NOTE 5 - CONVERTIBLE DEBT

9 Months Ended

Sep. 30, 2015

Note 5 - Convertible Debt

NOTE 5 - CONVERTIBLE DEBT

NOTE 5 – CONVERTIBLE DEBT

The following is a summary of convertible debentures outstanding as of September 30, 2015:

	Face Value		Initial Discount			Accumulated Amortization		Debt Extinguishment		Carrying Value
Convertible Promissory Notes	$	52,500	$	(14,629	)	$	14,629	$	—	$	52,500
Series A Debentures		145,637		(74,943	)		74,943		—		145,637
Series B Debentures		161,932		(69,135	)		69,135		—		161,932
Series C Debentures		350,833		—			—		—		350,833
Series D Debentures		763,199		(34,650	)		34,650		—		763,199
Series E Debentures		145,000		(145,000	)		145,000		—		145,000
Series F Debentures		402,000		(271,206	)		271,206		—		402,000
Total Debentures	$	1,968,601	$	(594,934	)	$	594,934	$	—	$	1,968,601
Total	$	2,021,101	$	(609,563	)	$	609,563	$	—	$	2,021,101

The following is a summary of convertible debentures outstanding as of December 31, 2014:

	Face Value		Initial Discount			Amortization		Debt Extinguishment		Carrying Value
Convertible Promissory Notes	$	52,500	$	(14,629	)	$	7,218	$	—	$	45,089
Series A Debentures		167,540		(74,943	)		74,943		—		167,540
Series B Debentures		161,932		(69,135	)		69,135		—		161,932
Series C Debentures		350,833		(72,869	)		—		72,869		350,833
Series D Debentures		763,199		(267,285	)		9,992		237,227		743,133
Series E Debentures		145,000		(145,000	)		33,725		—		33,725
Total Debentures	$	1,588,504	$	(629,232	)	$	187,795	$	310,096	$	1,457,163

	Face Value		Initial Discount			Amortization		Stock Settled Debt Obligation		Carrying Value
Convertible Debenture	$	113,128	$	(66,423	)	$	3,336	$	65,422	$	115,463
Total	$	1,754,132	$	(710,284	)	$	198,349	$	375,518	$	1,617,715

January-September 2015 Unsecured Redeemable Debentures (Series F)

In 2015, the Company borrowed from accredited investors and related parties (the “Debenture Holders”) $402,000 ($130,000 was provided by an officer and board member of the Company) pursuant to an Unsecured Redeemable Debenture Series F (the “Series F Debentures”) that required payment of interest at the end of the three-month Debenture term in the amount of 10% of the principal amount. The holders of the Series F Debentures also received warrants to acquire 402,000 shares of Common Stock for an exercise price of $0.15 per share, exercisable over three years.. In addition, the Company will issue the Debenture Holders warrants (the “2015 Warrant”) to purchase 402,000 shares of the Company’s Common Stock at a price per 2015 Warrant Share to be determined. The Company incurred no commission costs in connection with these transactions. The Series F Debentures are convertible into Common Stock at $.03 per share as to principal plus accrued interest upon an event of default.

The Company allocated the face value of the Series F Debentures to the warrants and the debentures based on their relative fair values, allocated $2,702 to the warrants, and determined that there were aggregate beneficial conversion features of $268,504. The fair value of the warrants was determined using the Black-Scholes-Merton (“BSM”) valuation model and the following assumptions: volatility – 38.96% to 45.08%, risk free rate – 0.83% to 1.13 %, dividend rate – 0.00%. The amounts allocated to the warrants and beneficial conversion features totaling $271,206 were recorded as a discount against the Series F Debentures, with offsetting entry to additional paid-in capital. The discounts are being amortized into interest expense over the term of the Series F Debentures.

As of September 30, 2015, the carrying value of the Series F Debentures was $402,000 as the discount had been fully amortized. During the three and nine months ended September 30, 2015, the Company recorded amortization of the discount of $37,315 and $271,206, respectively and interest expense of $20,356 and $48,742, respectively. During the three months ended September 30, 2015, the Company defaulted on some of the Series F debentures and as a result began accruing daily interest at a default rate of 18% per annum.

During the three months ended September 30, 2015, $319,000 of the Series F Debentures matured without payment creating an event of default. Consequently, the aggregate principal amount of these debentures plus accrued interest is convertible into Common Stock at $.03 per share. As of September 30, 2015, the Debentures were convertible into an aggregate of 10,633,333shares. At this time, the Company is in discussion with the Debenture Holders and no notices of conversion of these debentures have been received as of December 7, 2015.

November and December 2014 Unsecured Redeemable Debentures (Series E)

In October and November 2014, the Company borrowed from accredited investors and a related party (the “Debenture Holders”) $145,000 pursuant to an Unsecured Redeemable Debenture Series E (the “Series E Debentures”) that required payment of interest at the end of the nine-month Debenture term in the amount of 15% of the principal amount. The holders of the Series E Debentures also received warrants to acquire 145,000 shares of Common Stock for an exercise price of $0.15 per share, exercisable over four years equal. In addition, the Company will issue the Debenture Holders warrants (the “2015 Warrant”) to purchase 145,000 shares of the Company’s Common Stock at a price per 2015 Warrant Share to be determined. The Company incurred no commission costs in connection with these transactions. The Series E Debentures are convertible into Common Stock at $.03 per share as to principal plus accrued interest upon an event of default.

 The Company allocated the face value of the Series E Debentures to the warrants and the debentures based on their relative fair values, allocated $7,945 to the warrants, and determined that there were aggregate beneficial conversion features of $137,055. The fair value of the warrants was determined using the BSM valuation model and the following assumptions: volatility – 42.31% to 44.28%, risk free rate – 1.63% to 1.75% %, dividend rate – 0.00%. The amount allocated to the warrants and beneficial conversion features totaling $145,000 was recorded as a discount against the Series E Debentures, with offsetting entry to additional paid-in capital. The discounts are being amortized into interest expense over the term of the Series E Debentures.

As of September 30, 2015, the carrying value of the Series E Debentures was $145,000 as the discount had been fully amortized. During the three and nine months ended September 30, 2015, the Company recorded amortization of the discount of $0 and $145,000, respectively and interest expense of $6,225 and $28,879, respectively. During the three months ended September 30, 2015, the Company defaulted in redeeming the Series E debentures and as a result began accruing daily interest at a default rate of 18% per annum.

During the three months ended September 30, 2015, all of the Series E Debentures matured without payment creating an event of default. Consequently, aggregate principal amount of these debentures plus accrued interest is convertible into Common Stock at $.03 per share. As of September 30, 2015, the Debentures were convertible into an aggregate of 5,558,333 shares. At this time, the Company is in discussion with the Debenture Holders, the majority of which are related parties, and no notices of conversion of these debentures have been received as of December 7, 2015.

July to November 2014 Convertible Debentures (Series D)

During the months of July through November 2014, the Company issued Series D Convertible Debentures (the “Series D Debentures”) with an aggregate face value of $763,199 in exchange for $176,718 of cash plus accrued interest ($35,000 was provided by the CEO and CFO), in settlement of a Series A Convertible Debenture with outstanding principal and accrued interest of $26,477, and in settlement of Series B Convertible Debentures with aggregate outstanding principal and accrued interest of $560,003, of which $287,159 represented a conversion of notes payable-related parties to the Founders. The Series D Debentures accrue interest at an annual rate of 12%, mature in July through November 2015, and are convertible into the Company’s Common Stock at a conversion rate of $0.165 per share. The holders of the Series D Debentures also received warrants to acquire 3,332,000 shares of Common Stock for an exercise price of $0.20 per share, exercisable over five years.

The Company allocated the face value of the Series D Debentures to the warrants and the debentures based on their relative fair values, allocated $145,334 to the warrants, and determined that there were aggregate beneficial conversion features of $126,543. The fair value of the warrants was determined using the BSM valuation model and the following assumptions: volatility – 43.63% to 44.28%, risk free rate – 1.60% to 1.69% %, dividend rate – 0.00%. The amount allocated to the warrants and beneficial conversion features totaling $271,877 was recorded as a discount against the Series D Debentures, with offsetting entry to additional paid-in capital. A portion of the discount resulting in $237,227 was fully expensed upon execution of the new debentures as debt extinguishment costs and the remaining amount of $34,650 is being amortized into interest expense over the term of the Series D Debentures.

As of September 30, 2015, the carrying value of the Series D Debentures was $763,199 and there was no remaining unamortized discount. During the three and nine months ended September 30, 2015, the Company recorded amortization of the discount related to the Series D Debentures of $5,617 and $22,982, respectively and interest expense of $22,404 and $67,984,respectively. During the three and nine months ended September 30, 2014, the Company recorded amortization of the discount related to the Series D Debentures of $2,395 and $2,395, respectively and interest expense of $3,441 and $3,441, respectively. 

 During the three months ended September 30, 2015, all of the Series D Debentures matured without payment creating an event of default. Consequently, aggregate principal amount of these debentures plus accrued interest is convertible into Common Stock at $.165 per share. As of September 30, 2015, the Debentures were convertible into an aggregate of 4,833,333 shares. At this time, the Company is in discussion with the Debenture Holders, the majority of which are related parties, and no notices of conversion of these debentures have been received as of December 7, 2015.

August 2014 and November Convertible Debentures (Series C)

In August 2014, the Company issued Series C Convertible Debentures (the “Series C Debentures”) with an aggregate face value of $350,833 in exchange for the cancellation of Series B Convertible Debentures with outstanding principal and accrued interest of $350,833. The Series C Debentures accrue interest at an annual rate of 10%, mature in July and November 2015, and are convertible into the Company’s Common Stock at a conversion rate of $0.20 per share. The holders of the Series C Debentures also received warrants to acquire 1,500,000 shares of Common Stock for an exercise price of $0.20 per share, exercisable over five years.

The Company allocated the face value of the Series C Debentures to the warrants and the debentures based on their relative fair values, and allocated $72,869 to the warrants, which was recorded as a discount against the Series C Debentures, with offsetting entry to additional paid-in capital. The fair value of the warrants was determined using the BSM valuation model and the following assumptions: volatility – 43.74% and 44.28%, risk free rate – 1.62% and 1.67%, dividend rate – 0.00%. The discount was fully expensed upon execution of the new debentures as debt extinguishment costs.

As of September 30, 2015, the carrying value of the Series C Debentures was $350,833 interest expense for the three and nine months ended September 30, 2015 of $9,651 and $27,193 respectively was recorded and no amortization expense was recorded as it was fully expensed in the prior period.

During the three months ended September 30, 2015, all of the Series C Debentures matured without payment creating an event of default. Consequently, aggregate principal amount of these debentures plus accrued interest is convertible into Common Stock at $.20 per share. As of September 30, 2015, the Debentures were convertible into an aggregate of 1,754,165 shares. At this time, the Company is in discussion with the Debenture Holders, the majority of which are related parties, and no notices of conversion of these debentures have been received as of December 7, 2015.

October and November 2012 Convertible Debentures (Series B)

In October and November 2012, the Company issued Convertible Debentures (“Series B Debentures-Issuance II”) with an aggregate face value of $624,372 of which $565,372 represented a conversion of notes payable-related parties to the Founders. In 2013, two of the founders sold a portion of their debenture totaling $141,800 of their aggregate face to third parties. The Series B Debentures-Issuance II matured in October and November 2014, bore interest at an annual rate of 10%, and were convertible at the option of the holders into Units, each consisting of a) one share of Common Stock and b) one warrant to purchase one share of Common Stock at $0.40 per share (“Unit”). The number of Units issuable upon conversion of the Series B Debentures-Issuance II is determined by dividing the then outstanding principal and accrued but unpaid interest by a) $0.35 if a Liquidity Event, as defined in the debenture agreements, occurs within nine months of the closing of the offering of the Series B Debentures-Issuance II, or b) $0.32 if a Liquidity Event does not occur within nine months of the closing of the offering of the Series B Debentures-Issuance II.

In October and November 2014, all but one of the holders of the Series B Debentures-Issuance II exchanged the debentures with an aggregate face value of $464,440 and accrued interest of $51,317 for either a Series C or D Debenture with an aggregate face value of $513,757. The Company recorded a loss on early extinguishment of debt of $212,261, primarily related to fair value of the warrants in relation to the debt (relative fair value) on the debt exchange transaction. The Company has defaulted on its obligation to pay the remaining principal amount of a debenture due October and November 2014. The total amount due on this debenture, including interest, is $193,155 and is currently accruing interest at a default rate of 12% per annum. The Company has negotiated restructured terms with the majority of the debenture holders and is attempting to complete the formal restructuring of this debt obligation.

As of September 30, 2015, the net carrying value of the outstanding Series B Debentures-Issuance II totaled $161,932 and no unamortized discount remains therefore no amortization expense was recorded for the three and nine months ended September 30, 2015. As of September 30, 2014, the net carrying value of the outstanding Series B Debentures-Issuance II totaled $611,047 and the related amortization expense of $28,867 and $92,368 was recorded for the three and nine months ended September 30, 2014, respectively. During the three and nine months ended September 30, 2015, interest expense of $4,897 and $14,534, respectively was recorded on the Series B Debentures-Issuance II. During the three and nine months ended September 30, 2014, the Company recorded interest expense on the remaining Series B Debentures-Issuance II of $15,609 and $46,828, respectively. There was no unamortized debt issuance costs related to the Series B Debentures-Issuance II remaining and therefore no amortization expense was recorded during the three and nine months ended September 30, 2015 and 2014, respectively.

July 2012 Convertible Debentures (Series A)

In July 2012, the Company issued Convertible Debentures (the “Series A Debentures”) with an aggregate face value of $215,300 Canadian Dollars (US$197,344 as of September 30, 2014). The Series A Debentures matured in July 2014, bore interest at an annual rate of 10% through July 2014 and upon default accrued interest at 12% per annum. The Series A Debentures are convertible at the option of the holders into Units, each consisting of a) one share of Common Stock and b) one warrant to purchase one share of Common Stock at 0.40 Canadian Dollars per share (“Unit”). The number of Units issuable upon conversion of the Series A Debentures is determined by dividing the then outstanding principal and accrued but unpaid interest by a) 0.35 Canadian Dollars if a Liquidity Event, as defined in the Debenture agreement, occurs within nine months of the closing of the offering of the July Notes, or b) 0.32 Canadian Dollars if a Liquidity Event does not occur within nine months of the closing of the offering of the Series A Debentures.

In July 2014, a holder of a Series A Debenture exchanged the debenture with a face value of $25,000 Canadian Dollars (US$23,360), and accrued interest of $3,336 Canadian Dollars (US$3,117) for a Series D Convertible Debenture with a face amount of US$26,477. The Company recorded a loss on early extinguishment of debt of US$6,728, primarily related to fair value of the warrants in relation to the debt (relative fair value) on the debt exchange transaction. The Company has defaulted on its obligation to pay the remaining principal amount of debentures due October and November 2014. The total amount due on these debentures, including interest is US$220,031 and is currently accruing interest at a default rate of 12% per annum. The Company has negotiated restructured terms with the majority of the debenture holders and is attempting to complete the formal restructuring of these debt obligations.

As of September 30, 2015, the net carrying value of the outstanding Series A Debentures totaled $145,637 and no unamortized discount remains, therefore no amortization expense was recorded for the three and nine months ended September 30, 2015. During the three and nine months ended September 30, 2015, the Company recorded interest expense on the Series A Debentures of $4,369 and $14,076 respectively. As of September 30, 2014, the net carrying value of the outstanding Series A Debentures totaled $173,858. For the three and nine months ended September 30, 2014, the Company recorded amortization of the discount of $3,533 and $24,730, respectively; and interest expense on the Series A of $5,192 and $15,009, respectively. There was no unamortized debt issuance costs related to the Series B Debentures-Issuance II therefore no amortization expense was recorded during the three and nine months ended September 30, 2015. During the three and nine months ended September 30, 2014 $1,650 and $6,602 was recorded, respectively.

November 2014 Convertible Debenture with Peak One Opportunity Fund, L.P.

In November 2014, the Company entered into a Securities Purchase Agreement with Peak One Opportunity Fund, L.P. (“Peak”) pursuant to which the Company sold to Peak for $112,500 a Convertible Debenture (the “Peak Debenture”) in the principal amount of $125,000 (the “Principal Amount”) due on November 6, 2017 (the “Maturity Date”). Pursuant to the Peak Debenture, the Company agreed to pay interest on the Principal Amount outstanding from time to time in arrears (i) upon conversion or (ii) on the Maturity Date, at the rate of 5% per annum. The Company has the option to redeem the Peak Debenture prior to the Maturity Date at any time or from time to time by paying the Principal Amount plus accrued interest and a redemption premium of 20% of principal if the redemption is between 91-180 days after issuance and 40% of principal after 180 days Beginning 91 days after the issue date, Peak may convert the principal and accrued interest (the “Conversion Amount”) into shares of Common Stock at a conversion price for each share of Common Stock (the “Conversion Price”) equal to 65% of the lowest closing bid price (as reported by Bloomberg LP) of Common Stock for the 20 trading days immediately preceding the date of conversion of the Peak Debenture (subject to equitable adjustments resulting from any stock splits, stock dividends, recapitalizations or similar events).

The Company paid issuance costs of $10,000 and issued 137,500 shares of restricted common stock to cover the expenses incurred and analysis performed by Peak in connection with the transaction. The fair value of the 137,500 shares of restricted stock of $24,750, and $10,000 of issuance costs added to the principal, were recorded as deferred issuance costs to be amortized into interest expense over the term of the Peak Debenture.

The Peak Debenture was convertible into a variable number of shares based upon a fixed dollar amount and therefore treated as stock settled debt in accordance with ASC 480. On the date of issuance, the Company recorded the fair value of the financial instrument of $66,423 as a stock settled debt obligation along with debt discount of $12,500 to be amortized into interest expense through the maturity date.

During the three and nine months ended September 30, 2015, the Company recognized $39,601 and $63,087, respectively, of amortization of the discounts; $17,831 and $33,005 respectively, of amortization of deferred financing fees; and a loss on the redemption of $14,000 of the debenture.

During the nine months ended September 30, 2015, Peak converted $90,000 of principal into 8,825,690 shares of Common Stock and the Company redeemed the remaining principal amount of $35,000 in exchange for $49,000 of cash resulting in a loss on redemption of $14,000. Upon conversion and payment to Peak, the Company recorded the fair value of the stock settled debt of $155,631 to additional paid-in capital. The deferred financing costs were accelerated to interest expense through the date of conversion, which is included $17,831 and $34,750 for the three and nine months ended September 30, 2015 as noted above. As of September 30, 2015, the Peak Debenture is fully redeemed.

July 2014 Convertible Promissory Notes

In July 2014, the Company issued Convertible Promissory Notes with an aggregate face value of $52,500 for cash ($27,500 was provided by the CEO and CFO and two board members). The Convertible Promissory Notes accrue interest at an annual rate of 10%, mature in July 2015, and are convertible into the Company’s Common Stock at a conversion rate of $0.165 per share. The holders of the Convertible Promissory Notes also received warrants to acquire 318,182 shares of Common Stock for an exercise price of $0.50 per share, exercisable over five years.

The Company allocated the proceeds from the Convertible Promissory Notes to the warrants and the notes based on their relative fair values, allocated $6,117 to the warrants, and determined that there were aggregate beneficial conversion features of $8,512. The fair value of the warrants was determined using the BSM valuation model and the following assumptions: volatility – 43.99% to 44.08%, risk free rate – 1.66 to 1.74% %, dividend rate – 0.00%. The amount allocated to the warrants and beneficial conversion features; totaling $14,629, was recorded as a discount against the Convertible Promissory Notes with an offsetting entry to additional paid-in capital. The discounts are being amortized into interest expense over the term of the Convertible Promissory Notes.

During the three and nine months ended September 30, 2015, the Company recorded amortization of the discount of $156 and $7,411, respectively. During the three and nine months September 30, 2015, the Company recorded interest expense of $1,303 and $3,912, respectively. As of September 30, 2015, the carrying value of the Convertible Promissory Notes was $52,500 due to the fact that there was no remaining unamortized discount.