Convertible Notes Payable

9 Months Ended

Mar. 31, 2016

Convertible Notes Payable

Convertible Notes Payable

5. CONVERTIBLE NOTES PAYABLE

During the quarter ended December 31, 2015, the Company signed addenda to each of its outstanding convertible notes, fixing the conversion price at $0.004. Before the addenda, the conversion price for each of the notes was tied to the trading price of the Company’s common stock. Because of that fluctuation, the Company was required to report derivative gains and losses each quarter, which was included in earnings, and an overall derivative liability balance on the balance sheet. Accordingly, per ASC 815, the derivative liability on the note was extinguishedand re-valued per ASC 470 as a beneficial conversion feature, where applicable, to be expensed in the statement of operations.The Company has eliminated the derivative liability balance on the balance sheet and discontinued the gain/loss reporting on the income statement.

On March 25, 2013, the Company issued a convertible promissory note (“the March 2013 Note”) in the amount of up to $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, as amended, 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 $0.004. 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 March 31, 2016 is $85,440, which includes $19,440 of accrued interest.

On May 16, 2013, the Company issued 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 onJune 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, as amended, allow the lender to convert all or part of the outstanding balance plus accrued interest, at a conversion price of $0.004. 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 payable upon demand, but in no event later than 60 months from the effective date of each tranche. The balance of the May 2013 Note, as of March 31, 2016 is $125,379, which includes $25,379 of accrued interest.

On March 4, 2014, the Company issued 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, as amended, allow the lender to convert all or part of the outstanding balance plus accrued interest, at a conversion price of $0.004. The Company recorded a debt discount of $75,000 related to the beneficial conversion feature of the March 2014 Note. This discount is recognized over 18 months, beginning on the date of each tranche payment. For the quarter ended March 31, 2016, the Company included $4,921 in interest expense related to the discount. As of March 31, 2016, the portion of the discount that has not been amortized is $8,489.The March 2014 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. The balance of the March 2014 Note, as of March 31, 2016 is $90,266, which includes $15,266 of accrued interest.

On April 16, 2014, the Company issued 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, as amended, 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 $0.004. The Company recorded debt discount of $300,000 related to the conversion feature of the April 2014 Note. This discount is recognized over 18 months, beginning on the date of each tranche payment. For the quarter ended March 31, 2016, the Company included $1,726 in interest expense related to the discount. As of March 31, 2016, the portion of the discount that has not been amortized is $3,775. The April 2014 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. The balance of the April 2014 Note, as of March 31, 2016 is $354,316, which includes $54,316 of accrued interest.

On September 5, 2014, the Company issued 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, as amended, 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 $0.004. The Company recorded a debt discount of $250,000 related to the conversion feature of the September 2014 Note. This discount is recognized over 18 months, beginning on the date of each tranche payment. For the quarter ended March 31, 2016, the Company included $49,424 in interest expense related to the discount. As of March 31, 2016, the portion of the old and new discount that has not been amortized is $17,166. TheSeptember 2014 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. The balance of the September 2014 Note, as of March 31, 2016 is $285,729, which includes $35,729 of accrued interest.

On January 5, 2015, the Company issued 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, as amended, 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 $0.004.The Company recorded a debt discount of $250,000 related to the conversion feature of the January 2015 Note. This discount is recognized over 18 months, beginning on the date of each tranche payment. For the quarter ended March 31, 2016, the Company included $32,172 in interest expense related to the discount. As of March 31, 2016, the portion of the new discount that has not been amortized is $47,426. TheJanuary 2015 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. The balance of the January 2015 Note, as of March 31, 2016 is $278,081, which includes $28,081 of accrued interest.

On May 4, 2015, the Company issueda 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, as amended, 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 $0.004. The Company recorded a debt discount of $250,000 related to the conversion feature of the May 2015 Note. This discount is recognized over 18 months, beginning on the date of each tranche payment. For the quarter ended March 31, 2016, the Company included $24,944 in interest expense related to the discount. As of March 31, 2016, the portion of the new discount that has not been amortized is $73,690. TheMay 2015 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. The balance of the May 2015 Note, as of March 31, 2016 is $269,481, which includes $19,481 of accrued interest.

On August 19, 2015, the Company issued 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, as amended, 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 $0.004. The Company recorded a debt discount of $74,000 related to the conversion feature of the August 2015 Note. This discount is recognized over 18 months, beginning on the date of each tranche payment. For the quarter ended March 31, 2016, the Company included $7,495 in interest expense related to the discount. As of March 31, 2016, the portion of the new discount that has not been amortized is $28,096. The August 2015 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. The balance of the August 2015 Note, as of March 31, 2016 is $78,173, which includes $4,173 of accrued interest.

On October 1, 2015, the Company issued a convertible promissory note (the “October 2015 Note”) in the amount of $1,000,000, at which time an initial advance of $38,000 was received to cover operational expenses. The lender advanced an additional $38,500 on October 16, 2015, an additional $65,000 on November 17, 2015, an additional $32,000 on December 7, 2015, an additional $60,000 on December 17, 2015, an additional $35,000 on January 4, 2016, an additional $52,000 on January 19, 2016, an additional $58,000 on February 2, 2016, an additional $36,000 on February 18, 2016, an additional $40,000 on March 2, 2016, and an additional $27,000 on March 21, 2016, for a total draw of $481,500. The terms of the October 2015 Note, as amended, 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 $0.004. The October 2015 Note bears interest at a rate of 10% per year and matures 12 months from the effective date of each advance.The Company recorded a debt discount of $481,500 related to the conversion feature of the October 2015 Note. This discount is recognized over 12 months, beginning on the date of each tranche payment. For the quarter ended March 31, 2016, the Company included $103,688 in interest expense related to the discount. As of March 31, 2016, the portion of thediscount that has not been amortized is $380,594. The balance of the October 2015 Note, as of March 31, 2016 is $493,882, which includes $12,382 of accrued interest.

Following is the five year maturity schedule for our convertible notes payable:

Year ended June 30,	Amount Due
2016	$	911,701
2017	$	589,810
2018	$	—
2019	$	—
2020	$	—

Fair value of financial instruments

The Company’s 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 March 31, 2016and 2015, the Company’s 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 1measurements) 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. As of March 31, 2016 the Company had no Assets and liabilities measured at fair value on a recurring basis per ASC Topic 820.

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)
Liabilities
Derivative liability		1,951,201		—		—		1,951,201
Total liabilities measured at fair value	$	1,951,201	$	—	$	—	$	1,951,201

The following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair value:

Beginning balance as of July 1, 2015	$	1,951,201
Fair value on issuance of debt		426,500
Change on settlement of debt		(5,636,592	)
Loss on change in derivative liability		3,258,891
Ending balance as of December 31, 2015	$	—