Promissory notes, including related parties and debenture payable | 12 Months Ended |
Dec. 31, 2013 |
Debt Disclosure [Abstract] | ' |
Promissory notes, including related parties and debenture payable | ' |
5. Promissory notes, including related parties and debenture payable: |
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Promissory notes, including related parties at December 31, 2013 and December 31, 2012, consist of the following: |
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| 2013 | | 2012 | |
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Promissory notes payable: | | | | | | |
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Various, including related parties of $173,113 (2013) and $333,363 (2012); interest rate ranging from 8% to 10% [A] | $ | 192,213 | | $ | 351,563 | |
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Notes payable; interest rates ranging from 9% to 15%; interest payable quarterly; the notes are unsecured, matured on February 28, 2008; currently in default and past due [B] | | 2,090,719 | | | 2,090,719 | |
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| $ | 2,282,932 | | $ | 2,442,282 | |
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. [A] Pursuant to a November 4, 2011 Board of director resolution, these notes are convertible at conversion rates, determined at the discretion of the board of directors. During the year ended December 31, 2013 the Company issued notes of $26,500 (including related parties of $5,200), made payments of $147,450 (including $140,450 to related parties), converted $10,400 to shares of common stock and reclassed $28,000 to convertible notes on the balance sheet herein. |
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| [B] | These notes payable (the “Promissory Notes”) originally became due on February 28, 2007. The Company renewed $283,000 of the Promissory Notes on the same terms and conditions as previously existed. In April 2007 the Company, through a financial advisor, restructured $1,825,000 of the Promissory Notes (the “Restructured Notes”). The Company has accrued an expense of $36,500 to compensate the financial advisor 2% of the Restructured Notes as well as having issued 150,000 shares of common stock to the financial advisor. The Restructured Notes carry a stated interest rate of 15% (a default rate of 20%) and matured on February 28, 2008. The Company has not paid the interest due since June 2007, and no principal payments on the Promissory Notes have been made since 2008 and accordingly, they are in default. Accrued interest on these notes total $2,804,686 and $2,384,686 as of December 31, 2013 and 2012, respectively is included in accrued expenses on the consolidated balance sheets. | | | | |
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The chairman of the board of the Company has personally guaranteed up to $1 million of the Restructured Notes and two other non-related individuals each guaranteed $500,000 of the Restructured Notes. In consideration of their guarantees the Company granted warrants to purchase a total of 1,600,000 shares of common stock of the Company at an exercise price of $0.50 per share. The warrants were valued at $715,200 using the Black-Scholes option pricing model and were amortized over the one-year term of the Restructured Notes. The warrants expired in March 2010. |
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In January 2008, the Company and the three guarantors received a complaint filed by the financial advisor (acting as agent for the holders of the Restructured Notes) and the holders of the Restructured Notes. The claim is seeking $1,946,250 plus per diem interest beginning January 22, 2008 at the rate of twenty percent (20%) per annum plus $37,000 due the financial advisor for unpaid fees. The court has ruled in favor of a motion for summary judgment filed by certain of the plaintiffs and a judgment was entered on August 18, 2009 in the total amount of $2,487,250 in principal and interest on the notes, $40,920 in related claims and $124,972 in attorney’s fees and expenses. The Company is not aware of any payments being made by any of the guarantors and accordingly, the Company includes these liabilities on the December 31, 2013 and 2012 consolidated balance sheets in promissory notes payable and accrued expenses. |
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Debenture payable: |
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2012 Notes |
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During 2012, the Company issued three convertible notes aggregating $105,000 (“2012 Asher Notes”) to Asher Enterprises, Inc. (“Asher”). Among other terms the 2012 Asher Notes are due nine months from their issuance date, bear interest at 8% per annum, are payable in cash or shares at the Conversion Price as defined herewith, and are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Company’s common stock for the ten trading days immediately preceding the date of conversion. Upon the occurrence of an event of default, as defined in the Note, the Company is required to pay interest at 22% per annum and the holders may at their option declare the 2012 Notes, together with accrued and unpaid interest, to be immediately due and payable. In addition, the 2012 Asher Notes provides for adjustments for dividends payable other than is shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company. During the year ended December 31, 2012, Asher converted $11,000 of principal of the 2012 Asher Notes and the balance of the 2012 Asher Notes as of December 31, 2012 was $94,000. During 2013, the Company incurred an event of default on a portion of the 2012 Asher Notes as the Company did not maintain sufficient authorized shares reserved for issuance under the 2012 Asher Notes. The default resulted in the Company increasing the 2012 Asher Notes by $40,900 (the “Default Principal”). During the year ended December 31, 2013, the holder of the Asher Notes converted an aggregate of $134,900 of principal (including the Default Principal) and $5,400 of accrued and unpaid interest into 179,342,389 shares of common stock. As of December 31, 2013,no amounts remain outstanding on the 2012 Asher Notes. |
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On October 9, 2012, the Company issued a $5,000 convertible promissory note to Carebourn Capital LP (“Carebourn”). The Carebourn note is due on demand, bears interest at 8% per annum and has a conversion feature similar to the 2012 Asher Notes. As of December 31, 2013, the outstanding balance of the Carebourn note is $5,000, which is past due. |
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On October 17, 2012, the Company issued a $25,000 convertible promissory note to Continental Equities, LLC (“Continental”). On March 26, 2013, Carebourn acquired the Continental note from Continental. During the year ended December 31, 2013, the Company issued 18,737,288 shares of common stock to Carebourn Partners, LLC. (“Carebourn Partners”) and Carebourn Partners’ assignee upon the conversion of the acquired Continental note. No amounts remain open as of December 31, 2013. |
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On October 24 and 29, 2012, the Company issued convertible promissory notes of $9,000 and $16,000 (“the 2012 Gel Notes”) respectively, to GEL Properties, LLC (“Gel”) The conversion price for the 2012 Gel Notes is equal to 50% of the lowest closing bid price of the Common Stock as reported on the exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future with a floor of $0.0001 per share, for any of the five trading days including the day upon which a Notice of Conversion is received by the Company. If the shares have not been delivered within 3 business days, the Notice of Conversion may be rescinded. Accrued but unpaid interest shall be subject to conversion. No fractional shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share. During the year ended December 31, 2013, the Company issued 23,901,776 shares of common stock upon the conversion of the 2012 Gel Notes. |
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On November 1, 2012, the Company issued a convertible promissory note in the amount of $269,858 in exchange for previously accrued legal fees. The note bears interest at 8% per annum and is convertible at a conversion price for each share of common stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Company’s common stock for the ten trading days immediately preceding the date of conversion. During the year ended December 31, 2013, the Company issued 419,203,501 shares of common stock upon the conversion of $103,188 of the Note. As of December 31, 2013, the balance of the note is $166,670. |
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On December 24, 2012, the Company issued a $50,000 convertible promissory note to Flux Carbon Starter Fund, LLC (“Flux”). The note matured on June 30, 2013 and bears interest at 12% per annum. The Flux note has a conversion price equal to 50% of the lowest volume weighted average closing bid price for the 90 days preceding conversion. On June 24, 2013, Flux sold and assigned the note to 112359 Factor Fund, LLC (“Factor Fund”). During the year ended December 31, 2013, the Company issued 82,923,686 shares of common stock to Factor Fund and Factor Funds transferee upon the conversion of $50,000 of principal and $4,149 of accrued and unpaid interest. No amounts remain open as of December 31, 2013. |
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The Company received net proceeds of $193,500 for the 2012 Notes, after debt issuance costs of $16,500. These debt issuance costs have been amortized over the earlier of the terms of the Note or any redemptions and accordingly $5,757 and $10,743 has been expensed as debt issuance costs (included in interest expense) for the years ended December 31, 2012 and 2013, respectively. |
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2013 Notes |
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On March 14, 2013 the Company issued a convertible promissory note for $46,000 to an accredited investor (the “March 2013 Note”). The March 2013 Note, is due eight months from issuance and bears an interest rate of 8% per annum, and in the case of an event of default increases to 12% per annum (“the Default Rate”). The conversion feature of the 2013 Note is a 50% discount to the average of the three lowest day closing bid prices for the ten trading days prior to conversion. The Company received net proceeds of $41,400, after debt issuance costs of $4,600. These debt issuance costs were amortized over the earlier of the terms of the Note or any redemptions and accordingly $4,600 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2013. The Mach 2013 Note matured November 14, 2014, is in default, and the Default Rate was effective at that date. The balance of the March 2013 Note is $46,000 as of December 31, 2013. |
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The following notes issued in 2013, bear interest at 8% per annum and other than as described below have a conversion feature similar to the 2012 Asher Notes. The notes issued in 2013 are referred to as the 2013 Notes. |
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On April 8, 2013, the Company issued convertible a convertible promissory note to Schaper for $5,000. The outstanding principal balance on this note is $5,000 as of December 31, 2013. |
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On April 26, 2013, the Company issued a convertible promissory note for $50,000 to an unaffiliated accredited investor. The outstanding principal balance on this note is $50,000 as of December 31, 2013. |
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On June 3, 2013, the Company issued a $15,000 convertible promissory note to Gel, under the same terms and conditions as the 2012 Gel Notes. During the year ended December 31, 2013, the Company issued 35,665,775 shares of common stock in full satisfaction of this note. |
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On June 6, 2013 ($12,000), July 12, 2013 ($12,500) and August 9, 2013 ($6,250) the Company issued convertible promissory notes to Carebourn Partners. Each of these notes remain unpaid as of December 31, 2013. |
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On August 9, 2013, the Company issued a $6,250 note to Linrick Industries, LLC. The outstanding principal balance on this note is $6,250 as of December 31, 2013. |
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On August 22, 2013, the Company issued a $6,000 convertible promissory note to Schaper. The outstanding principal balance on this note is $6,000 as of December 31, 2013. |
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On September 3, 2013, the Company issued a $32,500 convertible promissory note to Asher. The outstanding principal balance on this note is $32,500 as of December 31, 2013. |
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On October 7, 2013, the Company issued a $3,500 convertible note to AU Funding, LLC in exchange for the cancellation of accounts payable of $3,500. The outstanding principal balance on this note is $3,500 as of December 31, 2013. |
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On October 7, 2013, the Company issued a $5,000 convertible note to Corizona Mining Partners, LLC in exchange for the cancellation of $5,000 of accounts payable. The outstanding principal balance on this note is $5,000 as of December 31, 2013. |
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On October 18, 2013, the Company issued a $10,000 and $20,000 convertible note to Gel, under the same terms and conditions as the 2012 Gel Notes. During the year ended December 31, 2013, the Company issued 228,900,000 shares of common stock in satisfaction of $23,145 of these two notes. The outstanding principal balance on the notes is $6,855 as of December 31, 2013. |
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On November 19, 2013, the Company issued a $16,500 convertible note to Carebourn Capital L.P. The outstanding principal balance on this note is $16,500 as of December 31, 2013. |
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On November 22, 2013, the Company issued a $35,000 and $30,000 convertible note to Mr. Fong and Mr. Hollander, respectively, for the cancellation of accrued and unpaid fees. The outstanding principal balances of the notes are $35,000 and $30,000 respectively, as of December 31, 2013. |
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On December 31, 2013, the Company issued a $20,000 convertible note to Gel, under the same terms and conditions as the 2012 Gel Notes. The outstanding principal balance on this note is $20,000 as of December 31, 2013. |
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The Company has determined that the conversion features of the 2012 and 2013 Notes represent embedded derivatives since the Notes are convertible into a variable number of shares upon conversion. Accordingly, the Notes are not considered to be conventional debt under EITF 00-19 and the embedded conversion features must be bifurcated from the debt hosts and accounted for as derivative liabilities. Accordingly, the fair value of these derivative instruments have been recorded as liabilities on the consolidated balance sheet with the corresponding amounts recorded as a discounts to the Notes. Such discounts will be accreted from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liabilities for derivative contracts will be recorded to other income or expenses in the consolidated statement of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. |
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The embedded conversion features included in the 2012 Notes resulted in initial debt discounts of $479,858 and an initial loss on the valuation of derivative liabilities of $27,154 for an initial derivative liability balance of $507,012. During the year ended December 31, 2012, Asher converted $11,000 of the 2012 Notes and the Company reduced the derivative liability by $8,761 for the conversion. As of December 31, 2012, the Company revalued the balance of $468,857 of the 2012 Notes and based on their fair value of $489,408, adjusted the derivative liability balance by $8,845 for the 2012 Notes. During the year ended December 31, 2013, noteholders converted in the aggregate $338,088 of the 2012 Notes and the Company reduced the derivative liability by $318,814 for the conversions. As of December 31, 2013 the Company revalued the balance of $171,670 of the 2012 Notes and based on their fair value of $172,604, increased the derivative liability balance by $1,010 for the 2012 Notes. |
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The embedded conversion features included in the 2013 Notes resulted in an initial debt discount of $397,000 and an initial loss on the valuation of derivative liabilities of $27,132 for a derivative liability initial balance of $424,132. During the year ended December 31, 2013, noteholders converted in the aggregate $47,745 of the 2013 Notes and the Company reduced the derivative liability by $47,745 for the conversions. As of December 31, 2013 the Company revalued the balance of $349,255 of the 2013 Notes and based on their fair value of $363,260, decreased the derivative liability balance by $13,127 for the 2013 Notes. |
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The fair value of the 2012 and 2013 Notes as of their dates of issuance, settlement and in their entirety as of December 31, 2013 was calculated utilizing the following assumptions: |
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| | Assumed Conversion Price at Issuance | | | | |
Issuance Date | | | Volatility Percentage | Risk-free Interest | | |
| Initial Term | | | Rate | | |
6/8/12 | 9 months | $0.01 | 380% | 0.09 | | |
6/25/12 | 9 months | $0.01 | 341% | 0.09 | | |
8/23/12 | 9 months | $0.05 | 295% | 0.09 | | |
10/9/12 | 9 months | $0.01 | 292% | 0.16 | | |
10/17/12 | 12 months | $0.00 | 295% | 0.17 | | |
10/24/12 | 12 months | $0.00 | 305% | 0.18 | | |
10/29/12 | 12 months | $0.00 | 306% | 0.18 | | |
11/1/12 | 6 months | $0.00 | 297% | 0.1 | | |
12/24/12 | 6 months | $0.00 | 303% | 0.12 | | |
3/14/13 | 9 months | $0.00 | 338% | 0.12 | | |
4/8/13 | 6 months | $0.00 | 297% | 0.1 | | |
4/26/13 | 12 months | $0.00 | 308% | 0.11 | | |
6/3/13 | 2 years | $0.00 | 320% | 0.13 | | |
6/6/13 | 9 months | $0.00 | 338% | 0.11 | | |
7/12/13 | 9 months | $0.00 | 236% | 0.12 | | |
8/9/13 | 9 months | $0.00 | 238% | 0.11 | | |
8/22/13 | 9 months | $0.00 | 245% | 0.13 | | |
9/3/13 | 9 months | $0.00 | 236% | 0.14 | | |
10/7/13 | 9 months | $0.00 | 267% | 0.1 | | |
10/18/13 | 9 months | $0.00 | 274% | 0.14 | | |
11/19/13 | 9 months | $0.00 | 292% | 0.1 | | |
11/22/13 | 9 months | $0.00 | 294% | 0.1 | | |
12/31/13 | 1-8 months | $0.00 | 327% | .02-.10 | | |
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The inputs used to estimate the fair value of the derivative liabilities are considered to be level 2 inputs within the fair value hierarchy. |
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A summary of the derivative liabilities related to convertible notes as of December 31, 2012 and 2013 is as follows: |
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| Derivative | | | Fair value change- year ended 12/31/12 | Derivative Liability Balance 12/31/12 | |
Fair Value | Liability Balance | Initial Derivative Liability | Redeemed convertible notes | | | |
| 12/31/11 | | | | | |
2011 Notes | $46,667 | - | ($44,890) | ($1,777) | $ - | |
2012 Notes | - | $507,012 | -8,761 | (8,845) | 489,406 | |
Total | $46,667 | $507,012 | ($53,651) | ($10,622) | $489,406 | |
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| Derivative | | | Fair value change- year ended 12/31/13 | Derivative Liability Balance 12/31/13 | |
| Liability Balance | Initial Derivative Liability | Redeemed convertible notes | | | |
| 12/31/12 | | | | | |
Fair Value | | | | | | |
2012 Notes | $489,406 | - | ($317,814) | $1,010 | $172,602 | |
2013 Notes | - | $424,132 | (47,745) | -13,127 | 363,260 | |
Total | $489,406 | $424,132* | ($365,559) | $(12,117)* | $535,862 | |
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* $68,032 included in the initial derivative liability is included in derivative liability expense of $55,913 for the year ended December 31, 2013. |
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A summary of debentures payable as of December 31, 2012 and December 31, 2013 is as follows: |
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| Issuance of new convertible notes | Amortization of discount on convertible | Debenture conversions year ended 12/31/12 | | |
| | Notes | | | |
Balances | | | | Balances | |
12/31/11 | | | | 12/31/12 | |
2011 Notes, face value | $ 25,000 | $ - | $ - | $ (25,000) | $ - | |
2012 Notes, face value | - | 479,858 | - | (11,000) | 468,858 | |
Note discount | -6,297 | -479,858 | 92,036 | - | (394,119) | |
Total | $ 18,703 | $ - | $ 92,036 | $ (36,000) | $ 74,739 | |
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| Increase to face value due to default | | | | |
| | Issuance of new convertible notes | Amortization of discount on convertible | Debenture conversions year ended 12/31/13 | |
| | | Notes | | |
Balances | | | | | Balances |
12/31/12 | | | | | 12/31/13 |
2012 Notes, face value | $ 468,858 | $40,900 | $ - | $ - | ($338,088) | $171,670 |
2013 Notes, face value | - | - | 397,000 | - | (47,745) | 349,255 |
Note discount | -394,119 | - | -397,000 | 603,276 | - | (187,843) |
Total | $ 74,739 | $40,900 | $ - | $603,276 | ($385,833) | $333,082 |
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