Quarterly report pursuant to Section 13 or 15(d)

Notes Payable

v3.5.0.2
Notes Payable
9 Months Ended
Sep. 30, 2016
Debt Disclosure [Abstract]  
Notes Payable
Note 6 – Notes Payable
 
Non-Convertible Notes
 
On March 8, 2016, the Company issued six-month notes payable in the aggregate principal amount of $600,000 which bear interest at a rate of 10% per annum. In connection with the note issuances, the Company issued immediately vested warrants to purchase an aggregate of 300,000 shares of common stock at an exercise price of $0.75 per share with an issuance date fair value of $93,400, which were recorded as a debt discount. In connection with the Company’s sequencing policy, the warrants were determined to be derivative liabilities.  See Note 4 – Fair Value for additional details. The warrants contain a provision that provides the Company with an option, prior to the expiration date, to redeem all of the warrants then outstanding upon not less than thirty (30) days nor more than (60) days notice to the applicable holder, at a redemption price of $0.01 per share, subject to the conditions that: (i) there is an effective registration statement covering the resale of the underlying shares of common stock and (ii) the common stock has traded for twenty (20) consecutive days with a closing price of at least $2.50 per share with an average trading volume of 100,000 shares per day. The warrants expire on March 25, 2019.
 
On May 10, 2016, the Company issued a six-month note payable in the principal amount of $53,000 which bears interest at 6% per annum, payable at maturity.
 
On July 20, 2016, the Company issued a six-month note payable in the principal amount of $200,000 which bears interest at 10% per annum, payable at maturity. In connection with the note issuance, the Company issued to the purchaser an immediately-vested, five-year warrant to purchase 150,000 shares of common stock at an exercise price of $0.75 per share. In connection with the Company’s sequencing policy, the warrant was determined to be a derivative liability. The $53,000 issuance date fair value was recorded as a debt discount and will be amortized over the term of the note.
 
On August 4, 2016, the Company issued a six-month note payable in the principal amount of $100,000 which bears interest at 10% per annum, payable at maturity. In connection with the note issuance, the Company issued to the purchaser an immediately-vested, five-year warrant to purchase 75,000 shares of common stock at an exercise price of $0.75 per share. In connection with the Company’s sequencing policy, the warrant was determined to be a derivative liability. The $26,500 issuance date fair value was recorded as a debt discount and will be amortized over the term of the note.
 
On August 16, 2016, the Company issued a six-month note payable in the principal amount of $50,000 which bears interest at 10% per annum, payable at maturity. In connection with the note issuance, the Company issued to the purchaser an immediately-vested, five-year warrant to purchase 37,500 shares of common stock at an exercise price of $0.75 per share. In connection with the Company’s sequencing policy, the warrant was determined to be a derivative liability. The $13,200 issuance date fair value was recorded as a debt discount and will be amortized over the term of the note.
 
On August 25, 2016, the Company issued a six-month note payable in the principal amount of $60,000 which bears interest at 10% per annum, payable at maturity. In connection with the note issuance, the Company issued to the purchaser an immediately-vested, five-year warrant to purchase 45,000 shares of common stock at an exercise price of $0.75 per share. In connection with the Company’s sequencing policy, the warrant was determined to be a derivative liability. The $15,900 issuance date fair value was recorded as a debt discount and will be amortized over the term of the note.
 
During the nine months ended September 30, 2016, the Company extended the maturity dates at maturity of non-convertible notes payable in the aggregate principal amount of $500,000 to various dates through September 30, 2016. In connection with the note extensions, the Company issued the purchasers an aggregate of 500,000 shares of common stock. The issuance date fair value of an aggregate of $200,000 was recorded as a debt discount and was amortized over the extended terms of the notes.
 
See Note 4 – Fair Value for details related to the fair value of warrants and Note 8 – Related Parties for details related to non-convertible notes held by the Company’s Chief Executive Officer (“CEO”) and a director of the Company.
 
Convertible Notes
 
Other Convertible Notes
 
In January 2016, the Company issued a convertible note payable in the principal amount of $250,000 to an investor who advanced the funds to the Company in January 2015. The note matures on July 27, 2016 and bears interest at a rate of 10% per annum, beginning from the date the funds were advanced. The note shall be automatically converted into shares of the Company’s common stock upon the earlier of (i) the closing of an offering of equity securities pursuant to which the Company receives an aggregate of at least $5,000,000 in gross proceeds (“Qualified Financing”); or (ii) the maturity date. In the event the note is converted upon the occurrence of a Qualified Financing (the “QF Conversion Shares”), the conversion price of the note shall be the lesser of (i) seventy percent (70%) of the price per share or per unit (assuming the unit includes one share of common stock or the price per unit divided by the number of shares of common stock underlying such unit) at which the Company sells its securities in a Qualified Financing; or (ii) the quotient obtained by dividing $35,000,000 by the aggregate number of outstanding shares of the common stock, measured on a fully-diluted basis, excluding certain shares, on the date immediately preceding the Qualified Financing. The QF Conversion Shares shall be subject to a prohibition from any sale, pledge or transfer for a period of six (6) months from the date of the closing on which the Company generates aggregate gross proceeds under the Qualified Financing of at least $5,000,000. In addition, upon conversion of the note following the occurrence of a Qualified Financing, the holder shall automatically receive five-year warrants to purchase that number of shares of common stock into which the note is convertible and such warrants shall have an exercise price equal to the lesser of (i) seventy percent (70%) of the price per share or per unit (assuming the unit includes one share of common stock or the price per unit divided by the number of shares of common stock underlying such unit) at which the Company sells its securities in a Qualified Financing; or (ii) $0.75. In the event the note is automatically converted upon the maturity date, the conversion price of the note shall be equal to the quotient obtained by dividing $20,000,000 by the aggregate number of outstanding shares of the common stock, measured on a fully-diluted basis, excluding certain shares, on the date immediately preceding the maturity date (the “Maturity Conversion Price”). In addition, in the event of an automatic conversion of the note upon the maturity date, the holder shall automatically receive five-year warrants to purchase that number of common stock into which the note is convertible and such warrants shall have an exercise price equal to the Maturity Conversion Price. In connection with the Company’s sequencing policy, the conversion option of the note was determined to be a derivative liability. The $179,000 issuance date fair value was recorded as a debt discount and will be amortized over the term of the note. See Note 4 – Fair Value for additional details.
 
During the nine months ended September 30, 2016, the Company extended the maturity dates at maturity of other convertible notes payable in the aggregate principal amount of $145,000 to January 24, 2017. In connection with the extensions, the Company issued the purchasers immediately-vested, three-year warrants to purchase an aggregate of 72,500 shares of common stock at an exercise price of $0.75 per share. In connection with the Company’s sequencing policy, the warrants were determined to be derivative liabilities. The $21,800 issuance date fair value was recorded as a debt discount and will be amortized over the extended term of the notes.
 
10% Convertible Note Offering
 
During the nine months ended September 30, 2016, the Company closed on an aggregate of $390,000 in principal amount of convertible notes to investors (the”10% Convertible Notes”). The 10% Convertible Notes bear interest at a rate of 10% per annum and are payable eighteen (18) months from the date of issuance (the “Maturity Date”). The 10% Convertible Notes shall be automatically converted into shares of the Company’s common stock upon the earlier of (i) the closing of an offering of equity securities pursuant to which the Company receives an aggregate of at least $5,000,000 in gross proceeds (“Qualified Financing”); (ii) the closing of a strategic transaction (including but not limited to the Company’s entry into a joint venture or partnership agreement or the sublicensing of the Company’s intellectual property) pursuant to which the Company, directly or indirectly, receives, or expects to receive within eighteen months, cash, assets or other consideration with a total aggregate value of at least $4,000,000 (“Strategic Transaction”); or (iii) the Maturity Date of the 10% Convertible Notes.
 
In the event the 10% Convertible Notes are converted upon the occurrence of a Qualified Financing (the “QF Conversion Shares”), the conversion price of the 10% Convertible Notes shall be the lesser of (i) seventy percent (70%) of the price per share or per unit (assuming the unit includes one share of common stock or the price per unit divided by the number of shares of common stock underlying such unit) at which the Company sells its securities in a Qualified Financing; or (ii) $0.75. The QF Conversion Shares shall be subject to a prohibition from any sale, pledge or transfer for a period of six (6) months from the date of the closing on which the Company generates aggregate gross proceeds under the Qualified Financing of at least $5,000,000. In the event the 10% Convertible Notes are converted upon the occurrence of a Strategic Transaction (the “ST Conversion Shares”), the conversion price of the 10% Convertible Notes shall be equal to $0.75. In addition, upon conversion of the 10% Convertible Notes following the occurrence of a Qualified Financing or a Strategic Transaction, each holder of a 10% Convertible Note shall automatically receive five-year warrants to purchase that number of shares of common stock into which the 10% Convertible Notes are convertible and such warrants shall have an exercise price equal to one hundred ten percent (110%) of the per-share or per unit (assuming the unit includes one share of common stock or the price per unit divided by the number of shares of common stock underlying such unit) at which the Company sells its securities in a Qualified Financing or $0.825 in the case of a Strategic Transaction, as applicable. The ST Conversion Shares shall be subject to a prohibition from any sale, pledge or transfer for a period of six (6) months from the date of the closing of a Strategic Transaction. In the event the 10% Convertible Notes are automatically converted upon the Maturity Date, the conversion price of the 10% Convertible Notes shall be equal to the quotient obtained by dividing $15 million by the aggregate number of outstanding shares of the common stock, measured on a fully-diluted basis, excluding certain shares, on the date immediately preceding the Maturity Date (the “Maturity Conversion Price”). In addition, in the event of an automatic conversion of the 10% Convertible Notes upon the Maturity Date, the holder shall automatically receive five-year warrants to purchase that number of common stock into which the 10% Convertible Notes are convertible and such warrants shall have an exercise price equal to the Maturity Conversion Price.
 
In connection with the Company’s sequencing policy, the conversion options of the notes were determined to be derivative liabilities. The $327,700 aggregate issuance date fair value was recorded as a debt discount and will be amortized over the term of the notes. See Note 4 – Fair Value for additional details.
 
Summary
 
During the three and nine months ended September 30, 2016, the Company recorded interest expense related to notes payable of $62,905 and $181,462 respectively. During the three and nine months ended September 30, 2015, the Company recorded interest expense related to notes payable of $9,074 and $15,830, respectively.
 
During the three and nine months ended September 30, 2016, the Company recorded amortization of debt discount of $463,060 and $1,061,736, respectively. During the three and nine months ended September 30, 2015, the Company recorded amortization of debt discount of $118,425 and $197,925, respectively.
 
As of the date of filing, notes payable with an aggregate principal balance of $1,953,000 were past due, however, no penalties or additional interest are associated with the notes payable as a result. Accrued interest related to these notes payable was an aggregate of $138,744 as of September 30, 2016. The Company has not satisfied this debt and is in negotiations with the noteholders to extend the maturity dates of such notes or convert the principal and accrued interest into equity.