from the last 10-Q
Note 4. Convertible Debentures
During February 2005 and August 2005 the Company issued $750,000 and $500,000, respectively, in convertible debentures. The debentures bear interest at 8% per year payable in cash or registered common stock at the Company’s option. The debentures mature in February and August 2008 and are convertible, at the option of the holder, to shares of the Company’s common stock at a conversion price per share equal to the lower of (i) 80% of the lowest closing bid price for the common stock for the fifteen days prior to the conversion date; or (ii) 125% of the volume weighted average price on the closing date.
In addition the Company issued to the holders of the convertible debentures warrants to purchase 750,000 and 500,000 shares of the Company’s common stock (see Note 6).
Pursuant to SFAS 133, the Company bifurcated the conversion feature from the debentures because the conversion price is not fixed and the debentures are not convertible into a fixed number of shares. Accordingly, the embedded derivative must be bifurcated and accounted for separately.
At and as of September 30, 2007, the following items relating to the convertible debentures, the discount on the convertible debentures relating to the beneficial conversion features, and the embedded derivative liability have been included in these financial statements:
9/30/07
12/31/06
Balance Sheet Effect:
Principal balance on debentures payable
422,002
470,117
Unamortized discount
(126,542)
(255,792)
Net debenture liability
295,460
214,325
Accrued interest on debentures
545,725
496,239
Total balance sheet effect of debentures payable
841,185
843,968
Statement of Operations Effect:
Interest expense
56,562
Amortization of debenture discount
129,250
Total Statement of Operations Effect
185,812
Note 5. Stock Options and Warrants
The Company periodically issues incentive stock options to key employees, officers, directors, and outside consultants to provide additional incentives to promote the success of the Company’s business and to enhance the
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ability to attract and retain the services of qualified persons. Warrants are periodically issued in connection with financing arrangements.
On January 25, 2007, our board of directors granted 13,074,499 options to employees, officers and directors, to purchase our common stock pursuant to our employee stock option plan. The options are fully vested on the grant date and are exercisable for seven years with an exercise price of $0.04. We valued these options at $413,445 using the Black-Scholes method using a volatility rate of 144.06%, an exercise price of $0.04, and a discount rate of 4.79%. The value of these options is included in general and administrative expenses for the nine months ended September 30, 2007.
Note 6. Commitments and Contingencies
In October of 2005 the Company registered the sale by Duchess Private Equities Fund II, L.P. (“Duchess”) of an aggregate of 8,000,000 shares of its common stock issuable to that company upon conversion of convertible debentures and upon exercise of warrants issued to it. On July 1, 2006, a portion of the shares covered by that registration statement remained unsold and the financial statements included in that registration statement's prospectus exceeded the maximum age for financial statements permitted under the SEC's regulations. The Company did not inform Duchess, as it was required to do under its contract, that the prospectus could no longer be used. As a result, sales made by Duchess after July 1, 2006 by means of the outdated prospectus were regarded as unregistered for purposes of the Securities Act of 1933, giving purchasers of those shares a right to rescind their purchases at any time within one year after the date of purchase. During the period from July 6, 2006 through October 20, 2006, Duchess sold an aggregate of 5,434,138 shares using the updated prospectus, at prices ranging from $0.03 to $0.073. The aggregate sales price for all of those sales was $254,977. The Company is required under its agreement with Duchess to indemnify Duchess for any loss it might suffer as a result of any exercise of those rescission rights by purchasers. The Company is unable to predict whether any of those purchasers will seek rescission of their purchases. If they do, the Company will be obligated to indemnify Duchess for an amount equal to the difference between the sales prices of those shares and the value of the shares it receives back from the purchasers upon rescission. If all of the purchasers were to rescind their purchases and if all of the shares taken back by Duchess as a result or to become totally valueless, the Company would owe Duchess $254,977 as a result of the rescission. As of September 30, 2007, and through the date of this report we are unaware of any claims presented to Duchess under this provision of our agreement with them.
Note 7. Common Stock Transactions
During the nine months ended September 30, 2007, we issued the following shares:
On January 16, 2007, we issued 1,875,000 shares to three accredited investors for $81,250 in cash.
On January 26, 2007, we issued 3 million shares to our counsel representing us in our lawsuit with Jones and Cannon. We valued these shares at $75,000 based upon the closing price of the Company’s common stock at the measurement date and the cost is included in general and administrative expense for the nine months ended September 30, 2007.
On June 28, 2007, we issued 5,168,388 shares to members and ex-members of our board of directors as compensation for services. These shares were valued at $175,725 in these financial statements and were recorded as a retirement of previously-accrued compensation for our board of directors.
Upon receipt of notice of conversion from Duchess Private Equities Fund II, L.P., we issued the following shares to convert our debenture balances into our common stock: 969,725 shares on April 18; 323,275 shares on August 2; 350,000 shares on August 22; 351,000 shares on August 31; 402,500 shares on September 5; 450,000 shares on September 5; 550,000 shares on September 21 and 600,000 shares on September 25, for an aggregate total of 3,996,500 shares. In issuing these shares, we retired $75,266 of our interest and principal liability on these debentures.
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On August 28, 2007, we issued 5,200,000 shares to a consultant for services provided throughout 2006 and 2007. We valued these shares at $130,000, the fair value at issuance, and retired existing debt to the consultant.
We issued 2,500,000 shares in partial settlement of the judgment entered against us in the matter of Jones and Cannon, LP Vs VirTra Systems, Inc. We will carry the remaining liability on this matter of $167,526 until the matter is completely settled.
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