4. Convertible Note Payable to Related Party, Notes Payable and Capital Leases
|12 Months Ended|
Sep. 30, 2012
|Notes to Financial Statements|
|Note 4 - Convertible Note Payable to Related Party, Notes Payable and Capital Leases||
Senior Secured Convertible Note Payable to Related Party
On August 20, 2010, Marvin P. Loeb, the Company's Chairman and CEO, loaned the Company $500,000 evidenced by a 6% Senior Secured Convertible Note with a principal amount of $500,000 (the "Senior Note"), which was secured by all of the assets of the Company, and was due August 19, 2015. The Senior Note contained a provision whereby the CEO could redeem the note at any time. Initially, the CEO agreed not to redeem the Note, without the written consent of the Company, for a period of two years from September 30, 2010. The funds provided under the Note were used for operations.
The Senior Note could be converted at any time into shares of the Company's common stock at a conversion price of $0.21 per share. The conversion price equaled the fair market value of the Company's common stock on the date of the purchase of the Note, and thus no beneficial conversion feature was recorded. However, the Note contained an anti-dilution provision whereby the price reset in the event of the sale or issuance of shares at a price lower than the conversion price set forth in the Note. Thus, the Company determined that this provision caused the conversion feature to be bifurcated from the Senior Note and treated as a derivative and accounted for at its fair value. The Company revalued the derivative at each reporting period.
At September 30, 2010, management determined the fair market value of the conversion feature was $94,000 and recorded the offset as a discount to the Note. On June 21, 2011, the CEO called the Senior Note and accrued interest. On the date of redemption, the Company revalued the derivative liability at $53,054 and had a remaining discount of $88,940. The Company recorded a gain on the change in the fair value of the derivative liability due to the change in fair value of the derivative liability between September 30, 2010 and the date of extinguishment.
The Company estimated the fair value of the conversion feature using the Lattice model. Accordingly, the fair value of the conversion feature as determined using the Lattice model is affected by our stock price on the date of issuance as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the Senior Note, actual and projected redemptions and conversion price resets.
Expected volatility was based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to expected remaining life of the Notes. We believed this method produced an estimate that was representative of our expectations of future volatility over the expected term of this conversion feature. We had no reason to believe future volatility over the expected remaining life of the conversion feature was likely to differ materially from historical volatility. Volatility used in the calculation ranged from a low of 124% in year one to a high of 301% in year five. Management estimated that the probability of the Note being redeemed 0% increasing by 10% per quarter.
The Company had been amortizing the discount over the period of two years, the term of the CEO's commitment not to call the Note, using the effective interest method. During the year ended September 30, 2011, the Company had amortized $10,000 of the discount to interest expense through the date of extinguishment .
Secured Note Payable to Related Party
On March 3, 2011, the Company was loaned $250,000 by Marcia H. Yeik Irrevocable Living Trust (the Trust), Marcia H. Yeik trustee thereof, the daughter of Marvin Loeb, CEO and Chairman, and the wife of Glenn D. Yeik, President and a member of the Board of Directors of the Company. Evidenced by a Note Payable (the Note) with a principal amount of $250,000 at an interest rate of 12% per annum, the Note required monthly payments through April 2, 2013. The proceeds from the Note were used to pay accounts payable due to a vendor in connection with the purchase of property and equipment for MST. The Note was subordinated to the security interest of the holder of the Companys Senior Note, and was payable in increments applied to the principal at $10,416 per month along with accrued interest on the remaining principal over the life of the Note.
On June 27, 2011, with the consent of the related party and approval by the Board of Directors, the interest rate of the Note was amended to 6% per annum and the Trust had the right to call the Note at any time and demand immediate payment of all unpaid principal and all accrued interest. The Note was paid in full with accrued interest on January 3, 2012.
Note Payable and Capital Lease Obligations
Note payable and capital leases consists of the following at September 30, 2012 and 2011:
The Company leases certain equipment under capital leases with initial terms ranging from three to five years. Future annual minimum lease payments are as follows as of September 30, 2012:
The entire disclosure for long-term debt.
Reference 1: http://www.xbrl.org/2003/role/presentationRef