| Convertible Notes Payable and Derivative Liability | NOTE 11 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE
LIABILITY
July and September 2014 Debentures
On July 21, 2014, as amended on September 19, 2014 and
October 20, 2014, the Company entered into a Securities
Purchase Agreement whereby the Company agreed to issue convertible
debentures (“July 2014 Debentures”) in the
aggregate principal amount of $3,500,000, in five tranches. The
initial closing in the aggregate principal amount of $1,000,000
occurred on July 21, 2014. The second closing in the amount of
$1,000,000 occurred on August 26, 2014; the third of $500,000
on September 26, 2014. The fourth and fifth, each in the
amount of $500,000, were to occur within 2 and 5 business days,
respectively, of the effective date of the registration statement
filed by the Company for the resale of the shares of common stock
issuable upon conversion of the July 2014 Debentures. The
Registration statement was withdrawn and terminated in
December 2014, and a new registration statement was filed on
April 9, 2015. The July 2014 Debentures bear interest at
the rate of 10% per year. The debt was due July 21, 2015,
with the original agreement calling for amortization payments,
including accrued principal and accrued interest, beginning on the
eleventh day of the fourth month after issuance and will continue
on the eleventh day of each following eight successive months
thereafter.
Also on September 19, 2014, as amended on October 20,
2014, the Company entered into a securities purchase agreement
pursuant to which it agreed to issue convertible debentures
(“September 2014 Debentures”) in the aggregate
principal amount of $2,500,000, in two tranches. The initial
closing in the principal amount of $1,000,000 occurred on
September 19, 2014. The second closing of $1,500,000, was to
occur within 2 days of the effective date of the registration
statement filed by the Company for the resale of the shares of
common stock issuable upon conversion of the September 2014
Debentures. The September 2014 Debentures bear interest at the
rate of 5% per year. The debt is due September 19, 2015,
and the original agreement called for amortization payments,
including accrued principal and accrued interest, due in nine
monthly installments, commencing the fourth month after
issuance.
Both the original July 2014 Purchase Agreement Debentures and
September 2014 Debentures, prior to subsequent amendment,
share the following significant terms:
All amounts are convertible at any time, in whole or in part, at
the option of the holders into shares of the Company’s common
stock at a conversion price. The Notes were initially convertible
into shares of the Company’s common stock at the initial
Fixed Conversion Price of $11.75 per share. The Fixed Conversion
Price is subject to adjustment for stock splits, combinations or
similar events. If the Company makes any subsequent equity sales
(subject to certain exceptions), under which an effective price per
share is lower than the Fixed Conversion Price, then the conversion
price will be reduced to equal such price. The Company may make the
amortization payments on the debt in cash, prompting a 30% premium
or, subject to certain conditions, in shares of common stock valued
at 70% of the lowest volume weighted average price of the common
stock for the 20 prior trading days.
In connection with each of the purchase agreements, the Company
entered into a registration rights agreement with the respective
investors, pursuant to which the Company agreed to file a
registration statement for the resale of the shares of common stock
issuable upon conversion of, or payable as principal and interest
on, the respective debentures, within 45 days of the initial
closing date under each agreement, and to have such registration
statements declared effective within 120 days of the initial
closing dates of each purchase agreement. Through subsequent
modifications of the July 2014 Debentures and
September 2014 Debentures, the required date to file the
registration statement and the effective date of the registration
statement have been changed to April 15, 2015 and
July 15, 2015, respectively. The registration statement was
filed on April 9, 2015, and became effective on June 11,
2015.
The conversion feature of the July 2014 Debenture and the
September 2014 Debenture meets the definition of a derivative
and due to the reset provision to occur upon subsequent sales of
securities at a price lower than the fixed conversion price,
requires bifurcation and is accounted for as a derivative
liability. The derivative related to the closings on the
July 2014 and September 2014 Debentures during the year
ending December 31, 2014, was initially recognized during
2014, at its estimated fair value of approximately $1,885,000 and
created a discount on the Debentures that would be amortized over
the life of the Debentures using the effective interest rate
method. The fair value of the embedded derivative is measured and
recognized at fair value each subsequent reporting period and the
changes in fair value are recognized in the Statement of Operations
as Change in fair value of derivative liability. For the year ended
December 31, 2014, the Company recognized a loss on the change
in fair value of derivative liabilities of approximately
$1,806,000. See Note 2 Fair value of financial instruments for
additional information on the fair value and gains or losses on the
embedded derivative.
On January 30, 2015, the Company and certain of the Investors
entered into an Amendment, Modification and Supplement to the
Purchase Agreement (the “Purchase Agreement Amendment”
or the “Modification”) pursuant to which the Investors
agreed to purchase an additional $1,800,000 in seven Modified
Closings: (1) $200,000 was funded at the Closing of the
Purchase Agreement Amendment; (2) $100,000 to be funded within
thirty (30) days of the Closing; (3) $100,000 to be
funded within two days following the filing of a registration
statement with the SEC to register the shares underlying the
Debentures (the “Registration Statement”) and of the
Company having filed with the SEC a restatement of the
Company’s consolidated financial statements as described in
the Company’s Current Report on Form 8-K filed with the SEC
on December 22, 2014; (4) $100,000 to be funded within
two days of receipt of the first comment letter from the SEC with
regard to the Registration Statement; (5) $500,000 to be
funded within two days of the date that the Registration Statement
is declared effective by the SEC; (6) $500,000 to be funded
within five days of the date that the Registration Statement is
declared effective by the SEC; and (7) $100,000 to be funded
within each of 90, 120, 150, and 180 days from the Closing of the
Purchase Agreement Amendment. The Modification also eliminated the
amortization payments discussed above, and provided for accrued and
unpaid interest to be payable upon conversion or maturity rather
than on specified payment dates. The Company was also required to
open a new dispensary in Portland, Oregon through a licensed
operator during the first calendar quarter of 2015 (which was later
modified to April 30, 2015). The Company also had to file the
Registration Statement by March 8, 2015 (later amended), and
it had to be declared effective by June 15, 2015 in order to
avoid default and acceleration under the Amended and Restated
Debenture. As noted above, the Registration Statement was filed on
April 9, 2015, and became effective June 11, 2015.
On March 13, 2015 the Company and the Investors entered into a
further amendment (“March 2015 Amendment”) to the
July 21, 2014, 10% Convertible debentures, as amended
January 30, 2015, whereby the reset of the fixed conversion
rate to $1.83 caused by recent dilutive issuances was reiterated
for all previously issued notes. In addition, the March 2015
Amendment modified the opening date of the Portland, Oregon
dispensary to April 30, 2015. Neither of these modified terms
had an impact on the accounting treatment of the Debentures.
The July 2014 financing was further modified on March 23,
2015. The closing dates of the financing were again modified,
investments by two members of the Board of Director’s
(“Board”) were required, and the deadline for filing of
the registration statement was changed to no later than
April 15, 2015, and its effective date to no later than
July 15, 2015. Neither of these modified terms had an impact
on the accounting treatment of the Debentures.
On April 9, 2015, the Company and their investors entered into
an Amendment, Modification and Supplement to the July 2014
convertible debenture which amends the closings as set forth in the
March 23, 2015 Modification to increase the amounts due in the
third tranche, due two days after the filing of the Registration
Statement, to $450,000.
On January 28, 2015, the Company and certain of the Investors
entered into an Amendment, Modification and Supplement to the
September 2014 Debenture, pursuant to which the remaining
$1,500,000 was to be funded in four Modified Closings as set forth
in the agreement, and contains other modifications with the same
terms as was contained in the January 30, 2015
Modification.
The Company considered whether the above modifications should be
accounted for as an extinguishment or modification of the existing
debt. The Company first evaluated whether the modification of terms
could be considered a troubled debt restructuring, but the
modification did not meet the criteria as the Investors did not
grant a concession to the Company for economic or legal reasons
related to any financial difficulties of the Company. The majority
of the modifications related to deadlines being extended for
certain required events. The only financial modification was to
revise the payment schedule on the Debentures to eliminate the
amortization payments and instead require all to be due at
maturity. The Company concluded this is not regarded as a
concession as it is not the forgiveness of any interest payments,
nor reduction of principal, nor change to the maturity date.
Therefore, the modification of the terms was evaluated to determine
whether the changes in the Debentures’ future cash flows were
in excess of 10% and considered substantial, which would require
the Debentures to be accounted for as extinguished and replaced
with new debt. As the modification resulted in a less than 10%
estimated change in future cash flows, the Company concluded that
the modification of the terms of the July 2014 and
September 2014 Debentures was to be accounted for as a
modification of the existing Debentures.
As part of the January 30, 2015 Modification, the parties
entered into a Modified Debenture Agreement for the $200,000 that
was funded at the Closing and agreed to use the same form of
Modified Debenture for each of the other foregoing Modified
Closings (collectively, the “Modified Debentures”). The
fixed conversion price of the Modified Debenture was the lower of
$5.00 or 51% of the lowest volume weighted average price for the 20
consecutive trading days prior to the applicable conversion date.
This new fixed conversion price was a dilutive issuance to the
outstanding July 2014 and September 2014 Debentures,
thereby triggering a reset of the older fixed conversion price. As
a result of the reset to the conversion price, at January 30,
2015, the derivative liability was re-measured to a fair value of
approximately $2,690,000, using a weighted probability model as
estimated by management. A decrease in fair value of the derivative
liability of approximately $1,072,000 was recognized as a gain on
the Statement of Consolidated Comprehensive Loss.
The additional Modified Debentures under the July 2014
Debentures closed on February 27, 2015 in the amount of
$100,000, March 13, 2015 in the amount of $50,000,
March 16, 2015 in the amount of $25,000,
March 20,
The additional Modified Debentures under the September 2014
Debentures closed on January 29, 2015 in the amount of
$100,000 and February 24, 2015 in the amount of $100,000.
These Modified Debentures have a fixed conversion price of the
lower of $5.00 or 51% of the VWAP for the last 20 days prior to the
conversion. This new fixed conversion price was a dilutive issuance
to the outstanding July 2014 and September 2014
Debentures, thereby triggering a reset of the previous $5.00 fixed
conversion price. The resulting reset and re-measurement of the
fair value of the derivative liability is included in the amounts
of the change to fair value discussed above.
The additional funding under the July 2014 Modified Debentures
pursuant to the closing schedule detailed above resulted in
$2,811,500 being received during the second quarter. The first
$300,000 had a fixed conversion price of the lower of $1.83 or 51%
of the VWAP for the 40 days prior to the conversion. The
April 17, 2015 closing contained a fixed conversion price of
the lower of $0.88 or 51% of the VWAP for the last 40 days prior to
the conversion. This new fixed conversion price was a dilutive
issuance to the outstanding July 2014 and September 2014
Debentures, thereby triggering a reset of the previous $1.83 fixed
conversion price. This reset resulted in the derivative liability
being revalued at April 17, 2015, using a weighted probability
model for a fair value of $3,287,000, for a increase in fair value
of approximately $1,764,000, recognized as a loss on the Statement
of Consolidated Comprehensive Loss.
There was additional funding of $1,300,000 of the
September 2014 Modified Debentures under the closing schedule
detailed above. These Modified Debentures all have a fixed
conversion price of the lower of $0.88 or 51% of the VWAP for the
last 40 days prior to the conversion.
The Directors’ convertible debentures required under the
March 23, 2015 Modification, issued in the first quarter of
2015, total $150,000, and have a three year term and an interest
rate of 8% per annum. They were originally convertible at a
fixed conversion price of the lower of $1.83 or 51% of the VWAP for
the last 20 days prior to conversion. As with the Modified
Debentures, the debentures included a reset provision, which
resulted in the conversion feature being bifurcated and accounted
for as a derivative liability, with an initial fair value of
$132,175. The director’s convertible debentures also reset on
February 27, 2015 and April 17, 2015, with the changes to
fair value included in the amounts disclosed above.
The Modified Debentures also included a warrant instrument granting
the Investor the right to purchase shares of common stock of the
Company equal to the principal amount of the applicable Modified
Debenture divided by a price equal to 120% of the last reported
closing price of the common stock on the applicable closing date of
the Modified Debenture, with a three year term.
The warrants issued are summarized below:
Date issued
Number of warrants Exercise price December 18,
Fair Value at issuance
July 2014 Modified Debentures
January 30, 2015 40,552 4.93 .06 $ 159,601
February 26, 2015 45,537 2.20 .06 79,904
March 13, 2015 21,151 2.36 .06 39,965
March 16, 2015 10,575 2.36 .06 19,981
March 20, 2015 41,946 1.79 .06 59,942
March 27, 2015 75,758 1.98 .06 119,888
April 2, 2015 60,386 1.66 .06 74,025
April 2, 2015 30,193 1.66 .06 37,012
April 10, 2015 107,914 1.39 .06 112,460
April 17, 2015 41,667 1.20 .06 37,680
April 24, 2015 127,119 1.18 .06 112,635
April 24, 2015 21,186 1.18 .06 18,772
May 1, 2015 156,250 .96 .06 113,133
May 7, 2015 134,615 .78 .06 79,234
May 8, 2015 42,000 .75 .06 23,768
May 15, 2015 200,000 .75 .06 113,365
May 22, 2015 250,000 .60 .06 113,366
May 29, 2015 258,621 .58 .06 112,537
June 5, 2015 288,462 .52 .06 120,738
June 12, 2015 930,233 .43 .06 303,246
June 19, 2015 3,448,276 .29 .06 751,159
September 2014 Modified Debentures
January 28, 2015 18,038 5.54 .06 80,156
February 13, 2015 57,870 1.73 .06 96,689
April 2, 2015 181,159 1.66 .06 222,109
April 24, 2015 90,579 1.10 .06 80,548
May 15, 2015 200,000 .75 .06 113,365
June 12, 2015 1,744,186 .43 .06 570,248
August 2015 Debentures
August 24, 2015 6,666,667 .06 321,757
September 18, 2015 588,235 .17 82,804
October 28, 2015 4,166,667 .12 363,306
November 16, 2015 1,785,714 .07 92,798
November 23, 2015 2,083,333 .06 68,988
November 30,2015 2,500,000 .05 81,988
December 7, 2015 6,250,000 .02 163,382
December 17, 2015 10,000,000 .02 76,376
Directors
January 5, 2015 129,305 .40 39,901
January 30, 2015 129,250 .40 39,916
February 2, 2015 237,778 .22 16,619
Total 43,161,222 $ 5,113,361
Effective September 18, 2015, the holder of the September 2014
Debentures and the Company agreed to amend its September 2014
Warrants, to reduce the exercise price of the warrants to purchase
an aggregate of 2,291,832 shares of the Company’s common
stock to six cents per share. Additionally, the holder of the July
2014 Debentures and the Company agreed to amend its July 2014
Warrants, to reduce the exercise price of the warrants to purchace
an aggregate of 6,332,441 shares of Common Stock to six cents per
share. As a result of the amendment, the fair value of the warrants
was remeasured as of September 18, 2015, for an additional fair
value of approximately $38,000 recognized as a financing
expense.
During the year ended December 31, 2015, approximately
2,292,000 of the above warrants were exercised, for cash proceeds
of $137,510 at an average exercise price of $0.06.
The Company determined at issuance that the warrants were properly
classified in equity as there is no cash settlement provision and
the warrants have a fixed exercise price and, therefore, result in
an obligation to deliver a known number of shares.
The Company adopted a sequencing policy that reclassifies
contracts, with the exception of stock options, from equity to
assets or liabilities for those with the earliest inception date
first. Any future issuance of securities, as well as period-end
reevaluations, will be evaluated as to reclassification as a
liability under our sequencing policy of earliest inception date
first until all of the convertible debentures are either converted
or settled.
The Company reevaluated the warrants as of December 31, 2015
and determined that they did not have a sufficient number of
authorized and unissued shares to settle all existing commitments,
and the fair value of the warrants for which there was insufficient
authorized shares, were reclassified out of equity to a liability.
Under the sequencing policy, of the approximately 40,870,000
warrants outstanding at December 31, 2015, it was determined
there was not sufficient authorized shares for approximately
38,040,000 of the outstanding warrants. The fair value of these
warrants was re-measured on December 31, 2015 using the Black
Scholes Merton Model, with key valuation assumptions used that
consist of the price of the Company’s stock on
December 31, 2015, a risk free interest rate based on the
average yield of a 2 or 3 year Treasury note and expected
volatility of the Company’s common stock, resulting in the
fair value of $940,000 being reclassified out of equity. The
Company estimated the fair value of the warrant liability based on
a Black Scholes valuation model. The key assumptions used consist
of the price of the Company’s stock, a risk free interest
rate based on the average yield of a two or three year Treasury
note (based on remaining term of the related warrants), and
expected volatility of the Company’s common stock over the
remaining life of the warrants.
Effective September 18, 2015, the holder of the
September 2014 Debentures and the Company agreed to amend the
Investor’s September 2014 Warrants, to reduce the
exercise price of the warrants to purchase an aggregate of
2,291,832 shares of the Company’s common stock to six cents
per share. The holder agreed to exercise in full those warrants in
cash within three trading days of the filing with the SEC of a Form
8-K, which occurred on September 18, 2015. During the year
ended December 31, 2015, approximately 2,292,000 warrants were
exercised.
Effective September 18, 2015, the holder of the July 2014
Debentures and the Company agreed to amend the Investor’s
July 2014 Warrants, to reduce the exercise price of the
warrants to purchase an aggregate of 6,332,441 shares of Common
Stock to six cents per share. The holder agreed to exercise in full
those warrants in cash within three trading days of the filing with
the SEC of a Form 8-K, which occurred on September 18, 2015.
As of December 31, 2015, the warrants have not yet been
exercised.
August 2015 Debentures
On August 14, 2015, the Company entered into a Securities
Purchase Agreement whereby they agreed to issue convertible
debentures in the aggregate principal amount of up to $3,979,877 to
certain Investors. The initial closing in the aggregate principal
amount of $650,000 occurred on August 14, 2015. An additional
11 payments were made in the total amount of $2,434,143 through
December 31, 2015. The August 2015 Debentures bear
interest at the rate of 10% per year.
On August 20, 2015, the Company also entered into a Securities
Purchase Agreement with another Investor in the aggregate principal
amount of up to $1,500,000 (collectively the
“August 2015 Debentures”), which was amended on
September 19, 2015, to increase the principal by an additional
$200,000. The entire $1,700,000 has been funded by
December 31, 2015.
The August 2015 Debentures contain the following significant
terms:
The debentures all mature in one year from the date of each
individual closing.
All amounts are convertible at any time, in whole or in part, at
the option of the holders into shares of the Company’s common
stock at a fixed conversion price. The conversion price is the
lower of (a) $0.75, or (b) a 49% discount to the lowest
daily VWAP (as reported by Bloomberg) of the Common Stock during
the 30 trading days prior to the conversion date. The Fixed
Conversion Price is subject to adjustment for stock splits,
combinations or similar events. If the Company makes any subsequent
equity sales (subject to certain exceptions), under which an
effective price per share is lower than the Fixed Conversion Price,
then the conversion price will be reset to equal such price. The
Company may prepay the Debentures in cash, prompting a 30% premium
or, subject to certain conditions, in shares of common stock valued
at 51% of the lowest volume weighted average price of the common
stock of the Company for the 30 prior trading days. The premium
will be recognized at such time as the Company may choose to prepay
the Debentures.
In connection with each of the purchase agreements, the Company
entered into a registration rights agreement with the respective
Investors pursuant to which the Company agreed to file a
registration statement for the resale of the shares of common stock
issuable upon conversion of, or payable as principal and interest
on, the respective debentures, within 45 days of the initial
closing date under each agreement, and to have such registration
statements declared effective within 120 days of the initial
closing dates of each purchase agreement. The pre-effective
registration statement was filed with the SEC on October 16,
2015.
The conversion feature of the August 2015 Debenture meets the
definition of a derivative and due to the reset provision to occur
upon subsequent sales of securities at a price lower than the fixed
conversion price, requires bifurcation and is accounted for as a
derivative liability. The derivatives related to all closings on
the August 2015 debentures were initially recognized at estimated
fair values of approximately $11,205,000 and created a discount on
the Debentures that will be amortized over the life of the
Debentures using the effective interest rate method. The fair value
of the embedded derivative is measured and recognized at fair value
each subsequent reporting period and the changes in fair value for
all derivatives for the years ended December 31, 2015 and 2014
of approximately $9,088,000 and $1,806,000, respectively are
recognized in the Statement of Operations as Change in fair value
of derivative liability. For the year ended December 31, 2014,
and the interim periods through September 30, 2015, the
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures based on
weighted probabilities of assumptions used in the Black Scholes
pricing model. The key valuation assumptions used consists, in
part, of the price of the Company’s common stock, ranging
from $8.81 down to $0.05; a risk free interest rate ranging from
0.41% to 0.12% and expected volatility of the Company’s
common stock, ranging from 196.78% to 106.38%, and the various
estimated reset exercise prices weighted by probability.
As of December 31, 2015, and for new issuances of convertible
debentures during the fourth quarter of fiscal 2015, the Company
estimated the fair value of the conversion feature derivatives
embedded in the convertible debentures based on a Monte Carlo
Simulation model (“MCS”). The MCS model was used to
simulate the stock price of the Company from the valuation date
through to the maturity date of the related debenture and to better
estimate the fair value of the derivative liability due to the
complex nature of the convertible debentures and embedded
instruments. Management believes that the use of the MCS model
compared to the black Scholes model as previously used would
provide a better estimate of the fair value of these instruments.
Beginning in the fourth quarter of 2015, using the MCS model, the
Company valued these embedded derivatives using a
“with-and-without method,” where the value of the
Convertible Debentures including the embedded derivatives, is
defined as the “with”, and the value of the Convertible
Debentures excluding the embedded derivatives, is defined as the
“without.” This method estimates the value of the
embedded derivatives by observing the difference between the value
of the Convertible Debentures with the embedded derivatives and the
value of the Convertible Debentures without the embedded
derivatives. The Company believes the “with-and-without
method” results in a measurement that is more representative
of the fair value of the embedded derivatives.
For each simulation path, the Company used the Geometric Brownian
Motion (“GBM”) model to determine future stock prices
at the maturity date. The inputs utilized in the application of the
GBM model included a starting stock price ranging from $0.03 to
$0.10, an expected term of each debenture remaining from the
valuation date to maturity ranging from .24 years to
1.04 years, an estimated volatility of ranging from 193% to
219%, and a risk-free rate ranging from .20% to .70%. See
Note 2 Fair value of financial instruments for additional
information on the fair value and gains or losses on the embedded
derivative.
This derivative feature also results in a debt discount for the
initial fair value recognized for the derivative. The debt discount
also includes the fair value of the warrants issued with the
convertible debentures. This debt discount is amortized as
“other expense” over the life of the convertible
debenture, or until conversion if earlier, which amounted to
approximately $11,692,000 for all the debentures issued in the year
ended December 31, 2015 and $676,000 for the same period of
2014. Additionally, the current year closings to convertible
debentures resulted in the calculated fair value of the debt being
greater than the face amounts of the debt by approximately
$9,201,000, with this excess amount being immediately expensed as
Financing costs.
The Debenture entered into with the second Investor on
August 20, 2015 included a warrant instrument granting the
Investor the right to purchase shares of common stock of the
Company equal to the principal amount of the applicable Debenture
divided by a price equal to 120% of the last reported closing price
of the Common stock on the applicable closing date of the
Debenture, with a three year term. During the three months ending
September 30, 2015, there were approximately 34,040,000
warrants issued relating to the August 20, 2015 debentures,
with a fair value of approximately $1,250,000, calculated with the
Black Sholes Merton model, with key valuation assumptions used that
consist of the price of the Company’s stock at settlement
date, a risk free interest rate based on the average yield of a 3
year Treasury note and expected volatility of the Company’s
common stock all as of the measurement date. There were no
conversions of the August 2015 Debentures during the year
ended December 31, 2015.
Entry into Security Agreement
In connection with entry into the August 20 Purchase Agreement
and August 14 Purchase Agreement, the Investors and the
Company entered into a Security Agreement, dated August 21,
2015, securing the amounts underlying the August 14 Debentures
and the August 20 Debentures. The Security Agreement grants a
security interest in all assets and personal property of the
Company, subject to certain excluded real property assets. The
security interests under the Security Agreement terminated
following the date that the registration statement registering the
shares underlying the Convertible Debentures was declared
effective, which occurred on December 15, 2015.
July 2015 Debenture
On July 10, 2015, another accredited Investor and affiliate of
the July 2014 Investor (the “July 2015
Investor”) purchased a separate Convertible Debenture (the
“July 2015 Debenture”) in the aggregate principal
amount of $500,000, that closed in five weekly tranches between
July 10 and August 15, 2015. The July 2015 Debenture
is in substantially the same form as the August 14 Debentures,
and does not include issuance of warrants. As such, the conversion
feature was also determined to require bifurcation and derivative
accounting. All amounts related to the July 2015 derivative
liability are included in amounts disclosed above for the
August 2015 debentures.
On October 14, 2015, the August 14 Investor assigned the
right to purchase August 14 Debentures in the principal amount
of $100,000 to the July 2015 Investor and the July 2015
Investor purchased such August 15 Debentures on the same
day.
October 2015 Debentures
On October 14, 2015, the Company issued seven debentures in
the aggregate of $2,000,000 to a service provider (the
“October 2015 Investor”) as consideration for
services previously rendered to the Company on the same terms as
the August 14 Debentures and August 14 Purchase Agreement
(the “October 2015 Debentures” and
“October 2015 Purchase Agreement”, respectively)
except that the October 2015 Purchase Agreement does not
provide for registration rights to the October 2015 Investor
with regard to the shares underlying the October 2015
Debentures. The service provider has agreed with the Company not to
convert the October 2015 Debentures for any amount in excess
of fees payable for services previously rendered to the Company at
the time of conversion. To the extent that the sale of shares
underlying the October 2015 Debentures do not satisfy
outstanding amounts payable to the service provider, such amounts
will remain payable to the service provider by the Company.
December 28, 2015 Amendment and Restriction
Agreement
On December 28, 2015, the Company, the August 14 Investor
and the August 20 Investor entered into a Debenture Amendment
and Restriction Agreement (the “Agreement”), pursuant
to which (1) the August 14 Investor agreed to be restricted
from converting any of its convertible debentures into common stock
until February 21, 2016, subject to certain limitations set
forth below (the “Restriction”) and (2) the
August 14 Investor agreed to assign, as of the effective date
of the Agreement approximately $390,000 of its convertible
debentures to the August 20 Investor in exchange for the
amount of principal outstanding under such debenture plus a premium
in cash from the August 20 Investor (the “Assigned
Debentures”). The accrued and unpaid interest under the
Assigned Debentures remained payable by the Company to the
August 14 Investor.
The August 14 Investor also agreed to amend the terms of each
of its debentures (other than the debentures that were assigned)
such that the debenture is convertible at a 40% discount to the
lowest trading price of the Company’s common stock during the
30 consecutive prior trading days rather than at a 49% discount to
the lowest ‘volume weighted-average price’ during the
30 consecutive prior trading days. This was not considered to be a
modification of the terms of the conversion feature, requiring
evaluation of |
