Note 8. Convertible Notes Payable

Balances

Convertible notes payable consists of the following as of June 30, 2014 and September 30, 2013:


	June 30, 2014			September 30, 2013
Convertible note payable in the original principal amount of $329,050 due on February 28, 2015, bearing interest at 10% per year, convertible into common stock at a rate of $0.04 per share.	$	-		$	283,103
Convertible note payable in the original principal amount of $109,565 due on June 30, 2015, bearing interest at 10% per year, convertible into common stock at a rate of $0.04 per share.		109,296			190,565
Convertible note payable in the original principal amount of $528,434 due on September 30, 2015, bearing interest at 10% per year, convertible into common stock at a rate of $0.04 per share.		528,434			528,434
Convertible note payable in the original principal amount of $276,825 due on June 30, 2016, bearing interest at 10% per year, convertible into common stock at a rate of $0.03 per share.		276,285			-
Total convertible notes payable	$	914,015		$	1,002,102

Less: current portion of convertible notes payable		(109,296	)		-
Less: discount on noncurrent convertible notes payable		(607,087	)		(925,840	)
Long-term convertible notes payable, net of discount	$	$197,632		$	76,262

During nine months ended June 30, 2014, the holders of the Convertible Note Payable dated February 28, 2013 elected to convert principal and accrued interest in the amounts show below into share of common stock at a rate of $0.04 per share. On the conversion date, the unamortized discount related to the principal amount converted was immediately amortized to interest expense. No gain or loss was recognized on the conversions as they occurred within the terms of the agreement, which provided for conversion at $0.04 per share.


Date	Amount Converted		Number of Shares Issued	Unamortized Discount
October 25, 2013	$	20,000	500,000	$	14,119
October 31, 2013		20,000	500,000		15,961
December 10, 2013		10,000	250,000		5,818
December 12, 2013		20,000	500,000		15,717
December 27, 2013		20,000	500,000		15,083
February 7, 2013		20,000	500,000		13,028
March 3, 2014		24,000	600,000		16,222
March 4, 2014		24,000	600,000		16,967
April 1, 2014		24,000	600,000		15,637
April 14, 2014		28,000	700,000		18,761
April 25, 2014		24,000	600,000		15,699
May 15, 2014		32,000	800,000		20,181
May 21, 2014		29,852	746,296		17,578
Total	$	295,852	7,396,296	$	200,771

As of June 30, 2014, there was no remaining balance of the note dated February 28, 2013.

During nine months ended June 30, 2014, the holders of the Convertible Note Payable dated June 30, 2013 elected to convert principal and accrued interest in the amounts show below into share of common stock at a rate of $0.04 per share. On the conversion date, the unamortized discount related to the principal amount converted was immediately amortized to interest expense. No gain or loss was recognized on the conversions as they occurred within the terms of the agreement, which provided for conversion at $0.04 per share.


Date	Amount Converted		Number of Shares Issued	Unamortized Discount
June 16, 2014	$	32,000	800,000	$	7,699
June 17, 2014		32,000	800,000		16,525
June 26, 2014		36,000	900,000		18,816
Total	$	100,000	2,500,000	$	43,040

As of June 30, 2014, the remaining balance on the note dated February 28, 2013 was $109,296.

Issuance of Convertible Promissory Notes

On June 30, 2014, we issued a Convertible Promissory Note for $276,285 to refinance advances. The note is payable, with accrued interest, on June 30, 2016. The note bears interest at rate of 10% per year, and is convertible into common stock at a rate of $0.03 per share.

The Company evaluated the terms of this note in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity's Own Stock and determined that the underlying common stock is indexed to the Company's common stock. The Company determined that the conversion feature did not meet the definition of a liability and therefore did not bifurcate the conversion feature and account for it as a separate derivative liability. The Company evaluated the conversion feature for a beneficial conversion feature. The effective conversion price was compared to the market price on the date of the notes and was deemed to be less than the market value of underlying common stock at the inception of the notes. Therefore, the Company recognized a beneficial conversion feature in the amount of $276,285 on June 30, 2014. The beneficial conversion feature was recognized as an increase in additional paid-in capital and a discount to the Convertible Notes Payable. The discount to the Convertible Notes Payable is being amortized to interest expense over the life of the notes using the effective interest method.

The Company evaluated the application of ASC 470-50-40/55, Debtor's Accounting for a Modification or Exchange of Debt Instrument as it applies to the three notes listed above and concluded that the revised terms constituted a debt modification rather than a debt extinguishment because the present value of the cash flow under the terms of each of the new instruments was less than 10% from the present value of the remaining cash flows under the terms of the original notes. No gain or loss on the modifications was required to be recognized.