NOTES PAYABLE

3 Months Ended

Sep. 30, 2012

4. NOTES PAYABLE

Notes payable consist of the following:


		September 30,			June 30,
		2012			2012
Note payable – former Managing Member	$	27,750		$	27,750
Note payable – related corporation		4,300			4,300
Note payable – stockholder		13,000			13,000
Note payable – Chief Executive Officer		10,000			5,000
Notes payable – Financial Institutions		41,485			—
Note payable – Southridge Partners II LP		40,000			40,000
Convertible note payable – former Digipath member		1,050,000			—
Convertible notes payable		398,284			195,000
Total		1,584,819			285,050
Convertible notes payable, discount		(87,230	)		(33,645	)
Total, net of discount		1,497,589			251,405
Less current portion		546,654			133,240
Long-term debt	$	950,935		$	118,165

Maturities of notes payable for the years ending September 30, 2013, 2014, 2015, 2016 and 2017 are $546,654, $925,925, $8,934, $9,456 and $6,620, respectively.

On March 4, 2011, AccelPath entered into a resignation and repurchase agreement with one of its Managing Members. The Managing Member resigned on March 4, 2011 and AccelPath agreed to repurchase 10,498,120 shares of $0.001 par value common stock for $74,000. To complete the repurchase, AccelPath issued a $74,000 note payable due in eight monthly installments of $9,269 including interest at 0.54% per annum. At September 30, 2012, AccelPath has not paid $27,750 of principal payments due for August through October 2011. During a default, unpaid principal bears interest at 12% per annum. In addition, AccelPath entered into a consulting agreement with the Managing Member requiring payments of $750 per month for a period of eight months in consideration for continuing services. At September 30, 2012, AccelPath has accrued but not made the $2,250 of consulting payments due for August through October 2011. Consulting expense for the three months ended September 30, 2012 and 2011 was $0 and $2,250, respectively.

On August 18, 2011, the Company borrowed $3,300 from a corporation controlled by our Chief Executive Officer. The Company borrowed an additional $1,000 on January 12, 2012. The note is payable on demand and accrues interest at a rate of 0.32% per annum.

During the three months ended December 31, 2011, the Company borrowed $15,000 from a stockholder and $5,000 from our Chief Executive Officer. On February 27, 2012, the Company repaid $2,000 of the note payable - stockholder. On September 27, 2012, the Company borrowed an additional $5,000 from our Chief Executive Officer. The balance of these notes are payable on demand and accrue interest at 0.19% per annum.

In October 2011, Digipath entered into a note payable agreement with a financial institution with monthly payments of $286 including interest at 4.4%. The note is secured by a vehicle and matures in October 2017.

In November 2011, Digipath entered into a note payable agreement with a financial institution with monthly payments of $584 including interest at 6.25%. The note is secured by equipment and matures in November 2016.

On February 10, 2012, the Company borrowed $40,000 from Southridge Partners II LP under a promissory note which matured on August 31, 2012. The note bears interest at 8% per annum and includes a redemption premium of $6,000 due on the maturity date. The redemption premium is being accrued over the term of the note as additional interest.

On February 10, 2012, the Company borrowed $50,000 from a third party. The Company repaid $5,000 of the note on March 12, 2012. The convertible promissory note bears interest at 5% per annum and matured on August 10, 2012. The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date and the investor has the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date. The Company also issued the investor a five-year warrant to purchase 500,000 shares of common stock at an exercise price of $0.01 per share. The warrant includes a cashless net exercise provision and has piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the note. The Company allocated $8,037 of the proceeds to the warrant and $41,963 of the proceeds to the discounted value of the note based on their relative fair values.

On February 17, 2012, the Company borrowed $100,000 from a third party. The convertible promissory note bears interest at 5% per annum and matures on August 16, 2013. The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date. The investor has the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date. In addition, the Company has the option to convert the promissory note into shares of common stock at the closing bid price 30 days prior to the maturity date if the price per share is at least $0.01. The Company also issued the investor a five-year warrant to purchase 1,000,000 shares of common stock at an exercise price of $0.01 per share. The warrant includes a cashless net exercise provision. The Company granted piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the note. The Company allocated $32,743 of the proceeds to the warrant and $67,257 of the proceeds to the discounted value of the note based on their relative fair values.

On April 18, 2012, the Company borrowed $50,000 from a third party. The convertible promissory note bears interest at 5% per annum and matures on October 17, 2013. The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date. The investor has the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date. In addition, the Company has the option to convert the promissory note into shares of common stock at the closing bid price 30 days prior to the maturity date if the price per share is at least $0.01. The Company also issued the investor a five-year warrant to purchase 500,000 shares of common stock at an exercise price of $0.01 per share. The warrant includes a cashless net exercise provision and the investor has piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the note. The Company allocated $8,225 of the proceeds to the warrant and $41,775 of the proceeds to the discounted value of the note based on their relative fair values.

On July 18, 2012, the Company entered into a subscription agreement with Southridge Partners II, LP ("Southridge") for the purchase of a convertible promissory note in the aggregate principal amount of $100,000. The note accrues interest at a rate of 5% per annum and is due on January 31, 2013. Southridge has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price of $0.0075 per share. The Company recorded a beneficial conversion discount of $29,333 based on the fair value of the common stock into which the note was convertible to on the commitment date and allocated $70,667 of the proceeds to the discounted value of the note.

On July 18, 2012, the Company entered into an agreement with Southridge to exchange 100 shares of Series E Preferred Stock and accrued dividends of $5,834 into a convertible promissory note in the principal amount of $105,834. The note accrues interest at a rate of 5% per annum and is due on September 1, 2013. Southridge has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 60% of the current market price. The Company recorded a beneficial conversion discount of $70,556 based on the fair value of the common stock into which the note is convertible to and allocated $35,278 of the proceeds to the discounted value of the note. On September 11, 2012, Southridge converted $27,550 of the note plus $797 of accrued interest into 7,874,272 shares of common stock.

On July 31, 2012, the Company borrowed a total of $7,000 from two individuals. The convertible promissory notes bear interest at 5% per annum and mature on January 31, 2014. The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date. The investors have the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date. In addition, the Company has the option to convert the promissory notes into shares of common stock at the closing bid price 30 days prior to the maturity date if the price per share is at least $0.01. The Company also issued the investors a five-year warrant to purchase a total of 70,000 shares of common stock at an exercise price of $0.01 per share. The warrants include a cashless net exercise provision and the investors have piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the notes. The Company allocated $443 of the proceeds to the warrants and $6,557 of the proceeds to the discounted value of the note based on their relative fair values. In August 2012, the investors converted their notes into a total of 700,000 shares of common stock.

On September 14, 2012, the Company borrowed $25,000 from a stockholder. The convertible promissory note bears interest at 5% per annum and matures on March 14, 2014. The Company has the option to pay the interest with its common stock at the closing bid price immediately prior to the due date. The investor has the option to convert the promissory note into shares of common stock at the closing bid price (but not less than $0.01 per share) immediately prior to the conversion date. In addition, the Company has the option to convert the promissory notes into shares of common stock at the closing bid price 30 days prior to the maturity date if the price per share is at least $0.01. The Company also issued the investor a five-year warrant to purchase a total of 250,000 shares of common stock at an exercise price of $0.01 per share. The warrant includes a cashless net exercise provision and the investor has piggyback registration rights for the shares of common stock underlying the warrant and the shares of common stock issuable pursuant to the note. The Company allocated $1,536 of the proceeds to the warrants and $23,464 of the proceeds to the discounted value of the note based on their relative fair values.

On September 18, 2012, the Company issued a $1,050,000 convertible promissory note in connection with the acquisition of Digipath. The note bears interest at 5% per annum and shall be paid on or before March 18, 2014. The principal amount of the note may be converted into shares of common stock at the election of the holder at any time. The number of shares into which the principal amount of the note may be converted is determined by dividing the principal amount of the note by the closing bid price on the trading day immediately prior to the date of the conversion notice; provided that in no event shall the per share price be less than $0.065 per share. The Company has the option of paying the accrued interest on the note with shares of common stock at the closing bid price immediately prior to the due date, provided that the per share price shall not be less than $0.065 per share. The Company also agreed to prepay a portion of the principal and accrued interest on the note on a monthly basis depending on the EBITDA generated by the assets acquired from Digipath. The Company also granted piggyback registration rights for the shares of common stock issuable pursuant to the note.

Interest expense on notes payable, including amortization of the discount on the convertible notes and the accrual of the redemption premium, was $58,198 and $19 for the three months ended September 30, 2012 and 2011, respectively.

The Company evaluated whether the convertible promissory notes contain a beneficial conversion feature (BCF) and determined that certain of the notes contained a BCF. The Company also evaluated the terms of the convertible promissory notes and the related warrants issued with the notes under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 815-15 and determined that these instruments do not require derivative accounting treatment.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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