Convertible Notes and Detached Warrants | 12 Months Ended |
Dec. 31, 2013 |
Convertible Notes And Detached Warrants | ' |
Convertible Notes Payable and Detached Warrants | ' |
5 | Convertible Notes and Detached Warrants | | | | | | | | | | | | | |
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Credit Facility – January 31, 2013 |
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On January 31, 2013, we entered into a Note Purchase Agreement with an investor pursuant to which the investor agreed to lend the Company up to $400,000 in multiple installments in exchange for a senior secured convertible promissory note with a conversion price equal to 60% of the lowest trading price per share during the previous 25 trading days. The first installment of $55,000 was delivered less a fee of $5,000 on the date of the Purchase Agreement. The second installment of $25,000 was delivered in April 2013. The notes mature on January 31, 2014, or upon default, whichever is earlier and bear interest at an annual rate of 12%. As described in Note 5, the embedded conversion feature qualified for liability classification at fair value. As a result, the Company recorded a full discount of $55,000 to the note payable on issuance of the first installment, and a full discount of $25,000 to the note payable on issuance of the second installment. As of December 31, 2013, there was $26,453 in outstanding principal and $18,333 in outstanding original interest discount (OID) on this note. |
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Conversions |
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The holder of the convertible note exercised a portion of the conversion rights of the note in the following installments during the year ended December 31, 2013: |
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Date | | | Shares | | | Price | | | Amount | |
| 8/13/13 | | | | 250,000 | | | | 0.03 | | | $ | 7,500 | |
| 9/9/13 | | | | 300,000 | | | | 0.0265 | | | $ | 7,950 | |
| 9/26/13 | | | | 600,000 | | | | 0.0116 | | | $ | 6,960 | |
| 10/16/13 | | | | 1,200,000 | | | | 0.0055 | | | $ | 6,600 | |
| 10/31/13 | | | | 1,500,000 | | | | 0.004 | | | $ | 6,000 | |
| 11/13/13 | | | | 2,200,000 | | | | 0.00275 | | | $ | 6,050 | |
| 12/3/13 | | | | 2,700,000 | | | | 0.0015 | | | $ | 4,050 | |
| 12/17/13 | | | | 2,750,000 | | | | 0.00125 | | | $ | 3,438 | |
Total | | | | 11,500,000 | | | | | | | | 48,548 | |
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As a result of the exercise of the conversion option of the note, the Company fully amortized the remaining balance of the associated debt discount of $55,000 recognizing interest expense for the same amount. |
Convertible Note – February 19, 2013 |
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On February 19, 2013, we entered into a credit facility with an investor unrelated to the investor described above pursuant to which the investor lent $103,500 to us in a single installment ($87,000 of proceeds net of legal fees) in exchange for a convertible promissory note with a conversion price equal to the average lowest trading price per share during the previous 10 trading days. The embedded conversion option cannot be exercised until 180 days from the date of the note and as such, was not priced until exercisable. The total number of conversion shares is calculated by dividing the amount of the notes by the conversion price. |
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In May of 2013, we did not comply with the timely filing requirement on this loan. Pursuant to the promissory note, a penalty of 50% of the outstanding principal amount equaling $51,750 was added to the balance of the note. This additional sum will be eligible for conversion at the same terms as the original principal balance. |
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The holder of the convertible note exercised a portion of the conversion rights of the note in the following installments during the year ended December 31, 2013. Note that the December 26, 2013 conversion of 200,000 shares was a conversion of accrued interest; all of the other conversions were on the principal amount. |
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Date | | | Shares | | | Price | | | Amount | |
| 8/26/13 | | | | 478,469 | | | | 0.0418 | | | $ | 20,000 | |
| 9/6/13 | | | | 840,336 | | | | 0.0357 | | | $ | 30,000 | |
| 9/26/13 | | | | 1,034,483 | | | | 0.0145 | | | $ | 15,000 | |
| 10/7/13 | | | | 1,492,537 | | | | 0.0134 | | | $ | 20,000 | |
| 10/21/13 | | | | 1,851,852 | | | | 0.0081 | | | $ | 15,000 | |
| 10/31/13 | | | | 2,508,772 | | | | 0.0057 | | | $ | 14,300 | |
| 11/11/13 | | | | 2,511,364 | | | | 0.0044 | | | $ | 11,050 | |
| 11/26/13 | | | | 2,733,333 | | | | 0.003 | | | $ | 8,200 | |
| 12/2/13 | | | | 2,760,000 | | | | 0.0025 | | | $ | 6,900 | |
| 12/9/13 | | | | 2,742,856 | | | | 0.0021 | | | $ | 5,760 | |
| 12/19/13 | | | | 2,758,824 | | | | 0.0017 | | | $ | 4,690 | |
| 12/26/13 | | | | 2,558,824 | | | | 0.0017 | | | $ | 4,350 | |
| 12/26/13 | | | | 200,000 | | | | 0.0017 | | | $ | 340 | |
Total | | | | 24,471,650 | | | | | | | $ | 155,590 | |
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Convertible Note – April 22, 2013 |
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On April 22, 2013, we entered into a credit facility with an investor unrelated to the investor described above pursuant to which the investor lent $63,000 (minus fees of $3,000) to us in a single installment in exchange for a convertible promissory note with a conversion price equal to 60% of the average lowest trading price per share during 5 of the previous 10 trading days. The embedded conversion option cannot be exercised until 180 days from the date of the note and as such, will not be priced until exercisable. The total number of conversion shares is calculated by dividing the amount of the notes by the conversion price. |
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On September 23, 2013 the investor lent an additional $50,000 in a single installment (minus fees of $3,000) under the same terms agreement and terms as the previous installment made April 22, 2013. |
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Credit Facility – October 14, 2011 |
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On October 14, 2011, we entered into a Note and Warrant Purchase Agreement with an investor pursuant to which the investor agreed to lend the Company up to $1,500,000 in multiple installments in exchange for a senior secured convertible promissory note with a conversion price of $0.50 per share and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share in the amount of each installment. The first installment of $400,000 was delivered on the date of the Purchase Agreement and we issued 400,000 warrants to the investor in |
connection with the first installment. The notes mature on October 14, 2014, or upon default, whichever is earlier and bear interest at an annual rate of 10%. |
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The second installment of $550,000 was delivered on November 29, 2011 and we issued 550,000 warrants in connection with the second installment. |
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The third installment of $25,000 was delivered on December 19, 2011 and we issued 25,000 warrants in connection with the third installment. |
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The fourth installment of $150,000 was delivered on February 10, 2012 and we issued 150,000 warrants in connection with the fourth installment. |
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The fifth installment of $250,000 was delivered on March 30, 2012 and we issued 250,000 warrants in connection with the fifth installment. |
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The sixth installment of $215,000 was delivered on June 4, 2012 and we issued 430,000 warrants in connection with the sixth installment. |
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Detachable Warrants |
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On October 14, 2011, the Company determined a relative fair value of $157,388 for the detachable warrants for the first installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 108.61%, risk free rate of 1.12% and an expected term of approximately 5 years. |
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On November 29, 2011, the Company determined a relative fair value of $209,317 for the detachable warrants for the second installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 109.19%, risk free rate of .93% and an expected term of approximately 5 years. |
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On December 19, 2011, the Company determined a relative fair value of $13,788 for the detachable warrants for the third installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 109.32%, risk free rate of .82% and an expected term of approximately 5 years. |
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As described in Note 5, during fiscal year 2012, these notes associated with the second financing were converted into share of common stock. |
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Conversions |
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On June 7, 2012, the Company issued 3,314,062 shares of common stock to one investor who elected to convert the outstanding principal amount of $1,590,000 and all of the accrued interest due on its convertible promissory notes dated October 14, 2011, November 29, 2011, December 19, 2011, February 10, 2012, March 30, 2012 and June 4, 2012 at a conversion price of $0.50 per share as provided in the note agreement. Therefore, the note was fully converted as of December 31, 2012 and no longer outstanding debt. |
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Credit Facility – December 31, 2010 |
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On December 31, 2010, the Company entered into a credit facility with one investor pursuant to which the investor agreed to lend up to $2,250,000 to us in multiple installments in exchange for a senior secured convertible promissory note with a conversion price of $0.50 per share and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share in the amount of each installment. The credit facility provides that the investor will lend additional installments to us in amounts as requested by us; provided however, that we provide the proposed use of proceeds for each requested amount. The investor shall have sole discretion in determining whether the proposed use of proceeds meets those requirements. The notes mature on December 31, 2013, or upon default, whichever is earlier and bear interest at an annual rate of 10%. |
Detachable Warrants |
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On December 31, 2010, the Company determined a relative fair value of $45,434 for the detachable warrants for the first installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of: -0-%, volatility of 94.1%, risk free rate: 2.01% and an expected term of 5 years. |
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On January 20, 2011, the Company determined a relative fair value of $78,062 for the detachable warrants for the second installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of: -0-%, volatility of 104.65%, risk free rate: 2.06% and an expected term of 5 years. |
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On March 9, 2011, the Company determined a relative fair value of $106,132 for the detachable warrants for the third installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 105.22%, risk free rate of 2.16% and an expected term of approximately 5 years. |
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On June 20, 2011, the Company determined a relative fair value of $29,276 for the detachable warrants for the fourth installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 105.87%, risk free rate of 1.55% and an expected term of approximately 5 years. |
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On June 30, 2011, the Company determined a relative fair value of $45,233 for the detachable warrants for the fifth installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 107.39%, risk free rate of 1.76% and an expected term of approximately 5 years. |
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Conversions |
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During fiscal year 2012, these notes associated with the first financing were converted into share of common stock, as follows: |
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On April 13, 2012, the Company issued 1,240,000 shares of common stock to one investor who elected to convert the outstanding principal amount of $620,000 due on its convertible promissory note date December 31, 2010 at a conversion price of $0.50 per share as provided in the note agreement. |
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On June 1, 2012, the Company issued 1,180,000 shares of common stock to one investor who elected to convert the outstanding principal amount of $590,000 due on its convertible promissory notes dated January 1, 2011, March 9, 2011, June 20, 2011 and June 30, 2011 at a conversion price of $0.50 per share as provided in the note agreement. |
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On June 11, 2012, the Company issued 300,481 shares of common stock to one investor who elected to convert all of their accrued interest in the amount of $150,240 on its convertible notes from its first financing at a conversion price of $0.50 per share as provided in the note agreement. Therefore, as of December 31, 2012 the December 31, 2010 credit facility was fully converted and no longer outstanding debt. |
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As described in Note 6, the Company issued convertible notes with detachable warrants. The Company accounted for these detachable warrants in accordance with ASC 470-20, which requires that the Company calculate the relative fair value of the warrants at the grant date and record the relative fair value as a discount to the related note payable with an offset to additional paid-in capital. The Company amortizes the debt discount associated with the warrants over the life of the convertible notes using the effective interest method. |
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On February 10, 2012, the Company determined a relative fair value of $61,354 for the detachable warrants for the fourth installment of the convertible notes. In calculating the relative fair value of the warrants, the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 110.77%, risk free rate of 1.04% and an expected term of approximately 5 years. |
On March 30, 2012, the Company determined a relative fair value of $130,853 for the detachable warrants for the fifth installment of the convertible notes. In calculating the relative fair value of the warrants, the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 110.64%, risk free rate of 1.04% and an expected term of approximately 5 years. |
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On June 4, 2012, the Company determined a relative fair value of $97,313 for the detachable warrants for the fifth installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 112.94%%, risk free rate of 0.27% and an expected term of approximately 4.69 years. |
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Warrant Summary |
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An overall summary of warrant activity for the period from December 31, 2012 through December 31, 2013 is presented below: |
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| | Number of | | | Weighted | | | Weighted | | | |
Warrants | Average | Average | | |
| Exercise | Remaining | | |
| Price | Contract Term | | |
Outstanding December 31, 2011 | | | 2,185,000 | | | $ | 1 | | | | 3.45 years | | | |
Issued | | | 615,000 | | | $ | 1 | | | | 4.17 years | | | |
Exercised | | | — | | | | — | | | | — | | | |
Outstanding December 31, 2012 | | | 2,800,000 | | | $ | 1 | | | | 3.68 years | | | |
Issued | | | — | | | $ | — | | | | — | | | |
Exercised | | | — | | | | — | | | | — | | | |
Outstanding December 31, 2013 | | | 2,800,000 | | | $ | 1 | | | | 2.61 years | | | |
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Exercisable, December 31, 2013 | | | 2,800,000 | | | $ | 1 | | | | 2.61 years | | | |
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Shares Reserved for Future Issuance |
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The Company has reserved shares for future issuance upon of its warrants as follows: |
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Warrants | | | 2,800,000 | | | | | | | | | | | |
Reserved shares at December 31, 2013 | | | 2,800,000 | | | | | | | | | | | |
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