| Note 7 - Convertible Notes Payable | NOTE 7 – CONVERTIBLE NOTES PAYABLE Note Holder Balance June 30, 2015 Unamortized Original Derivative Discount Unamortized Original Issue Discount Balance of Debt Discount Balance, net of Discount 6/30/2015 Typenex Co-Investment, LLC $163,131 $ (27,718) $ (14,594) $ (42,313) $ 120,818 Typenex Co-Investment, LLC 89,057 (15,132) (2,652) (17,784) 71,273 Total Convertible Notes Payable $252,188 $ (42,850) $ (17,246) $ (60,097) $ 192,091 Note Holder Balance June 30, 2016 Unamortized Original Derivative Discount Balance net of Derivative Discount 6/30/16 Iliad Co Loan Payable $ 272,250 $ - $ 272,250 TCA Global Loan Payable 659,409 (483,120) 176,289 Total Convertible Notes Payable $ 931,659 $ (483,120) $ 448,539 Description of Outstanding Convertible Note Obligations Iliad Co-Investment Note On August 12, 2015, the Company entered into a Note Purchase Agreement (the “Purchase Agreement”) with Iliad Research & Trading, L.P, a Utah limited liability partnership (“Iliad”), pursuant to which the Company concurrently issued to the investor an unsecured non-convertible Promissory Note in a principal amount of $245,000 (the “Original August Note”). The principal amount includes an original issue discount of $40,000 plus an additional $5,000 to cover the investor’s legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction. In consideration for the Original August Note, the investor paid an aggregate cash purchase price of $200,000, computed as follows: $245,000 original principal balance, less the original issue discount of $40,000, and less the transaction costs. The Original August Note was originally scheduled to mature on February 12, 2016 and the Company could prepay all or a portion of the amount owed earlier than it is due without penalty. The original issue discount of $40,000 was recorded as debt discount and fully amortized to interest expense during the fiscal year ended June 30, 2016. Interest did not accrue on the unpaid principal balance of the Original August Note unless an event of default occurred. Upon the occurrence of an event of default, the outstanding balance of the Original August Note will bear interest at the lesser of the rate of 18% per annum or the maximum rate permitted by applicable law. In addition, if an event of default occurs under the Original August Note, the investor may declare all unpaid principal, plus all accrued interest and other amounts due under the Original August Note to be immediately due and payable at an amount equal to 115% of the outstanding balance of the Original August Note as of the date of the applicable event of default, plus all interest, fees and charges that may accrue on such outstanding balance thereafter. On February 19, 2016, the Company entered into an Amendment to Promissory Note with Iliad which extended the maturity date of the Original August Note to April 12, 2016 and increased the principal amount of the note by $2,500 as consideration for the extension. The Company evaluated the Amendment to Promissory Note under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”), noting it did not meet the criteria for substantial modification under ASC 470, and accordingly treated the amendment as a modification to the Original August Note, adding $2,500 to the balance and extending the due date under the modified terms. On May 12, 2016 but effective as of April 15, 2016, the Company entered into an Exchange Agreement with Iliad (the “Exchange Agreement”). Pursuant to the Exchange Agreement, the Company and Iliad exchanged the Original August Note for a new promissory note in the original principal amount of $272,250 (the “Exchange Note”), which balance includes an exchange fee of $24,750. The Company evaluated the Exchange Agreement under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”), noting it met the criteria for substantial modification under ASC 470, and accordingly treated the Exchange Agreement as an extinguishment of debt and recorded a loss of extinguishment of debt of $54,225. The related derivative liability was also extinguished (see Note 8 for further discussion). The Exchange Note was issued in substitution of and not in satisfaction of the Original August Note. The Exchange Note provided that the Company was to make the following payments to Iliad: (a) a payment in shares of the Company’s common stock within three trading days of June 15, 2016 based on a note conversion amount of $50,000 and a conversion price that was equal to 70% of the average of the three lowest closing bid prices of the Company’s common stock in the twenty trading days immediately preceding such conversion (this payment of shares was not made by the Company as a result of a subsequent note amendment, see Note 14); and (b) a payment equal to the remaining aggregate outstanding balance of the Exchange Note on or before July 15, 2016, which payment must be made in cash. The Company identified an embedded derivative liability in the Exchange Note with an original estimated fair market value of $29,475 and recorded this as a derivative liability. See Note 8 for a discussion relating to the original derivative liability and re-measurement of such derivate liability and Note 14 for a discussion of a further modification to this facility. As of June 30, 2016, the outstanding balance on the Exchange Note was $272,250. TCA Global Credit Master Fund LP Note December 2015 On December 24, 2015, the Company entered into a Senior Secured Credit Facility Agreement (the “Loan Agreement”) with TCA Global Credit Master Fund, LP (“TCA”). At the initial closing on December 24, 2015, the Company issued to TCA a Convertible Promissory Note in the principal amount of $750,000 (the “TCA Note”). The TCA Note is scheduled to mature on June 24, 2017 (the “Maturity Date”). At any time prior to the Maturity Date or the earlier termination of the Loan Agreement, the Company can request up to $9,250,000 of additional loans, which additional loans may be made in the sole discretion of TCA. The Company may prepay borrowings at any time, in whole or in part, without penalty. Upon origination, the Company recorded a debt discount of $750,000 and amortized $266,880 during the year ended June 30, 2016, leaving an unamortized balance of $483,120. The loan will accrue interest on the unpaid principal balance at an annual rate of 18%. The Company made interest only payments of $11,250 on each of January 24, February 24 and March 24, 2016, and thereafter, will make payments of approximately $56,208 of principal and interest per month until the Maturity Date. In the event the Company is in default under the loan agreement with TCA or any related transaction document, including as a result of a default in the Company’s payment obligations, any amount due to TCA under the facility will, at TCA’s option, bear interest from the date due until such past due amount is paid in full at an annual rate of 22%. In addition, upon the occurrence and during the continuance of an event of default under the transaction documents, TCA may terminate its commitments to the Company and declare all of the Company’s obligations to TCA to be immediately due and payable. While the Note is outstanding, but only upon the occurrence of (i) an event of default under the loan agreement with TCA or any related transaction document or (ii) the Company’s mutual agreement with TCA, TCA may convert, subject to certain beneficial ownership limitations, all or any portion of the outstanding principal, accrued and unpaid interest and any other sums due and payable under the Note or any other transaction document (such total amount, the “Conversion Amount”) into a number of shares of the Company’s common stock equal to: (i) the Conversion Amount divided by (ii) eighty-five percent (85%) of the lowest of the daily volume weighted average price of the Company’s common stock during the five business days immediately prior to the conversion date (the “Conversion Shares”). Upon liquidation by TCA of Conversion Shares, if TCA realizes a net amount from such liquidation equal to less than the Conversion Amount, the Company is obligated to issue to TCA additional shares of the Company’s common stock equal to: (a) the Conversion Amount minus the net realized amount, divided by (b) the average volume weighted average price of the Company’s common stock during the five business days immediately prior to the date upon which TCA requests additional shares. The Company accounted for the conversion feature as a derivate liability (see Note 8 for further discussion). The payment and performance of all the Company’s indebtedness and other obligations to TCA, including all borrowings under the loan agreement and related agreements, are secured by liens on substantially all of the Company’s assets pursuant to a Security Agreement. Of the proceeds received at the initial closing, approximately $106,000 was used to pay in full all indebtedness outstanding under the Company’s Business Loan and Security Agreement with B of I Federal Bank (the “Bank”), entered into on November 3, 2015. Upon repayment of the Company’s indebtedness under the Business Loan and Security Agreement, the Bank released its liens on the Company’s assets. After the payment of approximately $51,000 of fees and cash expenses to TCA in connection with the loan transaction, the Company received net proceeds of approximately $593,000. As of June 30, 2016 the outstanding balance of the TCA Note was $659,409. In connection with the Loan Agreement, the Company agreed to pay to TCA a fee for advisory services provided to the Company prior to the entry into the Loan Agreement in the amount of $126,000 (the “Advisory Fee”). As partial payment of the Advisory Fee, the Company issued to TCA 3,810,000 shares of the Company’s common stock on December 24, 2015 (the “Advisory Fee Shares”), representing 4.99% of the Company’s issued and outstanding shares of common stock on such date. In the event that TCA receives net proceeds from the sale of such shares that are less than the Advisory Fee, TCA may require the Company to issue additional shares of common stock in an amount sufficient such that, when sold and the net proceeds from such sale are added to the net proceeds from the sale of any of the previously issued and sold Advisory Fee Shares, TCA shall have received total net funds equal to the Advisory Fee. Notwithstanding the foregoing, subject to certain conditions, the Company has the right to redeem the Advisory Fee Shares then in TCA’s possession for an amount payable in cash equal to the Advisory Fee, less any net cash proceeds received by TCA from previous sales of Advisory Fee Shares. In the event TCA has not realized net proceeds from the sale of Advisory Fee Shares equal to at least the Advisory Fee by the earlier to occur of: (i) December 24, 2016; (ii) the occurrence of an event of default under the transaction documents; or (iii) the Maturity Date, then at any time thereafter, TCA has the right to require the Company to redeem all of the Advisory Fee Shares then in TCA’s possession for cash equal to the Advisory Fee, less any cash proceeds received by TCA from any previous sales of Advisory Fee Shares. The Advisory Fee was recorded as a deferred finance fee of $126,000 and the Company amortized $42,000 during the year ended June 30, 2016, leaving an unamortized balance of $84,000. The Company determined that the Conversion feature of the TCA Note and the Advisory Fee meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 8 for a discussion relating to derivative liability. Description of Terminated Convertible Note Obligations Notes Issued to Gotama Capital S.A. On March 14, 2014, the Company closed the first of three tranches of a financing transaction pursuant to the terms of the Exchange Agreement. At the closing, the Company issued a convertible promissory note in the principal amount of $185,000 to Gotama Capital S.A. in exchange for cash proceeds of $185,000. The note bore interest at a rate of 8% per annum, with interest being payable on May 15 th On June 30, 2015, the Company converted $614,340 at a price of $0.15 per share, representing the entire principal amount of $560,000 and all accrued interest in the amount of $54,340 on the three convertible promissory notes issued to Gotama Capital S.A., into an aggregate of 4,095,605 shares of the Company’s common stock, par value $0.001 per share. As a result of the conversion, the three notes issued to Gotama Capital are no longer outstanding. Note Issued to Typenex Co-Investment, LLC in November, 2014 On November 4, 2014, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Typenex Co-Investment, LLC, a Utah limited liability company (the “Investor”), pursuant to which the Company concurrently issued to Investor a Secured Convertible Promissory Note in a principal amount of $1,687,500 (the “November Note”). The outstanding balance of this note as of June 30, 2016 and 2015 was $0 and $252,188, respectively. As of June 30, 2015, the unamortized debt discount balance was $60,096, the Company amortized $7,337 during the year ended June 30, 2016, leaving an unamortized debt discount of $52,759 which was recorded to loss on extinguishment of debt upon extinguishment of the November Note. As further described below, on December 18, 2015 the company entered into a Note Settlement Agreement relating to the November Note. Typenex Co-Investment June 2015 Note (See Note 9) On June 4, 2015, the Company entered into a Note Purchase Agreement (the “Purchase Agreement”) with Typenex Co-Investment, LLC, a Utah limited liability company, pursuant to which the Company concurrently issued to the investor an unsecured non-convertible Promissory Note in a principal amount of $245,000 (the “June Note”). In consideration for the June Note, the investor paid an aggregate cash purchase price of $200,000, computed as follows: $245,000 original principal balance, less the original issue discount of $40,000, and less the transaction costs. The June Note matured on December 4, 2015 and, as further described below, on December 18, 2015 the company entered into a Note Settlement Agreement relating to the June Note. As of June 30, 2015 the outstanding balance on the June Note was $245,000 and as of June 30, 2016, the outstanding balance on the June Note was $0. As of June 30, 2015, the unamortized debt discount balance was $34,098 and the Company amortized $34,098 during the year ended June 30, 2016, leaving an unamortized debt discount of $0. Note Settlement Agreement relating to the November Notes and the June Note On December 18, 2015, the Company and Typenex Co-Investment, LLC (the “Investor”) entered into a Note Settlement Agreement. The Note Settlement Agreement relates to the November Note and the June Note (collectively, the “Modified Notes”). The Note Settlement Agreement restructured the payment provision of the notes, including the June Note which was due and payable in full on December 4, 2015. The Company was to have made $50,000 monthly payments beginning December 15, 2015 and the remaining outstanding balance was to have been paid on or before March 15, 2016. This payment schedule was amended on February 19, 2016 (see below for a description of the Amendment to Note Settlement Agreement). As consideration for Investor’s agreement to enter into the Note Settlement Agreement, the Company agreed to increase the outstanding balance of each note by 15% (the “Restructure Effect”). Following the application of the Restructure Effect and including a $5,000 transaction expense fee, the outstanding balance of the November Note was $107,443 and the outstanding balance of the June Note was $281,750. The Company identified a derivative liability associated with the Note Settlement Agreement (See Note 8 below). The Company evaluated the Note Settlement Agreement under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”). ASC 470 requires modifications to debt instruments to be evaluated to assess whether the modifications are considered “substantial modifications”. A substantial modification of terms shall be accounted for like an extinguishment. For extinguished debt, a difference between the re-acquisition price and the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as losses or gains. The Company noted the change in terms per the Note Settlement Agreement, met the criteria for substantial modification under ASC 470, and accordingly treated the modification as extinguishment of the original November Note and June Note, replaced by the new convertible note under the modified terms. The Company recorded a loss on extinguishment of debt of $427,848 (which includes the unamortized debt discount of $52,759 noted above) during the year ended June 30, 2016, including true-up shares of 3,432,068 accrued in the amount of approximately $36,000 in the accompanying balance sheet (See Note 14). Amendment to Note Settlement Agreement On February 19, 2016, the Company entered into an Amendment to Note Settlement Agreement (the “Settlement Agreement Amendment”) with Investor. The Settlement Agreement Amendment relates to the Note Settlement Agreement (the “Original Agreement”) entered into between the parties on December 18, 2015. The Original Agreement, as amended by the Settlement Agreement Amendment, restructures the payment provision of the Modified Notes. The Settlement Agreement Amendment restructures the payment provisions contained in the Original Agreement and provides that the Company is to make the following payments to Investor, in lieu of the previously agreed to $50,000 cash payments, notwithstanding the terms of the Modified Notes (the “Restructure”): (a) a cash payment in the amount of $35,000 payable upon execution of the Settlement Agreement Amendment together with 918,386 shares of the Company’s common stock (subject to adjustment as described in the Settlement Agreement Amendment) based on a note conversion amount of $15,000 and a conversion price of $0.016333, which shares are to be issued and delivered pursuant to the terms of the Settlement Agreement Amendment and (b) a cash payment on or before March 15, 2016 in the amount of $35,000 together with shares of the Company’s common stock based on a note conversion amount of $15,000 and a conversion price of $0.016333, which 918,386 shares were issued and delivered pursuant to the terms of the Settlement Agreement Amendment; and (c) a payment equal to the remaining aggregate outstanding balance of the Modified Notes on or before April 15, 2016, which payment must be made in cash (collectively, the “Note Payments”). This Settlement Agreement Amendment was further modified on May 12, 2016 as described below. As consideration for Investor’s agreement to enter into the Settlement Agreement Amendment, the Company agreed to pay Investor a restructuring fee of $2,500.00. The Company evaluated the Settlement Agreement Amendment under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”). The Company noted the change in terms per the Settlement Agreement Amendment did not meet the criteria for substantial modification under ASC 470, and accordingly treated the amendment as a modification to the Note Settlement Agreement, adding $2,500 to the balance and extending the due date under the modified terms. On May 12, 2016 but effective as of April 15, 2016, the Company entered into Amendment #2 to Note Settlement Agreement (the “Second Amendment”) with Typenex Co-Investment, LLC (the “Investor”). The Second Amendment relates to the Note Settlement Agreement entered into between the parties on December 18, 2015, as previously amended on February 19, 2016 (as previously amended, the “Original Agreement”). The Original Agreement, as amended by the Second Amendment, restructures the payment provision of the Modified Notes. The Second Amendment restructures the payment provisions contained in the Original Agreement and provides that the Company is to make the following payments to Investor notwithstanding the terms of the Modified Notes (the “Restructure”): (a) a cash payment in the amount of $35,000 payable on or before April 15, 2016 together with 3,160,556 shares of the Company’s common stock (subject to adjustment as described in the Settlement Agreement Amendment) based on a note conversion amount of $50,000 and a conversion price of $0.015820, which shares are to be issued and delivered pursuant to the terms of the Settlement Agreement Amendment and (b) a cash payment on or before May 15, 2016 in the amount of $35,000 together with shares of the Company’s common stock based on a note conversion amount of $50,000 and a conversion price to be determined in accordance with the Notes, which shares are to be issued and delivered pursuant to the terms of the Settlement Agreement Amendment (see Note 3 for share issuance description); and (c) a payment equal to the remaining aggregate outstanding balance of the Notes on or before June 15, 2016, which payment must be made in cash (collectively, the “Note Payments”). The Second Amendment also provides that outstanding balance on each of the November Note and the June Note will bear interest at the rate of 10% per annum from the effective date of the amendment until such notes are repaid in full; previously, the June Note did not accrue interest on the unpaid principal balance of the note unless an event of default occurred. As consideration for Investor’s agreement to enter into the Second Amendment, the Company agreed to pay Investor a restructuring fee of $15,316. The Company evaluated the Second Amendment under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”), noting it did not meet the criteria for substantial modification under ASC 470, and accordingly treated the amendment as a modification to the Original Agreement. During the year ended June 30, 2016, the Company made principal payments of $277,009 and converted $130,000 of the Note Settlement into 10,594,769 shares. As of June 30, 2016, the outstanding balance under the November Note and June Note is $0. Upon the final payoff of the November Note and June Note, the Company recorded a gain on extinguishment of debt of $6,498 related to the re-measurement of the derivative liability. |
