Quarterly report pursuant to Section 13 or 15(d)

Convertible Note

Convertible Note
6 Months Ended
Mar. 31, 2015
Notes to Financial Statements  
Convertible Note

On August 7, 2014, the Company issued a Convertible Note (the “Note”) with an original principal balance of $632,500 to Brio Capital Master Fund LTD (“Brio”), for a purchase price of $550,000. The Note matures on February 6, 2016, and is payable in thirteen monthly installments of $48,654, commencing in the sixth month post-closing. Brio had the right, however not the obligation, six months after closing, to convert all or any part of the outstanding Note into the Company’s common stock at an initial conversion price of $0.20 per share. After six months from closing, the conversion price had a one-time reset to the lower of $0.20 or 90% of the average of the 3 lowest closing prices for the previous 10 trading days, subject to a floor of $0.14 per share. The Company was allowed to force conversion if the Company’s common stock trades at 250% greater than the conversion price for 20 consecutive trading days (see Note 12).


In addition to the Note, the Company issued a warrant to purchase up to 2,371,875 shares of the Company’s common stock. The warrant is exercisable at $0.25 per share, vests 6 months after the closing, and expires 5 years thereafter.


The Convertible Note contains an embedded conversion feature requiring bifurcation and liability treatment. The Company accounted for this conversion feature and the detachable warrants by allocating the proceeds from issuance of the convertible notes to the conversion feature and the warrants. These were based on a relative fair value and the conversion feature was valued by a third party.


To recognize the fair value of the warrants, the Company discounted the note and increased additional paid in capital. The fair value of the conversion feature was approximately $178,000 at inception, the Company discounted the note and created a derivative liability, which is evaluated each quarter and adjusted for any change in value.


During the period, Brio converted $500,000 of its outstanding loan into 2,500,000 shares of the Company’s common stock. Based on the closing stock price of $0.85 and $1.03 per common share, the 2,500,000 shares were valued at approximately $2,350,000 and the Company has recognized a loss on the extinguishment of debt of approximately $210,000. Included in the loss in extinguishment was the fair value of the derivative liability at the date of conversion.


At March 31, 2015, $132,500 was still outstanding under the original convertible note, with approximately $70,000 of unamortized debt discount, resulting in a net carrying value of approximately $63,000. A derivative liability of approximately $470,000 was remaining related to the conversion feature at March 31, 2015 (see note 12).