STOCKHOLDERS' EQUITY:

Series B Preferred stock:

July 1, 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 $

2.00100

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, 2017

and

2016,

the Company declared dividends of

$2,000

and

$2,000

respectively. At

June 30, 2017,

accrued dividends payable are

$12,000.

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

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

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.

During the year ended

June 30, 2016,

the Company issued

242,034

shares of the Company

’s common stock at prices ranging from

$0.76

$1.15

per share for services valued at

$228,558,

in the aggregate, to consultants and employees, including

$69,000

expensed for

75,000

fully vested bonus shares to Smith that were issued in

January 2016.

During the year ended

June 30, 2016,

the Company issued

12,500

shares of the Company

’s restricted common stock upon receipt of its subscription receivable of

$13,125

for the exercise of

12,500

warrants.

During the year ended

June 30, 2016,

the Company entered into subscription agreements to exercise certain warrants with expiry dates on or before

December 31, 2015,

into restricted shares of the Company

’s common stock at a reduced exercise price of

$1.05,

for the period from

June 30, 2015

through

July 15, 2015.

Pursuant to the offering,

265,894

warrants were exercised and

265,894

shares of the Company’s restricted common stock were issued resulting in cash proceeds of

$174,189

and receipt of a

$105,000

interest bearing, collateralized promissory note. During

January 2016,

the Company received a

$35,000

principal payment and entered into a new agreement with the borrowers which extended the maturity date of the remaining principal and interest until

June 15, 2016.

All the other terms of the original agreement remain unchanged. During

June 2016,

the Company received a

$10,000

principal payment and entered into a new agreement with the borrowers which extended the maturity date of the remaining principal and interest until

September 1, 2016.

All the other terms of the original agreement remain unchanged. On

June 30, 2016,

the Company and the borrowers agreed to cancel the existing promissory note with a remaining principal balance of

$60,000

and interest of

$2,727

resulting in a net cancellation of

57,142

previously issued but

not

outstanding restricted common shares.

During the year ended

June 30, 2016,

the Company entered into subscription agreements to sell units for

$0.80

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

$1.10

per share until

June 30, 2017

and pursuant thereto, the Company issued

393,698

units for total proceeds of

$314,957.

During the year ended

June 30, 2016,

cash commissions of

$24,496

were paid to brokers related to the unit offering. 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,

$8,041

was allocated to the warrants and

$306,916

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

During the year ended

June 30, 2016,

the Company entered into subscription agreements with various warrant holders, whereby the warrant holders elected to exercise

284,445

warrants at an exercise price of

$0.75

and

284,445

shares of the Company

’s common stock were issued resulting in cash proceeds of

$213,333.

During the year ended

June 30, 2016,

Smith exercised

6,280

warrants at an exercise price of

$0.75.

The warrants were entitled to an exercise bonus of

50%

of the exercise price which resulted in a reduced exercise price of

$0.375

per warrant. Smith elected to convert

$2,355

of deferred compensation in exchange for the issuance of

6,280

shares of the Company

’s common stock.

During the year ended

June 30, 2016,

Smith and various consultants elected to convert

$82,861

and

$200,877

of deferred compensation, respectively, into

99,159

and

236,539

shares, respectively, of the Company

’s common stock at conversion rates ranging from

$0.76

$1.15

per share.

During the year ended

June 30, 2017,

the Company issued

205,499

shares of the Company

’s common stock at prices ranging from

$0.75

$1.02

per share for services valued at

$158,636,

in the aggregate, to consultants and employees.

During the year ended

June 30, 2017,

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 year ended

June 30, 2017,

the Company entered into multiple 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 with varying expiry dates ranging from

December 31, 2017

through

June 30, 2018

and pursuant thereto, the Company issued

561,890

units for total proceeds of

$421,413,

net proceeds of

$390,773

after commissions. The Company allocated the proceeds from the

561,890

shares and the

280,949

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,

$11,701

was allocated to the warrants and

$409,712

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

During the year ended

June 30, 2017,

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 year ended

June 30, 2017,

two

consultants elected to convert

$140,502

of deferred compensation into

184,542

shares of the Company

’s common stock at a conversion rates ranging from

$0.75

$0.84

per share. The Company also issued

79,614

warrants to purchase common shares of the Company for

$1.00

per share with expiry dates of

December 31, 2018

in conjunction with

one

of the conversions.

During the year ended

June 30, 2017,

Smith elected to convert deferred compensation and accounts payable of

$75,000

and

$62,068,

respectively, into

182,758

units at

$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

March 31, 2018.

Warrants:

As of

June 30, 2017,

the Company had approximately

8.6

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

$1.22,

and the weighted-average remaining contractual life as of

June 30, 2017

3.3

years.

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 year ended

June 30, 2017,

the Company received the subscription receivable of

$7,500

and issued

10,000

shares of the Company

’s common stock in satisfaction of the warrant exercise.

During the year ended

June 30, 2017,

warrants to purchase

870,319

shares of common stock of the Company at prices between

$0.75

and

$3.00

per share expired.

During the year ended

June 30, 2017,

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 year ended

June 30, 2017,

a consultant was issued

25,000

warrants at an exercise price of

$0.90,

expiring on

December 31, 2019

in exchange for services valued at

$1,250.

During the year ended

June 30, 2017,

the Company entered into multiple 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 with expiry dates ranging from

December 31, 2017

through

June 30, 2018,

and pursuant thereto, the Company issued

561,890

units for gross proceeds of

$421,413.

The Company allocated the proceeds from the

561,890

shares and the

280,949

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,

$11,701

was allocated to the warrants and

$409,712

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

During the year ended

June 30, 2017,

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

option

may

be exercisable for more than

ten

years.

During the year ended

June 30, 2016,

the Company approved the modification of existing stock options held by a board member which extended certain expiration dates and resulted in incremental non-cash compensation expense of

$42,550.

During the year ended

June 30, 2017,

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 year ended

June 30, 2017,

the Company approved the issuance of

100,000

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

January 15, 2018

through

January 15, 2020.

The Company recorded

$37,105

and

nil

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

June 30, 2017

and

2016,

respectively.

The Company recorded compensation expense related to employee stock options of

$152,333

and

$99,553

for the years ended

June 30, 2017

and

2016,

respectively. The Company granted

319,500

and

100,000

options during the years ended

June 30, 2017

and

2016,

respectively. During the years ended

June 30, 2017

and

2016,

nil

and

288,333

options expired, respectively.

The fair value of the options granted during the years ended

June 30, 2017

and

2016

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

	Weighted Average, June 30, 2017		Range, June 30, 2017				Weighted Average, June 30, 2016		Range, June 30, 2016
Volatility		78%		73%	-	86%		74%		74%
Dividend yield		-			-			-		-
Risk-free interest rate		1.17%		0.82%	-	1.44%		1.75%		1.75%
Expected term (years)		3.9		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

two

years ended

June 30, 2017

is as follows:

	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at July 1, 2015		4,413,870		$	1.88		4.1	$	398,250
Granted		100,000			.92
Exercised		-			-
Forfeited		-			-
Expired		(288,333	)		2.90
Outstanding at June 30, 2016		4,225,537		$	1.45		4.1	$	158,675
Granted		319,500			0.97
Exercised		-			-
Forfeited		-			-
Expired		-			-
Outstanding at June 30, 2017		4,545,037		$	1.42		2.9	$	176,575
Exercisable at June 30, 2017		4,520,037		$	1.42		2.9	$	176,575

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

June 30, 2017:

	Options			Weighted Average Grant-Date Fair Value
Nonvested at July 1, 2016		50,000		$	0.76
Granted		319,500			0.46
Vested		(344,500	)		(0.50	)
Nonvested at June 30, 2017		25,000		$	0.46

The total fair value of stock options that vested during the years ended

June 30, 2017

and

2016

was

$173,520

and

$97,000,

respectively. As of

June 30, 2017,

the Company had

$4,600

of unrecognized compensation cost related to stock options.

Stock-based employee compensation charges in operating expenses in the Company

’s financial statements for the years ended

June 30, 2017

and

2016

are as follows:

	Year ended June 30, 2017		Year ended June 30, 2016
General and administrative:
Fair value of stock bonuses expensed	$	15,021	$	69,000
Change in fair value from modification of option terms		166,031		42,550
Fair value of stock options expensed		129,081		66,092
Total	$	310,133	$	177,642

Research and development:
Fair value of stock bonus expensed	$	22,084	$	-
Change in fair value from modification of option terms		11,440		-
Fair value of stock options expensed		23,252		33,461
Total	$	56,776	$	33,461