14. Convertible Promissory Note Payable

12 Months Ended

Jun. 30, 2012

Notes to Financial Statements

14. Convertible Promissory Note Payable

On May 1, 2012, the Company issued a two-year, 10% convertible promissory note in the amount of $150,000.  121 days from the issue date, the holder can convert any unpaid principal and accrued interest into common shares of the Company. Between 121 days and 150 days from the issue date, the conversion price per share shall be $0.25; from 151 days to 180 days from the issue date, the conversion price shall be $0.20; anytime thereafter the conversion price shall be $0.15, subject to adjustment as defined. . The investor also was issued a five year common stock purchase warrant for the purchase of up to 480,000 shares of the Company’s common stock, at a price per share of $0.40, that permits a cashless exercise in the event that the underlying shares of common stock to be issued upon exercise are not registered pursuant to an effective registration statement at the time of the exercise.

Convertible Promissory Note Payable Beneficial Conversion Feature

As part of the issuance of the convertible promissory note payable, the Company recorded a derivative for the embedded beneficial feature conversion on the convertible debentures. Since the conversion feature of the note payable may be reset based upon subsequent financing, the derivative was reflected as a liability.  The Company records changes in fair value at each reporting period in its consolidated statements of operations as a gain or loss associated with the change in fair market value.

The Company calculated the value of the conversion feature as of May 1, 2012 at $45,251, based upon the Black Scholes model, and has reflected this as a discount against the convertible promissory note, amortizable as interest expense over two years.  The Company recorded $3,771 in amortization expense as of June 30, 2012.

The Company calculated the value of the conversion feature at June 30, 2012, recording a loss on the change in fair market value of $1,749 as of June 30, 2012.

Warrants

As part of the issuance of certain convertible debentures, we recorded a derivative for the issuance of detachable warrants.    Although such warrants are typically considered equity instruments, the warrant agreement allows for resets of the conversion price based upon subsequent financing, therefore the warrant issuance was deemed a liability for financial reporting purposes under the accounting guidance.

The warrant was valued as of May 1, 2012 at $100,431, using a Black-Scholes Option Pricing Model with the stock price on day of grant, $0.22, per share, the risk free interest rate of .84% and the expected volatility of 108.93%.  This value has been reflected as discount of the convertible promissory note payable, amortizable as interest expense over two years.  As of June 30, 2012, the Company recorded $8,369 in interest expense.

The Company calculated the value of the conversion feature at June 30, 2012, recording a gain on the change in fair market value of $2,059 as of June 30, 2012.

The Company has reflected the value of the convertible promissory note payable in its consolidated balance sheet as follows:

	May 1, 2012			June 30, 2012
Convertible Promissory Note Payable	$	150,000		$	150,000
Less:		-
Beneficial Conversion Feature Discount		(45,251	)		(41,480	)
Warrant Discount		(100,431	)		(92,062	)
Total Discount		(145,682	)		(133,542	)
Convertible Promissory Note Payable - Net	$	4,318		$	16,458

In July 2013, $15,000 of the principal of the promissory note, and $1,467 in interest were repaid as a result of converting the debt to 164,671 shares of the Company’s common stock.  In connection with this financing, the investment banker received 40,000 shares of the Company’s common stock.

On July 17, 2012 and October 15, 2012, the Company sold an additional $50,000 and $39,015, respectively, of the 10% convertible promissory notes.  Warrants to purchase an aggregate of 272,530 shares of the Company’s common stock were issued in conjunction with these financings. In connection with these financings, the investment banker received a 10% promissory note for $6,000 and a warrant to purchase 34,500 shares of the Company’s common stock, under the same terms as the other notes sold, as payment for commissions on the financing. In addition, the investment banker received 22,253 shares of the Company’s common stock as commission.

On May 28, 2013, the Company sold an additional $59,000 of the 10% convertible promissory notes. In connection with this note, the Company agreed to hold 2,000,000 of its common stock as collateral for the note payable.