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NOTES PAYABLE
12 Months Ended
Dec. 31, 2013
NOTES PAYABLE [Abstract]  
NOTES PAYABLE
13. NOTES PAYABLE

 

Notes payable as of December 31, 2013 consists of the following:

 

    Principal
Amount
    Carrying
Value
    Cash
Interest
Rate
    Common
Stock
Conversion
Price
    Maturity
Date
90 day Convertible Notes (Chairman of the Board)   $ 2,518,000     $ 2,518,000       6 %   $ 1.05     Various 2014
24 month Convertible Notes ($100,000 to Board member)     225,000       225,000       6 %     1.05     March 2014 -
June 2014
Tonaquint 9% OID Convertible Notes and Warrants     112,500       87,705       7 %     0.30     May 2014
Southridge Convertible Note     12,000       12,000       None       75% of closing bid     June 2014
Series A1 15% OID Convertible Notes and Warrants     149,412       81,415       None       0.20     August 2014
Series A2 15% OID Convertible Notes and Warrants     134,236       69,571       None       0.25     September 2014
Notes Payable, gross   $ 3,151,148       2,933,691                      
Less LPA amount             (505,000 )                    
Notes Payable, net           $ 2,488,691                      

 

90 day Convertible Notes

The Company has issued 90-day notes payable to borrow funds from a director, now the chairman of our Board, as follows:

 

2013   $ 1,208,000  
2012     1,210,000  
2011     100,000  
Total   $ 2,518,000  

 

These notes have been extended several times and all bear 6.00% simple interest.  A conversion feature was added to the Notes when they were extended, which allows for conversion of the eligible principal amounts to common stock at any time after the six month anniversary of the effective date -the date the funds are received - at a rate of $1.05 per share.  Additional terms have been added to all Notes to include additional interest payments to all Notes if extended beyond their original maturity dates and to provide the lender with a security interest in unencumbered inventory and intangible assets of the Company other than proceeds relating to the Calmare device and accounts receivable.

 

A total of $505,000 of the aforementioned notes issued between December 1, 2012 and March 31, 2013 fall under the LPA with ASC Recap, and are expected to be repaid using the process as described in Note 11.  Because there can be no assurance that the Company will be successful in completing this process, the Company retains ultimate responsibility for this debt, until fully paid down.  As a result, the Company continues to accrue interest on these notes and they remain convertible as described above.

 

24 month Convertible Notes

In March 2012, the Company issued a 24-month convertible promissory note to borrow $100,000. Additional 24-month convertible promissory notes were issued in April 2012 ($25,000) and in June 2012 ($100,000). All of the notes bear 6.00% simple interest. Conversion of the eligible principal amounts to common stock is allowed at any time after the six month anniversary of the effective date of each note at a rate of $1.05 per share.

 

Tonaquint 9% Original Issue Discount Convertible Notes and Warrants

During the quarter ended September 30, 2013, the Company entered into a securities purchase agreement with Tonaquint, Inc., under which it was issued a $112,500 convertible promissory note in consideration for $100,000, the difference between the proceeds from the Note and the principal amount consists of a $10,000 original issue discount and a carried transaction expense of $2,500. The original issue discount is amortized over the life of the note. The note is convertible at an initial conversion price of $0.30 per share at any time, and contains a "down-round protection" feature that requires the valuation of a derivative liability associated with the note. The note bears interest at 7% and is due in May 2014; with five monthly installment payments of principal, accrued interest and any outstanding fees or allowed expenses beginning in January 2014. Tonaquint was also issued a market-related warrant for $112,500 in shares of common stock with a "cashless" exercise feature. The warrant has a $0.35 exercise price, a 5-year term and includes a "down-round protection" feature that requires it to be classified as a liability rather than as equity (see Note 9).

 

We estimated the fair value of each component on the issue date and the conversion date using a Black-Scholes pricing model with the following assumptions:

 

    Warrant -
July 16, 2013
    Warrant -
December 31,
2013
    Derivative -
July 16, 2013
    Derivative -
December 31,
2013
 
Expected term     5 years       4.54 years       0.83 years       0.38 years  
Volatility     124.51 %     139.93 %     192.87 %     230.46 %
Risk Free Rate     1.38 %     1.75 %     0.10 %     0.70 %

 

The proceeds of the Note were allocated to the three components as follows:

 

    Proceeds allocated
at issue date - July
16, 2013
    Value at December
31, 2013
 
Tonaquint Note   $ 57,400     $ 87,705  
Tonaquint Warrant   $ 26,076     $ 8,227  
Embedded conversion option derivative liability   $ 19,024     $ -  
Total   $ 102,500     $ 95,932  

 

Subsequent to December 31, 2013, the Company settled the note and Warrant with Tonaquint ( see Note 18.).

 

Southridge

During 2013 the Company had issued a convertible promissory note payable to Southridge as part of its EPA in the amount of $65,000, which during 2013 Southridge converted to 260,000 shares of common stock.

 

During 2013, the Company issued a six-month $12,000 convertible note payable to Southridge to cover legal expenses as part of the LPA (see Note 11). The convertible note is convertible into the Company's common stock at 75% of the lowest closing bid price during the twenty (20) trading days prior to conversion and is due in June 2014.

 

Series A 15% Original Issue Discount Convertible Notes and Warrants

During the quarter ended December 31, 2013, the Company did a private offering of two tranches of convertible notes and warrants, under which it issued $283,648 of convertible promissory notes for consideration of $241,100, the difference between the proceeds from the notes and the principal amount consists of $42,548 of original issue discount. The notes are convertible at initial conversion prices ranging from $0.20 to $0.25 per share anytime after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 170,354 in shares of common stock. The warrants have exercise prices that range from $0.40 to $0.60 and a 2-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense.

 

The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of share into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions:

 

    Warrants
(Tranche 1)-
November 15,
2013
    Warrants
(Tranche 2)-
December 30,
2013
 
Expected term     2 years       2 years  
Volatility     180.02 %     184.38 %
Risk Free Rate     0.31 %     0.39 %

 

The proceeds of the Notes were allocated to the components as follows:

 

    Proceeds allocated
at issue date
 
Private Offering Notes   $ 120,313  
Private Offering Warrants   $ 76,429  
Beneficial Conversion feature     44,358  
Total   $ 241,100