| Note 6 - Convertible Note Payable | On
August 22, 2014 (the Closing Date), we closed a financing transaction by entering into a Securities Purchase Agreement
dated August 22, 2014 (the Securities Purchase Agreement) with certain funds and investors signatory to such Securities
Purchase Agreement (the Purchasers) for an aggregate subscription amount of $1,000,000 (the Purchase Price)
of which $50,000 is from a related party. Pursuant to the Securities Purchase Agreement, we issued the following to the Purchasers:
(i) 10% Convertible Promissory Notes with an aggregate principal amount of $1,150,000 (the Notes), and (ii) warrants
to purchase an aggregate of 6,666,667 shares of the Companys common stock, par value $0.01 per share, for an exercise price
of $0.12 per share for a period of five (5) years from the effective date of the registration statement (the Warrants). We
recorded $150,000 of original issuance cost related to this transaction, which we have recorded as debt discount. The
terms of the Notes and the Warrants are as follows: 10%
Convertible Promissory Notes The
total principal amount of the Notes is issued with a 115% premium to the subscription amount. The Notes accrue interest at a rate
equal to 10% per annum and have a maturity date of February 22, 2016. The Notes are convertible any time after the issuance date
of the Notes. The Purchasers have the right to convert the Notes into shares of the Companys common stock at a conversion
price equal to $0.10 per share, subject to standard adjustments for stock dividends, stock splits, subsequent equity sales, subsequent
rights offerings and pro rata distributions. While the Notes are outstanding, in the event of a subsequent equity sale at a price
lower than the conversion price of $0.10 per share, the conversion price of the Notes shall be reduced to the lower conversion
price. The Notes can be redeemed under certain conditions and the Company can force the conversion of the Notes in the event certain
equity conditions are met. In
the event of default, the Purchasers have the right to require the Company to repay in cash all or a portion of the Notes at a
price equal to 125% of the aggregate principal amount of the Notes plus all accrued but unpaid interest. We
recorded $30,840 and $60,593 of interest expense related to the issuance of the Notes during the three and six months ended June
30, 2015, respectively. Warrants The
Warrants are exercisable in whole or in part, at an initial exercise price per share of $0.12, subject to adjustment. The exercise
price and number of shares of the Companys common stock issuable under the Warrants (the Warrant Shares)
are subject to adjustments for stock dividends, splits, combinations, subsequent rights offerings, pro rata distributions and
any issuance of securities below the exercise price of the Warrants. While the Warrants are outstanding, in the event of a subsequent
equity sale including a warrant exercise price lower than the exercise price of $0.12 per share, the exercise price of the Warrants
shall be reduced to the lower exercise price. Any adjustment to the exercise price shall similarly cause the number of Warrant
Shares to be adjusted so that the total value of the Warrants may increase, provided, that in no event shall the number of Warrant
Shares exceed 200% of the original number of Warrant Shares originally issued. In
addition to the Warrants described above, the Company also issued 800,000 warrants to a placement agent assisting with the convertible
note transaction. The terms of the placement agent warrants are the same as of the terms of the Warrants explained above. Registration
Rights Agreement In
connection with the sale of Notes and Warrants pursuant to the Securities Purchase Agreement, the Company entered into a registration
rights agreement (the Registration Rights Agreement) with the Purchasers, pursuant to which the Company agreed to
register all of the shares of common stock underlying the Notes and the shares of common stock underlying the Warrants (together,
the Registrable Securities) on a Form S-1 registration statement (the Registration Statement) to be
filed with the SEC within thirty (30) calendar days following the Closing Date (the Filing Deadline) and to use
its best efforts to cause the Registration Statement to be declared effective under the Securities Act within one hundred (100)
calendar days following the Closing Date (the Effectiveness Deadline). The Registration Statement became effective
November 26, 2014. Deferred
Financing Cost In
connection with the convertible note transaction explained above, the Company paid $55,000 for legal fees and $80,000 for placement
agent fees. In addition, $29,550 was also recorded to deferred financing costs related to the fair value valuation of the placement
agent warrants. $27,189 and $53,403 of deferred financing costs was amortized during the three and six months ended June 30, 2015,
respectively. The deferred financing cost balance is $74,152 and $127,555 as of June 30, 2015 and December 31, 2014, respectively. Derivative Because
the above convertible Notes and Warrants have full reset adjustments tied to future issuances of equity securities by
the Company, they are subject to derivative liability treatment under ASC 815-40-15, Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock On
issuance date, the fair value of the derivative liability for both the convertible Notes and Warrants was $295,773 and $246,905,
respectively. Therefore a total of $692,678 (including $150,000 original issuance costs) of debt discount was recorded. $109,515
and $202,568 was recorded as amortization of debt discount during the three and six months ended June 30, 2015, respectively.
As of June 30, 2015, the convertible Notes have a balance of $733,965, net of $358,535 of debt discount, and accrued interest
of $97,480. As of December 31, 2014, the convertible Notes have a balance of $541,525, net of $550,975 of debt discount, and accrued
interest of $39,917. As
of June 30, 2015, the related party convertible Note has a balance of $38,629, net of $18,871 of debt discount, and accrued interest
of $5,131. As of December 31, 2014, the related party convertible Note has a balance of $28,501, net of $28,999 of debt discount,
and accrued interest of $2,101. |
