NOTES PAYABLE | 13. NOTES PAYABLE Notes payable consist of the following: Short term December 31, 2016 December 31, 90 day Convertible Notes (Chairman of the Board) $ 2,498,980 $ 2,498,980 24 month Convertible Notes ($100,000 to Board member) 225,000 225,000 Series A-3 OID Convertible Notes and Warrants 14,353 14,353 Series B-1 OID Convertible Notes and Warrants 77,849 — Series B-2 OID Convertible Notes and Warrants 3,211,648 1,532,710 Short term notes payable, gross 6,027,830 4,271,043 Less LPA amount (485,980 ) (485,980 ) Short term notes payable, net $ 5,541,850 $ 3,785,063 Long term December 31, 2016 December 31, Series B-1 OID Convertible Notes and Warrants $ — $ 67,919 Details of notes payable as of December 31, 2016, are as follows: Short term Carrying Cash Common Maturity 90 day Convertible Notes (Chairman of the Board) $ 2,498,980 $ 2,498,980 6% $1.05 Various 2014 24 month Convertible Notes ($100,000 to Board member) 225,000 225,000 6% $1.05 3/2014 – 6/2014 Series A-3 OID Convertible Notes and Warrants 11,765 14,353 (1) None $0.25 1/2015 Series B-1 OID Convertible Notes $ 80,000 $ 77,849 None $0.23 3/2017 Series B-2 OID Convertible Notes and Warrants 3,243,529 3,211,648 None $0.20 – 0.25 8/2015 – 1/2017 Short term notes payable, gross $ 6,059,274 6,027,830 Less LPA amount (485,980 ) Short term notes payable, net $ 5,541,850 (1) Includes $2,588 of accrued loss on conversion of OID note. 90 day Convertible Notes The Company has issued 90-day notes payable to borrow funds from a director, now the chairman of our Board, as follows: 2013 $ 1,188,900 2012 1,210,000 2011 100,000 Total $ 2,498,980 These notes have been extended several times and all bear 6.00% simple interest. As of December 31, 2016, there is unpaid interest of $584,000 related to these notes. A conversion feature was added to the Notes when they were extended, which allows for conversion of the eligible principal amounts to common stock at any time after the six month anniversary of the effective date – the date the funds are received – at a rate of $1.05 per share. Additional terms have been added to all Notes to include additional interest of 1% simple interest per month on all amounts outstanding for all Notes if extended beyond their original maturity dates and to provide the lender with a security interest in unencumbered inventory and intangible assets of the Company other than proceeds relating to the Calmare Device and accounts receivable. Due to the Board’s February 10, 2014 decision authorizing management to nullify certain actions taken by prior management, the additional terms noted above were not approved and therefore, the additional interest for the extension of the Notes was not recorded. During 2014, management has been in negotiations to modify the terms of the Notes. However, until those negotiations are resolved, the Company has agreed to honor the additional terms and as such, the Company recorded additional interest of $425,000 and $388,000 during the years ended December 31, 2016 and December 31, 2015, respectively. The Company has recorded total additional interest of $1,432,000 through December 31, 2016. A total of $485,980 of the aforementioned notes issued between December 1, 2012 and March 31, 2013 fall under the LPA with ASC Recap, and are expected to be repaid using the process as described in Note 11. Because there can be no assurance that the Company will be successful in completing this process, the Company retains ultimate responsibility for this debt, until fully paid down. As a result, the Company continues to accrue interest on these notes and they remain convertible as described above. 24 month Convertible Notes In March 2012, the Company issued a 24-month convertible promissory note to borrow $100,000. Additional 24-month convertible promissory notes were issued in April 2012 ($25,000) and in June 2012 ($100,000). All of the notes bear 6.00% simple interest. Conversion of the eligible principal amounts to common stock is allowed at any time at a rate of $1.05 per share. As of July 17, 2017, the Company has not repaid the principal due on the March 2012 $100,000 note, the April 2012 $25,000 note or the June 2012 $100,000 note and is in default under the terms of the notes. There is also unpaid interest of $53,000 related to these notes at December 31, 2016. Series A-3 Original Issue Discount Convertible Notes and Warrants During the quarter ended March 31, 2014, the Company did a private offering of a third tranche of convertible notes and warrants, under which it issued $64,706 of convertible promissory notes for consideration of $55,000, the difference between the proceeds from the notes and principal amount consists of $9,706 of original issue discount. The notes are convertible at an initial conversion price of $0.25 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 129,412 shares of common stock. The warrants have an exercise price $0.60 and a term of 2 years. The beneficial conversion feature, if any, and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense. The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of share into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions: Warrants Expected term 2 years Volatility 184.88 % Risk Free Rate 0.32 % The proceeds of the Notes were allocated to the components as follows: Proceeds allocated Private Offering Notes $ 32,390 Private Offering Warrants 14,845 Beneficial Conversion feature 7,765 Total $ 55,000 During 2014, certain holders of Series A-3 OID convertible notes and warrants delivered to the Company a notice of conversion related to the Series A-3 OID convertible notes. Due to the timing of receipt of the notices by the Company, certain Note holders (“Noteholders”) received their shares during the quarter ended June 30, 2014, while other Noteholders received or are due to receive their shares after June 30, 2014. Additionally, the Company offered certain Noteholders an inducement to convert their notes to shares. The inducement, when offered, provided Noteholders a conversion price of $0.20. All other original terms, including the warrant terms, remained the same. Upon notice of conversion and irrespective of whether the shares were delivered in the quarter ended June 30, 2014 or subsequent to June 30, 2014 the Company: (i) accelerated and recognized as interest expense in the current period any remaining discount, and (ii) recognized a loss for the fair value of the additional shares offered as the conversion inducement. Presented below is summary information related to the conversion: Statement of Operations Loss on conversion of notes $ 43,288 Accelerated interest expense $ 35,109 Balance Sheet Shares issued as of June 30, 2014 798,825 Shares issued subsequent to June 30, 2014 529,415 Principal amount of notes converted $ 265,648 During the quarter ended March 31, 2015, a holder of Series A-3 OID convertible notes and warrants delivered to the Company a notice of conversion related to the Series A-3 OID convertible notes. Additionally, the Company offered the Noteholder an inducement to convert these notes to shares. The inducement provided the Noteholder a conversion price of $0.20. All other original terms, including the warrant terms, remained the same. Upon notice of conversion, the Company: (i) accelerated and recognized as interest expense in the current period any remaining discount, and (ii) recognized a loss for the fair value of the additional shares offered as the conversion inducement. As of July 17, 2017, the Company had not issued the shares due related to the conversion notice. Presented below is summary information related to the conversion: Statement of Operations Loss on conversion of notes $ 2,588 Accelerated interest expense $ — Balance Sheet Shares issued — Principal amount of notes converted $ 11,765 Series B-1 Original Issue Discount Convertible Notes and Warrants During the quarter ended March 31, 2014, the Company did a private offering of convertible notes and warrants, under which it issued $80,000 of convertible promissory notes for consideration of $65,000, the difference between the proceeds from the notes and principal amount consists of $15,000 of original issue discount. The notes are convertible at an initial conversion price of $0.35 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 185,714 in shares of common stock. The warrants have an exercise price of $0.45 and a 4-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense. The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of share into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions: Warrants Expected term 4 years Volatility 151.52 % Risk Free Rate 1.32 % The proceeds of the Notes were allocated to the components as follows: Proceeds Private Offering Notes $ 34,272 Private Offering Warrants 26,811 Beneficial Conversion feature 3,917 Total $ 65,000 The Series B-1 OID notes include an anti-dilution provision that if the Company issues more than 20 million shares of its common stock, subject to certain exceptions, the conversion price of the notes and the conversion price of the warrants would be subject to an automatic pre-determined price adjustment. During the quarter ended December 31, 2014 the Series B-1 OID noteholder and the Company agreed that this anti-dilution provision had been triggered and the Series B-1 OID note share conversion price was adjusted down to $0.23 per share, which increased the number of shares available upon conversion to 347,826. The anti-dilution provision in the Warrant changed the share purchase price downward to $0.33 per share but did not change the number of shares available under the Warrant. As a result of the triggering of the above noted one time anti-dilution provision, the Company reallocated the proceeds of the Notes during the quarter ended December 31, 2014 as follows: Proceeds Private Offering Notes $ 46,222 Private Offering Warrants 18,778 Beneficial Conversion feature — Total $ 65,000 Series B-2 Original Issue Discount Convertible Notes and Warrants During the quarter ended December 31, 2014, the Company did private offerings of convertible notes and warrants, under which it issued $358,824 of convertible promissory notes for consideration of $305,000, the difference between the proceeds from the notes and principal amount consists of $53,824 of original issue discount. The notes are convertible at an initial conversion price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 897,060 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense. The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of share into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions: Warrants Expected term 1 year Volatility 188.31 % Risk Free Rate 0.11 % The proceeds of the Notes were allocated to the components as follows: Proceeds Private Offering Notes $ 224,679 Private Offering Warrants 57,854 Beneficial Conversion feature 22,467 Total $ 305,000 During the quarter ended June 30, 2015, a holder of Series B-2 OID convertible notes and warrants delivered to the Company a notice of conversion related to the Series B-2 OID convertible notes, with a principal amount of $5,882. In the quarter ended September 30, 2015, the Company issued 29,410 shares due related to the conversion notice. As of July 17, 2017, the remaining notes have passed their maturity date. The Company has not repaid the amounts due on these notes and is in default under the terms of the notes. During the quarter ended March 31, 2015, the Company did an additional private offering of convertible notes and warrants, under which it issued $302,353 of convertible promissory notes for consideration of $257,000, the difference between the proceeds from the notes and principal amount consists of $45,353 of original issue discount. The notes are convertible at an initial conversion price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 755,882 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense. The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of shares into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions: Warrants Expected term 1 year Volatility 180.15-185.71 % Risk Free Rate 0.18-0.22 % The proceeds of the Notes were allocated to the components as follows: Proceeds Private Offering Notes $ 197,521 Private Offering Warrants 46,097 Beneficial Conversion feature 13,382 Total $ 257,000 As of July 17, 2017, these notes have passed their maturity date. The Company has not repaid the amounts due on these notes and is in default under the terms of the notes. During the quarter ended September 30, 2015, the Company did an additional private offering of convertible notes and warrants, under which it issued $705,882 of convertible promissory notes for consideration of $600,000, the difference between the proceeds from the notes and principal amount consists of $105,882 of original issue discount. The notes are convertible at an initial conversion price of $0.25 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 1,411,764 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense. The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of shares into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions: Warrants Expected term 1 year Volatility 171.36 % Risk Free Rate 0.28 % The proceeds of the Notes were allocated to the components as follows: Proceeds Private Offering Notes $ 342,857 Private Offering Warrants 120,000 Beneficial Conversion feature 137,143 Total $ 600,000 As of July 17, 2017, these notes have passed their maturity date. The Company has not repaid the amounts due on these notes and is in default under the terms of the notes. During the quarter ended December 31, 2015, the Company did an additional private offering of convertible notes and warrants, under which it issued $470,588 of convertible promissory notes for consideration of $400,000, the difference between the proceeds from the notes and principal amount consists of $70,588 of original issue discount. The notes are convertible at an initial conversion price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 1,176,470 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense. The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of shares into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions: Warrants Expected term 1 year Volatility 132.44 % Risk Free Rate 0.66 % The proceeds of the Notes were allocated to the components as follows: Proceeds Private Offering Notes $ 361,991 Private Offering Warrants 38,009 Beneficial Conversion feature Total $ 400,000 As of July 17, 2017, these notes have passed their maturity date. The Company has not repaid the amounts due on these notes and is in default under the terms of the notes. During the quarter ended March 31, 2016, the Company did an additional private offering of convertible notes and warrants, under which it issued $705,882 of convertible promissory notes for consideration of $600,000, the difference between the proceeds from the notes and principal amount consists of $105,882 of original issue discount. The notes are convertible at an initial conversion price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 3,529,412 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense. The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of shares into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions: Warrants Expected term 1 year Volatility 136.24 % Risk Free Rate 0.62 % The proceeds of the Notes were allocated to the components as follows: Proceeds Private Offering Notes $ 454,545 Private Offering Warrants 122,727 Beneficial Conversion feature 22,728 Total $ 600,000 As of July 17, 2017, these notes have passed their maturity date. The Company has not repaid the amounts due on these notes and is in default under the terms of the notes. During the quarter ended June 30, 2016, the Company did an additional private offering of convertible notes and warrants, under which it issued $705,882 of convertible promissory notes for consideration of $600,000, the difference between the proceeds from the notes and principal amount consists of $105,882 of original issue discount. The notes are convertible at an initial conversion price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 3,000,000 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense. The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of shares into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions: Warrants Expected term 1 year Volatility 128.74-134.16 % Risk Free Rate 0.55-0.61 % The proceeds of the Notes were allocated to the components as follows: Proceeds Private Offering Notes $ 409,174 Private Offering Warrants 111,243 Beneficial Conversion feature 79,583 Total $ 600,000 As of July 17, 2017, these notes have passed their maturity date. The Company has not repaid the amounts due on these notes and is in default under the terms of the notes. |