NOTE F - NOTES PAYABLE AND DERIVATIVE LIABILITIES

12 Months Ended

Jun. 30, 2013

NOTE F – NOTES PAYABLE AND DERIVATIVE LIABILITIES

Majority Shareholder

At June 30, 2013 and 2012, the outstanding debt owed to our majority shareholder totaled $2,476,382 and $2,767,662 respectively. This debt is evidenced by two notes, one of which is non-interest bearing. Interest is imputed at 10% on this non-interest bearing note. The stated interest rate on the other note is also 10%. Both notes are unsecured and payable upon demand. Aggregate accrued interest on these notes was $2,365,801 and $2,098,894 at June 30, 2013 and 2012, respectively.

During the 12 months ended June 30, 2013, the Company borrowed $5,037 and repaid $296,329 of majority shareholder notes. The borrowings are unsecured, carry an interest rate of 10%, and are payable upon demand.

During the year ended June 30, 2012, the Company borrowed $10,000 from Milk Farm Associates, a limited partnership and related entity. Dr. Moller is the general partner in Milk Farm and has a 32% ownership interest. Milk Farm Associates has dissolved and these amounts are no longer owed. Due to the entity being a related party, the debt was written off to Additional Paid-in Capital as of June 30, 2012.

Minority Shareholder

At June 30, 2013 and 2012, the outstanding debt owed to minority shareholders totaled $208,591 and $178,603, respectively. This debt is unsecured, payable upon demand and bears an annual interest rate of 10%. Aggregate accrued interest on these notes was $104,868 and $87,235 at June 30, 2013 and 2012, respectively

During the 12 months ended June 30, 2013, the Company borrowed $30,000 of minority shareholder notes. The borrowing is unsecured, carries an interest rate of 10%, and is due on October 2, 2013.

Non-Related Party

At June 30, 2013 and 2012, the outstanding debt owed to other parties totaled $1,333,682 and $981,182, respectively.

During the 12 months ended June 30, 2013, the Company borrowed $352,500 of non-related party notes. The borrowings are unsecured, carry an interest rate of 6% to 10%, and are due on demand. 400,000 options and 60,000 warrants were issued to two note holders in consideration for the notes payable. A debt discount of $99,454 was recorded as a result of these option and warrant issuances. Two notes are convertible 180 days after the effective date of the note at 53%-58% of the lowest 3 prices during the last 10 days prior to the conversion date. These notes are not yet convertible as of June 30, 2013.

Convertible Notes Payable and Derivative Liability

At June 30, 2013 and 2012, the Company owes $281,380 and $231,380, respectively, related to convertible notes payable, net of debt discount of $46,575 and $68,347 , respectively. During the 12 months ended June 30, 2013, the Company borrowed $50,000 of convertible notes payable. The borrowing is unsecured, carries an interest rate of 0% for the first 90 days, then increases to 12%, and is due on May 2, 2014. The notes are convertible at the lesser of $0.24/share or 60% of the lowest trading price in the last 25 trading days prior to conversion. A debt discount of $55,555 was recorded as a result of this convertible note. During the year ended June 30, 2013 and 2012, the Company amortized $176,781 and $156,906, respectively, of this discount to interest expense

The Company analyzed the conversion options for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as liabilities due to their being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The embedded conversion features were measured at fair value at inception with the change in fair value recorded to earnings. Additionally, because there is no explicit limit to the number of shares to be issued upon conversion of the above instruments, the Company cannot determine if it will have sufficient authorized shares to settle all other share-settleable instruments, including the warrants granted above. As a result, all other share-settable instruments have also been classified as liabilities.

Derivative Liabilities
June 30, 2012	$	142,327
Debt discount due to derivative liability		155,009
Loss on derivative liability over debt discount		23,826
Change in fair value		171,299
June 30, 2013	$	492,461

The fair value of the stock options granted were estimated using the Black Scholes method based on assumptions including (1) risk-free interest rates ranging from 0.11 % to 0.79%, (2) exercise prices ranging from $0.102 to $0.24, (3) an estimated expected term ranging from 0.07 to 4 years, (4) no dividend rate and (5) computed volatility rates ranging from 198.55% to 287.68% on the underlying stock.

- 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.

+ References+ Details

MOLLER INTERNATIONAL INC 10-K