NOTE 7 - CONVERTIBLE DEBENTURES
Following is a summary of convertible debentures as of March 31, 2008:
Convertible Debentures due on March 23, 2009, provides for interest in the amount of 10% per annum and are convertible at the lesser of (a) $0.015 or (b) 85% of the lowest closing bid price of Seaway common stock during the 10 trading days immediately preceding the conversion date. $ 150,000
Convertible debentures due on December 12, 2010 provide for interest at 7% per annum and are convertible at the lesser of (a) $0.10 per share or (b) 85% of the average 3 lowest Volume Weighted Average Prices ("VWAP") during the 20 trading days prior to the holder's election to convert. If the holder elects to convert a portion of the debenture and the VWAP is below $0.005, the Company shall have the right to prepay that portion of the debenture that the holder elected to convert, plus any accrued interest at 150% of such amount. 1,500,000
Convertible debenture due on September 18, 2012 provide for interest at 8% per annum and is convertible at the lesser of (a) $0.024 per share or (b) 90% of the closing market price for the day prior to the date of the holder's election to convert. 470,000
Convertible debentures due on demand provide for interest at 12% per annum and are convertible at the lesser of (a) $0.02 per share or (b) 90% of the closing market price for the day prior to the date of the holders' election to convert. 944,775
Convertible debenture due on December 10, 2011 provide for interest at 12% per annum and is convertible at the lesser of (a) $0.011 per share or (b) 75% of the closing market price for the day prior to the date of the holder's election to convert. 1.525,000
Convertible debentures due on November 30, 2010 provide for interest at 10% per annum and are convertible at the lesser of (a) $0.12 per share or (b) 90% of the average 3 lowest Volume Weighted Average Prices ("VWAP") during the 20 trading days prior to the holder's election to convert. 550,000
Convertible debenture due on March 2, 2010 provide for interest at 12% per annum and is convertible at the lesser of (a) $0.01 per share or (b) 75% of the average lowest Volume Weighted Average Price ("VWAP") during the 5 trading days prior to the holder's election to convert. 50,589
Convertible debenture due on February 28, 2010 provide for interest at 12% per annum and are convertible at the lesser of (a) $0.01 per share or (b) 75% of the average lowest Volume Weighted Average Price ("VWAP") during the 5 trading days prior to the holder's election to convert. 2,249,073
7,439,437
Less note discounts (3,791,928 )
Total convertible debentures, net of discounts $ 3,647,509
Convertible debentures, current portion $ 3,343,848
Less note discounts (1,814,226 )
Total current portion of convertible debentures 1,529,622
Convertible debentures, net of current portion 4,095,589
Less note discounts (1,977,702 )
Total convertible debentures, net of current maturities 2,117,887
Total convertible debentures, net of discounts $ 3,647,509
On January 30, 2008, the Company entered into an amended financing agreement with JMJ Financial. Under the terms of the agreement, in addition to the debenture issued in the amount of $325,000, the Company agreed to issue a $1,200,000 convertible debenture to JMJ Financial with an interest rate of 10%. The debenture is due December 10, 2011. The debt is convertible at the lesser of a) $.01 or b) 75% of the lowest trade price in the 20 trading days previous to the conversion. Concurrent with the debt, JMJ Financial issued a note receivable to the Company in the amount of $1,000,000. The note provides for interest at 12% and is due December 10, 2012.
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The Company determined that the conversion feature of the amended convertible debenture represent an embedded derivative since the debentures is convertible into a variable number of shares upon conversion. Accordingly, the assumed convertible debentures are 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 March 31, 2008 the fair value of the conversion derivative liability created by the assumed debentures calculated using the Black-Scholes model was $516,129. For the three months ended March 31, 2008 the unrealized loss on the derivative instrument created by this debenture was $156,578.
On March 3, 2008, the Company entered into a $50,589 Convertible Debenture due March 2, 2010 and bears interest at the rate of 12% per annum. The note is convertible at the lesser of $0.01 per share or 75% of the average lowest Volume Weighted Average Price ("VWAP") during the 5 trading days prior to the holder's election to convert.
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 assumed convertible debentures are 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 March 31, 2008 the fair value of the conversion derivative liability created by the assumed debentures calculated using the Black-Scholes model was $24,528. For the three months ended March 31, 2008 the unrealized gain on the derivative instrument created by this debenture was $150.
On March 4, 2008, Community Bank, N.A. (the "Bank") entered into an agreement (the "Assignment Agreement") with YA Global Investments, LP, a Cayman Island exempt limited partnership ("YA Global") whereby the Bank assigned and YA Global assumed the following debt instruments previously issued by Seaway Valley Capital Corporation:
(A) The Mortgage, dated February 14, 2006, between Hackett and the Assignor in the amount of Three Hundred and Eighty Thousand Dollars ($380,000) (the "Ogdensburg Mortgage");
(B) The Mortgage, dated November 6, 2001, between Hackett and the Assignor in the amount of One Hundred Fifty thousand Dollars ($150,000) (the "Canton Mortgage");
(C) The Commercial Promissory Note (No. C-06-03-008249), dated April 5, 2006, between Hackett and the Assignor in the amount of Two Hundred Fifty Thousand Dollars ($250,000) (the "April Note");
(D) The Commercial Promissory Note (No. C-06-09-017697), dated September 1, 2006, between Hackett and the Assignor in the amount of One Million Dollars ($1,000,000) (the "September Note"); and
(E) The Commercial Line of Credit Agreement and Note (No. C-06-03-008243), dated April 5, 2006, between Hackett and the Assignor in the amount of Nine Hundred Fifty Thousand Dollars ($950,000) (the "April Line of Credit" and together with the Ogdensburg Mortgage, the Canton Mortgage, the April Note and the September Note, as herein after jointly referred to as the "Debt Instruments").
The above Debt Instruments represented obligations that became obligations of Seaway Valley Capital Corporation on November 7, 2007 as a result of the Company's completion of the following acquisition transactions as previously reported:
First, and on October 23, 2007, the Company acquired all of the capital stock of WiseBuys Stores, Inc.. As a result, WiseBuys became a wholly-owned subsidiary of the Company and the Company assumed all liabilities, debts, and obligations of WiseBuys (the "WiseBuys Acquisition") through the Company's wholly-owned subsidiary, Seaway Valley Acquisition Corp.
Second and on November 7, 2007, WiseBuys purchased all of the outstanding capital stock of Patrick Hackett Hardware Company, a New York corporation in exchange for the Company's payment of a total of cash and promissory notes (the "Hackett's Acquisition"). As a result Hackett's became a wholly owned subsidiary of WiseBuys and WiseBuys and the Company agreed to assume and did assume the responsibility for the payment of all liabilities, debts, and other obligations of Hackett's, including, but not limited to, the Debt Instruments on November 7, 2007.
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In completing the Assignment Agreement, the Company entered into an exchange agreement (the "Exchange Agreement") and agreed to exchange $2,249,073 in Community Bank debt for convertible debentures of the same dollar value (the "Exchange Debentures"). The Exchange Debentures were issued to YA Global and carry an interest rate of 12% and are convertible into shares of the Company at the lesser of $0.01 per share or seventy five percent (75%) of the lowest volume weighted average price during the five (5) trading days immediately preceding the conversion date. As part of this Exchange Agreement, the Company amended three outstanding YA Global convertible debentures to, among other things, match the Exchange Debenture conversion feature. Additionally, the Company issued a cashless-only warrant to YA Global that can be exercised into and up to 134,600,000 shares of the Company's common stock at $0.01 per share. If exercised in part or whole, the Company would receive no consideration for the issuance of any common shares related to this warrant.
The Company determined that the conversion feature of the assumed convertible debentures represent an embedded derivative since the debentures is convertible into a variable number of shares upon conversion. Accordingly, the assumed convertible debentures are 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 March 31, 2008 the fair value of the conversion derivative liability created by the assumed debentures calculated using the Black-Scholes model was $1,090,460. For the period ended March 31, 2008 the unrealized gain on the derivative instrument created by this debenture was $6,649.
The following assumptions were applied to all convertible debt:
Market price $0.006
Exercise prices $0.004-$0.006
Expected Term (Days) 1-20
Volatility 21%-90%
Risk-free interest rate 1.38%-1.62%
During the period ended March 31, 2008, holders of the aforementioned securities converted amounts totaling $158,322 into 139,231,091 shares of common stock.
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