Convertible Notes Payable

12 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Note 8 - Convertible Notes Payable

During the year ended September 30, 2017, we executed a series of Promissory Notes (the “2017 Notes”) to four unrelated entities and received an aggregate of $493,000. The Notes have initial terms of one year or less and provide for an original issue discount of $52,500 in the aggregate, which are being amortized over their respective terms. The notes carry face interest rates of from 8% to 12% per annum. The Lenders have the rights, at any time and/or after 180 days at their election to convert all or part of the outstanding and unpaid principal and accrued interest into shares of our common stock. The conversion price is generally a range of between 50% and 58% of a two-day average of the lowest trading price in the 15 to 25 range of trading days prior the conversion. The Notes provide for additional penalties if we cannot deliver the underlying common stock on a timely basis.

We evaluated the terms of the conversion features of the convertible debenture in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity's Own Stock and determined it is indexed to the Company's common stock and that the conversion features meet the definition of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability.

We valued the conversion feature at origination of all Notes at $1,339,000 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, .50 to 1 years to maturity, risk free interest rate of 0.66% to 1.23% and annualized volatility of 206.9% to 483.4%. $537,000 of the value assigned to the derivative liability was recognized as a debt discount on the convertible debenture. The debt discount was recorded as reduction (contra-liability) to the convertible Notes and is being amortized over the respective lives of the convertible Notes. The balance of $802,000 of the value assigned to the derivative liability was recognized as origination interest on the derivative liability and expensed on origination.

To determine the fair value of our embedded derivatives, management evaluates assumptions regarding the probability of certain future events. Other factors used to determine fair value include our period end stock price, historical stock volatility, risk free interest rate and derivative term. The fair value recorded for the derivative liability varies from period to period. This variability may result in the actual derivative liability for a period either above or below the estimates recorded on our consolidated financial statements, resulting in significant fluctuations in other income (expense) because of the corresponding non-cash gain or loss recorded.

We valued the derivative liability and at the end of each accounting period the difference in value is recognized as gain or loss. At September 30, 2017, we determined the valuation using the Black-Sholes valuation model with the following assumptions: dividend yield of zero, 0.01 to 0.81 years to maturity, risk free interest rate of 1.30% and annualized volatility of 103.5% to 423.7&. We recognized $1,668,175 of expense for the change in value of the derivative for the year ended September 30, 2017.

During the year ended September 30, 2016, we executed a series of Promissory Notes (the “2016 Notes”) to two unrelated entities and received an aggregate of $142,730. The Notes have initial terms of one year or less and provide for an original issue discount of $62,000 in the aggregate, which are being amortized over their respective terms. The notes carry face interest rates of from 8% to 10% per annum. The Lenders have the rights, at any time and/or after 180 days at their election to convert all or part of the outstanding and unpaid principal and accrued interest into shares of our common stock. The conversion price is generally the lower of $.001 and 50% of the lowest trading price in the 20 range of trading days prior the conversion.

During the year ended September 30, 2017, two lenders converted an aggregate of $34,650 of the principal of the 2016 Notes into 34,650,000 shares of our $0.01 par value common stock. Additionally, during the year ended September 30, 2017 a lender converted an aggregate of $14,626 of the carrying value of the 2017 Notes into 4,171,160 shares of our $0.001 par value common stock.

The carrying value of all convertible notes at September 30, 2017 and 2016 was comprised of:

	2017		2016
Convertible notes payable	$	568,765	$	95,126
Unamortized original issue discount and debt discount		-305,165		-43,331
	$	293,600	$	51,795

Interest expense for the year ended September 30, 2017 was $1,264,175 and includes $846,239 of origination interest, $340,628 of amortization of debt discount, and $27,031 of amortization of original issue discount. Interest expense for the year ended September 30, 2016 was $499,678 and includes $437,530 of amortization of debt discount.