| EQUITY | Authorized Capital Stock The Company authorized 105,000,000 shares of
capital stock, of which 100,000,000 are shares of voting common stock, par value $0.001 per share, and 5,000,000 are shares preferred
stock, par value $0.001 per share. The Company has authorized to issue up to 100,000,000
shares of common stock with a par value of $0.001. As of September 30, 2018, we had 17,531,502 shares of common stock issued and
outstanding, held by 122 shareholders of record. The number of shareholders, including beneficial owners holding shares through
nominee names, is approximately 2,300. Each share of common stock entitles its holder to one vote on each matter submitted to the
shareholders for a vote, and no cumulative voting for directors is permitted. Shareholders do not have any preemptive
rights to acquire additional securities issued by us. As of September 30, 2018, there were options outstanding for the
purchase of 2,182,668 common shares, warrants for the purchase of 15,473,398 common shares and 4,914,071 shares of our common
stock issuable upon the conversion of Series A, Series C and Series D Convertible Preferred Stock. We have Convertible Note Payable
of $2,255,066 (9,020,264 common shares at the current price of $0.25 per share). All of which could potentially dilute future earnings
per share. Voting Preferred Stock The Company is authorized to issue up to 5,000,000
shares of preferred stock with a par value of $0.001. Series A Preferred Stock In July 2015, the Company sold Series A Preferred
Stock to two investors for a total of $350,000. As of December 21, 2018, the Company had 20,000 Series A Preferred Stock issued
and outstanding. Each holder of outstanding shares of Series
A Preferred is entitled to the number of votes equal to the number of whole shares of common stock into which the shares of Series
A Preferred held by such holder are then convertible as of the applicable record date. The Series A Preferred may not be redeemed
without the consent of the holder. The Company cannot amend, alter or repeal any preferences, rights, or other terms of the Series
A Preferred so as to adversely affect the Series A Preferred, without the written consent or affirmative vote of the holders of
at least 66% of the then outstanding shares of Series A Preferred, voting as a separate voting group, given by written consent
or by vote at a meeting called for such purpose for which notice shall have been duly given to the holders of the Series A Preferred. In connection with the issuance of the Series
A Preferred, the Company also issued (i) a Series C five-year Warrant for 2 shares of common stock and (ii) a Series D five-year
Warrant for 23,334 shares of common stock. The Series A Preferred Stock and Series C and D Warrants currently have no registration
rights. On August 14, 2017, the price of the Series
A Preferred Stock and Series C and D Warrants were adjusted to $0.25 per share pursuant to the documents governing such instruments. On September 23, 2018, a holder of Series A
Preferred Stock converted 3,334 shares into 3,334 shares of common stock. In addition, the holder exercised Series C and D Warrants
for 6,668 shares of common stock at $0.25 per share. Series C and D Preferred Stock and Warrants On August 5, 2016, the Company closed a Series
C Preferred Stock and Warrant Purchase Agreement with Clayton A. Struve, an accredited investor for the purchase of $1,250,000
of preferred stock with a conversion price of $0.70 per share. The preferred stock has a yield of 8% and an ownership blocker of
4.99%. In addition, Mr. Struve received a five-year warrant to acquire 1,785,714 shares of common stock at $0.70 per share. To determine the effective conversion price,
a portion of the proceeds received by the Company upon issuance of the Series C Preferred Stock was first allocated to the freestanding
warrants issued as part of this transaction. Given that the warrants will not subsequently be measured at fair value, the Company
determined that the warrants should receive an allocation of the proceeds based on their relative fair value. This is based on
the understanding that the FASB staff and the SEC staff believe that a freestanding instrument issued in a basket transaction should
be initially measured at fair value if it is required to be subsequently measured at fair value pursuant to US generally accepted
accounting principles (“GAAP”), with the residual proceeds from the transaction allocated to any remaining instruments
based on their relative fair values. As such, the warrants were allocated a fair value of approximately $514,706 upon issuance,
with the remaining $735,294 of proceeds allocated to the Series C Preferred Stock. Proportionately, this allocation resulted in
approximately 59% of the face amount of the Series C Preferred Stock issuance remaining, which applied to the stated conversion
price of $0.70 resulted in an effective conversion price of approximately $0.41. Having determined the effective conversion price,
the Company then compared this to the fair value of the underlying Common Stock as of the commitment date, which was approximately
$1.06 per share, and concluded that the conversion feature did have an intrinsic value of $0.65 per share. As such, the Company
concluded that the Series C Preferred Stock did contain a beneficial conversion feature and an accounting entry and additional
financial statement disclosure was required. Because our preferred stock is perpetual, with
no stated maturity date, and the conversions may occur any time from inception, the dividend is recognized immediately when a beneficial
conversion exists at issuance. During the year ending September 30, 2016, the Company recognized preferred stock dividends of $1.16
million on Series C preferred stock related to the beneficial conversion feature arising from a common stock effective conversion
rate of $0.41 versus a current market price of $1.06 per common share. On November 14, 2016, the Company issued 187,500
shares of Series D Convertible Preferred Stock and a warrant to purchase 187,500 shares of common stock in a private placement
to certain accredited investors for gross proceeds of $150,000 pursuant to a Series D Preferred Stock and Warrant Purchase Agreement
dated November 10, 2016. The warrants associated with the November 14,
2016 issuance were allocated a fair value of approximately $56,539 upon issuance, with the remaining $63,539 of net proceeds allocated
to the Series D Preferred Stock. Proportionately, this allocation resulted in approximately 53% of the amount of the Series D Preferred
Stock issuance remaining, which applied to the stated conversion price of $0.80 resulted in an effective conversion price of approximately
$0.34. Having determined the effective conversion price, the Company then compared this to the fair value of the underlying Common
Stock as of the commitment date, which was approximately $1.14 per share, and concluded that the conversion feature did have an
intrinsic value of $0.80 per share. As such, the Company concluded that the Series D Preferred Stock did contain a beneficial conversion
feature of $150,211 which was recorded as a beneficial conversion in stockholders’ equity. On December 19, 2016, the Company issued 187,500
shares of Series D Convertible Preferred Stock and a warrant to purchase 187,500 shares of common stock in a private placement
to an accredited investor for gross proceeds of $150,000 pursuant to a Series D Preferred Stock and Warrant Purchase Agreement
dated December 14, 2016. The warrants associated with the December 19,
2016 issuance were allocated a fair value of approximately $60,357 upon issuance, with the remaining $69,643 of net proceeds allocated
to the Series D Preferred Stock. Proportionately, this allocation resulted in approximately 54% of the amount of the Series D Preferred
Stock issuance remaining, which applied to the stated conversion price of $0.80 resulted in an effective conversion price of approximately
$0.37. Having determined the effective conversion price, the Company then compared this to the fair value of the underlying Common
Stock as of the commitment date, which was approximately $0.81 per share, and concluded that the conversion feature did have an
intrinsic value of $0.44 per share. As such, the Company concluded that the Series C Preferred Stock did contain a beneficial conversion
feature of $82,232 which was recorded as a beneficial conversion in stockholders’ equity. Because the Company’s preferred stock
is perpetual, with no stated maturity date, and the conversions may occur any time from inception, the dividend is recognized immediately
when a beneficial conversion exists at issuance. During the year ending September 30, 2017, the Company recognized preferred stock
dividends of $2.3 million on Series D preferred stock related to the beneficial conversion feature arising from a common stock
effective conversion rate of $0.34 and $0.37 versus the original market price of $1.14 and $1.06 per common share, respectively. On May 1, 2017, the Company issued 357,143 shares
of Series D Convertible Preferred Stock and a warrant to purchase 357,143 shares of common stock in a private placement to an accredited
investor for gross proceeds of $250,000 pursuant to a Series D Preferred Stock and Warrant Purchase Agreement dated May 1, 2016. The initial conversion price of the Series D
Shares is $0.70 per share, subject to certain adjustments. The initial exercise price of the warrant is $0.70 per share, also subject
to certain adjustments. The Company also amended and restated the Certificate of Designations, resulting in an adjustment to the
conversion price of all currently outstanding Series D Shares to $0.70 per share. On August 14, 2017, the price of the Series
C and D Preferred Stock were adjusted to $0.25 per share pursuant to the documents governing such instruments. After adjustment
there were 3,108,356 shares of Series D preferred stock authorized. On July 17, 2018, the Company filed with the
State of Nevada a second Amended and Restated Certificate of Designation of Preferences, Powers, and Rights of the Series D Convertible
Preferred Stock. The Amended Certificate restates the prior Certificate of Designation filed on May 8, 2017 to decrease the number
of authorized Series D shares from 3,906,250 shares to 1,016,014 shares. No other amendments were made to the preferences and rights
of the Series D Convertible Preferred Stock. The filing of the Amended Certificate was unanimously approved by the Board of Directors
and the shareholders of Series D Convertible Preferred Stock. Series F Preferred Stock On August 1, 2018, the Company filed with the
State of Nevada a Certificate of Designation establishing the Designations, Preferences, Limitations and Relative Rights of Series
F Preferred Stock (the “Designation”). The Designation authorized 500 shares of Series F Preferred Stock. The Series
F Preferred Stock shall only be issued to the current Board of Directors on the date of the Designation’s filing and is not
convertible into common stock. As set forth in the Designation, the Series F Preferred Stock has no rights to dividends or liquidation
preference and carries rights to vote 100,000 shares of common stock per share of Series F upon a Trigger Event, as defined in
the Designation. A Trigger Event includes certain unsolicited bids, tender offers, proxy contests, and significant share purchases,
all as described in the Designation. Unless and until a Trigger Event, the Series F shall have no right to vote. The Series F Preferred
Stock shall remain issued and outstanding until the date which is 731 days after the issuance of Series F Preferred Stock (“Explosion
Date”), unless a Trigger Event occurs, in which case the Explosion Date shall be extended by 183 days. Securities Subject to Price Adjustments On August 14, 2017, a private placement triggered
a provision in the documents governing 23,334 outstanding shares of Series A Preferred Stock, 1,785,715 outstanding shares of Series
C Preferred Stock and 1,016,004 outstanding shares Series D preferred Stock, which adjusted the conversion price of such Preferred
Stock to $0.25 per share. In addition, the conversion price of a Convertible Note Payables of $2,390,066 and the exercise price
of outstanding warrants to purchase 9,548,741 shares of common stock were adjusted to $0.25 per share pursuant to the documents
governing such instruments. As of December 21, 2018, there were outstanding
warrants for the purchase of 15,473,398 shares of common stock. In the future, if we sell our common stock at a price below $0.25
per share, the exercise price of 20,000 outstanding shares of Series A Preferred Stock, 1,785,715 outstanding shares of Series
C Preferred Stock, 1,016,004 outstanding shares Series D Preferred Stock that adjust below $0.25 per share pursuant to the documents
governing such instruments. In addition, the conversion price of a Convertible Note Payable of $2,255,066 (9,020,264 common shares
at the current price of $0.25 per share) and the exercise price of additional outstanding warrants to purchase 13,865,286 shares
of common stock would adjust below $0.25 per share pursuant to the documents governing such instruments. Common Stock All of the offerings and sales described below
were deemed to be exempt under Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act. No advertising or general
solicitation was employed in offering the securities, the offerings and sales were made to a limited number of persons, all of
whom were accredited investors and transfer was restricted by the company in accordance with the requirements of Regulation D and
the Securities Act. All issuances to accredited and non-accredited investors were structured to comply with the requirements of
the safe harbor afforded by Rule 506 of Regulation D, including limiting the number of non-accredited investors to no more than
35 investors who have sufficient knowledge and experience in financial and business matters to make them capable of evaluating
the merits and risks of an investment in our securities. The following equity issuances occurred during
the year ended September 30, 2018: The Company issued 779,676 shares of common
stock to Names Executive Officers, directors, employees and consultants and for services during the year ended September 30, 2018.
The Company expensed $273,068. On April 10, 2018, the Company issued 2,000,000
shares of our common stock to Phillip A. Bosua under the terms of the Merger Agreement with RAAI common stock. The shares were
valued at the fair market value of $520,000 or $0.26 per share. On June 25, 2018, the Company closed a private
placement and received gross proceeds of $1,750,000 ($1,710,000 as of June 30, 2018) in exchange for issuing 7,000,000 (6,840,000
as of June 30, 2018) shares of common stock and warrants to purchase 3,500,000 (3,420,000 as of June 30, 2018) shares of common
stock in a private placement to accredited investors pursuant to a series of substantially identical subscription agreements. The
initial exercise price of the warrants described above is $0.25 per share, subject to certain adjustments, and they expired five
years after their issuance. The shares and the warrants described above were issued in transactions that were not registered under
the Securities Act of 1933, as amended (the “Act”) in reliance upon applicable exemptions from registration under Section
4(a)(2) of the Act and/or Rule 506 of SEC Regulation D under the Act. On June 25, 2018, the Company issued 500,000
shares of our common stock to Phillip A. Bosua under the terms of an Employment agreement dated April 10, 2018. The shares were
valued at the fair market value of $165,000 or $0.33 per share. The Company closed debt conversions and issued
1,600,000 shares of common stock in exchange for the conversion of $464,000, 230,000 shares in exchange for $48,300 in legal services
and 605,000 shares in for $199.935 in preexisting debt owed by the Company to certain service providers, all of whom are accredited
investors. These shares were issued in transactions that were not registered under the Act in reliance upon applicable exemptions
from registration under Section 4(a)(2) of the Act and/or Rule 506 of SEC Regulation D under the Act. During the year ended September 30, 2018, the
Company issued 158,000 shares of our common stock related to warrant exercises that were valued at $80,128. On September 23, 2018, the Company issued 3,334
shares of our common stock related to the conversion of Series A Preferred Stock for $834. The following equity issuances occurred during
the year ended September 30, 2017: On October 21, 2015, the Company entered into
a Public Relations Agreement with Financial Genetics LLC for public relation services. On October 18, 2016, the Company entered
into an Amendment to Public Relations Agreement with Financial Genetics LLC. Under the Agreements, Financial Genetics was issued
359,386 shares of our common stock during the year ended September 30, 2017. The Company expensed $271,309 during the year ended
September 30, 2017. On October 6, 2016, the Company entered into
a Services Agreement with Redwood Investment Group LLC for financial services. Under the Agreement, Redwood was issued 200,000
shares of our common stock. The Company expensed $140,000 during the year ended September 30, 2017. The Company entered into Convertible Promissory
Notes totaling $710,000 with accredited investors during September 2015 to February 2016 to fund short-term working capital. The
Notes accrued interest at a rate of 8% per annum and became due September 2016 to February 2017 and were convertible into common
stock as part of our next financing. On November 30, 2016, the Company converted $695,000 of the /Convertible Promissory Notes
and interest of $54,078 into 936,348 shares of comment stock. The Company also issued warrants to purchase 936,348 shares of the
Company’s common stock. The five-year warrants are exercisable at $1.00 per share, subject to adjustment. On December 22, 2016, a supplier converted accounts
payable totaling $6,880 into 8,600 shares of common stock. On the year ended September 30, 2017, the Company
issued 795,000 shares of restricted common stock to two Names Executive Officers employees, two directors and six employees and
consultants and for services during 2015-2017. The shares were issued in accordance with the 2011 Stock Incentive Plan and were
valued at $0.17 per share, the market price of our common stock. The Company expensed $135,150 during the year ended September
30, 2017. Warrants to Purchase Common Stock The following warrants were issued during the
year ended September 30, 2018: On December 15, 2017, the Company received $250,000
and issued a senior convertible exchangeable debenture with a principal amount of $300,000 and a five year common stock purchase
warrant to purchase 1,200,000 shares of common stock in a private placement dated December 12, 2017 to an accredited investor pursuant
to a Securities Purchase Agreement dated August 14, 2017. See Note 12 for additional details. The initial exercise price of the
warrants described above is $0.25 per share, also subject to certain adjustments. The warrants were valued at $123,600 and the
beneficial conversion feature was valued at $93,174. On March 2, 2018, the Company received gross
proceeds of $280,000 in exchange for issuing a senior convertible redeemable debenture with a principal amount of $336,000 and
a five year warrant to purchase 1,344,000 shares of common stock in a private placement dated February 28, 2018 to an accredited
investor pursuant to a Securities Purchase Agreement dated August 14, 2017 See Note 9 for additional details. The initial exercise
price of the warrants described above is $0.25 per share, also subject to certain adjustments. The warrants had an estimated fair
value of $348,096 and the beneficial conversion feature was value at $252,932. The Company entered into a Note and Account
Payable Conversion Agreement pursuant to which (a) all $664,233 currently owing under the J3E2A2Z Notes was converted to a Convertible
Redeemable Promissory Note in the principal amount of $664,233, and (b) all $519,833 of the J3E2A2Z Account Payable was converted
into a Convertible Redeemable Promissory Note in the principal amount of $519,833 together with a warrant to purchase up to 1,039,666
shares of common stock of the Company for a period of five years. The initial exercise price of the warrants described above is
$0.50 per share, also subject to certain adjustments. See Note 9 for additional details. The warrants had an estimated value of
$60,820. In addition, effective as of January 31, 2018,
Mr. Erickson was issued a warrant to purchase up to 855,000 shares of common stock of the Company for a period of five years. The
initial exercise price of the warrants described above is $0.50 per share, also subject to certain adjustments. See Note 12 for
additional details. The warrants had an estimated value of $49,726. During the year ended September 30, 2018, The
Company issued placement agent warrants related to the issuance of senior convertible redeemable debentures and Series D Preferred
Stock to purchase up to 538,400 shares of common stock for a period of five years. The initial exercise price of the warrants described
above is $0.25 per share, also subject to certain adjustments. The estimated fair value was $134,600. On June 25, 2018, the Company closed a private
placement and received gross proceeds of $1,750,000 ($1,710,000 as of June 30, 2018) in exchange for issuing 7,000,000 (6,840,000
as of June 30, 2018) shares of common stock and warrants to purchase 3,500,000 (3,420,000 as of June 30, 2018) shares of common
stock in a private placement to accredited investors pursuant to a series of substantially identical subscription agreements. The
initial exercise price of the warrants described above is $0.25 per share, subject to certain adjustments, and they expired five
years after their issuance. The shares and the warrants described above were issued in transactions that were not registered under
the Securities Act of 1933, as amended (the “Act”) in reliance upon applicable exemptions from registration under Section
4(a)(2) of the Act and/or Rule 506 of SEC Regulation D under the Act. The Company issued warrants to purchase 1,229,000
shares of common stock to Named Executive Officers, directors, employees and consultants and for services during the year ended
September 30, 2018. The Company expensed $121,710. During the year ended September 30, 2018, the
Company issued 158,000 shares of our common stock related to warrant exercises that were valued at $80,128. During the year ended September 30, 2018, warrants
for the purchase of 544,998 shares of common stock valued at $136,250 expired. The following warrants were issued during the
year ended September 30, 2017: The Company entered into Convertible Promissory
Notes totaling $710,000 with accredited investors during September 2015 to February 2016 to fund short-term working capital. The
Notes accrued interest at a rate of 8% per annum and became due September 2016 to February 2017 and were convertible into common
stock as part of our next financing. On November 30, 2016, the Company converted $695,000 of the /Convertible Promissory Notes
and interest of $54,078 into 936,348 shares of comment stock. The Company also issued warrants to purchase 936,348 shares of the
Company’s common stock. The five-year warrants are exercisable at $1.00 per share, subject to adjustment. On November 14, 2016, the Company issued 187,500
shares of Series D Convertible Preferred Stock and a warrant to purchase 187,500 shares of common stock in a private placement
to certain accredited investors for gross proceeds of $150,000 pursuant to a Series D Preferred Stock and Warrant Purchase Agreement
dated November 10, 2016. The warrant was valued at $189,938. On December 19, 2016, the Company issued 187,500
shares of Series D Convertible Preferred Stock and a warrant to purchase 187,500 shares of common stock in a private placement
to an accredited investor for gross proceeds of $150,000 pursuant to a Series D Preferred Stock and Warrant Purchase Agreement
dated December 14, 2016. The warrant was valued at $131,250. On February 24, 2017, the Company issued 283,861
shares of Series D Convertible Preferred Stock and a warrant to purchase 283,861 shares of common stock in a private placement
to an accredited investor for conversion of a $220,000 Promissory Note and accrued interest of $7,089 pursuant to a Series D Preferred
Stock and Warrant Purchase Agreement dated February 28, 2017. The warrant was valued at $198,703. During the year ended September 30, 2017, the
Company revised five year placement agent warrants to purchase 312,500 shares of common stock. The price was reduced from $1.00
to $0.70 per share and the exercise price is now subject to adjustment. The Company recorded 250,000 shares during the year ended
September 30, 2016 the fair value of these warrants is $218,751 as of June 30, 2017. On May 1, 2017, the Company issued 357,143 shares
of Series D Convertible Preferred Stock and a warrant to purchase 357,143 shares of common stock in a private placement to an accredited
investor for gross proceeds of $250,000 pursuant to a Series D Preferred Stock and Warrant Purchase Agreement dated May 1, 2017.
The warrant was valued at $5,357. On August 14, 2017, the Company issued a common
stock purchase warrant to purchase 1,440,000 shares of common stock in a private placement to Clayton Struve for gross proceeds
of $300,000 pursuant to a Securities Purchase Agreement dated August 14, 2017. The initial exercise price of the Warrant is $0.25
per share, also subject to certain adjustments. The warrants were valued at $111,429. Warrants to acquire 7,668 shares of common stock
at $30.00 per share expired. The conversion price of the Series A, C and
D Shares and related warrants is currently $0.250 per share, subject to certain adjustments. A summary of the warrants issued as of September
30, 2018 were as follows:
September 30, 2018
Weighted
Average
Exercise
Shares Price
Outstanding at beginning of period 6,900,356 $ 0.428
Issued 9,276,066 0.250
Exercised (158,026 ) (0.507 )
Forfeited - -
Expired (544,998 ) (0.250 )
Outstanding at end of period 15,473,398 $ 0.326
Exerciseable at end of period 15,473,398 A summary of the status of the warrants outstanding
as of September 30, 2018 is presented below:
September 30, 2018
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Shares Exercise
Warrants Life ( In Years) Price Exerciseable Price
13,870,286 4.04 $ 0.250 13,870,286 $ 0.250
714,286 2.83 0.700 714,286 0.700
882,159 3.12 1.000 882,159 1.000
6,667 0.25 30.000 6,667 30.000
15,473,398 3.61 $ 0.326 15,473,398 $ 0.326 The significant weighted average assumptions
relating to the valuation of the Company’s warrants for the year ended September 30, 2018 were as follows:
Dividend yield 0%
Expected life 1-2 years
Expected volatility 125%-145%
Risk free interest rate .0202-.0214% At September 30, 2018, vested warrants totaling 15,466,731 shares
had an aggregate intrinsic value of $13,870,286. |
