| Convertible Notes Payable | 4. CONVERTIBLE NOTES PAYABLE On March 25, 2013, the Company entered
into a convertible promissory note (the March 2013 Note) in the amount of $100,000, at which time an initial advance
of $50,000 was received to cover operational expenses. The lender advanced an additional $20,000 on April 16, 2013, an additional
$15,000 on May 1, 2013 and an additional $15,000 on May 16, 2013, for a total draw of $100,000. The terms of the March 2013 Note
allow the lender to convert all or part of the outstanding balance plus accrued interest, at any time after the effective date,
at a conversion price of the lower of (a) $0.015 per share, or (b) 50% of the lowest trade price of Common Stock recorded on any
trade day after the effective date of the agreement. The March 2013 Note bears interest at a rate of 10% per year and is payable
upon demand, but in no event later than 60 months from the effective date of each tranche. On May 23, 2014, the lender converted
$17,000 of the $100,000 outstanding balance and accrued interest of $1,975 into 4,743,699 shares of common stock. On October 14,
2014, the lender converted $17,000 of the $100,000 outstanding balance and accrued interest of $2,645 into 4,911,370 shares of
common stock. The balance of the March 2013 Note, as of September 30, 2015 is $82,131, which includes $16,131 of accrued interest. On May 16, 2013, the Company signed
a convertible promissory note (the May 2013 Note) in the amount of $100,000, at which time an initial advance of
$10,000 was received to cover operational expenses. The lender advanced an additional $20,000 on June 3, 2013, an additional $25,000
on July 2, 2013, an additional $10,000 on September 3, 2013 and an additional $35,000 on February 18, 2014, for a total draw of
$100,000. The terms of the May 2013 Note allow the lender to convert all or part of the outstanding balance plus accrued interest,
at any time after the effective date, at a conversion price of the lower of (a) $0.015 per share, or (b) 50% of the lowest trade
price of Common Stock recorded on any trade day after the effective date of the agreement. The Company recognized a discount on
the May 2013 Note in the amount of $100,000, due to the beneficial conversion feature. This discount was recognized over twelve
months, and has been fully amortized as of September 30, 2015. The May 2013 Note bears interest at a rate of 10% per year and matures
on November 16, 2016. The balance of the May 2013 Note, as of September 30, 2015 is $120,366, which includes $20,366 of accrued
interest. On March 4, 2014, the Company entered
into a convertible promissory note (the March 2014 Note) in the amount of $250,000, at which time an initial advance
of $25,000 was received to cover operational expenses. The lender advanced an additional $20,000 on March 17, 2014 and an additional
$30,000 on April 2, 2014, for a total draw of $75,000. The terms of the March 2014 Note allow the lender to convert all or part
of the outstanding balance plus accrued interest, at any time after the effective date, at a conversion price of the lower of (a)
$0.012 per share, or (b) 50% of the lowest trade price of Common Stock recorded on any trade day after the effective date of the
agreement. The Company recorded a debt discount of $75,000 related to the beneficial conversion
feature of the March 2014 Note, along with derivative liabilities On April 16, 2014, the Company entered
into a convertible promissory note (the April 2014 Note) in the amount of $300,000, at which time an initial advance
of $40,000 was received to cover operational expenses. The lender advanced an additional $55,000 on April 30, 2014, an additional
$40,000 on May 16, 2014, an additional $40,000 on June 2, 2014, an additional $35,000 on June 30, 2014, an additional $40,000 on
July 18, 2014, and an additional $50,000 on August 15, 2014, for a total draw of $300,000. The terms of the April 2014 Note allow
the lender to convert all or part of the outstanding balance plus accrued interest, at any time after the effective date, at a
conversion price of the lower of (a) $0.012 per share, (b) 50% of the lowest trade price of Common Stock recorded on any trade
day after the effective date of the agreement, or (c) the lowest price per share offered to any person or entity after the effective
date. The Company recorded debt discount of $300,000 related to the conversion feature of
the April 2014 Note, along with derivative liabilities On September 5, 2014, the Company
entered into a convertible promissory note (the September 2014 Note) in the amount of $250,000, at which time an
initial advance of $40,000 was received to cover operational expenses. The lender advanced an additional $10,000 on September 17,
2014, an additional $30,000 on October 1, 2014, an additional $40,000 on October 16, 2014, an additional $40,000 on October 31,
2014, an additional $40,000 on November 18, 2014, and an additional $50,000 on December 16, 2014, for a total draw of $250,000.
The terms of the September 2014 Note allow the lender to convert all or part of the outstanding balance plus accrued interest,
at any time after the effective date, at a conversion price of the lower of (a) $0.015 per share, (b) 50% of the lowest trade price
of Common Stock recorded on any trade day after the effective date of the agreement, or (c) the lowest price per share offered
to any person or entity after the effective date. The Company recorded a debt discount of
$250,000 related to the conversion feature of the September 2014 Note, along with derivative liabilities On January 5, 2015, the Company
entered into a convertible promissory note (the January 2015 Note) in the amount of $250,000, at which time an initial
advance of $30,000 was received to cover operational expenses. The lender advanced an additional $45,000 on January 20, 2015, an
additional $45,000 on February 2, 2015, an additional $35,000 on February 16, 2015, an additional $35,000 on March 2, 2015, an
additional $30,000 on March 17, 2015,an additional $20,000 on April 2, 2015, and an additional $10,000 on April 17, 2015, for a
total draw of $250,000. The terms of the January 2015 Note allow the lender to convert all or part of the outstanding balance plus
accrued interest, at any time after the effective date, at a conversion price of the lower of (a) $0.015 per share, (b) 50% of
the lowest trade price of Common Stock recorded on any trade day after the effective date of the agreement, or (c) the lowest price
per share offered to any person or entity after the effective date. The Company recorded
a debt discount of $250,000 related to the conversion feature of the January 2015 Note, along with derivative liabilities On May 4, 2015, the Company entered
into a convertible promissory note (the May 2015 Note) in the amount of $250,000, at which time an initial advance
of $33,000 was received to cover operational expenses. The lender advanced an additional $43,000 on May 18, 2015, an additional
$45,000 on June 2, 2015, an additional $10,000 on June 17, 2015, an additional $38,000 on July 2, 2015, an additional $37,000 on
July 17, 2015, and additional $10,000 on August 5, 2015, and an additional $34,000 on August 19, 2015, for a total draw of $250,000.
The terms of the May 2015 Note allow the lender to convert all or part of the outstanding balance plus accrued interest, at any
time after the effective date, at a conversion price of the lower of (a) $0.015 per share, (b) 50% of the lowest trade price of
Common Stock recorded on any trade day after the effective date of the agreement, or (c) the lowest price per share offered to
any person or entity after the effective date. The Company recorded a debt discount of $250,000
related to the conversion feature of the May 2015 Note, along with derivative liabilities On August 19, 2015, the Company
entered into a convertible promissory note (the August 2015 Note) in the amount of $250,000, at which time an initial
advance of $3,000 was received to cover operational expenses. The lender advanced an additional $40,000 on September 1, 2015, and
an additional $31,000 on September 17, 2015, for a total draw of $74,000. The terms of the August 2015 Note allow the lender to
convert all or part of the outstanding balance plus accrued interest, at any time after the effective date, at a conversion price
of the lower of (a) $0.015 per share, (b) 50% of the lowest trade price of Common Stock recorded on any trade day after the effective
date of the agreement, or (c) the lowest price per share offered to any person or entity after the effective date. The
Company recorded a debt discount of $74,000 related to the conversion feature of the August 2015 Note, along with derivative liabilities ASC Topic
815 provides guidance applicable to convertible debt issued by the Company in instances where the number into which the debt can
be converted is not fixed. For example, when a convertible debt converts at a discount to market based on the stock
price on the date of conversion, ASC Topic 815 requires that the embedded conversion option of the convertible debt be bifurcated
from the host contract and recorded at their fair value. In accounting for derivatives under accounting standards, the Company
recorded a liability of $6,311,091 representing the estimated present value of the conversion feature considering the historic
volatility of the Companys stock, and a discount of $578,522 representing the imputed interest associated with the embedded
derivative. The discount is amortized over the life of the convertible debt, and the derivative liability is adjusted periodically
according to stock price fluctuations. At the time of conversion, any remaining derivative liability will be charged to additional
paid-in capital. For purpose
of determining the fair market value of the derivative liability, the Company used Black Scholes option valuation model. The significant
assumptions used in the Black Scholes valuation of the derivative are as follows:
Stock price on the valuation dates $ 0.022
Conversion price for the debt $ 0.004 - 0.0045
Dividend yield 0 %
Months to maturity 12 - 18 months
Risk free rate 0.33% - 0.56%
Expected volatility 84.18% - 144.55% Following is the five year maturity
schedule for our convertible notes payable:
Year ended June 30, Amount Due
2016 $ 464,776
2017 $ 436,489
2018 $
2019 $
2020 $ Fair value of financial instruments The Companys financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which approximates
their fair value, due to the relatively short maturity of these instruments. As of September 30, 2015 and 2014, the Companys
capital lease obligations and notes payable have stated borrowing rates that are consistent with those currently available to the
Company and, accordingly, the Company believes the carrying value of these debt instruments approximates their fair value. Fair value
is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the
inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These
tiers include:
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. We measure certain financial
instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows
at September 30, 2015:
Total (Level 1) (Level 2) (Level 3)
Assets $ $ $ $
Total assets measured at fair value $ $ $ $
Liabilities
Derivative liability 6,311,091 6,311,091
Convertible notes, net of discount 901,265 901,265
Total liabilities measured at fair value $ 7,212,356 $ $ $ 7,212,356 Assets and liabilities measured
at fair value on a recurring basis are as follows at June 30, 2015:
Total (Level 1) (Level 2) (Level 3)
Assets $ $ $ $
Total assets measured at fair value $ $ $ $
Liabilities
Derivative liability 1,951,201 1,951,201
Convertible notes, net of discount 700,884 700,884
Total liabilities measured at fair value $ 2,652,085 $ $ $ 2,652,085 |
