Convertible Debentures | 5. Convertible Debentures April 2007 Convertible Debenture On April 26, 2007, the Company issued a convertible debenture to an individual investor in the principal amount of $25,000. This convertible debenture matured on January 2, 2009 and remains unpaid and, as a result, such obligation can be placed in default by the holder. The convertible debenture accrues interest at a rate of 12% per annum and is convertible at any time into shares of the Companys common stock at the option of the holder at a conversion price of $0.40 per share. An aggregate of 62,500 shares of the Companys common stock can be issued upon the conversion of the outstanding principal amount due on this convertible debenture at the current conversion price of $0.40 per share. For the three and nine months ended September 30, 2016, the Company recorded $756 and $2,252, respectively, of interest expense related to this convertible debenture. For the three and nine months ended September 30, 2015, the Company recorded $756 and $2,244, respectively, of interest expense related to this convertible debenture. As of September 30, 2016 and December 31, 2015, the outstanding principal on this convertible debenture was $25,000, which was included as a component of current convertible debentures, and the accrued and unpaid interest was $18,694 and $16,441, respectively, which was included as a component of accrued expenses (see Note 4). Zanett Convertible Debenture On August 21, 2012, the Company issued to Zanett Opportunity Fund, Ltd. an 8% convertible debenture in the amount of $476,125 (the Zanett August 2012 Debenture). The Zanett August 2012 Debenture bears interest at a rate of 8% per annum, had a three-year term maturing on August 21, 2015 and was originally convertible into 4,761,250 of the Companys common stock at a conversion price of $0.10 per share. Effective July 7, 2016, the Zanett August 2012 Debenture was amended to extend the maturity date to December 31, 2017 and reduce the conversion price to $0.07 per share. As a result of this amendment, the Zanett August 2012 Debenture is convertible into 6,801,786 shares of the Companys common stock. For the three and nine months ended September 30, 2016, the Company recorded $9,601 and $28,594, respectively, of interest expense related to the Zanett August 2012 Debenture. For the three and nine months ended September 30, 2015, the Company recorded $9,601 and $28,489, respectively, of interest expense related to the Zanett August 2012 Debenture. As of September 30, 2016, the outstanding principal on the Zanett August 2012 Debenture was $476,125, which was included as a component of non-current convertible debentures, and the accrued and unpaid interest was $42,473, which was included as a component of accrued expenses (see Note 4). As of December 31, 2015, the outstanding principal on the Zanett August 2012 Debenture was $476,125, which was included as a component of current convertible debentures, and the accrued and unpaid interest was $13,880, which was included as a component of accrued expenses (see Note 4). November and December 2015 Convertible Debentures and Warrants On November 11, 2015, December 3, 2015 and December 18, 2015, the Company issued 12% convertible debentures (the 2015 Debentures) in the aggregate principal amount of $997,222 to five institutional investors and three individual investors. In connection with the issuance of the 2015 Debentures, the Company issued warrants (the 2015 Debenture Warrants) to purchase an aggregate of 7,123,014 shares of its common stock. The gross proceeds received in connection with these private placements were $897,500. The 2015 Debentures mature on the date that is two years from the issuance date, bear interest at a rate of 12% per annum and contain an original issue discount of 10% of the principal amount ($99,722 in aggregate). The entire principal amount of each of the 2015 Debentures is convertible at any time into shares of the Companys common stock at the option of the respective debenture holder at a conversion price of $0.07 per share. An aggregate of 14,246,029 shares of the Companys common stock can be issued pursuant to the 2015 Debentures at the current conversion price of $0.07 per share. The Company separately accounted for the liability and equity components of the 2015 Debentures based upon the relative fair value of the liability and equity components on the respective dates of issuance. As a result, the Company recorded a discount of $117,708 for the 2015 Debentures to account for the relative fair value attributable to the 2015 Debenture Warrants, which is being accreted as interest expense using the effective interest method over the respective two-year terms of each of the 2015 Debentures. In addition, the $99,722 original issue discount is also being accreted as interest expense using the effective interest method over the respective two-year terms of each of the 2015 Debentures. For the three and nine months ended September 30, 2016, the Company recorded a total of $57,565 ($27,402 accreted) and $171,443 ($81,610 accreted), respectively, of interest expense related to the 2015 Debentures. As of September 30, 2016 and December 31, 2015, $98,699 and $8,867, respectively, of interest due on the 2015 Debentures was accrued and recorded as a component of accrued expenses (see Note 4). As of September 30, 2016, the unamortized discount on the 2015 Debentures related to the fair value of the 2015 Debenture Warrants was $68,513, the unamortized discount on the 2015 Debentures related to the original issue discount was $58,598 and the net carrying value of the 2015 Debentures was $870,111, which was recorded as a component of non-current convertible debentures. As of December 31, 2015, the net carrying value of the 2015 Debentures was $788,501, which was recorded as a component of non-current convertible debentures. July 2016 Convertible Debentures and Warrants On July 14, 2016, the Company issued zero coupon secured convertible debentures to eight individual investors and one institutional investor (each a July 2016 Debenture and collectively, the July 2016 Debentures) in the aggregate principal amount of $670,557. In connection with the issuance of the July 2016 Debentures, the Company issued warrants (the July 2016 Debenture Warrants) to purchase an aggregate of 67,055,700 shares of its common stock. The gross proceeds received in connection with this private placement were $603,500. The July 2016 Debentures have a one-year term maturing on July 14, 2017, contain an original issue discount of 10% and are secured by the Companys assets. The entire principal amount of a July 2016 Debenture is convertible at any time into shares of the Companys common stock at the option of the holder at a conversion price of $0.01 per share (the July 2016 Debenture Conversion Price). If at any time subsequent to the issuance of the July 2016 Debentures and prior to the conversion of the July 2016 Debentures into shares of the Companys common stock, the Company closes on a financing involving the issuance of convertible debentures or shares of its common stock with or at a per share conversion price or purchase price that is less than the July 2016 Debenture Conversion Price (the Subsequent Financing Per Share Price), then the July 2016 Debenture Conversion Price will be reduced to seventy-five percent (75%) of the Subsequent Financing Per Share Price. The quoted market price of the Companys common stock on July 14, 2016 was $0.009 per share. An aggregate of 67,055,700 shares of the Companys common stock can be issued pursuant to the July 2016 Debentures at the current conversion price of $0.01 per share. The July 2016 Debenture Warrants have a five-year term and provide the holders with the right to purchase an aggregate of 67,055,700 shares of the Companys common stock at $0.01 per share. All of the shares of the Companys common stock underlying the July 2016 Debenture Warrants are fully vested. The July 2016 Debenture Warrants contain a cashless exercise provision and are callable in the event the closing price of the Companys common stock averaged over a period of ten consecutive trading days is equal to or greater than $0.04 per share. The exercise price of the July 2016 Debenture Warrants is subject to adjustment for stock dividends, stock splits, or similar events. The Company separately accounted for the liability and equity components of the July 2016 Debentures based upon the relative fair value of the liability and equity components on the respective dates of issuance. As a result, the Company recorded a discount of $294,794 for the July 2016 Debentures to account for the relative fair value attributable to the July 2016 Debenture Warrants, which is being accreted as interest expense using the effective interest method over the one-year term of the July 2016 Debentures. In addition, the $67,057 original issue discount is also being accreted as interest expense using the effective interest method over the one-year term of the July 2016 Debentures. For each of the three and nine months ended September 30, 2016, the Company recorded a total of $77,327 of accreted interest expense related to the July 2016 Debentures. As of September 30, 2016, the unamortized discount on the July 2016 Debentures related to the fair value of the July 2016 Debenture Warrants was $231,797, the unamortized discount on the July 2016 Debentures related to the original issue discount was $52,727 and the net carrying value of the July 2016 Debentures was $386,033, which was recorded as a component of current convertible debentures. |