Note 8 - Commitments and Contingencies

9 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

8.

     COMMITMENTS AND CONTINGENCIES:

Employment and consulting agreements:

Smith has held the positions of Director, President and General Counsel of Company and its subsidiaries under various agreements and terms since

March

2003.

During

September

2014,

Smith agreed to continue his employment agreement through

April

15,

2015

and also agreed to continue to defer his temporarily reduced salary of

$14,000

per month until such date. On

February

10,

2015,

the Company executed an Extension Agreement with Smith pursuant to which Smith extended his employment with the Company to

December

31,

2015

(with the Company having an option to extend his employment an additional

six

months). As part of the Extension Agreement, the balance of Smith’s existing convertible note payable as of

December

31,

2014,

adjusted for conversions subsequent to that date, was replaced with a new convertible note with an initial principal amount of

$760,520

with terms that i) materially reduce the interest rate by

50%

(from

8%

to

4%),

ii) increases the conversion price by

11%

(from

$0.45

to

$0.50),

iii) sets the conversion price at a fixed price so there can be no further reductions, iv) reduces the number of warrants received on conversion by

75%

(from

1

warrant per unit to

1/4

per unit) and v) extends the maturity date to

December

31,

2017.

Additionally, pursuant to the Extension Agreement, Smith: i) will continue to defer his cash compensation

($18,000

per month) until the Board of Directors re-instates cash payments to all employees and consultants who are deferring their compensation, ii) cancelled

150,000

contingent stock bonuses previously granted to him by the Company, iii) has been granted

150,000

new options which vested immediately and iv) outstanding options and warrants owned by Smith (and his donees) have been extended and had the exercise prices reduced to

$1.50

(if the exercise price exceeded

$1.50).

In

October

2015,

the Company executed an Extension Agreement

(“FY2016

Extension Agreement”) with Smith pursuant to which Smith extended his employment with the Company to

June

30,

2016

(with Company having an option to extend his employment an additional

six

months). As part of the

FY2016

Extension Agreement, Smith: i) will continue to defer his cash compensation

($19,000

per month) until the Board of Directors re-instates cash payments, ii) has been granted

100,000

new options which vested immediately, and iii) has been granted

75,000

shares of common stock as an extension bonus which are immediately vested and were issued on

January

5,

2016.

As of

July

1,

2016,

Smith is working under a month to month contract extension until a longer term agreement is reached. On

October

10,

2016,

the Company approved a month to month contract extension with Smith which includes provisions for i) issuance of

25,000

bonus shares of the Company’s common shares on

January

15,

2017

(which were subsequently cancelled), ii) grant of

75,000

options to purchase shares of the Company’s common shares at

$0.90

per share with expiry date of

December

31,

2020,

which options are subject to the exercise/extension bonus, iii) a monthly deferred salary of

$18,000

effective

October

1,

2016,

iv) the right to convert up to

$125,000

of his deferred compensation, at his sole election, at

$0.75

per share, until

March

15,

2018

(which was expanded on

April

27,

2017

to the right to convert up to

$300,000

of his deferred compensation, at his sole election, at

$0.75

per share, until

December

31,

2018),

and v) the right to convert his deferred compensation in whole or in part, at his sole election, at any time in any amount at “market” or into securities sold in the Company’s current/most recent private offering at the price of such offering to

third

parties.

Since

March

31,

2005,

the Company has had various agreements with Brightcap and/or Bassani, through which the services of Bassani are provided. The Board appointed Bassani as the Company's CEO effective

May

13,

2011.

During the fiscal years

2012

and

2013,

Bassani entered into extension agreements whereby he was awarded fully vested stock grants totaling

600,000

shares,

500,000

shares of which are to be issued

January

15,

2016

and

100,000

shares are to be issued

January

15,

2017.

The stock grants were expensed in the years they were awarded as they are fully vested. On

February

10,

2015,

the Company executed an Extension Agreement with Bassani pursuant to which Bassani extended the term of his service to the Company to

December

31,

2017,

(with the Company having an option to extend the term an additional

six

months.) As part of the agreement, the Company’s then existing loan payable, deferred compensation and convertible note payable to Bassani, were restructured into

two

promissory notes as follows: a) The sum of the cash loaned by Bassani to the Company of

$279,000

together with

$116,277

of unreimbursed expenses through

December

31,

2014,

were placed into a new promissory note with initial principal of

$395,277

which was due and payable on

December

31,

2015

and now has been replaced with a

September

2015

Convertible Note (Note

8).

In connection with these sums and the new promissory note, Bassani was issued warrants to purchase

592,916

shares of the Company’s common stock at a price of

$1.00

until

December

31,

2020;

and b) the remaining balances of the Company’s accrued obligations to Bassani

($1,464,545)

were replaced with a new convertible promissory note with terms that compared with the largest prior convertible note obligation to Bassani: i) materially reduce the interest rate by

50%

(from

8%

to

4%),

ii) increase the conversion price by

11%

(from

$0.45

to

$0.50),

iii) sets the conversion price at a fixed price so there can be no further reductions, iv) reduces the number of warrants received on conversion by

75%

(from

1

warrant per unit to

1/4

per unit) and v) extends the maturity date to

December

31,

2017

(Note

6).

Additionally, pursuant to the Extension Agreement, Bassani i) will continue to defer his cash compensation

($31,000

per month) until the Board of Directors re-instates cash payments to all employees and consultants who are deferring their compensation, ii) cancelled

250,000

contingent stock bonuses previously granted to him by the Company, iii) has been granted

450,000

new options which vested immediately and iv) outstanding options and warrants owned by Bassani (and his donees) have been extended and had the exercise prices reduced to

$1.50

(if the exercise price exceeded

$1.50).During

October

2016

Bassani was granted the right to convert up to

$125,000

of his deferred compensation, at his sole election, at

$0.75

per share, until

March

15,

2018

(which was expanded on

April

27,

2017

to the right to convert up to

$300,000

of his deferred compensation, at his sole election, at

$0.75

per share, until

December

31,

2018).

On

February

10,

2015,

the Company entered into an agreement with Schafer pursuant to which Schafer will continue to provide services to the Company through

December

31,

2015.

Additionally, pursuant to the agreement, i) the exercise period of outstanding options and warrants owned by Schafer have been extended, and ii)

25,000

contingent stock bonuses previously granted to Schafer have been cancelled by the Company. In

January

2016,

Schafer agreed to extend his agreement with the Company through

December

31,

2016.

During

June

2016,

Schafer and the Company determined that due to other obligations Schafer’s involvement with the Company during the

2016

fiscal year was less than anticipated and reduced his fiscal year

2016

compensation (all of which had been deferred) by

$160,000

and future compensation will be determined periodically based on evaluation by the board of directors.

Contingent stock bonuses:

The Company has declared contingent deferred stock bonuses to its key employees and consultants at various times throughout the years. The stock bonuses were contingent upon the Company’s stock price exceeding a certain target price per share, and the grantees still being employed by or providing services to the Company at the time the target prices are reached. During the

nine

months ended

March

31,

2017,

the Company cancelled all

117,500

outstanding contingent stock bonuses. In consideration for the cancellations, the Company granted

109,500

fully vested options to certain employees and a consultant to purchase common stock of the Company at

$1.00

per share until

December

31,

2020.

Execution/exercise bonuses:

As part of agreements the Company entered into with Bassani and Smith effective

May

15,

2013,

they were each granted the following: a) a

50%

execution/exercise bonus which shall be applied upon the effective date of the notice of intent to exercise (for options and warrants) or issuance event, as applicable, of any currently outstanding and/or subsequently acquired options, warrants and/or contingent stock bonuses owned by each (and/or their donees) as follows: i) in the case of exercise by payment of cash, the bonus shall take the form of reduction of the exercise price; ii) in the case of cashless exercise, the bonus shall be applied to reduce the exercise price prior to the cashless exercise calculations; and iii) with regard to contingent stock bonuses, issuance shall be triggered upon the Company’s common stock reaching a closing price equal to

50%

of currently specified price; and b) the right to extend the exercise period of all or part of the applicable options and warrants for up to

five

years

(one

year at a time) by annual payments of

$.05

per option or warrant to the Company on or before a date during the

three

months prior to expiration of the exercise period at least

three

business days before the end of the expiration period. Effective

January

1,

2016

such annual payments to extend warrant exercise periods have been reduced to

$.01

per option or warrant.

During the year ended

June

30,

2014,

the Company extended execution/exercise bonuses with the same terms as described above to Schafer and to Jon Northrop, the Company’s other board member.

As of

March

31,

2017,

the execution/exercise bonus was applicable to

3,145,000

of the Company’s outstanding options and

7,657,153

of the Company’s outstanding warrants.

Litigation:

On

September

25,

2014,

Pennvest exercised its right to declare the Pennvest Loan in default and has accelerated the Pennvest Loan and has demanded that

PA1

pay

$8,137,117

(principal, interest plus late charges) on or before

October

24,

2014.

PA1

did not make the payment and does not have the resources to make the payment demanded by Pennvest. During

August

2012,

the Company provided Pennvest (and the PADEP) with data demonstrating that the Kreider

1

system met the ‘technology guaranty’ standards which were incorporated in the Pennvest financing documents and, as a result, the Pennvest Loan is now solely an obligation of

PA1.

No litigation has commenced related to this matter but such litigation is likely if negotiations do not produce a resolution (Notes

1

and Note

5).

The Company currently is not involved in any other material litigation.