• Filing Date: 2014-04-14
  • Form Type: 10-K
  • Description: Annual report
v2.4.0.8
5. NOTES PAYABLE
12 Months Ended
Dec. 31, 2013
NotePayableAbstract  
NOTES PAYABLE

Notes Payable – Related Parties

 

Funds are advanced to the Company from various related parties, including from Mr. Robert Lutz. Other shareholders fund the Company as necessary to meet working capital requirements and expenses. The following is a summary of amounts due to related parties, including accrued interest separately recorded, as of December 31, 2013:

 

Related party Nature of relationship Terms of the agreement   Principal Amount     Accrued Interest  
Araldo A. Cossutta Mr. Cossutta is a member of the Board of Directors Secured by assets of the company and payable on October 12, 2012 with interest accrued at 5% per annum. The note accrues default interest at 18% per annum.   $ 75,000     $ 18,512  
                     

MAH Holding, LLC

 

MAH Holding, LLC has provided previous lines of credit to affiliates of WMT. Unsecured note with interest accrued at 10% per annum, due on demand.     40,620       10,743  
Total       $ 115,620     $ 29,255  

 

During the year ended December 31, 2013, related parties converted an aggregate of $300,000 of related party debt and $48,600 of accrued interest into 4,980 shares of Series C convertible preferred stock.

 

The following is a summary of amounts due to related parties, including accrued interest separately recorded, as of December 31, 2012:

 

Related party Nature of relationship Terms of the agreement   Principal Amount     Accrued Interest  
Lutz, Investments LP Mr. Lutz is the CEO of the Company Convertible note payable due March 31, 2012.  The note is convertible into common stock at $0.19 per share.   $ 200,000     $ 14,115  
                     
Dr. Philip J. Rubinfeld Mr. Rubinfeld is a member of the Board of Directors Secured by assets of the company and payable on October 12, 2012 with interest accrued at 5% per annum. The note accrues default interest at 18% per annum.     100,000       7,609  
                     
Araldo A. Cossutta Mr. Cossutta is a member of the Board of Directors Secured by assets of the company and payable on October 12, 2012 with interest accrued at 5% per annum. The note accrues default interest at 18% per annum.     75,000       5,706  
                     

MAH Holding, LLC

 

MAH Holding, LLC has provided previous lines of credit to affiliates of WMT. Unsecured note with interest accrued at 10% per annum, due on demand.     40,620       6,624  
Total       $ 415,620     $ 34,054  

 

   

 

Notes Payable

 

The following is a summary of amounts due to unrelated parties, including accrued interest separately recorded, as of December 31, 2013:

 

Note Payable Terms of the agreement   Principal Amount     Unamortized Discount     Principal Net of Discount     Accrued Interest  
March 4, 2011 Note Payable $223,500 note payable; (i) interest accrues at 13% per annum; (ii) maturity date of September 4, 2011; (iii) $20,000 fee due at maturity date with a $1,000 per day fee for each day the principal and interest is late.  This note is currently the subject of litigation  (see Note 12 "Legal Proceedings”)   $ 223,500       -     $ 223,500     $ 58,998  
                                   
Third Quarter 2012 Secured Subordinated Promissory Notes Seventeen notes (including the two with related parties mentioned above) in the original aggregate principal amount of $1,055,000; (i) 5% interest due on maturity date; (ii) maturity date of October 12, 2012; (iii) after the maturity date interest shall accrue at 18% per annum and the company shall pay to the note holders on a pro rata basis, an amount equal to twenty percent of the sales proceeds received by the Company and its subsidiary, WCI, from the sale of surgical powders, until such time as the note amounts have been paid in full.  As of March 31, 2014 three of these notes remain due, of which two are with unrelated parties, in the aggregate principal amount of $110,000.     35,000       -       35,000       9,013  
                                   
September 28, 2012 Promissory Note $51,300 note payable (i) interest accrues at 10% per annum; (ii) maturity date of December 31, 2012; (iii) default interest rate of 15% per annum.  As of March 31, 2014, $11,300 of this note is past due.     31,300       -       31,300       8,763  
                                   
Second Quarter 2012 Convertible Notes Two $25,000 notes; (i) issued on April 3 and April 23, respectively; (ii) convertible at $0.19 per share (the notes convert automatically into common stock upon a qualified financing transaction, the notes are not convertible at the holders’ option); (iii) interest accrues at 5% per annum; (iv) interest accrues at 9% per annum after the due dates of April 30 and June 30, 2012, respectively. On September 20, 2012, 222,420 shares of Common Stock were issued in conversion of the April 23 note. As of the date of this filing these notes and all related interest are paid in full.     5,000       -       5,000       4,340  
                                   
May 30,  2012 Convertible Note Note in the principal amount of up to $275,000 including an approximate original issue discount of 10% on each draw; (i) maturity date one year from the date of each draw (ii) convertible at the lesser of $0.19 or a 30% discount on the fair market value of the Company's common stock; (iv) one time interest charge of 5% will be applied if the note is not repaid within the first 90 days.  As of the date of this filing, this note at all related accrued interest has been paid in full.     39,900       (29,406 )     10,494       1,995  
                                   
July 16, 2013 Promissory Notes Two $45,000 notes; (i) issued July 16, 2013 as part of two settlement agreements; (ii) interest accrues at 8%; (iii) due April 14, 2014; (iv) convertible 180 days after the issue date at 80% of the fair market value of the Company’s common stock.  In the first quarter of 2014, the entire principal and accrued interest balance of these notes was converted into common stock.     90,000       -       90,000       3,629  
                                   
BMI Note #1 Note in the principal amount of $1,000,000 which accrues interest at 8% per annum.  The note is due October 10, 2014.  The note may be converted, at the option of BMI, into shares of the Company’s Series C Preferred Stock at a conversion price of $70.00 per share.     1,000,000       -       1,000,000       18,192  
                                   
Quest Capital Investors, LLC Furniture purchase agreement in the original amount of $11,700 with $300 payments due each month.     11,100       -       11,100       -  
                                   
BMI Note #2 Note payable which accrues interest at 8% per annum and allows the Company to drawdown, as needed, an aggregate of $2,000,000, subject to an agreed upon schedule.  The note is due October 15, 2014.  The note may be converted, at the option of BMI, into shares of the Company’s Series C Preferred Stock at a conversion price of $70.00 per share.     200,000       (21,431 )     178,569       2,652  
                                   
Total     $ 1,635,800     $ (50,837 )   $ 1,584,963     $ 107,582  

 

During the year ended December 31, 2013, the Company borrowed an aggregate of $290,244 and $1,817,400 under notes payable and convertible notes payable, respectively and repaid an aggregate of $662,169 and $331,500 on notes payable and convertible notes payable, respectively.

 

In connection with $140,000 of the 2013 borrowings, the Company issued an aggregate of 875,000 common stock warrants to the lenders (see Note 9). The fair value of the warrants was determined to be $51,643 and it was recorded as a discount to the notes that is being amortized to interest expense over the life of the notes using the effective interest rate method. During the year ended December 31, 2013, these discounts were fully amortized to interest expense.

 

During the year ended December 31, 2013, unrelated parties converted an aggregate of $1,360,822 of debt and $226,778 of accrued interest into 22,680 shares of Series C convertible preferred stock.

 

During the year ended December 31, 2013, unrelated parties converted an aggregate of $401,145 of debt and $5,500 of accrued interest into 11,239,999 shares of common stock.

 

$1,200,000 of the 2013 borrowings is convertible at the holder’s option into Series C convertible preferred stock at $70 per share. The $1,200,000 was drawn by the company on multiple dates. The Company evaluated each borrowing under FASB ASC 470-30 to determine if a beneficial conversion feature existed. The company determined beneficial conversion features existed on $200,000 of the borrowings. The intrinsic value of the beneficial conversion features was determined to be $25,000. The beneficial conversion features were recorded as discounts to the notes that are being amortized to interest expense. Amortization of these discounts totaled $3,569 for the year ended December 31, 2013.

 

In July of 2013, the Company established two notes payable in the amount of $45,000 each according to the terms of a settlement agreement. The company recognized settlement expense of $90,000 during 2013 associated with these notes. The settlement expense is included in general and administrative expenses in the statement of operation for the year ended December 31, 2013. The notes are unsecured, bear interest at 8% per annum and are due April 14, 2014. The notes become convertible 180 days after the issue date at 80% of the fair market value of the Company’s common stock.

 

The convertible notes associated with $628,900 of the 2013 borrowings qualified as derivative liabilities under FASB ASC 815 resulting in discounts to the notes of $617,399 (see Note 10). Also, in connection with these borrowings, the Company incurred original issue discounts totaling $11,500 which are being amortized to interest expense over the life of the notes.

 

As of December 31, 2013, unamortized deferred financing costs totaled $12,526. During 2013, the company paid third party debt issuance costs totaling $9,200. These costs are being amortized to interest expense over the life of the associated debt using the effective interest rate method. During 2013, aggregate amortization of deferred financing costs totaled $20,694. During the year ended December 31, 2013, aggregate amortization of debt discounts totaled $833,455.

 

The following is a summary of amounts due to unrelated parties, including accrued interest separately recorded, as of December 31, 2012 (not including the Debentures described below):

 

Note Payable Terms of the agreement   Principal Amount     Unamortized Discount     Principal Net of Discount     Accrued Interest  
March 4, 2011 Note Payable $223,500 note payable; (i) interest accrues at 13% per annum; (ii) maturity date of September 4, 2011; (iii) $20,000 fee due at maturity date with a $1,000 per day fee for each day the principal and interest is late.  This note is currently the subject of litigation  (see Note 12 "Legal Proceedings”)   $ 223,500       -     $ 223,500     $ 29,539  
                                   
Purchase Order Financing Agreement $50,000 note payable; (i) interest accrues at 10% per annum; (ii) proceeds used to purchase inventory; (iii) lender will be reimbursed $25 per gram as the inventory is sold.  As of March 31, 2012 the lender is due $8,775 of sales proceeds.     43,847       -       43,847       536  
                                   
Third Quarter 2012 Secured Subordinated Promissory Notes Seventeen notes (including two with related parties mentioned above) in the original aggregate principal amount of $1,055,000; (i) 5% interest due on maturity date; (ii) maturity date of October 12, 2012; (iii) after the maturity date interest shall accrue at 18% per annum and the company shall pay to the note holders on a pro rata basis, an amount equal to twenty percent of the sales proceeds received by the Company and its subsidiary, WCI, from the sale of surgical powders, until such time as the note amounts have been paid in full.  As of March 31, 2013 fifteen of these notes remain due, of which thirteen are with unrelated parties in the aggregate principal amount of $610,000.     860,000       -       860,000       65,149  
                                   
September 19, 2012 Promissory Note $20,000 note payable; (i) interest accrues at 10% per annum; (ii) maturity date of December 31, 2012; (iii) warrant to purchase 20,000 shares of common stock at an exercise price of $0.15 per share to be issued upon default.  As of December 31, 2012 this note was not paid and the 20,000 warrants were issued to the note holder.  As of March 31, 2013 the $20,000 balance is past due.     20,000       -       20,000       570  
                                   
September 28, 2012 Promissory Note $51,300 note payable (i) interest accrues at 10% per annum; (ii) maturity date of December 31, 2012; (iii) default interest rate of 15 per annum.  As of March 31, 2013 this note is past due.     51,300       -       51,300       1,357  
                                   
October 1, 2012 Promissory Note $75,000 note payable;  (i) interest accrues at 9% per annum; (ii) the principal is due and payable as follows: (a) $10,000 on October 31; and (b) $15,000 each on November 31, 2012 December 31, 2012 and January 31, 2013 and (c) $20,000 on February 28, 2013 the maturity date; (iii) the Company will issue to Lender five-year warrant to purchase a total of 225,000 shares of common Stock at a price of $0.15 per share. As of March 31, 2013, the $15,000 payment due in January has been paid, the due date of the final $20,000 payment has been extended, and the balance is unpaid.     35,000       -       35,000       186  
                                   
December 7, 2012 Promissory Note $75,000 note payable; (i) interest accrues at 10% per annum; (ii) the principal is due and payable as follows: (a) $10,000 each on January 15, 2013 and February 15, 2013; and (b) $15,000 on March 15, 2013 and (c) $20,000 each on April 15, 2013 and May 15, 2013 the maturity date; (iii) the Company will issue to Lender five-year warrant to purchase a total of 350,000 shares of common Stock at a price of $0.075 per share. As of March 31, 2013 $35,000 in principal has been paid leaving a balance of $40,000 due.     75,000       -       75,000       521  
                                   
December 11, 2012 Promissory Note $50,000 note payable;  (i) interest accrues at 9% per annum; (ii) the principal is due and payable as follows: (a) $5,000 each on February 11, 2013 and March 11, 2013; and (b) $10,000 on April 11, 2013 and May 11, 2013 and (c) $20,000 on June 11, 2013 the maturity date; (iii) the Company will issue to Lender five-year warrant to purchase a total of 225,00 shares of common Stock at a price of $0.09 per share. Additionally, the Company will issue warrants to purchase 375,000 common shares at $0.09 exercisable only upon an event of default. As of March 31, 2013 $10,000 in principal has been paid leaving a balance of $40,000 due.     50,000       -       50,000       263  
                                   
June 21, 2011 Note Convertible promissory note in the principal amount of $560,000; (i) interest accrues at 12% per annum; (ii) maturity date of June 21, 2015; (iii) upon closing the Company issued to the lender 100,000 shares of Common Stock valued at $60,000 and two warrants to purchase 250,000 shares of common stock each, with exercise prices of $0.50 $1.00; (iv) the debt is convertible at a 30% discount on the fair market value of the stock.  The Company measured the fair value of the warrants and the beneficial conversion feature of the note and recorded a discount against the principal of the note. (see  Note 4 "Other Significant Transaction - Forbearance Agreement")     200,000       -       200,000       -  
                                   
March 2012 Convertible Notes Three convertible notes in the principal amount of $25,000, $50,000 and $100,000 respectively; (i) issued between March 3 and March 22, 2012; (ii) convertible at $0.19 per share; (iii) interest accrues at 5% per annum; (iv)  interest accrues at 9% per annum after the due dates between March 31 and June 30, 2012. As of the date of this filing these notes are past due.     175,000       -       175,000       11,281  
                                   
Second Quarter 2012 Convertible Notes Two $25,000 notes; (i) issued on April 3 and April 23, respectively; (ii) convertible at $0.19 per share; (iii) interest accrues at 5% per annum; (iv) interest accrues at 9% per annum after the due dates of April 30 and June 30, 2012, respectively. On September 20, 2012, 222,420 shares of Common Stock were issued in conversion of the April 23 note. As of the date of this this filing the April 3 note is past due.     25,000       -       25,000       1,629  
                                   
May 30,  2012 Convertible Note Note in the principal amount of up to $275,000 including an approximate original issue discount of 10%; (i) maturity date one year from the effective date (ii) convertible at the lesser of $0.19 or a 30% discount on the fair market value of the Company's common stock; (iv) one time interest charge of 5% will be applied if the note is not repaid within the first 90 days.     73,645       (18,005 )     55,640       2,750  
                                   
Total     $ 1,832,292     $ (18,005 )   $ 1,814,287     $ 113,781  

 

 

Debentures

 

2010 Debentures

 

During 2010, the Company issued Debentures in the aggregate principal amount of $695,000 with a maturity date of March 2013. The Debentures could be converted into shares of the Company’s common stock at a conversion price equal to seventy percent (70%) of the lowest closing bid price per share for the twenty (20) trading days immediately preceding the date of conversion; provided that no holder could convert Debentures into, nor shall the Company issue to such holder, shares of common stock to the extent that the conversion would result in a holder and its affiliates together beneficially owning more than 4.99% of the then issued and outstanding shares of the Company’s common stock.  In accordance with ASC Topic No. 470-20-25-4, a discount in the amount of $297,857 was calculated as the total value of the beneficial conversion feature, which was amortized over the term of the debt.  In addition, debt issuance costs of $102,850 were deferred and amortized over the term of the debt.    Interest expense on the debentures accrued at 6% per annum.

 

In April of 2012, 4 million shares of common stock were issued to Commercial Holding, AG, a related party and holder of the debentures, in conversion of the $695,000 of debentures and all remaining accrued interest payable.

 

2012 Debentures

 

On March 27, 2012, the Company entered into a Securities Purchase Agreement and sold $400,000 of convertible debentures with a maturity date of March 27, 2015, to an unrelated party for $360,000.  The Debentures may be converted into Common Stock at a conversion price equal to seventy percent (70%) of the lowest closing bid price per share for the twenty (20) trading days immediately preceding the date of conversion; provided that no holder may convert Debentures into, nor shall the Company issue to such holder, shares of common stock to the extent that the conversion would result in a holder and its affiliates together beneficially owning more than 4.99% of the then issued and outstanding shares of Common Stock.   Additionally, the Securities Purchase Agreement entitled the purchaser to 200,000 shares of Common Stock

 

In accordance with ASC Topic No. 470-20-25-4, a discount in the amount of $171,429 was calculated as the total value of the beneficial conversion feature, which was amortized over the term of the debt.  Additionally, a discount of $35,676 was allocated to 200,000 shares of Common Stock based on the relative fair market value of the stock and convertible debt at the time of the agreement.

 

In 2012, the debenture holder elected to convert $50,000 in principal into 1,387,754 shares of Common Stock.  In 2013, the debenture holder elected to convert $300,000 in principal into 8,351,368 shares of Common Stock.  A pro rata share of the discount associated with the debentures was expensed with each issuance of Common Stock. The balance of accrued interest payable related to the debentures was $18,238 at December 31, 2012. In 2013, the debenture holder also elected to receive a cash principal payment of $50,000 and accrued interest payable, accrued at 6% per annum, of $30,659.  As of December 31, 2013, the debentures have been paid in full and all related discounts and debt issuance costs are fully amortized. The balance of accrued interest payable at December 31, 2013 is $0.