Note 10 - Stockholders' Deficit

12 Months Ended

Jun. 30, 2014

Notes to Financial Statements

Note 10 - Stockholders' Deficit

Note 10 - Stockholders' Deficit

Common Stock

Year ended June 30, 2014

During fiscal 2014, the Company issued 1,000,000 shares of common stock with a recorded value of $90,000 as payment to a service provider. These shares were valued at fair value at the date of issuance.

On June 30, 2014 we issued 15,133,330 shares of common stock to various entities and individuals in exchange for net cash proceeds of $1,021,500. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public. The Company issued rule 144 shares in connection with these issuances.

The Company also issued 3,333,333 shares of common stock to convert $100,000 of outstanding principal under the convertible promissory notes (see Note 7). A total of 9,029,251 shares of common stock are issuable as of June 30, 2014 relating to the settlement of demand notes outstanding with a principal value of $219,521 and accrued interest balance of $51,357 (see Notes 8 and 9). 

Year ended June 30, 2013

In July and August 2012, the Company acquired previously issued 1,500,000 shares of common stock for a note conversion in the year ended June 30, 2013 for total costs of $25,460. The amount paid was reflected as a reduction to paid in capital.

In October 2012, pursuant to a settlement agreement with a former officer, the former officer returned 2,000,000 shares of common stock and options to purchase 10,000,000 shares of commons stock granted to him in February 2012. In exchange for the return of these equity instruments, the Company granted the former officer warrants to purchase 7,500,000 shares of common stock with a fair value of $140,043 using a Black-Scholes Option Pricing Model. The warrants vested immediately, exercisable at $0.05/share and will expire in 10 years after grant. Furthermore, the Company also reversed previously recognized compensation expense of $43,069 pertaining to the unvested portion of the returned options. As result, the Company recognized a total cost of $96,974 pursuant to the settlement agreement which is included as part of General and Administrative Expense in the accompanying Statement of Operations for the year ended June 30, 2013.

In December 2012 and May 2013, we issued an aggregate of 2,771,000 shares of common stock to a Director, employees and consultants with a fair value of $113,930. Included in this issuance was a 500,000 shares of common stock issued to a Director in exchange for the cancellation of his 500,000 fully vested options granted in February 2012. The shares of common stock issued were valued at the market price on the date of issuance.

In December 2012 6,800,858 shares of common stock previously issued to the Company's Officers and a service provider were cancelled. In exchange for the cancellation, the Company issued options to purchase 6,800,858 shares of common stock with a fair value of $201,920 using a Black-Scholes Option Pricing Model. The options vest immediately, exercisable at $0.03/share and will expire in 10 years after grant.

Preferred Stock

On March 17, 2009, the Company  filed Amended and Restated Articles of Incorporation and created two  new series of preferred stock, the first of which is designated Series A Preferred Stock and the second of which is designated as Series B Preferred Stock. The total number of shares of Common Stock which this corporation shall have authority to issue is 1,000,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock of which 5,000,000 shares are designated as Series A Preferred Stock, and 5,000,000 shares are designated as Series B Preferred Stock, with the rights, preferences and privileges of the Series B Preferred Stock to be designated by the Board of Directors. Each share of Common Stock and Preferred Stock has a par value of $0.001. As of June 30, 2014 and 2013, there are no shares of Series A or Series B Preferred Stock outstanding.

Stock Options

The Company has not adopted a formal stock option plan, however, it has assumed outstanding stock options resulting from the acquisition of its wholly-owned subsidiary, Hydrodynamic Technology, Inc. In addition, the Company has made periodic non- plan grants. A summary of the stock option activity from June 30, 2014 and 2013 is as follows:

				Weighted-
				Average
			Weighted-	Remaining
			Average	Contractual
			Exercise	Life
	Options		Price	(Years)
Outstanding June 30, 2012	13,560,957	$	0.10	8.95
- Granted	10,550,858		0.03	9.50
- Forfeited	(10,500,000)		-	-
- Exercised	-		-	-
- Expired	-		-	-
Outstanding June 30, 2013	13,611,815		0.10	8.17
- Granted	-		-	-
- Forfeited	-		-	-
- Exercised	-		-	-
- Expired	-		-	-
Outstanding at June 30, 2014	13,611,815	$	0.10	6.37
Exercisable at June 30, 2014	13,611,815	$	0.10	6.37
Vested at June 30, 2014	13,611,815	$	0.10	6.37

No options were issued in fiscal 2014, and 1,424,021 options previously granted to a former Officer and Director had either expired, were cancelled or replaced with warrants.

In October 2012, pursuant to a settlement agreement with a former officer, the Company cancelled 10,000,000 options granted to the former officer in February 2012 (see Common Stock above for further discussion).

In May 2013, the Company cancelled 500,000 options granted to a Director in February 2012 (see Common Stock above for further discussion).

In December 2012 and May 2013, the Company granted options to employees to purchase a total of 3,750,000 shares of common stock with a fair value of $113,233 using the Black-Scholes Option Pricing Model. The options vest immediately, exercisable at $0.03/share and will expire in 10 years after grant.

In December 2012, the Company granted options to purchase 6,800,858 shares of common stock to Officers and a service provider with a fair value of $74,189 using the Black-Scholes Option Pricing Model.

The intrinsic value of the outstanding options was $590,043 and $0 as of June 30, 2014 and 2013, respectively. The following table summarizes additional information concerning options outstanding and exercisable at June 30, 2014.

		Options Outstanding				Options Exercisable
			Weighted		Weighted			Weighted
			Average		Average			Average
	Exercise	Number	Remaining		Exercise	Number		Remaining
	Price	of Shares	Life (Years)		Price	of Shares		Life (Years)
$	0.03	11,800,858	6.96	$	0.03	11,800,858	$	6.96
$	0.33	637,297	2.31	$	0.33	637,297	$	2.31
$	0.67	1,173,660	2.68	$	0.67	1,173,660	$	2.68
		13,611,815				13,611,815

Warrants

A summary of the Company's warrant activity and related information from as of June 30, 2014 and 2013 is as follows.

				Weighted-
				Average
			Weighted-	Remaining
			Average	Contractual
			Exercise	Life
	Warrants		Price	(Years)
Outstanding at June 30, 2012	11,222,287	$	0.42	0.85
Granted	15,703,933		0.05	7.76
Exercised	-		-	-
Expired	(8,492,353)		0.46	-
Outstanding at June 30, 2013	18,433,867		0.09	6.74
Granted	47,362,581		0.07	7.40
Exercised	-		-	-
Expired	(2,729,934)		0.50	-
Outstanding at June 30, 2014	63,066,514	$	0.06	6.91
Vested and expected to vest at June 30, 2014	59,774,848	$	0.07	6.85
Exercisable at June 30, 2014	59,774,848	$	0.07	6.85

2014

In October 2013, the Company granted employees warrants to purchase 9,100,000 shares of common stock at $0.04/share, vesting immediately and expiring in 5 and 10 years from grant date. The fair value of the warrants amounted to $363,882 using the Black-Scholes Merton valuation model with the following average assumptions: risk-free interest rate of 0.90%; dividend yield of 0%; volatility of 232%; and an expected life of 3.75 years.

In October 2013, the Company granted consultants warrants to purchase 13,100,000 shares of common stock at prices ranging from $0.04 up to $0.045/share, vest over a period of one year and expiring in 5 and 10 years from grant date. The fair value of the warrants that vest during the current fiscal year amounted to $726,299 using the Black-Scholes Merton valuation model with the following average assumptions: risk-free interest rate of 2.58%; dividend yield of 0%; volatility of 200%; and an expected life of 9.75 years.

In April 2014, the Company issued 9,029,251 warrants to demand note holders pursuant to a conversion agreement (see Notes 8 and 9).

In April 2014, the Company granted a new Board member warrant to purchase 1,000,000 shares of common stock at $0.08/share which vest over a period of one year and expiring in 5 years from grant date. The fair value of the warrants that vest during the fiscal year ended June 30, 2014 amounted to $3,324 using the Black-Scholes Merton valuation model with the following average assumptions: risk-free interest rate of 3.34%; dividend yield of 0%; volatility of 185%; and an expected life of 9.75 years.

In June of 2014, the Company issued warrants to purchase 15,133,330 shares of common stock to the purchasers of common stock offering at $0.12 per share, vesting immediately and expiring in 5 years from grant date. Pursuant to the term of the grant, the underlying shares of common stock must be registered with the SEC within one year after its purchase otherwise, the warrant will be considered cashless.

2013

In October 2012, pursuant to settlement agreement with a former officer, Company issued 7,500,000 warrants (see Common Stock for further discussion).

In December 2012, the Company issued 3,333,333 warrants to a note holder pursuant to convertible note offering (see Note 7).

In May 2013, the Company granted warrants to Officers to purchase a total of 4,000,000 shares of common stock with a fair value of $197,549 using the Black-Scholes Option Pricing Model. The warrants vest immediately, exercisable at $0.05/share and will expire in 10 years after grant.

In May 2013, the Company also granted warrants to an employee and a service provider to purchase a total of 870,600 shares of common stock with a fair value of $37,347 using the Black-Scholes Option Pricing Model. The warrants vest immediately, exercisable at $0.05/share up to $0.07/share and will expire in 3 to 10 years after grant.

As of June 30, 2014, total compensation cost related to non-vested warrant award not yet recorded is approximately $262,535. The intrinsic value of the outstanding warrants was $1,551,329 and $0 as of June 30, 2014 and 2013, respectively. The following table summarizes additional information concerning warrants outstanding and exercisable at June 30, 2014.

		Warrants Outstanding				Warrants Exercisable
			Weighted		Weighted			Weighted
			Average		Average			Average
	Exercise	Number	Remaining		Exercise	Number		Exercise
	Price	of Shares	Life (Years)		Price	of Shares		Price
$	0.04 - 0.07	47,933,184	7.51	$	0.05	44,641,518	$	0.05
$	0.12	15,133,330	5.00	$	0.12	15,133,330	$	0.12
		63,066,514				59,774,848

The table below represents the assumptions for valuing the options and warrants granted in fiscal 2014 and 2013:

	Year Ended June 30,
	2014	2013
Expected life in years	3 - 10	3 - 10
Stock price volatility	185% - 232%	211% - 225%
Risk free interest rate	1.44% - 3.50%	0.37% - 1.84%
Expected dividends	None	None
Forfeiture rate	0%	0%

The assumptions used in the Black Scholes models referred to above are based upon the following data: (1) The contractual life of the underlying non-employee options is the expected life. The expected life of the employee option is estimated by considering the contractual term of the option, the vesting period of the option, the employees' expected exercise behavior and the post-vesting employee turnover rate. (2) The expected stock price volatility was based upon the Company's historical stock price over the expected term of the option. (3) The risk free interest rate is based on published U.S. Treasury Department interest rates for the expected terms of the underlying options. (4) The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and does not expect to pay dividends to common shareholders in the future. (5) The expected forfeiture rate is based on historical forfeiture activity and assumptions regarding future forfeitures based on the composition of current grantees.