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

$100

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, 2018

and

2017,

the Company declared dividends of

$2,000

and

$2,000

respectively. During the

six

months ended

December 31, 2018,

the Company declared dividends of

$1,000.

December 31, 2018,

accrued dividends payable are

$15,000.

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.

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.

During the

six

months ended

December 31, 2018,

the Company issued

25,718

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

$0.50

$0.74

per share for services valued at

$13,904,

in the aggregate, to a consultant and an employee.

During the

six

months ended

December 31, 2018,

the Company issued

1,028

shares as commissions for the warrant exercises during the year ended

June 30, 2018

valued at

$514.

During the

six

months ended

December 31, 2018,

the Company entered into subscription agreements under

two

different offerings to sell units for

$0.50

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

$0.75

per share with expiry dates of

June 30, 2019

and pursuant thereto, the Company issued

954,733

units for total proceeds of

$477,365,

net proceeds of

$432,929

after commissions. The Company allocated the proceeds from the

954,733

shares and the

477,369

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,

$17,515

was allocated to the warrants and

$459,850

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

During the

six

months ended

December 31, 2018,

Smith elected to convert deferred compensation and accounts payable of

$87,063

and

$12,937,

respectively, into an aggregate

200,000

units at

$0.50

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

$0.75

per share until

December 31, 2022.

Warrants:

As of

December 31, 2018,

the Company had approximately

16.3

million warrants outstanding, with exercise prices from

$0.60

$3.00

and expiring on various dates through

June 30, 2025.

The weighted-average exercise price for the outstanding warrants is

$0.96,

and the weighted-average remaining contractual life as of

December 31, 2018

4.1

years.

During the

six

months ended

December 31, 2018,

warrants to purchase

41,319

shares of common stock of the Company at a price of

$1.00

per share expired.

During the

six

months ended

December 31, 2018,

the Company entered into subscription agreements under

two

different offerings to sell units for

$0.50

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

$0.75

per share with expiry dates of

June 30, 2019

and pursuant thereto, the Company issued

954,733

units for total proceeds of

$477,365,

net proceeds of

$432,932

after commissions. The Company allocated the proceeds from the

954,733

shares and the

477,369

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,

$17,515

was allocated to the warrants and

$459,850

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

During the

six

months ended

December 31, 2018,

the Company received an interest bearing, secured promissory note for

$300,000

from Bassani as consideration to purchase warrants to purchase

3,000,000

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

$0.60

and have expiry dates of

December 31, 2025.

The promissory note bears interest at

per annum, is secured by Bassani’s

January 2015

Convertible Note. The secured promissory note is payable

July 1, 2020.

During the

six

months ended

December 31, 2018,

the Company received an interest bearing, secured promissory note for

$30,000

from Smith as consideration to purchase warrants to purchase

300,000

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

$0.60

and have expiry dates of

December 31, 2023.

The warrants have a

75%

exercise bonus. The promissory note bears interest at

per annum, is secured by Smith’s

2015

January 2015

Convertible Note. The secured promissory note is payable on

July 1, 2020.

During the

six

months ended

December 31, 2018,

Smith elected to convert deferred compensation and accounts payable of

$87,063

and

$12,937,

respectively, into an aggregate

200,000

units at

$0.50

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

$0.75

per share until

December 31, 2022.

During the

six

months ended

December 31, 2018,

the Company issued

125,000

warrants to a consultant to purchase

125,000

shares of the Company’s restricted common stock, which warrants have exercise prices ranging between

$0.74

and

$1.20

per share and have expiry dates of ranging from

August 27, 2020

through

October 27, 2020.

The warrants were in exchange for services expensed at

$6,250,

in aggregate.

During the

six

months ended

December 31, 2018,

the Company agreed to extend the expiration dates of

5,079,188

warrants owned by certain individuals (including

1,765,000

owned by Bassani and

3,104,010

owned by Smith) which were scheduled to expire at various dates ranging from

September 30, 2018

through

December 31, 2021.

The Company recorded non-cash compensation expense related to the modification of the warrants of

$163,026

(

$88,250

and

$68,758

for Bassani and Smith, respectively) and

$3,750

as interest expense.

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

30,000,000

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

six

months ended

December 31, 2018,

the Company approved the modification of existing stock options held by Smith, which extended certain expiration dates. The modifications resulted in incremental non-cash compensation of

$222,300.

The Company recorded compensation expense related to employee stock options of

$22,500

and

$97,350

for the

three

months ended

December 31, 2018

and

2017,

respectively, and

$118,000

and

$99,650

for the

six

months ended

December 31, 2018

and

2017,

respectively. The Company granted

325,000

and

295,000

options during the

six

months ended

December 31, 2018

and

2017,

respectively.

The fair value of the options granted during the

six

months ended

December 31, 2018

and

2017

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

	Weighted Average, December 31, 2018		Range, December 31, 2018				Weighted Average, December 31, 2017		Range, December 31, 2017
Volatility		70%		63%	-	76%		73%		73%
Dividend yield		-			-			-		-
Risk-free interest rate		2.73%		2.68%	-	2.78%		1.75%		1.75%
Expected term (years)		3.9		3.4	to	4.3		3		3

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, 2018

is as follows:

	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at July 1, 2018		6,827,225	$	1.11		3.8	$	-
Granted		325,000		0.68
Exercised		-		-
Forfeited		-		-
Expired		-		-
Outstanding at December 31, 2018		7,152,225	$	1.10		3.5	$	36,675
Exercisable at December 31, 2018		7,002,225	$	1.11		3.6	$	23,175

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

December 31, 2018:

	Options			Weighted Average Grant-Date Fair Value
Nonvested at July 1, 2018		-		$	-
Granted		325,000			0.36
Vested		(175,000	)		0.46
Nonvested at December 31, 2018		150,000		$	0.25

The total fair value of stock options that vested during the

six

months ended

December 31, 2018

and

2017

was

$80,500

and

nil

respectively. As of

December 31, 2018,

the Company had

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, 2018

and

2017

are as follows:

	Three months ended December 31, 2018		Three months ended December 31, 2017		Six months ended December 31, 2018		Six months ended December 31, 2017
General and administrative:
Fair value of stock bonuses expensed	$	-	$	3,090	$	-	$	7,223
Change in fair value from modification of option terms		-		243,761		211,185		243,761
Change in fair value from modification of warrant terms		-		156,865		118,233		156,865
Fair value of stock options expensed		22,500		97,350		92,125		99,650
Total	$	22,500	$	501,066	$	421,543	$	507,499

Research and development:
Fair value of stock bonus expensed	$	-	$	8,071	$	-	$	15,098
Change in fair value from modification of option terms		-		105,895		11,115		105,895
Change in fair value from modification of warrant terms		-		132,677		44,793		132,677
Fair value of stock options expensed		-		-		25,875		-
Total	$	-	$	246,643	$	81,783	$	253,670