Note 9 - Convertible Debentures | 3 Months Ended |
Mar. 31, 2014 |
Convertible Debentures [Abstract] | ' |
Convertible Debentures [Text Block] | ' |
Note 9 – Convertible debentures |
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The following reflect the Convertible Debentures for the period ended March 31, 2014 and December 31, 2013. |
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| | March 31, | | | December 31, | |
2014 | 2013 |
On January 27, 2012, the Company received proceeds of $130,000 from the sale of 16% Convertible Subordinated Debentures. The Company is in default. | | $ | 130,000 | | | $ | 130,000 | |
On December 20, 2013, the Company amended the debenture initially issued November 14, 2012 in which it received proceeds of $750,000 from the sale of 16% Convertible Subordinated Debentures. Interest is due June 1, 2014 and September 1, 2013. | | | 762,000 | | | | 762,000 | |
On November 14, 2012, the Company received proceeds of $250,000 from the sale of 16% Convertible Subordinated Debentures. Interest is due March 1, 2013, June 1, 2013 and September 1, 2013. The Company is in default. | | | 250,000 | | | | 250,000 | |
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Total | | | 1,142,000 | | | | 1,142,000 | |
Less unamortized debt discounts | | | (114,116 | ) | | | (266,240 | ) |
Less current maturities | | | (1,027,884 | ) | | | (875,760 | ) |
Total Long-term convertible debentures | | $ | - | | | $ | - | |
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On November 14, 2012, the Company received proceeds of $1,000,000 from the sale of 16% Convertible Subordinated Debentures (the “November 2012 Debentures”). The November 2012 Debentures were due on March 1, 2014. The aggregate principal amount of the combined November 2012 Debentures is $1,000,000 with an interest rate of 16% per annum. The interest is payable quarterly on March 1st, June 1st, September 1st, and December 1st, beginning on March 1, 2013. The November 2012 Debentures are convertible at any time after the original issue date at a conversion price of $0.085 per share, subject to adjustments. The Company recorded a discount from the relative fair value of the conversion feature and the intrinsic value of the conversion option of $421,715. The Company estimated the fair value of these derivatives using a multinomial Distribution (Lattice) valuation model with the following assumptions: stock price on the measurement date of $0.07; term of 1.5 years; expected volatility between 112% - 159%; and discount rate of 0.22% and accounted for them as debt discount, which will be amortized over the term of the loan which expired March 1, 2014. The Company analyzed the conversion option under ASC 815 and determined and recorded a $449,840 derivative liability. The Company, in its sole discretion, may choose to pay interest in cash, shares of Common Stock, or in combination thereof. At the Company’s election, it may, at any time after the six-month anniversary of the transaction’s closing date, deliver a notice to the holders to redeem the then-outstanding principal amount of the November 2012 Debentures for cash. In the event the Company defaults, the outstanding principal amount of the November 2012 Debentures, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the holders’ election, immediately due and payable in cash. In addition, the investors received 100% of the number of shares of common stock that the purchase amount would buy in warrants at the conversion price of $0.09, or a total of 11,764,706 warrants with a 5-year term. The Company recorded a discount from the relative fair value of the warrants and the intrinsic value of the conversion option of $208,685. The Company estimated the fair value of these derivatives using a multinomial Distribution (Lattice) valuation model with the following assumptions: stock price on the measurement date of $0.07; warrant term of 5 years; expected volatility between 112%-593%; and discount rate of 0.63% and accounted for them as debt discount, which will be amortized over the term of the loan which expires March 1, 2014. The Company analyzed the warrants under ASC 815 and determined and recorded a $222,603 derivative liability. The November 2012 Debentures are secured by the remaining unencumbered assets of the Company. The Company’s subsidiary companies guaranteed the security agreement by agreeing to act as surety for the payment of the November 2012 Debentures. As further consideration, the Company issued a combined total of 4,000,000 shares of common stock to the investors, which the Company recorded as a debt discount of $299,600 at issuance and will amortize the debt discount over the term of the debt. For the year ended December 31, 2013, the Company amortized $5,912. The Company shall take all actions necessary to nominate and recommend shareholder approval for the appointment of one director selected by Hillair Capital Management LLC to ESP’s Board of Directors. In conjunction with this debenture, the Company paid $70,000 of professional fees and recorded these fees as a debt discount to be amortized over the term of the debenture. The Company determined that the Debenture and warrant had derivative features and derivative liabilities were established for each. |
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On September 30, 2013 the Company agreed with its convertible debenture holders to amend and restate the November 2012 Debenture. The September 1, 2013 payment obligation was extended and deferred to $375,000 on December 1, 2013 and $625,000 on March 1, 2014 plus accrued interest; the conversion price was amended and restated to $0.05 from $0.085; the related warrant exercise price per share of the common stock was amended and restated to $0.075 from $0.09. The Company evaluated the application of ASC 470-50, Modifications and Extinguishments and ASC 470-60, Trouble Debt Restructurings by Debtors and concluded that the revised terms did not constitute a substantial modification or a troubled debt restructuring. The amended and restated exercise price of the warrant and conversion price were valued as derivative instruments and were revalued at the fair market value of the derivative instruments at September 30, 2013. |
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On December 20, 2013 the Company agreed with one convertible debenture holder to amend and restate the November 2012 Debenture amended previously on September 30, 2013. The December 1, 2013 payment obligation was extended and deferred to $281,250 on June 1, 2014 and $468,750 on September 1, 2014 plus accrued interest. The Company issued 5,000,000 common stock purchase warrants with an exercise price per share of $0.075 and a term of 5 years. The amended and restated exercise price of the Warrant and Conversion price were valued as derivative instruments and were revalued at the fair market value of the derivative instruments at December 20, 2013 as debt discount. The Company estimated the fair value of these derivatives using a multinomial Distribution (Lattice) valuation model with the following assumptions: stock price on the measurement date of $0.07; term of 1.5 years; expected volatility between 123% - 143% and accounted for them as debt discount, which will be amortized over the term of the loan which expires September 1, 2014. The Company analyzed the conversion option under ASC 815 and determined and recorded a derivative liability for these warrants at $13,365 and included them in debt discount. The Company estimated the conversion option of this debt conversion feature at $158,612 and included it in debt discount. The Company evaluated the application of ASC 470-50, Modifications and Extinguishments and ASC 470-60, Trouble Debt Restructurings by Debtors and concluded that the revised terms constituted a substantial modification which resulted in a debt extinguishment. The Company recognized a loss on the extinguishment of $310,767 during 2013. Accrued interest of $12,000 was incorporated into the reissued convertible debenture principal amount. |
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On December 1, 2013 and March 1, 2014 the Company failed to make the amended principle payment on one if its convertible debentures dated November 14, 2012 and amended on September 30, 2013. This convertible debenture is now in default. Under the terms of the convertible debenture all principle payments are now due and reflected as current and the interest rate increased to 18%. |
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