PCSV PCS Edventures Com Inc (PK)

Notes to the Financial Statements

June 30, 2016

(Unaudited)

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

PCS Edventures.com, Inc. (the Company) sells into the STEM education market with (1) an existing STEM library and deep expertise in creating STEM solutions comprised of curriculum and materials; (2) a unique learning methodology – an adaptive (customized to individual learners), experiential (hands-on in nature) learning framework that can be monetized in a number of ways, with what the Company believes is an approach to educational assessment and incentivizing students for the future, and the Company is an innovative leader in this area; (3) an innovative K12 robotics and engineering system comprised of hardware and software specifically designed to engage students in STEM topics such as hands-on physics, engineering, and coding; (4) a long history as a prime STEM provider in the Kingdom of Saudi Arabia, a relationship which the Company believes will continue to provide revenue growth; and (5) a continual view to the future of STEM education developments, exemplified by the Company’s anticipated release of a STEM drone program to enhance its other product offerings.

The education market is seasonal in its order flow and the Company has implemented a number of initiatives to provide revenue streams that diversify this order flow seasonality. The Company entered the retail consumer space with a retail product launch this year and also has a working model for experiential learning labs. With a plan to expand higher margin digital delivery products, the Company is now in the development stage of a unique, subscription-based online learning system that can be licensed to schools or non-profit organizations, as well as be used in the home environment. The Company’s acquisition of Thrust UAV is also expected to diversify revenue streams, as drone sales are not anticipated to be as seasonal as our education products.

The financial statements presented herein are those of the Company.

In October 1994, the Company exchanged common stock on a one-for-one basis for common stock of PCS Schools, Inc. As a result of this exchange, PCS Schools, Inc. became a wholly-owned subsidiary of the Company. In the late 1990s, the Company divested the stand-alone learning labs to focus on the creation of turn-key lab modules coupled with web-based technology for use in the classroom and afterschool programs.

On March 27, 2000, the Company changed its name from PCS Education Systems, Inc. to PCS Edventures!. com, Inc.

In August 2001, the Company successfully completed an SB-2 registration filing with the Securities and Exchange Commission (the “SEC”) and began trading publicly on the OTC Bulletin Board.

On November 30, 2005, the Company entered into an agreement with 511092 N.B. LTD., a Canadian corporation (LabMentors), to exchange the Company’s common stock for common stock of 511092 N.B. LTD., which exchange was completed in December, 2005, with LabMentors becoming a wholly-owned subsidiary. In December 2005, the name of this subsidiary was formally changed to PCS LabMentors, Ltd. (See Note 17). The Company divested LabMentors, the wholly-owned subsidiary, in August of 2013.

In January, 2012, the Company committed to a business plan enhancement, which included the opening, operating, and licensing of EdventuresLab private learning centers and launched a pilot program in the spring of 2012. As of June 30, 2014, two EdventuresLab programs had been opened and were operating in the Idaho Treasure Valley.

On January 31, 2013, the Company formed a subsidiary called Premiere Science, Inc., incorporated and registered in the State of Idaho. The subsidiary is 100% wholly-owned by the Company and was formed to use as an additional sales and marketing tool to gain other business opportunities. There were no operations for the subsidiary during the quarter ended June 30, 2016.

On September 26, 2014, the shareholders voted for the proposal to grant the Board of Directors the authority to change the name of the Company in a fashion that will remove the “.com” from its name, but retain the current brand.

On July 23, 2015, the Board of Directors resolved that the name of the Company be changed to PCS Edventures!, Inc. No amendment to the Company’s Articles of Incorporation has yet been filed, although the Company anticipates that, following the assignment of a new Cusip Number and the required filing with the Financial Industry Regulatory Authority, this name change will become effective.

On February 15, 2016, the Company acquired Thrust UAV, a private company engaged in the development and assembly of first person view (FPV) racing drones, for $109,000.

NOTE 2 - UNAUDITED FINANCIAL STATEMENTS

The June 30, 2016, financial statements presented herein are unaudited, and in the opinion of management, include all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows. Such financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report on Form 10-K for PCS Edventures!.com, Inc. for the fiscal year ended March 31, 2016. The June 30, 2016, balance sheet was derived from the audited balance sheet included therein.

The operating results for the three-month period ended June 30, 2016, are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2017.

NOTE 3 - GOING CONCERN

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business. The established sources of revenues are not sufficient to cover the Company’s operating costs. The Company has accumulated significant losses and payables and generated negative cash flows. The combination of these items raises substantial doubt about its ability to continue as a going concern. Management’s plans to alleviate this adverse position are as follows:

The Company’s strategy to remove the going concern doubt is to optimize its operational structure, focus attention on increasing STEM education sales through both channel partners and its direct sales force, and to bring to market a racing drone and STEM education drone product line from Thrust UAV, the Company’s recently acquired drone development and assembly business. We will continue to focus on the improvement of our web-based marketing efforts, expand our sales force and channel partners, and tighten sales processes for our domestic STEM sales. We will continue to use our EdventuresLab program for (1) an R&D test bed for product improvement and refinement with a major emphasis on digital delivery of content; (2) revenue generation through afterschool and summer course fees; (3) revenue through licensing EdventuresLab curriculum and methods; and (4) revenues from STEM retail products. We believe e-commerce sales of kits associated with STEM learning targeting the families of students attending the centers as well as the larger home retail market will provide a consistent, dependable boost in Q3FY2017 revenues to offset low education sales traditionally anticipated during this time frame. We will actively seek retail distribution methods and channels for our robotics retail products and expand their usability for other market segments. Thrust UAV is currently in late-stage development for its first major product release and is forging distributor relationships to take the product to market in Q2 of FY2107.

Revenue for the quarter ending June 30, 2016, was $653,655 compared to revenue of $1,291,219 for same quarter in the year ago period, a decrease of approximately 49%. Net loss for the three months ended June 30, 2016, was ($410,077) compared to a net income of $130,865 for the same quarter in the year ago period, a 413% decrease. These decreases in revenue and net income resulted primarily from the timing of order recognition, as a major customer’s annual order fulfillment and revenue recognition occurred during the last quarter in FY2016 (one quarter earlier than previous historical experience) whereas the previous annual order was completed in the first quarter of FY2016. Additionally, no international contracts were fulfilled in the first quarter of FY2017. Cash used in operations for the three months ended June 30, 2016, was ($26,871), predominately due to research and development costs concerning the Thrust UAV business unit.

While the efforts put in by management and the entire employee team are beginning to be realized, the ability of the Company to continue as a going concern is dependent upon our ability to successfully accomplish the plans described, to raise capital as needed, and to attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Fixed asset depreciation expense for the three months ended June 30, 2016 and 2015 was $2,821 and $2,598, respectively.

Intangible asset amortization expense for the three months ended June 30, 2016 and 2015 was $26,630 and $0, respectively.

Note Payable

On February 12, 2016, the Company entered into a note payable of $84,000. The note does not bear an interest rate, as it has a set nine payment arrangement of $9,333 per month for nine months starting on April 1, 2016, with the final payment due on December 1, 2016. There was no accrued interest and the principal balance was $56,000 as of June 30, 2016.

On February 12, 2016, the Company entered into a note payable of $24,547. The note does not bear an interest rate, as it has a set nine payment arrangement of $2,727 per month for nine months starting on April 1, 2016, with the final payment due on December 1, 2016. There was no accrued interest and the principal balance was $16,365 as of June 30, 2016.

On May 1, 2014, the Company entered into a 36 month note payable of $20,000. The note bears interest at twelve percent (12%) per annum. The Company had paid $12,209 in principal, leaving a balance of $7,791 at June 30, 2016. Total interest accrued as of June 30, 2016 was $2,609.

On April 11, 2014, the Company entered into a 36 month note payable of $60,000. The note bears interest at twelve percent (12%) per annum. The Company has paid $36,141 in principal, leaving a balance of $23,859 at June 30, 2016. Total interest accrued as of June 30, 2016, was $2,565.

Convertible Note Payable – Related Party

On October 21, 2014, the Company entered into at 10% Convertible Promissory Note with a current board member and shareholder, in the amount of $200,000, convertible into shares of common stock of the Company at the market price of $0.04 per share. The original note due date of October 22, 2015, was extended until April 30, 2016. The debt discount was calculated as $50,000. O n April 29, 2016, the note was converted, along with $30,521 in accrued interest, into 5,763,014 shares of common stock. Due to conversion within the terms of the note, no gain or loss was recognized.

Note Payable – Related Party

On January 13, 2012, the Company entered into two separate promissory notes in the amount of $35,000 each for an aggregate amount of $70,000. The notes bear interest at nine percent (9%) per annum and were previously due and payable on or before January 10, 2013. Minimum monthly payments of 1.5% of the loan balances are required and are submitted to the Lenders’ financial institution. The note was amended April 1, 2013, and re-written with a new principal amount of $32,100 each for an aggregate amount of $64,200. The notes bear interest at nine percent (9%) per annum and are due and payable on or before April 1, 2020. The underlying loan requires that the Company pay to the Lenders’ financial institution monthly payments of $1,033 on or before the 1st day of each month, beginning May 1, 2013, and continuing each month in like amounts until the final payment due on April 1, 2020. The Company had paid $24,152 in principal, leaving a balance of $40,048 at June 30, 2016. No interest is accrued for this note payable. Total Interest paid during the quarter ending June 30, 2016 was $944.

On April 18, 2012, the Company entered into a long-term promissory note with one of its employees and board members for $25,000 with an interest rate of seven and one-half percent (7.5%) per annum. The balance is due in full on or before April 18, 2017. Monthly payments are made for interest only to the Lender’s financial intuition. On June 30, 2016, $4,557 over the interest only payment had been paid resulting in an ending principal amount of $20,443. No interest is accrued for this note payable. Total Interest paid during the quarter ending June 30, 2016 was $246.

On February 6, 2016 the Company executed a promissory note with one of its shareholders and board members, for $100,000 at 10% interest per annum. The promissory note was due February 29, 2016, and was extended multiple months to June 30, 2016. On June 8, 2016 this promissory note was combined with promissory notes: March 16, 2016, for $100,000; April 1, 2016, for $100,000; and April 19, 2016, for $40,000. The resulting $340,000 promissory note bearing an interest rate of ten percent (10%) per annum has a due date of December 31, 2016. Total interest accrued as of June 30, 2016 was $3,945.

On March 16, 2016, the Company executed a promissory note with one of our shareholders and board members, for $100,000 at ten percent (10%) interest per annum. The promissory note was due April 30, 2016, and was extended multiple months to June 30, 2016. On June 8, this note was consolidated with promissory notes: February 6, 2016, for $100,000; April 1, 2016, for $100,000; and April 19, 2016, for $40,000. The resulting $340,000 promissory note bearing an interest rate of ten percent (10%) per annum has a due date of December 31, 2016. Total interest accrued as of June 30, 2016 was $2,877.

On April 1, 2016, the Company executed a promissory note with one of our shareholders and board members, for $100,000 at ten percent (10%) interest per annum. The promissory note was due April 30, 2016, and was extended multiple months to June 30, 2016. On June 8, this note was consolidated with promissory notes: February 6, 2016, for $100,000; March 16, 2016, for $100,000; and April 19, 2016, for $40,000. The resulting $340,000 promissory note bearing an interest rate of ten percent (10%) per annum has a due date of December 31, 2016. Total interest accrued as of June 30, 2016 was $2,493.

On April 19, 2016, the Company executed a promissory note with one of our shareholders and board members, for $40,000 at ten percent (10%) interest per annum. The promissory note was due April 30, 2016, and was extended multiple months to June 30, 2016. This note was consolidated with promissory notes: February 6, 2016, for $100,000; March 16, 2016, for $100,000; April 1, 2016, for $100,000. The resulting $340,000 promissory note bearing an interest rate of ten percent (10%) per annum has a due date of December 31, 2016. Total interest accrued as of June 30, 2016 was $997.

On June 8, 2016 the Company executed a promissory note with one of its shareholders and board members, for $340,000 at 10% interest per annum that consolidated the following notes: February 6, 2016, for $100,000; March 16, 2016, for $100,000; April 1, 2016, for $100,000; and April 19, 2016 for $40,000. This promissory note is secured with the Company’s inventory, fixed and liquid assets, property, equipment, intangible assets and intellectual property, and the Company’s net loss carry forward . The promissory note is due December 31, 2016. Total interest accrued as of June 30, 2016 for all four promissory notes discussed above and combined on June 8, 2016 was $10,312.

Line of Credit

On September 13, 2011, the Company drew down a line of credit at a financial institution in the amount of $39,050. The line of credit bears interest at 17.5% per annum. The Company makes variable monthly payments. For the period ending June 30, 2016, the company paid $890 in principle. Since inception, the Company has paid $22,437 in principal, leaving a balance of $16,613 payable. Total interest paid during the period ending June 30, 2016, was $393.

Note Payable, Related Party, Long Term

On October 21, 2014, the Company executed a promissory note with one of its shareholders and board members in the amount of $870,457. The note, originally due May 31, 2015, was non-convertible, had an interest rate of ten percent (10%) per annum, was secured by accounts receivable, fixed assets, intellectual property, and the Company’s net loss carry forward and was used to finance operations and purchase inventory. This note’s due date was extended to September 30, 2015, and included new cash loaned to the Company of $175,000. This note includes $7,957 of accrued interest on the paid off notes listed below. This note paid off the following notes: $50,000 of the February 11, 2014, note; $250,000 of the Convertible long term related party note; $145,000 of the note dated May 7, 2014; $29,500 of the June 27, 2014, 105,000 note; $105,000 of the note dated July 21, 2014; $210,000 of the note dated July 28, 2014; $25,000 of the note dated August 8, 2014; and $123,000 of the note dated August 20, 2014. $22,222 of interest was rolled into principal on January 1, 2015, resulting in a principal balance of $892,679. On June 8, 2016, this note was combined with the January 22, 2015, promissory note, at ten percent (10%) per annum, with the principal balance of $400,000, resulting in a new note with a balance due of $1,292,679, due July 1, 2018. This promissory note is secured with the Company’s inventory, fixed and liquid assets, property, equipment, intangible assets and intellectual property, and the Company’s net loss carry forward . The accrued interest was $174,243 as of June 30, 2016.

On January 22, 2015, the Company issued 2,000,000 warrants to a shareholder and board member with a 36 month term to purchase “restricted” Rule 144 common stock, no par value (the “Shares”), as consideration for the issuance of a promissory note in the amount of $400,000, from the Company at a purchase price of $0.04 per share of common stock (the “Exercise Price”). These warrants are fully vested and exercisable. The warrants were evaluated for embedded derivatives in accordance with ASC 815 and were found to not include any embedded derivatives. The warrants attached to the note were valued using the Black Scholes Valuation Model. The assumptions used in the model included the historical volatility of the Company’s stock of 180%, and the risk-free rate for the periods within the expected life of the warrant based on the U.S. Treasury yield curve in effect of 0.35%. The resulting fair value was $66,717. This value was recorded as a debt discount and fully amortized as of March 31, 2016. On June 8, 2016, this note was combined with the January 22, 2015, promissory note, at 10% per annum, with the principal balance of $400,000, resulting in a new note with a balance of $1,292,679, due July 1, 2018. The accrued interest was $174,243 as of June 30, 2016.

On February 17, 2015 and April 20, 2015, the Company executed Promissory Notes with one of our shareholders and board members for $135,000 each at ten percent (10%) interest per annum, due June 30, 2015, secured by accounts receivable on completed contracts to finance operations and purchase inventory. $95,000 of the principle balance of the April 20, 2015 note was paid, leaving a $40,000 principle balance. The Lender had provided the Company with extensions of due dates for both notes through June 30, 2016. The principal of $135,000 was combined with the $40,000 remaining principal into a $175,000 note due January 15, 2019. The Accrued interest at June 30, 2016, was $27,355.

On June 8, 2016, the company executed Promissory Notes with one of our shareholders and board members for $1,292,679. The note is due July 1, 2018, has an interest rate of ten percent (10%) per annum, is secured by inventories, fixed assets, intellectual property, and the Company’s net loss carry forward. This promissory note for $1,292,679, combined and replaced the October 21, 2014 promissory note for $892,679 and January 16, 2015 promissory note for $400,000 per the table below.

On June 8, 2016, the company executed Promissory Notes with one of our shareholders and board members for $175,000. The note is due January 15, 2019, has an interest rate of ten percent (10%) per annum, is secured by inventories, fixed assets, intellectual property, and the Company’s net loss carry forward. This promissory note for $175,000, combined and replaced the promissory note dated February 17 ^th and March 5 ^th , 2015 for $135,000 and the unpaid principle balance of $40,000 remaining on the promissory note dated April 20, 2015 per the table below.

Convertible Note Payable – Non-related party

On August 1, 2012, the Company issued amendments to the convertible note agreements (convertible into common stock at a rate of $0.15 per share) in the aggregated amount of $215,000 and extended the due date with repayment in the amount of $40,000 per quarter to begin April, 2013, and the final payment due in August, 2014, with any remaining balance due at that time. In consideration for extending the due date of the promissory notes, the expiration dates on the warrants issued (fully expensed in the prior period) on March 31, 2011, and June 27, 2011, were amended and extended an additional three years, making the new expiration dates August 1, 2017. At the Lenders’ sole option, Lenders may elect to receive payment of their respective notes and all accrued interest in restricted common stock of the Company at the price per share of said common stock at same rate as the warrants. On June 7, 2013, the Company executed an amendment to the loan transaction. The amended transaction involved the extension of the promissory notes from April 30, 2013, to April 30, 2016, with the creditors waiving any default under the previous note. The Company made interest payments to each of the eight note holders for all accrued interest from August 1, 2012, to April 30, 2013, for consideration of the extension. On the fourth extension, all accrued interest was combined with the original principal amount as of July 31, 2012. On July 13, 2015, three non-related party conversions with a principal balance of $102,033, combined with the accrued interest to date of $17,894, were converted to 799,514 shares of common stock. As of June 30, 2016, the ending principal balance was $90,696. Interest accrued as of June 30, 2016 was $24,972.

NOTE 9 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company includes fair value information in the notes to financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made.

NOTE 10 – NOTE RECEIVABLE

On July 31, 2013, the Company signed a Memorandum of Understanding with a Canadian company owned by Joseph Khoury (“JAK”), proposing a purchase agreement in which JAK would purchase LabMentors from the Company for USD $150,000. JAK agreed to assume 100% of LabMentors outstanding liabilities of approximately $100,000, and to pay the remainder through a note receivable in the amount of $50,740, carried an annual interest rate of three percent (3%) compounded annually and was to be paid over a period of 60 months in equal monthly payments beginning in month 13 of the 60 month period. This sale was finalized during the period ending September 30, 2013. On April 14, 2015, JAK informed the Company of the potential closure of LabMentors and an inability to meet its note obligations. LabMentors had made three note payments as of the date of the notification totaling $3,399.

In evaluation of the notes potential for collectability, a note allowance was accrued to the full amount of the note receivable balance. The note receivable principal balance at June 30, 2015 was $49,513. The note receivable allowance balance at June 30, 2016, and June 30, 2015, was $49,513 and $49,513, respectively.

NOTE 11 - ACCOUNTS RECEIVABLE

The Company had accounts receivable of $786,241 net of an allowance for $2,096 for the fiscal year ended March 31, 2016. This accounts receivable balance included a major international customer’s final work orders; a major domestic customer’s annual sales order; and an international customer’s lab royalty fees. The Company had an accounts receivable balance of $307,677 net of allowance of $2,096 as of June 30, 2016. The quarter over quarter decrease reflects the payments from these two major customers.

NOTE 12 – INVENTORY

The Company had inventory of $192,527 net of an inventory reserve of $3,391 for the fiscal year ended March 31, 2016. The inventory reserve is consideration for obsolete and slow moving inventories. This March 31, 2016 inventory balance reflected the shipment of the two major customer orders mentioned in Note 11. The majority of summer camp sales span February through June. Summer camp components are generally purchased within the week ordered to keep inventories lean. The company had an inventory balance of $176,740 net of an inventory reserve of $3,391 as of June 30, 2016. The quarter over quarter decrease reflects the shipment of summer camp sales orders in que during peak season.

NOTE 13 - COMMITMENTS AND CONTINGENCIES

a. Operating Lease Obligation

The Company leases its main office under a non-cancelable lease agreement accounted for as an operating lease. On December 31, 2013, the Company signed an amendment to the existing lease to reduce the leased square feet to 5,412 for $6,765 per month for the 12 months ending December 31, 2014. On February 1, 2015, the Company signed a new lease to reduce the square feet to 3,609 for $4,511 per month for the 12 months ending January 31, 2016. The Company signed a lease amendment for the main office space on May 11, 2016, for $15.48 per square foot or $4,647 per month for the 12 months expiring May 31, 2017.

Rent expense for the corporate offices was $17,896 and $14,185 for the quarters ended June 30, 2016, and 2015, and $54,135 and $77,869 for the 12 months ended March 31, 2016, and 2015, respectively, under this lease arrangement.

The Company leases additional warehouse space in Boise, Idaho. Originally, this warehouse space consisted of approximately 2,880 square feet. The lease expired in June 2012. This lease was extended for 24 months, beginning July 1, 2012. The lease was extended to a new expiration of October 31, 2015. The Company signed a sixth amendment on April 15, 2015, to lease an additional approximately 1,400 square feet bay adjacent to the existing leased space. Rent expense for the warehouse was $5,620 and $5,620 for the quarters ended June 30, 2016, and 2015, respectively, and $25,130 and $16,225 for the 12 months ended March 31, 2016, and 2015, respectively.

On March 15, 2016, the Company leased a warehouse, office space, and manufacturing facility of approximately 10,000 square feet for $6,300 per month for 12 months. On April 28, 2016, the Company moved all inventories, property, plant, and equipment to a new warehouse facility. Rent expense for the new warehouse location was $18,265 and $0 for the quarters ended June 30, 2016, and 2015, respectively, and $3,150 and $0 for the 12 months ended March 31, 2016, and 2015, respectively.

The Company leased an additional learning lab site in Eagle Idaho in the first quarter of FY2015. The lease term has a three year term for 1,050 square feet, for an annual base rent of $16,640 or $1,387 per month, with three percent (3%) growth per year.

b. Litigation

On or about May 18, 2015, the Company was named as a co-defendant in a legal action related to one of its employees, alleged to have been driving an automobile negligently while on work related services for the Company, and causing damages to the plaintiffs in the action. The action was brought in the District Court of the Fourth Judicial District of the State of Idaho, in and for the County of Ada, Civil Action number CV PI 1507419. The insurance carrier has indicated the claim would not be supported if the employee was not on company business. The Company has engaged legal counsel to represent it in this matter.

On October 13, 2015, the Company filed a Summons and Complaint against Ty Jacobsen, dba Jacobsen Enterprises. The complaint primarily involved defamation and breach of contract. The Complaint is un-resolved at this time, and the Company is in negotiations with Mr. Jacobsen. The outcome of this matter is unknown as of the date of this Quarterly Report.

c. Contingencies

None.

NOTE 14 - STOCKHOLDERS’ EQUITY

a. Common Stock

During the three months ending June 30, 2015, $22,000 has been accrued in Restricted Stock Units payable for the issue of 200,000 shares for services that will be issued in future periods. Each restricted stock unit is valued at a range from $0.11, based on the closing price of the Company’s common stock at the date of grant. The total amount recorded in stock payable as of June 30, 2015, for these services and other prior period services is $31,000.

During the three months ending June 30, 2015, the Company expensed amounts related to stock options and warrants granted in the current period as well as prior periods valued at $3,547.

During the three months ended June 30, 2015, the company accrued $8,250 payable in Restricted Stock Unit to its non-management directors. Each restricted stock unit is valued at a range from $0.05 to $0.10, based on the closing price of the Company’s common stock at the date of grant. These agreements call for payment of current year director fees via issuance of restricted stock units over a vesting period of not less than twelve months, and require continued service for twelve months and reelection at the next annual shareholder meeting. As of June 30, 2015, $20,367 has been accrued for director services and recorded in stock payable.

During the three months ended June 30, 2015, the company issued a total of 75,000 Rule 144 restricted common stock shares in two transactions, to a contractor for services. On April 26, 2016, the company issued 50,000 shares valued at $0.08, based on the common stock closing price of the company on the day of grant. On May 10, 2016 the company issued 25,000 Rule 144 restricted common stock shares valued at $0.09, based on the common stock closing price of the company on the date of grant.

During the three months ending June 30, 2016, $1,620 had been accrued in Restricted Stock Units payable for the issue of 81,000 shares for services that will be issued in future periods. Each Restricted Stock Unit was valued at $0.04, based on common stock closing price of the Company on the date of any grant, then revalued quarterly to $0.08 at March 31, 2016, and June 30, 2016. The total amount recorded in Restricted Stock Units payable as of June 30, 2016, for these services and other prior period services, was $4,860.

During the three months ending June 30, 2016, the Company expensed amounts related to stock options and warrants granted in the current period as well as prior periods valued at $7,336.

During the three months ended June 30, 2016, the Company accrued $16,000 in Stock Payable as a stock award of 200,000 Rule 144 restricted common stock shares to an employee. E ach stock unit awarded was valued at $0.08, based on the closing price of the Company’s common stock at the date of grant. The common stock was subsequently issued on July 8, 2016.

On October 21, 2014, the Company entered into at ten percent (10%) Convertible Promissory Note with a current board member and shareholder, in the amount of $200,000, convertible into shares of common stock of the Company, at the closing market price of $0.04 on such date. O n April 29, 2016, the note was converted, along with $30,521 in accrued interest, into 5,763,014 shares of common stock. Due to conversion within the terms of the note, no gain or loss was recognized.

b. Preferred Stock

The Company has 20,000,000 authorized shares of preferred stock. As of June 30, 2016, there are no preferred shares issued or outstanding.

NOTE 15 - BASIC AND DILUTED NET LOSS PER COMMON SHARE

Basic net loss per common share for the three-month periods ended June 30, 2016, and 2015, are based on 80,418,842 and 74,235,284, respectively, of weighted average common shares outstanding. Diluted net loss per share for the three-month period ended June 30, 2016 and 2015, are based on 84,818,314 and 78,791,182, respectively, of weighted average common shares outstanding.

NOTE 16 - DILUTIVE INSTRUMENTS

Stock Options

The Company is required to recognize expense of options or similar equity instruments issued to employees using the fair-value-based method of accounting for stock-based payments in compliance with the financial accounting standard pertaining to share-based payments. This standard covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Application of this pronouncement requires significant judgment regarding the assumptions used in the selected option pricing model, including stock price volatility and employee exercise behavior. Most of these inputs are either highly dependent on the current economic environment at the date of grant or forward-looking over the expected term of the award.

No common stock options were exercised during the quarter ended June 30, 2016.

January 1, 2014, the Company granted 40,000 incentive options each to three employees per year for three years. These options were issued as incentive compensation to the employee and require the achievement of certain milestones. The options were valued using the Black-Scholes valuation model. The options have an expected volatility rate of 259.07% calculated using the Company common stock price for a three-year period.  A risk free interest rate of 0.26% - 0.76% was used to value the options. The total value of these options was $17,726. The options vest over a three-year period and are exercisable at a range of $.05 to $0.6 per share, which represents the fair market value at the date of grant in accordance with the 2009 Equity Incentive Plan. As of June 30, 2015, $6,923 of the total value was expensed. $1,041 was expensed in the quarter ending June 30, 2015. As of June 30, 2016, $15,735 of the total value was expensed. $516 was expensed in the quarter ending June 30, 2016.

February 1, 2014, the Company granted 40,000 incentive options each to one employee per year for three years. These options were issued as incentive compensation to the employee and require the achievement of certain milestones. The options were valued using the Black-Scholes valuation model. The options have an expected volatility rate of 258.20% calculated using the Company common stock price for a three-year period.  A risk free interest rate of 0.41% - 0.64% was used to value the options. The total value of these options was $4,107. The options vest over a three-year period and are exercisable at a range of $.05 to $0.6 per share, which represents the fair market value at the date of grant in accordance with the 2009 Equity Incentive Plan. As of June 30, 2015, $1,710 of the total value was expensed. $345 was expensed in the quarter ending June 30, 2015. As of June 30, 2016, $3,417 of the total value was expensed. $345 was expensed in the quarter ending June 30, 2016.

On November 18, 2015, the Company granted 200,000 stock options to an officer, Robert Grover. The expected volatility rate of 186.52% calculated using the Company stock price over the two-year period ending November 17, 2015. A risk free interest rate of 0.80 % was used to value the options. The options were valued using the Black-Scholes valuation model. The total value of the options was $14,659. The options vest over a three year period and are exercisable at $0.09 per share, which represents the fair market value at the date of grant in accordance with the 2009 Equity Incentive Plan. As of June 30, 2016, $9,027 of the total value of the options had been expensed. In the quarter ending June 30, 2016, $3,635 of the total value was expensed.

On February 16, 2016, the Company granted 850,000 incentive stock options to three employees. The expected volatility rate of 218.68% was calculated using the Company stock price over the period beginning February 14, 2014, through the last business date prior to issue. A risk free interest rate of 0.29 % was used to value the options. The options were valued using the Black-Scholes valuation model. The total value of these options was $24,154. The options vest over a two-year period and are exercisable at $0.04 per share, which represents the fair market value at the date of grant in accordance with the 2009 Equity Incentive Plan. As of June 30, 2016, $4,213 of the total value of the options had been expensed. In the quarter ending June 30, 2016, $2,840 of the total value was expensed.

During the quarter ending June 30, 2016, the Company did not grant options.

Warrants

On January 22, 2015, the Company issued 2,000,000 warrants to a shareholder and board member with a 36 month term to purchase “restricted” Rule 144 common stock, no par value (the “Shares”), as consideration for the issuance of a promissory note in the amount of $400,000, from the Company at a purchase price of $0.04 per share of common stock (the “Exercise Price”). These Warrants are fully vested and exercisable. The warrants were evaluated for embedded derivatives in accordance with ASC 815 and were found to not include any embedded derivatives. The warrants attached to the note were valued using the Black Scholes Valuation Model. The assumptions used in the model included the historical volatility of the Company’s stock of 180%, and the risk-free rate for the periods within the expected life of the warrant based on the U.S. Treasury yield curve in effect of 0.35%. The resulting fair value was $66,717. This value was recorded as a debt discount and was amortized over the life of the loan. The remaining $38,184 of the debt discount was amortized during the quarter ending June 30, 2015.