NOTE 5 - STOCKHOLDERS’ DEFICIT

Common stock

During the year ended June 30, 2013, the Company completed nine private placements.

(i)

The first private placement amounted to $186,600, for the issuance of 533,140 units consisting of common stock at $0.35 per share and warrants at $0.001 per warrant to purchase 799,708 shares of common stock on or before August 31, 2014 at an exercise price of $0.70 per share.

(ii)

The second private placement amounted to $422,297, for the issuance of 1,398,333 units consisting of common stock at $0.30 per share and warrants at $0.001 per warrant to purchase 2,796,666 shares of common stock on or before August 31, 2014 at an exercise price of $0.60 per share.

(iii)

The third private placement amounted to $143,769, for the issuance of 363,296 units consisting of common stock at $0.30 per share and 100,000 units consisting of common stock at $0.35 and warrants at $0.001 per warrant to purchase 926,604 shares of common stock on or before September 30, 2014 at an exercise price of $0.50 per share.

(iv)

The fourth private placement amounted to $5,000, for the issuance of 14,285 units consisting of common stock at $0.35 per share and warrants at $0.001 per warrant to purchase 21,421 shares of common stock on or before February 28, 2014 at an exercise price of $0.70 per share.

(v)

The fifth private placement amounted to $414,954, for the issuance of 2,075,000 units consisting of common stock at $0.20 per share and warrants at $0.001 per warrant to purchase 4,150,000 shares of common stock on or before January 31, 2015 at an exercise price of $0.50 per share.

(vi)

The sixth private placement amounted to $598,650, for the issuance of 2,368,250 units consisting of common stock at $0.20 per share and 1,250,000 units consisting of common stock at $0.10 and warrants at $0.001 per warrant to purchase 4,736,500 shares of common stock on or before February 28, 2015 at an exercise price of $0.50 per share.

(vii)

The seventh private placement amounted to $20,000, for the issuance of 100,000 units consisting of common stock at $0.20 per share and warrants at $0.001 per warrant to purchase 200,000 shares of common stock on or before February 28, 2015 at an exercise price of $0.50 per share.

(viii)

The eighth private placement amounted to $115,000, for the issuance of 575,000 units consisting of common stock at $0.20 per share and warrants at $0.001 per warrant to purchase 1,150,000 shares of common stock on or before May 25, 2015 at an exercise price of $0.50 per share.

(ix)

The ninth private placement amounted to $485,000, for the issuance of 2,425,000 units consisting of common stock at $0.20 per share and warrants at $0.001 per warrant to purchase 4,850,000 shares of common stock on or before May 25, 2015 at an exercise price of $0.50 per share.

Share issue costs to complete the private placements totaled $199,910.

The Company determined that the warrants did not contain any provisions that would preclude equity treatment.

The holder of a convertible debenture converted $139,000 of principal to 930,382 shares of the Company’s common stock resulting in $252,456, representing the present value of convertible debenture and the fair value of derivative liability recorded, allocated to equity, see note 13.

The Company issued 2,247,500 shares of common stock as consideration for consulting services. These shares have been recorded at a value of $974,125 representing the fair value of the shares on the date of issuance.

During the fiscal year ended June 30, 2014, the Company completed four private placements:

(i)

The first private placement amounting to $13,400 for the issuance of 44,000 units consisting of common stock and warrants. 20,000 units were issued at $0.25 per unit and 24,000 units were issued at $0.35 per unit. Warrants were issued at $0.001 per warrant to purchase 88,000 shares of common stock on or before July 31, 2015 at an exercise price of $0.50 per share; and

(ii)

The second private placement amounting to $28,951 for the issuance of 144,757 units consisting of common stock at $0.20 per share and warrants at $0.001 per warrant to purchase 144,757 shares of common stock on or before September 13, 2015 at an exercise price of $0.60 per share; and

(iii)

The third private placement amounting to $1,147,024 was received for subscriptions of 6,744,257 units consisting of common stock at $0.17 per share and warrants at $0.001 per warrant to purchase 6,744,251 shares of common stock on or before eighteen months after the closing date at an exercise price of $0.30 per share. Share issue costs of $88,610 have been accrued for; and

(iv)

The fourth private placement amounting to $210,000 for the issuance of 1,238,236 units consisting of common stock and warrants. 1,238,236 units were issued at $0.17 per unit. Warrants were issued at $0.001 per warrant to purchase 1,238,236 shares of common stock on or before December 1, 2015 at an exercise price of $0.30 per share.

The Company determined that the warrants did not contain any provisions that would preclude equity treatment.

Share issue costs to complete private placements totaled $168,010.

During the fiscal year ended June 30, 2014, the Company issued shares of common stock pursuant to consulting agreements as follows:

(i)

550,000 shares measured at a fair value of $0.50 per share

(ii)

250,000 shares measured at a fair value of $0.36 per share

(iii)

100,000 shares measured at a fair value of $0.30 per share

(iv)

500,000 shares measured at a fair value of $0.29 per share

(v)

185,000 shares measured at a fair value of $0.27 per share

During the fiscal year ended June 30, 2014, the Company issued 541,666 shares of common stock for options vesting prior to the termination agreement (note 16(c)).The shares issued were measured at a fair value of $0.44 per share and recorded as shares issued for services in the statement of stockholders' deficit.

During the fiscal year ended June 30, 2014, the Company issued 3,379,734 shares of common stock in settlement of convertible debentures. The value of this stock was $1,122,933 ($0.33 per share) measured at fair market value on the date the shares were issued.

Preferred stock

The preferred stock may be issued in one or more series. The distinguishing features of each series, including preference, rights and restriction, are to be determined by the Company's Board of Directors upon the establishment of each such series.

During the year ended June 30, 2000, the Company designated 1,000,000 of its authorized 20,000,000 preferred shares as Series A convertible preferred stock with a par value of $0.001 each and a stated value and liquidation preference of $1.00 per share.

Cumulative dividends are accrued at the rate of 5% annually, payable in cash or shares of common stock at the option of the Company. The shares may be converted to restricted shares of common stock at the average trading price ten days prior to conversion and are entitled to votes equal to the number of shares of common stock into which each series of preferred stock may be converted. Each Series A convertible preferred share may be redeemed by the Company for $1.50 within one year after the date of issue and for $2.00, $2.50, $3.00, $3.50 and $4.00 in each of the subsequent five years after the date of issue, with the redemption price increasing by $0.50 each year thereafter. The Company may, at its discretion, redeem the shares at a price higher than stipulated herein.

On November 8, 2012, a director of the Company resigned from his position as director and CEO of the Company. The Company agreed to redeem 70,588 shares of preferred stock held by the director at $4.25 per share for a total of $300,000 (note 16(a)). As at June 30, 2013, no payments had been made.

On May 1, 2014, the Company entered into an amended agreement whereby the above mentioned liability, remaining preferred stock and stock options were exchanged for 750,000 shares of common stock valued at the share price of $0.26 per share in settlement of the remaining debt (Note 16(a)). On June 13, 2014 the remaining 103,567 preferred shares were converted into 382,151 shares of common stock. As of June 30, 2014 there are no outstanding preferred shares of stock.

Stock-based compensation

During the fiscal year ended June 30, 2014, the Company recorded stock-based compensation expense with respect to vested stock options and warrants and modified stock options of $266,243 (2013- $131,679) included in selling, general, and administrative expenses.

Stock-based compensation not yet recognized at June 30, 2014 relating to non-vested stock options and warrants was $23,852 and $0 (June 30, 2013 - $23,633), which will be recognized over a period of 2 years (2013 - 0.59 and 0.27 years), respectively.

Stock options and restricted shares

In January 2001, the Company adopted the Integral Technologies, Inc. 2001 Stock Plan (the "2001 Plan"), a non-qualified stock option plan under which the Company may issue up to 2,500,000 stock options and bonuses of common stock of the Company to provide incentives to officers, directors, key employees and other persons who contribute to the success of the Company. This plan was amended during December 2001 to increase the number of common stock options that may be granted from 2,500,000 to 3,500,000 stock options. As of June 30, 2014, there were 764,500 (2013 - 764,500) common stock options available under this plan.

In April 2003, the Company adopted the Integral Technologies, Inc. 2003 Stock Plan (the "2003 Plan"), and a non-qualified stock option plan under which the Company may issue up to 1,500,000 stock options. As of June 30, 2014, there were 1,375,000(2013 - 1,375,000) common stock options available under this plan.

During the fiscal year ended June 30, 2010, the Company adopted the Integral Technologies, Inc. 2009 Stock Plan (the "2009 Plan"), and a non-qualified stock option plan under which the Company may issue up to 4,000,000 common stock options. As of June 30, 2014, there were 500,000 (2013 - 1,275,000 over issued) common stock options available under this plan.

During the fiscal year ended June 30, 2014, the Company entered into an agreement with an employee whereby the employee was granted 150,000 stock options at an exercise price equal to the fair market value on the date the options were granted of $0.25 per share. The option will be fully vested over a period of 3 years from the date of the employment, with 1/3 of the options vesting each anniversary date. The options have a term of five year.

During the fiscal year ended June 30, 2014, the Company entered into an agreement with an employee whereby 750,000 stock options were granted at an exercise price equal to the fair market value on the date the options were granted of $0.31 per share. 500,000 of the stock options remain unvested until certain milestones within the agreement are reached. All the options have a term of 3 years.

Key assumptions

The fair value of the Company’s stock options was estimated on the measurement date using the Black-Scholes option pricing model with the following weighted average assumptions:

	2014			2013
Expected life (years)		3.29			3.17
Interest rate		1.17	%		1.09	%
Volatility		104.25	%		78.50	%
Dividend yield		0.00	%		0.00	%
Estimated forfeitures		0.00	%		0.00	%

Expected life: The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience and vesting schedules of similar awards.

Risk-free interest rate: The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on US Treasury zero-coupon issues with an equivalent remaining term.

Expected volatility: The Company’s expected volatility represents the weighted average historical volatility of the Company’s common stock for a period equal to the expected life of the options.

Expected dividend yield: The Black-Scholes valuation model calls for a single expected dividend yield as an input. The dividend yield is determined by dividing the expected per stock dividend for its common stock during the coming year by the grant date stock price of those stock. The expected dividend assumption is based on the Company’s current expectations about its anticipated dividend policy.

Estimated forfeitures: Represents the Company’s historical forfeitures and considers termination behavior as well as analysis of actual option forfeitures.

Stock option activity

The following summarizes information about the Company’s options outstanding:

	Number of Options			Price Per Option		Weighted Average Exercise Price
Outstanding, June 30, 2013		5,900,000		$	0.25 to $ 1.00	$	0.43
Granted		1,100,000		$	0.25 to $ 0.50	$	0.34
Cancelled		(1,000,000	)	$	0.50	$	0.50
Forfeited		(100,000	)	$	0.50	$	0.50
Outstanding, June 30, 2014		5,900,000		$	0.25 to $ 1.00	$	0.40
Exercisable, June 30, 2014		5,250,000		$	0.25 to $ 1.00	$	0.42

A summary of the status of non-vested options as of June 30, 2014 is as follows;

	Number of Options			Weighted Average Grant Date Fair Value
Non-vested at June 30, 2013		450,000		$	0.66
Options granted		1,100,000			0.34
Options forfeited		(100,000	)		0.50
Options vested		(800,000	)		0.53
Non-vested at June 30, 2014		650,000		$	0.30

The weighted-average fair value of options granted during the fiscal year ended June 30, 2014 was $0.34 and there were no options granted in the fiscal year ended June 30, 2013.

The following summarizes the options outstanding and exercisable:

			Number of Options
Expiry Date	Exercise Price		June 30, 2014		June 30, 2013
March 9, 2014	$	0.25		125,000		125,000
June 1, 2014	$	0.85		100,000		100,000
July 31, 2014	$	1.00		415,000		415,000
October 15, 2014	$	0.50		100,000		100,000
November 15, 2014⁽¹⁾	$	1.00		100,000		100,000
December 1, 2014	$	0.50		75,000		75,000
December 1, 2014	$	0.85		100,000		100,000
December 31, 2014 ⁽²⁾	$	1.00		110,000		110,000
December 31, 2014 ⁽³⁾	$	0.25		1,000,000		1,500,000
April 15, 2015	$	0.50		100,000		100,000
June 1, 2015	$	0.50		75,000		75,000
June 1, 2015	$	0.85		100,000		100,000
October 15, 2015	$	0.50		-		100,000
December 1, 2015	$	0.50		75,000		75,000
December 1, 2015	$	0.85		100,000		100,000
April 15, 2016	$	0.50		-		100,000
June 1, 2016	$	0.50		75,000		75,000
June 1, 2016	$	0.85		100,000		100,000
June 30, 2016	$	0.25		2,000,000		2,000,000
October 15, 2016	$	0.50		-		100,000
December 1, 2016	$	0.50		75,000		75,000
December 1, 2016	$	0.85		100,000		100,000
February 19, 2017	$	0.31		750,000		-
April 15, 2017	$	0.50		-		100,000
June 1, 2017	$	0.50		75,000		75,000
January 13, 2019	$	0.25		50,000		-
January 13, 2020	$	0.25		50,000		-
January 13, 2021	$	0.25		50,000		-
Total outstanding				5,900,000		5,900,000
Total exercisable				5,250,000		5,450,000

⁽¹⁾

During the fiscal year ended June 30, 2014, the expiry date of 100,000 options was extended from November 15, 2013 to November 15, 2014.

⁽²⁾

During the fiscal year ended June 30, 2014, the expiry date of 110,000 options was extended from March 31, 2014 to December 31, 2014.

⁽³⁾

During the fiscal year ended June 30, 2014, the expiry date of 500,000 options was extended from March 31, 2014 to December 31, 2014.

The weighted average remaining contractual lives for options outstanding and exercisable at June 30, 2014 are 1.55and 1.30 years (June 30, 2013 - 1.26 and 0.92 years), respectively.

The aggregate intrinsic value of options outstanding and exercisable as at June 30, 2014 was $163,750 and $156,250(2013 - $1,186,750 and $1,165,750), respectively. The aggregate intrinsic values exclude options having a negative aggregate intrinsic value due to awards with exercise prices greater than market value. The intrinsic value is the difference between the market value of the shares and the exercise price of the award.

During the year ended June 30, 2014, the Company granted restricted shares. The holder of a restricted share award is generally entitled at all times on and after the date of issuance of the restricted shares to exercise the rights of a shareholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. These shareholders do not have the ability to sell, transfer or otherwise encumber the restricted shares awards until they fully vest. The restricted shares granted vest over three or four-year period and the grant date fair value of the awards is recognized as expense over the vesting period. Total compensation expense recognized was $111,167 for the year ended June 30, 2014 which is included in stock-based compensation above.

Restricted share activity is summarized as follows:

	Shares		Weighted Average Grant Date Fair Value per Share
Outstanding as of June 30, 2013		-		-
Granted		1,950,000	$	0.34
Cancelled		-		-
Forfeited		-		-
Outstanding as of June 30, 2014		1,950,000	$	0.34

As of June 30, 2014, there was $555,833 of total unrecognized compensation costs related to the outstanding restricted shares, which is expected to be recognized over a weighted average period of 3.09 years.

A summary of the status of non-vested restricted shares as of June 30, 2014 is as follows:

	Number of Restricted Stock Awards			Weighted Average Grant Date Fair Value
Non-vested at June 30, 2013		-		$	-
Awards granted		1,950,000			0.34
Awards forfeited		-			-
Awards vested		(537,500	)		0.34
Non-vested at June 30, 2014		1,412,500		$	0.34

Stock purchase warrants

The following summarizes information about the Company’s stock purchase warrants outstanding:

	Number of Warrants			Price Per Share		Weighted Average Exercise Price

Balance, June 30, 2013		34,966,559				$	0.58
Issued		8,215,244		$	0.30 - $0.60	$	0.31
Expired		(4,848,216	)	$	0.70 - $1.00	$	0.72
Exercised ⁽¹⁾		(1,743,030	)	$	0.17	$	0.17
Balance, June 30, 2014		36,590,557		$	0.30 - $1.00	$	0.46

⁽¹⁾

During the fiscal year ended June30, 2014, 1,076,363 investor warrants exercisable at $0.50 and 666,667 investor warrants exercisable at $0.60 were re-priced to $0.17 and were exercised.

			Number of Warrants
Expiry Date	Exercise Price		June 30, 2014		June 30, 2013

December 31, 2013 ⁽¹⁾	$	0.50		-		3,710,000
December 31, 2013 ⁽²⁾	$	0.70		-		3,963,152
December 31, 2013 ⁽³⁾	$	1.00		-		1,558,929
December 29, 2013 ⁽⁴⁾	$	0.70		-		311,428
January 3, 2014 ⁽⁵⁾	$	0.70		-		856,692
January 31, 2014 ⁽⁶⁾	$	0.70		-		2,360,459
February 14, 2014 ⁽⁷⁾	$	0.70		-		300,000
February 28, 2014	$	0.70		-		21,421
March 31, 2014 ⁽⁸⁾	$	0.57		-		1,675,000
May 31, 2014 ^{(1), (3)}	$	0.50		-		-
July 17, 2014	$	0.31		300,000		300,000
August 31, 2014	$	0.60		2,129,999		2,796,666
August 31, 2014 ⁽²⁾	$	0.70		799,709		799,708
September 30, 2014 ^{(1), (2)}	$	0.50		3,808,604		926,604
November 30, 2014 ⁽⁴⁾	$	0.50		100,000		-
January 31, 2015	$	0.50		4,150,000		4,150,000
February 28, 2015 ⁽²⁾	$	0.50		5,049,356		4,936,500
February 28, 2015 ^{(2), (3)}	$	0.30		249,382		-
May 25, 2015 ^{(1), (2), (5), (6), (8)}	$	0.50		10,952,548		6,000,000
July 31, 2015	$	0.50		88,000		-
September 13, 2015^{(2), (4)}	$	0.30		235,715		-
September 13, 2015	$	0.60		144,757		-
October 1, 2015⁽⁷⁾	$	0.30		7,044,251		-
December 1, 2015	$	0.30		1,238,236		-
November 29, 2016	$	0.70		300,000		300,000
Total outstanding				36,590,557		34,966,559
Total exercisable				36,590,557		34,891,559

⁽¹⁾

During the fiscal year ended June 30, 2014, the expiry date of 2,682,000 warrants was extended to September 30, 2014, and the expiry date of 1,028,000 warrants was extended to May 25, 2015.

⁽²⁾

During the fiscal year ended June 30, 2014, the expiry date of 71,429 warrants was extended to September 13, 2015 and re-priced to $0.30, and the expiry date of 200,000 warrants was extended to September 30, 2014, and the expiry date of 96,213 warrants was extended to February 28, 2015 and re-priced at $0.30, and the expiry date of 112,857 warrants was extended to February 28, 2015 and re-priced at $0.50.

⁽³⁾

During the fiscal year ended June 30, 2014, the expiry date of 1,076,363 warrants was extended to May 31, 2014 and re-priced to $0.17 and 153,169 warrants extended to February 28, 2015 and re-priced to $0.30.

⁽⁴⁾

During the fiscal year ended June 30, 2014, the expiry date of 100,000 warrants was extended to November 30, 2014 and re-priced at $0.50, and 14,286 warrants extended to September 13, 2015 and re-priced to $0.30.

⁽⁵⁾

During the fiscal year ended June 30, 2014, the expiry date of 856,692 warrants was extended to May 25, 2015 and re-priced to $0.50.

⁽⁶⁾

During the fiscal year ended June 30, 2014, the expiry date of 1,392,856 warrants was extended to May 25, 2015 and re-priced to $0.50, and 150,000 warrants extended to September 13, 2015 and re-priced to $0.30.

⁽⁷⁾

During the fiscal year ended June 30, 2014, the expiry date of 300,000 warrants was extended to October 1, 2015 and re-priced to $0.30.

⁽⁸⁾

During the fiscal year ended June 30, 2014, the expiry date of 1,675,000 warrants was extended to May 25, 2015 and re-priced to $0.50.

The following promissory notes receivable were written off:

(i)

$17,500 due on exercise of 210,000 stock options, interest at 10% per annum, due November 1, 2002, subsequently extended to June 30, 2003; and

(ii)

$12,237 due on exercise of 23,000 stock options, interest at 10% per annum, due June 30, 2003.

During the fiscal year ended June 30, 2014, the promissory notes were reversed through equity.

Share obligations

Pursuant to a consulting agreement dated August 19, 2013, the Company is obligated to pay $5,000 to $10,000 per month based on the number of hours worked and to issue 6,000 shares of common stock per month beginning September 1, 2013.

As at June 30, 2014 no shares have been issued. As such, a total of 42,000 shares of common stock are issuable. The obligation to issue shares of common stock was measured at a weighted average fair value of $0.35 per share on the date each series of shares became issuable. A total of $14,760 was recorded as an obligation to issue shares within equity and as consulting expense in the consolidated statements of operations.

Pursuant to loan agreements dated December 19, 2013 and December 24, 2013, the Company was obligated to issue 50,000 shares. The obligation to issue shares of common stock was measured at a weighted average fair value of $0.30 per share on the date each series of shares became issuable. A total of $15,250 was recorded as an obligation to issue shares within equity.