THIRD PARTY DEBT | NOTE 5. THIRD PARTY DEBT CONVERTIBLE NOTES PAYABLE Beginning on February 11, 2014, the Company issued 6% Convertible Notes (the “6% Notes”) pursuant to subscription agreements to ten (10) accredited investors (the “Holders”) with the aggregate principal amount of $230,000. The 6% Notes are not secured by any collateral or any assets pledged to the Holders. The maturity dates are from February 28, 2015 to March 31, 2015, and the annual rate of interest is six percent (6%). Subject to certain limitations, the Holders can, at their sole discretion, convert the outstanding and unpaid principal and interest of their notes into fully paid and nonassessable shares of the Company’s common stock. The conversion price of these 6% Notes is the average of the fifteen (15) lowest daily VWAP’s occurring during the twenty (20) consecutive trading days immediately preceding the date each Holder elects convert all of their 6% Note minus a discount of 40%. In no event will the conversion price be less than $1.00 per share or greater than $3.00 per share. The Company had a preexisting relationship with each of the Holders, and no general solicitation or advertising was used in connection with the issuance of the 6% Notes. We recorded a discount totaling $92,000 related to the beneficial conversion feature embedded in the notes upon issuance and amortized $32,333 and $57,667 of the discount to interest expense during the year ended September 30, 2015 and 2014, respectively. On March 12, 2015, the Company offered to pay accrued interest and modify the terms of the six (6) Holders’ outstanding 6% Notes, decreasing the conversion floor from $1.00 to $0.50 in order to encourage the noteholders to convert their promissory notes. The Company recorded a loss on debt extinguishment of $23,443 as a result of the fair value in excess of the modified conversion floor. In March 2015, the Company paid all accrued interest on the 6% notes of $17,200. Five (5) of the six (6) holders converted in full a total of $80,000 of 6% Notes into 160,000 shares of common stock. The remaining note holder partially converted $20,000 of 6% Notes into 40,000 of common shares and extended the terms on the remaining $30,000 for six (6) months. As of September 30, 2015, there is $1,010 in accrued interest expense related to the one (1) remaining note and the Company recorded $1,010 in interest expense related to the 6% note during the year ended September 30, 2015. On December 14, 2015, the note holder converted $30,000 in principal and $1,351 of accrued interest into 13,063,013 shares of common stock. As a result of the subsequent conversion the principal balance and accrued interest as of September 30, 2015 were classified as long-term. Securities Purchase Agreement On December 3, 2014, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with an accredited investor (the “Investor”) pursuant to which the Company agreed to sell, and the Investor agreed to purchase, an unsecured convertible promissory note (the “Note”) in the principal amount of $560,000 less an original issue discount (“OID”) of $50,000 and transaction expenses of $10,000 for a total purchase price of $500,000. The Company also paid a finder’s fee in the amount of $25,000 in connection with this transaction, which was recorded as a discount to the note as it was paid from the proceeds. The closing under the Securities Purchase Agreement occurred on December 3, 2014. The Company received $475,000 net proceeds after transactions costs. We amortized $27,778 of the discount to interest expense during the year ended September 30, 2015. In addition, the Company recorded $45,940 in deferred financing costs and amortized $25,522 to interest expense during the year ended September 30, 2015. As of September 30, 2015, the Company had unamortized costs of $20,418 in current deferred financing costs. The deferred financing costs are amortized through the maturity date. The Note bears interest at the rate of 10% per annum and is convertible into common stock of the Company at a conversion price per share of 70% of the average of the three (3) lowest Closing Sale Prices in the ten (10) Trading Days immediately preceding the applicable Conversion (subject to adjustment in the event of stock splits, stock dividends, and similar transactions, and in the event of subsequent sales of common stock at a lower purchase price (subject to certain exceptions))(the “Conversion Price”). In no event will the Conversion Price be less than $0.50 per share. Repayment of principal on the Note, together with accrued interest thereon, is due in twelve monthly installments, commencing six months from issuance. The Company may make such payments in cash (in which event the Company will pay a 25% premium) or, subject to certain conditions, in shares of common stock valued at the lower of the Conversion Price or 70% of the average of the three (3) lowest Closing Sale Prices in the ten (10) Trading Days immediately preceding the applicable payment date (the “Amortization Conversion Rate”). The Maturity Date of the Note is seventeen months from the date of issuance. We recorded a discount totaling $168,000 related to the beneficial conversion feature embedded in the note upon issuance. We amortized $84,000 of the discount to interest expense during the year ended September 30, 2015. On August 26, 2015, the Company and Investor entered into an Amendment whereby the conversion rate of the note was amended to 55% of the lowest price of the prior fifteen (15) trading days and conversion floor removed which amendment was triggered by the dilutive issuances of the August 2015 convertible note financing thereby entitling Investor to the lowest conversion rate granted during the year ended September 30, 2015 per the terms of the Securities Purchase Agreement. As a result, we expensed the unamortized discount of $84,000 to loss on debt extinguishment. On August 26, 2015, the carrying value on the note was $332,666, net of unamortized discounts of $109,000. The Company recorded the note as a derivative liability at fair value of $830,921, a derivative discount of $332,666, and the excess in fair value of $498,254 to loss on debt extinguishment. The total loss on debt extinguishment on this note was $582,254. During the year ended September 30, 2015, the Company amortized $54,984 of the derivative discount to interest expense, recorded a gain on the change in fair value of the derivative liability of $63,699, and allocated the fair value of $123,310 of the conversions below as a reduction in the derivative liability. As of September 30, 2015, the derivative liability was $643,912. On December 10, 2015, the Company and the Investor entered into a forbearance agreement regarding the Investor’s convertible note and added $105,000 to the principal. See Note 11 to the consolidated financial statements. Between June 2015 and September 2015, the Company issued the following conversions for payment towards Investor: Conversion Date Principal Accrued Total Conversion Common June 4, 2015 $ 46,667 $ 28,871 $ 75,538 $ 0.342 220,949 July 3, 2015 46,667 4,295 50,962 $ 0.194 263,141 August 11, 2015 25,000 - 25,000 $ 0.138 181,818 September 3, 2015 25,000 - 25,000 $ 0.056 445,196 September 23, 2015 25,000 - 25,000 $ 0.041 606,061 September 29, 2015 23,000 - 23,000 $ 0.015 1,548,822 $ 191,334 $ 33,166 $ 224,500 3,265,987 Subsequent to year end, the Investor also enacted the following conversions: Conversion Date Principal Accrued Total Conversion Common October 8, 2015 $ 21,000 $ - $ 21,000 $ 0.012 1,818,182 October 16, 2015 18,900 - 18,900 $ 0.012 1,636,364 October 22, 2015 25,800 - 25,800 $ 0.011 2,333,786 October 29, 2015 22,460 - 22,460 $ 0.011 2,031,660 November 11, 2015 33,500 - 33,500 $ 0.007 4,649,549 November 18, 2015 24,000 - 24,000 $ 0.006 4,195,804 November 30, 2015 30,000 - 30,000 $ 0.005 5,741,627 December 11, 2015 22,000 - 22,000 $ 0.002 9,090,909 December 28, 2015 22,500 - 22,500 $ 0.002 9,297,521 January 7, 2016 20,000 - 20,000 $ 0.002 10,101,010 $ 240,160 $ - $ 240,160 50,896,412 As a result, as of September 30, 2015, $23,969 and $44,794, net of total unamortized discounts of $104,538 and $195,366 are classified as current and long-term on the accompanying consolidated balance sheet. As of September 30, 2015, there is $9,945 in accrued interest expense related to this note and the Company recorded $43,111 in interest expense related to this note during the year ended September 30, 2015. $2M Securities Purchase Agreement On February 10, 2015, the Company entered into a securities purchase agreement (the “February 2015 Securities Purchase Agreement”) with an accredited investor pursuant to which the Company agreed to sell, and the investor agreed to purchase, an unsecured convertible promissory note (the “$2M Note”) in the principal amount of $2,000,000 less an OID of $182,000 and transaction expenses of $10,000 for a total purchase price of $1,808,000. The closing under the February 2015 Securities Purchase Agreement occurred on February 10, 2015. The $2M Note bears interest at the rate of 10% per annum and is immediately convertible into common stock of the Company at a conversion price per share of 70% of the lowest daily VWAP in the ten (10) Trading Days immediately preceding the applicable Conversion (subject to adjustment in the event of stock splits, stock dividends, and similar transactions, and in the event of subsequent sales of common stock at a lower purchase price (subject to certain exceptions))(the “Conversion Price”). In no event will the Conversion Price be less than $0.50 per share. Repayment of principal on the $2M Note, together with accrued interest thereon, is due in twelve bi-monthly installments, commencing approximately six months from issuance. The Company may make such payments in cash (in which event the Company will pay a 25% premium) or, subject to certain conditions, in shares of common stock valued at the lower of the Conversion Price or 70% of the lowest daily VWAP in the ten (10) Trading Days immediately preceding the applicable payment date (the “Amortization Conversion Rate”). The Maturity Date of the $2M Note is twelve months from the date of issuance. During the year ended September 30, 2015, the Company received $800,000 toward the $2M Note with an original issue discount of $148,600 and transaction costs for net proceeds of $651,395, respectively. We amortized $46,087 of the discount to interest expense during the year ended September 30, 2015. In addition, we recorded a discount totaling $108,641 related to the beneficial conversion feature embedded in the note upon issuance. During the year ended September 30, 2015, we amortized $54,456 of the discount to interest expense. On August 13, 2015, the Company entered into an Amendment, Waiver and Modification Agreement (the “Amendment”) to its $2M Securities Purchase Agreement and related Transaction Documents with Redwood Management, LLC including any designees and or assignees thereto. Under the terms of the Amendment, the parties agreed to reduce the $2,000,000 outstanding balance of the $2M Note to $800,000 to reflect the total amount funded under the note, to terminate the offsetting investor note securing the additional unfunded balance and to waive any past claims of default or offsetting interest on the $2M Note or investor note. In addition, the conversion rate of the note was amended to 55% of the lowest price of the prior fifteen (15) trading days and conversion floor removed which amendment was triggered by the dilutive issuances of the August 2015 convertible note financing thereby entitling Investor to the lowest conversion rate granted during the year ended September 30, 2015 per the terms of the $2M Securities Purchase Agreement. As a result, we expensed the unamortized discount of $40,000 to loss on debt extinguishment. On August 13, 2015, the carrying value on the note was $655,816, net of unamortized discounts of $94,184. The Company recorded the note as a derivative liability at fair value of $970,956, a derivative discount of $655,816, and the excess in fair value of $315,140 to loss on debt extinguishment. The total loss on debt extinguishment on this note was $369,324. During the year ended September 30, 2015, the Company amortized $183,189 of the derivative discount to interest expense, recorded a loss on the change in fair value of the derivative liability of $288,763, and allocated the fair value of $230,905 of the conversions below as a reduction in the derivative liability. As of September 30, 2015, the derivative liability was $1,028,814. The following is summary of conversions by the $2M Note holder during the year ended September 30, 2015: Conversion Date Principal Converted Accrued Total Converted Conversion Rate Common Shares Issued August 13, 2015 $ 50,000 - $ 50,000 $ 0.127 393,701 August 26, 2015 25,000 - 25,000 $ 0.056 446,428 September 8, 2015 25,000 - 25,000 $ 0.056 446,428 September 14, 2015 25,000 $ - 25,000 $ 0.053 469,925 September 16, 2015 10,000 - 10,000 $ 0.053 188,679 September 17, 2015 25,000 - 25,000 $ 0.053 469,925 September 22, 2015 10,000 - 10,000 $ 0.043 232,558 September 24, 2015 10,000 - 10,000 $ 0.026 390,625 September 25, 2015 10,000 - 10,000 $ 0.019 518,135 September 29, 2015 13,410 - 13,410 $ 0.015 900,000 $ 203,410 $ - $ 203,410 4,456,404 Subsequent to year end, the $2M Note holder also enacted the following conversions: Conversion Date Principal Converted Accrued Interest Converted Total Converted Conversion Rate Common Shares Issued October 1, 2015 $ 10,000 $ - $ 10,000 $ 0.0148 675,676 October 5, 2015 10,000 - 10,000 $ 0.0148 675,676 October 6, 2015 13,262 - 13,262 $ 0.0138 961,000 October 7, 2015 10,000 - 10,000 $ 0.0115 865,801 October 9, 2015 11,728 - 11,728 $ 0.0116 1,011,000 October 9, 2015 10,000 - 10,000 $ 0.0115 865,801 October 12, 2015 14,680 - 14,680 $ 0.0115 1,271,000 October 13, 2015 11,601 - 11,601 $ 0.0116 1,000,052 October 15, 2015 14,680 - 14,680 $ 0.0115 1,271,000 October 19, 2015 17,400 - 17,400 $ 0.0116 1,500,000 October 19, 2015 15,000 - 15,000 $ 0.0116 1,298,701 October 20, 2015 16,650 - 16,650 $ 0.0111 1,500,000 October 21, 2015 17,500 - 17,500 $ 0.0115 1,515,152 October 23, 2015 20,000 - 20,000 $ 0.0115 1,731,602 October 26, 2015 24,420 - 24,420 $ 0.0111 2,200,000 October 29, 2015 26,640 - 26,640 $ 0.0111 2,400,000 November 2, 2015 29,970 - 29,970 $ 0.0111 2,700,000 November 2, 2015 20,000 - 20,000 $ 0.0111 1,809,136 November 5, 2015 32,190 - 32,190 $ 0.0111 2,900,000 November 10, 2015 28,800 - 28,800 $ 0.0096 3,000,000 November 12, 2015 23,930 - 23,930 $ 0.0072 3,323,611 November 17, 2015 16,500 - 16,500 $ 0.0060 2,727,273 November 19, 2015 1,640 11,225 12,865 $ 0.0056 2,316,013 November 23, 2015 23,111 - 23,111 $ 0.0056 4,127,000 November 27, 2015 24,750 - 24,750 $ 0.0055 4,500,000 December 2, 2015 18,450 - 18,450 $ 0.0041 4,500,000 December 8, 2015 18,000 - 18,000 $ 0.0036 5,000,000 December 11, 2015 13,368 - 13,368 $ 0.0024 5,570,000 December 16, 2015 14,181 - 14,181 $ 0.0024 5,860,000 December 22, 2015 15,488 - 15,488 $ 0.0024 6,400,000 December 29, 2015 17,666 17,666 $ 0.0024 7,300,000 $ 541,604 $ 11,225 $ 552,830 82,775,494 As a result, as of September 30, 2015, $10,427 and $82,822, net of total unamortized discounts of $44,558 and $458,782 are classified as current and long-term on the accompanying consolidated balance sheet. As of September 30, 2015, there is $26,861 and $11,225 in current and long-term accrued interest expense related to this note, respectively, and the Company recorded $38,086 in interest expense related to this note during the year ended September 30, 2015. Convertible Note Financing On August 5, 2015, the Company entered into a series of convertible note financings with several accredited investors totaling an aggregate of $541,000 in aggregate proceeds raised less certain fees and costs as set forth in the financing documents known as the “August 2015 Notes”. The financing was disclosed on the Company’s Current Report on Form 8-K filed on August 11, 2015 and is incorporated herein by reference. The Company recorded an original issue discount of $12,500 along with these notes and amortized $1,042 of the discount to interest expense during the year ended September 30, 2015. As of September 30, 2015, there is $8,388 of accrued interest related to these notes and the Company recorded $8,388 in interest expense related to the notes during the year ended September 30, 2015. The Company will record an embedded beneficial conversion feature at estimated fair value as a derivative liability at fair value in six months when the notes become convertible. On August 12, 2015, the Company entered into an additional convertible note financing transaction with an accredited investor in the principal amount of $105,000 less fees and costs. The closing under the financing occurred concurrently with the execution of the financing documents on August 12, 2015. The convertible note bears interest at the rate of 8% per annum and is convertible into common stock of the Company at any time after 180 days from issuance of the note at a conversion price per share equal to 58% of the average of the lowest trading price of the common stock in the thirteen (13) trading days immediately preceding the applicable conversion date. The Company has the option to prepay the convertible note in the first 180 days from closing subject to a prepayment penalty of 150% of principal plus interest. The maturity date of the convertible note is June 12, 2016 subject to the noteholder’s right to extend maturity an additional nine (9) month period. The Company recorded an original issue discount of $5,000 along with these notes and amortized $1,000 of the discount to interest expense during the year ended September 30, 2015. The Company will record an embedded beneficial conversion feature at estimated fair value as a derivative liability at fair value in six months when the notes become convertible. The discount will be amortized over the remaining term of the note. As of September 30, 2015, there is $1,143 of accrued interest and related interest expense on the notes during the year ended September 30, 2015. The foregoing descriptions of the August 12, 2015 note financing and related documentation do not purport to be complete and are qualified in their entirety by reference to the full text of the documents, which are filed as exhibits to this Quarterly Report on Form 10-K and are incorporated herein by reference. As of September 30, 2015, future minimum principal payments for the years ending September 30, 2016 and 2017 are $1,487,256 and $154,000, respectively. As of September 30, 2015, expected amortization of debt discounts for the years ending September 30, 2016 and 2017 are $179,528 and $695,963, respectively. As of September 30, 2015, expected amortization of deferred financing costs for the years ending September 30, 2016 and 2017 are $107,909 and $12,067, respectively. The Company has the ability to increase the authorized common stock of the Company in the event that the convertible notes require more shares than available. |