XML 1130 R20.htm IDEA: XBRL DOCUMENT v2.4.0.8
5. Debt (Q2)
 15 Months Ended 6 Months Ended
Mar. 31, 2014
Jun. 30, 2014
Quarter 2 [Member]
5. Debt

Note 5 Debt

 

(A) Summary of Debt Transactions

 

At December 31, 2013 and 2012, debt consists of the following:

 

   2013  2012
 Notes payable  $503,203   $739,534 
 Notes payable - related party   26,108    133,000 
 Convertible notes   2,194,133    —   
 Convertible notes - related party   50,000    —   
 Less: debt discount   (1,925,191)   —   
 Debt - net   848,253    872,534 
 Amortization of debt discount   92,304    —   
 Less: current portion - notes payable   (98,086)   (236,325)
 Less: current portion - notes payable - related party   (26,108)   (133,000)
 Long term debt - net  $816,362   $503,209 

  

Notes Payable

 

   Third Party  Related Party  Totals
 Balance December 31, 2011  $849,640   $6,000   $855,640 
 Proceeds   120,000    127,000    247,000 
 Repayments   (230,106)   —      (230,106)
 Balance December 31, 2012   739,534    133,000    872,534 
 Proceeds   160,000    61,655    221,655 
 Repayments   (116,331)   (35,547)   (151,878)
 Conversion of note payable to convertible debt   (180,000)   (50,000)   (230,000)
 Debt forgiveness   (100,000)   (83,000)   (183,000)
 Balance December 31, 2013  $503,203   $26,108   $529,311 

 

 

Convertible Debt - Net

 

The Company has recorded derivative liabilities associated with these convertible debt instruments, as more fully discussed at Notes 6 and 10 (C).

 

   Third Party  Related Party  Totals
 Balance December 31, 2012  $—     $—     $—   
 Proceeds   2,000,000    —      2,000,000 
 Repayments   —      —      —   
 Conversion of note payable to convertible debt   180,000    50,000    230,000 
 Conversion of accrued interest into convertible debt   14,133    —      14,133 
 Less: gross debt discount recorded   (1,925,191)   —      (1,925,191)
 Add: amortization of debt discount   92,304    —      92,304 
 Balance December 31, 2013  $361,245   $50,000   $411,245 

 

In connection with the $2,000,000 convertible debt offering in November 2013, the Company issued 3,672,134 detachable warrants. The notes and warrants were treated as derivative liabilities, see Notes 6 and 10.

 

The Company was required to register the underlying convertible debt shares and warrants within 60 days (January 2014), and for the registration statement to become effective 90 days after this date (April 2014). As of the date of the accompanying report, the registration statement has not yet been filed, which upon filing, must be declared and remain effective. As a result of not filing the registration statement timely, the Company began accruing liquidated damages equal to 2% of the gross proceeds which is equivalent to $40,000 per month each for May and June 2014. The liquidated damages clause is capped at 15% of gross proceeds raised. If the Company fails to pay the liquidated damages, an interest rate of 18% will be applied to the outstanding debt instruments.

 

In the event any of these notes are prepaid prior to maturity, a penalty rate of 10% would apply for any payments occurring between months 12 – 18 and a 5% rate for any payments occurring between 19-24 months.

 

All convertible debt is secured by a 2nd priority lien on all assets of the Company. The Company is subordinate only to a third party bank loan, which is currently included as a component of notes payable ($503,203).

 

(B) Terms of Debt

 

In 2012, all outstanding debt had the following terms:

 

• Unsecured

• Due on demand

• Interest ranging from 10% - 12%

 

In 2013, all outstanding debt had the following terms:

 

• Unsecured -$26,108

• Secured - $503,203

• Due:

• On demand ($26,108 – related party);

• Due August 29, 2018 ($503,203 – third party)

• Due November 26, 2015 ($2,244,133 – all convertible debt – gross – secured by all assets of the Company)

 

• Interest

• Non-interest bearing on notes issued prior to 2013 (see 2012 notes above); or

• Ranging from 12% - 15%

 

All convertible debt and related warrants issued with the convertible notes in 2013 were convertible at $0.25 and $0.375/share, respectively; however, given the existence of a ratchet feature, these debt and warrant instruments could potentially carry a lower conversion price in the future in the event any future offering offered a lower per share amount for a conversion.

 

(C) Future Commitments

 

At December 31, 2013, the Company has outstanding debt of $816,362 (See Note 5 (A)). Future minimum repayment obligations are as follows:

 

Year Ended December 31   
2014  $124,194 
2015   2,649,250 
 Less: unamortized debt discount   (1,832,888)
 Less: current maturities   (124,194)
 Debt - long term  $816,362 

Note 5 Debt

 

(A) Summary of Debt Transactions

 

At June 30, 2014 and December 31, 2013, debt consists of the following:

  

   2014  2013
           
Notes payable  $454,646   $503,203 
Notes payable - related party   —      26,108 
Convertible notes   4,464,233    2,194,132 
Convertible notes - related party   50,000    50,000 
Less: debt discount   (4,174,650)   (1,925,191)
Debt - net   794,229    848,252 
Amortization of debt discount   671,683    92,304 
Less: current portion - notes payable   (98,086)   (98,086)
Less: current portion - notes payable - related party   (0)   (26,108)
Long term debt - net  $1,367,826   $816,362 

 

Notes Payable

 

   Third Party  Related Party  Totals
                
Balance December 31, 2011  $849,640    6,000   $855,640 
Proceeds   120,000    127,000    247,000 
Repayments   (230,106)   —      (230,106)
Balance December 31, 2012   739,534    133,000    872,534 
Proceeds   160,000    61,655    221,655 
Repayments   (116,331)   (35,547)   (151,878)
Conversion of note payable to convertible debt   (180,000)   (50,000)   (230,000)
Conversion of note payable to contributed capital   (100,000)   (83,000)   (183,000)
Balance December 31, 2013   503,203    26,108    529,311 
Proceeds   —      —      —   
Repayments   (48,560)   (26,108)   (74,668)
Conversion of note payable to convertible debt   —      —      —   
Conversion of note payable to contributed capital   —      —      —   
Balance June 30, 2014  $454,643   $—     $454,643 

 

 

Convertible Debt - Net

 

The Company has recorded derivative liabilities associated with these convertible debt instruments, as more fully discussed at Notes 6 and 10 (C).

 

    Third Party    Related Party    Totals 
Balance December 31, 2012  $—     $—     $—   
Proceeds   2,000,000    —      2,000,000 
Repayments   —      —      —   
Conversion of note payable to convertible debt   180,000    50,000    230,000 
Conversion of accrued interest into convertible debt   14,133    —      14,133 
Less: gross debt discount recorded - Day 1   (1,925,191)   —      (1,925,191)
Add: amortization of debt discount   92,304    —      92,304 
Balance December 31, 2013   361,246    50,000    411,246 
Proceeds   2,270,100    —      2,270,100 
Less: gross debt discount recorded - Day 1   (2,249,459)   —      (2,249,459)
Add: amortization of debt discount   579,382    —      579,382 
Balance June 30, 2014  $961,269   $50,000   $1,011,269 

 

In connection with the $2,000,000 convertible debt offering in November 2013, the Company issued 3,672,134 detachable warrants. The notes and warrants were treated as derivative liabilities, see Notes 6 and 9.

 

The Company was required to register the underlying convertible debt shares and warrants within 60 days (January 2014), and for the registration statement to become effective 90 days after this date (April 2014). The registration statement has not yet been filed, which upon filing, must be declared and remain effective. As a result of not filing the registration statement timely, the Company began accruing liquidated damages equal to 2% of the gross proceeds which is equivalent to $40,000 per month each for May and June 2014. The liquidated damages clause is capped at 15% of gross proceeds raised. If the Company fails to pay the liquidated damages, an interest rate of 18% will be applied to the outstanding debt instruments.

 

In connection with the $2,270,100 convertible debt offering during the three months ended June 30, 2014, the Company issued 5,390,100 detachable warrants. The notes and warrants were treated as derivative liabilities, see Notes 6 and 9.

 

In the event any of these notes are prepaid prior to maturity, a penalty rate of 10% would apply for any payments occurring between months 12 – 18 and a 5% rate for any payments occurring between 19-24 months.

 

All convertible debt is secured by a 2nd priority lien on all assets of the Company. The Company is subordinate only to a third party bank loan, which is currently included as a component of notes payable ($454,643).

 

(B)Terms of Debt

 

In 2012, all outstanding debt had the following terms:

 

•Unsecured
•Due on demand
•Interest ranging from 10% - 12%

 

In 2014 and 2013, all outstanding debt had the following terms:

 

•Unsecured -$26,108
•Secured - $454,643
•Due:
•On demand ($26,108 – related party);
•Due August 29, 2018 ($454,653 – third party)
•Due November 26, 2015 ($2,244,133 –convertible debt – gross – secured by all assets of the Company)
•Due May 8, 2016 ($2,270,100 –convertible debt – gross – secured by all assets of the Company)

 

•Interest
•Non-interest bearing on notes issued prior to 2013 (see 2012 notes above); or
•Ranging from 12% - 15%

 

All convertible debt and related warrants issued with the convertible notes were convertible at $0.25 and $0.375/share, respectively; however, given the existence of a ratchet feature, these debt and warrant instruments could potentially carry a lower conversion price in the future in the event any future offering offered a lower per share amount for a conversion.

 

In connection with the secured loan of $454,643, the lender required for the Company to hold in escrow $50,000 for required payments through April 2014. As of June 30, 2014, the escrow balance was $0.

 

In connection with the Notes Offering, the Company entered into Registration Rights Agreements, dated November 26, 2013, May 8, 2014 and June 25, 2014 (the “Registration Rights Agreements”) whereby the Company agreed to prepare and file a registration statement with the SEC within sixty (60) days after execution of the applicable Registration Rights Agreement and to have the registration statement declared effective by the SEC within ninety (90) days thereafter (on day 150).

 

Because the Company was unable to timely file a registration statement pursuant to the terms of each Registration Rights Agreement noted above, the Company is in default under such Registration Rights Agreements (the “Filing Default Damages”). Pursuant to the Registration Rights Agreement, the Filing Default Damages mandate that the Company shall pay to the Investors, for each thirty (30) day period of such failure and until the filing date of the registration statement and/or the common stock may be sold pursuant to Rule 144, an amount in cash, as partial liquidated damages and not as a penalty, equal to 2% of the aggregate gross proceeds paid by the Investors for these Notes.

 

The maximum liquidated damages shall be equal to 15% of the aggregate gross proceeds received by the Company in connection with the issuance of the Notes and Warrants. If the Company fails to pay any partial liquidated damages in full within five (5) days of the date payable, the Company shall pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Investors, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full.

 

As of June 30, 2014, as a component of accounts payable and accrued expenses, the Company has accrued penalties totaling $218,143 pertaining to the registration rights agreement.

 

(C) Future Commitments

 

At June 30, 2014, the Company has outstanding debt of $1,367,826, net of debt discount (See Note 5 (A)).

 

Future minimum repayment obligations are as follows:

 

Year Ended December 31   
      
2014  $98,086 
2015   4,870,793 
Less: unamortized debt discount   (3,502,967)
Less: current maturities   (98,086)
Debt - long term  $1,367,826