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Debt
3 Months Ended
Jun. 30, 2012
Debt Disclosure [Abstract]  
Debt Disclosure [Text Block]

NOTE 7 - CONVERTIBLE DEBENTURES

During the year ended September 30, 2010, the Company issued, pursuant to a securities purchase agreement, 10% convertible debentures with a face value of $1,500,000.  The first tranche of the total financing, with a face value of $900,000, was issued during the first quarter ended December 31, 2009.  In April 2010, additional debentures with a face value of $600,000 were issued.  All of the debentures have a two year maturity and were issued with attached common stock purchase warrants.  The effective interest rate on the debentures is 10% per annum.  The debentures are secured by all assets of the Company except those specifically excluded in the agreement which include all Kansas properties and related assets.

The debentures are convertible at any time after the original issue date into a number of shares of the Company’s common stock, determined by dividing the amount to be converted by an initial conversion price of $0.30 per share.  Additionally, attached common share purchase warrants expire 42 months from the original issue date and permit the holders two exercise options.  The warrants were exercisable by purchase of the Company’s common stock for cash at an initial exercise price of $0.45, or alternatively, with respect to the warrants issued in conjunction with the initial $900,000 tranche, in a cashless exercise, the number of shares being determined in accordance with a predetermined formula based on the Company’s then current stock price.   Subsequent to the initial issue date, the initial conversion price of $0.30 per share was amended to $0.18 per share and then $0.12 based on of provisions in the agreements related to equity issuances and issuance of additional convertible debentures described hereafter during the year ended September 30, 2011.  All of the warrants containing cashless exercise provision were fully exercised during the year ended September 30, 2010.

During the year ended September 30, 2010, the holders of the debentures and the common stock purchase warrants associated with the first $900,000 issuance, exercised all 3,000,000 warrants to acquire 2,111,388 shares of the Company’s common stock in two separate cashless exercises on January 6 and January 27, 2010.  Warrants attached to the debentures issued in April 2010 total 2,000,000, do not contain a cashless exercise provision, and remain to be exercised at the election of the debenture holders.

During the year ended September 30, 2011, the Company entered into a Securities Purchase Agreement with certain institutional investors to issue $500,000 of Secured Convertible Debentures.  The debentures provide for interest to be paid quarterly, at the rate of 10% per annum, and are due two years from the issuance date.  The debentures are secured by all assets of the Company except those specifically excluded in the agreement which include all Kansas properties and related assets.

 

The debentures are convertible at any time after the original issue date into a number of shares of the registrant’s common stock, determined by dividing the amount to be converted by an initial conversion price of $0.18 per share.  In addition to the debentures the purchasers were issued an aggregate of 2,833,113 common share purchase warrants, each having a term of 42 months, expiring April of 2014, and giving the purchasers the right to purchase the Company’s common shares at an initial exercise price of $0.18 per share. Subsequent to the initial issue date, the initial conversion price of $0.18 per share was amended to $0.12 per share based on provisions in the agreements related to equity issuances and issuance of additional convertible debentures described hereafter during the year ended September 30, 2011. 

 

Further, the modified conversion price of $0.12 per share was amended to $0.05 per share based on provisions in the agreements related to equity issuances and issuance of additional convertible debentures described hereafter during the nine months ended June 30, 2012.

Based upon the fair values as of the original agreement dates of the December 2009 and April 2010 debentures, $1,500,000 was allocated to the common stock purchase warrants and the conversion features resulting in a discount on the debt.  Giving effect to the amortization of the discount, and the conversion of $658,000 in principal conversion for the year ended September 30, 2011, $ nil and $118,625 of the discount remains to be amortized at June 30, 2012 and September 30, 2011, respectively. 

Based upon the fair values as of the original agreement dates of the October 2010 debentures, $500,000 was allocated to the common stock purchase warrants and the conversion features resulting in a discount on the debt. Giving effect to the amortization of the discount, and the conversion of $115,000 and $60,000 and the modification of the denture agreement for the nine months ended June 30, 2012 and the year ended September 30,  2011, respectively, and $ nil and $198,000 of the discount remains to be amortized as of June 30, 2012 and September 30, 2011, respectively. 

The 10% interest payable quarterly as per provisions in the debentures may be paid in shares of common stock at the Company's option according to a predetermined formula.  For the nine months ended June 30, 2012 and June 30, 2011, 483,811 and 774,563 common shares were issued, respectively, for interest payable under the debentures.  Interest expense of $64,147 and $86,810 has been included in ‘Interest and financing costs’ in the consolidated statements of operations for the nine months ended June 30, 2012 and June 30, 2011, respectively. Interest accrued is included on the Consolidated Balance Sheets in "Other payables, interest and taxes accrued" of $29,045 and $33,362 at June 30, 2012 and September 30, 2011, respectively.

The debentures all contain ‘down-round’ provisions which call for the debt conversion and warrant exercise prices to be reduced based on future issues of debt or equity with more favorable provisions.  Management has determined that these provisions cause the conversion options and warrants to require derivative liability accounting.  As such, management has valued at fair value at the date of issuance and bifurcated from the host instruments.  See Note 6.

In all three cases, the entire face amount of the debt issued has been allocated to discount, and is being amortized over the respective term of the debt.

During the nine months ended June 30, 2012 and fiscal year ended September 30, 2011, holders of the debt elected to convert $115,000 and $718,000 face amounts of the debt into 958,333 and 4,898,614 shares of common stock, respectively, according to the terms of the agreements.

Giving effect to monthly amortization of the debt discounts and the conversion of debt into shares of common stock, during the nine months ended June 30, 2012 and June 30, 2011, respectively, $144,814 and $628,939, respectively, of debt discount amortization has been posted to the statement of operations.  

On January 9, 2012, the Company entered into a Modification Agreement with the Purchasers.   The maturity date of the 2009 Debentures was extended to March 15, 2012.  Also the conversion price of Debentures issued in the 2009 Transactions and 2010 Transaction was reduced to five cents ($0.05) per share, and the Exercise Price of the Warrants issued in the 2009 Transactions and 2010 Transaction was reduced to five cents ($0.05) per share.  The Company determined that the modification resulted in a substantial change in the terms of the agreements such that recognition of an extinguishment loss is required. The Company recognized a loss on extinguishment of $1,023,417 including write-off of the remaining unamortized debt discount of $171,811 and loss on warrant derivative resulting from exercise price modification of $71,383 at January 9, 2012.

As of June 30, 2012, the Company is in default of the terms of the convertible debentures as a result of certain provisions of the agreement.  The December 2009 and April 2010 debentures maturity date of December 14, 2011 has lapsed, causing the default provisions on all debentures including the October 2010 debentures for a total balance of $1,164,000 as of June 30, 2012.  The Exercise Price of all outstanding warrants is reduced to five cents ($0.05) per share effective January 9, 2012.