| Note 7 - Convertible Notes Payable | NOTE 7 CONVERTIBLE NOTES PAYABLE Note Holder Balance Unamortized Original Unamortized Deferred Balance of Convertible Notes, Net of September 30, 2016 Derivative Discount Finance Cost Discount Debt Discount Discount and Deferred Cost Iliad Co Loan Payable 43,156 - (1,875) (1,875) 41,281 TCA Global Loan Payable 505,432 (357,089) (98,427) (455,516) 49,916 Total Convertible Notes Payable 548,588 (357,089) (100,302) (457,391) 91,197 Description of Outstanding Convertible Note Obligations Outstanding as of September 30, 2016 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 investors 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. 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 of $245,000 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. 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 Companys 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 Companys 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); 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. On July 15, 2016, the Company entered into a second Exchange Agreement (the Second Exchange Agreement) with Iliad. Pursuant to the Second Exchange Agreement, the Company and Iliad exchanged the Exchange Note for a new promissory note in the original principal amount of $81,632 (the Second Exchange Note), which balance includes an exchange fee of $2,500. The Second Exchange Note was issued in substitution of and not in satisfaction of the Exchange Note. The Company evaluated the Exchange Amendment dated July 15, 2016 to the Exchange Agreement dated May 12, 2016 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 $42,198. The Second Exchange Agreement and related Second Exchange Note restructured the payment provisions of the Exchange Note. The Second Exchange Note provides that the Company is to make to Iliad a payment equal to the remaining aggregate outstanding balance of the Second Exchange Note on or before July 15, 2017, which payment must be made in cash. Interest accrues on the outstanding balance of the Second Exchange Note at a rate of 10% per annum; provided, however that if the Company fails to repay the Second Exchange Note when due, or if the Company is otherwise in default under the Second Exchange Note, at the option of Iliad a default interest rate of 18% per annum will apply. In the event the Company is in default under the Second Exchange Note, Iliad also has the option to accelerate the note with the outstanding balance becoming immediately due and payable at an amount equal to 115% of the outstanding balance of the Second Exchange Note as of the date the event of default occurred. The Second Exchange Note may be prepaid without penalty at any time. The Second Exchange Note provides that, until the Second Exchange Note has been paid in full, Iliad may convert all or part of the outstanding note balance (the Conversion Amount) into shares of common stock of the Company at the Conversion Price (as defined below). Notwithstanding the foregoing, the Company has the option to pay the Conversion Amount in cash in lieu of delivering shares of its common stock. As used, Conversion Price means a price per share equal to 70% of the average of the three lowest closing bid prices of the Companys common stock in the twenty trading days immediately preceding the applicable conversion. The Second Exchange Note provides that the Company may not issue shares to Iliad under the Second Exchange Note if the issuance of such shares would cause Iliad to beneficially own more than 9.99% of the Companys outstanding common stock. The Company determined that the conversion feature of the Second Exchange Note meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 10 for a discussion relating to derivative liability. As of November 14, 2016, the outstanding balance on the Second Exchange Note was $0. 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 $706,911 and amortized $223,791 during the year ended June 30, 2016, leaving an unamortized balance of $483,120. For the three months ended September 30, 2016, the Company incurred an amortization expense of $126,031, leaving an unamortized balance of $357,089 at the end of the period. 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 Companys payment obligations, any amount due to TCA under the facility will, at TCAs 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys common stock equal to: (a) the Conversion Amount minus the net realized amount, divided by (b) the average volume weighted average price of the Companys 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. The payment and performance of all the Companys 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 Companys 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 Companys Business Loan and Security Agreement with B of I Federal Bank (the Bank), entered into on November 3, 2015. Upon repayment of the Companys indebtedness under the Business Loan and Security Agreement, the Bank released its liens on the Companys 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 September 30, 2016 the outstanding balance of the TCA Note was $505,432. 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 Companys common stock on December 24, 2015 (the Advisory Fee Shares), representing 4.99% of the Companys 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 TCAs 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 TCAs 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. During the three months ended September 30, 2016, the Company amortized $21,913, leaving an unamortized balance of $62,087 at the end of the period. 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 10 for a discussion relating to derivative liability. |
