A-1 CONVERTIBLE PREFERRED STOCK (CONTINUED)

In accordance with Series A and A-1 certificates of designation above, cumulative dividends on each share of Series A and A-1 preferred stock accrue at a rate of 10% of the $6 liquidation amount. After May 31, 2011, the dividend rate increased from 10% to 18%. Dividends are payable quarterly in cash when and if declared by the Board of Directors. The dividends accrue and accumulate whether or not they have been declared by the board of directors and whether or not there are profits or other funds legally available. There were no dividends declared as of December 31, 2013 and 2012. During the years ended December 31, 2013 and 2012, there were $419,391 and $471,716, respectively, of preferred stock dividends accumulated for Series A preferred stock. At December 31, 2013 and 2012, there were cumulative unpaid dividends of $1,979,171 and $1,559,780, respectively, preferred stock dividends accumulated for Series A preferred stock. During the years ended December 31, 2013 and 2012, there were $66,862 of preferred stock dividends accumulated for Series A-1 preferred stock. At December 31, 2013 and 2012, there were cumulative unpaid dividends of $243,440 and $176,577, respectively, of preferred stock dividends accumulated for Series A-1 preferred stock. See Note 14 regarding the effect of amendments to the certificates of designation of the Series A preferred stock.

On or after April 30, 2012, a holder can request the Company repurchase on the date which is 31 calendar days thereafter, all shares of Series A or A-1 preferred stock held by the holder for cash equal to $6 per share plus accrued and declared but unpaid dividends as of the repurchase date. The Company has the option whether or not to agree to the repurchase. If the Company fails to repurchase the shares, the majority holders of Series A and A-1 stock have the right to elect the majority of the board of directors. During the years ended December 31, 2013 and 2012, no such holder requested the Company repurchase all shares of Series A or A-1 preferred. Majority holders have not exercised the right to elect the majority of the board of directors.

F-38

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 8. - SERIES A & A-1 CONVERTIBLE PREFERRED STOCK (CONTINUED)

Registration Rights - In connection with the Series A-1 preferred stock subscription agreements, the Company agreed to pay the various subscribers 1/2% of the aggregate purchase price of shares acquired each month beginning on various dates between December 1, 2009 and July 1, 2010 until i) the Company has prepared and filed a registration statement with the Securities and Exchange Commission which has been declared effective under the Securities Act or the holder is then able to sell the underlying common shares under Rule 144 promulgated pursuant to the Securities Act and ii) the Company has obtained a ticker symbol and common shares are eligible to trade on the OTCBB. At December 31, 2009, the estimated liability related to this obligation amounted to $39,078 and was included as a liability and a reduction of additional paid-in capital. At December 31, 2013 and 2012, the estimated liability amounted to $99,851 and $94,268, respectively, and the resulting change for the years ended December 31, 2013 and 2012 amounting to $5,583 and $22,630, respectively, is included as other expense in the accompanying statements of operations. The arrangement provides for no limitation as to the maximum potential consideration to be transferred.

NOTE 9. - SERIES B CONVERTIBLE PREFERRED STOCK

The Board of Directors has designated 40,000 shares of 10% convertible Series B par value $.001 preferred stock. Prior to December 31, 2011, there were 30,729 shares of Series B preferred stock sold and 307,288 warrants for proceeds and conversion of advances amounting to $921,864.

During the year ended December 31, 2012, the Company sold an additional 4,100 shares and 41,000 warrants for proceeds of $123,000. During the year ended December 31, 2013, the Company issued 332 shares of Series B preferred with no warrants for settlement of approximately $10,000 services previously rendered, and a director exchanged 300 shares of Series B preferred for 255 shares of Series B-1 preferred.

Commencing on July 1, 2011, cumulative dividends on each share accrue at a rate of 10% of the $30 liquidation amount. Dividends are payable quarterly in cash when and if declared by the Board of Directors. The dividends accrue whether or not they have been declared by the board of directors and whether or not there are profits or other funds legally available. During the years ended December 31, 2013 and 2012, $120,102 and $110,944, respectively, of preferred stock dividends accumulated for Series B preferred stock. Through December 31, 2012, in the event dividends are not declared by the board of directors prior to the relevant dividend payment dates, such dividends shall be payable in shares of Series B preferred stock. As the $110,944 of accumulated dividends for the year ended December 31, 2012 was not declared as of the dividend payment dates, such dividends were paid by the issuance of 3,688 shares of Series B preferred. Since there are not profits to distribute, these dividends have been recorded as a reduction of additional paid-in capital offsetting the increase to preferred stock.

F-39

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 9. - SERIES B CONVERTIBLE PREFERRED STOCK (CONTINUED)

Warrants - In connection with the Series B preferred stock subscription agreements, purchasers’ acquired ten detachable warrants for each share of purchased Series B preferred. Each warrant entitles the holder to acquire three shares of $.001 par value common stock at a post-split exercise price of $1 per common share, and expires on the earlier of March 31, 2015 or such date after June 30, 2012 at which i) the common stock is listed on the OTCBB and ii) the shares to be acquired by exercise of the warrants have been registered under the Securities Act of 1933, for 60 consecutive days. If the Company subdivides or combines its common stock, issues or pays the holders of common stock, or take a record of the holders of common stock for the purpose of entitling them to receive a dividend payable in or distribution of common stock, the number of shares of common stock purchasable upon exercise of the warrant and the warrant price shall be proportionally adjusted.

Because the warrants were issued in conjunction with the Series B preferred stock, the proceeds of the offering were allocated between the Series B preferred and the warrants based on the relative fair value of each instrument. The assumed value of the Series B preferred was determined based on the fair value of the underlying common shares and the fair value of the warrants was valued using the Black-Scholes option pricing model. During the year ended December 31, 2012, gross proceeds from the Series B preferred amounted to $123,000, of which $22,939 were allocated to the warrants. The amount allocated to warrants represents an additional dividend on the preferred shares and, due to the Company's accumulated deficit, the allocation results in an increase and decrease to additional paid-in capital and as such, there is no impact on the accompanying financial statements.

F-40

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 9. - SERIES B CONVERTIBLE PREFERRED STOCK (CONTINUED)

preferred amounted to $123,000, of which $6,810 were allocated to registration rights as a liability and a reduction of additional paid-in capital on the accompanying balance sheets. As of December 31, 2013 and 2012, the estimated liability amounted to $150,489 and $134,816, respectively, and the resulting change from the allocation proceeds amounting to $15,673 and $60,846, respectively, is included in other expense of the accompanying statements of operations. The arrangement provides for no limitation as to the maximum potential consideration to be transferred.

NOTE 10. - SERIES B-1 CONVERTIBLE PREFERRED STOCK

In November 2012, the Board of Directors designated 20,000 shares of 10% convertible Series B-1 par value $.001 preferred stock. In connection therewith, for each $35 of consideration, the Company offered one unit consisting of one share of Series B-1 convertible preferred stock and fifty common stock warrants exercisable at $1.00 per share. In March 2014, the certificate of designation was amended to increase in the shares designated to 80,000. The offering resulted in the sale of 572 shares of Series B-1 preferred and 28,600 warrants during the year ended December 31, 2012. During the year ended December 31, 2013, the Company issued an additional 16,773 shares of Series B-1 preferred and 838,650 warrants for $587,065 proceeds and issued 2,745 shares of Series B-1 preferred and 137,250 warrants for stockholders that converted $96,040 advances from the year ended December 31, 2012. In addition, one stockholder exchanged 300 shares of Series B preferred for 255 shares of Series B-1 preferred.

Commencing December 31, 2012, cumulative dividends on each share accrue at a rate of 10% of the $35 liquidation amount. Dividends are payable quarterly in cash when and if declared by the Board of Directors. The dividends accrue whether or not they have been declared by the board of directors and whether or not there are profits or other funds legally available. Through June 30, 2014, in the event that dividends have not been declared by the board of directors prior to the relevant dividend payment date, such dividends shall be payable in shares of Series B-1 preferred stock. During the years ended December 31, 2013 and 2012, dividends of $34,378 and $555, respectively, were paid by the issuance of 982 and 16 shares, respectively, of Series B-1 preferred.

F-41

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 10. - SERIES B-1 CONVERTIBLE PREFERRED STOCK (CONTINUED)

The conversion ratio is subject to adjustment when the Company declares or pays dividends, makes a distribution on common stock payable in common shares, or affects a subdivision, split, consolidation, combination, or reverse split of outstanding common shares into a greater or lesser number of common shares. The conversion price of $.70 is adjusted based on changes in the conversion ratio. The Series B-1 holder would be entitled to receive the number of common stock or securities or property that such holder would have owned or been entitled to receive upon the happening of such event had the Series B-1 preferred been converted immediately prior to the record or effective date of such event.

Because the warrants were issued in conjunction with the Series B-1 preferred stock, the proceeds of the offering will be allocated between the Series B-1 preferred and the warrants based on the relative fair value of each instrument. The assumed value of the Series B preferred was determined based on the fair value of the underlying common shares and the fair value of the warrants was valued using the Black-Scholes option pricing model. As of December 31, 2013 and 2012, the gross proceeds and conversion of advances from the Series B-1 preferred amounted to $683,105 and $20,000, respectively, of which $95,828 and $4,002 were allocated to the warrants, respectively. The amount allocated to warrants represents an additional dividend on the preferred shares and, due to the Company's accumulated deficit, the allocation results in an increase and decrease to additional paid-in capital and as such, there is no impact on the accompanying financial statements.

F-42

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 10. -SERIES B-1 CONVERTIBLE PREFERRED STOCK (CONTINUED)

Registration rights - In connection with the Series B-1 preferred stock subscription agreement, the Company agreed to pay subscribers 1/2% of the liquidation preference of shares held by subscribers each month beginning July 1, 2013 until i) the common shares are eligible for trading on the OTCBB and ii) the common shares issuable upon conversion of the shares shall be registered under the Securities Act of 1933 or the subscriber is able to sell such common shares under Rule 144. Because the transfer of consideration is probable and reasonably estimable at inception of the arrangement, the contingent liability related to registration rights will be included in the allocation of proceeds in accordance with GAAP. During the year ended December 31, 2012, the gross proceeds from the Series B-1 preferred amounted to $20,000, of which the amount attributable to the registration rights was not material to the financial statements. During the year ended December 31, 2013, conversion of advances and gross proceeds from Series B-1 preferred amounted to $683,105, of which $4,401 was allocated to the registration rights as a liability and a reduction of additional paid-in capital on the accompanying balance sheet. As of December 31, 2013 and 2012, the estimated liability amounted to $9,796 and $1,200, respectively, and the resulting change from the allocation proceeds amounting to $4,196 is included in other expense on the accompanying statement of operations during the year ended December 31, 2013. The arrangement provides for no limitation as to the maximum potential consideration to be transferred.

Beneficial Conversion Feature - The effective conversion price of the Series B-1 was at a price lower than the market price of the common stock at the date of the issuance, resulting in a non-cash beneficial conversion feature of $100,229 during the year ended December 31, 2013. As there is an accumulated deficit, this beneficial conversion feature was immediately recognized as additional paid-in capital. The amount allocated to beneficial conversion feature represents an additional dividend on the preferred shares and, due to the Company’s accumulated deficit, the allocation results in an increase and decrease to additional paid-in capital and as such, there is no impact on the accompanying financial statements.

NOTE 11. COMMON STOCK

In July 2012, the total number of common shares authorized for issuance was increased from 10,000,000 to 25,000,000. On July 5, 2012, the Company’s Board of Directors authorized and declared a 200% common stock dividend, resulting in a three-for-one forward split of the Company’s common stock. The split was effective in the form of a stock dividend distribution on August 10, 2012 to stockholders of record on the close of business on July 5, 2012. The accompanying financial statements and related notes thereto were retroactively adjusted in connection with the December 31, 2012 financial statements to reflect the split.

The following is a summary of warrants outstanding and exercisable at December 31, 2013 and 2012 and activity during the years then ended:

F-43

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 11. COMMON STOCK (CONTINUED)

	2013				2012
			Weighted					Weighted
			Average					Average
			Exercise					Exercise
	Warrants		Price		Warrants			Price

Outstanding January 1		1,073,464	$	1.00		1,107,594		$	1,17
Granted during the year		1,035,900		0.99		151,600			1.00
Exercised		-		-		-			-
Expired		-		-		(185,730	)		2.00

Outstanding at December 31		2,109,364	$	1.00		1,073,464		$	1.00

Exercisable at December 31		2,109,364	$	1.00		1,073,464		$	1.00

Weighted average months remaining				21.91					27.32

The Company issued 60,000 warrants to a consultant in October 2013 vesting immediately with an expiration date in October 2018 and an exercise price of $0.75 per share of underlying common stock. The Company recorded $25,142 as a prepaid expense and additional paid-in capital based on the fair value of the warrants granted using the Black-Scholes option pricing model and is amortizing into selling, general and administrative expenses as services are rendered.

NOTE 12. - STOCK BASED COMPENSATION

F-44

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 13. - COMMITMENTS AND CONTINGENCIES

Leases - The Company leases office and warehouse space under an operating lease which expires on July 31, 2014. Rent expense for the lease for the years ended December 31, 2013 and 2012 amounted to $96,822 and $91,001, respectively. Aggregate future minimum lease payments under the non-cancelable operating lease are $40,374 for the year ended December 31, 2014. The Company has made a $12,253 security deposit included within other assets in the accompanying balance sheets as of December 31, 2013 and 2012.

Revenue Arrangements - During 2011, the Company leased equipment from a vendor under a capital lease for 3 years, which was delivered during the year ended December 31, 2012. The lease requires payments aggregating $200,000, of which $85,000 were made through December 31, 2012, is assignable, and contains a bargain purchase option of $1 following the completion of the payments required by the Company. As of December 31, 2012, the Company had a remaining obligation under this lease agreement in the amount $115,000 included in current and long-term capital lease liability on the accompanying balance sheet. The remaining $115,000 was paid during the year ended December 31, 2013. Also, during 2011, the Company purchased additional equipment from a different vendor, which was delivered during the year ended December 31, 2011.

The Company entered into an agreement to lease both pieces of equipment to a customer for aggregate consideration of $360,000, of which $270,000 had been received as of December 31, 2012. The amount included in financing receivables on the accompanying balance sheet as of December 31, 2012 represents the third year lease payment from the customer due two years after completion of training or July 2014; however, the amount was collected during the year ended December 31, 2013.

Following the final lease payment, ownership of the equipment transferred to the customer. Accordingly, the cost related to the above capital lease and other equipment acquired is included in cost of revenue as related revenue is recognized. The terms of the agreement with the customer also involve the sale of non-leased equipment and allow for additional billings related to installation, integration, and training, as well as future royalties related to usage of the equipment.

As of December 31, 2012, deposits received from this customer related to an equipment lease prior to the Company meeting the revenue recognition policies amounted to $210,000, and is included as unearned revenue in the accompanying balance sheets. Costs incurred related to the same customer contract prior to the Company meeting revenue recognition policies amounted to $200,000 as of December 31, 2012 and are included as customer contracts in progress in the accompanying balance sheets.

In accordance with Accounting for Multiple-Deliverable Revenue Arrangements (ASC 805), the significant deliverables qualify as separate units of accounting. In conjunction with the agreement, the customer can return the equipment if acceptance criteria is not met for a partial refund. ASC 805 states the amount of revenue allocable to the delivered unit or units of accounting is limited to the amount that is not contingent upon the delivery of additional items or meeting other specified performance conditions. As there was an amount of $200,000 contingent upon customer acceptance, revenue related to the customer agreement during the year ended December 31, 2012 was limited to approximately $298,000. All of the equipment under this agreement was delivered during the year ended December 31, 2012 and customer acceptance occurred in the first quarter of 2013, at which time deferred revenue in the amount of $210,000 was recognized as revenue and customer contracts in progress in the amount of $200,000 was recognized as cost of revenue.

F-45

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 13. - COMMITMENTS AND CONTINGENCIES (CONTINUED)

During the year ended December 31, 2013, revenue related to this customer represented approximately 79% of total revenue (96% - 2012).

NOTE 14. – SUBSEQUENT EVENTS

Subsequent to December 31, 2013, the Company raised approximately $362,000 from the sale of 10,345 Series B-1 preferred units at $35 per unit.

The Company amended the certificate of designation of the Series A Preferred with the effect of satisfying cumulative unpaid dividends through September 30, 2013 with common stock at the rate of one common share per $0.65 of dividends, and reducing the dividend rate to 10% from 18% prospectively as of October 1, 2013. As a result of the board of directors’ declaration of dividends in February 2014, $1,913,479 of cumulative dividends were satisfied by the issuance of 2,943,837 shares of common stock.

F-46

REVIEWED

FINANCIAL STATEMENTS

GYROTRON TECHNOLOGY, INC.

June 30, 2014

with

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

F-47

GYROTRON TECHNOLOGY, INC.

CONTENTS

	Page

Report of Independent Registered Public Accounting Firm		F-49

Financial Statements:
Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013		F-50
Statements of Operations for the six months ended June 30, 2014 and June 30, 2013 (unaudited)		F-51
Statements of Operations for the three months ended June 30, 2014 and June 30, 2013 (unaudited)		F-52
Statement of Changes in Stockholders’ Deficiency for the six months ended June 30, 2014 (unaudited)		F-53
Statement of Changes in Stockholders’ Deficiency for the six months ended June 30, 2013 (unaudited)		F-54
Statements of Cash Flows for the six months ended June 30, 2014 and June 30, 2013 (unaudited)		F-55

Notes to the Financial Statements		F-56

F-48

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Gyrotron Technology, Inc.

We have reviewed the accompanying balance sheet of Gyrotron Technology, Inc. as of June 30, 2014, the related statements of operations for the three month and six month periods ended June 30, 2014 and 2013, and the related statements of cash flows and changes in stockholders' deficiency for the six month periods ended June 30, 2014 and 2013. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements and Note 1 to the annual financial statements for the year ended December 31, 2013 not presented herein, the Company has suffered recurring losses from operations, has a net stockholders’ deficiency, and its current liabilities exceeds its current assets. This raises 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 to the respective financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the balance sheet of Gyrotron Technology as of December 31, 2013, and the related statements of operations, changes in stockholder's deficiency, and cash flows for the year then ended not presented herein; and in our report dated April 17, 2014, we expressed an unqualified opinion on those financial statements, including an explanatory paragraph concerning matters that raise substantial doubt about the Company’s ability to continue as a going concern. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 2013 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

/s/ FREED MAXICK CPAs, P.C.

Buffalo, New York

September 5, 2014

F-49

GYROTRON TECHNOLOGY, INC.

BALANCE SHEETS

			JUNE 30,			DECEMBER 31,
			2014			2013
			(Unaudited)
ASSETS
Current assets:
	Cash		$	49,397		$	60,082
	Accounts receivable-net			12,890			-
	Prepaid expenses and other current assets			16,740			25,347
	Loan receivable-director			-			8,973
	Loan receivable-officer			-			24,155
		Total current assets		79,027			118,557

	Machinery and equipment-net			48,418			89,476
	Patents-net			56,546			54,358
	Other assets			12,253			12,253
	Total assets		$	196,244		$	274,644

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
	Note payable		$	44,835		$	46,784
	Accounts payable			21,726			74,913
	Accrued expenses and other liabilities			16,123			9,257
	Accrued employee compensation			354,902			363,864
	Registration rights obligation			327,720			260,136
	Unearned revenue			12,000			-
		Total current liabilities		777,306			754,954

Commitments and contingencies (Note 11)				-			-

Stockholders' deficiency
	Preferred stock, 1,000,000 shares authorized, $0.001 par value
	Series A: 450,000 shares designated, 436,774 outstanding			437			437
	Series A-1: 125,000 shares designated, 61,910 outstanding			62			62
	Series B: 40,000 shares designated, 39,959 outstanding			40			40
	Series B-1: 80,000 shares designated, 32,737 outstanding (21,343 - 2013)			33			22
	Common stock, 25,000,000 shares authorized, $0.001 par value,
	15,222,024 shares issued (11,903,664-2013) and
	14,414,058 shares outstanding (11,095,698-2013)			15,222			11,904
	Additional paid-in capital			9,141,787			8,797,951
	Accumulated deficit			(9,347,940	)		(8,900,023	)
				(190,359	)		(89,607	)
	Treasury stock, 807,966 shares, at cost			(390,703	)		(390,703	)
		Total stockholders' deficiency		(581,062	)		(480,310	)

	Total liabilities and stockholders' deficiency		$	196,244		$	274,644

See accompanying notes.

F-50

GYROTRON TECHNOLOGY, INC.

STATEMENTS OF OPERATION

For the Six Months Ended June 30, (Unaudited)

	2014			2013

Revenues	$	93,045		$	225,000

Cost of revenues		28,075			212,221

Gross profit		64,970			12,779

Operating expenses:
Selling, general and administrative		400,733			279,980
Research and development		44,570			22,077
Total operating expenses		445,303			302,057

Operating loss		(380,333	)		(289,278	)

Other (expense) income:
Other income		-			4,526
Interest and penalties expense		-			(785	)
Registration rights obligation		(67,584	)		-

Net loss		(447,917	)		(285,537	)

Preferred stock dividends accumulated and warrants		(350,231	)		(430,172	)

Net loss attributable to common stockholders	$	(798,148	)	$	(715,709	)

Loss per common share-basic and diluted	$	0.06		$	0.06

Weighted average shares outstanding-basic and diluted		13,270,060			11,095,698

See accompanying notes.

F-51

GYROTRON TECHNOLOGY, INC.

STATEMENTS OF OPERATION

For the Three Months Ended June 30,

(Unaudited)

	2014			2013

Revenues	$	92,085		$	15,000

Cost of revenues		28,075			10,714

Gross profit		64,010			4,286

Operating expenses:
Selling, general and administrative		175,358			169,569
Research and development		16,435			10,342
Total operating expenses		191,793			179,911

Operating loss		(127,783	)		(175,625	)

Other (expense) income:
Other income		-			4,526
Registration rights obligation		(18,616	)		-

Net loss		(146,399	)		(171,099	)

Preferred stock dividends accumulated and warrants		(135,768	)		(195,166	)

Net loss attributable to common stockholders	$	(282,167	)	$	(366,265	)

Loss per common share-basic and diluted	$	0.02		$	0.03

Weighted average shares outstanding-basic and diluted	$	14,158,884		$	11,095,698

See accompanying notes.

F-52

GYROTRON TECHNOLOGY, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY

Six Months Ended June 30, 2014

(Unaudited)

	Preferred Series A				Preferred Series A-1				Preferred Series B				Preferred Series B-1				Common Stock				Additional Paid-in			Accumulated			Treasury
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Capital			Deficit			Stock			Total

Balance, December 31, 2013		436,774	$	437		61,910	$	62		39,959	$	40		21,343	$	22		11,903,664	$	11,904	$	8,797,951		$	(8,900,023	)	$	(390,703	)	$	(480,310	)

Issuance of Series B-1 convertible preferred stock, 10% cumulative dividend		-		-		-		-		-		-		10,776		11		-		-		377,124			-			-			377,135

Issuance of common shares as settlement for dividend on Series A preferred		-		-		-		-		-		-		-		-		2,943,837		2,943		(2,943	)		-			-			-

Issuance of common shares as settlement for dividend on Series A-1 preferred		-		-		-		-		-		-		-		-		374,523		375		(375	)		-			-			-

Reinvestment of Series B-1
preferred stock dividends		-		-		-		-		-		-		618		-		-		-		-			-			-			-

Declaration of Series B-1
preferred stock dividends		-		-		-		-		-		-		-		-		-		-		(29,970	)		-			-			(29,970	)

Net loss		-		-		-		-		-		-		-		-		-		-		-			(447,917	)		-			(447,917	)

Balance, June 30, 2014		436,774	$	437		61,910	$	62		39,959	$	40		32,737	$	33		15,222,024	$	15,222	$	9,141,787		$	(9,347,940	)	$	(390,703	)	$	(581,062	)

See accompanying notes.

F-53

GYROTRON TECHNOLOGY, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY

Six Months Ended June 30, 2013

(Unaudited)

	Preferred Series A				Preferred Series A-1				Preferred Series B					Preferred Series B-1				Common Stock				Additional Paid-in			Accumulated			Treasury
	Shares		Amount		Shares		Amount		Shares			Amount		Shares		Amount		Shares		Amount		Capital			Deficit			Stock			Total

Balance, December 31, 2012		436,774	$	437		61,910	$	62		39,927		$	40		588	$	1		11,903,664	$	11,904	$	8,084,140		$	(8,281,143	)	$	(390,703	)	$	(575,262	)

Settlement of liablility with Series B preferred, 10% cumulative mdividend		-		-		-		-		332			-		-		-		-		-		9,986			-			-			9,986

Issuance of Series B-1 convertible preferred stock, 10% cumulative dividend		-		-		-		-		-			-		6,573		7						230,033			-			-			230,040

Series B-1 registration
rights obligation		-		-		-		-		-			-		-		-		-		-		(4,400	)		-			-			(4,400	)

Conversion of Series B
for Series B-1 preferred		-		-		-		-		(300	)		-		255		-		-		-		-			-			-			-

Reinvestment of Series B-1
preferred stock dividends		-		-		-		-		-			-		293		-		-		-		-			-			-			-

Net loss		-		-		-		-		-			-		-		-		-		-		-			(285,537	)		-			(285,537	)

Balance, June 30, 2013		436,774	$	437		61,910	$	62		39,959		$	40		7,709	$	8		11,903,664	$	11,904	$	8,319,759		$	(8,566,680	)	$	(390,703	)	$	(625,173	)

See accompanying notes.

F-54

GYROTRON TECHNOLOGY, INC.

STATEMENT OF CASH FLOW

For the Six Month Ended June 30,

(Unaudited)

	2014			2013

Cash flows from operating activities:
Net loss	$	(447,917	)	$	(285,537	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		46,054			45,937
(Increase) decrease in assets:
Accounts receivable		(12,890	)		(32,205	)
Loans receivable, officer		24,155			-
Customer contracts in progress		-			200,000
Prepaid expenses and other current assets		8,607			(7,850	)
Financing receivable		-			90,000
Increase (decrease) in liabilities:
Accounts payable		(52,214	)		64,351
Accrued expenses and other liabilities		6,866			(67,134	)
Accrued employee compensation		(8,962	)		37,181
Registration rights obligation		67,584			-
Unearned revenue		12,000			(180,000	)
Net cash used by operating activities		(356,717	)		(135,257	)

Cash flows from investing activities:
Payments for patents		(7,184	)		-
Net cash used by investing activities		(7,184	)		-

Cash flows from financing activities:
Repayments of note payable		(1,949	)		(1,299	)
Proceeds from sale of preferred stock		377,135			210,010
Repayments of capital lease liability		-			(85,000	)
Dividends paid on Series B Preferred		(29,970	)		-
Proceeds from repayment of note receivable - director		8,000			-
Net proceeds from repayment of advances from shareholders		-			3,327
Net cash provided by financing activities		353,216			127,038

Net decrease in cash		(10,685	)		(8,219	)

Cash - beginning of period		60,082			8,219

Cash - end of period	$	49,397		$	-

Supplemental disclosure of non-cash financing activities:
Common stock issued in payment of accumulated and declared dividends on Series A Preferred	$	1,913,479		$	-
Common stock issued in payment of accumulated and declared dividends on Series A-1 Preferred	$	243,440		$	-
Series B-1 preferred dividends paid by issuance of Series B-1 shares	$	21,625		$	10,254
Registration rights obligation offseting additional paid-in capital	$	-		$	4,400
Settlement of liability with issuance of Series B Preferred	$	-		$	9,986
Conversion of advances into Series B-1 Preferred	$	-		$	20,030

See accompanying notes.

F-55

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – The accompanying unaudited financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to fairly state the financial position, results of operations and cash flows with respect to the interim financial statements have been included. Operating results for the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The financial statements should be read in conjunction with the 2013 audited financial statements and the notes thereto.

Liquidity and Management Plans - As shown in the accompanying financial statements, the Company incurred a net loss for the three and six months ended June 30, 2014 of $146,399 and $447,917, respectively, and had negative working capital of $698,279 and stockholders' deficiency of $581,062 at June 30, 2014. Further, cash used in operating activities during the six months ended June 30, 2014 amounted to $356,717. The Company is expected to continue to incur losses throughout the remainder of 2014.

The Company's management and Board of Directors have obtained additional funding after June 30, 2014 (see Note 12) and intend to obtain additional funding for general working capital needs and professional fees through private placement of its equity securities. The Company will continually evaluate funding options including additional offerings of its securities to investors. There can be no assurance as to the availability or terms upon which such financing alternatives might be available.

Machinery and Equipment - Machinery and equipment are stated at cost net of accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets using straight-line and accelerated methods for both financial statement and income tax reporting purposes. Maintenance and repairs are charged to operations as incurred; significant betterments are capitalized. Depreciation expense amounted to $20,529 for each of the three months ended June 30, 2014 and 2013 and $41,058 for each of the six months ended June 30, 2014 and 2013, and is included within operating expenses in the accompanying statements of operations.

F-56

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Impairment of Long-Lived Assets - Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future cash flows of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flow or appraised values, depending on the nature of the assets. There was no impairment of long-lived assets during the six months ended June 30, 2014 and 2013.

Income Taxes - The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year and the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized.

Share-Based Payments - The Company accounts for stock option awards granted in accordance with Share-Based Payments Topic of the FASB Accounting Standards Codification (ASC) 718. Under ASC 718, compensation expense related to stock based payments is recorded over the requisite service period based on the grant date fair value of the awards. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards, including the option's expected term and the price volatility of the underlying stock.

Treasury Stock - The Company accounts for treasury stock under the cost method, which requires the Company to record the shares as a reduction to equity at the purchased amount.

Multiple-Element Arrangements -The Company enters into multiple-element contractual arrangements with customers including the technology license, delivery of equipment, installation, consulting, testing and training. Elements under such contracts are considered separate units of accounting if both of the following criteria are met: i) the delivered item(s) have value to the customer on a standalone basis and ii) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance is considered probable and substantially in control of the Company. For deliverables not meeting the criteria for being a separate unit of accounting, the appropriate allocation of arrangement consideration and recognition of revenue is then determined for the combined unit of accounting. Revenue is allocated amongst deliverables in a multiple-element revenue arrangement according to fair value with an allocation based on selling price. The selling price used for each deliverable will be based on vendor-specific objective evidence ("VSOE") if available, third-party evidence if VSOE is not available, or management's estimate of an element's stand-alone selling price if neither VSOE nor third-party evidence is available. The selling price is allocated amongst deliverables based upon each deliverable's relative selling price to total revenue consideration. The amount allocable to the delivered unit or units of accounting is limited to the amount that is not contingent upon the delivery of additional items or meeting other specified performance conditions.

F-57

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Sales-Type Leases - The Company provides lease financing through sales-type leases. Leases qualify as sales-type leases using the present value of minimum lease payments classification criteria. The Company believes that the sales-type lease contains only normal collection risk. Accordingly, the Company records the fair value of equipment as revenue, the cost of equipment as cost of revenue and the minimum lease payments plus the estimated residual value as finance receivables.

Research and Development Expenses - Research and development expenses are charged to operations as incurred.

As of June 30, 2014, there were the following common shares underlying securities that could potentially dilute future earnings:

Preferred A stock	1,637,903
Preferred A-1 stock		232,163
Preferred B stock		1,198,770
Preferred B warrants		1,044,864
Preferred B-1 stock		1,636,847
Preferred B-1 warrants		1,543,300
Other warrants		60,000
		7,353,847

Accounting Estimates - The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results may differ from estimated amounts.

The estimated fair value of note payable is summarized as follows:

June 30, 2014				December 31, 2013
Carrying		Estimated		Carrying		Estimated
Amount		Fair Value		Amount		Fair Value

$	44,835	$	41,000	$	46,784	$	40,000

F-58

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Reclassification – Certain balances in 2013 have been reclassified to conform with the 2014 financial statement presentation.

NOTE 2. - LOAN RECEIVABLE, OFFICER

The Company had a non-interest bearing loan to an officer that was due on demand in the amount of $24,155. During the six months ended June 30, 2014, the Company forgave the loan. The expense is included in selling, general and administrative expenses on the accompanying statements of operations for the six months ended June 30, 2014.

NOTE 3. - MACHINERY AND EQUIPMENT

The components of machinery and equipment are as follows:

	Estimated	June 30,			December 31,
	Useful Life	2014			2013

Machinery and equipment	5 to 7 years	$	882,338		$	882,338
Furniture and fixtures	5 to 7 years		25,874			25,874
			908,212			908,212
Less accumulated depreciation			(859,794	)		(818,736	)

		$	48,418		$	89,476

NOTE 4. - PATENTS

The components of patents are as follows:

	June 30,			December 31,
	2014			2013

Patents	$	153,607		$	146,423
Less accumulated amortization		(97,061	)		(92,065	)

	$	56,546		$	54,358

The Company amortizes patent costs on a straight-line basis over the expected period of benefit of the related capitalized expenditures. Amortization expense amounted to $2,498 and $2,440 for the three months ended June 30, 2014 and 2013, respectively, and $4,996 and $4,880 for the six months ended June 30, 2014 and 2013, respectively and is included in operating expenses on the accompanying statements of operations. Excluding patents that have not been issued as of June 30, 2014, amortization expense for the next five years is expected to be approximately $10,000 per year for 2014 through 2016, approximately $6,000 in 2017, and approximately $14,000 thereafter.

F-59

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 5. - NOTE PAYABLE

The Company has a note payable due to Ben Franklin Technology Center of Southeastern Pennsylvania (the Center). The terms of the note stated the Company is required to pay a maximum of 150% times the $50,000 borrowed amount. The rate of repayment is 3% of all Company revenues. Payments are due within thirty days after the end of each quarter. Amounts due which are not paid within 10 days after the due date bear interest at 15% per year. The note payable is secured by substantially all assets of the Company. In accordance with the loan agreement, the Company is required to comply with various terms and conditions. As of June 30, 2014 and December 31, 2013 the Company was not in compliance with certain provisions. As a result, the Center has the option to demand payment of the entire amount outstanding immediately and, if not cured by the Company, can charge interest at 15% per year on the entire balance. Accordingly, the balance has been classified as current in the accompanying balance sheets.

NOTE 6. - SERIES A & A-1 CONVERTIBLE PREFERRED STOCK

The Board of Directors has designated 450,000 shares of convertible Series A par value $.001 preferred stock and 125,000 shares of convertible Series A-1 par value $.001 preferred stock. Each share of Series A and A-1 preferred stock shall has a liquidation preference equal to $6 per share plus any accrued or declared and unpaid dividends owed to holders of shares. In the event of a liquidation, winding up, or dissolution of the Company, no distribution shall be made to holders of shares of common stock ranking junior to Series A and A-1 preferred stock. Series A and A-1 preferred stock rank equal for all purposes.

The holders of preferred stock have the right to one vote for each share of common stock into which such share of preferred stock could then be converted.

In January 2014, the Company amended the certificate of designation of the Series A Preferred with the effect of satisfying cumulative unpaid dividends through September 30, 2013 with common stock at the rate of one common share per $0.65 of dividends, and reducing the dividend rate to 10% from 18% beginning October 1, 2013. As a result of the board of directors’ declaration of dividends in February 2014, $1,913,479 of cumulative dividends were satisfied with 2,943,837 shares of common stock. These shares were issuable at June 30, 2014 and a portion of them have not been issued for administrative reasons. Accordingly, the presentation in these financial statements considers these shares as effectively issued.

In May 2014, the Company amended the certificate of designation of the Series A-1 Preferred with the effect of satisfying cumulative unpaid dividends through December 31, 2013 with common stock at the rate of one common share per $0.65 of dividends, and reducing the dividend rate to 10% from 18% beginning January 1, 2014. As a result of the board of directors’ declaration of dividends in June 2014, $243,440 of cumulative dividends were satisfied with 374,523 shares of common stock. These shares were issuable at June 30, 2014 and had not been issued for administrative reasons. Accordingly, the presentation in these financial statements considers these shares as effectively issued.

During the three months ended June 30, 2014 and 2013, there were $117,929 and $65,516, respectively, of preferred stock dividends accumulated for Series A preferred stock. During the six months ended June 30, 2014 and 2013, there were $131,032 and $235,858, respectively, of preferred stock dividends accumulated for Series A preferred stock. At June 30, 2014 and December 31, 2013, there were cumulative unpaid dividends of $196,636 and $1,979,171, respectively, for Series A preferred stock.

F-60

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 6. - SERIES A & A-1 CONVERTIBLE PREFERRED STOCK (CONTINUED)

During the three months ended June 30, 2014 and 2013, there were $9,287 and $16,716 of preferred stock dividends accumulated for Series A-1 preferred stock. During the six months ended June 30, 2014 and 2013, there were $18,573 and $33,431 of preferred stock dividends accumulated for Series A-1 preferred stock. At June 30, 2014 and December 31, 2013, there were cumulative unpaid dividends of $18,573 and $243,440, respectively, for Series A-1 preferred stock.

Prior to the amendments described above, on or after April 30, 2012, a holder could have requested the Company to repurchase on the date which is 31 calendar days thereafter, all shares of Series A or A-1 preferred stock held by the holder for cash equal to $6 per share plus accrued and declared but unpaid dividends as of the repurchase date. The Company had the option whether or not to agree to the repurchase. If the Company had failed to repurchase the shares, the majority holders of Series A and A-1 stock would have had the right to elect the majority of the board of directors. No such holder at any time requested the Company repurchase all shares of Series A or A-1 preferred. Majority holders did not exercise the right to elect the majority of the board of directors.

After giving effect to the aforementioned amendments, on or after May 31, 2015, a holder of the Series A or A-1 preferred stock can request the Company repurchase on the date which is 30 calendar days thereafter, all shares of Series A or A-1 preferred stock held by the holder for cash equal to $6 per share plus accrued and unpaid dividends as of the repurchase date. The Company has the option whether or not to agree to the repurchase. In the event the Company fails to repurchase, or, after December 31, 2014, payment of dividends on a series of preferred stock is four quarters in arrears, the dividend rate on that series will increase to 18% and the majority holders of said series together with holders of any series of equal seniority, will have the right to elect the majority of the board of directors until such failure or arrearage is cured. At June 30, 2014 dividends on the Series A and A-1 were three and two quarters in arrears, respectively.

Under both the Series A and Series A-1 certificates of designation, as a result of a prior default, the holder had the right, at any time, to convert each share of preferred stock into 3.53 (the conversion ratio) shares of common stock , or a conversion price of $1.70. The amendment to the certificate of designation of the Series A preferred stock in the first quarter of 2014 and the amendment to the certificate of designation of the Series A-1 preferred stock in the second quarter of 2014 reduced the conversion price to $1.60, resulting in each share being convertible into 3.75 shares of common stock. The conversion ratio and price are subject to adjustment when the Company declares or pays dividends, makes a distribution on common stock payable in common shares, or affects a subdivision, split, consolidation, combination, or reverse split of outstanding common shares into a greater or lesser number of common shares. Due to the uncertainty surrounding redemption as a result of the conversion feature, the Series A and A-1 preferred stock is classified as equity in the accompanying financial statements.

The Company, at its option, may require conversion of all or any pro-rata portion of shares of Series A or A-1 preferred stock outstanding into common stock at the conversion price if at any time i) the common stock is listed for trading on a national securities exchange, an inter-dealer automated quotation system, or over the counter bulletin board, ii) the Company shall have prepared and filed with the Securities and Exchange Commission a registration statement covering the shares of common stock to be issued upon due conversion of preferred stock, and such registration statement shall have been declared effective under the Securities Act of 1933, as amended, and continues to be effective, iii) during any preceding period of twenty consecutive trading days (while i) and ii) are fulfilled) the closing price equals or exceeds 150% of the conversion price, and iv) the Company is current on its dividends for that Series.

F-61

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 6. - SERIES A & A-1 CONVERTIBLE PREFERRED STOCK (CONTINUED)

Registration Rights - In connection with the Series A-1 preferred stock subscription agreements, the Company agreed to pay the various subscribers 1/2% of the aggregate purchase price of shares acquired each month beginning on various dates between December 1, 2009 and July 1, 2010 until i) the Company has prepared and filed a registration statement with the Securities and Exchange Commission which has been declared effective under the Securities Act or the holder is then able to sell the underlying common shares under Rule 144 promulgated pursuant to the Securities Act and ii) the Company has obtained a ticker symbol and common shares are eligible to trade on the OTCBB. At June 30, 2014 and December 31, 2013, the estimated liability amounted to $110,716 and $99,851, respectively, and the resulting change for the three and six months ended June 30, 2014 amounting to $2,791 and $11,165, respectively, is included as other expense in the accompanying statements of operations. The arrangement provides for no limitation as to the maximum potential consideration to be transferred.

NOTE 7. - SERIES B CONVERTIBLE PREFERRED STOCK

The Board of Directors has designated 40,000 shares of 10% convertible Series B par value $.001 preferred stock. During the six months ended June 30, 2013, the Company issued 332 shares of Series B preferred with no warrants for settlement of approximately $10,000 services previously rendered, and a director exchanged 300 shares of Series B preferred for 255 shares of Series B-1 preferred.

At June 30, 2014 and December 31, 2013, there were cumulative unpaid dividends of $150,071 and $120,102, respectively, for the Series B preferred stock. On June 30, 2014 the Company paid one quarter of accrued dividends to the Series B holders.

Each share of Series B preferred stock has a liquidation preference equal to $30 per share plus any accrued or declared and unpaid dividends owed to holders of shares. In the event of a liquidation, winding up, or dissolution of the Company, the Series B ranks senior to the common stock and junior to the Series A and A-1 preferred stock.

The holder of Series B preferred stock has the right, at any time, to convert each share into common stock at a conversion ratio of one share of Series B preferred stock to 30 shares of common stock conversion price of $1 per common share. The conversion ratio is subject to adjustment when the Company declares or pays dividends, makes a distribution on common stock payable in common shares, or affects a subdivision, split, consolidation, combination, or reverse split of outstanding common shares into a greater or lesser number of common shares. The original conversion price of $3 per common share was adjusted to $1 as a result of a stock split during 2012. The Series B holder would be entitled to receive the number of common stock or securities or property that such holder would have owned or been entitled to receive upon the happening of such event had the Series B preferred been converted immediately prior to the record or effective date of such event.

F-62

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 7. - SERIES B CONVERTIBLE PREFERRED STOCK (CONTINUED)

The Company, at its option, may require conversion of all or any pro-rata portion of shares of Series B preferred stock outstanding into common stock if at any time i) the common stock is listed for trading on a national securities exchange, an inter-dealer automated quotation system, or over the counter bulletin board, ii) the Company shall have prepared and filed with the Securities and Exchange Commission a registration statement covering the shares of common stock to be issued upon due conversion of preferred stock, and such registration statement shall have been declared effective under the Securities Act of 1933, iii) during any preceding period of twenty consecutive trading days (while i) and ii) are fulfilled) the closing price equals or exceeds 166 2/3% of the conversion price then in effect, and iv) the Company is current on its dividends on the Series B preferred stock. The holders of Series B preferred stock have the right to one vote for each share of common stock into which such share of preferred stock could then be converted.

On or after May 31, 2016, a holder can request the Company repurchase on the date which is 30 calendar days thereafter, all shares of Series B preferred stock held by the holder for cash equal to $30 per share plus accrued and unpaid dividends as of the repurchase date. The Company has the option whether or not to agree to the repurchase. In the event the Company fails to repurchase or payment of Series B dividends is six quarters in arrears, the post-split conversion price shall decrease to $0.85, and in addition, until such failure or arrearage is cured, the dividend rate will increase to 18% and the majority holders of Series B preferred stock have the right to elect the majority of the board of directors, At June 30, 2014 dividends on the Series B were five quarters in arrears.

Warrants - In connection with the Series B preferred stock subscription agreements, purchasers’ acquired ten detachable warrants for each share of purchased Series B preferred. Each warrant entitles the holder to acquire three shares of $.001 par value common stock at an exercise price of $1 per common share, and expires on the earlier of March 31, 2015 or such date after June 30, 2012 at which i) the common stock is listed on the OTCBB and ii) the shares to be acquired by exercise of the warrants have been registered under the Securities Act of 1933, for 60 consecutive days. If the Company subdivides or combines its common stock, issues or pays the holders of common stock, or take a record of the holders of common stock for the purpose of entitling them to receive a dividend payable in or distribution of common stock, the number of shares of common stock purchasable upon exercise of the warrant and the warrant price shall be proportionally adjusted.

As of June 30, 2014 and December 31, 2013, the estimated liability amounted to $181,835 and $150,489, respectively, and the change in the estimated liability for the three and six months ended June 30, 2014 amounting to $7,836 and $31,345, respectively, is included in other expense of the accompanying statements of operations. The arrangement provides for no limitation as to the maximum potential consideration to be transferred.

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GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 8. - SERIES B-1 CONVERTIBLE PREFERRED STOCK

In November 2012, the Board of Directors designated 20,000 shares of 10% convertible Series B-1 par value $.001 preferred stock. In connection therewith, for each $35 of consideration, the Company offered one unit consisting of one share of Series B-1 convertible preferred stock and 50 common stock warrants exercisable at $1.00 per share. In March 2014, the certificate of designation was amended to increase in the shares designated to 80,000. During the six months ended June 30, 2014 and 2013 the Company issued 10,776 and 6,573 shares of Series B-1 preferred and 538,800 and 328,650 warrants for proceeds of $377,135 and $230,040, respectively. In addition, during the six months ended June 30, 2013, one stockholder exchanged 300 shares of Series B preferred for 255 shares of Series B-1 preferred.

Commencing December 31, 2012, cumulative dividends on each share accrue at a rate of 10% of the $35 liquidation amount. Dividends are payable quarterly in cash when and if declared by the Board of Directors. The dividends accrue whether or not they have been declared by the board of directors and whether or not there are profits or other funds legally available. Through March 31, 2014, in the event that dividends have not been declared by the board of directors prior to the relevant dividend payment date, such dividends shall be payable in shares of Series B-1 preferred stock. During the three months ended June 30, 2013 and six months ended June 30, 2014 and 2013, dividends of $6,531, $21,625 and $10,254, respectively, were paid by the issuance of 187, 618 and 293 shares, respectively, of Series B-1 preferred. During the three months ended June 30, 2014, there were $28,428 of preferred stock dividends accumulated for Series B-1 preferred stock not paid by the issuance of Series B-1 preferred.

The conversion ratio is subject to adjustment when the Company declares or pays dividends, makes a distribution on common stock payable in common shares, or affects a subdivision, split, consolidation, combination, or reverse split of outstanding common shares into a greater or lesser number of common shares. The Series B-1 holder is entitled to receive the number of common stock or securities or property that such holder would have owned or been entitled to receive upon the happening of such event had the Series B-1 preferred been converted immediately prior to the record or effective date of such event. The conversion price of $0.70 is adjusted based on changes in the conversion ratio.

The Company, at its option, may require conversion of all or any prorata portion of shares of Series B-1 preferred stock outstanding into common stock if at any time i) the common stock is listed for trading on a national securities exchange, an inter-dealer automated quotation system, or over the counter bulletin board, ii) the Company shall have prepared and filed with the Securities and Exchange Commission a registration statement covering the shares of common stock to be issued upon due conversion of preferred stock, and such registration statement shall have been declared effective under the Securities Act of 1933, iii) during any preceding period of twenty consecutive trading days (while i) and ii) are fulfilled) the closing price equals or exceeds 157% of the conversion price then in effect, and iv) the Company is current on its dividends on the Series B-1 preferred stock. The holders of Series B-1 preferred stock have the right to one vote for each share of common stock into which such share of preferred stock could then be converted.

F-64

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 8. - SERIES B-1 CONVERTIBLE PREFERRED STOCK (CONTINUED)

On or after August 31, 2017, a holder can request the Company repurchase on the date which is 30 calendar days thereafter, all shares of Series B-1 preferred stock held by the holder for cash equal to $35 per share plus accrued and unpaid dividends as of the repurchase date. The Company has the option whether or not to agree to the repurchase. In the event the Company fails to repurchase or payment of Series B-1 dividends is six quarters in arrears, the post-split conversion price shall decrease to $0.595, and in addition, until such failure or arrearage is cured, the dividend rate will increase to 18% and the majority holders of Series B-1 preferred stock have the right to elect the majority of the board of directors, At June 30, 2014 dividends on the Series B-1 were one quarter in arrears.

Warrants - Each warrant issued together with the Series B-1 preferred entitles the holder to acquire one share of $.001 par value common stock at a post-split exercise price of $1 per common share, and expires on the earlier of March 31, 2016 or such date after September 30, 2013 at which i) the common stock is listed on the OTCBB and ii) the shares to be acquired by exercise of the warrants have been registered under the Securities Act of 1933, for 60 consecutive days. If the Company subdivides or combines its common stock, issues or pays the holders of common stock, or take a record of the holders of common stock for the purpose of entitling them to receive a dividend payable in or distribution of common stock, the number of shares of common stock purchasable upon exercise of the warrant and the warrant price shall be proportionally adjusted.

Because the warrants were issued in conjunction with the Series B-1 preferred stock, the proceeds of the offering are allocated between the Series B-1 preferred and the warrants based on the relative fair value of each instrument. The assumed value of the Series B-1 preferred was determined based on the fair value of the underlying common shares and the fair value of the warrants was valued using the Black-Scholes option pricing model. As of June 30, 2014 and December 31, 2013, the gross proceeds from sales of the Series B-1 preferred and warrants amounted to $1,080,240 and $703,105, respectively, of which $141,145 and $95,828 were allocated to the warrants, respectively. The amount allocated to warrants represents an additional dividend on the preferred shares and, due to the Company's accumulated deficit, the allocation results in an increase and decrease to additional paid-in capital and as such, there is no impact on the accompanying financial statements. During the six months ended June 30, 2014 and 2013, $45,317 and $43,033 were reflected as a dividend as a result of these warrants, respectively.

Registration rights - In connection with the Series B-1 preferred stock subscription agreement, the Company agreed to pay subscribers 1/2% of the liquidation preference of shares held by subscribers each month on beginning on dates varying between July 1, 2013 and October 1, 2014 until i) the common shares are eligible for trading on the OTCBB and ii) the common shares issuable upon conversion of the shares shall be registered under the Securities Act of 1933 or the subscriber is able to sell such common shares under Rule 144. Because the transfer of consideration is probable and reasonably estimable at inception of the arrangement, the contingent liability related to registration rights will be included in the allocation of proceeds in accordance with GAAP.

During the six months ended June 30, 2014 and 2013 gross proceeds from Series B-1 preferred amounted to $377,135 and $230,040, of which $0 and $4,400 were allocated to the registration rights as a liability and a reduction of additional paid-in capital on the accompanying balance sheet. As of June 30, 2014 and December 31, 2013, the estimated liability amounted to $35,196 and $9,796, respectively, and the change in the estimated liability for the three months and six months ended June 30, 2014 amounting to $25,074 is included in other expense on the accompanying statement of operations. The arrangement provides for no limitation as to the maximum potential consideration to be transferred.

F-65

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 8. - SERIES B-1 CONVERTIBLE PREFERRED STOCK (CONTINUED)

Beneficial Conversion Feature - The effective conversion price of the Series B-1 was at a price lower than the market price of the common stock at the date of the issuance, resulting in a non-cash beneficial conversion feature for the six months ended June 30, 2014 and 2013 of $45,317 and $47,433, respectively. As there is an accumulated deficit, this beneficial conversion feature was immediately recognized as additional paid-in capital. The amount allocated to beneficial conversion feature represents an additional dividend on the preferred shares and, due to the Company’s accumulated deficit, the allocation results in an increase and decrease to additional paid-in capital and as such, there is no impact on the accompanying financial statements.

NOTE 9. - COMMON STOCK

The following is a summary of warrants outstanding and exercisable at June 30, 2014 and 2013 and activity during the six months then ended:

	2014				2013
			Weighted				Weighted
			Average				Average
			Exercise				Exercise
	Warrants		Price		Warrants		Price

Outstanding at January 1,		2,109,364	$	0.99		1,073,464	$	1.00

Granted during 6 months ended June 30,		538,800	$	1.00		328,650	$	1.00

Outstanding at June 30,		2,648,164	$	0.99		1,402,114	$	1.00

Exercisable at June 30,		2,648,164	$	0.99		1,402,114	$	1.00

Weighted average months remaining				16.94				24.06

See Note 7 – Series B Convertible Preferred Stock and Note 8 – Series B-1 Convertible Preferred Stock related to warrants granted during the six months ended June 30, 2014 and 2013. In addition, the Company issued 60,000 warrants to a consultant in October 2013 vesting immediately with an expiration date in October 2018 and an exercise price of $0.75 per share of underlying common stock. The Company recorded $25,142 as a prepaid expense and additional paid-in capital based on the fair value of the warrants granted using the Black-Scholes option pricing model and amortized into selling, general and administrative expenses as services were rendered.

F-66

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS

NOTE 10. - STOCK BASED COMPENSATION

NOTE 11. - COMMITMENTS AND CONTINGENCIES

Leases - The Company leases office and warehouse space under an operating lease which expires on July 31, 2015. Rent expense for the six months ended June 30, 2014 and 2013 amounted to $50,248 and $48,670 and the three months ended June 30, 2014 and 2013 amounted to $25,123 and $24,335, respectively.

Aggregate future minimum lease payments under the non-cancelable operating lease, including annual rent adjustments for direct expenses such as direct costs of operation, maintenance, and repairs are $53,129 for the remainder of 2014 and $62,657 for 2015. The Company has made a $12,253 security deposit included within other assets in the accompanying balance sheets as of June 30, 2014 and December 31, 2013.

Revenue Arrangements - During 2011, the Company leased equipment from vendors under a capital lease for 3 years and entered into an agreement to lease both pieces of equipment to a customer. Following the final lease payment, ownership of the equipment transferred to the customer. Accordingly, the cost related to the above capital lease and other equipment acquired is included in cost of revenue as related revenue is recognized. The terms of the agreement with the customer also involve the sale of non-leased equipment and allow for additional billings related to installation, integration, and training, as well as royalties related to usage of the equipment.

All of the equipment under this agreement was delivered during the year ended December 31, 2012 and customer acceptance occurred in the first quarter of 2013, at which time deferred revenue in the amount of $210,000 was recognized as revenue and customer contracts in progress in the amount of $200,000 was recognized as cost of revenue.

F-67

GYROTRON TECHNOLOGY, INC.

NOTES TO THE FINANCIAL STATEMENTS