| NOTE 6 - NOTES PAYABLE | Short
Term Notes Payable to Stockholders
Short
Term Notes Payable to
Stockholders
March31,
2018 June
30, 2017
Short
term notes payable (A) $ 114,000 $ 114,000
Short
term notes payable (B) 250,000 175,000
Net
total $ 364,000 $ 289,000 Short
Term Notes Payable to Stockholders
(A) In 2012, the Company
issued a short term note payable to a non-affiliate stockholder. The note was scheduled to mature on December 31, 2013 and
accrued interest at seven and one-half (7.5) percent per annum. In February 2016, the noteholder provided the Company with
an additional $1,000. As of March 31, 2018, the outstanding balance was $114,000. The Company is currently in default and
is in discussions with the noteholder to restructure the terms of the note.
(B) In 2017, the Company
issued short term notes payable to a non-affiliate stockholder. The notes were scheduled to mature on June 30, 2017 and accrued
no interest. In addition, the Company issued to the noteholder 50,000 shares of the Companys common stock. In connection
with the issuance of the 50,000 shares of stock, the Company recorded the approximate $26,000 value of the shares issued as
debt discount cost. The expense has been fully amortized at June 30, 2017. The Company used a recent sale of stock to an independent
third party for cash to determine the fair market value of the transaction. As of June 30, 2017, the outstanding principal
balance was $175,000. On August 29, 2017, the Company issued a $250,000 amended and consolidated note payable. The amended
and consolidated note payable is a consolidation of the $175,000 notes payable and an additional $75,000. The amended and
consolidated promissory note was scheduled to mature on December 31, 2017 and accrues no interest. In addition, the Company
issued to the noteholder 200,000 shares of the Companys common stock (see Note 7). In connection with the issuance of
the 200,000 shares of stock, the Company recorded the approximate $30,000 value of the shares issued as loss on extinguishment
of debt. The Company is currently in default and is in discussions with the noteholder to restructure the terms of the note. Short
Term Convertible Notes Payable
Short
Term Convertible Notes
Payable
March31, 2018 June
30, 2017
Crown
Bridge Partners $ 65,000 $ -
Auctus
Fund 110,000 -
EMA
Financial 110,000 -
Subtotal 285,000 -
Debt
discount (261,250 ) -
Net
total $ 23,750 $ - Crown
Bridge Partners On
March 2, 2018, the Company held an initial closing under a Securities Purchase Agreement (the Crown SPA) and corresponding
Convertible Promissory Note (the Crown Note) with Crown Bridge Partners, LLC (Crown), dated February 14,
2018. Under the Crown SPA and the Crown Note, Crown agreed to loan the Company up to One Hundred Thirty Thousand Dollars ($130,000)
in tranches. The Crown Note has an original issuance discount of $13,000, meaning the maximum amount the Company can borrow under
the Crown Note is $117,000. The initial tranche on March 2, 2018 was $65,000, with the Company receiving $58,500 and the remaining
$6,500 being retained by Crown as the portion of the prorated original issuance discount. The Crown Note bears interest at Ten
Percent (10%) per annum and matures twelve (12) months from the date of each tranche, with the initial tranche of $65,000 maturing
on March 2, 2019. Under the terms of the Crown Note, Crown has the right, at any time to convert all or part of the amounts due
to it under the Crown Note into shares of the Companys common stock. The conversion price is 55% of the lesser of (a) the
lowest traded price or (b) the lowest closing bid price, of the Companys common stock on the twenty-five trading days prior
to the conversion date. However, Crown may not convert the amounts due under the Note into shares of the Companys common
stock if such conversion would cause it to own more than 4.99% of the Companys then-outstanding common stock, which limitation
may be waived by Crown upon 61 days-notice. In the event the Company defaults under the terms of the Crown Note, the Company owes
150% of the principal amount then due under the Note, plus any unpaid interest, immediately. The Company may prepay the amounts
loaned to the Company under the Crown Note as follows: (i) during the initial 60-day period after each tranche, at 125% multiplied
by the amount the Company is prepaying, (ii) during the 61st through 120 days after each tranche, at 135% multiplied by the amount
the Company is prepaying, and (iii) during the 121st through 180th day after each tranche, at 150% multiplied by the amount the
Company is prepaying. Any prepayments are subject to Crowns written acceptance of such prepayment. After 180 days from each
tranche the Company cannot prepay that tranche in cash. While
this Note is outstanding, if the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including
but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction,
as defined by the Securities Act, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares
pursuant to a settlement or otherwise) at a discount to market greater than the Variable Conversion Price in effect at that time
(prior to all other applicable adjustments in the Note), then the Variable Conversion Price shall be automatically adjusted to
such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding.
Each time, while this Note is outstanding, the Company enters into a Section 3(a)(9) transaction, as defined by the Securities
Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10)
transaction, as defined by the Securities Act, in which any 3rd party has a look back period greater than the look back period
in effect under the Note at that time, then the Holders look back period shall automatically be adjusted to such greater
number of days until this Note is no longer outstanding. In
addition to issuing the Crown Note, the Company agreed to issue Crown a warrant with each funding tranche. Each warrant will be
for the purchase of shares of the Companys common stock equal to 75% of the face value of the tranche divided by $0.50.
For example, the first tranche of funding is for $65,000, the Company issued a warrant to purchase 97,500 shares of the Companys
common stock at an exercise price of $0.50 per share. The warrant contains a cashless exercise provision. Each warrant expires
five years after the date of issuance. In
connection with the warrants, if the Company, at any time from and after the Issuance Date, shall sell or grant any option to
purchase, or sell or grant any right to reprice, or otherwise dispose of, sell or issue (or announce any offer, sale, grant or
any option to purchase or other disposition of) any Common Stock or Common Stock Equivalents entitling any person, firm, association
or entity to acquire shares of Common Stock at an effective price per share less than the then-current Exercise Price (including
but not limited to under the Note), as adjusted hereunder (any such issuance being referred to as a Dilutive Issuance Auctus
Fund On
March 8, 2018, the Company closed a Securities Purchase Agreement (the Auctus SPA) and corresponding Convertible Promissory
Note (the Auctus Note) with Auctus Fund, LLC (Auctus), dated February 15, 2018. Under the Auctus SPA and
the Auctus Note, Auctus agreed to loan the Company One Hundred Ten Thousand Dollars ($110,000). The Auctus Note bears interest
at Ten Percent (10%) per annum and matures on November 15, 2018. Under the terms of the Auctus Note, Auctus has the right, at
any time to convert all or part of the amounts due to it under the Auctus Note into shares of the Companys common stock.
The conversion price is 55% multiplied by the lowest Trading Price during the twenty-five trading days prior to the conversion
date. However, Auctus may not convert the amounts due under the Note into shares of the Companys common stock if such conversion
would cause it to own more than 4.99% of the Companys then-outstanding common stock, which limitation may be waived by Auctus
upon 61 days-notice. In the event the Company defaults under the terms of the Auctus Note, the Company owes 150% of the principal
amount then due under the Note, plus any unpaid interest, immediately. The Company may prepay the amounts loaned to the Company
under the Auctus Note as follows: (i) during the initial 90-day period after the issue date, at 135% multiplied by the amount
the Company is prepaying, and (ii) from the 91st through the 180th day after the issue date, at 150% multiplied by the amount
the Company is prepaying. Any prepayments are subject to Auctus written acceptance of such prepayment. After 180 days from
the issue date the Company cannot prepay the Auctus Note. While
this Note is outstanding, if the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including
but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction,
as defined by the Securities Act, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares
pursuant to a settlement or otherwise) at a discount to market greater than the Variable Conversion Price in effect at that time
(prior to all other applicable adjustments in the Note), then the Variable Conversion Price shall be automatically adjusted to
such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding.
Each time, while this Note is outstanding, the Company enters into a Section 3(a)(9) transaction, as defined by the Securities
Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10)
transaction, as defined by the Securities Act, in which any 3rd party has a look back period greater than the look back period
in effect under the Note at that time, then the Holders look back period shall automatically be adjusted to such greater
number of days until this Note is no longer outstanding. In
addition to issuing the Auctus Note, the Company agreed to issue Auctus a warrant to acquire 275,000 shares of the Companys
common stock at an exercise price of $0.20 per share. The warrant contains a cashless exercise provision and expires on the fifth
anniversary of the warrant. In
connection with the warrants, if the Company, at any time from and after the Issuance Date, shall sell or grant any option to
purchase, or sell or grant any right to reprice, or otherwise dispose of, sell or issue (or announce any offer, sale, grant or
any option to purchase or other disposition of) any Common Stock or Common Stock Equivalents entitling any person, firm, association
or entity to acquire shares of Common Stock at an effective price per share less than the then-current Exercise Price (including
but not limited to under the Note), as adjusted hereunder (any such issuance being referred to as a Dilutive Issuance EMA
Financial On
March 8, 2018, the Company closed a Securities Purchase Agreement (the EMA SPA) and corresponding Convertible Promissory
Note (the EMA Note) with EMA Financial, LLC (EMA), dated February 12, 2018. Under the EMA SPA and the
EMA Note, EMA agreed to loan the Company One Hundred Ten Thousand Dollars ($110,000). The EMA Note has an original issuance discount
of $6,600, meaning the amount the Company received at funding was $103,400. The EMA Note bears interest at Ten Percent (10%) per
annum and matures on February 12, 2019. Under the terms of the EMA Note, EMA has the right, at any time to convert all or part
of the amounts due to it under the EMA Note into shares of the Companys common stock. The conversion price is 55% multiplied
by the lowest Trading Price during the twenty trading days prior to the conversion date. However, EMA may not convert the amounts
due under the Note into shares of the Companys common stock if such conversion would cause it to own more than 4.99% of
the Companys then-outstanding common stock, which limitation may be waived by EMA upon 61 days-notice. In the event the
Company defaults under the terms of the EMA Note, the Company owes 150% of the principal amount then due under the Note, plus
any unpaid interest, immediately. The Company may prepay the amounts loaned to the Company under the EMA Note as follows: (i)
during the initial 90-day period after the issue date, at 135% multiplied by the amount the Company is prepaying, and (ii) from
the 91st through the 180th day after the issue date, at 150% multiplied by the amount the Company is prepaying. Any prepayments
are subject to EMAs written acceptance of such prepayment. After 180 days from the issue date the Company cannot prepay
the EMA Note. While
this Note is outstanding, if the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including
but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction,
as defined by the Securities Act, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares
pursuant to a settlement or otherwise) at a discount to market greater than the Variable Conversion Price in effect at that time
(prior to all other applicable adjustments in the Note), then the Variable Conversion Price shall be automatically adjusted to
such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding.
Each time, while this Note is outstanding, the Company enters into a Section 3(a)(9) transaction, as defined by the Securities
Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10)
transaction, as defined by the Securities Act, in which any 3rd party has a look back period greater than the look back period
in effect under the Note at that time, then the Holders look back period shall automatically be adjusted to such greater
number of days until this Note is no longer outstanding. In
addition to issuing the EMA Note, the Company agreed to issue EMA a warrant to acquire 137,500 shares of the Companys common
stock at an exercise price of $0.40 per share. The warrant contains a cashless exercise provision and expires on the fifth anniversary
of the warrant. In
connection with the warrants, if the Company, at any time from and after the Issuance Date, shall sell or grant any option to
purchase, or sell or grant any right to reprice, or otherwise dispose of, sell or issue (or announce any offer, sale, grant or
any option to purchase or other disposition of) any Common Stock or Common Stock Equivalents entitling any person, firm, association
or entity to acquire shares of Common Stock at an effective price per share less than the then-current Exercise Price (including
but not limited to under the Note), as adjusted hereunder (any such issuance being referred to as a Dilutive Issuance Short
Term Convertible Notes Conversion The
Company evaluated the notes under the requirements of ASC 480 Distinguishing Liabilities From Equity (ASC 480) and
concluded that the notes do not fall within the scope of ASC 480. The Company next evaluated the notes under the requirements
of ASC 815 Derivatives and Hedging. Due to the existence of the anti-dilution provisions which reduces the purchasers
conversion price in the event of subsequent dilutive issuances by the Company below the purchasers conversion price as described
above, the conversion features do not meet the definition of indexed to the Companys stock, and the scope exception
to ASC 815s derivative accounting provisions does not apply. The Company also evaluated the embedded derivative criteria
in ASC 815, and concluded that the conversion features meet all the embedded derivative criteria in ASC 815, and therefore, the
conversion features meet the definition of an embedded derivative that should be separated from the notes and accounted for as
a derivative liabilities. The
embedded derivatives were recorded as a derivative liabilities on the consolidated Balance Sheet at its fair value of $330,000
at the date of issuance. At each subsequent reporting date, the fair value of the embedded derivative liabilities will be remeasured
and changes in the fair value will be recorded in the consolidated Statements of Operations. At March 31, 2018, the embedded derivatives
were re-measured at fair value that was determined to be $320,000. During the three and nine months ended March 31, 2018, the
Company recorded a gain on embedded derivative re-valuation of $10,000 and $10,000, respectively. The
fair value of the embedded derivative liabilities are measured in accordance with ASC 820 Fair Value Measurement,
using the Monte Carlo Method modeling incorporating the following inputs:
March
31, March
2,
Crown
Bridge Partners 2018 2018
Expected
dividend yield 0.00 % 0.00 %
Expected
stock-price volatility 260.0 % 255.0 %
Risk-free
interest rate 2.01 % 2.06 %
Stock
price $ 0.15 $ 0.18
Conversion
price $ 0.05 $ 0.06
March
31, March
8,
Auctus
Fund 2018 2018
Expected
dividend yield 0.00 % 0.00 %
Expected
stock-price volatility 255.0 % 275.0 %
Risk-free
interest rate 2.01 % 1.97 %
Stock
price $ 0.15 $ 0.16
Conversion
price $ 0.05 $ 0.05
March
31, March
8,
EMA
Financial 2018 2018
Expected
dividend yield 0.00 % 0.00 %
Expected
stock-price volatility 270.0 % 265.0 %
Risk-free
interest rate 2.01 % 2.05 %
Stock
price $ 0.15 $ 0.16
Conversion
price $ 0.05 $ 0.06 Short
Term Convertible Notes Warrants The
Company evaluated the Warrants under ASC 480 Distinguishing Liabilities From Equity and ASC 815 Derivatives
and Hedging. Due to the existence of the antidilution provision, which reduces the Exercise Price and Conversion Price in
the event of subsequent issuances, the Warrants are not indexed to our common stock, and the Company has determined that the Warrants
meet the definition of a derivative under ASC 815. Accordingly, the Warrants were recorded as derivative liabilities in the consolidated
Balance Sheet at their fair value of $96,289 at the date of issuance. At each subsequent reporting date, the fair value of the
Warrants will be remeasured and changes in the fair value will be reported in the consolidated Statements of Operations. At March
31, 2018, the warrant liability was re-measured at fair value that was determined to be $96,903. During the three and nine months
ended March 31, 2018, the Company recorded a loss on warrant re-valuation of $614 and $614, respectively. The
fair value of the Warrants is measured in accordance with ASC 820 Fair Value Measurement, using Monte Carlo
simulation modeling, incorporating the following inputs:
Crown
Bridge Partners March
31, 2018 March
3, 2018
Expected
dividend yield 0.00 % 0.00 %
Expected
stock-price volatility 215.0 % 215.0 %
Risk-free
interest rate 2.56 % 2.63 %
Stock
price $ 0.15 $ 0.18
Exercise
price $ 0.20 $ 0.50
Auctus
Fund March
31, 2018 March
8, 2018
Expected
dividend yield 0.00 % 0.00 %
Expected
stock-price volatility 215.0 % 215.0 %
Risk-free
interest rate 2.56 % 2.63 %
Stock
price $ 0.15 $ 0.16
Exercise
price $ 0.20 $ 0.20
EMA
Financial March
31, 2018 March
8, 2018
Expected
dividend yield 0.00 % 0.00 %
Expected
stock-price volatility 215.0 % 215.0 %
Risk-free
interest rate 2.56 % 2.63 %
Stock
price $ 0.15 $ 0.16
Exercise
price $ 0.20 $ 0.40 Debt
Discount The
Company issued the notes with warrants that require liability treatment under ASC 815. As such, the proceeds of the notes were
allocated, based on fair values, as follows: original issue discount of approximately $32,000, approximately $96,000 to the warrants
granted, and approximately $330,000 to the embedded derivative, resulting in a debt discount to such notes of approximately $285,000
with the remaining amount of approximately $173,000 expensed at inception of the note. The debt discount is accreted to interest
expense over the term of the note. The
Company recorded debt discount accretion of approximately $24,000 and $0 to interest expense for the three and nine months ended
March 31, 2018, respectively. The accretion of debt discount expense to be recognized in future years is approximately $261,000. Changes
in the derivative and warrant liabilities were as follows:
Derivative
liabilities:
March
2-8, 2018 $ 330,000
Increase
(decrease) in fair value (10,000 )
March
31, 2018 $ 320,000
Warrant
liabilities:
March
2-8, 2018 $ 96,289
Increase
in fair value 614
March
31, 2018 $ 96,903 Convertible
Notes to Stockholders
Convertible
Notes Payable
March31, 2018 June
30, 2017
Convertible
notes payable (A) $ 116,000 $ 131,000
Convertible
note payable (B) 260,000 260,000
Convertible
notes payable (C) 2,560,112 2,460,112
Subtotal 2,936,112 2,851,112
Debt
discount (7,049 ) (12,053 )
Net
total $ 2,929,063 $ 2,839,059 Convertible
Notes Payable (A) Between
September 2013 and December 2017, the Company entered into various unsecured convertible promissory notes with non-affiliate stockholders
for principal amounts of approximately $7,500 to $30,000, totaling approximately $157,000, offset by the conversion of convertible
notes payable to shares of the Companys common stock of approximately $26,000 and the repayment of one note totaling $15,000,
netting a balance of approximately $116,000. Under the terms of these notes, maturity dates range from June 2015 and July 2019,
interest rates range from 7.5% to 8.0% per annum, and are convertible into shares of the Companys common stock at rates
that range from $0.20 and $5.00 per share, but only if such conversion would not cause the noteholders to own more than 9.9% of
the Companys outstanding common stock and contains piggyback registration rights. In addition, the Company granted to certain
noteholders a cashless option to purchase one (1) share of the Companys common stock, $.001 par value, at the exercise price
of $0.50 to $1.25 per share, for each share the noteholders are entitled pursuant to the promissory notes. The options are fully
vested and shall expire from one to three years from date of execution. For the period ended March 31, 2018, the Company is in
default approximately $47,500 on various notes. As a result, these notes are included in the current portion of convertible notes
payable, and the Company is in discussions with the noteholders to restructure the terms of the notes. The
Company determined that some of the notes had a beneficial conversion feature of approximately $38,000. The
Company recognized an accretion of debt discount expense of approximately $5,000 and $11,500 for the nine-month periods ended
March 31, 2018 and 2017, respectively, and approximately $1,700 and $2,000 for the three-month periods ended March 31, 2018 and
2017, respectively. The accretion of debt discount expense to be recognized in future years is approximately $7,000. Unsecured,
Amended and Consolidated Convertible Note Payable (B) December
2014 Convertible Note In
December 2014, the Company entered into an unsecured convertible promissory note with a non-affiliate stockholder for a principal
amount of $200,000. The note payable accrued interest at 7.5% per annum and was convertible into shares of the Companys
common stock at a conversion rates of $1.00 per share, but only if such conversion would not cause the noteholder to own more
than 9.9% of the Companys outstanding common stock and contained piggyback registration rights. The note payable was extinguished
in December 2015. In
December 2014, the Company determined that the note had a beneficial conversion feature of approximately $90,000. December
2015 Convertible Note In
December 2015, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate
stockholder for a principal amount of $260,000. In exchange, the Company extinguished a $10,000 short term note payable, the $200,000
convertible note payable issued in December 2014, and received cash of $50,000. The amended and consolidated note payable matures
in October 2019, accrues interest at 7.5% per annum, and convertible into shares of the Companys common stock at a conversion
rates of $0.20 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Companys
outstanding common stock, and contains piggyback registration rights. In addition, the Company granted to the noteholder a cashless
warrant to purchase one (1) share of the Companys common stock, $.001 par value, at the exercise price of $0.50 per share,
for each share the noteholder is entitled pursuant to the promissory note. The options are fully vested and shall expire three
years from date of execution. The
Company determined the estimated relative fair value discount of the warrants was approximately $128,000 which was valued using
the Black-Scholes option pricing model with the following inputs: volatility of 240%; risk-free interest rate of 1.05%; expected
term of 3 years; and 0% dividend yield. The
Company determined that the note had a beneficial conversion feature of approximately $141,000. Unsecured,
Amended and Consolidated Convertible Notes Payable (C) January
2017 Convertible Note In
January 2017, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate
stockholder for a principal amount of approximately $2,460,000. In exchange, the Company modified the $2,410,112 convertible promissory
note payable issued in November 2016 and received cash of $50,000. The amended and consolidated convertible note payable matures
in January 2019, accrues interest at 5% per annum, and is convertible into shares of the Companys common stock at a conversion
rate of $0.15 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Companys
outstanding common stock, and contains piggyback registration rights. The note payable was extinguished in October 2017. In
connection with the $2,460,000 convertible note payable, the Company determined the embedded conversion feature does not meet
the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered a modification,
and not an extinguishment that would require the recognition of a gain or loss. October
2017 Convertible Note In
October 2017, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate
stockholder for a principal amount of approximately $2,560,000. In exchange, the Company modified the $2,460,112 convertible promissory
note payable issued in January 2017 and received cash of $100,000. The amended and consolidated convertible promissory note matures
in October 2019, accrues interest at 5% per annum and is convertible into shares of the Companys common stock at a conversion
rate of $0.10 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Companys
outstanding common stock, and contains piggyback registration rights. In
connection with the $2,560,000 convertible note, the Company determined the embedded conversion feature does meet the criteria
in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered an extinguishment
that would require the recognition of a gain or loss. The Company recognized a loss from extinguishment of debt of approximately
$0 and $3.1 million for the three-month and nine-month periods ended March 31, 2018, respectively. The
Company recognized interest expense on all notes payable to stockholders of approximately $126,000 and $116,000 for the nine-month
periods ended March 31, 2018 and 2017, respectively and approximately $44,000 and $40,000 for the three-month periods ended March
31, 2018 and 2017, respectively. Accrued interest on all notes payable to stockholders at March 31, 2018 and 2017 totaled approximately
$382,000 and $219,000, respectively, and is included in accounts payable. As
of March 31, 2018, future maturities of all notes payable are as follows:
2018 $ 724,000
2019 2,845,112
2020 16,000
Total
outstanding notes 3,585,112
Debt
Discount (268,299 )
Net
Notes Payable $ 3,316,813 |
