| 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. As of March 31, 2019, the Company had 22,002,904
shares of common stock issued and outstanding, held by 122 stockholders of record. The number of stockholders, 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 stockholders for a vote, and no cumulative voting for directors is permitted. Stockholders
do not have any preemptive rights to acquire additional securities issued by us. As of March 31, 2019, there were options
outstanding for the purchase of 2,282,668 common shares, warrants for the purchase of 17,572,583 common shares, and 4,894,071 shares
of the Company’s common stock issuable upon the conversion of Series A, Series C and Series D Convertible Preferred Stock.
In addition, the Company has an unknown number of shares (9,020,264 common shares at the current price of $0.25 per share) are
issuable upon conversion of convertible debentures of $2,255,066. 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 On January 29, 2019, a holder of Series A Preferred
Stock converted 20,000 shares into 80,000 shares of common stock. There are no Series A Preferred Stock outstanding as of March
31, 2019. 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. On
August 14, 2017, the price of the Series C Stock were adjusted to $0.25 per share pursuant to the documents governing such instruments. As of March 31, 2019, the Company has 3,108,356
of Series D Preferred Stock outstanding with Clayton A. Struve, an accredited investor, outstanding. On August 14, 2017, the price
of the Series D Stock were adjusted to $0.25 per share pursuant to the documents governing such instruments. 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 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 In the future, if we sell our common stock at
a price below $0.25 per share, the exercise price of 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 12,664,385 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 six months ended March 31, 2019: During the six months ended March 31, 2019,
the Company issued 336,427 shares of common stock and cancelled warrants to purchase 26,573 shares of common stock at $0.25 per
share to two consultants and two investors related to the cashless exercise of warrants. During the six months ended March 31, 2019,
the Company issued 145,000 shares of common stock for services provided by two consultants. The shares were valued at $246,900
or $1.703 per share. On January 2, 2019, the Company issued 100,000
shares of common stock for services provided to Ronald P. Erickson. The shares were valued at $102,000 or $1.02 per share. On January 29, 2019, a holder of Series A Preferred
Stock converted 20,000 shares into 80,000 shares of common stock. Private Placements On March 4, 2019, the Company closed rounds
one and two of a private placement and received gross proceeds of $2,409,975 in exchange for issuing Subordinated Convertible Notes
and Warrants in a private placement to 26 accredited investors, pursuant to a series of substantially identical Securities Purchase
Agreements, Common Stock Warrants, and related documents. On March 18, 2019, Company closed round three
of a private placement and received gross proceeds of $1,400,000 in exchange for issuing Subordinated Convertible Notes and Warrants
in a private placement to 8 accredited investors, pursuant to a series of substantially identical Securities Purchase Agreements,
Common Stock Warrants, and related documents. The Convertible Notes have a principal amount
of $3,809,975 and bear annual interest of 8%. Both the principal amount of and the interest are payable on a payment-in-kind basis
in shares of Common Stock of the Company. They are due and payable in common stock on the earlier of (a) mandatory and automatic
conversion of the Convertible Notes into a financing that yields gross proceeds of at least $10,000,000 or (b) on the one-year
anniversary of the Convertible Notes. Investors will be required to convert their Convertible Notes into Common Stock in any $10,000,000
financing at a conversion price per share equal to the lower of (i) $1.00 per share or (ii) a 25% discount to the price per share
paid by investors in the $10,000,000 Financing. If the Convertible Notes have not been paid or converted prior to the Maturity
Date, the outstanding principal amount of the Convertible Notes will be automatically converted into shares of Common Stock at
the lesser of (a) $1.00 per share or (b) any adjusted price resulting from the application of a “most favored nations”
provision, which requires the issuance of additional shares of Common Stock to investors if the Company issues certain securities
at less than the then-current conversion price. The Warrants were granted on a 1:0.5 basis (one-half
Warrant for each full share of Common Stock into which the Convertible Notes are convertible). The Warrants have a five-year term
and an exercise price equal to 120% of the per share conversion price of the Qualified Financing or other mandatory conversion. The Convertible Notes are initially convertible
into 3,809,975 shares of Common Stock, subject to certain adjustments, and the Warrants are initially exercisable for 1,904,988
shares of Common Stock at an exercise price of $1.20 per share of Common Stock, also subject to certain adjustments. In connection with the private placement, the
placement agent for the Convertible Notes and the Warrants received a cash fee of $324,798 and warrants to purchase 487,197 shares
of the Company’s common stock, all based on 8% of gross proceeds to the Company. The placement agent has also received a
$25,000 advisory fee. As part of the Purchase Agreement, the Company
entered into a Registration Rights Agreement, which grants the investors “demand” and “piggyback” registration
rights to register the shares of Common Stock issuable upon the conversion of the Convertible Notes and the exercise of the Warrants
with the Securities and Exchange Commission for resale or other disposition. In addition, the Convertible Notes are subordinated
to certain senior debt of the Company pursuant to a Subordination Agreement executed by the investors. The Convertible Notes and Warrants 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 expects to continue offering additional
Convertible Notes and Warrants on substantially the same terms until April 15, 2019 (unless extended at the discretion of the Company)
or until the Company has raised a maximum of $5 million in gross proceeds (or such other amount determined by the Company in its
discretion). The offering was extended until May 31, 2019. Warrants to Purchase Common Stock The following warrants were issued during the
six months ended March 31, 2019: The Company issued 336,427 shares of common
stock and cancelled warrants to purchase 26,573 shares of common stock at $0.25 per share to two consultants and two investors
related to the cashless exercise of warrants. The Company issued warrants to purchase 70,000
shares of common stock at $1.61 to$2.72 per share to three consultants. The warrants were valued at $30,325 or 0.79 to $1.11 per
share. The warrants expire during the first quarter of 2024. Private Placements The Warrants issued for the private placements
discussed above were granted on a 1:0.5 basis (one-half Warrant for each full share of Common Stock into which the Convertible
Notes are convertible). The Warrants have a five-year term and an exercise price equal to 120% of the per share conversion price
of the Qualified Financing or other mandatory conversion. The Warrants are initially exercisable for 1,904,988
shares of Common Stock at an exercise price of $1.20 per share of Common Stock, also subject to certain adjustments. In connection with the private placement, the
placement agent for the Convertible Notes and the Warrants received warrants to purchase 487,197 shares of the Company’s
common stock, all based on 8% of gross proceeds to the Company. A summary of the warrants outstanding as of March 31, 2019 were as
follows:
March 31, 2019
Weighted
Average
Exercise
Shares Price
Outstanding at beginning of period 15,473,398 $ 0.326
Issued 2,462,185 1.222
Exercised (336,427 ) (0.250 )
Forfeited - -
Expired (26,573 ) (0.250 )
Outstanding at end of period 17,572,583 $ 0.453
Exercisable at end of period 17,572,583 A summary of the status of the warrants outstanding as of March 31,
2019 is presented below:
March 31, 2019
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Shares Exercise
Warrants Life ( In Years) Price Exercisable Price
13,507,286 3.50 $ 0.250 13,507,286 $ 0.250
714,286 2.33 0.700 714,286 0.700
882,159 2.62 1.000 882,159 1.000
2,442,185 4.93 1.20-1.50 2,442,185 1.20-1.50
20,000 4.92 2.34-4.08 20,000 2.34-4.08
6,667 - 30.000 6,667 30.000
17,572,583 3.78 $ 0.453 17,572,583 $ 0.453 The significant weighted average assumptions relating to the valuation
of the Company’s warrants for the six months ended March 31, 2019 were as follows: Assumptions
Dividend yield 0%
Expected life 1 yr
Expected volatility 125%
Risk free interest rate 2.0% There were vested warrants of 16,613,757 as of March 31, 2019 with
an aggregate intrinsic value of $14,664,327. |
