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4. Convertible Debentures
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Jun. 30, 2011
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| Debt Disclosure [Text Block] |
Convertible
debentures consist of the following:
2008
Winter Offering. From November 24, 2008 to
December 5, 2008, the Company conducted an offering (the
“2008 Winter Offering”) of up to $500,000
aggregate face amount of its Convertible Notes. A
total of $524,700 aggregate face amount of the 2008 Winter
Notes were sold for an aggregate purchase price of $477,000
net proceeds. Therefore, while the stated interest
on the 2008 Winter Notes is 0%, the implied interest rate on
the 2008 Winter Notes is 10%. The 2008 Winter
Notes matured on the first anniversary of the date of
issuance. The 2008 Winter Notes are convertible,
at the option of the note holders, into shares of common
stock of the Company (the “Conversion Shares”) at
a conversion price equal to the average of the closing bid
price of the Company’s common stock for the five
trading days preceding the closing date of the 2008 Winter
Offering (the “Conversion Price”). Up
to 3,086,470 Conversion Shares are issuable at a Conversion
Price of $0.17 per share.
Each
of the investors in the 2008 Winter Offering received, for no
additional consideration, a warrant (the “ 2008 Winter
Warrants”), entitling the holder to purchase a number
of shares of the Company’s common stock equal to 50% of
the number of shares of common stock into which the ( 2008
Winter Notes) are convertible (the “2008 Winter Warrant
Shares”). Each 2008 Winter Warrant is exercisable
on a cash basis only at a price of $0.30 per share, and is
exercisable for a period of two years from the date of
issuance. Up to 1,543,235 2008 Winter Warrant
Shares are initially issuable upon exercise of the 2008
Winter Warrants.
The
aggregate value of the Winter 2008 Offering Warrants issued
in connection with the December 5, 2008 closing were valued
at $168,925 using the Black-Scholes-Merton option valuation
model with the following assumptions; risk-free interest rate
of 3.42%; dividend yield of 0%; volatility factors of the
expected market price of common stock of 153.56%; and an
expected life of two years (statutory term) and vest
immediately upon issuance. The Company also
determined that the notes contained a beneficial conversion
feature of $308,075. The value of the Winter 2008
Offering Warrants, the beneficial conversion feature, and the
initial discount and transaction fees of $47,700 were
considered as debt discount and were amortized over the life
of the Note.
As
June 30, 2011, investors have converted $519,200 of the
Convertible Notes into 3,054,117 shares of the
Company’s common stock. As of June 30, 2011, one
note for $5,500 was in default and outstanding ($6,997 in
total including $1,497 in penalties and interest).
2009
Spring Offering. From March 17, 2009 to
April 30, 2009, the Company conducted and concluded a private
offering (the “Spring 2009 Offering”) of up to
$300,000 aggregate face amount of its convertible notes (the
“Spring 2009 Notes”) with 11 accredited
investors. A total of $181,500 aggregate face amount of the
Spring 2009 Notes were sold for an aggregate purchase price
of $165,000. The Spring 2009 Notes matured on the
first anniversary of their date of issuance, are convertible,
at the option of the noteholder, into up to 672,222 shares of
common stock of the Company at a conversion price of $0.27
per share.
Each
of the investors in the Spring 2009 Offering received, for no
additional consideration, a warrant (the “Spring 2009
Warrants”), entitling the holder to purchase a number
of shares of the Company’s common stock equal to 50% of
the number of shares of common stock into which the Spring
2009 Notes are convertible (the “Warrant
Shares”). Each Spring 2009 Warrant is
exercisable on a cash basis only at an initial price of $0.50
per share, and is exercisable for a period of two
years. Up to 336,111 Warrant Shares are initially
issuable on exercise of the Spring 2009 Warrants.
The
Company received $165,000 in net proceeds in the Spring 2009
Offering which was used for general corporate purposes and
working capital. The aggregate value of the Spring 2009
Offering Warrants issued in connection with the April 30,
2009 closing were valued at $39,994 using the
Black-Scholes-Merton option valuation model with the
following assumptions; risk-free interest rate of 0.94%;
dividend yield of 0%; volatility factors of the expected
market price of common stock of 156.39%; and an expected life
of two years (statutory term) and vest immediately upon
issuance. The Company also determined that the
notes contained a beneficial conversion feature of
$96,827. The value of the Spring 2009 Offering
Warrants, the beneficial conversion feature, and the initial
discount and transaction fees of $16,500 were
considered as debt discount and were amortized over the life
of the Note.
As
of June 30, 2011, investors have converted $176,000 of the
Convertible Notes plus penalty and interest of $7,538 into
679,768 shares of the Company’s common
stock. As of June 30, 2011, one note in the amount
of $5,500 was in default and outstanding ($6,755 in total
which includes $1,255 of penalty and interest).
2009
Wellfleet Offering. On November 20, 2009, the Company
completed a private financing of $75,000 principal amount of
7% Convertible Promissory Notes (the “Notes”) due
September 28, 2012 and 300,000 Common Stock Purchase Warrants
exercisable at $.30 per share (the “Warrants”),
pursuant to a Securities Purchase Agreement (the
“Purchase Agreement”) with 3 accredited investors
(the “Note Offering”), through Sandgrain
Securities, Inc., as placement agent.
The
Notes are initially convertible into the Company’s
common stock at a price of $.25 per share and accrue interest
at 7% per year with a default rate of 10%, payable quarterly
in cash. Interest payments are payable in stock at
the sole discretion of the Note holders, or, in the event
that shares issuable thereon are registered under the
Securities Act of 1933, as amended (the “Act”),
or otherwise freely tradable pursuant to Rule 144, at the
discretion of the Company as well. The Notes and any unpaid
interest are due and fully payable on September 28,
2012. The conversion price of the Notes is
adjustable for corporate events such as merger,
reclassification or stock splits.
Pursuant
to the terms of the Purchase Agreement, and among other
terms, in the event the Company conducts any subsequent
financings (each, a “Follow On Offering”) of any
kind other than an offering of securities substantially
similar to the Notes and Warrants or certain other exempted
issuances enumerated in the Notes, the Notes may, at the
discretion of each holder thereof, be exchanged in
whole or in part to the extent of outstanding principal
and/or interest in such Note, into the securities offered in
the Follow On Offering, by applying and exchanging the
outstanding principal and interest of such Notes towards the
purchase price of the securities offered in such Follow On
Offering, at the same price and terms of the Follow On
Offering.
The
Company paid a placement agent fee to Sandgrain Securities,
Inc. of (i) $6,000 in cash, (ii) 24,000 shares of Common
Stock constituting 8% of the number of Conversion Shares
initially issuable upon exercise of the Notes, and (iii)
24,000 warrants, substantially similar to the Warrants sold
to investors (the “Placement Agent Warrants”), in
connection with the Note Offering, in addition to legal
fees.
Each
of the warrant agreements included an anti-dilution provision
that allowed for the automatic reset of the exercise price
upon any future sale of common stock or warrants at or below
the current exercise price. The Company considered
the current Financial Accounting Standards Board guidance of
“Determining Whether an Instrument Indexed to an
Entity’s Own Stock” which indicates that any
adjustment to the fixed amount (either conversion price or
number of shares) of the instrument regardless of the
probability or whether or not within the issuers’
control, means the instrument is not indexed to the issuers
own stock. Accordingly, the Company determined that as the
strike price of these warrants contain exercise prices that
may fluctuate based on the occurrence of future offerings or
events, and as such is not a fixed amount. As a result,
the Company determined that these warrants are not considered
indexed to the Company’s own stock and
characterized the fair value of these warrants as
derivative liabilities upon issuance.
The
Company determined that the fair value of the warrant
liability at issuance on November 20, 2009 to be $75,000
based upon a probability weighted average Black-Sholes-Merton
calculation. The Company recorded the full value of the
derivative as a liability at issuance with an offset to
valuation discount. The fair value of the warrant
liability as of June 30, 2011 was $24,735 (see Note
8).
As
of June 30, 2011, investors have converted $75,000 of the
Convertible Notes plus $4,664 of accrued interest into
318,656 shares of the Company’s common
stock. There was no outstanding balance as of June
30, 2011.
2009 Fall
Offering. From October 2, 2009 to January 15, 2010,
the Company conducted and completed a private offering (the
“Fall 2009 Offering”) consisting of an aggregate
of $1,588,125 of 7% Convertible Promissory Notes (the
“Notes”) with interest compounded quarterly at
the annual rate of 7% payable at maturity, and warrants to
purchase an aggregate of 6,352,500 shares of our common stock
(the “Fall 2009 Warrants”). The Company
received $1,284,425 net proceeds, of which $344,500 was
received as of December 31, 2009. The Fall 2009
Notes mature on the second anniversary of the closing of this
offering and will be convertible, at the option of the note
holder, into up to 6,352,500 shares of our common stock at a
conversion price of $0.25 per share. The Fall 2009
Warrants are for a term of three years at an exercise price
of $0.30 per share.
Each
of the warrant agreements included an anti-dilution provision
that allowed for the automatic reset of the exercise price
upon any future sale of common stock or warrants at or below
the current exercise price. The Company considered
the current Financial Accounting Standards Board guidance of
“Determining Whether an Instrument Indexed to an
Entity’s Own Stock” which indicates that any
adjustment to the fixed amount (either conversion price or
number of shares) of the instrument regardless of the
probability or whether or not within the issuers’
control, means the instrument is not indexed to the issuers
own stock. Accordingly, the Company determined that as the
strike price of these warrants contain exercise prices that
may fluctuate based on the occurrence of future offerings or
events, and as such is not a fixed amount. As a result,
the Company determined that these warrants are not considered
indexed to the Company’s own stock and
characterized the fair value of these warrants as
derivative liabilities upon issuance.
The
Company determined that the fair value of the warrant
liability at issuances to be $3,027,815 based upon a
probibility weighted average Black-Scholes-Merton calculation
(See Note 8), of which, $654,978 was recorded on December 31,
2009 and $2,372,837 was recorded on January 15,
2010. The Company recorded the full value of the
derivative of $2,372,837 as a liability at issuance with an
offset to valuation discount. As the fair value of the
liability of $2,372,837 exceeded the note value of
$1,243,625, the excess of the liability over the note amount
of $1,129,212 was considered to be cost of the private
placement and was charged to expense upon
issuance. The fair value of the warrant liability
as of June 30, 2011 was $1,613,819 (see Note 8).
As
of June 30, 2011, investors have converted $1,578,125 of the
Convertible Notes plus interest of $11,502 into 6,358,507
shares of the Company’s common stock. The
outstanding balance at June 30, 2011 was $11,062 which
includes $1,062 in accrued interest.
2010
Fall Offering #2
From
October 4, 2010 to November 30, 2010, the Company conducted
and concluded a private offering (the “Fall 2010
Offering #2”) consisting of up to $3,000,000 aggregate
face amount of its convertible notes (the “ Fall 2010
Notes). A total of $940,347 Fall 2010 #2 Notes were sold to
ten accredited investors for an aggregate purchase price of
$849,861. While there was no stated interest rate
on the Fall 2010 #2 Notes, the implied effective interest
rate on the Fall 2010 #2 Notes is 10% per annum. The Fall
2010 #2 Notes mature on the first anniversary of the closing
of this offering and will be convertible, at the option of
the noteholder into 3,761,386 shares of the Company’s
common stock at a conversion price of $0.25 per share (the
“Conversion Price”).
Each
of the investors in the Fall 2010 #2 Offering will receive,
for no additional consideration, a warrant (the “Fall
2010 #2 Warrants”), entitling the holder to purchase a
number of shares of our common stock equal to 100% of the
number of shares of common stock into which the Fall 2010 #2
Notes are convertible (the “Warrant
Shares”). Each Fall 2010 Warrant is
exercisable on a cash basis only at an initial price of $0.30
per share, and is exercisable for a period of twenty four
months. Up to 3,761,386 Warrant Shares are
initially issuable on exercise of the Fall 2010 #2
Warrants.
The
Company received $849,861 in net proceeds in the Fall 2010 #2
Offering which was used for general corporate purposes and
working capital. The aggregate value of the Fall 2010 #2
Offering Warrants issued were valued at $436,986 using the
Black-Scholes-Merton option valuation model with the
following assumptions; risk-free interest rate of .27;
dividend yield of 0%; volatility factors of the expected
market price of common stock of 121%; and an expected life of
two years (statutory term) and vest immediately upon
issuance. The Company also determined that the
notes contained a beneficial conversion feature of
$417,875. As of June 30, 2011, the aggregate value
of the Fall 2010 #2 Offering Warrants, the beneficial
conversion feature and the implied discount and transaction
fees of $85,486 are considered as debt discount and will be
amortized over the life of the notes.
As
of June 30, 2011, investors have converted $929,347 of the
Convertible Notes into 3,717,386 shares of the
Company’s common stock. The outstanding
balance at June 30, 2011 was $11,000.
2011
Winter Offering
From
December 13, 2010 through February 28, 2011, the
Company conducted a private offering (the
“Winter 2011 Offering”) of up to $3,000,000
aggregate face amount of its convertible notes (the
“Winter 2011 Notes”). A total of $2,588,422
aggregate face amount of the Winter 2011 Notes
were sold for an aggregate purchase price of
$2,353,111. While there was no stated interest
rate on the Winter 2011 Notes, the implied effective interest
rate on the Winter 2011 Notes is 10% per annum. The Winter
2011 Notes mature on the first anniversary of their date of
issuance. The Winter 2011 Notes are convertible, at the
option of the note holder, into 10,353,688 shares of common
stock of the Company (the “Conversion Shares”) at
an initial conversion price of $0.25 per share (the
“Conversion Price”).
Each
of the investors in the Winter 2011 Offering received, for no
additional consideration, a warrant (the “Winter 2011
Warrants”), entitling the holder to purchase a number
of shares of the Company’s common stock equal to 100%
of the number of shares of common stock into which the Winter
2011 Notes are convertible (the “Warrant
Shares”). Each Winter 2011 Warrant is exercisable
on a cash basis only at an initial price of $0.30 per share,
and is exercisable immediately upon issuance and for a period
of two (2) years from the date of issuance. Up to 10,353,688
Warrant Shares are initially issuable to date on exercise of
the Winter 2011 Warrants.
The
Company received $2,353,111 in net proceeds in the 2011
Winter Offering which was used for general corporate purposes
and working capital. The aggregate value of the 2011 Offering
Warrants issued were valued at $1,368,888 using the
Black-Scholes-Merton option valuation model with the
following assumptions; risk-free interest rate of .25;
dividend yield of 0%; volatility factors of the expected
market price of common stock of 130%; and an expected life of
two years (statutory term) and vest immediately upon
issuance. The Company also determined that the
notes contained a beneficial conversion feature valued
at $984,223. As of June 30, 2011, the
aggregate value of the 2011 Winter Offering Warrants, the
beneficial conversion feature and the implied discount and
transaction fees of $235,311 are considered as debt discount
and will be amortized over the life of the notes.
As
of June 30, 2011, investors have converted $2,296,372 of the
Convertible Notes into 9,185,486 shares of the
Company’s common stock. The outstanding balance at June
30, 2011 was $292,050.
2011
Spring Offering
From
March 14, 2010 through May 31, 2011, the
Company conducted a private offering (the
“Spring 2011 Offering”) of up to $1,000,000
aggregate face amount of its convertible notes (the
“Spring 2011 Notes”). A total of $1,469,550
aggregate face amount of the Spring 2011 Notes were sold
for an aggregate purchase price of
$1,335,955. While there was no stated interest
rate on the Spring 2011 Notes, the implied effective interest
rate on the Spring 2011 Notes is 10% per annum. The Spring
2011 Notes mature on the first anniversary of their date of
issuance. The Spring 2011 Notes are convertible, at the
option of the note holder, into 5,878,200 shares of common
stock of the Company (the “Conversion Shares”) at
an initial conversion price of $0.25 per share (the
“Conversion Price”).
Each
of the investors in the Spring 2011 Offering received, for no
additional consideration, a warrant (the “Spring 2011
Warrants”), entitling the holder to purchase a number
of shares of the Company’s common stock equal to 100%
of the number of shares of common stock into which the Spring
2011 Notes are convertible (the “Warrant
Shares”). Each Spring 2011 Warrant is exercisable
on a cash basis only at an initial price of $0.30 per share,
and is exercisable immediately upon issuance and for a period
of two (2) years from the date of issuance. Up to 5,878,200
Warrant Shares are initially issuable to date on exercise of
the Spring 2011 Warrants.
The
Company received $1,335,955 in net proceeds in the 2011
Spring Offering which was used for general corporate purposes
and working capital. The aggregate value of the 2011 Spring
Offering Warrants issued were valued at $726,787 using the
Black-Scholes-Merton option valuation model with the
following assumptions; risk-free interest rate of .45;
dividend yield of 0%; volatility factors of the expected
market price of common stock of 119%; and an expected life of
two years (statutory term) and vest immediately upon
issuance. The Company also determined that the
notes contained a beneficial conversion feature valued
at $609,168. As of June 30, 2011, the
aggregate value of the 2011 Spring Offering Warrants, the
beneficial conversion feature and the implied discount and
transaction fees of $133,595 are considered as debt discount
and will be amortized over the life of the notes.
As
of June 30, 2011, investors have converted $969,650 of the
Convertible Notes into 3,878,600 shares of the
Company’s common stock. The outstanding
balance at June 30, 2011 was $499,900.
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