Quarterly report pursuant to Section 13 or 15(d)

Convertible Debentures, Disclosure

v3.7.0.1
Convertible Debentures, Disclosure
3 Months Ended
Jun. 30, 2017
Notes  
Convertible Debentures, Disclosure

NOTE 8 - CONVERTIBLE DEBENTURES

 

Background

On January 25, 2017, the Company entered into a securities purchase agreement with an accredited investor to place Convertible Debentures (as amended the “Debentures”) with a maturity date of January 25, 2018 in the aggregate principal amount of up to $600,000 (the “Transaction”), provided that in case of an event of default, the Debentures may become at the holder’s election immediately due and payable. The initial closing of the Transaction occurred on January 25, 2017 when the Company issued a Debenture for $300,000.  A second closing for $150,000 occurred on March 2, 2017 and a third closing for $150,000 occurred on May 3, 2017. The Debentures bear interest at the rate of 5% per annum.  In addition, the Company must pay to the holder a fee equal to 7% of the amount of the Debentures to assist in their monitoring costs for the Debentures. The net proceeds of the financing will be used for general corporate matters and for other expenses.

 

Conversion Features

The Debentures may be converted at any time on or prior to maturity at the lower of $0.3107 or 93% of the average of the three lowest daily volume weighted average price (VWAP) during the 10 consecutive trading days immediately preceding the conversion date, provided that as long as we are not in default under the Debenture, the conversion price may never be less than $0.05.

 

Any time after the six-month anniversary of the issuance of a Debenture that the daily VWAP is less than $0.05 for a period of twenty consecutive trading days (the “Triggering Date”) and only for so long as such conditions exist after a Triggering Date, the Company shall make monthly payments beginning on the last calendar day of the month when the Triggering Date occurred.  Each monthly payment shall be in an amount equal to the sum of (i) the principal amount outstanding as of the Triggering Date divided by the number of such monthly payments until maturity, (ii) a redemption premium of 20% in respect of such principal amount and (iii) accrued and unpaid interest hereunder as of each payment date.  The Company may, no more than twice, obtain a thirty-day deferral of a monthly payment due as a result of a Triggering Date through the payment of a deferral fee in the amount equal to 10% of the total amount of such monthly payment.  Each deferral payment may be paid by the issuance of such number of shares as is equal to the applicable deferral payment divided by a price per share equal to 93% of the average of the four lowest daily VWAPs during the 10 consecutive Trading Days immediately preceding the due date in respect of such monthly payment begin deferred, provided that such shares issued will be immediately freely tradable shares in the hands of the holder.

 

Debt discount, embedded redemption feature and beneficial conversion feature

Upon issuance of the Debentures in the three closings, the Company recognized an aggregate debt discount of approximately $239,000 to the aggregate $600,000 principal value of Debentures, comprised approximately of the following:

 

Fees paid to an affiliate of the lender

$

109,000

Beneficial conversion feature

 

103,000

Estimated fair value of embedded derivative

 

27,000

Aggregate discount amount

$

239,000

 

The debenture is presented net of the related debt discount and the discount is amortized to interest expense over the Debenture’s term using the effective interest method.

 

Beneficial Conversion Feature

At the time of each closing, the Debenture’s effective conversion price was below the quoted market price of the Company’s common stock. As such, the Company recognized a beneficial conversion feature equal to the intrinsic value of the conversion feature on each issuance date, resulting in a discount to the Debenture with a corresponding credit to additional paid-in capital.

 

Embedded Derivative

The monthly payment provision within the Debentures is a contingent put option that is required to be separately measured at fair value, with subsequent changes in fair value recognized in the Consolidated Statements of Operations. The Company estimated the fair value of the monthly payment provision, as of the issuance date and June 30, 2017 using probability analysis of the occurrence of a Triggering Date applied to the discounted maximum redemption premium for any given payment. The probability analysis utilized in calculating the embedded derivative upon issuance and at June 30, 2017 was calculated using the following key inputs:

 

 

 

Key Inputs

Stock price

 

$

0.11 - $0.23

Probability of Triggering Date

 

 

3.5% - 25.3%

Volatility

 

 

213.7%

Risk-free rate

 

 

0.82% - 1.14%

Discount rate

 

 

39.6%

 

The maximum redemption was discounted at 39.6%, the calculated effective rate of the Debenture before measurement of the contingent put option. The fair value estimate of the embedded derivative is a Level 3 measurement.  The roll-forward of the Level 3 fair value measurement, for the three months ended June 30, 2017, is as follows:

 

Balance at

March 31, 2017

Issuance

Net unrealized

(gain)/loss

Balance at

June 30, 2017

24,000

$ 6,000

$ (10,000)

$ 20,000

 

The carrying value of the Debentures, as of June 30, 2017, is comprised of the following:

 

Secured Convertible Debenture at June 30, 2017:

 

 

Principal value of 5%, convertible

$

600,000

Fair value of embedded derivative

20,000

Accrued Interest

 

10,063

Debt discount

(157,614)

Carrying value of Secured Convertible Debenture Note

$

472,449

 

As of June 30, 2017, the estimated aggregate fair value of all outstanding convertible notes payable is approximately $650,000. The fair value estimate is based on the estimated option value of the conversion terms. The estimated fair value represents a Level 3 measurement.

 

As of June 30, 2017, there were 27,134,419 shares of our common stock outstanding, of which 12,523,878 shares were held by non-affiliates. If the selling stockholder converts the Convertible Notes, the ownership position of the shareholders prior to the conversion would be diluted. If the selling stockholder converts the Convertible Notes into all of the 4,000,000 shares being offered by this prospectus, such shares would represent 12.8% of all of our then outstanding shares and 24.2% of the then total number of shares held by non-affiliates (assuming no further issuances).

 

Events of Default or Financial covenants

The Company is in compliance with all terms associated with the convertible note.