Convertible Debt and Other Debt |
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Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible Debt and Other Debt |
We have entered into various convertible debentures. The convertible debentures have terms ranging from 12 to 24 months and subject to annual interest rates ranging from 4% to 10%. The proceeds received are net of fees. The lenders charge interest per annum based on the principal balance. The lenders have the right, at any time after 180 days from the issue date to convert any or part of the outstanding and unpaid principal and interest into shares of the Companys common stock based on a volume weighted average price of the closing prices of the Companys shares during various periods prior to conversion subject to adjustments for stock splits, stock dividends or rights offerings. The Company shall have the right to prepay the debenture for a payment of the outstanding principal plus unpaid interest at any time on or before six months after the effective date. If the Company chooses to prepay it will incur pre-payment penalties ranging from 19% to 38% of the principal balance. The Company is required to reserve shares of common stock for full conversion of these debentures. The maturity dates range from six months to two years after the effective date of the payment. The Company determined that the conversion feature met the definition of a liability in accordance with ASC 815-40 and therefore bifurcated the conversion feature on each debt agreement and accounted for it as a derivative liability. The fair value of the conversion feature was accounted for as a note discount and will be amortized to interest expense over the life of the loan. The fair value of the conversion feature was reflected in the conversion option liability line in the condensed consolidated balance sheet.
The proceeds from these convertible debts were allocated between the host debt instrument and the convertible option based on the residual method. The estimated fair value of the convertible option was determined using a binomial formula, resulting in allocations to the convertible option and accounted for as a liability in the Companys condensed consolidated balance sheet. In accordance with the provisions of ASC 815-40, the gross proceeds is offset by debt discounts which will be amortized to interest expense over the expected life of the debt.
In connection with the senior secured convertible debentures issued in our still open private placement with closings in July 2015 and September 2015, we also issued warrants to the lenders to purchase an aggregate 5,857,142 shares of the Common Stock, at an exercise price of $0.40 per share, expiring five years after the issuance date.
ASC 470-20 states that the proceeds from the issuance of debt with detachable stock warrants should be allocated between the debt and warrants on the basis of their relative fair market values. The debt discount will be amortized to interest expense over the two year term of these loans. We amortized $149,025 of the debt discount to interest expense in 2015. The warrants issued in connection with the convertible debentures are classified as warrant derivative liabilities because the warrants are entitled to certain rights in subsequent financings and the warrants contain down-round protection and therefore, do not meet the scope exception for treatment as a derivative under ASC 815, Derivatives and Hedging, (ASC 815). Since down-round protection is not an input into the calculation of the fair value of the warrants, the warrants cannot be considered indexed to the Companys own stock which is a requirement for the scope exception as outlined under ASC 815. The estimated fair value of the warrants was determined using the binomial model, resulting in an allocation of $1,182,439 to the total warrants out of the gross proceeds of $3,280,000. The fair value will be affected by changes in inputs to that model including our stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. We will continue to classify the fair value of the warrants as a liability until the warrants are exercised, expire or are amended in a way that would no longer require these warrants to be classified as a liability, whichever comes first.
The specific terms of the convertible debts and outstanding balances as of September 30, 2015 are listed in the tables below.
The loans above with outstanding balances of zero were outstanding as of December 31, 2014 and were paid off during the nine months ended September 30, 2015.
1 The original issue discount is reflected in the first year. 2 The annual interest starts accruing in the second year.
The following table provides a summary of the changes in convertible debt, net of unamortized discount, during 2015:
Other Notes
On January 15, 2015 we signed a Merchant Agreement with a lender. Under the agreement we received $150,000 in exchange for rights to all customer receipts until the lender is paid $187,500, which was collected at the rate of $744 per business day. The payments were secured by essentially all tangible assets of the Company. $67,925 of the proceeds were used to pay off the outstanding balance of a previous loan from this lender. The Company paid $1,875 in fees in connection with this loan. The note was paid off in its entirety prior to September 30, 2015.
On January 29, 2015 we signed a Merchant Agreement with a lender. Under the agreement we received $200,000 in exchange for rights to all customer receipts until the lender is paid $278,000, which was collected at the rate of $1,985 per business day. The payments were secured by essentially all tangible assets of the Company. The Company paid $999 in fees in connection with this loan. The note was paid off in its entirety prior to September 30, 2015.
On March 17, 2015 we signed a Merchant Agreement with a lender. Under the agreement we received $50,000 in exchange for rights to all customer receipts until the lender is paid $67,450, which was collected at the rate of $559 per business day. The payments were secured by essentially all tangible assets of the Company. The Company paid $999 in fees in connection with this loan. The note was paid off in its entirety prior to September 30, 2015.
On May 29, 2015 we signed a Merchant Agreement with a lender. Under the agreement we received $100,000 in exchange for rights to all customer receipts until the lender is paid $132,000, which was collected at the rate of $1,098 per business day. The payments were secured by essentially all tangible assets of the Company. The Company paid $3,999 in fees in connection with this loan. The note was paid off in its entirety prior to September 30, 2015.
On August 28, 2015 we signed a Merchant Agreement with a lender. Under the agreement we received $300,000 in exchange for rights to all customer receipts until the lender is paid $384,000, to be collected at the rate of $2,560 per business day. The payments are not secured. On the closing date, $131,710 of the proceeds were used to pay off the outstanding balances of two existing Notes. The Company paid $6,000 in fees in connection with this loan. The outstanding balance is recorded as other debt on the balance sheet.
During the nine months ended September 30, 2015 we signed two ninety day notes with an investor. Under the terms of the notes, the Company received a total of $500,000. The investor converted these loans in the Companys offering on July 22, 2015.
During the nine months ended September 30, 2015, the Company made payments of $537,641 in total on the non-convertible debt from non-related parties. |