Quarterly report pursuant to Section 13 or 15(d)

3. CONVERTIBLE NOTES PAYABLE

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3. CONVERTIBLE NOTES PAYABLE
9 Months Ended
Sep. 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 an exercise price of $0.30 per share, exercisable at date of issuance.  Interest on the Typenex Note accrued at the rate of 10% per annum.  The Typenex Note was 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 elected to pay in shares of common stock would 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 had the option to 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 were 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 was 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 was also subject to adjustment if the aggregate market value of the Company's common stock fell 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 failed to pay any of the installments including interest due under the Typenex Note when due, or if other events of default thereunder occurred, a default interest rate of 22% per annum would apply and the lender, at their option could have required 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 was required to be accounted for as a liability due to "full ratchet" protection and the lender's put option feature, which was 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, was a derivative that required bifurcation.  The Company also assessed the features of the conversion options and determined that it was a derivative that required 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 included both the put and conversion option features, as of issuance date totaling $154,900 and was 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 was accreted through the Typenex Note's maturity.  For the three and nine months ended September 30, 2015, the Company recorded $56,591 and $126,818, respectively, of non-cash interest associated with the accretion of the Typenex Note discount. The Company made the first installment payment of $37,500 on September 16, 2015, plus accrued interest of $11,797.  On September 23, 2015, using the proceeds from the CJY Holdings convertible note discussed below, the Company and the lender agreed to a full settlement of the Typenex Note, including the cancellation of the warrant, in exchange for a total payment of $217,500. As a result of the prepayment, the Company recorded a loss on extinguishment of debt and warrants of $868 in the accompanying statement of operations.

 

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 accrued at the rate of 10% per annum and was due at maturity of the note in March 2016.  The Company had the option to 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 were 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 was 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 failed to repay the JDF Note when due, or if other events of default occurred, a default interest rate of 15% per annum would apply and the lender, at their option, could have required the Company to repay, at 120%, all amounts that were outstanding. The Company assessed the features of the JDF Note and determined that the lender's put option feature, which was 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, was a derivative that required bifurcation.  The Company also assessed the conversion features of the JDF Note and determined that the conversion option was a derivative that required bifurcation. The Company recorded the fair value of the JDF Note compound derivative, which included 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 resulted in an aggregate initial discount of $54,200 on the JDF Note. 

 

The Company assessed the features of the additional advance and determined that the lender's put option feature and the conversion feature were derivatives that required bifurcation.  The value of the compound derivative, which included both the put and conversion option features, was not material as of the issuance date.

On July 16, 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, as discussed above, with a maturity date of March 13, 2016. In connection with the amended agreement, the Company recorded a debt discount of $10,000.

 

The debt discounts on the JDF Notes were accreted through maturity the respective maturity dates. For the three and nine months ended September 30, 2015, the Company recorded $14,471 and $26,970, respectively, of non-cash interest associated with the accretion of the JDF Notes discounts. On September 23, 2015, using the proceeds from the CJY Holdings convertible note discussed below, the Company and the lender agreed to a full settlement of the JDF Notes in exchange for a total payment of $310,000. As a result of the prepayment, the Company recorded a loss on extinguishment of debt of $119,304 in the accompanying statement of operations.

 

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 could 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 were due two years from the date funded.  The Company could 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 were 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 failed 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 would apply and the lender, at their option, could 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 became 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, was a derivative that required bifurcation. The Company also assessed the conversion features of the JMJ Note and determined that the conversion option is a derivative that required bifurcation. The Company recorded the fair value of the JMJ Note compound derivative, which included 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 was be accreted through the JMJ Note's maturity date. For the three and nine months ended September 30, 2015, the Company recorded $1,965 and $13,872, respectively, of non-cash interest associated with the accretion of the JMJ Note discount. On July 17, 2015, using the proceeds from the JDF amendment discussed above, the Company and the lender agreed to a full settlement of the JMJ Note in exchange for a total payment of $93,333. As a result of the prepayment, the Company recorded a loss on extinguishment of debt of $69,361 in the accompanying statement of operations.

 

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 accrued at the rate of 8% per annum and was due upon maturity of the note in December 2015.  The Company had the option to repay the outstanding principal balance of the Vis Vires Note, 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 were 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 failed to repay the Vis Vires Note when due, or if other events of default thereunder occurred, a default interest rate of 22% per annum would apply and the lender, at their option, could have required 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 became 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, was a derivative that requires bifurcation. The Company recorded the fair value of the Vis Vires Note compound derivative, which included 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 was accreted through the Vis Vires Note's maturity date. For the three and nine months ended September 30, 2015, the Company recorded $6,913 and $14,581, respectively, of non-cash interest associated with the accretion of the Vis Vires Note discount. On September 23, 2015, using the proceeds from the CJY Holdings convertible note discussed below, the Company and the lender agreed to a full settlement of the Vis Vires Note in exchange for a total payment of $105,000. As a result of the prepayment, the Company recorded a loss on extinguishment of debt of $30,460 in the accompanying statement of operations.

 

On September 24, 2015, the Company entered into a securities purchase agreement with CJY Holdings, LLC. (CJY), a significant shareholder and related party to the Company. Pursuant to this agreement, the Company issued to CJY a convertible promissory note in the principal amount of $750,000 (CJY Note).  Interest accrues at the rate of 10% per annum and is due upon maturity of the note on September 24, 2018.  The Company has the option to repay the outstanding principal balance of the CJY Note at no penalty to the Company. At any time on or after issuance, amounts outstanding under the CJY Note are convertible into the Company's common stock, in whole or in part, at the option of the holder, at a fixed initial conversion price of $0.05 per share of the Company's common stock. The CJY Note agreement contains standard anti-dilution protection surrounding certain common stock adjustments by the Company. The CJY Note shall convert, in full, automatically upon the closing of a subsequent financing at the finalized terms of the subsequent financing. In the occurrence of an event of default, CJY may require the Company to repay the outstanding principal and accrued interest upon demand. The Company assessed the features of the CJY Note and determined that the embedded conversion options and put feature do not require bifurcation. In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company recorded a beneficial conversion feature of $750,000 upon issuance and a corresponding debt discount of $750,000 which will be accreted over the term of the note.  During the interim period ended September 30, 2015, the Company recorded $4,795 of non-cash interest associated with the accretion of the CJY Note discount.

 

Subsequent to September 30, 2015, the Company has entered into additional convertible promissory note agreements with CJY in the aggregate principal amount of $300,000, at the same terms as stated above, to provide the Company with financing for operations.