| Convertible Notes Payable | Note 8 - Convertible Notes Payable Debt Offering (A) On May 3, 2011, June 13, 2011 and August 1, 2011, the Company sold three (3) $25,000 notes or $75,000 in aggregate of unsecured, subordinated convertible notes (the "Notes") with the following terms and conditions:
● Maturity dates ranging from October 1, 2011 to December 31, 2015 as amended (see below);
● Interest rate at 10% per annum, with interest payable at maturity;
● Convertible (see further description below); and
● Subordinate to any senior debt, mezzanine debt, secured debt, or other creditors having priority by law or agreement of the Company as may be incurred by the Company prior to maturity. Conversion Feature - Convertible Notes In the event the Company consummates, prior to the maturity date of the Notes, an equity financing pursuant to which it sells shares of its common stock with the aggregate gross proceeds of not less than $5 million (a “Qualified Financing”), then the note holder has the right to either (i) exercise the option to call the notes due, whereby the Company shall repay the balance of the notes, including the unpaid principal and all accrued interest; or (ii) exercise the conversion option of converting all of the amounts due from the Company for additional shares. The conversion price shall be the lesser of (i) an amount equal to ninety percent (90%) of the then offering price of such additional shares, or (ii) $0.15 per share. If the Company does not engage in a Qualified Financing
on or prior to the maturity date of the Notes, the holder of the note may exercise the option of converting the Notes, including all principal and accrued interest, into shares of the Company's common stock at a conversion price of $0.15 per share. If the option is not exercised on the maturity date the conversion option will cease to exist. Because these conversion features are variable, management has concluded that the features cannot be indexed solely to the Company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities. During the fiscal year ended September 30, 2012, two (2) note holders converted notes and related accrued interest of $52,774 at $0.15 per share into 351,827 shares of common stock. On December 22, 2014, the remaining note holder, having a note in the principal amount of $25,000, signed a note amendment extending the maturity date of the note. The maturity of the note was extended to December 31, 2015 or the closing of an equity investment where the Company receives net proceeds of more than $500,000, whichever is earlier. Derivative Warrants Each of the three (3) note holders received a warrant to purchase shares of the Company's common stock equal to 30% of the principal amount of their note (e.g., a warrant to purchase 7,500 shares for each $25,000 invested). These warrants are exercisable at $0.75 per share expiring three (3) years from the date of issuance, i.e. May 3, 2014, June 13, 2014 and August 1, 2014, respectively. Management has concluded that the above conversion features cannot be indexed solely to the Company’s own stock and therefore are precluded from equity classification. The warrants have a maturity date
subsequent to the maturity date of the Notes and the warrants are not otherwise excluded from liability treatment. As a result, the warrants must be accounted for as derivative liabilities. Extinguishment Accounting In order for the conversion feature to be consistent for all note holders, on August 3, 2011, in accordance with a note Modification and Amendment Agreement, one note holder’s conversion price relating to the initial issuance was modified from an amount equal to ninety percent (90%) of the then offering price of such additional shares (future issuances) to the lesser of (i) an amount equal to ninety percent (90%) of the then offering price of such additional shares, or (ii) $0.15 per share. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $34,390, for the fiscal year ended September 30, 2011. On June 1, 2012, one note holder signed a note amendment extending the maturity date of the note to March 1, 2013, this was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $8,667, for the fiscal year ended September 30, 2012. On March 1, 2013, one (1) note holder signed a note amendment further extending the maturity date of the note to December 31, 2013, or the closing of an equity investment where the Company receives net proceeds of more than $500,000, whichever is earlier. This was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $25,667, for the year ended September 30, 2013. On February 10, 2014, one (1) note holder signed a note amendment further extending the maturity date of the note to December 31, 2014, or the closing of an equity investment where the Company receives net proceeds of more than $500,000, whichever is earlier. This was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $12,166, for the fiscal year ended September 30, 2014. On December 22, 2014, one (1) note holder signed a note amendment further extending the maturity date of the note to December 31, 2015, or the closing of an equity investment where the Company receives net proceeds of more than $500,000, whichever is earlier. This modification was not considered a substantial modification of terms. The Company accounted for the modification by comparing the fair value of the conversion feature on the date of modification to the as-modified note to the fair value of the existing note. The increase in fair value of the conversion feature to the as-modified note was recorded in earnings on the date of the modification. Debt Offering (B) On January 31, 2012, the Company sold two (2) $130,000 notes or $260,000 in aggregate of secured, subordinated convertible notes (the "Notes") with the following terms and conditions:
● Maturing on June 25, 2015 as amended (see below);
● Interest rate at 5% per annum, with interest payable semi-annually;
● Default interest rate is 10% per annum;
● Convertible to common shares at $0.10 per share (see discussion of ratchet feature below);
● Three (3) year warrants to purchase 780,000 shares of common stock, with an exercise price of $0.15 per share; and
● Secured by all assets of the Company. On November 13, 2012 the maturity date of these notes was extended from January 31, 2013 to January 31, 2014. As consideration for the extension, the Company issued the Note holders 307,500 warrants, with an exercise price of $0.15 per share. On July 19, 2013 the maturity date of these notes was further extended from January 31, 2014 to January 31, 2015. As consideration for the extension, the Company issued the Note holders 300,000 warrants, with an exercise price of $0.15 per share. (See “ Amendments to the Convertible Notes Payable (F)” below.) On February 11, 2015, due to default, the Company received demand notices from the Lender in accordance with Section 7.2 of the Subscription Agreements for mandatory redemption payments on the notes. In accordance with the Provisions of Section 7.2 of the Subscription Agreements, the Lender demanded repayment of the notes calculated at 120% of the principal amount of the notes, assuming no other defaults apply, plus accrued but unpaid interest. On March 27, 2015 the maturity date of these notes was further extended from January 31, 2015 to June 25, 2015. (See “ Amendments to the Convertible Notes Payable (G)” below.) As of June 25, 2015, the Company is not compliant with the repayment terms of the notes and is in default. The Company intends to request that the maturity date of these notes be further extended, however, there can be no assurance that a further extension will be granted. Conversion Feature - Convertible Notes The holder has the right from and after the date of the issuance of the Notes and then at any time until the Notes are fully paid, to convert any outstanding and unpaid principal and accrued unpaid interest at a conversion price of $0.10 per share. In the event the Company issues any common stock prior to the complete conversion or payment of the Notes, for a per share price that is less than the conversion price, the conversion price of the Notes shall be reduced to the lower per share price. Because these notes contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities. (See “ Amendments to the Convertible Notes Payable (F and G)” below regarding amendments to conversion feature.) Derivative Warrants Each of the two (2) note holders received warrants to purchase 390,000 shares of the Company's common stock. These warrants are exercisable at $0.15 per share. The warrants expire three (3) years from the date of issuance. In the event the Company issues any common stock prior to expiration date of the warrants, for a per share price that is less than the purchase price of the warrants, the warrant price shall be reduced to the lower per share price. Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities. Extinguishment Accounting On November 13, 2012, the note holders signed a note amendment extending the maturity date of the note to January 31, 2014, this was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $151,610, for the fiscal year ended September 30, 2013. On July 19, 2013, the note holders signed a second note amendment extending the maturity date of the note to January 31, 2015, this was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $124,800, for the fiscal year ended September 30, 2013. On March 27, 2015, the note holders signed a note amendment extending the maturity date of the Notes to June 25, 2015, waived the prohibition against prepayment of the Notes and also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. This was considered a substantial modification of terms and the Company applied extinguishment accounting. (See “ Amendments to the Convertible Notes Payable (G)” below regarding extinguishment accounting.) As of June 25, 2015, the Company is not compliant with the repayment terms of the notes and is in default. As a result of the default, the notes revert back to the original terms, reinstating the noteholders conversion option. This was considered a substantial modification of terms and the Company applied extinguishment accounting. (See “ Default on Convertible Notes Payable (H)” below regarding extinguishment accounting.) Debt Offering (C) On November 19, 2012, the Company sold two (2) $102,500 notes or $205,000 in aggregate of secured, subordinated convertible notes (the "Notes") with the following terms and conditions:
● Maturing on June 25, 2015 as amended (see below);
● Interest rate at 5% per annum, with interest payable semi-annually;
● Default interest rate is 10% per annum;
● Convertible to common shares at $0.10 per share (see discussion of ratchet feature below);
● Three (3) year warrants to purchase 615,000 shares of common stock, with an exercise price of $0.15 per share; and
● Secured by all assets of the Company. On July 19, 2013 the maturity date of these notes was extended from January 31, 2014 to January 31, 2015. As consideration for the extension, the Company issued the Note holders 300,000 warrants, with an exercise price of $0.15 per share. (See “ Amendments to the Convertible Notes Payable (F)” below.) On February 11, 2015, due to default, the Company received demand notices from the Lender in accordance with Section 7.2 of the Subscription Agreements for mandatory redemption payments on the notes. In accordance with the Provisions of Section 7.2 of the Subscription Agreements, the Lender demanded repayment of the notes calculated at 120% of the principal amount of the notes, assuming no other defaults apply, plus accrued but unpaid interest. On March 27, 2015 the maturity date of these notes was further extended from January 31, 2015 to June 25, 2015. (See “ Amendments to the Convertible Notes Payable (G)” below.) As of June 25, 2015, the Company is not compliant with the repayment terms of the notes and is in default. The Company intends to request that the maturity date of these notes be further extended, however, there can be no assurance that a further extension will be granted. Conversion Feature - Convertible Notes The holder has the right from and after the date of the issuance of the Notes and then at any time until the Notes are fully paid, to convert any outstanding and unpaid principal and accrued unpaid interest at a conversion price of $0.10 per share. In the event the Company issues any common stock prior to the complete conversion or payment of the Notes, for a per share price that is less than the conversion price, the conversion price of the Notes shall be reduced to the lower per share price. Because these notes contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities. (See “ Amendments to the Convertible Notes Payable (F and G)” below regarding amendments to conversion feature.) Derivative Warrants Each of the two (2) note holders received warrants to purchase 307,500 shares of the Company's common stock. These warrants are exercisable at $0.15 per share. The warrants expire three years from the date of issuance. In the event the Company issues any common stock prior to expiration date of the warrants, for a per share price that is less than the purchase price of the warrants, the warrant price shall be reduced to the lower per share price. Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities. Extinguishment Accounting On July 19, 2013, the note holders signed a note amendment extending the maturity date of the note to January 31, 2015, this was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $189,668, for the fiscal year ended September 30, 2013. On March 27, 2015, the note holders signed a note amendment extending the maturity date of the Notes to June 25, 2015, waived the prohibition against prepayment of the Notes and also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. This was considered a substantial modification of terms and the Company applied extinguishment accounting. (See “ Amendments to the Convertible Notes Payable (G)” below regarding extinguishment accounting.) As of June 25, 2015, the Company is not compliant with the repayment terms of the notes and is in default. As a result of the default, the notes revert back to the original terms, reinstating the noteholders conversion option. This was considered a substantial modification of terms and the Company applied extinguishment accounting. (See “ Default on Convertible Notes Payable (H)” below regarding extinguishment accounting.) Debt Offering (D) On July 19, 2013, the Company sold $250,000 in aggregate of secured, subordinated convertible notes (the "Notes") to three (3) note holders with the following terms and conditions:
● Maturing on June 25, 2015, as amended (see below);
● Interest rate at 5% per annum, with interest payable semi-annually;
● Default interest rate is 10% per annum;
● Convertible to common shares at $0.10 per share (see discussion of ratchet feature below);
● Three (3) year warrants to purchase 750,000 shares of common stock, with an exercise price of $0.15 per share; and
● Secured by all assets of the Company. On February 11, 2015, due to default, the Company received demand notices from the Lender in accordance with Section 7.2 of the Subscription Agreements for mandatory redemption payments on the notes. In accordance with the Provisions of Section 7.2 of the Subscription Agreements, the Lender demanded repayment of the notes calculated at 120% of the principal amount of the notes, assuming no other defaults apply, plus accrued but unpaid interest. On March 27, 2015 the maturity date of these notes was extended from January 31, 2015 to June 25, 2015. (See “ Amendments to the Convertible Notes Payable (F and G)” below.) As of June 25, 2015, the Company is not compliant with the repayment terms of the notes and is in default. The Company intends to request that the maturity date of these notes be further extended, however, there can be no assurance that a further extension will be granted. Conversion Feature - Convertible Notes The holder has the right from and after the date of the issuance of the Notes and then at any time until the Notes are fully paid, to convert any outstanding and unpaid principal and accrued unpaid interest at a conversion price of $0.10 per share. In the event the Company issues any common stock prior to the complete conversion or payment of the Notes, for a per share price that is less than the conversion price, the conversion price of the Notes shall be reduced to the lower per share price. Because these notes contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities. (See “ Amendments to the Convertible Notes Payable (F and G)” below regarding amendments to conversion feature.) Derivative Warrants Two (2) note holders received warrants to purchase 300,000 shares of the Company's common stock and one (1) note holder received warrants to purchase 150,000 shares of the Company's common stock. These warrants are exercisable at $0.15 per share. The warrants expire three years from the date of issuance. In the event the Company issues any common stock prior to expiration date of the warrants, for a per share price that is less than the purchase price of the warrants, the warrant price shall be reduced to the lower per share price. Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities. Extinguishment Accounting On March 27, 2015, the note holders signed a note amendment extending the maturity date of the Notes to June 25, 2015, waived the prohibition against prepayment of the Notes and also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. This was considered a substantial modification of terms and the Company applied extinguishment accounting. (See “ Amendments to the Convertible Notes Payable (G)” below
regarding extinguishment accounting.) As of June 25, 2015, the Company is not compliant with the repayment terms of the notes and is in default. As a result of the default, the notes revert back to the original terms, reinstating the noteholders conversion option. This was considered a substantial modification of terms and the Company applied extinguishment accounting. (See “ Default on Convertible Notes Payable (H)” below regarding extinguishment accounting.) Debt Offering (E) On October 18, 2013, the Company sold $280,000 in aggregate of secured, subordinated convertible notes (the "Notes") to three (3) note holders with the following terms and conditions:
● Maturing on June 25, 2015, as amended (see below);
● Interest rate at 5% per annum, with interest payable semi-annually;
● Default interest rate is 10% per annum;
● Convertible to common shares at $0.10 per share (see discussion of ratchet feature below);
● Three (3) year warrants to purchase 1,400,000 shares of common stock, with an exercise price of $0.15 per share; and
● Secured by all assets of the Company. On February 11, 2015, due to default, the Company received demand notices from the Lender in accordance with Section 7.2 of the Subscription Agreements for mandatory redemption payments on the notes. In
accordance with the Provisions of Section 7.2 of the Subscription Agreements, the Lender demanded repayment of the notes calculated at 120% of the principal amount of the notes, assuming no other defaults apply, plus accrued but unpaid interest. On March 27, 2015 the maturity date of these notes was extended from January 31, 2015 to June 25, 2015. (See “ Amendments to the Convertible Notes Payable (G)” below.) As of June 25, 2015, the Company is not compliant with the repayment terms of the notes and is in default. The Company intends to request that the maturity date of these notes be further extended, however, there can be no assurance that a further extension will be granted. Conversion Feature - Convertible Notes The holder has the right from and after the date of the issuance of the Notes and then at any time until the Notes are fully paid, to convert any outstanding and unpaid principal and accrued unpaid interest at a conversion price of $0.10 per share. In the event the Company issues any common stock prior to the complete conversion or payment of the Notes, for a per share price that is less than the conversion price, the conversion price of the Notes shall be reduced to the lower per share price. Because these notes contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities. (See “ Amendments to the Convertible Notes Payable (F and G)” below regarding amendments to conversion feature.) Derivative Warrants One (1) note holder received warrants to purchase 650,000 shares of the Company's common stock, one (1) note holder received warrants to purchase 500,000 shares of the Company's common stock, ,and one (1) note holder received warrants to purchase 250,000 shares of the Company's common stock. These warrants are exercisable at $0.15 per share. The warrants expire three years from the date of issuance. In the event the Company issues any common stock prior to expiration date of the warrants, for a per share price that is less than the purchase price of the warrants, the warrant price shall be reduced to the lower per share price. Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities. Extinguishment Accounting On March 27, 2015, the note holders signed a note amendment extending the maturity date of the Notes to June 25, 2015, waived the prohibition against prepayment of the Notes and also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. This was considered a substantial modification of terms and the Company applied extinguishment accounting. (See “ Amendments to the Convertible Notes Payable (G)” below regarding extinguishment accounting.) As of June 25, 2015, the Company is not compliant with the repayment terms of the notes and is in default. As a result of the default, the notes revert back to the original terms, reinstating the noteholders conversion option. This was considered a substantial modification of terms and the Company applied extinguishment accounting. (See “ Default on Convertible Notes Payable (H)” below regarding extinguishment accounting.) Amendments to the Convertible Notes Payable (F) During November 2014 the Company entered into loan modification agreements with certain convertible note holders (the “Lenders”) (Debt offerings “B through E” above). Each of the Lenders agreed to certain modifications to the terms of the notes as outlined below:
● The Company may prepay the notes at any time, provided that the notes are paid off at one time, in full, on or before December 31, 2014, at 105% of the amount owed on the notes;
● Conversion rights of the notes are suspended through and including December 31, 2014; and
● In consideration of the Lenders’ entry into the loan modifications, the Company agreed to issue to each of the Lenders warrants to purchase shares of the Company’s common stock in cash. The number of warrant shares which may be issued to the Lenders and the exercise price thereof shall be determined by reference to one or more public or private offerings of the Company’s securities expected to be completed in 2015. Derivative Warrants Due to the fact that these warrants convert at a variable amount and contain price protection features, they are subject to derivative liability treatment. The Company has applied ASC No. 815, due to the potential for settlement in a variable quantity of shares and contain price protection features. The warrants have been measured at fair value using a binomial model at period end with gains and losses from the change in fair value of derivative liabilities recognized on the statements of operations. The warrants, when issued, gave rise to a derivative liability of $113,430 of which was expensed immediately. Amendments to the Convertible Notes Payable (G) On March 27, 2015, the Company entered into a Fifth Amendment (the “Fifth Amendment”) to certain transaction documents (the “Purchase Agreements”) pursuant to which three investors (the “Lenders”) had lent funds to the Company in exchange for secured convertible promissory notes (the “Notes”) and warrants (Debt offerings “B through E” above). Pursuant to the terms of the Fifth Amendment, the Lenders agreed to extend the maturity dates on the Notes from January 31, 2015 to June 25, 2015 and waive the prohibition against prepayment of the Notes. The Lenders also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. The Company could not guarantee, however, that it would be able to prepay the Notes by June 25, 2015. As consideration for the Fifth Amendment, the Company agreed to issue 500,000 shares of the Company’s common stock in the aggregate to the Lenders on a pro rata basis. The Company also acknowledged and confirmed that, pursuant to Section 7.2 of the Purchase Agreements, the principal amount of each of the Notes would be increased by 20% of the original principal amount to reflect an increase with respect to a Mandatory Redemption Payment (as defined in the Purchase Agreements). The Company issued the Noteholders an aggregate of 500,000 shares of common stock on April 6, 2015 as per the terms of the Fifth Amendment. Extinguishment Accounting On March 27, 2015, the Lenders signed a note amendment extending the maturity date of the Notes to June 25, 2015, waived the prohibition against prepayment of the Notes and also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. This was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $40,550, for the period ended June 30, 2015. Default on Convertible Notes Payable (H) As of June 25, 2015, the Company is not compliant with the repayment terms of certain notes and is in default. The Company intends to request that the maturity date of these notes be further extended, however, there can be no assurance that a further extension will be granted. Extinguishment Accounting As a result of the default, the notes revert back to the original terms, reinstating the noteholders conversion option. This was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $199,000, for the period ended June 30, 2015. Convertible notes payable consisted of the following:
June 30, September 30,
Convertible notes payable $ 1,219,000 $ 1,020,000
Discount on convertible notes - (127,048 )
Convertible notes payable, net $ 1,219,000 $ 892,952 Debt Discount Convertible Notes The debt discounts recorded pertain to the derivative liability classification of the embedded conversion option and warrants and debt modifications. The following is a summary of the Company’s debt discount - convertible notes:
June 30, September 30,
Debt discount - convertible notes $ 900,655 $ 898,322
Amortization of debt discount - convertible notes (900,655 ) (771,274 )
Debt discount - convertible notes - net $ - $ 127,048 |
