Note 8. Shareholders’ Equity

Preferred Stock

The Company's Amended Articles of Incorporation authorizes the issuance of 50,000,000 shares of Preferred Stock, subject to any limitations prescribed by law, without further vote or action by the stockholders, to issue from time to time shares of preferred stock in one or more series. Each such series of Preferred Stock shall have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as shall be determined by the Company's board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.

Series A Convertible Preferred Stock

The Company has authorized a total of 10,000,000 shares of Series A Convertible Preferred Stock (the “Series A”). The Series A is convertible at any time into shares of the Company’s common stock at the conversion rate of two shares of common stock per each share of Series A converted. The Series A is treated on an “as converted” basis for both voting and liquidation rights. On November 20, 2014, the CEO of the Company converted 10,000,000 shares of preferred Series A to 20,000,000 shares of common stock. There are no shares of Series A preferred stock outstanding as of July 31, 2015.

Options

2010 Equity Incentive Plan

On January 15, 2010, the Board and Stockholders approved and adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan is intended to promote the interests of the Company by attracting and retaining exceptional employees, consultants, directors, officers and independent contractors (collectively referred to as the “Participants”), and enabling such Participants to participate in the long-term growth and financial success of the Company. Under the 2010 Plan, the Company may grant stock options, which are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Incentive Stock Options”), non-qualified stock options (the “Nonqualified Stock Options”), stock appreciation rights (“SARs”) and restricted stock awards (the “Restricted Stock Awards”), which are restricted shares of common stock (the Incentive Stock Options, the Nonqualified Stock Options, the SARs and the Restricted Stock Awards are collectively referred to as “Incentive Awards”). Incentive Awards may be granted pursuant to the 2010 Plan for 10 years from the Effective Date.

From time to time, the Company may issue Incentive Awards pursuant to the 2010 Plan. Each of the awards will be evidenced by and issued under a written agreement. In accordance with the rules of the plan, the exercise price of options granted shall be not less than 110% of the average of the closing price for the 30 days preceding the grant date.

At July 31, 2015, 477,778 options remain available for future grant under the 2010 Plan

As of July 31, 2015, there were options outstanding under the 2010 Plan to purchase 200,000 shares of common stock at a purchase price of $0.20 per share, 250,000 shares of common stock at a purchase price of $0.09 per share, 75,000 shares of common stock at a purchase price of $0.03 per share, 275,000 shares of common stock at a purchase price of $0.16 per share and 1,000,000 shares of common stock at a purchase price of $0.24 per share. No options have been exercised since the Plan was created.

The Company recognized a non-cash stock compensation expense of $121,769 and $39,382 for the years ended July 31, 2015 and 2014, respectively in connection with options issued under the 2010 Plan.

No options were granted under the 2010 Plan during the fiscal year ending July 31, 2015.

2014 Equity Incentive Plan

On June 2, 2014, the Board and Stockholders approved and adopted the 2014 Equity Incentive Plan (the “2014 Plan”).

The 2014 Plan is intended to promote the interests of the Company by attracting and retaining exceptional employees, consultants, directors, officers and independent contractors (collectively referred to as the “Participants”), and enabling such Participants to participate in the long-term growth and financial success of the Company. Under the 2014 Plan, the Company may grant stock options, which are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Incentive Stock Options”), non-qualified stock options (the “Nonqualified Stock Options”), stock appreciation rights (“SARs”) and restricted stock awards (the “Restricted Stock Awards”), which are restricted shares of common stock (the Incentive Stock Options, the Nonqualified Stock Options, the SARs and the Restricted Stock Awards are collectively referred to as “Incentive Awards”). Incentive Awards may be granted pursuant to the 2014 Plan for 10 years from the Effective Date.

From time to time, the Company may issue Incentive Awards pursuant to the 2014 Plan. Each of the awards will be evidenced by and issued under a written agreement. In accordance with the rules of the plan, the exercise price of options granted shall be not less than 110% of the average of the closing price for the 30 days preceding the grant date.

The Board reserved a total of 10,000,000 shares of Common Stock for issuance under the 2014 Plan. If an incentive award granted under the 2014 Plan expires, terminates, is unexercised, or is forfeited, or if any shares are surrendered in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the Plan.

The number of shares subject to the 2014 Plan, any number of shares subject to any numerical limit in the 2014 Plan, and the number of shares and terms of any Incentive Award may be adjusted in the event of any change in the Company outstanding Common Stock by reason of any stock dividend, spin-off, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares, or similar transaction.

The Company uses the Black-Scholes valuation model as the method for determining the estimated fair value of certain financial instruments.

Expected Term—Expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined using the contractual term of the option grant.

Expected Volatility—Expected volatility is estimated by studying the volatility of our stock for similar terms.

Expected Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input. The Company has never paid dividends and has no plans to pay dividends.

Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero-coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.

On August 11, 2014, 1,750,000 options were granted to two employees at an exercise price of $0.24 per share. By using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 1.86%; volatility of 200%; expected life of 6.5 years; and zero dividend yield; the Company recognized a non-cash stock compensation charge of $167,332 for the year ended July 31, 2015 in connection with the issuance and vesting of these options.

On September 5, 2014, 750,000 options were granted to one employee at an exercise price of $0.24 per share. By using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 1.92%; volatility of 200%; expected life of 6.5 years; and zero dividend yield, the Company recognized a non-cash stock compensation charge of $53,432 for the year ended July 31, 2015 in connection with the issuance and vesting of these options.

A summary of stock option activity under the 2010 and 2014 Plans is as follows:

	Options available		Options		Wighted average
	for grant		outstanding		exercise price
Balance at July 31, 2013		1,732,778		545,000	$	0.13
Granted		(1,305,000)		1,305,000	$	0.22
Balance at July 31, 2014		427,778		1,850,000	$	0.19
Authorized		10,000,000		-	$	-
Granted		(2,500,000)		2,500,000	$	0.24
Canceled, forfeited, or expired		50,000		(50,000)	$	0.18
Balance at July 31, 2015		7,977,778		4,300,000	$	0.22

Options exercisable as of July 31, 2014 were:

		Options outstanding		Weighted average
Exercise price		at July 31, 2014		remaining life
$	0.03		45,000		8.09
$	0.09		175,000		7.75
$	0.16		45,750		9.46
$	0.20		220,000		6.08
$	0.24		75,000		9.79
			560,750

Options exercisable as of July 31, 2015 were:

		Options outstanding		Weighted average
Exercise price		at July 31, 2015		remaining life
$	0.03		75,000		7.09
$	0.09		250,000		6.75
$	0.16		137,250		8.46
$	0.20		220,000		5.08
$	0.24		1,125,000		8.98
			1,807,250

As of July 31, 2015, unrecognized compensation cost related to unvested stock options amounted to $769,800, which will be recognized over the remaining weighted-average requisite service period of 1.49 years. The intrinsic value of the Company’s outstanding common stock options as of July 31, 2015 was zero.

For the year ended July 31, 2015 non-cash stock compensation expenses of $143,881 were allocated to research and development expenses and $222,514 to general and administrative expenses. All non-cash stock compensation expenses for the year ended July 31, 2014 were allocated to general and administrative expenses.

Common Stock

In September 2011, the Company amended and restated its Articles of Incorporation to effectuate a 1 for 8 reverse stock split by decreasing the authorized shares for issuance from 1,000,000,000 shares of common stock, $0.001 par value per share to 125,000,000 shares of common stock, $0.008 par value per share. On June 8, 2015, the Company increased the authorized shares of common stock to 200,000,000. On August 4, 2015, the Board and holders of a majority of the outstanding capital stock authorized and approved an amendment to increase the authorized shares of common stock to 700,000,000. There were 55,999,118 and 26,162,093 shares of common stock outstanding as of July 31, 2015 and July 31, 2014, respectively.

Kodiak Capital Group LLC Investment Agreement

On October 31, 2011, we entered into an Investment Agreement and a Registration Rights Agreement with Kodiak Capital Group, LLC (the “Investor”) to purchase up to $1,000,000 of the Company’s Common Stock. In accordance with these Equity Line Transaction agreements, the Company filed a registration statement on Form S-1, which was declared effective on January 25, 2013. The Investment Agreement allows the Company to sell Common Stock in increments of $25,000 at a per share purchase price equal to 80% of the volume weighted average price of the Common Stock over five consecutive trading days. The agreements provide for the Company to exercise put options that obligate the Investor to purchase common stock shares valued at $25,000 per each put option.

Pursuant to the agreement, the Company issued the following common stock to the Investor, each in exchange for a $25,000 investment: 120,193 shares on March 25, 2014; 208,333 shares on May 12, 2014; 100,806 shares on May 27, 2014; 148,810 shares on September 23, 2014; 168,919 shares on October 3, 2014; 219,491 shares on October 13, 2014; 223,215 shares on October 22, 2014; and 215,518 shares on November 4, 2014.

On April 20, 2015, we entered into a new Investment Agreement and a Registration Rights Agreement with the same investor to purchase up to $1,000,000 of the Company’s Common Stock. The Investment Agreement allows the Company to sell Common Stock in increments of $25,000 at a per share purchase price equal to 80% of the volume weighted average price of the Common Stock over five consecutive trading days. The agreement provides for the Company to exercise put options that obligate the Investor to purchase common stock shares valued at $25,000 per each put option as long as the Company has an effective registration statement in order to register the purchased shares. The Company issued 500,000 shares of common stock to Kodiak as a commitment fee on the date of the transaction and recorded $95,000 as other expense on the statement of operations to account for the value of the issued shares based on the trading price of the Company's stock on the issuance date.

Pursuant to the 2015 agreement with the investor, the Company issued 500,000 shares on April 24, 2015 in exchange for a $25,000 investment.