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CONVERTIBLE NOTES PAYABLE
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9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2012
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| Notes to Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NOTE 9 - CONVERTIBLE NOTES PAYABLE | On November 24, 2011, the Company completed a non-brokered private placement unit offering that raised $180,000 in gross proceeds, $50,000 of which was received from related parties. Each $1,000 unit consisted of one 8.5% unsecured convertible note and 2,000 shares of the Company’s common stock. The notes have a 12-month term and are convertible into common shares of the Company at a price of $0.10 per share at any time prior to the maturity date, which is November 23, 2012. The notes require interest only payments on a quarterly basis. On June 30, 2012, $100,000 of the convertible notes was converted into 1,000,000 common shares of the Company.
The convertible notes contain provisions that will allow the Company to force conversion, if the lowest daily closing bid price of the Company’s Common Shares for each of the sixty-five (65) trading days immediately preceding the redemption notice is not less than $1.50 per such Common Share; or the Company completes one or more offerings of its Common Shares or securities convertible into Common Shares at a price or conversion price, as the case may be, of not less than $1.50 per such Common Share and the gross proceeds from such offering(s) total not less than $5,000,000. At December 31, 2011, the lenders had advanced $180,000 under this financing agreement, $50,000 of which was received from related parties.
The intrinsic value of the beneficial conversion feature and the debt discount associated with the equity issued in connection with the convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded for the convertible notes and on the equity equaled $125,874 and $54,126, respectively. As of September 30, 2012, the Company has amortized $84,771 of the total outstanding debt discount leaving an unamortized debt discount of $11,982.
On December 8, 2011, the Company executed a convertible promissory note in the amount of $52,500. The note bears interest at a rate of 8.0% per annum and has a maturity date of September 12, 2012. Any amount of principal or interest not paid in full at maturity will bear an interest rate of 22 percent. The convertible promissory note may be converted in whole or in part, at the option of the holder, to shares of common stock at any time following 180 days after the issuance date of the note. The conversion price under the note is 59 percent multiplied by the market price (representing a 41 percent discount rate). In June 2012, the note principal was fully repaid. One half was paid in cash along with accrued interest of $1,007 and a prepayment premium of $13,125. The other half of the note principal was repaid through the issuance of 171,750 shares of common stock of the Company.
On June 27, 2012, the Company executed a convertible promissory note in the amount of $73,500. The note bears interest at a rate of 8.0% per annum and has a maturity date of March 29, 2013. Any amount of principal or interest not paid in full at maturity will bear an interest rate of 22 percent. The convertible promissory note may be converted in whole or in part, at the option of the holder, to shares of common stock at any time following 180 days after the issuance date of the note. The conversion price under the note is 59 percent multiplied by the market price that is the average of the lowest three trading prices for the common stock during the ten trading day period prior to the conversion date. The total initial beneficial conversion feature recorded was $44,909. As of September 30, 2012, the Company has amortized $5,088 of the total outstanding debt discount leaving an unamortized debt discount of $39,821.
On September 6, 2012, for aggregate gross proceeds of $598,000, the Company issued secured convertible promissory notes (the “Convertible Notes”) and warrants to purchase common stock of the Company. $300,000 of the gross proceeds was received from a related party. The Convertible Notes accrue bear interest at a rate of 10% per annum and have a maturity date of September 6, 2013. The conversion price is $0.15 per share. In the event the Company sells shares of common stock at a price per share that is less than the conversion price then in effect (the "New Issue Price"), excluding issuances under a board approved equity incentive plan or for bona fide services to officers and directors, immediately following such issuance, the conversion price then in effect shall be reduced to a price that is equal to the New Issue Price. The Convertible Notes are secured by a first priority interest in all of the Company's right, title, interest, claims and demands in and to certain property, including all accounts, chattel paper, deposit accounts and cash, documents, equipment, general intangibles, goods, instruments, intellectual property, inventory, investment property, letter-of-credit rights and proceeds from or related to each of the foregoing in accordance with the terms and conditions of a Security Agreement dated as of September 6, 2012. The Warrants are exercisable by the holder at any time prior to two years from the date of issuance at an exercise price of $0.30 per share. The Company has issued Warrants to purchase an aggregate of 7,979,333 shares of common stock of the Company in connection with the Convertible Notes. The Company determined the notes qualified for derivative liability treatment under ASC 814-40. The Company recorded an initial derivative liability of $462,557 and a debt discount of $598,000 on the origination date of the note. As of September 30, 2012, the Company has amortized $39,322 of the total outstanding debt discount leaving an unamortized debt discount of $558,678.
On September 7, 2012, as consideration for amounts owed of $23,422, the Company issued an unsecured convertible promissory note bearing interest at a rate of 10% per annum and having a maturity date of September 7, 2013. The conversion price is equal to seventy five percent (75%) of the closing bid price for the Common Stock on the trading day immediately preceding the conversion. The total initial beneficial conversion feature recorded was $7,807. As of September 30, 2012, the Company has amortized $492 of the total outstanding debt discount leaving an unamortized debt discount of $7,315.
The components of convertible notes payable are summarized in the table below:
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