Convertible Notes Payable | 6 Months Ended |
Jun. 30, 2014 |
Convertible Notes Payable [Abstract] | ' |
Convertible notes payable | ' |
7. | Convertible notes payable | | | | | | | | | | | | | | | | | | | |
Investor loans issued in 2010 and 2011 |
|
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. |
|
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 six months ended June 30, 2014 and 2013 amounted to $5,326 and $59,700, respectively, including amortization of the discount of $0 and $44,166, respectively. As of June 30, 2014 and December 31, 2013, the debt discount was fully amortized. During 2013, $10,000 of the principal was repaid. |
|
Modification and conversion of investor loans in 2013 |
|
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. |
|
Extension of investor loans in 2013 |
|
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. |
|
Modification and conversion of investor loans in 2014 |
|
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.-10- |
|
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. |
|
On March 31, 2014, an Investor 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. |
|
On April 25, 2014, a Bridge Loan holder with a principal balance of $20,000 agreed to an amendment that modified the conversion option from $0.15 per share to a conversion option in which the principal balance of $20,000 would be convertible into 297,331 shares of common stock. This amounted to a conversion price of approximately $0.07 per share. Additionally, the bridge loan holder agreed to forgive accrued interest amounting to $813. 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 $31,157 (the difference between the reacquisition price of $55,652 and the net carrying amount of $24,495). The $20,000 in principal was converted into 297,331 shares of common stock on April 25, 2014. |
|
As of June 30, 2014 and December 31, 2013, the outstanding principal balance of the Investor Loans issued in 2010 and 2011 amounted to $142,000 and $190,000, respectively. Loans issued in 2014 in connection with Business Combination |
|
During the six months ended June 30, 2014, the Company issued (i) a $50,000 face value convertible note as part of the consideration for the ADL business acquisition (“ADL Note”) and (ii) a $50,000 face value convertible note as part of the consideration for the GCD business acquisition (“GCD Note”). Both notes bear an interest rate of 10% and mature in September 2014. The note holders have the option to convert the notes into common stock at a fixed conversion price. The ADL Note has a conversion price of $0.50 per share whereas the GCD Note has a conversion price of $1.00 per share. |
|
The Company evaluated the terms and conditions of the convertible notes under the guidance of ASC 815, Derivatives and Hedging. The conversion features 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”). Neither of the notes resulted in a BCF because the conversion prices were not in the money on the inception dates. |
|
As of June 30, 2014, the outstanding balance of the ADL Note and GCD Note was $100,000. Interest expense on the ADL Note and GCD Note for the six months ended June 30, 2014 was $2,740. |
|
Investor Loans issued in 2014 |
|
During the six months ended June 30, 2014, the Company issued convertible notes for an aggregate face value of $173,500 along with 517,000 shares of common stock as consideration. Each of the notes bear an interest rate of 10% and mature in September 2014. The note holders have the option to convert the notes into common stock at a fixed conversion price. Of the $173,500 in convertible notes, $148,500 in principal was converted simultaneously after being issued. |
|
The Company evaluated the terms and conditions of the convertible notes under the guidance of ASC 815, Derivatives and Hedging. The conversion features 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”). Each of the notes resulted in a BCF because the conversion price was in the money on each of the inception dates. The instruments issued in connection with the $173,500 convertible note financing are detailed in the following table: |
|
Issue Date | | | Face Value | | | | Common Stock Consideration | | | | Shares Indexed to Conversion Option | | | | Stock Options Issued | | | | | |
1-Feb-14 | | $ | 50,000 | | | | 100,000 | | | | 500,000 | | | | - | | | | | |
1-Apr-14 | | | 15,000 | | | | 200,000 | | | | 75,000 | | | | - | | | | | |
1-Apr-14 | | | 6,000 | | | | 12,000 | | | | 74,000 | | | | - | | | | | |
11-Apr-14 | | | 7,000 | | | | 14,000 | | | | 86,000 | | | | - | | | | | |
15-Apr-14 | | | 7,000 | | | | 14,000 | | | | 111,000 | | | | - | | | | | |
22-Apr-14 | | | 10,000 | | | | 20,000 | | | | 80,000 | | | | - | | | | | |
24-Apr-14 | | | 2,000 | | | | 4,000 | | | | 25,000 | | | | - | | | | | |
28-Apr-14 | | | 10,000 | | | | 20,000 | | | | 123,000 | | | | - | | | | | |
29-Apr-14 | | | 5,000 | | | | 10,000 | | | | 61,428 | | | | - | | | | | |
21-May-14 | | | 1,500 | | | | 3,000 | | | | 22,000 | | | | - | | | | | |
17-Jun-14 | | | 10,000 | | | | 20,000 | | | | 122,857 | | | | - | | | | | |
30-Jun-14 | | | 50,000 | | | | 100,000 | | | | 614,286 | | | | 714,285 | | | | | |
| | $ | 173,500 | | | | 517,000 | | | | 1,894,571 | | | | 714,285 | | | | | |
|
The allocation of proceeds related to the $173,500 convertible note financing is detailed in the following table: |
|
Issue Date | | | Face Value (Proceeds) | | | | Deferred Finance Fees | | | | Common Stock Consideration | | | | Beneficial Conversion Feature | | | | Convertible Notes | |
1-Feb-14 | | $ | 50,000 | | | | 22,000 | | | | 11,000 | | | | 16,000 | | | | 45,000 | |
1-Apr-14 | | | 15,000 | | | | 40,000 | | | | 40,000 | | | | - | | | | 15,000 | |
1-Apr-14 | | | 6,000 | | | | 8,400 | | | | 2,400 | | | | 6,000 | | | | 6,000 | |
11-Apr-14 | | | 7,000 | | | | 10,220 | | | | 3,220 | | | | 7,000 | | | | 7,000 | |
15-Apr-14 | | | 7,000 | | | | 9,800 | | | | 2,800 | | | | 7,000 | | | | 7,000 | |
22-Apr-14 | | | 10,000 | | | | 3,800 | | | | 3,800 | | | | 5,200 | | | | 4,800 | |
24-Apr-14 | | | 2,000 | | | | 2,800 | | | | 800 | | | | 2,000 | | | | 2,000 | |
28-Apr-14 | | | 10,000 | | | | 14,000 | | | | 4,000 | | | | 10,000 | | | | 10,000 | |
29-Apr-14 | | | 5,000 | | | | 7,000 | | | | 2,000 | | | | 5,000 | | | | 5,000 | |
21-May-14 | | | 1,500 | | | | 2,100 | | | | 600 | | | | 1,500 | | | | 1,500 | |
17-Jun-14 | | | 10,000 | | | | 2,800 | | | | 2,800 | | | | 7,200 | | | | 2,800 | |
30-Jun-14 | | | 50,000 | | | | 8,000 | | | | 8,000 | | | | - | | | | 50,000 | |
| | $ | 173,500 | | | | 130,920 | | | | 81,420 | | | | 66,900 | | | | 156,100 | |
|
The following table summarizes the activity related to the investor loans issued in 2014: |
|
Investor Loans issued in 2014 | | 2013 | | | | | | | | | | | | | | | | | |
Issued | | $ | 173,500 | | | | | | | | | | | | | | | | | |
Converted | | | (148,500 | ) | | | | | | | | | | | | | | | | |
Face value as of June 30, 2014 | | | 25,000 | | | | | | | | | | | | | | | | | |
Unamortized discount | | | (6,148 | ) | | | | | | | | | | | | | | | | |
Carrying value as June 30, 2014 | | $ | 18,852 | | | | | | | | | | | | | | | | | |
|
Interest expense on the Investor Loans issued in 2014 for the six months ended June 30, 2014 was $217,397, of which $172,359 related to the amortization of deferred finance cost, $44,752 related to the amortization of debt discount. -12- |
|
The following table illustrates the carrying values for the convertible notes payable as of June 30, 2014 and December 31, 2013: |
|
| | June, 30 | | | December 31, | | | | | | | | | | | | | |
Convertible Notes Payable | | 2014 | | | 2013 | | | | | | | | | | | | | |
Investor Loans issued in 2010 and 2011 | | $ | 142,000 | | | $ | 190,000 | | | | | | | | | | | | | |
Loans issued with business combinations | | | 100,000 | | | | - | | | | | | | | | | | | | |
Investor Loans issued in 2014 | | | 25,000 | | | | - | | | | | | | | | | | | | |
Unamortized discount | | | (6,148 | ) | | | - | | | | | | | | | | | | | |
Carrying value | | $ | 260,852 | | | $ | 190,000 | | | | | | | | | | | | | |
|
Accrued interest related to convertible notes payable amounted to $28,898 and $26,943 as of June 30, 2014 and December 31, 2013, respectively. |