PROMISSORY NOTES PAYABLE AND ADVANCES

12 Months Ended

Dec. 31, 2016

Debt Disclosure [Abstract]

PROMISSORY NOTES PAYABLE AND ADVANCES

NOTE 6 - PROMISSORY NOTES PAYABLE AND ADVANCES

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

			Amounts converted		Carrying Value as of		Carrying Value as of		Accrued Interest		Accrued Interest
	Company		to Common Stock as of		December 31,		December 31,		as of December 31,		as of December 31,		Principal Value
	Proceeds		December 31, 2016		2016		2015		2016		2015		as of Maturity
15% Note	$	500,000	$	-	$	-	$	500,000	$	-	$	31,479	$	-
10% Note		50,000		-		50,000		50,000		5,726		1,383		50,000
10% Note (2015)		87,500		-		110,000		62,949		11,633		548		110,000
10% Note (2015 Advances)		322,500		-		361,111		229,555		37,852		1,642		361,111
10% Note (2016 Advances)		1,065,000		-		799,024		-		43,492		-		1,080,556
8% Convertible Note		245,000		-		-		-		-		-		-
4% Convertible Note		-		62,428		270,350		-		360		-		270,350
15% Note (2016 Advances)		35,000		-		35,000		-		2,373		-		35,000
9% Convertible Note		240,000		-		52,034		-		4,683		-		267,500
10% Convertible Note		70,000		-		6,837		-		341		-		77,779
5% Convertible Note - conversion of Related Party		-		-		382,061		-		5,668		-		382,061
5% Convertible Note		375,000		-		160,000		-		3,879		-		480,000
15% CAH Note		-		-		575,000		-		65,693		-		575,000
	$	2,990,000	$	62,428	$	2,801,417	$	842,504	$	181,700	$	35,052	$	3,689,357

2016 activity

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 $106,278.

Management used a Monte Carlo valuation model to estimate the fair value of the embedded conversion option at issuance of the convertible note, with the following weighted average key inputs:

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

The embedded conversion feature is separately measured at fair value, with changes in fair value recognized in current operations.  The embedded conversion has been reduced by $58,962 during the year ended December 31, 2016 (see Note 7).

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 fair value of $27,000;

• Recording of a beneficial conversion feature of $43,785; and

• Original issuance discount of $25,000.

The debt discounts are amortized to interest expense using the effective interest method over the term of the notes. During the year ended December 31, 2016, the Company recognized interest expense of approximately $202,000 resulting from the amortization of the entire debt discount noted above resulting in a Gemini Note balance of $275,000.

On October 28, 2016, the Gemini Note was purchased in full, including accrued interest of approximately $13,000, by another lender in exchange for a convertible note (“the 4% Convertible Note”) issued by the Company. The 4% Convertible Note accrues interest at 4% per annum, is entitled to the same conversion features as the Gemini Note and matures on June 30, 2017. The lender charged the Company $45,000 in fees, which were added to the balance, and converted approximately $62,000 of the 4% Convertible Note balance into 331,413 shares of the Company’s common stock, resulting in a balance of $270,350 as of December 31, 2016.

During January through June 2016, three individuals (the “Lenders”) advanced a total of $140,000 to the Company. The borrowings were not accompanied by documentation of the nature of the borrowings. However, there were general discussions as to the repayment terms and the interest expected of 10% per annum to be paid to the Lenders in connection with the borrowings. Accordingly, we have accounted for the borrowings based on estimates of their still undocumented final terms.

In July 19, 2016, we issued a sixty day 15% promissory note payable to a purchaser for cash proceeds totaling $35,000. In the event that we secure any future financing with aggregate gross proceeds of at least $500,000 while the promissory note is outstanding, the promissory note and all accrued interest therefrom will be immediately due and payable within ten business days of the closing of such financing.

From July through September 30, 2016, certain investors advanced a total of $925,000 (the “Advances”) to the Company with a right to convert at no greater than $0.40 per share. In connection with the Advances, the Company also issued warrants to purchase 770,833 shares of our common stock at an exercise price of $0.60 per share with a 5 year term. The relative fair value of the warrants compared to the Advances was $295,540, which was recorded as a component of stockholders’ deficit with the offset recorded as a discount on the Advances. The fair value of the warrants was determined using the Black-Scholes Model (see Note 8). The Company then computed the effective conversion price of the Advances on the issuance date, noting that the Advances gave rise to a BCF of $629,460. The sum of the relative fair value of the warrants and the BCF was recorded as a debt discount to be amortized over the term of the advances.

The debt discounts are amortized to interest expense using the effective interest method over the term of the Advances. During the year ended December 31, 2016, the Company recognized interest expense of $643,469, from the amortization of the debt discount, resulting in the Advances balance of $643,469. 

The Advances contain an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815. The embedded conversion feature of the Notes was valued at inception using the Monte Carlo simulation at $1,212,384 and was recorded as a loss on the consolidated statements of operations. As of December 31, 2016, the derivative was remeasured to $491,218 (see Note 7) and the difference was recorded as a change in fair value of derivative liabilities on the consolidated statements of operations.

Management used a Monte Carlo valuation model to estimate the fair value of the embedded conversion option at issuance of the Advances, with the following weighted average key inputs:

	At issuance
Stock price	$	0.74
Term (years)		0.75
Volatility		116	%
Risk-free rate of interest		0.5	%
Dividend yield		0.0	%

On October 21, 2016, we issued a $267,500 face value convertible note that accrues interest at 9% per annum and matures on October 21, 2017 (“the 9% Convertible Note”). The Company received proceeds of $240,000, net of costs and original issuance discount. Upon holding the note for six months, the conversion terms allow the holder to convert outstanding principal into the Company’s common stock at the lower of (i) $0.40 per share or (ii) 65% of the lowest closing bid price of the common stock for the fifteen prior trading days, including upon which the conversion notice is received by the Company. The 9% Convertible Note allows for prepayment within 180 days from the date of issuance. If the note is outstanding for 90 days or less, the prepayment rate is 125% of principal plus accrued interest; and if the note is outstanding for more than 90 days but less than 180 days, the prepayment rate is 150% of principal plus accrued interest. In connection with the 9% Convertible Note, the Company also issued warrants to purchase 222,916 shares of our common stock at an exercise price $0.60 per share with a 4 year term. The relative fair value of the warrants compared to the 9% Convertible Note was $56,737, which was recorded as a component of stockholders’ deficit with the offset recorded as a discount to the 9% Convertible Note. The fair value of the warrants was determined using the Black-Scholes Model (see Note 8). The Company then computed the effective conversion price of the 9% Convertible Note on the issuance date, noting that the 9% Convertible Note gave rise to a BCF of $151,112.

The 9% Convertible Note contains an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815. The embedded conversion feature of the 9% Convertible Note was valued at inception using the Monte Carlo simulation at $296,786 with $32,150 being recorded as a discount to the 9% Convertible Note and $264,633, the remainder, being recorded as a loss on the consolidated statements of operations. Management used a Monte Carlo valuation model to estimate the fair value of the embedded conversion option at issuance of the 9% Convertible Notes, with the following weighted average key inputs:

	At issuance
Stock price	$	0.50
Term (years)		1.03
Volatility		116	%
Risk-free rate of interest		0.7	%
Dividend yield		0.0	%

The sum of the relative fair value of the warrants, BCF, original issuance discount, issuance costs and applicable portion of the embedded conversion option that was recorded as a debt discount is to be amortized over the term of the 9% Convertible Note. The debt discounts are amortized to interest expense using the effective interest method over the term of the 9% Note. During the twelve months ended December 31, 2016, the Company recognized interest expense of $52,034, from the amortization of the debt discount, resulting in the 9% Convertible Note balance of $52,034. 

As of December 31, 2016, the derivative was remeasured to $215,873 (see Note 7) and the difference was recorded as a change in fair value of derivative liabilities on the statement of operations.

On October 28, 2016, we issued a $480,000 face value convertible note that accrues interest at 5% per annum and matures on April 28, 2017 (“the 5% Convertible Note”). The Company received proceeds of $375,000, net of costs and original issuance discount. The conversion terms allow the holder to convert outstanding principal into the Company’s common stock if an event of default occurs, or if the Company does not repay the note in full at the original maturity date, at 60% of the lowest closing bid price of the common stock for the thirty prior trading days immediately preceding the trading date. Prepayment rates are 115% if the note is repaid within the first sixty days from the date of issuance and 125% thereafter. The Company computed the effective conversion price of the 5% Convertible Note on the issuance date, noting that the 5% Convertible Note gave rise to a BCF of $375,000.

The sum of the BCF, original issuance discount and issuance costs that was recorded as a debt discount is to be amortized over the term of the 5% Convertible Note. The debt discounts are amortized to interest expense using the effective interest method over the term of the 5% Convertible Note. During the year ended December 31, 2016, the Company recognized interest expense of $160,000, from the amortization of the debt discount, resulting in the 5% Convertible Note balance of $160,000. 

In connection with the 5% Convertible Note, the Company also issued warrants with a 7 year term to purchase 1,428,572 shares of our common stock at an exercise price per share equal to the lower of (a) $0.47; or (b) 75% of the closing bid price of the common stock on the effective date of the Company’s first public offering following the issuance date. The Company determined that the warrants are derivatives requiring bifurcation in accordance with the provisions of ASC 815. The warrants were valued at inception using the Monte Carlo simulation at $579,451 and recorded as a loss on the consolidated statements of operations. Management used a Monte Carlo valuation model to estimate the fair value of the warrant derivative at issuance of the 5% Convertible Note, with the following weighted average key inputs:

	At issuance
Stock price	$	0.45
Term (years)		7.00
Volatility		112	%
Risk-free rate of interest		1.6	%
Dividend yield		0.0	%

As of December 31, 2016, the warrant derivatives were remeasured to $443,816 (see Note 7) and the difference was recorded as a change in fair value of derivative liabilities on the statement of operations. 

The 5% Convertible Note also contains an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815. The embedded conversion feature of the 5% Convertible Note was valued at inception using the Monte Carlo simulation at $36,130 and recorded as a loss on the consolidated statements of operations. Management used a Monte Carlo valuation model to estimate the fair value of the embedded conversion option at issuance of the 5% Convertible Note, with the following weighted average key inputs:

	At issuance
Stock price	$	0.45
Term (years)		0.50
Volatility		118	%
Risk-free rate of interest		0.5	%
Dividend yield		0.0	%

 As of December 31, 2016, the derivative was remeasured to $34,517 (see Note 7) and the difference was recorded as a change in fair value of derivative liabilities on the statement of operations. 

On November 7, 2016, the amounts owed to related parties totaling $382,061 were sold to two unrelated investors. The Company issued a note to each investor in the amount of $191,030. The notes have an interest rate of 5% per annum and mature on the earlier of: (i) May 7, 2016; (ii) the date the Company raises a total of $2 million, subsequent to the issuance of these notes. The notes have a conversion feature under which the note holder can convert at any time at a conversion price of $0.40 per share.

On December 15, 2016, we issued a $77,779 face value convertible note that accrues interest at 10% per annum and matures on June 15, 2017 (“the 10% Convertible Note”). The Company received proceeds of $70,000, net of original issuance discount. The conversion terms allow the holder to convert outstanding principal into the Company’s common stock at 65% of the price of the common stock when the Company a capital raise transaction of at least $15,000,000 in debt, and or equity subsequent to the issuance date. The 10% Convertible Note allows for prepayment any time after 90 days from the date of issuance at a prepayment rate of 110% of principal and accrued interest outstanding. In connection with the 10% Convertible Note, the Company also issued warrants to purchase 77,778 shares of our common stock at an exercise price $0.50 per share with a 4 year term. The relative fair value of the warrants compared to the 10% Convertible Note was $22,616, which was recorded as a component of stockholders’ deficit with the offset recorded as a discount to the 10% Convertible Note. The fair value of the warrants was determined using the Black-Scholes Model (see Note 8). The Company then computed the effective conversion price of the 10% Convertible Note on the issuance date, noting that the 10% Convertible Note gave rise to a BCF of $47,384.

The sum of the relative fair value of the warrants, BCF and original issuance discount was recorded as a debt discount is to be amortized over the term of the 10% Convertible Note. The debt discounts are amortized to interest expense using the effective interest method over the term of the 10% Convertible Note. During the year ended December 31, 2016, the Company recognized interest expense of $6,838, from the amortization of the debt discount, resulting in the 10% Convertible Note balance of $6,838. 

The 10% Convertible Note contains an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815. The embedded conversion feature of the 10% Convertible Note was valued at inception using the Monte Carlo simulation at $43,883 and recorded as a loss on the consolidated statements of operations. Management used a Monte Carlo valuation model to estimate the fair value of the embedded conversion option at issuance of the 10% Convertible Notes, with the following weighted average key inputs:

	At issuance
Stock price	$	0.41
Term (years)		0.41
Volatility		118	%
Risk-free rate of interest		0.6	%
Dividend yield		0.0	%

As of December 31, 2016, the derivative was remeasured to $43,739 (see Note 7) and the difference was recorded as a change in fair value of derivative liabilities on the statement of operations.

2015 activity

On September 25, 2015, we entered into a Securities Purchase Agreement and issued a 15% Promissory Note with the principal face value of $500,000 (the “15% Note”) to an accredited investor. Under the terms of the 15% Note, all principal and related accrued interest outstanding are due and payable to the noteholder upon the earlier of: (i) September 25, 2016; or (ii) within ten business days after the consummation of an equity or convertible debt financing with aggregate gross proceeds of at least $1,000,000.

Borrowings made pursuant to the 15% Note bear interest at the annual rate of 15% (or $75,000), irrespective of whether paid at or prior to September 25, 2016.  If any amount payable pursuant to the note payable is not paid when due (without regard to any applicable grace periods as set forth in the Note), whether at stated maturity, by acceleration or otherwise, such overdue amount shall bear interest at the rate of 15% from the date of such non-payment until such amount is paid in full. We have recognized $31,479 in interest expense through December 31, 2015 based on an estimated repayment date of May 15, 2016. 

During November 2015, we issued a one year 10% promissory notes payable (the “10% Note”) to a purchaser for cash proceeds totaling $50,000. In the event that we secure any future financing with aggregate gross proceeds of at least $1 million while the 10% Note is outstanding, the 10% Note and all accrued interest therefrom will be immediately due and payable within ten business days of the closing of such financing. The holder may also convert any unpaid principal under the 10% Note into any funding instrument entered into by our Company for a period of 180 days after the date of the 10% Note. The full interest of 10% of the borrowings under the 10% Note ($5,000) is due irrespective of whether paid at maturity or when required to be prepaid. The 10% Note remains outstanding and we have recognized $5,726 and $1,383 in interest expense through December 31, 2016 and December 31, 2015, respectively. 

On November 30, 2015 and on three subsequent dates during December 2015, four individuals (the “Lenders”) provided an advance to the Company with a face value of $361,111 for cash proceeds totaling $322,500. The borrowings (“2015 Advances”) were not accompanied by documentation of the nature of the 2015 Advances. However, there were general discussions as to the repayment terms, the interest expected to be paid to the Lenders and additional equity of the Company to be issued to the Lenders in connection with the 2015 Advances. Accordingly, we have accounted for the Advances based on estimates of their final terms.

On December 11, 2015, we entered into a Securities Purchase Agreement and issued a 10% Convertible Promissory Note with the principal face value of $110,000 (the “10% 2015 Note”) to an accredited investor for cash proceeds of $87,500, net of issuance costs. Under the terms of the 10% 2015 Note, all principal and related accrued interest outstanding are due and payable to the noteholder upon the earlier of: (i) December 10, 2016; or (ii) in the event that the Company completes a financing or a series of financings, with the same or different investors, that in the aggregate result in gross proceeds to the Company of at least $3 million, then the Company is required to pre-pay and redeem the entire remaining outstanding principal amount plus Interest of this Note in cash, provided that (A) the Company shall pay the Holder one hundred twenty percent (120%) of the principal plus interest outstanding in repayment and (B) such amount must be paid in cash on the next Business Day after receipt of the gross proceeds.

While any amounts are outstanding under the 10% 2015 Note, such amounts outstanding are convertible into share of the Company’s Common Stock at the lesser of: 1) $0.90 per share and 2) 75% of the price per share of the Company’s Common Stock sold in a future financing with gross proceeds of at least $1 million, subject to adjustments as stated in the Note agreement.

In connection with the 10% 2015 Note, the Company also issued a five-year warrant to purchase up to 61,111 shares of its common stock to the Note holder. The exercise price of the warrant is $1.50 per share, subject to adjustments provided in the warrant agreement (but in no event at an exercise price below $0.50 per share). The consideration upon exercise may also be paid on a cashless basis as detailed in the Note.

The Company accounted for warrants to be issued in connection the 2015 Advances under similar terms as the warrant granted for the 10% 2015 Note.

In connection with the warrants expected to be issued in connection with the 2015 Advances and the 10% 2015 Note, we have estimated a relative fair value of $138,333 using the Black-Scholes option pricing model based on the following weighted average assumptions:

Total 2015 Advances and 10% 2015 Note face value	$	471,111
Warrants to be issued		256,172
Term		5 years
Strike price	$	1.50
Fair market value	$	0.95
Expected volatility		128	%
Risk-free interest rate		1.56	%

The sum of the relative fair value of the warrants and the original issuance discount of $51,111 was recorded as a debt discount to be amortized over the term of the advances. The debt discounts are amortized to interest expense using the effective interest method over the term of the 10% 2015 Note and the 2015 Advances. During the twelve months ended December 31, 2016, and December 31, 2015, the Company recognized interest expense of $166,107 and $20,837, respectively, from the amortization of the debt discount, resulting in the 10% 2015 Note and 2015 Advances balance of $471,111.