STOCKHOLDERS' EQUITY:

Series B Preferred stock:

July

2014,

the Company had

200

shares of Series B redeemable convertible Preferred stock outstanding with a par value of

$0.01

per share, convertible at the option of the holder at

$2.00

per share, with dividends accrued and payable at

2.5%

per quarter. The Series B Preferred stock is mandatorily redeemable at

$2.00

per share by the Company

three

years after issuance and accordingly was classified as a liability. The

200

shares have reached their maturity date, but due to the cash constraints of the Company have not been redeemed.

During the years ended

June

30,

2016

and

2015,

the Company declared dividends of

$2,000

and

$2,000

respectively. During the

three

and

six

months ended

December

31,

2016,

the Company declared dividends of

$500

and

$1,000,

respectively. At

December

31,

2016,

accrued dividends payable are

$11,000.

The dividends are classified as a component of operations as the Series B Preferred stock is presented as a liability in these financial statements. For the

three

and

six

months ended

December

31,

2015

these amounts were presented differently but the

December

31,

2015

financial statements were revised even though such revision previously was and continues to be immaterial to the prior year financial statements.

Common stock:

Holders of common stock are entitled to

one

vote per share on all matters to be voted on by common stockholders. In the event of liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share in all assets remaining after liabilities have been paid in full or set aside and the rights of any outstanding preferred stock have been satisfied. Common stock has no preemptive, redemption or conversion rights. The rights of holders of common stock are subject to, and

may

be adversely affected by, the rights of the holders of any outstanding series of preferred stock or any series of preferred stock the Company

may

designate in the future.

Centerpoint holds

704,309

shares of the Company’s common stock. These shares of the Company’s common stock held by Centerpoint are for the benefit of its shareholders without any beneficial interest. The Company accounts for these shares similar to treasury stock.

During the

six

months ended

December

31,

2016,

the Company issued

23,687

shares of the Company’s common stock at prices ranging from

$0.75

$1.02

per share for services valued at

$19,507,

in the aggregate, to consultants and employees.

During the

six

months ended

December

31,

2016,

the Company issued

10,000

shares of the Company’s restricted common stock upon receipt of its subscription receivable of

$7,500

for the exercise of

10,000

warrants.

During the

six

months ended

December

31,

2016,

the Company entered into subscription agreements to sell units for

$0.75

per unit, with each unit consisting of

one

share of the Company’s restricted common stock and

one

warrant to purchase

one

half of a share of the Company’s restricted common stock for

$1.00

per share until

December

31,

2017

and pursuant thereto, the Company issued

140,000

units for total proceeds of

$105,000,

net proceeds of

$103,500

after commissions. The Company allocated the proceeds from the shares and the warrants based upon their relative fair values, using the share price on the day each of the subscription agreements were entered into and the fair value of the warrants, which was determined to be

$0.05

per warrant. As a result,

$2,968

was allocated to the warrants and

$102,032

was allocated to the shares, and both were recorded as additional paid in capital.

During the

six

months ended

December

31,

2016,

the Company sold

30,467

shares of the Company’s common stock for

$0.75

per share for total proceeds of

$22,850.

During the

six

months ended

December

31,

2016,

a consultant elected to convert

$6,008

of deferred compensation into

7,152

shares of the Company’s common stock at a conversion rate of

$0.84

per share.

Warrants:

As of

December

31,

2016,

the Company had approximately

8.4

million warrants outstanding, with exercise prices from

$0.75

$3.00

and expiring on various dates through

December

31,

2021.

The weighted-average exercise price for the outstanding warrants is

$1.26,

and the weighted-average remaining contractual life as of

December

31,

2016

3.8

years.

During the

six

months ended

December

31,

2016,

warrants to purchase

722,319

shares of common stock of the Company at prices between

$0.75

per share expired.

June

30,

2016

the Company had a subscription agreement for the exercise of

10,000

warrants at an exercise price of

$0.75,

resulting in a subscription receivable of

$7,500.

During the

six

months ended

December

31,

2016,

the received the subscription receivable of

$7,500

and the Company issued

10,000

shares of the Company’s common stock in satisfaction of the warrant exercise.

During the

six

months ended

December

31,

2016,

Smith and a consultant each purchased

40,000

warrants at an exercise price of

$1.00,

with expiry dates of

December

31,

2021.

Smith and the consultant utilized deferred compensation of

$2,000

each to purchase the warrants.

During the

six

months ended

December

31,

2016,

a consultant was issued

25,000

warrants at

$0.90,

expiring on

December

31,

2019

in exchange for services valued at

$1,250.

During the

six

months ended

December

31,

2016,

the Company entered into subscription agreements to sell units for

$0.75

per unit, with each unit consisting of

one

share of the Company’s restricted common stock and

one

warrant to purchase

one

half of a share of the Company’s restricted common stock for

$1.00

per share until

December

31,

2017

and pursuant thereto, the Company issued

140,000

units for gross proceeds of

$105,000.

The Company allocated the proceeds from the shares and the warrants based upon their relative fair values, using the share price on the day each of the subscription agreements were entered into and the fair value of the warrants, which was determined to be

$0.05

per warrant. As a result,

$2,968

was allocated to the warrants and

$102,032

was allocated to the shares, and both were recorded as additional paid in capital.

During the

six

months ended

December

31,

2016,

the Company received an interest bearing, secured promissory note for

$40,000

from Bassani as consideration to purchase warrants to purchase

800,000

shares of the Company’s restricted common stock, which warrants are exercisable at

$1.00

and have expiry dates of

December

31,

2021

(“Bassani Warrant”). The promissory note bears interest at

per annum, is secured by a perfected security interest in the Bassani Warrant, and is payable on

November

15,

2017.

Stock options:

The Company’s

2006

Consolidated Incentive Plan, as amended (the

“2006

Plan”), provides for the issuance of options (and/or other securities) to purchase up to

22,000,000

shares of the Company’s common stock. Terms of exercise and expiration of options/securities granted under the

2006

Plan

may

be established at the discretion of the Board of Directors, but no option

may

be exercisable for more than

ten

years.

During the

six

months ended

December

31,

2016,

the Company approved the modification of existing stock options held by an employee and

two

former employees, who are now consultants, which extended certain expiration dates and reduced certain exercise prices, which resulted in incremental non-cash compensation expense of

$177,471.

During the

six

months ended

December

31,

2016,

the Company approved the issuance of

100,000

shares in stock bonuses to an employee and a consultant with various vesting dates from

April

15,

2017

through

January

15,

2020.

The Company recorded

$14,784

of non-cash compensation related to the stock bonuses for the

three

and

six

months ended

December

31,

2016,

respectively.

The Company recorded compensation expense related to employee stock options of

$108,960

and

$74,320

for the

three

months ended

December

31,

2016

and

2015,

respectively, and

$129,816

and

$89,640

for the

six

months ended

December

31,

2016

and

2015,

respectively. The Company granted

294,500

and

100,000

options during the

six

months ended

December

31,

2016

and

2015,

respectively.

The fair value of the options granted during the

six

months ended

December

31,

2016

and

2015

were estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	Weighted Average, December 31, 2016			Range, December 31, 2016			Weighted Average, December 31, 2015			Range, December 31, 2015
Volatility		79	%	78%	-	86%		74	%		74	%
Dividend yield		-			-			-			-
Risk-free interest rate		1.14	%	0.82%	-	1.17%		1.75	%		1.75	%
Expected term (years)		4.0		3	-	4		5			5

The expected volatility was based on the historical price volatility of the Company’s common stock. The dividend yield represents the Company’s anticipated cash dividend on common stock over the expected term of the stock options. The U.S. Treasury bill rate for the expected term of the stock options was utilized to determine the risk-free interest rate. The expected term of stock options represents the period of time the stock options granted are expected to be outstanding based upon management’s estimates.

A summary of option activity under the

2006

Plan for the

six

months ended

December

31,

2016

is as follows:

	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at July 1, 2016		4,225,537	$	1.79		4.1	$	158,675
Granted		294,500		1.00
Exercised		-		-
Forfeited		-		-
Expired		-		-
Outstanding at December 31, 2016		4,520,037	$	1.42		3.4	$	31,125
Exercisable at December 31, 2016		4,420,037	$	1.44		3.3	$	38,625

The following table presents information relating to nonvested stock options as of

December

31,

2016:

	Options			Weighted Average Grant-Date Fair Value
Nonvested at July 1, 2016		50,000		$	0.76
Granted		294,500			0.47
Vested		(244,500	)		(0.47	)
Nonvested at December 31, 2016		100,000		$	0.61

The total fair value of stock options that vested during the

six

months ended

December

31,

2016

and

2015

was

$113,770

and

$59,000,

respectively. As of

December

31,

2016,

the Company had

$16,867

of unrecognized compensation cost related to stock options.

Stock-based employee compensation charges in operating expenses in the Company’s financial statements for the

three

and

six

months ended

December

31,

2016

and

2015

are as follows:

	Three months ended December 31, 2016		Three months ended December 31, 2015		Six months ended December 31, 2016		Six months ended December 31, 2015
General and administrative:
Fair value of stock bonuses expensed	$	6,830	$	69,000	$	6,830	$	69,000
Change in fair value from modification of option terms		166,031		42,550		166,031		42,550
Fair value of stock options expensed		90,067		62,371		106,565		64,209
Total	$	262,928	$	173,921	$	279,426	$	175,759

Research and development:
Fair value of stock bonus expensed	$	7,954	$	-	$	7,954	$	-
Change in fair value from modification of option terms		11,440		-		11,440		-
Fair value of stock options expensed		18,889		11,949		23,251		25,431
Total	$	38,283	$	11,949	$	42,645	$	25,431