Quarterly report pursuant to Section 13 or 15(d)

3. CONVERTIBLE NOTES PAYABLE

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3. CONVERTIBLE NOTES PAYABLE
6 Months Ended
Jun. 30, 2015
Debt Disclosure [Abstract]  
NOTE 3. CONVERTIBLE NOTES PAYABLE

In March 2015, the Company entered into a securities purchase agreement with Typenex Co-Investment, LLC, (“Typenex”).  Pursuant to this agreement, the Company issued to Typenex a convertible promissory note (“Typenex Note”) in the principal amount of $225,000 with an original issue discount of $20,000 plus additional financing fees of $5,000 and a five year warrant to purchase 979,965 shares of the Company’s common stock at at an exercise price of $0.30 per share, exercisable at date of issuance.  Interest on the Typenex Note accrues at the rate of 10% per annum.  The Typenex Note is to be repaid in six equal monthly installments in cash or in shares of common stock at the Company’s option (the “Conversion Shares”) plus any unpaid interest beginning September 17, 2015 until the maturity date in February 2016.  The conversion price for determining the number of Conversion Shares in respect of any installment for which the Company elects to pay in shares of common stock will be the lesser of (i) $0.30 or (ii) 70% (subject to adjustment) of the average of the three lowest closing bid prices of the common stock during the 20 trading days immediately preceding the date of conversion.  The Company can repay the Typenex Note before maturity, at its option, by paying the lender an amount equal to 125% of the then outstanding principal amount.   Amounts outstanding under the Typenex Note are convertible into the Company’s common stock, in whole or in part, at any time,  at the option of the lender, with an initial conversion price of $0.30 per share. The initial conversion price for lender conversions is subject to adjustment under certain circumstances, including “full ratchet” anti-dilution protection upon the issuance of any common stock, securities convertible into common stock, or certain other issuances at a price below the then-existing conversion price, with certain exceptions. The initial conversion price for lender conversions is also subject to adjustment should the aggregate market value of the Company’s common stock fall below $5 million dollars, in which case the conversion price would become the lesser of (i) $0.30 per share or (ii) 70% (subject to adjustment) of the average of the three lowest closing bid prices of the Company’s common stock during the 20 trading days immediately preceding the date of conversion. If the Company fails to pay any of the installments including interest due under the Typenex Note when due, or if other events of default thereunder should occur, a default interest rate of 22% per annum will apply and the lender, at their option may require the Company to repay, at 115%, all amounts that are outstanding plus 5% for each additional event of default. The Company assessed the features of the Typenex Note and warrant and determined that the warrant is required to be accounted for as a liability due to "full ratchet" protection and the lender’s put option feature, which becomes exercisable upon an event of default, including but not limited to, failure to pay, insolvency, change of control, delisting of the Company’s stock or failure to comply with the reporting requirements under the Exchange Act, is a derivative that requires bifurcation.  The Company also assessed the features of the conversion options and determined that it is a derivative that requires bifurcation.  The Company recorded the fair value of the warrant of $146,995 (Note 9) as a discount to the carrying value of the Typenex Note and as a liability. The Company recorded the fair value of the Typenex Note compound derivative, which includes both the put and conversion option features, as of issuance date totaling $154,900 and is accounted for as a liability in the accompanying balance sheet.  See Note 9 for further discussion surrounding the Typenex Note compound derivative. Of the $154,900 originally recorded in derivative value, $53,005 of this fair value was recorded as a discount to the carrying value of the Typenex Note and $101,895 was recorded as a loss in interest expense in the accompanying statement of operations.  The original issuance discount, financing fees, warrant issuance and bifurcated compound derivative resulted in a full discount of $225,000 on the Typenex Note. The discount will be accreted through the Typenex Note's maturity.  For the three and six months ended June 30, 2015, the Company recorded $10,227 and $60,000, respectively, of non-cash interest associated with the accretion of the Typenex Note discount.

  

In March 2015, the Company entered into a securities purchase agreement with JDF Capital, Inc., (“JDF”).  Pursuant to this agreement, the Company issued to JDF a convertible promissory note ("JDF Note") in the principal amount of $110,000 with an original issue discount of $10,000 and financing fees of $6,000.  Interest accrues at the rate of 10% per annum and is due at maturity of the note in March 2016.  The Company can repay the outstanding principal balance of the JDF Note during the first 180 days following issuance, at its option,  by paying the lender an amount equal to 130% during the first 60 days following the issuance, 140% from 61 days to 120 days following the issuance and 150% from 121 days to 180 days following the issuance. At any time on or after June 12, 2015, amounts outstanding under the JDF Note are convertible into the Company’s common stock, in whole or in part, at the option of the lender, with an initial conversion price of a 40% discount to the lower of (i) the lowest reported sales price of the common stock during the 20 trading day period immediately prior to the date of conversion or (ii) the lowest reported sales price during the 20 days trading period immediately prior to issuance of the JDF Note.  The initial conversion price for lender conversions is subject to adjustment under certain circumstances, including “full ratchet” anti-dilution protection upon the issuance of any common stock, securities convertible into common stock, or certain other issuances at a price below the then-existing conversion price, with certain exceptions.  If the Company fails to repay the JDF Note when due, or if other events of default thereunder should occur, a default interest rate of 15% per annum will apply and the lender, at their option, may require the Company to repay, at 120%, all amounts that are outstanding. The Company assessed the features of the JDF Note and determined that the lender’s put option feature, which becomes exercisable upon an event of default, major transaction or triggering event, including but not limited to, failure to pay, insolvency, change of control, delisting of the Company’s stock or failure to comply with the reporting requirements under the Exchange Act,  is a derivative that requires bifurcation.  The Company also assessed the conversion features of the JDF Note and determined that the conversion option is a derivative that requires bifurcation. The Company recorded the fair value of the JDF Note compound derivative, which includes both the put and conversion option features, as of issuance date totaling $38,200, as a discount to the carrying value of the JDF Note and accounted for it separately as a liability in the accompanying balance sheet. See Note 9 for further discussion surrounding the JDF Note compound derivative. The original issuance discount, financing fees, bifurcated compound derivative  result in an aggregate initial discount of $54,200 on the JDF Note.  The discount will be accreted through the JDF Note’s maturity.  For the three and six months ended June 30, 2015, the Company recorded $10,442 and $12,499, respectively, of non-cash interest associated with the accretion of the JDF Note discount.

 

In July 2015, the Company was advanced an additional principal amount of $110,000 with an original issue discount of $10,000 as an amendment to the original JDF Note terms as discussed above. These funds were specifically designated to be used to repay the JMJ Note in full during July 2015 as discussed below.

 

In March 2015, the Company entered into a convertible promissory note agreement with JMJ Financial (“JMJ”) with a total potential principal amount of $500,000 with a $50,000 original issue discount ("JMJ Note").  At their discretion, JMJ may fund to the Company any portion of the $500,000, net of the original issue discount ratably applied.  On March 18, 2015, the Company borrowed $83,333 of the principal amount, subject to the original issue discount of $8,333, for net proceeds of $75,000.  Borrowings under the JMJ Note are due two years from the date funded.  The Company may repay amounts borrowed under the JMJ Note within 90 days of funding without interest.  Amounts not repaid within 90 days of funding bear a one-time interest charge of 12%.  Amounts outstanding under the JMJ Note are convertible into the Company’s common stock, in whole or in part, at any time,  at the option of the lender, with an initial conversion price of a 40% discount (subject to adjustment) to the lowest trade price of the common stock during the 20 trading day period immediately prior to the date of conversion.  If the Company fails to repay amounts due under the JMJ Note when due, or if other events of default thereunder should occur, a default interest rate of 18% per annum will apply and the lender, at their option, may require the Company to repay, at 150%, all amounts that are outstanding. The Company assessed the features of the JMJ Note and determined that the lender’s put option feature, which becomes exercisable upon an event of default, including but not limited to, failure to pay, insolvency or failure to comply with the reporting requirements under the Exchange Act,  is a derivative that requires bifurcation. The Company also assessed the conversion features of the JMJ Note and determined that the conversion option is a derivative that requires bifurcation. The Company recorded the fair value of the JMJ Note compound derivative, which includes both the put and conversion option features, as of issuance date totaling $67,400, as a discount to the carrying value of the JMJ Note and accounted for it separately as a liability in the accompanying balance sheet. See Note 9 for further discussion surrounding the JMJ Note compound derivative. The original issuance discount, financing fees and bifurcated compound derivative resulted in an initial discount as of issuance date of $83,233 on the JMJ Note. This discount will be accreted through the JMJ Note’s maturity date. For the three and six months ended June 30, 2015, the Company recorded $10,404 and $11,907, respectively, of non-cash interest associated with the accretion of the JMJ Note discount.

 

The Company repaid the JMJ Note in July 2015 from proceeds advanced from the JDF Note amendment as discussed above.

 

In March 2015, the Company entered into a securities purchase agreement with Vis Vires Group (Vis Vires).  Pursuant to this agreement, the Company issued to Vis Vires a convertible promissory note in the principal amount of $79,000 with financing fees of $8,500 ("Vis Vires Note").  Interest accrues at the rate of 8% per annum and is due upon maturity of the note in December 2015.  The Company can repay the outstanding principal balance of the Vis Vires Note, at its option,  by paying the lender an amount ranging from 110% during the 30 days following the issuance of the note up to 135% from 151 days to 180 days following the issuance of the Vis Vires Note. At any time on or after September 18, 2015, amounts outstanding under the Vis Vires Note are convertible into the Company’s common stock, in whole or in part, at the option of the lender, with an initial conversion price of a 39% discount to the average of the lowest three reported closing bid prices of the common stock during the 10 trading day period immediately prior to the date of conversion. The initial conversion price for lender conversions is subject to adjustment under certain circumstances, including “full ratchet” anti-dilution protection upon the issuance of any common stock, securities convertible into common stock, or certain other issuances at a price below the then-existing conversion price, with certain exceptions.  If the Company fails to repay the Vis Vires Note when due, or if other events of default thereunder should occur, a default interest rate of 22% per annum will apply and the lender, at their option, may require the Company to pay, at 120%, all amounts that are outstanding. The Company assessed the features of the Vis Vires Note and determined that the lender’s put option feature, which becomes exercisable upon an event of default, including but not limited to, failure to pay, insolvency, change of control, delisting of the Company's stock, a financial statement restatement or failure to comply with the reporting requirements under the Exchange Act, is a derivative that requires bifurcation. The Company recorded the fair value of the Vis Vires Note compound derivative, which includes both the put and conversion option features, as of issuance date totaling $13,831, as a discount to the carrying value of the Vis Vires Note and accounted for it separately as a liability in the accompanying balance sheet. See Note 9 for further discussion surrounding the Vis Vires Note compound derivative. The financing fees and bifurcated compound derivative resulted in an initial discount as of issuance date of $22,331 on the Vis Vires Note. This discount will be accreted through the Vis Vires Note’s maturity date. For the three and six months ended June 30, 2015, the Company recorded $6,531 and $7,668, respectively, of non-cash interest associated with the accretion of the Vis Vires Note discount.

 

Each of the convertible note agreements has a Conversion Delay feature that requires the Company to deliver shares upon conversion of the note within a defined period of time.  If the Company fails to deliver the shares within the defined period, the Company may be obligated to cash payments to the lender or reimburse the investor in cash for losses that the investor incurs as a result of not having access to the shares.  The Company assessed the provisions of the Conversion Delay feature as an embedded derivative and has concluded that the feature meets the definition of a derivative and is not clearly and closely related to the convertible note host agreements. The Conversion Delay feature has been bifurcated from the convertible notes and accounted for separately. The value of this feature was nominal as of the issuance date and June 30, 2015.  

 

The principal amount of convertible notes payable, the related discount and the net carrying amount as of June 30, 2015 are as follows:

 

                     

Remaining Period

for Amortization

    Principal     Discount     Net      of Discount
Typenex Note   $ 225,000     $ 154,773     $ 70,227     7.5 months
JDF Note     110,000       41,701       68,299     8.5 months
JMJ Note     83,333       71,326       12,007     20.5 months
Vis Vires Note     79,000       14,663       64,337     5.5 months
      497,333       282,463       214,870      
Less:  current portion     414,000       211,137       202,863      
Long term portion   $ 83,333     $ 71,326     $ 12,007