Annual report pursuant to Section 13 and 15(d)

NOTE 5: DEBT

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NOTE 5: DEBT
12 Months Ended
Dec. 31, 2016
Debt Disclosure [Abstract]  
Debt Disclosure [Text Block]
NOTE 5: DEBT

Convertible Debt

2015

During the year ended December 31, 2015, the Company borrowed an aggregate of $5,308,680, net of original issue discounts and fees of $493,860, under convertible notes payable and issued an aggregate of 1,270,325 common shares for the conversion of $50,000 in convertible debt and accrued interest. During the year ended December 31 2015, the Company repaid ten convertible notes at a cost of $1,425,397. As of December 31, 2015, the Company had outstanding convertible notes payable of $6,747,528, net of unamortized discounts of $1,142,241. The outstanding convertible notes of the Company are unsecured, bear interest between 8% and 12% per annum, mature between October 2014 and December 2018 and are convertible at variable rates between 58% and 75% of the quoted market price of the Company’s common stock. All notes that were convertible during the year ended December 31, 2015 were accounted for as derivative liabilities (see Note 6). Aggregate amortization of the debt discounts on convertible debt for the year ended December 31, 2015 was $1,408,955 of which $56,347 was capitalized as construction in progress. In 2015, the Company defaulted on and entered into standstill agreements on certain of its convertible notes resulting in an aggregate increase to the outstanding principal balance on its convertible debt of $466,890 which was recognized as loan default and standstill expense during 2015.

In November 2015, the Company signed an umbrella financing agreement with Black Diamond Financial Group for up to an aggregate of $7,591,472 in face value of notes. Financing advanced represents 91% of face value and attracts interest at 12%. A 5% financing fee was also accrued totaling $255,512 and recognized as a discount to the debt. The duration of the notes is three years. There are three separate categories of funding, Series A which can be converted into units consisting of one common share and one warrant (exercisable at $0.10 per share with a term of 3 years) at a fixed price of $0.08 per unit, Series B which can be converted into common shares at $0.12 per share and Series C which can be converted into common shares at $0.15 per share. As part of the financing agreement, previously issued convertible notes to the lender with an aggregate outstanding principal amount of $4,669,430 were converted into the three new series of notes. The Company evaluated the modification under ASC 470-50 and determined that it qualified as an extinguishment of debt. In connection with the modification, the lender received an aggregate of 170,237 shares of common stock valued at $139,594 and 2,093,860 common stock warrants valued at $1,674,821. The warrants are exercisable at rates between $0.10 and $0.15 per share and have a term of 5 years. The aggregate loss on extinguishment of debt recognized in 2015 was $6,042,463.

2016

During the year ended December 31, 2016, the Company borrowed an aggregate of $3,038,101, net of original issue discounts and fees of $303,312, under convertible notes payable and issued an aggregate of 18,018,838 common shares for the conversion of $1,231,250 in convertible debt and $56,723 in accrued interest. During the year ended December 31 2016, the Company repaid partial balances of five convertible notes at a cost of $905,644. As of December 31, 2016, the Company had outstanding convertible notes payable of $6,650,484, net of unamortized discounts of $1,920,571. The outstanding convertible notes of the Company are unsecured, bear interest between 8% and 12% per annum, mature between October 2014 and December 2019 and are convertible at variable rates between 58% and 75% of the quoted market price of the Company’s common stock. All notes that were convertible during the year ended December 31, 2016 were accounted for as derivative liabilities (see Note 6). Aggregate amortization of the debt discounts on convertible debt for the years ended December 31, 2016 and 2015 was $1,774,565 and $1,352,608, respectively, of which $56,347 was capitalized as construction in progress during the year ended December 31, 2015. During the years ended December 31, 2016 and 2015, the Company defaulted on and entered into standstill agreements on certain of its convertible notes resulting in an aggregate increase to the outstanding principal balance on its convertible debt of $132,871 and $466,890, respectively. In 2016, one of our convertible notes was in default. The note carried as collateral the company IP and assets. In March 2017 this note was bought out and the remainder of the note was converted into equity. As such the collateral was returned to the company.

During the year ended December 31, 2016, the Company entered into a Debt Settlement Agreement with a convertible note holder of two past due notes with outstanding principal balances of $100,000 each. The settlement agreement provides for the payment of $250,000 to settle the notes, payable in four monthly installments of $62,500 beginning September 16, 2016. In connection with this settlement agreement, the Company transferred $50,000 accrued interest into principal of the note. As of December 31, 2016, all payments have been made and the debt has been repaid in full.

During the year ended December 31, 2016, the Company entered into a Debt Settlement Agreement with a convertible note holder of a past due note with an outstanding principal balance of $100,000. The settlement agreement provides for the payment of $125,000 to settle the note, payable in three monthly installments of $31,250 beginning September 20, 2016. In connection with this settlement agreement, the Company transferred $25,000 accrued interest into principal of the note. As of December 31, 2016, all payments have been made and the debt has been repaid in full.

During the year ended December 31, 2016, the Company incurred loan standstill expenses added to debt principal of $604,688. Also during the year ended December 31, 2016, the Company issued an aggregate of 3,057,693 shares to note holders to suspend the conversion of certain outstanding convertible notes. The fair value of these shares of $1,537,308 was recognized as a debt standstill expense.

Nonconvertible Debt

During the year ended December 31, 2016, the Company borrowed $100,000, net of original debt discount of $2,000 under a note payable. The note payable bears interest at 12% per annum, was due in one month and was unsecured. During 2016, the Company entered into a settlement agreement with the note holder, whereby, the Company’s CEO pledged 434,244 shares as security for repayment of the note. As of December 31, 2016, these shares were transferred to the note holder to settlement the debt in a total of $102,000 principal amount. As a result, $19,371 was recognized as loss on debt extinguishment.

During the year ended December 31, 2016, the Company borrowed $50,000 under a note payable. The note payable bears no interest, is unsecured and due upon demand.

As of December 31, 2016 and 2015, the Company had outstanding notes payable to third parties of $565,185 and $413,185, respectively.

As of December 31, 2015, a total of $714,667 note payable was in default. Outstanding notes payable and convertible notes payable consisted of the following as of December 31, 2016 and 2015:

 
 
December 31,
 
Name
 
2016
   
2015
 
Convertible Debt:
           
  Note 1
 
$
-
   
$
100,000
 
  Note 2
   
-
     
100,000
 
  Note 3
   
634,541
     
756,873
 
  Note 5
   
-
     
100,000
 
  Note 6
   
-
     
50,000
 
  Note 7
   
-
     
25,000
 
  Note 8
   
3,741,473
     
3,741,473
 
  Note 9
   
1,630,073
     
1,366,336
 
  Note 10
   
1,577,742
     
507,846
 
  Note 19
   
-
     
-
 
  Note 20
   
-
     
-
 
  Note 21
   
80,126
     
-
 
  Note 22
   
355,000
     
-
 
  Note 23
   
100,000
     
-
 
  Note 24
   
347,100
     
-
 
  Note 25
   
105,000
     
-
 
    Total
   
8,571,055
     
6,747,528
 
Less: current portion
   
(1,436,641
)
   
(1,131,873
)
  Total long-term debt
   
7,134,414
     
5,615,655
 
Less: Unamortized discount
   
(1,881,152
)
   
(1,142,241
)
    Net
 
$
5,253,262
   
$
4,473,414
 
 
               
Nonconvertible Debt:
               
  Note 17
 
$
35,000
   
$
35,000
 
  Note 18
   
378,185
     
378,185
 
  Note 26
   
-
     
-
 
  Note 27
   
50,000
     
-
 
    Total
 
$
463,185
   
$
413,185