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7. STOCKHOLDERS' EQUITY

12 Months Ended

Dec. 31, 2018

Notes to Financial Statements

NOTE 7. STOCKHOLDERS' EQUITY

Our Board of Directors (the “Board”) may, without further action by our shareholders, from time to time, direct the issuance of any authorized but unissued or unreserved shares of preferred stock in series and at the time of issuance, determine the rights, preferences and limitations of each series. The holders of such preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of our common stock. Furthermore, the Board could issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our common stock.

Convertible Series A Preferred Stock

Our authorized Convertible Series A Preferred Stock, $0.01 par value, consists of 1,000,000 shares. At December 31, 2018 and 2017, there were 510,000 shares issued and outstanding. The Convertible Series A Preferred Stock is convertible at the rate of one share of common stock for one share of Convertible Series A Preferred Stock.

Convertible Series B Preferred Stock

Our authorized Convertible Series B Preferred Stock, $1,000 stated value, 7.5% cumulative dividend, consists of 4,000 shares. At December 31, 2018 and 2017, there were no shares issued and outstanding, respectively. Each share of Convertible Series B Preferred Stock may be converted (at the holder’s election) into two hundred shares of our common stock.

Common Stock

During the year ended December 31, 2017, the Company issued 249,824 shares of common stock valued at $38,100 for professional services rendered, of which the Company issued 200,000 shares that were valued at $32,000 and issued to our Board (See Note 9).

In August 2017, warrants to purchase 375,000 and 600,000 shares of common stock were exercised, which resulted in gross proceeds to the Company of $18,750 and $30,000, respectively.

During the year ended December 31, 2018, we issued 362,500 shares of common stock valued at $33,500 to members of our Board (see Note 9).

In May 2018, we issued 1,877,960 shares of common stock in connection with the conversion of $705,212 of principal and accrued interest outstanding under a Note (see Note 6).

Stock Options

In January 2018, we issued options to purchase an aggregate of 100,000 shares of common stock to our Chief Operating Officer, valued at $11,780. The options have an exercise price of $0.12 per share and expire in January 2023. The options were valued using the Black-Scholes model using the following assumptions: volatility: 146%; dividend yield: 0%; zero coupon rate: 2.27%; and a life of 5 years.

In January 2018, we issued options to purchase an aggregate of 20,000 shares of common stock to our Scientific Advisory Board members, valued at $1,810 in total. The options have an exercise price of $0.10 per share and expire in January 2028. The options were valued using the Black-Scholes model using the following assumptions: volatility: 147%; dividend yield: 0%; zero coupon rate: 2.41%; and a life of 10 years.

The following table summarizes stock options outstanding as of December 31, 2018 and 2017:

		December 31, 2018								December 31, 2017
		Number of Options				Weighted Average Exercise Price				Number of Options				Weighted Average Exercise Price
Outstanding, beginning of period			200,000			$	0.76				200,000			$	0.76
Granted			120,000			$	0.12				—				—
Exercised			—				—				—				—
Outstanding, end of period			320,000			$	0.52				200,000			$	0.76

Options outstanding and exercisable by price range as of December 31, 2018 were as follows:

	Outstanding Options								Average Weighted				Exercisable Options
	Range				Number				Remaining Contractual Life in Years				Number				Weighted Average Exercise Price

	$	0.05				20,000				2.02				20,000			$	0.05
	$	0.10				20,000				9.08				20,000			$	0.10
	$	0.12				100,000				4.02				100,000			$	0.12
	$	0.27				40,000				6.01				40,000			$	0.27
	$	0.55				100,000				7.10				100,000			$	0.55
	$	2.10				40,000				1.01				40,000			$	2.10
						320,000				5.05				320,000			$	0.52

Stock Warrants

In March and May of 2017, in connection with the issuance of the Notes, we issued three-year warrants to purchase up to an aggregate of 999,998 shares of common stock at an exercise price of $0.69 per share (see Note 6).

On June 30, 2017, we issued warrants to purchase up to 15,000 shares of common stock at an exercise price of $0.10 per share to the members of the Scientific Advisory Board with a term of five years, which vested upon issuance. The Company utilized the Black-Scholes method to fair value the warrants received by the members of the Scientific Advisory Board at $1,400 with the following assumptions: volatility, 150%; expected dividend yield, 0%; risk free interest rate, 1.83%; and a life of 5 years. The grant date fair value of each share underlying the warrant was $0.09.

During the first and second quarter of 2017, we recognized approximately $23,000 in equity compensation expense for the vested and unvested portion of a warrant issued to a former employee pursuant to his agreement with the Company. In September 2017, the employee resigned from his position with the Company and the unvested portion of his warrant was terminated. For the year ended December 31, 2017, we reversed the equity compensation expense for the accrued but unvested portion of his warrant of $22,000.

In June 2017, we modified the terms of outstanding warrants to purchase 4,000,000 shares of common stock. Pursuant to a settlement agreement, the term of the warrants was increased by 2 years and the exercise price was modified to $0.12 per share (decrease of $0.03 per share). Pursuant to ASC 718, the modified terms of the warrants resulted in approximately $196,000 in incremental equity compensation expense for the year ended December 31, 2017. We utilized the Black-Scholes method to fair value the warrants under the original and modified terms with the following range of assumptions: volatility, 81%-97%; expected dividend yield, 0%; risk free interest rate, 1.28%; and a life of 0.33 - 2.33 years, respectively. The grant date fair value of each share of common stock underlying the warrant was $0.01 and $0.06, respectively.

In July 2017 we issued a warrant to purchase 250,000 shares of common stock to the CEO at an exercise price of $0.10 per share pursuant to his employment agreement with the Company. The warrant was valued at approximately $23,000 and has a term of 5 years. We utilized the Black-Scholes method to fair value the warrant received by the CEO with the following assumptions: volatility, 153%; expected dividend yield, 0%; risk free interest rate, 1.90%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $0.09.

In October 2017, we issued warrants to purchase up to 10,000 shares of common stock at an exercise price of $0.17 per share to the members of the Scientific Advisory Board with a term of five years, which vested upon issuance. The Company utilized the Black-Scholes method to fair value the warrants received by the members of the Scientific Advisory Board at approximately $1,500 with the following assumptions: volatility, 147%; expected dividend yield, 0%; risk free interest rate, 1.98%; and a life of 5 years. The grant date fair value of each share underlying the warrant was $0.15.

In December 2017 we issued a warrant to purchase 3,500,000 shares of common stock to the CEO at an exercise price of $0.12 per share pursuant to his employment agreement with the Company. The warrant was valued at approximately $412,000 and has a term of 5 years. We utilized the Black-Scholes method to fair value the warrant received by the CEO with the following assumptions: volatility, 145%; expected dividend yield, 0%; risk free interest rate, 2.23%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $0.12.

In November 2018 we issued a warrant to purchase 250,000 shares of common stock to the CEO at an exercise price of $0.08 per share pursuant to his employment agreement with the Company. The warrant was valued at approximately $18,000 and has a term of 5 years. We utilized the Black-Scholes method to fair value the warrant received by the CEO with the following assumptions: volatility, 142%; expected dividend yield, 0%; risk free interest rate, 2.95%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $0.07.

The following table summarizes the outstanding common stock warrants as of December 31, 2018 and 2017:

		December 31, 2018								December 31, 2017
		Number of Warrants				Weighted Average Exercise Price				Number of Warrants				Weighted Average Exercise Price
Outstanding, beginning of period			35,501,411			$	0.33				37,076,413			$	0.31
Granted			250,000				0.08				4,774,998				0.24
Exercised			-				-				(975,000	)			0.05
Expired			(9,200,800	)			(0.30	)			(5,375,000	)			0.13
Outstanding, end of period			26,550,611			$	0.34				35,501,411			$	0.33

Warrants outstanding and exercisable by price range as of December 31, 2018 were as follows:

	Outstanding Warrants												Exercisable Warrants
	Exercise Price				Number				Average Weighted Remaining Contractual Life in Years				Number				Weighted Average Exercise Price
	$	0.08				250,000				4.89				250,000			$	0.08
	$	0.10				265,000				3.53				265,000			$	0.10
	$	0.12				3,500,000				3.98				3,500,000			$	0.12
	$	0.12				4,000,000				0.79				4,000,000			$	0.12
	$	0.17				10,000				3.82				10,000			$	0.17
	$	0.27				250,000				3.00				250,000			$	0.27
	$	0.29				10,125,613				1.80				10,125,613			$	0.29
	$	0.30				3,300,000				1.17				3,300,000			$	0.30
	$	0.32				250,000				2.75				250,000			$	0.32
	$	0.42				250,000				2.50				250,000			$	0.42
	$	0.50				250,000				2.25				250,000			$	0.50
	$	0.55				100,000				2.08				100,000			$	0.55
	$	0.69				999,998				1.22				999,998			$	0.69
	$	1.00				3,000,000				1.34				3,000,000			$	1.00
						26,550,611				2.24				26,550,611			$	0.34

There were no unvested warrants outstanding as of December 31, 2018.