7. Notes Payable | 3 Months Ended |
Dec. 31, 2013 |
Debt Disclosure [Abstract] | ' |
7. Notes Payable | ' |
(A) Related Party |
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The following is a summary of the Company’s related party liabilities: |
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| | 31-Dec-13 | | | 30-Sep-13 | |
Notes payable (1) | | $ | 20,915 | | | $ | 20,915 | |
Advances (2) | | | 7,226 | | | | 7,226 | |
Less: payments | | | (968 | ) | | | (968 | ) |
Total related party liabilities | | $ | 27,173 | | | $ | 27,173 | |
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(1) The note is non-interest bearing, unsecured, and due on demand. |
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(2) The advances are non-interest bearing, unsecured, and due on demand. |
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(B) Convertible Debt – Secured – Derivative Liabilities |
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Fife Note |
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On February 15, 2011, the Company issued convertible notes, totaling $300,000, to John Fife with the following provisions: |
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● | Interest rate 6%; | | | | | | | |
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● | Default interest rate of 12%; | | | | | | | |
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● | Notes are due 48 months from the issuance date of February 23, 2011; | | | | | | | |
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● | Conversion rates equal to 70% or 80% of the market price on date of conversion by applying a specified formula that utilizes the average of the 3 lowest quoted closing prices 20 days immediately preceding the conversion date, and then takes the higher of the average 3 lowest closing prices or $0.12 floor price; and | | | | | | | |
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● | Secured by the Chief Executive Officer’s 15,000,000 shares of the Company common stock. | | | | | | | |
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The investor is entitled at its option to convert all or part of the principal and accrued interest into shares of the Company’s common stock at a conversion price as discussed above. The Company classified the embedded conversion feature as a derivative liability due to management’s assessment that the Company may not have sufficient authorized number of shares of common stock required to net-share settle. |
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On February 23, 2011, the Company entered into asecured convertible promissory note between the Company and a third party (the “Lender”). The note balance totaled $300,000. The Lender expects to contribute funds in tranches, the first tranche being equal to $300,000, and an additional ten tranches equal to $200,000 each commencing on October 23, 2011, and continuing each subsequent month for ten months. No additional draw downs occurred during the year ended September 30, 2011. In January 2012, the Company received $22,000 from a lender for an additional investment, under the same terms above, which is convertible to shares pursuant to the terms described below. See Note 9(A) related to conversions of this $300,000 note. |
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The number of shares of common stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the higher of (i) the Market Price or (ii) the Floor Price. Where “Market Price” is defined as 80% of the average of the closing bid price for the three (3) days with the lowest closing bids during the twenty trading days immediately preceding the conversion date, provided, however, that if the market prices fall below $0.05 per share of common stock the conversion factor shall be reduced by 10 percentage points. The “Floor Price” is defined as $.012. The trading data used to compute the closing bid shall be as reported by Bloomberg, LP or if such information is not then being reported by Bloomberg, then as reported by such other data information sources as may be selected by the Lender. |
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The note also contains language that removes the $0.12 floor if certain “triggering events” occur during the life of the note. Since the floor price can be removed upon any one of these events occurring, the conversion feature of this note has two elements: normal conversion and conversion upon a triggering event. |
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Upon each occurrence of any of the following triggering events , (a) the conversion factor shall be reduced by 10 percent points (i.e., if the conversion factor were 80% immediately prior to the occurrence of the triggering event, it shall be reduced to 70% upon the occurrence of a triggering event), (b) the conversion price shall be computed without regard to the Floor Price, and (c) this note shall accrue interest at the rate of 1% per month, whether before or after judgment; provided, however, that (1) in no event shall the triggering effects be applied more than two times, and (2) notwithstanding any provisions to the contrary herein, in no event shall the applicable interest rate at any time exceed the maximum interest rate allowed under applicable law: |
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On October 4, 2012, Mr. Fife foreclosed on his note to us because we were in default. According to the terms of the indenture, Mr. Fife was issued 15 million shares to forestall on his claim against the firm. At the time, the common stock of the Company was trading at $.0039. Therefore, a corresponding expense of $58,500 was recorded at that time and included in General and Administrative Expense. |
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As of December 31, 2013, as a result of the triggering events (a) and (b), the Company computes the exercise price related to convertible debt, without regard to the floor price. |
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The normal conversion resulted in a debt discount under ASC 470-25-8 since the calculated market price as of the date of the note was higher ($0.145) than the conversion floor of $0.12. |
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At the balance sheet date, $93,600 of the debt has been converted leaving a principal balance of $206,400. |
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Lucosky Brookman LLP Note |
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Effective on January 10, 2012, the Company issued to Lucosky Brookman LLP (“Lucosky”) a convertible promissory note ( the “Lucosky Note”) for legal services provided since February 1, 2011 of $53,727. The Lucosky Note bears interest at twelve percent (12%) per annum and has a term of six months. Should the Lucosky Note not be paid by the Maturity Date, an event of Default occurs and the interest rate becomes eighteen percent (18%) per annum. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 50% of the average of the closing price for the five (5) days immediately preceding the conversion date. |
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During the quarter ended December 31, 2013, $34,790 of the debt was converted into common stock. $18,937 of principal value remains |
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Consulting Notes |
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During the last six months of the prior fiscal year, the Company issued notes totaling $215,000 to a consultant. $165,000 of the Notes bear interest at twelve percent (12%) per annum and mature on June 30, 2014. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 50% of the low closing bid price for the five (5) days immediately preceding the conversion date. |
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The remaining $125,000 of the Notes bear no interest and have a six month term. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 50% of the low closing bid price for the five (5) days immediately preceding the conversion date. These Notes are due in the second quarter of the Fiscal year ended September 30, 2014. |
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St. George Notes |
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On August 27, 2013, St. George Investments LLC (“St. George”) advanced the Company $12,500 (“St. George Note”). The St. George Note has a one year term, an interest rate of ten percent and a ten percent original issue discount (“OID”). An OID represents the difference between the amount received and the face value of the note. The St. George Note has a face value of $13,750, and the OID will be amortized into expense pro-rata over the term of the Note. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 60% of the average of the two (2) low closing bid prices for the ten (10) days immediately preceding the conversion date. |
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On October 10, 2013, St. George Investments LLC (“St. George”) advanced the Company $15,000 (“St. George Note”). The St. George Note has a one year term, an interest rate of ten percent and a ten percent original issue discount (“OID”). An OID represents the difference between the amount received and the face value of the note. The St. George Note has a face value of $13,750, and the OID will be amortized into expense pro-rata over the term of the Note. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 60% of the average of the two (2) low closing bid prices for the ten (10) days immediately preceding the conversion date. |
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On November 19, 2013, St. George Investments LLC (“St. George”) advanced the Company $10,000 (“St. George Note”). The St. George Note has a one year term, an interest rate of ten percent and a ten percent original issue discount (“OID”). An OID represents the difference between the amount received and the face value of the note. The St. George Note has a face value of $13,750, and the OID will be amortized into expense pro-rata over the term of the Note. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 60% of the average of the two (2) low closing bid prices for the ten (10) days immediately preceding the conversion date. |
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Other Notes |
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The Company has received another $111,000 in proceeds from multiple investors. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 50% of the low closing bid price for the twenty (20) days immediately preceding the conversion date. There is no interest on these Notes. $11,000 of the Notes matures in the fiscal third quarter of 2014, $70,000 in the fourth quarter of fiscal 2014 and $30,000 matures in the fiscal second quarter of 2014. |
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(C) Debt Issue Costs |
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In connection with the issuance of the $300,000 note discussed above, the Company incurred debt issue costs as follows: |
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· | 8% cash – which is equivalent to $24,000, and | | | | | | | |
· | 8% warrants – having a fair value of $26,901, which was computed as follows; | | | | | | | |
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| | Commitment Date | | | | | |
Expected dividends | | | 0% | | | | | |
Expected volatility | | | 180% | | | | | |
Expected term: conversion feature | | 2 years | | | | | |
Risk free interest rate | | | 1.73% | | | | | |
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In January 2012, we raised an additional $22,000 as discussed above, and the Company incurred debt issue costs as follows: |
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· | 8% cash – which is equivalent to $1,760, and | | | | | | | |
· | 8% warrants – having a fair value of $154, which was computed as follows; | | | | | | | |
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| | Commitment Date | | | | | |
Expected dividends | | | 0% | | | | | |
Expected volatility | | | 364% | | | | | |
Expected term: conversion feature | | 2 years | | | | | |
Risk free interest rate | | | 0.65% | | | | | |
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The debt issue costs have been capitalized and are being amortized over the life of the note. |
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Debt issue costs paid, September 30, 2011 | | $ | 50,901 | | | | |
Amortization of debt issue costs, September 30, 2011 | | | (11,833 | ) | | | |
Amortization of debt issue costs, September 30, 2012 | | | (9,833 | ) | | | |
Amortization of debt issue costs, September 30, 2013 | | | (13,199 | ) | | | |
Amortization of debt issue costs, December 31, 2012 | | | (3,577 | | | | |
Debt issue costs - net | | $ | 12,406 | | | | |
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(D) Debt Discount |
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During the three months ended December 31, 2013 and December 31, 2012, Company recorded debt discounts totaling $170,000 and $165,000, respectively. |
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The debt discount recorded in the current quarter pertains to convertible debt containing embedded conversion options that are required to bifurcated and reported at fair value. |
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During the three months ended December 31, 2013, the Company amortized $81,462 in debt discount. |