| NOTE 5 - CONVERTIBLE DEBT | NOTE
5 CONVERTIBLE DEBT The
following is a summary of convertible debentures outstanding as of June 30, 2015:
Face Value Initial Discount Accumulated Amortization Debt Extinguishment Carrying Value
Convertible Promissory Notes $ 52,500 $ (14,629 ) $ 14,474 $ $ 52,345
Series A Debentures 154,733 (69,219 ) 69,219 154,733
Series B Debentures 161,932 (69,135 ) 69,135 161,932
Series C Debentures 350,833 350,833
Series D Debentures 763,199 (34,650 ) 29,033 757,582
Series E Debentures 166,750 (145,000 ) 145,000 166,750
Series F Debentures 339,000 (271,206 ) 233,891 301,685
Total Debentures $ 1,936,447 $ (589,210 ) $ 546,278 $ $ 1,893,515
Face Value Initial Discount Accumulated Amortization Stock Settled Debt Obligation Carrying Value
Convertible Debenture $ 88,586 $ (66,423 ) $ 26,822 $ 50,560 $ 99,545
Total $ 2,077,533 $ (670,262 ) $ 587,574 $ 50,560 $ 2,045,405 The
following is a summary of convertible debentures outstanding as of December 31, 2014:
Face Value Initial Discount Amortization Debt Extinguishment Carrying Value
Convertible Promissory Notes $ 52,500 $ (14,629 ) $ 7,218 $ $ 45,089
Series A Debentures 167,540 (69,219 ) 69,219 167,540
Series B Debentures 161,932 (69,135 ) 69,135 161,932
Series C Debentures 350,833 (72,869 ) 72,869 350,833
Series D Debentures 763,199 (267,285 ) 9,992 237,227 743,133
Series E Debentures 145,000 (145,000 ) 33,725 33,725
Total Debentures $ 1,588,504 $ (623,508 ) $ 182,071 $ 310,096 $ 1,457,163
Face Value Initial Discount Amortization Stock Settled Debt Obligation Carrying Value
Convertible Debenture $ 113,128 $ (66,423 ) $ 3,336 $ 65,422 $ 115,463
Total $ 1,754,132 $ (704,560 ) $ 192,625 $ 375,518 $ 1,617,715 January-March 2015 Unsecured Redeemable
Debentures (Series F) In
2015, the Company borrowed from accredited investors and related parties (the Debenture Holders) $319,000 ($130,000
was provided by an officer and board member of the Company) pursuant to an Unsecured Redeemable Debenture Series F (the Series
F Debentures) that required payment of interest at the end of the three-month Debenture term in the
amount of 10% of the principal amount. The holders of the Series F Debentures also received warrants to acquire 319,000 shares
of common stock for an exercise price of $0.15 per share, exercisable over three years. In addition, the Company will issue the
Debenture Holders warrants (the 2015 Warrant) to purchase 319,000 shares of the Companys common stock at a
price per 2015 Warrant Share to be determined. The Company incurred no commission costs in connection with these transactions. The
Series F Debentures are convertible into common stock at $.03 per share as to principal plus accrued interest upon an event of
default. The
Company allocated the face value of the Series F Debentures to the warrants and the debentures based on their relative fair values,
allocated $2,427 to the warrants, and determined that there were aggregate beneficial conversion features of $197,573. The fair
value of the warrants was determined using the Black-Scholes-Merton (BSM) valuation model and the following assumptions:
volatility 43.95% to 49.60%, risk free rate 0.83% to 1.13 %, dividend rate 0.00%. The amount allocated
to the warrants and beneficial conversion features totaling $200,000 was recorded as a discount against the Series F Debentures,
with offsetting entry to additional paid-in capital. The discounts are being amortized into interest expense over the term
of the Series F Debentures. During
the three and six months ended June 30, 2015, the Company recorded amortization of the discount of $149,736 and $233,891, respectively
and interest expense of $26,283 and $28,387, respectively. During the three months ended June 30, 2015, the Company defaulted on
some of the Series F debentures and as a result, reclassed $20,000 of accrued interest as of the date of maturity to the face amount
of the debenture and then began accruing daily interest on the new face amount of $339,000 at a default rate of 18% per annum.
As of June 30, 2015, the carrying value of the Series F Debentures was $301,685, net of unamortized discounts of $37,315. During
the three months ended June 30, 2015, $212,000 of the Series F Debentures matured without payment creating an event of default.
Consequently, aggregate principal amount of these debentures plus accrued interest is convertible into Common Stock at .03 per
share. As of June 30, 2015, the Debentures were convertible into an aggregate of 7,066,667 shares. At this time, the Company is
in discussion with the Debenture Holders and no notices of conversion of these debentures have been received as of August 14, 2015. November and December 2014 Unsecured
Redeemable Debentures (Series E) In
October and November 2014, the Company borrowed from accredited investors and a related party (the Debenture Holders)
$145,000 pursuant to an Unsecured Redeemable Debenture Series E (the Series E Debentures) that required payment
of interest at the end of the six-month Debenture term in the amount of 15% of the principal amount. The holders
of the Series E Debentures also received warrants to acquire 145,000 shares of common stock for an exercise price of $0.15 per
share, exercisable over four years equal. In addition, the Company will issue the Debenture Holders warrants (the 2015 Warrant)
to purchase 145,000 shares of the Companys common stock at a price per 2015 Warrant Share to be determined. The Company
incurred no commission costs in connection with these transactions. The Series E Debentures are convertible into common stock at
$.03 per share as to principal plus accrued interest upon an event of default. The
Company allocated the face value of the Series E Debentures to the warrants and the debentures based on their relative fair values,
allocated $7,945 to the warrants, and determined that there were aggregate beneficial conversion features of $137,055. The fair
value of the warrants was determined using the BSM valuation model and the following assumptions: volatility 42.31% to
44.28%, risk free rate 1.63% to 1.75% %, dividend rate 0.00%. The amount allocated to the warrants and beneficial
conversion features totaling $145,000 was recorded as a discount against the Series E Debentures, with offsetting entry to additional
paid-in capital. The discounts are being amortized into interest expense over the term of the Series E Debentures. During
the three and six months ended June 30, 2015, the Company recorded amortization of the discount of $39,243 and $145,000, respectively
and interest expense of $17,291 and $22,654, respectively. During the three months ended June 30, 2015, the Company defaulted in
redeeming the Series E debentures and as a result, reclassed $21,750 of accrued interest as of the date of maturity to the face
amount of the debenture and then began accruing daily interest on the new face amount of $166,750 at a default rate of 18% per
annum. As of June 30, 2015, the carrying value of the Series E Debentures was $166,750 and the discount has been fully amortized. During
the three months ended June 30, 2015, all of the Series E, Debentures matured without payment creating an event of default. Consequently,
aggregate principal amount of these debentures plus accrued interest is convertible into Common Stock at .03 per share. As of June
30, 2015, the Debentures were convertible into an aggregate of 5,558,333 shares. At this time, the Company is in discussion with
the Debenture Holders, the majority of which are related parties, and no notices of conversion of these debentures have been received
as of August 14, 2015. July to November 2014 Convertible
Debentures (Series D) During
the months of July through November 2014, the Company issued Series D Convertible Debentures (the Series D Debentures)
with an aggregate face value of $763,199 in exchange for $176,718 of cash plus accrued interest ($35,000 was provided by the CEO
and CFO), in settlement of a Series A Convertible Debenture with outstanding principal and accrued interest of $26,477, and in
settlement of Series B Convertible Debentures with aggregate outstanding principal and accrued interest of $560,003, of which $287,159
represented a conversion of notes payable-related parties to the Founders. The Series D Debentures accrue interest at an annual
rate of 12%, mature in July through November 2015, and are convertible into the Companys common stock at a conversion rate
of $0.165 per share. The holders of the Series D Debentures also received warrants to acquire 3,332,000 shares of common stock
for an exercise price of $0.20 per share, exercisable over five years. The
Company allocated the face value of the Series D Debentures to the warrants and the debentures based on their relative fair values,
allocated $145,334 to the warrants, and determined that there were aggregate beneficial conversion features of $126,543. The fair
value of the warrants was determined using the BSM valuation model and the following assumptions: volatility 43.63% to
44.28%, risk free rate 1.60% to 1.69% %, dividend rate 0.00%. The amount allocated to the warrants and beneficial
conversion features totaling $271,877 was recorded as a discount against the Series D Debentures, with offsetting entry to additional
paid-in capital. A portion of the discount resulting in $237,227 was fully expensed upon execution of the new debentures as
debt extinguishment costs and the remaining amount of $34,650 is being amortized into interest expense over the term of the Series
D Debentures. During
the three and six months ended June 30, 2015, the Company recorded amortization of the discount related to the Series D Debentures
of $8,244 and $19,040, respectively and interest expense of $22,861 and $45,580, respectively. As of June 30, 2015, the carrying
value of the Series D Debentures was $757,582, net of unamortized discounts of $5,617. August 2014 and November Convertible
Debentures (Series C) In
August 2014, the Company issued Series C Convertible Debentures (the Series C Debentures) with an aggregate face
value of $350,833 in exchange for the cancellation of Series B Convertible Debentures with outstanding principal and accrued interest
of $350,833. The Series C Debentures accrue interest at an annual rate of 10%, mature in July and November 2015, and are convertible
into the Companys Common Stock at a conversion rate of $0.20 per share. The holders of the Series C Debentures also received
warrants to acquire 1,500,000 shares of Common Stock for an exercise price of $0.20 per share, exercisable over five years. The
Company allocated the face value of the Series C Debentures to the warrants and the debentures based on their relative fair values,
and allocated $72,869 to the warrants, which was recorded as a discount against the Series C Debentures, with offsetting entry
to additional paid-in capital. The fair value of the warrants was determined using the BSM valuation model and the following assumptions:
volatility 43.74% and 44.28%, risk free rate 1.62% and 1.67%, dividend rate 0.00%. The discount was fully
expensed upon execution of the new debentures as debt extinguishment costs. As
of June 30, 2015, the carrying value of the Series C Debentures was $350,833, interest expense for the three and six months ended
June 30, 2015 of $8,771 and $17,542 respectively was recorded and no amortization expense was recorded as it was fully expensed
in the prior period. October and November 2012 Convertible
Debentures (Series B) In
October and November 2012, the Company issued Convertible Debentures (Series B Debentures-Issuance II) with an aggregate
face value of $624,372 of which $565,372 represented a conversion of notes payable-related parties to the Founders. In 2013, two
of the founders sold a portion of their debenture totaling $141,800 of their aggregate face to third parties. The Series B Debentures-Issuance
II matured in October and November 2014, bore interest at an annual rate of 10%, and were convertible at the option of the holders
into Units, each consisting of a) one share of Common Stock and b) one warrant to purchase one share of Common Stock at $0.40 per
share (Unit). The number of Units issuable upon conversion of the Series B Debentures-Issuance II is determined by
dividing the then outstanding principal and accrued but unpaid interest by a) $0.35 if a Liquidity Event, as defined in the debenture
agreements, occurs within six months of the closing of the offering of the Series B Debentures-Issuance II, or b) $0.32 if a Liquidity
Event does not occur within six months of the closing of the offering of the Series B Debentures-Issuance II. In
October and November 2014, all but one of the holders of the Series B Debentures-Issuance II exchanged the debentures with an aggregate
face value of $464,440 and accrued interest of $51,317 for either a Series C or D Debenture with an aggregate face value of $513,757.
The Company recorded a loss on early extinguishment of debt of $212,261, primarily related to fair value of the warrants in relation
to the debt (relative fair value) on the debt exchange transaction. The Company has defaulted on its obligation to pay the remaining
principal amount of a debenture due October and November 2014. The total amount due on this debenture, including interest, is $188,257
and is currently accruing interest at a default rate of 12% per annum. The Company has negotiated restructured terms with the majority
of the debenture holders and is attempting to complete the formal restructuring of this debt obligation. As
of June 30, 2015, the net carrying value of the outstanding Series B Debentures-Issuance II totaled $161,932 and no unamortized
discount remains therefore no amortization expense was recorded for the three and six months ended June 30, 2015. As of June 30,
2014, the net carrying value of the outstanding Series B Debentures-Issuance II totaled $572,536 and $31,750 and $63,501 of
amortization expense was recorded for the three and six months ended June 30, 2014. During the three and six months ended June
30, 2014, interest expense of $4,791 and $9,636, respectively was recorded on the Series B Debentures-Issuance II. During the three
and six months ended June 30, 2014, we recorded interest expense on the Series B Debentures-Issuance II of $4,048 and $8,097, respectively.
As of June 30, 2015 no unamortized debt issuance costs related to the Series B Debentures-Issuance II remains therefore no amortization
expense was recorded during the three and six months ended June 30, 2015. During the three and six months ended June 30, 2014,
$2,476 and $4,951, respectively of amortization expense was recorded related to the debt issuance costs for the Series B Debentures-Issuance
II. July 2012 Convertible Debentures
(Series A) In
July 2012, the Company issued Convertible Debentures (the Series A Debentures) with an aggregate face value of $215,300
Canadian Dollars (US$197,344 as of December June 30, 2014). The Series A Debentures matured in July 2014, bore interest at an annual
rate of 10% through July 2014 and upon default accrued interest at 12% per annum. The Series A Debentures are convertible at the
option of the holders into Units, each consisting of a) one share of Common Stock and b) one warrant to purchase one share of Common
Stock at 0.40 Canadian Dollars per share (Unit). The number of Units issuable upon conversion of the Series A Debentures
is determined by dividing the then outstanding principal and accrued but unpaid interest by a) 0.35 Canadian Dollars if a Liquidity
Event, as defined in the Debenture agreement, occurs within six months of the closing of the offering of the July Notes, or b)
0.32 Canadian Dollars if a Liquidity Event does not occur within six months of the closing of the offering of the Series A Debentures. In
July 2014, a holder of a Series A Debenture exchanged the debenture with a face value of $25,000 Canadian Dollars (US$23,360),
and accrued interest of $3,336 Canadian Dollars (US$3,117) for a Series D Convertible Debenture with a face amount of US$26,477.
The Company recorded a loss on early extinguishment of debt of US$6,728, primarily related to fair value of the warrants in relation
to the debt (relative fair value) on the debt exchange transaction. The Company has defaulted on its obligation to pay the remaining
principal amount of debentures due October and November 2014. The total amount due on these debentures, including interest is US$220,031
and is currently accruing interest at a default rate of 12% per annum. The Company has negotiated restructured terms with the majority
of the debenture holders and is attempting to complete the formal restructuring of these debt obligations. As
of June 30, 2015, the net carrying value of the outstanding Series A Debentures totaled $154,733 and no unamortized discount remains
therefore no amortization expense was recorded for the three and six months ended June 30, 2015. As of June 30, 2014, the net carrying
value of the outstanding Series A Debentures totaled $193,811 and $10,599 and $21,197, respectively of amortization expense was
recorded for the three and six months ended June 30, 2014. During the three and six months ended June 30, 2015, the Company recorded
interest expense on the Series A Debentures of $5,064 and $9,706 respectively. During the three and six months ended June 30, 2014,
the Company recorded interest expense on the Series A Debentures of $4,934 and $9,817 respectively. As of June 30, 2015 no unamortized
debt issuance costs related to the Series A Debentures remains therefore no amortization expense was recorded during the three
and six months ended June 30, 2015. During the three and six months ended June 30, 2014, $6,609 and $13,217, respectively of amortization
expense was recorded related to the debt issuance costs for the Series A Debentures. November 2014 Convertible Debenture
with Peak One Opportunity Fund, L.P. In
November 2014, the Company entered into a Securities Purchase Agreement with Peak One Opportunity Fund, L.P. (Peak)
pursuant to which the Company sold to Peak for $112,500 a Convertible Debenture (the Peak Debenture) in the principal
amount of $125,000 (the Principal Amount) due on November 6, 2017 (the Maturity Date). Pursuant to
the Peak Debenture, the Company agreed to pay interest on the Principal Amount outstanding from time to time in arrears (i)
upon conversion or (ii) on the Maturity Date, at the rate of 5% per annum. The Company has the option to redeem the Peak Debenture
prior to the Maturity Date at any time or from time to time by paying the Principal Amount plus accrued interest and a redemption
premium of 20% of principal if the redemption is between 91-180 days after issuance and 40% of principal after 180 days. Beginning
91 days after the issue date, Peak may convert the principal and accrued interest (the Conversion Amount) into shares
of common stock at a conversion price for each share of common stock (the Conversion Price) equal to 65% of the lowest
closing bid price (as reported by Bloomberg LP) of common stock for the 20 trading days immediately preceding the date of conversion
of the Peak Debenture (subject to equitable adjustments resulting from any stock splits, stock dividends, recapitalizations or
similar events). The
Company paid issuance costs of $10,000 and issued 137,500 shares of restricted common ctock to cover the expenses incurred and
analysis performed by Peak in connection with the transaction. The fair value of the 137,500 shares of restricted stock of $24,750,
and $10,000 of issuance costs added to the principal, were recorded as deferred issuance costs to be amortized into interest expense
over the term of the Peak Debenture. The
Peak Debenture is convertible into a variable number of shares based upon a fixed dollar amount and therefore treated as stock
settled debt in accordance with ASC 480. On the date of issuance, the Company recorded the fair value of the financial instrument of
$66,423 as a stock settled debt obligation along with debt discount of $12,500 to be amortized into interest expense through the
maturity date. During
the three and six months ended June 30, 2015, the Company recognized $21,418 and $27,905, respectively of amortization of the discounts,
$9,429 and $12,287, respectively of amortization of deferred financing fees, and recorded interest expense of $1,558 and $3,099,
respectively. During
the three months ended June 30, 2015, Peak converted $30,000 of principal into 1,373,625 shares of common stock. Upon conversion
the Company recorded the fair value of the stock settled debt on the dates of conversion, totaling $45,816, to additional paid
in capital. The deferred financing costs were accelerated to interest expense through the date of conversion, which is included
in the $21,418 noted above. The Company adjusted the remaining stock settled debt obligation to fair value as of June 30, 2015,
totaling $50,560, and recognized derivative expense of $454 for the change in fair value for the three months ended June 30, 2015. As
of June 30, 2015, the Peak Debenture is carried at $99,545, net of unamortized discount of $39,601. July 2014 Convertible Promissory
Notes In
July 2014, the Company issued Convertible Promissory Notes with an aggregate face value of $52,500 for cash ($27,500 was provided
by the CEO and CFO and two board members). The Convertible Promissory Notes accrue interest at an annual rate of 10%, mature in
July 2015, and are convertible into the Companys common stock at a conversion rate of $0.165 per share. The holders of the
Convertible Promissory Notes also received warrants to acquire 318,182 shares of common stock for an exercise price of $0.50 per
share, exercisable over five years. The
Company allocated the proceeds from the Convertible Promissory Notes to the warrants and the notes based on their relative fair
values, allocated $6,117 to the warrants, and determined that there were aggregate beneficial conversion features of $8,512. The
fair value of the warrants was determined using the BSM valuation model and the following assumptions: volatility 43.99%
to 44.08%, risk free rate 1.66 to 1.74% %, dividend rate 0.00%. The amount allocated to the warrants and beneficial
conversion features; totaling $14,629, was recorded as a discount against the Convertible Promissory Notes with an offsetting entry
to additional paid-in capital. The discounts are being amortized into interest expense over the term of the Convertible Promissory
Notes. During
the three and six months ended June 30, 2015, the Company recorded amortization of the discount of $3,648 and $7,255, respectively.
During the three and six months June 30, 2015, the Company recorded interest expense of $1,309 and $2,609, respectively. As of
June 30, 2015, the carrying value of the Convertible Promissory Notes was $52,345, net of unamortized discounts of $156. |
