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Convertible Notes

12 Months Ended

Jun. 30, 2014

4. Convertible Notes Payable

As of June 30, 2014, the Company extended, for two years, seven of the convertible notes totaling $275,000. As part of this extension the note holders agreed to cancel their $0.50 warrants. The remaining $250,000 convertible notes have reached maturity and the Company is working to negotiate a settlement. As of June 30, 2013, the Company extended to one year term for $525,000 of the convertible note payable issued between August 17, 2012 and March 31, 2013.

Between August 17, 2012 and March 31, 2013, our Company issued a total of $525,000 in convertible promissory notes to eleven accredited investors, one of which is a member of our Board and another was a former member of our Board. The convertible promissory notes must be repaid by our Company within six months from the date of issuance; accrue interest at the rate of 14%; and are subject to conversion at the election of the investors at such time as our Company has raised a minimum of $500,000 in a subsequent equity financing. The conversion price will be the lower of 80% of the per share purchase price paid by the new investors in the subsequent financing, or $0.50 per share. Unless these promissory notes are converted or repaid earlier, our Company must pay the note-holders the amount of the then accrued interest on the three, six, and nine month anniversaries of the issue date. As of June 30, 2013, the Company had extended the maturity date of the notes to one year from the date of issuance.

On various dates during June 2014 and July 2014 the Company and holders of certain convertible notes, the dates for which are outlined below, agreed to 1) cancel $0.50 warrants and retained the $0.01 warrant, as defined in the original Convertible Note Purchase Agreements warrants to purchase common shares in the Company, 2) extend the due dates on the Notes to July 1, 2016, and 3) reduce the interest on the notes to 10% from 14%. In total, 300,000 warrants at $0.50 were cancelled. The original dates for the notes and the amounts of the notes affected by these agreements are listed below. Notes dated otherwise retained the original terms.


	•	Note dated August 16, 2012 for $25,000 Note dated August 24, 2012 for $25,000
	•	Note dated September 8, 2012 for $40,000
	•	Note dated September 12, 2012 for $50,000 Note dated September 18, 2012 for $25,000
	•	Note dated October 5, 2012 for $10,000
	•	Note dated October 24, 2012 for $25,000
	•	Note dated December 21, 2012 for $100,000
	•	Note dated July 31, 2012 for $25,000

In connection with the issuance of the promissory notes, the investors in the aggregate received two-year warrants to purchase up to a total of 78,750 shares of common stock at $0.50 per share, and two-year warrants purchasing up to a total of 131,250 shares of common stock at $0.01 per share. For purposes of accounting for the detachable warrants issued in connection with the convertible notes, the fair value of the warrants was estimated using the Black-Scholes-Merton option pricing formula. The value of all warrants granted at the date of issuance totaled $508,413 and was recorded as a discount to the notes payable. The amount will be amortized over the nine month term of the respective convertible note as additional interest expense.