Additional DD...from the August 10q
On February 26, 2007, the Company entered into a Securities Purchase Agreement
(the "February 2007 CCP Agreement"), with Cornell Capital Partners, LP.
("Cornell"). In connection with the February 2007 CCP Agreement, Cornell
purchased secured convertible debentures amounting to $1,125,000 due on February
26, 2009.
The February 26, 2007 Cornell debentures provide for interest in the amount of
10% per annum and are convertible at the lesser of $0.05 or 90% of the lowest
closing bid price of the Company's common stock during the 30 trading days
immediately preceding the conversion date. Cornell will be entitled to convert
the February 26, 2007 debenture on the basis of the conversion price into the
Company's common stock, provided that Cornell cannot convert into shares that
would cause Cornell to own more 4.9% of the Company's outstanding common stock.
The Company at its option shall have the right, with three (3) business days
advance written notice (the "Redemption Notice"), to redeem a portion or all
amounts outstanding under the 10% Secured Debenture prior to the Maturity Date
provided that the Closing Bid Price of the Company's common stock, as reported
by Bloomberg, LP, is less than the Fixed Conversion Price at the time of the
Redemption Notice. The Company shall pay an amount equal to the principal amount
being redeemed plus a redemption premium ("Redemption Premium") equal to twenty
percent (20%) of the principal amount being redeemed, and accrued interest,
(collectively referred to as the "Redemption Amount").
In connection with the February 2007 CCP Agreement, the Company paid Yorkville
Advisors, LLP a fee equal to $100,000 and a structuring fee of $25,000 from the
proceeds of the closing. Accordingly, the Company received net proceeds of
$1,000,000. These fees were treated as a deferred financing fees and beginning
on February 27, 2007 are being amortized over the term of the loan. The Company
used $900,000 of the proceeds from the Cornell Debenture to repay loans payable
to GreenShift Corporation and GS Ethanol Technologies.
In addition the Company issued to Cornell a warrant to purchase 50,000,000
shares of the Company's common stock at $0.03 a share. The value of the warrant
was calculated to be $712,125 at the time of the issuance using the guidance
found in APB Opinion 14, "Accounting for Convertible Debt and Debt issued with
Detachable Stock Purchase Warrants" and was recorded as a discount. The discount
is amortized to interest expense using the effective interest method of
amortization.
The Company determined that the conversion feature of the convertible debenture
represents an embedded derivative since the debenture is convertible into a
variable number of shares upon conversion. Accordingly, the convertible
debenture is not considered to be conventional debt under EITF 00-19 and the
embedded conversion feature must be bifurcated from the debt host and accounted
for as a derivative liability. The embedded derivative feature created by the
variable conversion meets the criteria of SFAS 133 and EITF 00-19, and should be
accounted for as a separate derivative. At June 30, 2007 the fair value of the
conversion derivative liability created by this debenture calculated using the
Black-Scholes model was $3,266,171. For the three and six months periods ended
June 30, 2007 the unrealized loss on the derivative instrument created by this
debenture was $1,859,921and $3,266,171, respectively.
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