| DEBT |
Convertible Debentures
The following table sets forth the components
of the Company’s convertible debentures at June 30, 2015 and December 31, 2014:
| |
|
June 30,
2015 |
|
|
December 31,
2014 |
|
| |
|
|
|
|
|
|
| 7% Convertible debentures |
|
$ |
200,000 |
|
|
$ |
200,000 |
|
| 9% Convertible debentures |
|
|
3,610,000 |
|
|
|
3,210,000 |
|
| Loan discounts |
|
|
(41,137 |
) |
|
|
(410,334 |
) |
| Total convertible debentures, net |
|
|
3,768,863 |
|
|
|
2,999,666 |
|
| Less: Current portion of convertible debentures, net |
|
|
3,260,000 |
|
|
|
50,000 |
|
| Noncurrent portion of convertible debentures net |
|
$ |
508,863 |
|
|
$ |
2,949,666 |
|
During the year ended December 31, 2014, the
Company privately placed a series of unsecured, convertible debentures with accredited investors for gross proceeds of $900,000
(of which $300,000 was raised during the predecessor period of January 1 through April 25, 2014). The debentures carry interest
rates ranging between 7% and 9% per annum, payable semiannually in cash, for a three-year terms with fixed conversion prices ranging
from $5.00 to $7.00 per share if converted within the first year of issuance or fixed conversion prices ranging from $6.00 to $9.00
if converted during the second or third year following issuance.
On October 15, 2014, the Company converted, upon
receiving formal notice from a noteholder, $50,000 in note principal, plus accrued interest, into 10,450 shares of restricted common
stock.
On October 31, 2014, the Company issued an unsecured,
convertible debenture for $610,000 to an accredited investor. The debenture carries an interest rate of 9% per annum for a seventeen-month
term with a fixed conversion price of $5.50 per share. The principal and interest are payable in twelve equal installments commencing
April 30, 2015. The investor received 15,000 shares of the Company’s common stock valued at $95,100 as consideration for
entering into the debenture agreement.
On January 12, 2015, the Company issued an unsecured,
convertible debenture for $400,000 to an accredited investor. The cost of this issuance was $28,000. The debenture carries an interest
rate of 9% per annum, payable semiannually in cash, for an eighteen-month term with a fixed conversion price of $5.50 per share.
The investor received 5,000 shares of the Company’s common stock valued at $32,150 as consideration for entering into the
debenture agreement.
All of the convertible debentures were analyzed
at the time of their issuance for beneficial conversion features. In some instances, the Company concluded that a beneficial conversion
feature existed. The beneficial conversion features were measured using the commitment-date stock price and aggregated $624,140.
This amount was recorded as a debt discount and is being amortized as interest expense over the terms of the related convertible
debentures. The debt discount associated with these beneficial conversion features amounted to $41,137 and $410,334 as of June
30, 2015 and December 31, 2014, respectively. The related amortization expense totaled $33,754 and $96,564, respectively, for the
three and six-month periods ended June 30, 2015, as compared to $17,838 for both the three and six-month periods ended June 30,
2014.
In addition, the Company analyzed its convertible
debentures for derivative accounting consideration and determined that derivative accounting was not applicable.
On April 30, 2015, the Company was required to
pay $50,833 in principal, along with accrued interest of approximately $28,000, per the terms of a convertible note. The Company
failed to make this payment. On May 13, 2015, the Company received a letter from the noteholder’s counsel alleging certain
breaches and declaring the note to be in default. The interest rate on the convertible note increased from 9.0% to 22.0% per annum
as a result of the default. The noteholder has made a demand for payment and is seeking to enforce all of its contractual, legal
and equitable rights under the convertible note and related agreements. The original principal balance outstanding on the convertible
note is $610,000 and is presented as a current liability on the Company’s Consolidated Balance Sheets. The note is unsecured.
On July 12, 2015, the Company was required to
pay $18,000 in interest per the terms of a $400,000 convertible note dated January 12, 2015. The Company failed to make this payment.
On July 27, 2015, the Company received a notice of default. The interest rate on the convertible note increased from 9.0% to 15.0%
per annum as a result of the default and the noteholder is entitled to $20,000 in legal fees. The noteholder advised the Company
that it reserves any and all rights and remedies to protect its interests under the terms of the convertible note.
The Company is in default for failure to pay
interest on twelve additional convertible notes during the current year period with an aggregate principal balance of $2,250,000.
The interest rate on these notes ranges between 7% and 9% per annum, and does not increase in the event of a default. The principal
amounts on these unsecured notes are presented as current liabilities on the Company’s Consolidated Balance Sheets.
As a result of the defaults noted above, the
Company accelerated the amortization of all deferred financing costs and beneficial conversion features associated with these convertible
notes. These charges totaled $461,982 and were recorded to interest expense in the Company’s Consolidated Statements of Operations.
At June 30, 2015, the underlying shares of the
Company’s common stock related to these convertible debentures totaled 687,208 shares.
Senior, Secured Promissory Notes
The following table sets forth the components
of the Company’s promissory notes at June 30, 2015 and December 31, 2014:
| |
|
June 30,
2015 |
|
|
December 31,
2014 |
|
| |
|
|
|
|
|
|
| Promissory notes |
|
$ |
1,000,000 |
|
|
$ |
2,000,000 |
|
| Loan discounts |
|
|
— |
|
|
|
(11,997) |
|
| Total promissory notes, net |
|
|
1,000,000 |
|
|
|
1,988,003 |
|
| Less: Current portion of convertible debentures, net |
|
|
1,000,000 |
|
|
|
1,988,003 |
|
| Noncurrent portion of convertible debentures net |
|
$ |
— |
|
|
$ |
— |
|
On April 25, 2014, the Company issued a series
of promissory notes aggregating in $1,000,000 principal to the former stockholders of ALD in connection with its acquisition. The
promissory notes carry an interest rate of 5% per annum, payable at maturity, for a one year term and are secured by the assets
of ALD. In determining the fair value of the promissory notes issued, the Company considered, among other factors, the market yields
on debt securities depending on the time horizon and level of perceived risk of the specific investment. The Company arrived at
an estimated market rate of 9% and calculated the present value of the $1,000,000 promissory note and its related interest to be
$965,019. As a result, the Company recorded a discount against the promissory notes of $34,981. The discount is being amortized
using the effective interest method over the life of the notes. For the six-month period ended June 30, 2015, the Company recorded
$11,997 in interest expense related to the note discount. No discount balance remained unamortized at June 30, 2015.
On April 24, 2015, the Company was informed by
the counsel of the former ALD stockholders that the failure to pay all of the principal and accrued interest on the outstanding
promissory notes would result in the declaration of default, and that absent full payment of the notes by the maturity date, the
former stockholders would commence collection proceedings and seek to enforce all of their contractual, legal and equitable rights
under the note and related agreements. The notes were not repaid at their maturity date and are currently in default. See “Note
11 — Subsequent Events” for additional information.
On October 13, 2014, the Company received $1,000,000
in loan proceeds from an accredited investor pursuant to the terms of a secured promissory note. The promissory note was due and
payable in full by the Company on December 5, 2014. As consideration for loaning these proceeds to the Company, the investor was
entitled to receive a $40,000 interest payment along with the principal at maturity. This loan was secured by 1,000,000 shares
of the Company’s common stock owned by its former executive chairman. On December 26, 2014, the Company repaid all principal
and accrued interest amounts associated with this promissory note.
On December 21, 2014, the Company received $1,000,000
in loan proceeds from an accredited investor pursuant to the terms of a secured promissory note. The promissory note was due and
payable in full by the Company on March 5, 2015 and was secured by 1,000,000 shares of the Company’s common stock owned by
its former executive chairman, Richard St Julien. As consideration for loaning these proceeds to the Company, the investor was
entitled to receive a $50,000 interest payment along with the principal at maturity. On March 5, 2015, the Company paid $50,000
to satisfy the accrued interest due on the promissory note.
On March 31, 2015, the Company issued 181,818
shares of its common stock along with an equal number of common stock purchase warrants in lieu of cash to satisfy the $1,000,000
principal payment owed to the noteholder. The fair value of the common stock was $1,363,635. The stock purchase warrants have been
accounted for as equity in accordance with ASC 480. Using the Black-Scholes model, the Company calculated a relative fair value
of $369,779 for these stock purchase warrants. The difference between the fair value of the equity and the settled liability
totaled $733,414 and was recorded as a loss on settlement of debt.
Loans Payable
On September 5, 2014, the Company received $130,000
from a third party in the form of a demand loan bearing interest at a rate of 9% per annum. The entire principal amount, plus accrued
interest totaling $9,263, was outstanding at June 30, 2015.
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