Convertible notes and debenture		$	366,296
Unamortized discounts			(121,059)
Premium			27,187
Convertible notes, net		$	272,424

 

On September 30, 2013 the Company’s subsidiary issued a Debenture for $139,680 (AUD$150,000) plus warrants for 3,000,000 common shares of the Company. The Company agreed to pay 12% interest on the principal amount and the maturity date is December 31, 2015.  This debenture rolls into it $27,963 of loans outstanding at June 30, 2013 (see Note 5), an August 2013 note of $63,196 along with September advances of $46,446 and accrued interest.  The debenture is convertible only at the Company’s option into common stock at $0.0698 per share and is convertible at that same rate by the lender only upon default by the Company, as defined in the debenture.  The warrants were determined to be derivative instruments due to the variable exercise price of the warrants which is initially $0.0698 and subject to adjustment if the Company issues shares at a price below the initial exercise price.  Accordingly, the fair value of the warrants was determined using a Black-Scholes option pricing model with a stock price of $0.20, exercise price of $0.0698, volatility of 53% based on the comparative companies method since the Company’s stock is very thinly traded, an expected term of 27 months based on the debenture term and a risk free rate of 0.4%.  The approximate initial $400,000 value of the warrants was recorded as a derivative liability in the accompanying consolidated balance sheet, along with a debt discount of approximately $140,000 and change in warrant derivative liability of approximately $260,000 as an expense for the three months ended September 30, 2013. (See note 12 for current period re-measurement)

 

In May 2014, the Company issued a 10% convertible promissory note for $25,000 as a prepaid fee for services to be provided under a settlement and stipulation agreement as discussed in Note 13. The note and all accrued interest is due on November 8, 2014. The note is convertible immediately at 50% of the lowest closing bid price in the 30 days prior to conversion. 

 

On May 29, 2014, the Company issued a convertible note payable for $75,000. The Company agreed to pay 8% interest per annum on the principal amount and the maturity date is May 29, 2015. The note is convertible at the option of the holder at any time after 180 days at a rate of 55% of the lowest trading bid price of the Company’s common stock for the ten prior trading including the date upon which the conversion notice was received. The convertible note is treated as stock settled debt under ASC 480 and accordingly the Company is accreting a $61,364 put premium over 180 days from the execution of the convertible note. Through June 30, 2014, the Company has accreted $10,275 of the put premium. Accrued interest as of June 30, 2014 was $526.

 

On May 29, 2014, the Company issued a second convertible note payable for $75,000. The Company agreed to pay 8% interest per annum on the principal amount and the maturity date is May 29, 2015. The note is convertible at the option of the holder at any time after 180 days at a rate of 55% of the lowest trading bid price of the Company’s common stock for the ten prior trading including the date upon which the conversion notice was received. The convertible note is treated as stock settled debt under ASC 480 and accordingly the Company is accreting a $61,364 put premium over 180 days from the execution of the convertible note. Through June 30, 2014, the Company has accreted $10,275 of the put premium. Accrued interest as of June 30, 2014 was $526.

 

On May 30, 2014, the Company issued a third convertible note payable for $50,000. The Company agreed to pay 8% interest per annum on the principal amount and the maturity date is May 29, 2015. The note is convertible at the option of the holder at any time after 180 days at a rate of 55% of the lowest trading bid price of the Company’s common stock for the ten prior trading including the date upon which the conversion notice was received. The convertible note is treated as stock settled debt under ASC 480 and accordingly the Company is accreting a $40,909 put premium over 180 days from the execution of the convertible note. Through June 30, 2014, the Company has accreted $6,636 of the put premium. Accrued interest as of June 30, 2014 was $340.

 

The Company recorded $30,000 of debt discounts for fees paid to lenders related to the above note issuances. Amortization of the discounts through June 30, 2014 was $3,133. 

 

In addition to each of the above initial convertible promissory notes (“initial convertible notes”), the Company issued to each lender another convertible promissory note for the same amounts of $75,000, $75,000 and $50,000 termed "back-end notes". These notes have the same terms as the initial notes. Each back-end note shall initially be paid for by an offsetting promissory note issued to the Company by the lender ("Note receivable") provided that prior to the conversion of the Back-End Notes, the holders must have paid off the Notes receivable in cash. The Notes receivable are due on January 30, 2015, unless the Company does not meet the “current public information” requirement pursuant to Rule 144, in which case both the Back-End Notes and the Notes receivable may be both cancelled. The Notes receivable are initially secured by the pledge of the back end Notes, but may be exchanged for other collateral with an appraised value of at least $50,000, upon Company’s approval following a three (3) day written notice to the Company. The term of the Notes receivable and the Back-End Notes are one year, upon which the outstanding principal and interest is payable. The amount funded plus accrued interest under Back-End Notes are convertible into Common Stock at any time after the requisite Rule 144 holding period (subject to the condition above for the Back-End Notes), at a conversion price equal to 55% of the lowest trading bid price in the ten (10) trading days prior to the conversion. 

 

In the event the Company redeems the initial convertible promissory notes in full, the Company is required to pay off all principal, interest and any other amounts owing multiplied by i) 130% if prepaid within 60 days of the issuance date; ii) 140% if prepaid 60 but less than 121 days after the issuance date; and (iii) 150% if prepaid 120 but less than 180 days after the issuance date. There shall be no redemption after the 180th day. The Back-End Notes may not be prepaid, except that if the initial Convertible Notes are redeemed by the Company within six months of their issuance, all obligations of the Company and holders under the Back-End Note and the Notes receivable will be deemed satisfied and such notes shall automatically be deemed cancelled and of no further force or effect.

 

In the event of two specific defaults, which include the maintenance of a minimum trading price and an aggregate dollar trading volume of the Company's common shares, the holders may cancel the back-end notes and the related notes receivable and otherwise in the event of other defaults as defined in the securities purchase agreement, the amount of principal and accrued interest will become immediately due and payable and may be offset by amounts due to the Company by the holders. Additionally, the back-end notes will bear default interest at a rate of 16% per annum, or the highest rate of interest permitted by law.

 

Since the back-end notes are not convertible until the notes receivable are paid and also not for 180 days from the note dates, and the notes receivable and notes payable have a right a setoff, the notes receivable and back-end notes and related accrued interest receivable and payable have been netted for presentation purposes on the accompanying consolidated balance sheet.