June Convertible Debt Offering (June Convertible Debt Offering [Member])

June Convertible Debt Offering [Member]

NOTE 6. JUNE CONVERTIBLE DEBT OFFERING

June Convertible Note Offering

On June 20, 2013 the Company issued $1,500,000 senior secured convertible notes (the “June Convertible Notes”) with an original issue discount of 12%, and a conversion price of $0.068 per share (the “June Conversion Price”), for face value of $1,680,000. The term of the June Convertible Notes includes an eighteen-month maturity period, with partial redemptions beginning on June 1, 2014. The June Convertible Notes bear an annual interest rate of 8%, which is paid quarterly in the form of cash or equity beginning November 2013. Interest is payable in cash or at the Company’s option in shares of common stock, provided certain conditions are met, based on a share value equal to the lesser of (a) 90% of the average of the volume weighted average price (the “VWAP”) for the 20 consecutive trading days prior to the applicable interest payment date and (b) 100% of the average of the VWAP for the 20 consecutive trading days prior to the applicable interest payment date less $0.01. Upon any Event of Default (as defined in the June Convertible Note), the outstanding principal amount of the June Convertible Note, plus liquidated damages, interest, a premium of 30% and other amounts owing in respect thereof through the date of acceleration, shall become, at the June Convertible Note holders’ election, immediately due and payable in cash. Commencing five days after the occurrence of any Event of Default, the interest rate on the June Convertible Note shall accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law. The June Conversion Price is subject to “full ratchet” and other customary anti-dilution protections. As of October 15, 2013, with the timely filing of our Form 10-K, the Company will remain in compliance with the covenants of the Debentures. The June Convertible Notes limit the Company from incurring additional indebtedness, pay dividends or make distributions to shareholders, incur liens that would rank senior in priority or pari passu to the June Convertible Notes, sell or otherwise dispose of any assets or rights of the Company or its subsidiaries.

In connection with the issuance of the June Convertible Notes, 24,705,882 five-year cashless exercise warrants (“June Convertible Note Warrants”) were issued with “weighted average” and other customary anti-dilution protections. The June Convertible Note Warrants are exercisable at $0.082 per share and are subject to “weighted average” and other customary anti-dilution protections (see Note 7 for further detail).

June Convertible Note Redemption

On each of June 1, 2014, July 1, 2014, August 1, 2014, September 1, 2014, October 1, 2014 and November 1, 2014, the Company is obligated to redeem an amount equal to $140,000 and on December 1, 2014, the Company is obligated to redeem an amount equal to $840,000, (plus accrued but unpaid interest, liquidated damages and any other amounts then owing in respect of the June Convertible Note) (collectively, the “Periodic Redemption Amount”). In lieu of a cash redemption and subject to the Company meeting certain equity conditions described in the June Convertible Note, the Company may elect to pay the Periodic Redemption Amount in shares based on a conversion price equal to the lesser of (a) $0.068 per share, subject to adjustments upon certain events, and (b) 90% of the average of the VWAP for the 20 consecutive trading days prior to the applicable redemption date.

The fair value of the June Convertible Note Warrants and the corresponding Debt Conversion Feature, issued on June 20, 2013, totaling $1,243,177 is recorded as a debt discounts in the accompanying balance sheet and is amortized as interest expense in the accompanying statement of operations over the term of the June Convertible Note using the effective interest method (see Note 7 for further detail).

Original Issue Discount

For certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The June Convertible Notes were issued with an original issue discount of 12%. The original issue discount is recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the term of the June Convertible Note.

June Convertible Note Face Value	$	1,680,000
Debt Discount
June Convertible Note Warrant Derivative		752,126
Conversion Feature Derivative		491,051
Original Issue Discount		180,000
Total Debt Discount	$	1,423,177
Amortization of Debt Discount, as of June 30, 2013		(24,893	)
Debt Discount, Net	$	1,398,284

June Convertible Note Carrying Value at June 30, 2013	$	281,716

Deferred Financing Costs

The Company paid Gottbetter Capital Markets (“GCM”) who acted as the sole placement agent for the June Convertible Notes a commission of 7.2% of the first $1,400,000 funds raised in the June Convertible Notes offering for a total payment of $100,000. In addition, the placement agent received five-year broker warrants to purchase approximately 2.0 million shares of our common stock at an exercise price of $0.082 per share. The broker warrants are identical to the warrants in all material respects. We also paid $117,446 in legal fees to Gottbetter & Partners and $85,207 in professional fees to the lead investor in the Debenture.

June Convertible Note Broker Warrants

In addition, GCM received five-year warrants (the “June Convertible Note Broker Warrants”) to purchase 2,000,000 shares of the Company’s common stock. The June Convertible Note Broker Warrants were issued with “weighted average” and other customary anti-dilution protections. The June Convertible Note Broker Warrants are identical to the June Convertible Note Warrants in all material respects.

Placement agent and other fees associated with June Convertible Note offering	$	304,293
June Convertible Note Broker Warrants		60,886
Total Deferred Financing Costs	$	365,179
Amortization of Deferred Financing Costs, as of June 30, 2013		6,387
Deferred Financing Costs, Net, as of June 30, 2013	$	358,792

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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