Convertible Notes Payable | 3 Months Ended |
Mar. 31, 2014 |
Long-term Debt [Abstract] | ' |
Convertible notes payable | ' |
7. | Convertible notes payable |
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Investor loans |
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Between September 27, 2010 and July 21, 2011, the Company issued notes payable to third party investors with an aggregate face value of $447,500 (“Investor Loans”). Of the aggregate $447,500 in Investor Loans, $88,333 were loans from related parties. The notes have a common maturity date of August 31, 2013, payable at face value plus accrued interest at maturity. The notes accrue interest at the rate of 7% per annum. |
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Interest on these notes was calculated using an effective interest rate of 7.51% and 12.63% generating a debt discount in the amount of $224,063. Interest expense on the Investor Loans for the three months ended March 31, 2014 and 2013 amounted to $2,848 and $29,685, respectively, including amortization of the discount of $0 and $21,961, respectively. As of March 31, 2014 and December 31, 2013, the debt discount was fully amortized. |
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Modification and conversion of investor loans |
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On August 31, 2013 (the maturity date), holders of investor loans with an aggregate principal balance of $247,500 agreed to add a conversion option to the contracts which provided that the principal balance of $247,500 would be convertible into 569,252 shares of common stock. This amounted to a conversion price of approximately $0.43 per share. Additionally, the holders agreed to forgive accrued interest amounting to $60,252. Under ASC 470-50-40-10, when a modification or an exchange of debt instruments adds a substantive conversion option, extinguishment accounting is required. As a result, the Company recorded a loss on extinguishment of debt amounting to $116,176 (the difference between the reacquisition price of $393,250 and the net carrying amount of $277,074). The $247,500 in principal was converted into 569,252 shares of common stock on August 31, 2013. |
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Extension of investor loans |
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The remaining principal balance of $200,000 was still outstanding as of the maturity date. The holders of these Investor Loans agreed to extend the maturity date of their notes and added a conversion option to the notes. These amendments gave rise to an extinguishment because of the addition of a conversion option. As a result, the Company recorded a loss on extinguishment of debt in the amount of $435,574 in 2013. |
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On January 1, 2014, an Investor Loan holder with a principal balance of $5,000 agreed to an amendment that modified the conversion option from $0.50 per share to a conversion option in which the principal balance of $5,000 would be convertible into 26,250 shares of common stock. This amounted to a conversion price of approximately $0.19 per share. Additionally, the Investor Loan holder agreed to forgive accrued interest amounting to $164. In accordance with ASC 470-50-40-10, a test was performed to see if the modification resulted in a 10% change in cash flows. This amendment gave rise to an extinguishment because the difference in cash flows was greater than 10%. As a result, the Company recorded a loss on extinguishment of debt in the amount of $1,194 (the difference between the reacquisition price of $6,607 and the net carrying amount of $5,413). The $5,000 in principal was converted into 26,250 shares of common stock on January 1, 2014. |
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On February 18, 2014, an Investor Loan holder with a principal balance of $5,000 agreed to an amendment that modified the conversion option from $0.50 per share to a conversion option in which the principal balance of $5,000 would be convertible into 11,956 shares of common stock. This amounted to a conversion price of approximately $0.42 per share. Additionally, the Investor Loan holder agreed to forgive accrued interest amounting to $931. In accordance with ASC 470-50-40-10, a test was performed to see if the modification resulted in a 10% change in cash flows. This amendment did not give rise to an extinguishment because the difference in cash flows was not greater than 10%. The $5,000 in principal was converted into 11,956 shares of common stock on February 18, 2014. |
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On March 31, 2014, a Bridge Loan holder with a principal balance of $15,000 agreed to an amendment that modified the conversion option from $0.50 per share to a conversion option in which the principal balance of $15,000 would be convertible into 192,575 shares of common stock. This amounted to a conversion price of approximately $0.08 per share. Additionally, the bridge loan holder agreed to forgive accrued interest amounting to $4,609. In accordance with ASC 470-50-40-10, a test was performed to see if the modification resulted in a 10% change in cash flows. This amendment gave rise to an extinguishment because the difference in cash flows was greater than 10%. As a result, the Company recorded a loss on extinguishment of debt in the amount of $17,019 (the difference between the reacquisition price of $35,446 and the net carrying amount of $18,427). The $15,000 in principal was converted into 192,575 shares of common stock on March 31, 2014. |
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As of March 31, 2014, the outstanding balance of these investor loans was $165,000. |
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Loans issued in 2014 |
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During the three months ended March 31, 2014, the Company issued (i) a $50,000 face value convertible note to a related party (“Note 1”), (ii) a $50,000 face value convertible note as part of the consideration for the ADL business acquisition (“Note 2”) and (iii) a $50,000 face value convertible note as part of the consideration for the GCD business acquisition (“Note 3”). Each of the notes mature on September 20, 2014. The note holders have the option to convert the notes into common stock at a fixed conversion price. The conversion price for Note 1 is $0.10 per share, for Note 2 is $0.50 per share and for Note 3 is $1.00 per share. In connection with Note 1, the Company agreed to issue 100,000 shares of common stock. |
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The Company evaluated the terms and conditions of the convertible notes under the guidance of ASC 815, Derivatives and Hedging. The conversion feature met the definition of conventional convertible for purposes of applying the conventional convertible exemption. The definition of conventional contemplates a fixed number of shares issuable under the arrangement. The instruments were convertible into a fixed number of shares and there were no down round anti-dilution protection features contained in the contracts. The Company was required to consider whether the new hybrid contracts embodied a beneficial conversion feature (“BCF”). Note 1 resulted in a beneficial conversion feature in the amount of $16,000 since the conversion feature was in the money. However, Notes 2 and 3 did not result in the issuance of a beneficial conversion feature since the notes were not in the money. |
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During the three months ended March 31, 2014, Note 1 was converted into 500,000 shares of common stock. |
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As of March 31, 2014, the outstanding balance of Note 2 and Note 3 was $100,000. |
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As of March 31, 2014 and December 31, 2013 the outstanding principal balance of the remaining convertible notes payable amounted to $265,000 and $190,000, respectively. Accrued interest related to convertible notes payable amounted to $24,334 and $26,943 as of March 31, 2014 and December 31, 2013, respectively. |