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SECURED CONVERTIBLE NOTES PAYABLE

3 Months Ended

Mar. 31, 2016

Convertible Notes Payable [Abstract]

On December 31, 2014, the Company entered into a Securities Purchase Agreement (“2014 Agreement”) with certain accredited investors to sell to the Purchasers an aggregate of up to $500,000 of principal amount of notes due December 31, 2015 representing the Purchasers’ subscription amount. The 2014 Agreement defines certain covenants and provides for a purchase price reset for a period of three years, unless the securities have been assigned, whereby should the Company issue or sell any shares of common stock or any common stock equivalents at a price less than the Purchasers’ conversion price per share, the Company will be required to issue additional shares of common stock to the Purchasers for no additional consideration resulting in a share dilution adjustment, as defined. The 2014 Agreement also provides a Most Favored Nations Provision whereby if the Company issues or sells any common stock at terms more favorable within three years, then the Company will be required to amend the 2014 Agreement to provide such favorable terms to the Purchasers. The Company paid $33,000 in legal and escrow agent fees, a placement agency fee of $20,000 in the form of a note payable, substantially similar to the Purchasers’ notes and issued 64,000, shares of its common stock valued at $640,000 and $20,000 as due diligence fees, all of which have been recorded as debt issuance costs on the accompanying consolidated financial statements and is being charged to operations over the twelve months ended December 31, 2015. The Company recorded amortization expense of $0 and $178,250 on the debt issuance costs during the three months ended March 31, 2016 and 2015, respectively. At December 31, 2015 the maturity date of the notes were extended to December 31, 2016.

Under the 2014 Agreement, the Company sold an aggregate of $425,000 in Secured Convertible Notes (“Notes”) and issued an additional $20,000 Note for placement fees. The Company fulfilled its obligations as defined by certain equity requirements; therefore, the Notes will be convertible into shares of the Company’s common stock. Under certain conditions defined in the agreement, the Company has the option to convert the Notes into shares of the Company's common stock. Since the equity obligations were met during 2015 the Notes accrued interest at 10% per annum through June 30, 2015. The original conversion price on the Note was $6.00, and has subsequently reduced to $0.30 at December 31, 2015.

During the first quarter of 2016, the Company issued 175,000 shares of its common stock in connection with the conversion of $52,500 of Notes. In accordance with the accounting for debt extinguishment, the difference between the $52,500 carrying value of the Notes, plus the associated embedded derivative liability of $54,306 and the $68,000 fair value of 175,000 shares of common stock issued, resulting in a net gain of approximately $39,000.

Each Holder of the Notes has been granted a security interest in assets of the Company in accordance with a Security Agreement. The Security Agreement provides the Collateral Agent a security interest in all goods, machinery, equipment, contract rights and intangibles in the event of a default under the Agreement.

In connection with this 2014 Agreement, and under the anti-dilution provisions of the February 2014 private placement, on December 31, 2014, the Company issued an aggregate of 160,093 shares of common stock and 13,333 warrants to purchase common shares at $6.00 per share to existing stockholders holding securities purchased in that offering. This reflects the post-split adjustment to shares issued and price per share. The fair value of the 13,333 warrants issued in 2014 were valued at $122,807 using the Black-Scholes Pricing model and was reflected as a change in the derivative liability in the 2014 statement of operations.

In addition, the pricing of this 2014 Agreement triggered the pricing reset provision in the 3,333 warrants issued in the February 14, 2014 private placement. Such triggering resulted in the exercise price of the previously issued warrants resetting to $6.00 from $30.00 at December 31, 2014. The exercise price was further reduced to $0.30 as a result of additional financing in 2015. At March 31, 2016, using the Black-Scholes Pricing Model, the Company re-valued the remaining February 2014 warrants at $1,151 a decrease in fair value of $440 from December 31, 2015 and a decrease in fair value of $569,849 since inception.

At March 31, 2016, the 13,333 ratchet warrants granted at December 31, 2014 were re-valued using the Black-Scholes Pricing Model at $4,890, a decrease in fair value of $1,743 from December 31, 2015.

The significant assumptions utilized by the Company in the valuation of these warrants at March 31, 2016 and December 31, 2015 were as follows:

	2016			2015
Market Price:	$	0.43		$	0.55
Exercise Price:	$	0.30		$	0.30
Volatility:		138	%		149	%
Dividend Yield:	zero			zero
Term in years:	2.88 and 3.75			3.1 and 4.0
Risk Free Rate of Return:		1.21	%		1.76	%

The outstanding warrants for 26,884 common shares at December 31, 2015, held by the January and April 2013 private placement investors do not have a cashless exercise and were not affected by the reset provision. During January 2016, 3,903 warrants expired. The Company re-valued the remaining warrants at March 31, 2016 using the Black-Scholes Pricing Model at $0: there was no change in fair value of $0 at December 31, 2015.

The significant assumptions utilized by the Company in the valuation of these warrants at March 31, 2016 and December 31, 2015 were as follows:

	2016			2015
Market Price:	$	0.43		$	0.55
Exercise Price:	$	30.00		$	30.00
Volatility:		138	%		149	%
Dividend Yield:	zero			zero
Term in years:	<1			<1
Risk Free Rate of Return:		0.87	%		1.31	%

On September 21, 2015, the Company entered into a Securities Purchase Agreement (“Sept 2015 Agreement”) with certain accredited investors to sell to the Purchasers an aggregate of up to $250,000 of principal amount of notes due September 30, 2016, representing the Purchasers’ subscription amount. The new offering is substantially the same terms and conditions as the December 2014 Notes. In connection with the new offering, the Company issued allonges to the December 2014 Notes increasing the principal amount of the Notes ("Allonges") pursuant to the terms of the new offering with such Allonges having a maturity date of September 30, 2016 and a conversion price equal to $1.00 per share (subject to further reduction), at September 21, 2015. The conversion price was reduced to $0.30 at December 31, 2015 as a result of a subsequent financing.

The Sept 2015 Agreement defines certain covenants and provides for a purchase price reset for a period of three years, unless the securities have been assigned, whereby should the Company issue or sell any shares of common stock or any common stock equivalents at a price less than the Purchasers’ conversion price per share, the Company will be required to issue additional shares of common stock to the Purchasers for no additional consideration resulting in a share dilution adjustment, as defined. The Sept 2015 Agreement also provides a Most Favored Nations Provision whereby if the Company issues or sells any common stock at terms more favorable within three years, then the Company will be required to amend the Sept 2015 Agreement to provide such favorable terms to the Purchasers. The Company paid $12,500 in legal fees, a placement agency fee of $25,000 in the form of a note payable, substantially similar to the Purchasers’ notes, all of which was recorded as debt issuance costs on the accompanying consolidated financial statements and will be charged to operations over the twelve months ended September 30, 2016 or to the date of conversion, if earlier. The Company recorded amortization expense of $9,375 on the debt issuance costs during the three months ended March 31, 2016

Under the Sept 2015 Agreement, the Company sold an aggregate of $250,000 in Secured Convertible Notes and issued an additional $25,000 Note for placement fees. Once the Company has fulfilled its obligations as defined by certain equity requirements, the Notes will be convertible into shares of the Company’s common stock at the option of the Company. Until the equity obligations are met, the Notes bear interest at 10%, per annum. Interest will be earned at a rate of 10% for the twelve months ending September 30, 2016 or to the date of conversion, whichever is earlier. The conversion price for the Note and accrued interest was equal to $1.00 per share at September 21, 2015 subject to adjustments as stock dividends and stock splits, as defined. At December 31, 2015, the conversion price was reduced to $0.30.

On December 31, 2015, the Company entered into a Securities Purchase Agreement (“Dec 2015 Agreement”) with certain accredited investors to sell to the Purchasers an aggregate of up to $500,000 of principal amount of notes due December 31 2016, representing the Purchasers’ subscription amount. The new offering is substantially the same terms and conditions as the December 2014 Notes.

The Dec 2015 Agreement defines certain covenants and provides for a purchase price reset for a period of three years, unless the securities have been assigned, whereby should the Company issue or sell any shares of common stock or any common stock equivalents at a price less than the Purchasers’ conversion price per share, the Company will be required to issue additional shares of common stock to the Purchasers for no additional consideration resulting in a share dilution adjustment, as defined. The Dec 2015 Agreement also provides a Most Favored Nations Provision whereby if the Company issues or sells any common stock at terms more favorable within three years, then the Company will be required to amend the Dec 2015 Agreement to provide such favorable terms to the Purchasers. The Company paid $18,000 in legal fees and a placement agency fee of $50,000 in the form of a note payable, with substantially similar to the Purchasers’ notes, all of which was recorded as debt issuance costs on the accompanying consolidated financial statements and will be charged to operations over the twelve months ended December 31, 2016 or to the date of conversion, if earlier. The Company recorded amortization expense of $17,000 on the debt issuance costs during the three months ended March 31, 2016.

Under the Dec 2015 Agreement, the Company sold an aggregate of $500,000 in Secured Convertible Notes (“Notes”) and issued an additional $50,000 Note for placement fees. Once the Company has fulfilled its obligations as defined by certain equity requirements, the Notes will be convertible into shares of the Company’s common stock at the option of the Company. Until the equity obligations are met, the Notes bear interest at 10%, per annum. Interest will be earned at a rate of 10% for the twelve months ending December 31, 2016 or to the date of conversion, whichever is earlier. The conversion price for the Note and accrued interest is equal to $0.30 per share, subject to adjustments as stock dividends and stock splits, as defined.

A summary of the convertible notes at March 31, 2016 are as follows:

	Face Amount			Unamortized Discount			Debt Issuance Cost			Carrying Value
December 31, 2015	$	1,270,000		$	(660,712	)	$	(96,125	)	$	513,163
2016 Amortization		-			396,091			26,375			422,466
Conversions		(52,500	)		-			-			(52,500	)
March 31, 2016	$	1,217,500		$	(264,621	)	$	(69,750	)	$	883,129

In connection with the Sept 2015 and Dec. 2015 Agreements, and under the anti-dilution provisions of the December 2014 private placement, the Company is required to issue an aggregate of 2,611,003 shares of common stock to existing stockholders holding securities purchased in that offering, of which 1,918,002 were issued as of March 31, 2016.