PROMISSORY NOTES PAYABLE AND ADVANCES

6 Months Ended

Jun. 30, 2016

Debt Disclosure [Abstract]

PROMISSORY NOTES PAYABLE AND ADVANCES

NOTE 6 - PROMISSORY NOTES PAYABLE AND ADVANCES

On April 4, 2016, we issued a note payable to Canyon Assets Holdings, Inc. (“Lender”) dated March 28, 2016 in the principal amount of $575,000. The note was issued to the Lender in consideration for the Lender’s having satisfied on the Company’s behalf an outstanding note payable (the “CAH Note”) of the Company (the “JTS Note”). The JTS Note issued September 25, 2015 was repaid in full ($500,000 face value and accrued interest of $75,000) by the Lender with the payment of $575,000 in cash. The terms of the CAH Note call for an interest rate of 15%, due one year from the date of the CAH Note. However, all accrued and unpaid interest and all other amounts payable under the CAH Note are due to the Lender within ten (10) business days after the closing by the Company of an equity or convertible debt financing in one or more series of transactions, with aggregate gross proceeds of at least $1 million. 

On April 4, 2016, we issued a $275,000 face value note payable and 50,000 shares of our common stock to Gemini Master Fund, LTD (“Gemini”) pursuant to a Security Purchase Agreement dated March 30, 2016 (the date the funds were received by our Company). Under the terms of the related note payable (the “Gemini Note”), the Company received $245,000, net of costs and original issue discount. Other significant terms of the Gemini Note include:

• A maturity date of December 31, 2016 in the absence of events triggering mandatory early repayment (as summarized below);

• Interest accrues at the rate of 8% on the $275,000 face value (18% in the event of an event of default as defined in the Gemini Note);

• The Gemini Note is convertible in part (subject to a $10,000 minimum) at the option of Gemini into shares of the Company’s common stock at the rate of $0.70 per share (subject to adjustment summarized below);

• The Company has the option to prepay the Gemini Note;

• All prepayments of the Gemini Note, whether effected at the option of the Company or subject to mandatory early repayment (as summarized herein), require the Company to repay Gemini 112% of the outstanding principal and all outstanding accrued interest through the date of prepayment;

• All principal and interest outstanding under the Gemini Note are required to be immediately repaid should the Company complete a financing or series of financings totaling $1.5 million or more;

• The Conversion price of the Gemini Note is adjusted for the following: 1) loss of Company DTC eligibility - conversion price adjusts to $0.25 per share; 2) stock dividends and splits - as described in the Gemini Note; 3) a rights offering below the market price (as defined) - as described in the Gemini Note; 4) fundamental transactions (as defined) - as described in the Gemini Note; 5) subsequent equity sales below $0.70 per share - as more particularly detailed and described in the Gemini Note; and

• The Gemini Note is convertible into 392,857 shares of common stock

The embedded conversion feature of the Gemini Note was bifurcated and valued at $106,000 at inception. 

The embedded conversion feature is separately measured at fair value, with changes in fair value recognized in current operations.  Management used a Monte Carlo valuation model to estimate the fair value of the embedded conversion option at issuance of the convertible note issued during the six months ended June 30, 2016, with the following key inputs: 

	At inception
Stock price	$	0.68
Term (years)		0.76
Volatility		98.9	%
Risk-free rate of interest		0.5	%
Dividend yield		0.0	%

In connection with the issuance of the Gemini Note, we recorded additional debt discounts related to the following: 

• Issuance of 50,000 shares of our common stock resulting in the relative common stock fair value of $27,000;

• Recording of a beneficial conversion feature of $44,000; and

• Original issuance discount of $25,000.

The debt discount is amortized to interest expense using the effective interest method over the term of the notes. During the three and six months ended June 30, 2016, the Company recognized interest expense of approximately $67,000 resulting from amortization of the debt discount, resulting in a net Gemini Note balance of $140,530. 

Borrowings under notes payable and advances as of June 30, 2016 and December 31, 2015 are summarized as follows: 

	Company Proceeds		Carrying Value at June 30, 2016		Carrying Value at December 31, 2015		Accrued Interest at June 30, 2016		Accrued Interest at December 31, 2015		Principal Value at Maturity
15% Note	$	500,000	$	—	$	500,000	$	—	$	31,479	$	—
10% Note		50,000		50,000		50,000		3,205		1,383		50,000
10% Note (2015 Advances)		410,000		476,512		292,504		25,183		2,190		461,111
10% Note (2016 Advances)		140,000		130,494		—		3,422		—		155,556
8% Convertible Note		245,000		140,530		—		5,545		—		275,000
8% Convertible Note		—		575,000		—		11,847		—		575,000
	$	1,345,000	$	1,372,536	$	842,504	$	49,202	$	35,052	$	1,516,667