Convertible Notes Payable | 9 Months Ended |
Sep. 30, 2014 |
Convertible Notes Payable [Abstract] | ' |
Convertible notes payable | ' |
7. | Convertible notes payable | | | | | | | | | | | | | | | | | | | | | | | |
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The following table illustrates the carrying values for the convertible notes payable as of September 30, 2014 and December 31, 2013: |
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| | September 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 | | | 15,000 | | | | - | | | | | | | | | | | | | | | | | |
Carrying value | | $ | 257,000 | | | $ | 190,000 | | | | | | | | | | | | | | | | | |
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Accrued interest related to convertible notes payable amounted to $34,266 and $26,943 as of September 30, 2014 and December 31, 2013, respectively. |
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Investor loans issued in 2010 and 2011 |
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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”). In connection with the financing, the Company issued 1,062,375 shares of common stock. 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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The common stock issued in connection with financing was valued based on a relative fair value basis generating a debt discount in the amount of $224,063. Interest expense on the Investor Loans for the nine months ended September 30, 2014 and 2013 amounted to $7,832 and $80,192, respectively, including amortization of the discount of $0 and $59,337, respectively. As of August 31, 2013 the debt discount was fully amortized. During 2013, $10,000 of the principal was repaid. |
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Modification and conversion of investor loans in 2013 |
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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 $423,928 and the net carrying amount of $307,752 ). 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 in 2013 |
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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 to June 30, 2014 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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Modification and conversion of investor loans in 2014 |
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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 as an inducement 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. As a result the Company recorded an inducement charge of in the amount of $1,194. 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 converted their note into 11,956 shares of common stock. |
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On March 31, 2014, an Investor Loan holder with a principal balance of $15,000 agreed to modified the conversion option as an inducement 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. As a result, the Company recorded an inducement charge in the amount of $17,019. The $15,000 in principal was converted into 192,575 shares of common stock on March 31, 2014. |
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On April 25, 2014, a Bridge Loan holder with a principal balance of $20,000 agreed to an amendment that modified the conversion option as an inducement 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. As a result, the Company recorded an inducement charge of $31,157. The $20,000 in principal was converted into 297,331 shares of common stock on April 25, 2014. |
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In addition to the conversions mentioned above, a principal payment in the amount of $3,000 was made during the nine months ended September 30, 2014. As of September 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. |
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Loans issued in 2014 in connection with Business Combination |
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During the nine months ended September 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. |
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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 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. |
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As of September 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 nine months ended September 30, 2014 was $5,260. As of September 30, 2014, these notes are considered in default. |
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Investor Loans issued in 2014 |
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The following table summarizes the activity related to the investor loans issued in 2014: |
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Investor Loans issued in 2014 | | | | | | | | | | | | | | | | | | | | | | |
Issued | | $ | 363,500 | | | | | | | | | | | | | | | | | | | | | |
Converted | | | (348,500 | ) | | | | | | | | | | | | | | | | | | | | |
Outstanding as of September 30, 2014 | | $ | 15,000 | | | | | | | | | | | | | | | | | | | | | |
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During the nine months ended September 30, 2014, the Company issued various convertible notes for an aggregate face value of $363,500. Each of the notes bear interest at 10% and mature two months after the date of issuance. The note holders have the option to convert the notes into common stock at a fixed conversion price. The Company also issued common stock, and in connection with some of the notes, common stock warrants, as prepaid interest expense. Of the $363,500 in convertible notes issued, holders of $348,500 in principal immediately converted their notes into 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 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 instruments issued in connection with the $363,500 convertible note financing are detailed in the following table: |
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| | | | | | | | | | | Prepaid Interest | | | | | | | | | |
Issue Date | | | Face Value (Proceeds) | | | | Shares | | | | Shares Issued | | | | Warrants Issued | | | | | | | | | |
Indexed to | | | | | | | | |
Conversion | | | | | | | | |
Option | | | | | | | | |
1-Feb-14 | | $ | 50,000 | | | | 500,000 | | | | 100,000 | | | | - | | | | | | | | | |
1-Apr-14 | | | 15,000 | | | | 75,000 | | | | 200,000 | | | | - | | | | | | | | | |
1-Apr-14 | | | 6,000 | | | | 74,000 | | | | 12,000 | | | | - | | | | | | | | | |
11-Apr-14 | | | 7,000 | | | | 86,000 | | | | 14,000 | | | | - | | | | | | | | | |
15-Apr-14 | | | 7,000 | | | | 111,000 | | | | 14,000 | | | | - | | | | | | | | | |
22-Apr-14 | | | 10,000 | | | | 80,000 | | | | 20,000 | | | | - | | | | | | | | | |
24-Apr-14 | | | 2,000 | | | | 25,000 | | | | 4,000 | | | | - | | | | | | | | | |
28-Apr-14 | | | 10,000 | | | | 123,000 | | | | 20,000 | | | | - | | | | | | | | | |
29-Apr-14 | | | 5,000 | | | | 61,428 | | | | 10,000 | | | | - | | | | | | | | | |
21-May-14 | | | 1,500 | | | | 22,000 | | | | 3,000 | | | | - | | | | | | | | | |
17-Jun-14 | | | 10,000 | | | | 122,857 | | | | 20,000 | | | | - | | | | | | | | | |
30-Jun-14 | | | 50,000 | | | | 614,286 | | | | 100,000 | | | | 714,285 | | | | | | | | | |
1-Jul-14 | | | 10,000 | | | | 122,857 | | | | 20,000 | | | | 142,857 | | | | | | | | | |
3-Jul-14 | | | 5,000 | | | | 61,428 | | | | 10,000 | | | | 71,429 | | | | | | | | | |
3-Jul-14 | | | 1,000 | | | | 12,500 | | | | 2,000 | | | | 14,286 | | | | | | | | | |
9-Jul-14 | | | 50,000 | | | | 614,286 | | | | 100,000 | | | | 714,286 | | | | | | | | | |
9-Jul-14 | | | 5,000 | | | | 61,428 | | | | 10,000 | | | | 71,428 | | | | | | | | | |
14-Jul-14 | | | 10,000 | | | | 122,857 | | | | 20,000 | | | | 142,857 | | | | | | | | | |
30-Jul-14 | | | 24,000 | | | | 252,000 | | | | 48,000 | | | | 300,000 | | | | | | | | | |
14-Aug-14 | | | 25,000 | | | | 307,142 | | | | 50,000 | | | | 357,142 | | | | | | | | | |
18-Aug-14 | | | 50,000 | | | | 614,286 | | | | 100,000 | | | | 714,286 | | | | | | | | | |
21-Aug-14 | | | 3,000 | | | | 24,000 | | | | 6,000 | | | | 15,000 | | | | | | | | | |
18-Sep-14 | | | 7,000 | | | | 102,667 | | | | 14,000 | | | | 50 | | | | | | | | | |
| | $ | 363,500 | | | | 4,190,022 | | | | 897,000 | | | | 3,307,856 | | | | | | | | | |
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The Company was required to consider whether notes embodied a beneficial conversion feature (“BCF”). Certainof the notes resulted in a BCF because the conversion price was in the money on the inception date. |
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The allocation of proceeds related to the $363,500 convertible note financing is detailed in the following table: |
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| | | | | Prepaid Interest | | | | | | | |
Issue Date | | Face Value (Proceeds) | | | Shares Issued | | | Warrants Issued | | | Total | | | Beneficial Conversion Feature | | | Convertible Notes | |
1-Feb-14 | | $ | 50,000 | | | $ | 11,000 | | | | - | | | $ | 11,000 | | | $ | 16,000 | | | $ | 34,000 | |
1-Apr-14 | | | 15,000 | | | | 40,000 | | | | - | | | | 40,000 | | | | - | | | | 15,000 | |
1-Apr-14 | | | 6,000 | | | | 2,400 | | | | - | | | | 2,400 | | | | 6,000 | | | | - | |
11-Apr-14 | | | 7,000 | | | | 3,220 | | | | - | | | | 3,220 | | | | 7,000 | | | | - | |
15-Apr-14 | | | 7,000 | | | | 2,800 | | | | - | | | | 2,800 | | | | 7,000 | | | | - | |
22-Apr-14 | | | 10,000 | | | | 3,800 | | | | - | | | | 3,800 | | | | 5,200 | | | | 4,800 | |
24-Apr-14 | | | 2,000 | | | | 800 | | | | - | | | | 800 | | | | 2,000 | | | | - | |
28-Apr-14 | | | 10,000 | | | | 4,000 | | | | - | | | | 4,000 | | | | 10,000 | | | | - | |
29-Apr-14 | | | 5,000 | | | | 2,000 | | | | - | | | | 2,000 | | | | 5,000 | | | | - | |
21-May-14 | | | 1,500 | | | | 600 | | | | - | | | | 600 | | | | 1,500 | | | | - | |
17-Jun-14 | | | 10,000 | | | | 2,800 | | | | - | | | | 2,800 | | | | 7,200 | | | | 2,800 | |
30-Jun-14 | | | 50,000 | | | | 8,000 | | | $ | 94,177 | | | | 102,177 | | | | - | | | | 50,000 | |
1-Jul-14 | | | 10,000 | | | | 1,600 | | | | 10,382 | | | | 11,982 | | | | - | | | | 10,000 | |
3-Jul-14 | | | 5,000 | | | | 800 | | | | 5,191 | | | | 5,991 | | | | - | | | | 5,000 | |
3-Jul-14 | | | 1,000 | | | | 160 | | | | 1,038 | | | | 1,198 | | | | - | | | | 1,000 | |
9-Jul-14 | | | 50,000 | | | | 13,000 | | | | 115,429 | | | | 128,429 | | | | 29,857 | | | | 20,143 | |
9-Jul-14 | | | 5,000 | | | | 1,300 | | | | 8,710 | | | | 10,010 | | | | 2,986 | | | | 2,014 | |
14-Jul-14 | | | 10,000 | | | | 2,600 | | | | 10,382 | | | | 12,982 | | | | 5,971 | | | | 4,029 | |
30-Jul-14 | | | 24,000 | | | | 8,160 | | | | 39,554 | | | | 47,714 | | | | 18,840 | | | | 5,160 | |
14-Aug-14 | | | 25,000 | | | | 9,500 | | | | 54,898 | | | | 64,398 | | | | 25,000 | | | | - | |
18-Aug-14 | | | 50,000 | | | | 19,000 | | | | 95,653 | | | | 114,653 | | | | 50,000 | | | | - | |
21-Aug-14 | | | 3,000 | | | | 1,020 | | | | 2,752 | | | | 3,772 | | | | 1,080 | | | | 1,920 | |
18-Sep-14 | | | 7,000 | | | | 980 | | | | 4,721 | | | | 5,701 | | | | 187 | | | | 6,813 | |
| | $ | 363,500 | | | $ | 139,540 | | | $ | 442,887 | | | $ | 582,427 | | | $ | 200,821 | | | $ | 162,679 | |
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The 897,000 shares of common stock and the 3,307,856 warrants issued to investors in connection with the above notes were accounted for as prepaid interest expense under the guidance of ASC 820-15-20. For the $348,500 in principal that was converted immediately after being issued, the $542,427 in related prepaid interest was charged to interest expense upon conversion. The $40,000 in prepaid interest related to the $15,000 note that was not converted was amortized over the life of the note, which matured on June 1, 2014. As of September 30, 2014, all prepaid interest was fully amortized. |
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The warrants issued in connection with the convertible notes were valued using a binomial model using the following inputs: |
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| | Inputs | | | | | | | | | | | | | | | | | | | | | |
Linked common shares | | | 3,307,856 | | | | | | | | | | | | | | | | | | | | | |
Range of quoted market prices on valuation dates | | | $0.08 - $0.19 | | | | | | | | | | | | | | | | | | | | | |
Contractual exercise price | | | $0.01 | | | | | | | | | | | | | | | | | | | | | |
Expected term (years) | | | 3.5 | | | | | | | | | | | | | | | | | | | | | |
Market volatility | | | 128.46% | | | | | | | | | | | | | | | | | | | | | |
Risk free rates using zero coupon US Treasury Security rates | | | 0.87% - 1.06% | | | | | | | | | | | | | | | | | | | | | |
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Interest expense on the Investor Loans issued in 2014 for the nine months ended September 30, 2014 was $784,117, of which $582,427 related to the amortization of prepaid interest, $200,821 related to the amortization of the beneficial conversion feature and $869 related to interest accrued on the note that was not immediately converted. |