Convertible Debt

9 Months Ended

Sep. 30, 2014

9.	Convertible Debt

During the nine months ending September 30, 2014, the Company issued $433,000 of convertible debentures “(Convertible Debentures”) to certain investors (“Investors”). The Convertible Debentures do not accrue interest. The debentures mature on December 31, 2014. The Investors are entitled to convert the accrued interest and principal of the Convertible Debentures into common stock of the Company at a conversion price equal to 55% of the lowest daily volume weighted average price for the three trading days preceding conversion.

Initial Accounting:

Under the initial accounting, the Company separated the Convertible Debentures instrument into component parts of the Convertible Debentures and embedded conversion derivative liability. The Company estimated the fair value of each component as of the date of issuance. The fair value of the embedded conversion derivative liability exceeded the proceeds from the Convertible Debentures, which resulted in a debt discount of $433,000. The debt is accreted to interest expense over the life of the Convertible Debentures.

The following is a summary of the proceeds from the issuance of the Convertible Debentures and the initial accounting of the issuance (in thousands):

Proceeds from convertible debt issuance	$	433

Allocation of proceeds to embedded conversion derivative liability	$	433

During the nine months ended September 30, 2014 and 2013, the Company recognized $1,761,000 and $1,349,000, respectively, of interest expense on the Convertible Debentures related to debt discount accretion. The 2014 amount includes $637,000 of unaccreted discount at the date of certain conversions.

The follow is a summary of Convertible Debt (in thousands):

	September 30, 2014

Convertible debentures	$	460
Debt discount		-
Net convertible debentures	$	460

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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