From January 2016 through March 2016, holders of Variable Rate Convertible Debentures with a face value of $76,162 converted their debentures and accrued interest into 236,266,584 shares of common stock. In addition, the Company entered into Forbearance Agreements with a group of these investors in order to hold a shareholders’ meeting for the purpose of increasing authorized shares to satisfy the over commitment of shares resulting from the exercise of the Variable Rate Convertible Debentures.
Variable Conversion Rate Debentures
Starting in 2015, the Company entered into convertible debentures with floating exercise prices discounted to market prices. As a result, a significant number of shares were either issued in 2015 or will be issued in subsequent periods at deeply discounted variable conversion prices. The downward pressure placed on the Company’s stock as a result of these conversions can be classified as “death spirals” since the investors have no incentive to maintain a stable stock price. The Company accounts for these debentures as derivative liabilities which means the debentures are revalued at the end of each period and gains and losses are recognized at the issuance of the debentures and on the conversion of the debentures.
Over Commitment of Shares
Since the number of shares issuable under convertible debentures with floating exercise prices is undeterminable, the Company may be required to issue shares in excess of the number of shares authorized by its shareholders. As a result, when the Company determines that is does not have sufficient shares to meet the obligations of derivative unexercised debentures, warrants and options, the derivatives must be valued using the Black Scholes Option Pricing method and a liability is recorded as though the obligations would be settled using some means other than stock.
As of December 31, 2015, the Company has issued and outstanding Convertible Debentures (“Debentures”) with original terms of nine months to one year, an interest rate ranging from 10-20% per year and an original issue discount ranging from 5% to 10% which, at the option of the holder, may convert into common stock at an initial conversion price ranging from $0.03 to $0.099 per share. The Debentures were issued with detachable five year cashless Holders Warrants that allow the holders to purchase one share of stock for each two shares available under the converted Debentures at an exercise price ranging from $0.06 to $0.1287 per share. In addition, the Company issued five year cashless Agent Warrants equal to 10% of the total number of shares issuable under the Debentures and Holders Warrants at an exercise price ranging from $0.0745 to $0.1287 per share. For debentures issued through March 31, 2013, at the option of the Debenture holder, the terms of the Debentures and Holders Warrants are subject to an exchange feature in the event that the Company issues securities with terms more favorable than those of the then outstanding Debentures and Holders Warrants. Debentures issued subsequent to March 31, 2013 do not contain such an exchange clause. The gross amount of Debentures outstanding is $5,932,345 as of December 31, 2015.
During the year ended December 31, 2015, the Company has issued and outstanding Convertible Debentures (“Variable Debentures”) with original terms of 9 months to one year, an interest rate ranging from 0-10% per year and original issue discount rate ranging from 0-10% which contain variable conversion rates ranging from discounts of 40-50% of the Company’s common stock based on the lowest trading prices ranging from 10-25 days previous to conversion. The Variable Debentures contain prepayment options which enable the Company to prepay the notes for periods of 0-180 days subsequent to issuance at premiums ranging from 0-50%. The gross amount of Variable Debentures outstanding is $242,415 as of December 31, 2015.
As of December 31, 2015 and 2014, the balances of the Debentures are as follows:
Balance at beginning of period $ 4,496,602 $ 2,951,629
Issuance of debentures for cash 1,970,250 2,506,376
Original issue discount 145,263 128,071
Debentures converted to common stock (437,355 ) (1,089,474 )
Convertible debt 6,174,760 4,496,602
Less unamortized costs of financing 349,729 576,502
Convertible debt, net of unamortized costs $ 5,825,031 $ 3,920,100
Convertible debt in default $ 4,313,199 $ 1,862,160