4. Notes Payable
|9 Months Ended|
Sep. 30, 2013
|Debt Disclosure [Abstract]|
On June 27, 2012, the Company entered into a Securities Purchase Agreement with Hillair Capital Investments L.P. ("Hillair") whereby the Company issued and sold (i) a $1,000,000 16% senior secured convertible debenture due June 27, 2014 (the Debenture), and (ii) a common stock purchase warrant (the Debenture Warrant) to purchase up to 5,000,000 shares of the Companys common stock. The initial closing of the Debenture and Warrant Transaction occurred on June 27, 2012 (Original Issue Date). The Company issued to Hillair the Debenture and the Debenture Warrant for the purchase price of $1,000,000. The Debenture is convertible, in whole or in part, into shares of Common Stock upon notice by the holder to the Company, subject to certain conversion limitations set forth in the Debenture. The conversion price for the Debenture is $0.21 per share, subject to adjustments. Interest on the Debenture accrues at the rate of 16% annually and is payable quarterly on February 1, May 1, August 1 and November 1, beginning on November 1, 2012, on any redemption, conversion and at maturity. Interest is payable in cash or at the Companys option in shares of the Companys common stock; provided certain conditions are met. On August 29, 2013, pursuant to an agreement between the Company, Hillair and four new holders, the original debenture was assigned and exchanged for an aggregate of $1,163,333 in new notes with the same provisions. The additional value is due to an increase of $150,000 in prepayment fees and $13,333 in accrued but unpaid interest at the time of the exchange. The interest rate and maturity date were not changed. Commencing on December 27, 2013, the Company will be obligated to redeem a certain amount under the reissued Debentures on a quarterly basis, in an amount equal to $300,000 on each of December 27, 2013 and March 27, 2014 and $488,033 on June 27, 2014. On September 6, 2013, a holder of the reissued debenture issued notice of voluntary conversion for $75,000 of the issuance price reducing the aggregate amount of the outstanding debentures to $1,088,333.
Accrued interest was recorded as of September 30, 2013 and December 31, 2012 in the amounts of $40,663 and $45,716, respectively.
Debt Discount was recorded in the aggregate amount of $648,972 for the issuance of warrants and the derivative value of the convertible feature of the debenture at inception of the issuance to Hillair. The unamortized discount amount of $322,903 for the Hillair debenture was recorded as interest expense in the period ended September 30, 2013.
The warrants were valued in the amount of $379,688, based on the Black-Scholes valuation using the following assumptions:
Debt Discount for the convertible feature of the debenture was valued in the amount of $269,284 using the Black-Scholes calculation with the following assumptions:
Debt Discount was recorded in the aggregate amount of $1,163,333 for the derivative value of the convertible feature of the reissued debenture on the exchange date using the Black-Scholes calculation with the following assumptions:
Interest expense for the amortization of the debt discount for the warrants and convertible feature of the debenture is calculated on a straight-line basis over the remaining life of the debenture. For the periods ended September 30, 2013 and December 31, 2012, amortization of the debt discount was recorded in the amounts of $278,577 and $163,825, respectively, for a debt discount balance of $979,499 and $485,147, respectively.
To secure the Companys obligations under the Debenture, the Company granted a security interest in certain of its property to secure the prompt payment, performance and discharge in full of all of the Companys obligations under the Debenture.
National Securities Corporation acted as placement agent to the Company in connection with the Debenture and Warrant Transaction and received commissions of 8% of the gross proceeds and a five year warrant to purchase up to 380,952 shares of the companys common stock at a price of $0.33 per share, which warrant contained terms substantially similar to the Debenture Warrants.
Additional information regarding the Debenture may be found in the Form 8-K filed by the Company on July 2, 2012.
On August 30, 2013, the Company issued 12% convertible notes to several parties with a maturity date of October 21, 2013 for an aggregate of $530,000. The notes have a stated conversion rate of $0.01212 and can be voluntarily converted at any time by the holder and mandatorily by the Company upon certain conditions. Cash was received in the aggregate of $309,000. Four officers and directors of the Company converted outstanding salaries payable to the new notes in the aggregate of $221,000. Additional information regarding the notes payable may be found on the Form 8-K filed by the Company on September 4, 2013.
Debenture Interest accrued and unpaid for the 2006 issuance of $2.5 million is $19,049 as of September 30, 2013 and December 31, 2012. Interest on this series of debentures was terminated effective July 24, 2009 in accordance with the conversion agreement upon establishment of a secondary trading market for our common stock.
As of September 30, 2013 and December 31, 2012, the Company had the following notes payable and accrued interest balances outstanding:
Maturities requirements on notes payable subject to mandatory redemption at September 30, 2013, are as follow:
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.
Reference 1: http://www.xbrl.org/2003/role/presentationRef