Note 11. Convertible Debt and Derivative Liability

On December 18, 2014, the Company entered into a convertible note agreement with an investor for the purchase and sale of up to $285,000 of the Company’s original issue discount convertible debentures with a term of 3 years. The first debenture, in the principal amount of $160,000, was issued on December 18, 2014.

In connection with the agreement, the Company provided the lender with 200,000 shares of common stock. The Company used the trading price of its common stock on December 18, 2014 as the fair value of the common stock. The Company recorded a debt discount of $42,000 attributed to the issuance of the common stock.

The agreement provides that the holder may convert the notes into common stock at 70% of the lowest trading price in a 20 day trading window prior to the conversion. The note does not bear interest if repaid within 90 day of the borrowing date while a 30% one-time interest fee will be charged on the 181^st day if the note is still outstanding. The Company has determined that the right to convert the notes at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on December 18, 2014 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $80,008 on the issuance date. The debt discount attributed to the convertible note, the issuance of the common stock, and the derivative liability is being amortized over the term of the note of 3 years and recorded as interest expense in the statements of operations.

During the year ended July 31, 2015, the lender converted $65,000 of the principal balance of the note in exchange for 1,807,579 shares of Common Stock, which also resulted in the de-recognition of $77,643 of the balance of the derivative liability. As of July 31, 2015, the Company determined the fair value of the derivative liability was $113,151 and accordingly recorded the change in fair value of $110,786 as other expense in the statements of operations.

On February 20, 2015, the Company entered into a convertible note agreement with an investor for the purchase and sale of up to $66,667 of the Company’s original issue discount convertible notes with a term of 2 years.

The agreement provides that the holder may convert the notes into common stock at the lesser of $0.15 per share or 60% of the lowest trading price in a 25 day trading window prior to the conversion. The note does not bear interest if repaid within 90 day of the borrowing date while a 12% one-time interest fee will be charged on the 91^st day if the note is still outstanding. The Company has determined that the right to convert the notes at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on February 20, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $50,000 on the issuance date. The debt discount attributed to the convertible note and the derivative liability is being amortized over the term of the note of 2 years and recorded as interest expense in the statements of operations. As of July 31, 2015, the Company determined the fair value of the derivative liability has increased to $102,259 and accordingly recorded the change in fair value of $52,259 as other expense in the statements of operations.

On March 4, 2015, the Company entered into a convertible note agreement with an investor for a principal balance of $100,000 with a term of 1 year.

The agreement provides that the holder may convert the notes into common stock at 60% of the lowest trading price in a 15 day trading window prior to the conversion. The debt accrues interest at a rate of 8% per annum, payable in common stock at the conversion rate. The Company has determined that the right to convert the notes at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on March 4, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $89,672 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 1 year and recorded as interest expense in the statements of operations. As of July 31, 2015, the Company determined the fair value of the derivative liability has increased to $115,747 and accordingly recorded the change in fair value of $26,075 as other expense in the statements of operations.

On April 1, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $64,000 of with a term of 1 year.

The agreement provides that the holder may convert the note into common stock at 61% of the lowest 3 trading prices in a 10 day trading window prior to the conversion. The note accrues interest at a rate of 8% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on April 1, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $55,958 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 1 year and recorded as interest expense in the statements of operations. As of July 31, 2015, the Company determined the fair value has increased to $61,376 and accordingly recorded the change in fair value of $5,418 as other expense in the statements of operations.

On April 24, 2015, the Company entered into a convertible note agreement with an investor for a total principal of up to $115,000 with a term of 1 year. The debenture, in the principal amount of $115,000, was issued on April 24, 2015.

The agreement provides that the holder may convert the note into common stock at the lesser of $0.10 or 65% of the lowest trading price in a 30 day trading window preceding the date of conversion. The note accrues interest at a rate of 15% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on April 24, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $80,000 on the issuance date. The debt discount attributed to the convertible note and the derivative liability is being amortized over the term of the note of 1 year and recorded as interest expense in the statements of operations. As of July 31, 2015, the Company determined the fair value has increased to $115,837 and accordingly recorded the change in fair value of $35,837 as other expense in the statements of operations.

On April 24, 2015, the Company entered into a convertible note agreement with an investor for the purchase and sale of $50,000 of the Company’s original issue discount convertible note with a term of 8 months.

The agreement provides that the holder may convert the notes into common stock at 70% of the lowest trading price in a 30 day trading window prior to the conversion. The note accrues an interest of 1% per annum. The Company has determined that the right to convert the notes at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on April 24, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $31,572 on the issuance date. The debt discount attributed to the convertible note and the derivative liability is being amortized over the term of the note of 8 months and recorded as interest expense in the statements of operations. As of July 31, 2015, the Company determined the fair value of the derivative liability has increased to $47,217 and accordingly recorded the change in fair value of $15,645 as other expense in the statements of operations.

On May 21, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $43,000 of with a term of nine months.

The agreement provides that the holder may convert the note into common stock at 61% of the lowest 3 trading prices in a 10 day trading window prior to the conversion after 180 days. The note accrues interest at a rate of 8% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on May 21, 2015 and remeasured at July 31, 2015. The Company recorded a debt discount for the fair value of the derivative liability of $29,204 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of nine months and recorded as interest expense in the statements of operations. As of July 31, 2015, the Company determined the fair value has increased to $40,674 and accordingly recorded the change in fair value of $11,470 as other expense in the statements of operations.

On June 11, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $27,778 of with a term of 2 years.

The agreement provides that the holder may convert the note into common stock at the lesser of 0.125 or 65% of the lowest trading prices in a 25 day trading window proceeding to the conversion. The note accrues interest at a rate of 10% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on June 11, 2015 and remeasured at July 31, 2015. The Company recorded a debt discount for the fair value of the derivative liability of $25,000 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 2 years and recorded as interest expense in the statements of operations. As of July 31, 2015, the Company determined the fair value has increased to $43,278 and accordingly recorded the change in fair value of $18,278 as other expense in the statements of operations.

On June 15, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $55,000 of with a term of 1 year.

The agreement provides that the holder may convert the note into common stock at 60% of the lowest trading prices in a 25 day trading window prior to the conversion or the effective date of the Note. The note accrues interest at a rate of 10% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on June 15, 2015 and remeasured at July 31, 2015. The Company recorded a debt discount for the fair value of the derivative liability of $24,270,000 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 1 year and recorded as interest expense in the statements of operations. As of July 31, 2015, the Company determined the fair value has increased to $28,308 and accordingly recorded the change in fair value of $4,038 as other expense in the statements of operations.

On July 9, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $65,750 of with a term of 9 months.

The agreement provides that the holder may convert the note into common stock at 63% of the lowest trading prices in a 25 day trading window prior to the conversion or the effective date of the Note after 180 days. The note accrues interest at a rate of 8% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on July 9, 2015 and remeasured at July 31, 2015. The Company recorded a debt discount for the fair value of the derivative liability of $60,000 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 9 months and recorded as interest expense in the statements of operations. As of July 31, 2015, the Company determined the fair value has increased to $73,427 and accordingly recorded the change in fair value of $13,427 as other expense in the statements of operations.

On July 10, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $75,000 of with a term of 1 year.

The agreement provides that the holder may convert the note into common stock at 35% of the lowest trading prices in a 10 day trading window prior to the conversion or the effective date of the Note after 180 days. The note accrues interest at a rate of 10% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on July 10, 2015 and remeasured at July 31, 2015. The Company recorded a debt discount for the fair value of the derivative liability of $71,250 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 1 year and recorded as interest expense in the statements of operations. As of July 31, 2015, the Company determined the fair value has increased to $100,591 and accordingly recorded the change in fair value of $29,341 as other expense in the statements of operations.

On July 27, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $43,000 of with a term of nine months.

The agreement provides that the holder may convert the note into common stock at 61% of the lowest 3 trading prices in a 10 day trading window prior to the conversion after 180 days. The note accrues interest at a rate of 8% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on July 27, 2015 and remeasured at July 31, 2015. The Company recorded a debt discount for the fair value of the derivative liability of $29,084 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of nine month and recorded as interest expense in the statements of operations. As of July 31, 2015, the Company determined the fair value has increased to $40,128 and accordingly recorded the change in fair value of $11,044 as other expense in the statements of operations.

The Company used a Binomial Lattice model to calculate the fair value of its derivative liabilities using the following inputs:

	Issuance date			July 31, 2015
Volatility		96% - 196	%		174% - 207	%
Expected Term (years)		0.69 - 3.00			0.42 - 2.38
Expected dividend yield		0	%		0	%
Risk-free rate		0.15% - 1.10	%		0.13% - 0.80	%

As of July 31, 2015, amounts outstanding under the Company’s convertible debt payable were as follows:

Principal balance	$	800,195
Debt discount		(570,467)
Net carrying value of debt		229,728
Less current portion		193,559
Long term net carrying value of debt		36,169

The future minimum payments under convertible debt agreements as of July 31, 2015 are as follows:

Year Ending July 31:
2016	$	650,007
2017		150,188

	$	800,195