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CONVERTIBLE DEBT
 6 Months Ended
Dec. 31, 2012
Debt Disclosure [Abstract]  
CONVERTIBLE DEBT

NOTE 5.              CONVERTIBLE DEBT

 

Convertible Note Offering

 

On December 21, 2012 the Company issued senior secured convertible notes (the “Convertible Notes”). The term of the Convertible Notes include an eight month maturity period and an annual interest rate of 12% which is accrued until payment or until the Convertible Notes are converted into equity. The Convertible Notes were issued at a price of $200,000 per unit, for total gross proceeds of $2,000,000 with an original issue discount of 0.2%.

 

The Convertible Notes are convertible at a per share conversion price of $0.25, which is subject to a one-time reset right (“Conversion Price Reset”) as well as “weighted average” and other customary anti-dilution protections (“Debt Conversion Feature”). The Conversion Price Reset will be available on the earlier of (the “Reset Date”) (i) the date of maturity of the 12% Notes or (ii) the completion of a subsequent financing by the Company of at least $5,000,000, if the closing price of the Company’s stock is less than $0.30 on the Reset Date. For (i) the conversion price after the reset will be equal to 70% of the 5-day VWAP immediately preceding the Reset Date. For (ii) the Conversion Price after the reset will be equal to 70% of 5-day VWAP immediately after the Reset Date.

 

In connection with the issuance of Convertible Notes, 8,000,000 five-year cashless exercise warrants (“Convertible Note Warrants”) were issued with “weighted average” and other customary anti-dilution protections. 4,000,000 Convertible Note Warrants are exercisable at $0.50 and 4,000,000 Convertible Note Warrants are exercisable at $1.00 (see Note 6 for further detail).

 

Debt Discounts

 

Convertible Note Warrants and Debt Conversion Feature

The fair value of the Convertible Note Warrants and the Debt Conversion Feature totaling $1,349,720 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 Convertible Note using the effective interest method (see Note 6 for further detail).

 

Original Issue Discount

For certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The Convertible Notes issued on December 21, 2012 were issued with an original issue discount of 0.2%. 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 Convertible Note.

 

Convertible Note Value $2,000,000 
Debt Discount    
Convertible Note Warrant Derivative  686,192 
Conversion Feature Derivative  663,528 
Original Issue Discount  4,000 
Total Debt Discount $1,353,720 
Amortization of Debt Discount, as of December 31, 2012  (52,704)
Debt Discount, Net $1,301,016 
Convertible Note Value, Net at December 31, 2012 $698,984 

 

Deferred Financing Costs

 

Transaction Fees

The Company paid Aegis Capital Corp. (“Aegis”) who acted as the sole placement agent for the initial closing of the Convertible Notes Offering a commission of 10% of the funds raised in the Convertible Notes offering and a 3% non-accountable reimbursement of its expenses, for a total payment of $260,000, which is recorded as a deferred financing cost in the accompanying balance sheet.

 

The Company incurred additional fees of $52,710 for legal and escrow agent fees, which are recorded as a deferred financing cost in the accompanying balance sheet.

 

Convertible Note Broker Warrants

In addition, Aegis received five-year warrants (the “Convertible Note Broker Warrants”) to purchase 1,600,000 shares of the Company’s common stock. The Convertible Note Broker Warrants are identical to the Convertible Note Warrants in all material respects. The fair value of the Convertible Note Broker Warrants of $137,238 is recorded under deferred financing costs in the accompanying balance sheet (see Note 6 for further detail).

 

Third Party Share Sale

The Convertible Note holders were sold 4,000,000 free trading shares by non-affiliated, third party shareholders of the Company at par value. Although the Company was not a party to the sale of these shares by third party shareholders, per FASB ASC Topic 718, the fair value of this non-affiliated third party transaction is recognized by the Company as a deferred financing cost of the Convertible Note transaction. Additionally, the Company will provide no reimbursement or compensation to the selling shareholders of the 4,000,000 free trading shares. As such, the Company does not anticipate recognizing any further expenses in relation to this third-party transaction. The fair value of this third party transaction of $1,156,000 is recorded under deferred financing costs in the accompanying balance sheet.

 

Placement agent and other fees associated with Convertible Note offering $312,710 
Convertible Note Broker Warrants  137,238 
Third Party Share Grant  1,156,000 
Total Deferred Financing Costs $1,605,948 
Amortization of Deferred Financing Costs, as of December 31, 2012  (62,523)
Deferred Financing Costs, Net, as of December 31, 2012 $1,543,425