| Note 4. Convertible Preferred Stock and Common Stock Warrants | NOTE 4. CONVERTIBLE PREFERRED STOCK AND COMMON STOCK WARRANTS On December 16, 2016 the shareholders authorized an increase to the aggregate number of shares of Preferred Stock that the Company is authorized to issue from 5,000,000 shares to 50,000,000 shares. On December 28, 2016, the Company completed a private placement with affiliates of Prettybrook Partners, LLC (Prettybrook) and certain other purchasers (collectively with Prettybrook, the Preferred Investors) for the offer and sale of the remaining designated 390,000 shares of the Companys Series A 8% Convertible Preferred Stock (the Series A Preferred) in the aggregate amount of approximately $975,000. Proceeds from the private placement were recorded net of offering costs incurred. The Series A Preferred is convertible to common stock on a 1:1 basis. A Forced Conversion can be initiated based on a formula related to share price and trading volumes as outlined in the certificate of designation of the rights and preferences of the Series A Preferred. The dividend is fixed at 8% and is payable in either cash or common stock. This dividend is payable quarterly and equates to an annual payment of $78,000 or equivalent value in common stock. Certain redemption rights are attached to the Series A Preferred, but none of the redemption rights for cash are deemed outside the control of the Company. The redemption rights deemed outside the control of the Company require common stock payments or an increase in the dividend rate. The Series A Preferred includes a liquidation preference under which Preferred Investors would receive cash equal to the stated value of their stock plus unpaid dividends. In accordance with the terms of the sale of the Series A Preferred, the Company was required to register the underlying common shares associated with the Series A Preferred and warrants issued to the Preferred Investors in the private placement, as described below. That registration statement was filed on Form S-3 on January 28, 2017 and amended on February 1, 2017. The registration statement became effective on February 10, 2017. The Series A Preferred votes on an as-converted basis, one vote for each share of common stock issuable upon conversion of the Series A Preferred, provided, however, that no holder of Series A Preferred shall be entitled to cast votes for the number of shares of common stock issuable upon conversion of such Series A Preferred held by such holder that exceeds the quotient of (x) the aggregate purchase price paid by such holder of Series A Preferred for its Series A Preferred, divided by (y) the greater of (i) $2.50 and (ii) the market price of the common stock on the trading day immediately prior to the date of issuance of such holders Series A Preferred. The market price of the common stock on the trading day immediately prior to the date of issuance of the Series A Preferred in December 2016 was $2.37 per share. Based on a $975,000 investment and a $2.37 per share price the number of potential common stock eligible for voting by Preferred Investors is 390,000. The Preferred Investors purchased an aggregate total of 390,000 shares of Series A Preferred Stock, and received in connection with such purchase, (i) A-Warrants, exercisable by cash exercise only, to purchase 292,500 shares of common stock, and (ii) B-Warrants, exercisable by cashless exercise, to purchase 292,500 shares of common stock after exercise of A-Warrants. The warrants are exercisable for 72 months from the date of issuance and carry a put feature in the event of a change in control. The put right is not subject to derivative accounting as all equity holders are treated the same in the event of a change in control. Shareholders originally authorized the issuance of 2,000,000 shares of the Series A Preferred stock in June, 2015 and 1,610,000 of those shares were issued in June 2015, leaving 390,000 available for future issuance. Those remaining 390,000 shares were issued in December 2016 as described in this Note 4. The only difference between the Series A Preferred issued in June 2015 and the Series A Preferred issued in December 2016 is that the formula determining voting rights for the Series A Preferred issued in June 2015 indicated a cutback in the voting power of those shares whereas the Series A Preferred issued in December 2016 were not subject to any cutback. For information regarding the original issuance of the Series A Preferred in June 2015 please see the 10K filed for fiscal year ended June 30, 2016. The Series A Preferred stock includes a conversion right at a price that creates an embedded beneficial conversion feature. A beneficial conversion feature arises when the conversion price of a convertible instrument is below the per share fair value of the underlying stock into which it is convertible. The conversion price is in the money and the holder realizes a benefit to the extent of the price difference. The issuer of the convertible instrument realizes a cost based on the theory that the intrinsic value of the price difference (i.e., the price difference times the number of shares received upon conversion) represents an additional financing cost. The conversion rights associated with the Series A Preferred issued by the Company do not have a stated life and, therefore, all of the beneficial conversion feature amount of $375,858 was recorded as dividends on the same date the preferred shares were issued. The $375,858 dividend is added to the net loss to arrive at the net loss applicable to common stockholders for purposes of calculating loss per share for the three and six months ended December 31, 2016. |
