NOTE 7 - NOTES PAYABLE AND DERIVATIVE LIABILITY
At fiscal year ended September 30, 2012, the
Company had notes payable in the amount of $344,691, compared to $189,179, in the prior fiscal year. The notes included a note
payable to an unaffiliated party in the amount of $93,769, which is not secured by collateral of the company, carries accrued interest
of 6%and is due on demand by the holder. The second note payable is to an affiliated company of our President in the amount of
$28,456, is not secured by collateral of the company, carries no interest, and is due on demand by the holder.
A third note payable
was issued to an unaffiliated party on February 27, 2012 in the aggregate amount of $58,000. As of September 30, 2012, $11,000
remained outstanding on the principle amount of the note. The note carries an interest rate of 8%, is not secured by collateral
of the company, and has a maturity date of November 29, 2012. The note has conversion rights beginning after month six (6). The
variable conversion price is 58% of the market price, which is calculated by the average three (3) lowest closing bid prices as
quoted on the applicable trading market (the OTCBB) during the previous ten (10) trading days. The note holder may
not own any more than 4.99% of the companys outstanding common stock. The Company recognizes the conversion option of the
note (an embedded derivative) as a derivative liability.
ASC Topic 815 (ASC 815) requires
that all derivative financial instruments be recorded on the balance sheet at fair value. Fair values for exchange traded securities
and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using
market based pricing models incorporating readily observable market data and requiring judgment and estimates.
The Company issued convertible notes and has
evaluated the terms and conditions of the conversion features contained in the notes to determine whether they represent embedded
or freestanding derivative instruments under the provisions of ASC 815. The Company determined that the conversion features contained
in the notes represent freestanding derivative instruments that meet the requirements for liability classification under ASC 815.
As a result, the fair value of the derivative financial instruments in the notes is reflected in the Companys balance sheet
as a liability. The fair value of the derivative financial instruments of the convertible notes was measured at the inception date
of the notes and warrants and each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments
are recorded as non-operating, non-cash income or expense at each balance sheet date.
The Company valued the conversion features
in its convertible notes using the Black-Scholes model. The Black-Scholes model values the embedded derivatives based on a risk-free
rate of return ranging from 0.29% to 0.30%, grant dates at 8/1/2011, 10/6/2011 and 9/30/2012, the term of convertible note, conversion
prices is 55% and 58% of stock bid price at date of note conversion, current stock prices on the measurement date ranging from
$0.0013 to $0.0070, and the computed measure of the Companys stock volatility, ranging from 1,839.96% to 2,342.87%.
Included in the September 30, 2012 financial
statements is a derivative liability in the amount of $18,963 to account for this
transaction. It is revalued quarterly henceforth and adjusted as a gain or loss to the consolidated statements of operations depending
on its value at that time.
Included in our Consolidated Statements of
Operations for the years ended September 30, 2012 and 2011 are $68,907 in change of fair value of derivative and $131,945 of debt
discount amortization in non-cash charges pertaining to the derivative liability as it pertains to the gain on derivative liability
and debt discount, respectively.
on goodwill impairment
||September 30, 2012
||September 30, 2011|
| Loss on goodwill impairment, AquaLiv
|| $ --
| Net loss on impairments