XML 62 R19.htm IDEA: XBRL DOCUMENT v3.2.0.727
NOTES PAYABLE
12 Months Ended
Dec. 31, 2014
Debt Disclosure [Abstract]  
NOTES PAYABLE
13. NOTES PAYABLE

 

Notes payable consist of the following:

 

    December 31, 2014     December 31, 2013  
90 day Convertible Notes (Chairman of the Board)   $ 2,498,980     $ 2,518,000  
24 month Convertible Notes ($100,000 to Board member)     225,000       225,000  
10 day Note (Board member)     42,500       -  
Tonaquint 9% OID Convertible Notes and Warrants     -       87,705  
Southridge Convertible Note     -       12,000  
Series A1 15% OID Convertible Notes and Warrants     -       81,415  
Series A2 15% OID Convertible Notes and Warrants     -       69,571  
Series A3 15% OID Convertible Notes and Warrants     11,765       -  
Series B OID Convertible Notes and Warrants     56,659       -  
1 Year 15% OID Convertible Notes and Warrants     244,565       -  
Notes Payable, gross     3,079,469       2,933,691  
Less LPA amount     (485,980 )     (505,000 )
Notes Payable, net   $ 2,593,489     $ 2,488,691  

 

Details of notes payable as of December 31, 2014 are as follows:

 

    Principal 
Amount
    Carrying 
Value
    Cash 
Interest 
Rate
    Common 
Stock 
Conversion 
Price
    Maturity 
Date
90 day Convertible Notes (Chairman of the Board)   $ 2,498,980     $ 2,498,980       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
10 day Note (Board member)     42,500       42,500       None       None     January 2015
Series A3 15% OID Convertible Notes and Warrants     11,765       11,765       None       0.25     January 2015
Series B OID Convertible Notes and Warrants     80,000       56,659       None       0.23     March 2017
1 Year 15% OID Convertible Notes and Warrants     358,824       244,565       None       0.20     Aug. 2015 – Nov. 2015
Notes Payable, gross   $ 3,217,069       3,079,469                      
Less LPA amount             (485,980 )                    
Notes Payable, net           $ 2,593,489                      

 

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   $ 1,188,900  
2012     1,210,000  
2011     100,000  
Total   $ 2,498,980  

 

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 of 1% simple interest per month on all amounts outstanding for 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.

 

Due to the Board’s February 10, 2014 decision authorizing Management to nullify certain actions taken by prior management, the additional terms noted above were not approved and therefore, the additional interest for the extension of the Notes was not recorded.  During 2014, Management has been in negotiations to modify the terms of the Notes. However, until those negotiations are resolved, the Company has agreed to honor the additional terms and as such, the Company recorded additional interest of approximately $510,000 during the three months ended September 30, 2014 and $602,000 for the year ended December 31, 2014.

 

A total of $485,980 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 at a rate of $1.05 per share.

 

As of June 23, 2015 the Company has not repaid the principal due on the March 2012 $100,000 note, the April 2012 $25,000 note or the June 2012 $100,000 note and is in default under the terms of the notes. There is also unpaid interest of $29,000 related to these notes.

 

10 day Note

In late December 2014, the Company issued a 10 day non-interest bearing note to a Board member in the amount of $42,500. This note was repaid in early January 2015.

 

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 consisted of a $10,000 original issue discount and a carried transaction expense of $2,500. The original issue discount was being amortized over the life of the note. The note was convertible at an initial conversion price of $0.30 per share at any time, and contained a “down-round protection” feature that requires the valuation of a derivative liability associated with the note. The note bore interest at 7% and was due in May 2014. Tonaquint was also issued a market-related warrant for $112,500 in shares of common stock with a “cashless” exercise feature. The warrant had a $0.35 exercise price, a 5-year term and included a “down-round protection” feature that required it to be classified as a liability rather than as equity (see Note 9).

 

During the first quarter of 2014 the Company executed a debt settlement agreement with Tonaquint related to the note and warrant. The warrant was settled during the first quarter of 2014 for a cash payment of $98,000, resulting in a loss of $98,000. The note was settled during the second quarter of 2014 for cash payments totaling $144,000 ($20,000 paid in the first quarter of 2014 and $124,000 paid in the second quarter of 2014). Because the execution of the debt settlement agreement in the first quarter of 2014 resulted in a significant modification of the original terms of the note agreement, the Company adjusted the carrying value of the note in the first quarter of 2014 and recorded a related loss of approximately $34,000.

 

Southridge

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 was convertible into the Company’s common stock at the greater of $0.25 or 85% of the average closing bid price during the five (5) trading days prior to conversion and was due in June 2014.

 

During the third quarter of 2014, the Company issued to Southridge 50,000 shares in exchange for and in full satisfaction for the note and recorded a $5,500 loss upon conversion of the note.

 

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.

 

During the quarter ended March 31, 2014, the Company did a private offering of a third tranche of convertible notes and warrants, under which it issued $64,706 of convertible promissory notes for consideration of $55,000, the difference between the proceeds from the notes and principal amount consists of $9,706 of original issue discount.

 

The notes are convertible at initial conversion prices ranging from $0.20 to $0.25 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 958,179 in shares of common stock. The warrants have exercise prices that range from $0.40 to $0.60 and a term of 2 years. The beneficial conversion feature, if any, 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
    Warrants 
(Tranche
3) 
February 
14, 2014
 
Expected term     2 years       2 years       2 years  
Volatility     180.02 %     184.38 %     184.88 %
Risk Free Rate     0.31 %     0.39 %     0.32 %

 

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

 

    Proceeds allocated 
at issue date
 
Private Offering Notes   $ 152,703  
Private Offering Warrants     91,274  
Beneficial Conversion feature     52,123  
Total   $ 296,100  

 

During 2014, certain holders of OID convertible notes and warrants delivered to the Company a notice of conversion related to the OID convertible notes. Additionally, the Company offered certain Noteholders an inducement to convert their notes to shares. The inducement, when offered, provided Noteholders a conversion price of $0.20. All other original terms, including the warrant terms, remained the same. Upon notice of conversion the Company: (i) accelerated and recognized as interest expense in the current period any remaining discount, and (ii) recognized a loss for the fair value of the additional shares offered as the conversion inducement.

 

Presented below is summary information related to the conversion:

 

Statement of Operations        
Loss on conversion of notes   $ 58,366  
Accelerated interest expense   $ 35,109  
         
Balance Sheet        
Shares issued     1,682,946  
         
Principal amount of notes converted   $ 336,588  

 

Series B Original Issue Discount Convertible Notes and Warrants

During the quarter ended March 31, 2014, the Company did a private offering of convertible notes and warrants, under which it issued $80,000 of convertible promissory notes for consideration of $65,000, the difference between the proceeds from the notes and principal amount consists of $15,000 of original issue discount. The notes are convertible at an initial conversion price of $0.35 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 185,714 in shares of common stock. The warrants have an exercise price of $0.45 and a 4-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 
March 20,
2014
 
Expected term     4 years  
Volatility     151.52 %
Risk Free Rate     1.32 %

 

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

 

    Proceeds
allocated 
at issue date
 
Private Offering Notes   $ 34,272  
Private Offering Warrants     26,811  
Beneficial Conversion feature     3,917  
Total   $ 65,000  

 

The Series B OID notes include an anti-dilution provision that if the Company issues more than 20 million shares of its common stock, subject to certain exceptions, the conversion price of the notes and the conversion price of the warrants would be subject to an automatic pre-determined price adjustment. During the quarter ended December 31, 2014 the Series B OID noteholder and the Company agreed that this anti-dilution provision had been triggered and the OID note share conversion price was adjusted down to $0.23 per share, which increased the number of shares available upon conversion to 347,826. The anti-dilution provision in the Warrant changed the share purchase price downward to $0.33 per share but did not change the number of shares available under the Warrant.

 

As a result of the triggering of the above noted one time anti-dilution provision, the Company reallocated the proceeds of the Notes during the quarter ended December 31, 2014 as follows:

 

    Proceeds
allocated 
at issue date
 
Private Offering Notes   $ 46,222  
Private Offering Warrants     18,778  
Beneficial Conversion feature     -  
Total   $ 65,000  

 

1 Year 15% OID Convertible Notes and Warrants

During the quarter ended December 31, 2014, the Company did a private offering of convertible notes and warrants, under which it issued $358,824 of convertible promissory notes for consideration of $305,000, the difference between the proceeds from the notes and principal amount consists of $53,824 of original issue discount. The notes are convertible at an initial conversion price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 897,060 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-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 shares 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 
November 7,
2014
 
Expected term     1 year  
Volatility     188.31 %
Risk Free Rate     0.11 %

 

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

 

    Proceeds
allocated 
at issue date
 
Private Offering Notes   $ 224,679  
Private Offering Warrants     57,854  
Beneficial Conversion feature     22,467  
Total   $ 305,000