If anyone thinks the following bodes well for common shareholders buying on the open market, even if the company starts producing revenues somehow, that person needs to get some education on how these types of convertible notes work, especially when the notes are to family members as is the case here with YESD. LOL. Again, just my opinion but the last year should show you what happens and will continue to happen IMO.
Note 15.
Related Parties
The company converted to common stock $409,000 certain short term notes due to our CEO at market prices. As part of the transaction he was also issued 3 year warrants (see Note 7).
Senior convertible notes of $40,000 held by our CEO were converted to 10,587,105 common shares in 2011 (see Note 9).
At June 30, 2011, there were accounts payable of $45,000 due to our CFO.
The Company incurred approximately $52,000 and $0 of expenses in the six months ended June 30, 2011 and 2010 to related parties who are affiliated with Directors of the Company.
Note 16.
Subsequent Events
Shares Issued in Exchange for Services
As part of the Marketing Agreement disclosed in Note 11, in July and August 2011 the Company became obligated to issue 1,351,598 common shares to the vendor as payment of $5,000 monthly stock-based fees.
Conversion of senior secured debt
On July 25, 2011, an investor converted $15,000 of senior secured convertible notes dated December 19, 2009 into an aggregate of 6,000,000 million shares of the Company’s common stock. The notes were converted at a rate of $0.004 per share as described in the note agreements.
Sale of Series B preferred stock
The Company is designating 250,000 Series B convertible preferred shares, par value $0.0001 with a stated value of $2.00 and dividends of 10% whether or not declared by the Board and voting rights on as converted basis. The Series B shares convertible into common stock at a rate of 1,000 common shares to 1 preferred share. The Series B contains certain price protection provisions which may reduce the conversion rate if the Company sells shares for less than $0.002.
On August 25, 2011 the Company entered into a Subscription Agreement with an accredited investor. Pursuant to that agreement, the Company agreed to issue 50,000 shares of a newly created Series B Convertible Preferred Stock in exchange for $100,000 or $2.00 per preferred share ($0.002 per common share on as converted basis). When created and issued, the 50,000 shares of Series B Convertible Preferred Stock will be convertible into 50 million shares of the company's common stock. In addition, the Company agreed to issue warrants granting the investor a right to purchase 70 million shares of common stock at a price of $0.01. The warrant expires five years from the date of issue.
The agreement agreements contain a 9.99% ownership limitation which prohibits the investor from converting the Series B Convertible Preferred Stock and Series B Warrants if such conversion would increase the investor’s beneficial ownership of the Company’s common stock over 9.99%.
As additional consideration for the investment, on August 25, 2011, the Company entered into an amendment to the subscription agreement dated December 28, 2009 with the investor. Under the terms of the agreement, the Company agreed to modify the conversion price of the remaining balance of notes held by an affiliate of the investor from $0.004 to $0.002. The amendment was made pursuant to the price protection provisions of the original December 2009 subscription agreement and accordingly there is no accounting effect as of the amendment date. As a result of the amendment, the $8,000 of convertible notes held by the investor are convertible into 4,000,000 shares of the Company’s common stock. In addition, the Company agreed to lower the exercise price of warrants held by the investor from $0.01 to $0.002 also under the original price protection provisions of the warrants.
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As additional consideration for the investment, on August 25, 2011 the Company entered into an amendment of the Series A Preferred subscription agreement. Under the terms of the amendment the Company agreed to modify the conversion price of the Series A financing from $0.005 to $0.002, subject to obtaining the requisite stockholder consent in compliance with SEC review and notice requirements. In addition, the Company agreed to lower the exercise price of Series A Warrant held by the investor from $0.05 to $0.01. As a result of the amendment, once effective, the 40,000 shares of Series A preferred stock held by the investor will be convertible into 106,000,000 shares of the Company’s common stock. Based on the facts and circumstances, management determined that these modifications represent a modification of the original contract and are compensatory in nature. As a result, for the period ending September 30, 2011, the Company will recognize an expense of approximately $460,000 based on the quoted trading price of $0.0072 on the August 2011 issuance date.
As additional consideration for the investment, on August 25, 2011 the Company entered into an amendment to Convertible Promissory Notes dated March 8, 2011 and May 31, 2011. Under the terms of the amendment, the Company agreed to modify the conversion price of the $77,500 in the notes held by the investor to the lower of the applicable rate pursuant to the terms of the notes, or $0.002. Management has determined that the modification does not qualify as a debt modification for accounting purposes since the modification changed the nature of the debt from stock settled debt to debt to be accounted for under derivative accounting. The put premium will be reclassified to additional paid in capital and the debt will be bifurcated into debt and embedded conversion option derivative liability.
Sale of common stock
On September 1, 2011, the Company entered into a Subscription Agreement for common stock with Sonoma. Pursuant to the agreement, Sonoma paid $81,000 for 10,125,000 shares of common stock at the above market per-share purchase price of $0.008. As additional consideration for the financing, Sonoma was issued a warrant to purchase an additional 10,125,000 shares at an exercise price of $0.008. The warrant expires three years from the date of issue.
On August 26, 2011 Emerging Growth Research, LLC, an entity controlled by our CEO, Joseph Noel, repaid loans due to Sonoma in the amount of $82,000.
