Note 8 - Convertible Notes | 9 Months Ended |
Sep. 30, 2013 |
Debt Disclosure [Abstract] | ' |
Debt Disclosure [Text Block] | ' |
Note 8 – Convertible Notes |
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Convertible notes consisted of the following: |
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| | September 30, | | | December 31, | |
| | 2013 | | | 2012 | |
Convertible Promissory Note Payable to JMJ Financial, unsecured, one time interest charge of 8%, due on February 22, 2014 | | $ | 191,663 | | | $ | 191,663 | |
Convertible Promissory Note Payable to Asher Enterprises, unsecured, interest rate of 8% per annum, with payment due on March 21, 2013, fully converted in 2013 | | | - | | | | 7,500 | |
Convertible Promissory Note Payable to Asher Enterprises, unsecured, interest rate of 8% per annum, with payment due on May 10, 2013, fully converted in 2013 | | | - | | | | 42,500 | |
Convertible Promissory Note Payable to Asher Enterprises, unsecured, interest rate of 8% per annum, with payment due on August 27, 2013, fully converted in 2013 | | | - | | | | 42,500 | |
Convertible Promissory Note Payable to Asher Enterprises, unsecured, interest rate of 8% per annum, with payment due on December 6, 2013 | | | 27,500 | | | | - | |
Convertible Promissory Note Payable to Asher Enterprises, unsecured, interest rate of 8% per annum, with payment due on May 19, 2014 | | | 35,000 | | | | - | |
Convertible Promissory Note Payable to Carebourn Capital L.P., unsecured, interest rate of 8% per annum, with payment due on December 19, 2013 | | | 23,411 | | | | - | |
Convertible Promissory Note Payable to TCA Global Credit Master Fund, LP, secured by all of the Company's assets, interest rate of 12% per annum, with payment due on January 3, 2013 | | | - | | | | 62,165 | |
Convertible Promissory Note Payable to TCA Global Credit Master Fund, LP, secured by all of the Company's assets, interest rate of 12% per annum, with payment due monthly until April 26, 2014 | | | 215,970 | | | | - | |
Convertible Promissory Note Payable issued in the course of a private placement to individual, unsecured, interest rate of 8% per annum, with payment due on September 3, 2014 | | | 35,000 | | | | - | |
Convertible Promissory Note Payable issued in the course of a private placement to individual, unsecured, interest rate of 8% per annum, with payment due on January 26, 2014 | | | 75,000 | | | | 100,000 | |
| | | 603,544 | | | | 446,328 | |
Less: debt discount | | | (216,394 | ) | | | (229,573 | ) |
| | $ | 387,150 | | | $ | 216,755 | |
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JMJ Financial |
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On February 22, 2011, the Company issued a convertible promissory note in the amount of $1,050,000 to JMJ Financial, Inc. (“JMJ”). The note bears interest in the form of a one-time interest charge of 8%, payable with the note’s principal amount on the maturity date, February 22, 2014. The note is convertible to the Company’s common stock at a price equal to 70% of the average of the three lowest closing market prices of the Company’s common stock for the 20 trading days prior to the conversion date. In connection with the note, the Company entered into a registration rights agreement with JMJ to provide JMJ registration rights for common shares underlying this note. The note will only be funded when the conversion price calculated on each payment date is equal to or greater than $0.015 per share and there are sufficient shares remaining in the registration statement. During 2012, JMJ converted $15,498 under this agreement into 180,000 shares of the Company’s common stock. The principal amount owed to JMJ at September 30, 2013 and December 31, 2012 was $191,663 under the convertible promissory note. The Company analyzed the JMJ note for derivative accounting consideration and determined that the note qualifies for accounting treatment as a financial derivative and recorded an initial discount of $450,000 on the issuance date. For the nine months ended September 30, 2013 and 2012, the Company recorded $75,970 and $60,000 of interest expense related to the amortization of the debt discount. At September 30, 2013 and December 31, 2012, there was $30,721 and $106,691, respectively, of unamortized debt discount related to the JMJ notes. |
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The Company is currently in litigation with JMJ. See Note 11. |
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Asher Enterprises |
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On February 28, 2013 and August 15, 2013, the Company issued convertible promissory notes to Asher Enterprises for proceeds of $42,500 and $35,000 in cash, respectively, (the “2013 Asher Notes”). The notes are convertible to the Company’s common stock at a conversion price equal to the greater of (1) 55% multiplied by the average of the lowest three trading prices for the Company’s common stock during the 10 trading day period ending on the latest completed trading day prior to the conversion date and (2) a fixed conversion price of $0.00009 per share. The Company analyzed the conversion feature of the 2013 Asher Notes for derivative accounting consideration and determined that the conversion features for the 2013 Asher Notes do not qualify for accounting treatment as a financial derivative. The 2013 Asher Notes have an aggregate beneficial conversion feature discount of $77,500, of which $41,661 was amortized as interest expense for the nine months ended September 30, 2013. For the nine months ended September 30, 2013, the Company also recorded interest expense of $66,930 related to the amortization of debt discount on notes issued in 2012 to Asher Enterprises. At September 30, 2013, there was $35,839 of unamortized discount related to the outstanding 2013 Asher Notes. |
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During the nine months ended September 30, 2013, Asher Enterprises converted principal of $97,600 with accrued interest related to notes issued in 2012 into 2,726,118 shares of the Company’s common stock. In addition, on September 12, 2013, Asher Enterprises converted principal of $15,000 related to the note issued in 2013 into 1,339,286 shares of the Company’s common stock. |
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Carebourn Capital |
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On March 19, 2013, the Company issued a convertible promissory note to Carebourn Capital for proceeds of $60,000 in cash. (“2013 Carebourn Note”). The note is convertible to the Company’s common stock at a conversion price equal to the greater of (1) 55% multiplied by the average of the lowest three trading prices for the Company’s common stock during the 10 trading day period ending on the latest completed trading day prior to the conversion date (2) a fixed conversion price of $0.00009 per share. The Company analyzed the conversion feature of the 2013 Carebourn Note for derivative accounting consideration and determined that the conversion feature for the 2013 Carebourn Notes does not qualify for accounting treatment as a financial derivative. The 2013 Carebourn Note has a beneficial conversion feature discount of $49,091, of which $43,519 was amortized as interest expense for the nine months ended September 30, 2013. At September 30, 2013, there was $5,572 of unamortized discount related to the 2013 Carebourn Note. On September 20, 2013, Carebourn Capital converted principal of $36,590 related to this note into 2,350,000 shares of the Company’s common stock. |
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TCA Global Credit Master Fund, LP |
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2012 TCA Securities Purchase Agreement |
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On January 3, 2012, the Company entered into a securities purchase agreement with TCA Global Credit Master Fund, LP (“TCA”), pursuant to which, TCA would purchase up to $2,000,000 of the Company’s common stock. The Company agreed to pay a $100,000 facility fee by issuing to TCA a number of the Company’s common shares (“facility shares”). To determine the number of shares issuable to TCA for the facility fee, the Company’s common stock was valued at a volume weighted average price at January 2, 2012. The facility shares should be adjusted nine months after January 2, 2012 by the volume weighted average prices of the Company’s common stock five trading days prior to the revaluation date. The Company issued 559,268 common shares in 2012 to TCA which satisfied $51,924 of the facility fee upon revaluation. On August 13, 2012, the Company and TCA agreed to terminate the committed equity financing agreement based on the Company’s failure to achieve bulletin board listing as required under the agreement. |
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In connection with the securities purchase agreement with TCA, the Company issued a convertible promissory note to TCA for a principal amount of $225,000 (“TCA Note”). The note bears interest at a rate of 12% per annum and provides for the payment of all principal and interest 12 months from the date of the note’s issuance. The conversion price was determined by multiplying 95% by the average of the two lowest daily volume weighted average prices of the Company’s common stock on the OTC Markets during the five business days immediately preceding the date of conversion. The Company analyzed the TCA Note for derivative accounting consideration and determined that the TCA Note qualifies for accounting treatment as a financial derivative. The conversion feature of the TCA Note was valued at $174,448 on the issuance date and recorded as debt discount which was fully amortized in 2012. |
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TCA converted principal of $27,840 into 300,000 shares of the Company’s common stock on January 3, 2013. On May 9, 2013, 1,750,000 shares, valued at $140,000, were issued to TCA to settle all outstanding liabilities related to the January 2, 2012 security purchase agreement which totaled $106,987. The Company recorded a $33,013 loss on extinguishment of debt related to the settlement. There is a leak out provision provided in this settlement. TCA shall return all remaining shares back to the Company once proceeds of the sale of shares from the 1,750,000 shares issued reached $80,000 and the Company will issue additional shares to TCA if all shares issued on May 9, 2013 are sold and total net proceeds do not reach $80,000. |
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2013 TCA Securities Purchase Agreement |
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On April 26, 2013, the Company entered into a securities purchase agreement with TCA, pursuant to which, TCA shall purchase from the Company up to $2,000,000 of senior secured convertible redeemable debentures (the “Debentures”). The Debentures will be purchased in a series of closings and pursuant to the first such closing, TCA purchased that certain senior convertible redeemable debenture in the amount of $250,000. |
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The Debentures were issued at 7% discount and the discount of $17,500 is amortized over one year, the term of the Debentures, using straight-line method. The note bears interest at a rate of 12% per annum and the Company shall make monthly payments of principal and interest commencing on May 26, 2013 with the first two payments only including interest. If all or any portion of the payments of principal and interest is late, the Company should pay TCA a late charge equal to 5% of such unpaid payment. During the nine months ended September 30, 2013, the Company made principal payments of $51,530 and interest payments of $9,761 to TCA. |
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The Debentures are convertible at a price determined by multiplying 85% of the average daily volume weighted average price of the Company’s common stock during the five business days immediately preceding the date of conversion. The Company analyzed the Debentures for derivative accounting consideration and determined that the Debentures qualify for accounting treatment as a financial derivative. The conversion feature of the Debentures was valued at $218,053 on the issuance date and recorded as debt discount. As of September 30, 2013, there was $111,893 of unamortized debt discount related to the Debentures. |
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The Company also issued to TCA 9,375,000 shares, which were pledged as security for the securities purchase agreement and was held with an escrow agent until such time as the full payment and performance of all of the obligations of the Company have been satisfied in accordance with the terms of said agreement. The Company also granted TCA the right to vote and receive dividends during the period the 9,375,000 shares were held by TCA. The Company recorded shares issued at par value of $9,375 with an offset to additional paid-in capital. |
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On May 9, 2013 the Company issued 2,000,000 restricted shares to pay for the $100,000 facility fee pursuant to the 2013 TCA securities purchase agreement entered into April 26, 2013 with TCA. TCA will return all remaining shares to the Company if total net proceeds of $100,000 are reached and the Company will issue additional shares if a total of 2,000,000 shares are sold and net proceeds do not total $100,000. |
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2012 Individual Convertible Notes Payable |
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During 2012, the Company issued 22 convertible notes payable to individuals for proceeds of $956,501 in cash (“Individual Convertible Notes”). The Individual Convertible Notes mature one year from the date of issuance. Interest accrues at the rate of 8% per year on the outstanding principal amount to be paid at maturity. |
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The principal amount of the Individual Convertible Notes and accrued interest are convertible into the Company’s common stock at a conversion price equal to 75% of the average of the daily volume weighted average prices of the Company's Common Stock during the five trading days immediately prior to the conversion date, provided that in no event, shall the note holders convert any portion of the Individual Convertible Notes when the sum of (1) the number of shares of common stock beneficially owned by the holder and its affiliates and (2) the number of shares of common stock issuable upon conversion would result in beneficial ownership by the holder and its affiliates of more than 4.99% of the Company’s outstanding common shares. During the nine months ended September 30, 2013, $25,000 of the Individual Convertible Notes with accrued interest was converted into 353,727 shares of the Company’s common stock. As of September 30, 2013 and December 31, 2012, Individual Convertible Notes included principal of $75,000 payable to Vincent Olmo, the Company’s COO, with a debt discount of $0 and $42,534, respectively. This note was extended on November 5, 2013 and is due January 26, 2014. |
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In connection with the issuance of the Individual Convertible Notes, warrants to purchase 3,826,005 shares of the Company’s common stock at $0.25 per share (“$0.25 Warrant”) and warrants to purchase 1,913,003 shares of the Company’s common stock at $0.50 per share (“$0.50 Warrant”) were issued to investors. The warrants have a term of less than one year and expire during the period beginning December 31, 2012 and ending June 30, 2013. |
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Of the $956,501 proceeds received from the Individual Convertible Notes, $347,097 was allocated to the warrants based on a grant date fair value of $589,416 calculated using the Black-Scholes-Merton option pricing model (“Black-Scholes Model”) with the following assumptions: (1) 3.9% risk-free discount rate, (2) expected volatility of 155.60 ~218.64%, (3) $0 expected dividends, and (4) an expected term of 0.3~1 years based on the term of warrant. |
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On March 1, 2013, the Company extended the expiration date of the $0.25 warrants to June 30, 2013 and the $0.50 warrants to September 30, 2013. Warrants to purchase 2,859,008 shares of the Company’s common stock that originally expired on December 31, 2012 were reissued to the note holders. The Company recorded a $148,127 modification expense related to the extension. |
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On August 28, 2013, the Company further extended the expiration date of the $0.25 warrants to June 30, 2014 and the $0.50 warrants to September 30, 2014. The Company recorded a $40,501 modification expense related to the extension. |
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The Company analyzed the Individual Convertible Notes for derivative accounting consideration and determined that the conversion feature of the Individual Convertible Notes qualify for accounting treatment as a financial derivative. The conversion feature of Individual Convertible Notes was valued at $777,766 on the issuance date. As a result, some of the Individual Convertible Notes were fully discounted and the fair value of the conversion feature in excess of the principal amount allocated to the Individual Convertible Notes of $182,733 was expensed immediately as additional interest expense. For the nine months ended September 30, 2013, the Company recognized $55,952 of interest expense related to the amortization of the debt discount. At September 30, 2013 and December 31, 2012, there was $0 and $55,952 of unamortized discount related to the Individual Convertible Notes, respectively. |
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2013 Individual Convertible Notes Payable |
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On April 25, 2013, the Company issued a $50,000 convertible note to an individual together with warrants to purchase 200,000 shares of the Company’s common stock at $0.25 per share and 100,000 shares of the Company’s common stock at $0.50 per share. These warrants were valued at $3,526, calculated using the Black-Scholes Model. The individual investor converted the $50,000 convertible promissory note into 1,000,000 shares of the Company’s common stock on the same date the note was issued. |
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On September 3, 2013, the Company issued a $35,000 convertible note to an individual. The note matures one year from the date of issuance. Interest accrues at the rate of 8% per year on the outstanding principal amount to be paid at maturity. The conversion provisions of this note are the same as the 2012 Individual Convertible Notes as described above. The Company analyzed the note for derivative accounting consideration and determined that the conversion feature of the note qualifies for accounting treatment as a financial derivative. The conversion feature of this note was valued at $37,837 on the issuance date. As a result, the note was fully discounted and the fair value of the conversion feature in excess of the principal amount allocated to the note of $2,837 was expensed immediately as additional interest expense. For the nine months ended September 30, 2013, the Company recognized $2,632 of interest expense related to the amortization of the debt discount. At September 30, 2013, there was $32,368 of unamortized discount related to the note. In connection with the issuance of the note, warrants to purchase 140,000 shares of the Company’s common stock at $0.25 per share and 70,000 shares of the Company’s common stock at $0.50 per share were issued to the note holder. These warrants were valued at $2,588 using the Black-Scholes Model. |