February 2007 Convertible Debentures

 

On February 8, 2007, the Company closed on a private placement of 8% convertible debentures dated February 1, 2007 (the “February 2007 Debentures”).  The gross proceeds received in connection with this private placement were $250,000.  The February 2007 Debentures originally had a three year term, maturing on January 31, 2010.  In January 2010, the holders agreed to a new maturity date of January 31, 2012, extending the term of the February 2007 Debentures for an additional two year period.

 

On January 11, 2012, the Company issued 50,000 shares of common stock at $1.00 per share as full payment of $50,000 of outstanding principal on certain February 2007 Debentures and 5,237 shares of common stock at per share prices ranging between $0.70 and $0.80 as full payment of $3,729 of accrued and unpaid interest related to those February 2007 Debentures.  Due to the reduction in the conversion price, the Company recorded a loss on conversion of these February 2007 Debentures of $21,750 during the fiscal year ended October 31, 2012.

 

Effective January 31, 2012, certain holders of the February 2007 Debentures with an aggregate outstanding principal amount of $175,000, agreed to amend such February 2007 Debentures by extending the maturity date to January 31, 2014.  In addition, effective January 31, 2012, a holder of a February 2007 Debenture with an outstanding principal amount of $25,000 agreed to amend his February 2007 Debenture by extending the maturity date to July 31, 2012.  The Company has not made payment on this February 2007 Debenture and, as a result, such obligation can be placed in default by the holder.  In addition, $175,000 of principal payments is due on the February 2007 Debentures on January 31, 2014.  The Company does not anticipate making payment on these February 2007 Debentures by January 31, 2014 and, as a result, these obligations can be placed in default by the holders subsequent to January 31, 2014.  The Company has not made payment on this February 2007 Debenture and, as a result, such obligation can be placed in default by the holder.

 

The February 2007 Debentures bear interest at a rate of 8% per annum.  Interest is payable in annual installments, beginning on February 1, 2008, in cash or, at the option of the Company, in shares of the Company’s common stock.  If the Company elects to pay the interest in shares of the Company’s common stock, the number of shares issued as payment will be equal to the quotient of the unpaid interest divided by the market price of the Company’s common stock as defined in the February 2007 Debentures.

 

Up to 50% of the aggregate principal amount of the February 2007 Debentures is convertible into shares of the Company’s common stock at the option of the holders at a conversion price of $2.00 per share.  The remaining 50% of the aggregate principal amount of the February 2007 Debentures is convertible at the option of the holders at a conversion price of $3.00 per share.  The fair value of the Company’s common stock as of February 1, 2007 was $2.00 per share.  An aggregate amount of 83,334 shares of common stock can be issued upon the full conversion of the outstanding principal of the February 2007 Debentures.  The February 2007 Debentures also contain demand registration rights upon the request of the holders of more than 50% of the aggregate principal amount of the then outstanding February 2007 Debentures or the securities issuable upon the conversion of the February 2007 Debentures.  The Company has determined that the value attributable to the demand registration rights is de minimis.

 

 

On April 16, 2013, the Company issued an aggregate of 145,454 shares of its common stock to the holders of the February 2007 Debentures  in satisfaction of $16,000 of interest due for the period February 1, 2012 through January 31, 2013.  The number of shares issued as payment of the interest due was calculated based on the market price of the Company’s common stock ($0.11 per share) as defined in the February 2007 Debentures (see Note 8).

 

For the fiscal years ended October 31, 2013 and 2012, the Company recorded a total of $15,900 and $16,797, respectively, of interest expense related to the February 2007 Debentures.  As of October 31, 2013, $11,968 of interest due on the February 2007 Debentures was accrued and is included as a component of accrued expense.

 

As of October 31, 2013, the Company classified the $200,000 principal of the February 2007 Debentures as a component of current convertible debentures.    As of October 31, 2012, the Company classified $25,000 of the principal of the February 2007 Debentures as a component of current convertible debentures and $175,000 of the principal of the February 2007 Debentures as a component of non-current convertible debentures.

 

May 2011 Convertible Debenture

 

On May 20, 2011, the Company issued an 8% convertible debenture to an institutional investor (the “May 2011 Debenture”).  The gross proceeds received in connection with this private placement were $100,000.  The May 2011 Debenture has a three year term maturing on May 20, 2014 and bears interest at a rate of 8% per annum.  Interest is payable in annual installments, beginning on May 20, 2012, in cash or, at the option of the Company, in shares of the Company’s common stock.  If the Company elects to pay the interest in shares of the Company’s common stock, the number of shares issued as payment will be equal to the quotient of the unpaid interest divided by the market price of the Company’s common stock as defined in the May 2011 Debenture.

 

The entire principal amount of the May 2011 Debenture is convertible at any time into shares of the Company’s common stock at the option of the holder at a conversion price of $0.30 per share.  In addition, at the option of the Company and subject to certain restrictions provided in the May 2011 Debenture, the entire principal amount of the May 2011 Debenture is convertible into shares of the Company’s common stock at a conversion price of $0.30 per share upon the occurrence of: (a) a merger or acquisition of the Company or (b) the closing of a financing involving the Company’s common stock that results in gross proceeds to the Company, on a cumulative basis, of at least $600,000.  The quoted market price of the Company’s common stock as of May 20, 2011 was $0.10 per share.  An aggregate of 333,333 shares of common stock can be issued upon the full conversion of the May 2011 Debenture.

 

 

For the fiscal years ended October 31, 2013 and 2012, the Company recorded a total of $8,002 and $8,023, respectively, of interest expense related to the May 2011 Debenture.  As of October 31, 2013, $11,620 of interest due on the May 2011 Debenture was accrued and is included as a component of accrued expense.

 

As of October 31, 2013, the Company classified the $100,000 principal of the May 2011 Debenture as a component of current convertible debentures.    As of October 31, 2012, the Company classified the $100,000 principal of the May 2011 Debenture as a component of non-current convertible debentures.

 

August 2012 Convertible Debenture

 

On August 15, 2012, the Company issued an 8% convertible debenture to an institutional investor (the “August 2012 Debenture”).  The gross proceeds received in connection with this private placement were $100,000.  The August 2012 Debenture has a three year term maturing on August 15, 2015 and bears interest at a rate of 8% per annum.  Interest is payable in annual installments, beginning on August 15, 2013, in cash or, at the option of the Company, in shares of the Company’s common stock.  If the Company elects to pay the interest in shares of the Company’s common stock, the number of shares issued as payment will be equal to the quotient of the unpaid interest divided by the market price of the Company’s common stock as defined in the August 2012 Debenture.

 

The entire principal amount of the August 2012 Debenture is convertible at any time into shares of the Company’s common stock at the option of the holder at a conversion price of $0.40 per share.  In addition, at the option of the Company and subject to certain restrictions provided in the August 2012 Debenture, the entire principal amount of the August 2012 Debenture is convertible into shares of the Company’s common stock at a conversion price of $0.40 per share upon the occurrence of: (a) a merger or acquisition of the Company or (b) the closing of a financing involving the Company’s common stock that results in gross proceeds to the Company, on a cumulative basis, of at least $600,000.  The quoted market price of the Company’s common stock as of August 15, 2012 was $0.40 per share.  An aggregate of 250,000 shares of the Company’s common stock can be issued upon the full conversion of the August 2012 Debenture.

 

For the fiscal years ended October 31, 2013 and 2012, the Company recorded a total of $8,068 and $1,732, respectively of interest expense related to the August 2012 Debenture.  As of October 31, 2013, $9,800 of interest due on the August 2012 Debenture was accrued and is included as a component of accrued expense.

 

As of October 31, 2013 and 2012, the Company classified the $100,000 principal of the August 2012 Debenture as a component of non-current convertible debentures.