| Convertible Debt | NOTE 4 – CONVERTIBLE
DEBT November 2016 Financing On November 23, 2016, the Company entered
into and closed on the transaction set forth in an Amended and Restated Securities Purchase Agreements (the “Securities Purchase
Agreements”) it entered into with three institutional investors (the “Purchasers”) for the sale of the Company’s
convertible notes and warrants. Pursuant to the terms provided for in the Securities Purchase Agreement, the Company issued upon
closing to the Purchasers for an aggregate subscription amount of $350,000: (i) 14.29% Original Issue Discount 10% Senior Secured
Convertible Notes (the “November 2016 Notes”); and (ii) warrants (the “Warrants”) to purchase 2,333,334
shares of the Company’s common stock at an initial exercise price of $0.175 (subject to adjustments under certain conditions
as defined in the Warrants) (see below for reduction of warrant exercise price) which are exercisable for a period of five years
from November 23,2016. The aggregate principal amount of the November 2016 Notes was $350,000 and the Company received $300,000
after giving effect to the original issue discount of $50,000. The November 2016 Notes bear interest at a rate equal to 10% per
annum (which interest rate increased to 24% per annum upon the occurrence of an Event of Default (as defined in the November 2016
Notes)), had a maturity date of July 23, 2017 and were convertible (principal, and interest) at any time after the issuance date
of the November 2016 Notes into shares of the Company’s Common Stock at an initial conversion price equal to $0.15 per share
(subject to adjustment as provided in the Note) (see below for reduction for reduction of conversion price), provided, however,
that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the November
2016 Notes shall be convertible and the Warrants shall be exercisable at 60% of the lowest closing price during the prior twenty
trading days of the Common Stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”).
Due to non-payment of the November 2016 Notes, an event of default occurred and accordingly, the November 2016 Notes and Warrants
are convertible and exercisable based on the default terms. On May 23, 2017, in connection with
the November 2016 Notes, the Company entered into forbearance agreements (the “Forbearance Agreements”) with the Purchases
whereby the Purchasers waived any event of default, as defined in the November 2016 Notes. The Company failed to make a payment
on May 23, 2017 to each of the Holders as required pursuant to the November 2016 Notes which resulted in an event of default under
such Notes. As of result of the event of default, the aggregate amount owing under the November 2016 Notes as of May 23, 2017 was
increased to $509,135 with such amount including a mandatory default amount of $141,299 and accrued interest of $17,836 resulting
in debt settlement expense of $141,299 which was recorded in May 2017. The Forbearance Agreement also provides for the Holders
to forbear their right to demand an immediate cash payment of the principal amount due plus accrued interest as a result of the
Company’s failure to satisfy its payment obligations to the Holder on May 23, 2017 so long as the Company complies with its
other obligations under the November 2016 Notes and the other transaction documents. The Forbearance Agreements did not waive the
default interest rate of 24%. In consideration therefore, and as currently set forth in the November 2016 Notes, the Holders shall
be entitled to convert such notes from time to time at their discretion in accordance with the terms of the November 2016 Notes
and the November 2016 Notes shall not be subject to repayment unless agreed to by the Holder of such Note. In connection with the
Forbearance Agreement, in May 2017, the Company increased the principal balance of the November 2016 Notes by $159,135, reduced
accrued interest payable by $17,836, and recorded debt settlement expense of $141,299. In 2017, the Company also increased
the principal amount of these notes by $42,327 for other default charges and other expenses. During the six months ended June 30,
2018, the Company issued 13,028,779 shares of common share for the conversion of principal balance of $139,712, accrued interest
of $21,869 and recorded additional default interest expense of $8,892 The November 2016 Notes and related
Warrants include a down-round provision under which the conversion price and exercise price could be affected by future equity
offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of
these November 2016 Notes, the Company sold stock at a share price of $0.075 per share then to $0.05 per share and then $0.01 per
share. Accordingly, pursuant to these ratchet provisions, the conversion price on the November 2016 Notes were lowered to $0.05
per share then to $0.03 per share and then to $0.006 per share and the exercise price of the November 2016 Warrants was lowered
to $0.006. Additionally, the total number of November 2016 Warrants were increased on a full ratchet basis from 2,333,334 warrants
to 13,611,114 warrants (see Note 7). In September 2017, the Company issued 9,547,087 shares of its common stock upon the cashless
exercise of 9,074,076 of these warrants (see Note 7). The remaining 4,537,038 warrants were then ratcheted to 22,685,192 warrants
based on the new ratcheted down $0.006 per share exercise price. June 2017 Financing On June 2, 2017, the Company entered
into a 2 nd nd nd The aggregate principal amount of the
June 2017 Notes is $233,345 and the Company received $200,000 after giving effect to the original issue discount of $33,345. The
June 2017 Notes bear interest at a rate equal to 10% per annum (which interest rate is increased to 24% per annum upon the occurrence
of an Event of Default (as defined in the June 2017 Notes)), have a maturity date of February 2, 2018 and are convertible (principal,
and interest) at any time after the issuance date of issuance into shares of the Company’s common stock at an initial conversion
price equal to $0.15 per share (subject to adjustment as provided in the June 2017 Notes), provided, however, that if an event
of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the June 2017 Note shall
be convertible at 60% of the lowest closing price during the prior twenty trading days of the common stock as reported on the OTCQB
or other principal trading market (the “Default Conversion Price”). The June 2017 Notes provide for two amortization
payments on the six-month, seven-month and eight-month anniversary of the issue date with each amortization payment being one third
of the total outstanding principal and interest. If the six-month amortization payment is made in cash then the payment is an amount
equal to 120% of the applicable amortization payment and if the seven-month or the eight-month amortization payments are made in
cash then the payment is an amount equal to 125% of the applicable amortization payment. In 2018, the Company also increased
the principal amount of these notes by $2,268 for other default charges and other expenses. The June 2017 Notes may be prepaid at
any time until the 180th day following the Original Issue Date at an amount equal to (i) 115% of outstanding principal balance
of the Note and accrued and unpaid interest during the period from the Original Issue Date through the three months following the
Original Issue Date, and (ii) 120% of outstanding principal balance of the June 2017 Notes and accrued and unpaid interest during
months four through six following the Original Issue Date. In order to prepay the June 2017 Notes, the Company shall provide 20
Trading Days prior written notice to the Holder, during which time the Holder may convert the June 2017 Notes in whole or in part
at the Conversion Price. The June 2017 Notes and related Warrants
include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings
undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these June
2017 Notes, the Company sold stock at a share price of $0.05 per share and then $.01 per share. Accordingly, pursuant to these
ratchet provisions, the conversion price of the notes were lowered to $0.006 per shares and the exercise price of the June 2017
Warrants were lowered to $0.006 per share and the total number of June 2017 Warrants were increased on a full ratchet basis from
1,555,632 warrants to 45,372,600 warrants, an increase of 43,816,968 warrants. During the six months ended June 30, 2018, the Company
issued 6,893,145 shares of its common stock upon the cashless exercise of 9,074,520 of these warrants and cancelled 6,049,680 warrants
related to a change in the estimate of the number warrants reflected as issued previously calculated in connection with the full
ratchet adjustment terms of the warrant. July 2017 Financing On July 26, 2017, the Company entered
into and closed on a 3 rd rd rd rd In order to prepay these Notes, the
Company shall provide 20 Trading Days prior written notice to the Purchaser, during which time the Purchaser may convert the Notes
in whole or in part at the Conversion Price. The July 2017 Notes and related Warrants
include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings
undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these July
2017 Notes, the Company sold stock at a share price of $0.05 per share and then at $0.01 per share. Accordingly, pursuant to these
ratchet provisions, the conversion price of the notes were lowered to $0.006 per share and the exercise price of the July 2017
Warrants were lowered to $0.006 per share and the total number of July 2017 Warrants were increased on a full ratchet basis from
4,769,763 warrants to 79,496,050 warrants, an increase of 74,726,287 warrants (see Note 7). During the six months ended June 30,
2018, the Company issued 15,845,290 shares of its common stock upon the cashless exercise of 19,874,013 of these warrants and cancelled
6,624,670 warrants related to a change in the estimate of the number warrants reflected as issued previously calculated in connection
with the full ratchet adjustment terms of the warrant. January 2018 Financing On January 29, 2018, the Company entered
into and closed on a 4 th th th th These Notes provide for three amortization
payments on the six-month, seven-month and eight-month anniversary of the original issue date with each amortization payment being
one third of the total outstanding principal and interest. If the six-month amortization payment is made in cash, then the payment
is an amount equal to 110% of the applicable amortization payment and if the seven-month or the eight-month amortization payments
are made in cash then the payment is an amount equal to 115% of the applicable amortization payment. These Notes may be prepaid
at any time until the 180th day following the Original Issue Date at an amount equal to (i) 115% of outstanding principal balance
of the Note and accrued and unpaid interest during the period from the Original Issue Date through the five months following the
Original Issue Date, and (ii) 120% of outstanding principal balance of the Notes and accrued and unpaid interest during the six
month following the Original Issue Date. In order to prepay these Notes, the Company shall provide 20 Trading Days prior written
notice to the Purchaser, during which time the Purchaser may convert the Notes in whole or in part at the Conversion Price. March 2018 Financing On March 13, 2018, the Company entered
into a 5 th th The initial exercise price of the Warrants
is $0.04 per share, subject to adjustment as described below, and the Warrants are exercisable for five years after the issuance
date. The Warrants are exercisable for cash at any time and are exercisable on a cashless basis at any time there is no effective
registration statement registering the shares of common stock underlying the Warrants. The exercise price of the Warrants is subject
to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or
similar events affecting the common stock and also upon any distributions of assets, including cash, stock or other property to
the Company’s stockholders. The exercise price of the Warrants is also subject to full ratchet price adjustment if the Company
issues common stock at a price per share lower than the then-current exercise price of the Warrant. The March 2018 Notes and related Warrants
include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings
undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these March
2018 Notes, the Company defaulted on these Notes. Accordingly, pursuant to the default provisions, the conversion price of the
notes were lowered to the Default Conversion Price and the exercise price of the March 2018 Warrants shall be 60% of the Default
Conversion Price and the total number of March 2018 Warrants were increased on a full ratchet basis from 12,500,000 warrants to
34,013,605, an increase of 21,513,605 warrants (see Note 7). The Notes provide for amortization payments
on each of the six-month anniversary of the issue date, seven-month anniversary of the issue date and on the maturity date with
each amortization payment being one third of the total outstanding principal and all interest accrued as of the payment date. If
the six-month amortization payment is made in cash then the Company shall pay the holder 110% of the applicable amortization payment
and if the seven-month or the maturity date amortization payments are made in cash then the Company shall pay the holder 115% of
the applicable amortization payment. The holder may elect at its option to receive the amortization payments in common stock subject
to certain equity conditions. The Notes may be prepaid at any time
until the 180th day following the original issue date at an amount equal to (i) 115% of outstanding principal balance of the Note
and accrued and unpaid interest through the five month anniversary of the issue date, and (ii) 120% of outstanding principal balance
of the Notes and accrued and unpaid interest from the fifth month anniversary of the issue date through the six month anniversary
of the issue date. In order to prepay the Notes, the Company shall provide 20 trading days prior written notice to the holders,
during which time a holder may convert its Note in whole or in part at the conversion price. The November 2016 Notes, June 2017 Notes,
July 2017, January 2018 and March 2018 Notes contain certain covenants, such as restrictions on the incurrence of indebtedness,
creation of liens, payment of restricted payments, redemptions, payment of cash dividends and the transfer of assets. These Notes
also contains certain adjustment provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization
or similar transactions. The conversion price is also subject to adjustment if the Company issues or sells shares of its common
stock for a consideration per share less than the conversion price then in effect, or issue options, warrants or other securities
convertible or exchange for shares of its common stock at a conversion or exercise price less than the conversion price of these
Notes then in effect. If either of these events should occur, the conversion price is reduced to the lowest price at which these
securities were issued or are exercisable. The Company granted the Purchasers certain rights of first refusal on future offerings
by the Company for as long as the Purchasers hold these Notes. In addition, subject to limited exceptions, the Purchasers will
not have the right to convert any portion of these Note if the Purchaser, together with its affiliates, would beneficially own
in excess of 4.99% of the number of shares of the Company’s Common Stock outstanding immediately after giving effect to its
conversion. The Purchaser may increase or decrease this ownership limitation to any percentage not exceeding 9.99% upon 61 days
prior written notice to the Company. The November 2016, June 2017, July 2017,
January 2018 and March 2018 Warrants are exercisable for shares of the Company’s common stock upon the payment in cash of
the exercise price and they are also exercisable on a cashless basis at any time there is no effective registration statement registering
the shares of common stock underlying the Warrants. The exercise price of these Warrants are subject to adjustment in the event
of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the
Common Stock and also upon any distributions of assets, including cash, stock or other property to the Company’s stockholders.
The exercise price of these Warrants are also subject to full ratchet price adjustment if the Company sells or grants any option
to purchase, sells or re-prices any common stock or common stock equivalents, as defined, at an exercise price lower than the then-current
exercise price of these Warrants with the exception for certain exempted issuances and subject to certain limitations on the reduction
of the exercise price as provided in the Warrants. In the event of a fundamental transaction, as described in these Warrants and
generally including any reorganization, recapitalization or reclassification of the Common Stock, the sale, transfer or other disposition
of all or substantially all of the Company’s properties or assets, the Company’s consolidation or merger with or into
another person, the acquisition of more than 50% of the outstanding Common Stock, or any person or group becoming the beneficial
owner of 50% of the voting power represented by the outstanding Common Stock, the holders of these Warrants will be entitled to
receive upon exercise of the Warrants the kind and amount of securities, cash or other property that the holders would have received
had they exercised these Warrants immediately prior to such fundamental transaction; provided that upon the occurrence of certain
fundamental transactions, the holder can require the Company to purchase these Warrants for cash at a price equal to the higher
of the Black Scholes Value of the unexercised portion of these Warrants or difference between the cash per share paid in the fundamental
transaction and the exercise price per share. The holders of these Warrants will not have the right to exercise any portion of
these Warrants if the holder (together with its affiliates) would beneficially own in excess of 9.99% of the number of shares of
common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance
with the terms of these Warrants. In connection with the Company’s
obligations under the November 2016, June 2017, July 2017, January 2018 and March 2018 Notes, the Company entered into a Security
Agreement, Pledge Agreement and Subsidiary Guaranty with Calvary Fund I LP, as agent, pursuant to which the Company granted a lien
on all assets of the Company (the “Collateral”) excluding permitted indebtedness which included a first lien held by
Regions Bank in connection with the $100,000 revolving promissory note entered into with Regions Bank in October 2014, for the
benefit of the Purchasers, to secure the Company’s obligations under the Notes. Upon an Event of Default (as defined in the
related Notes), the Purchasers may, among other things, collect or take possession of the Collateral, proceed with the foreclosure
of the security interest in the Collateral or sell, lease or dispose of the Collateral. During the six months ended June 30,
2018, the Company issued 38,395,067 shares of its common stock upon the conversion of principal note balances of $279,359 and accrued
interest and penalties of $91,907. Derivative liabilities pursuant to
Notes and Warrants In connection with the issuance of the
November 2016, June 2017, July 2017, January 2018 and March 2018 Notes and Warrants, the Company determined that the terms of these
Note and Warrants contain terms that included a down-round provision under which the conversion price and exercise price could
be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception.
Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s
Own Stock”, the embedded conversion option contained in the convertible instruments and the Warrants were accounted for as
derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The
fair value of the embedded conversion option derivatives and Warrants were determined using the Binomial valuation model. At the
end of each period, on the date that debt was converted into common shares, and on the date of a cashless exercise of warrants,
the Company revalued the embedded conversion option and warrants derivative liabilities. In connection with the issuance of the
January and March 2018 Notes and Warrants, during the six months ended June 30, 2018, on the initial measurement date, the fair
values of the embedded conversion option derivative and warrant derivative of $627,526 was recorded as derivative liabilities and
was allocated as a debt discount up to the net proceeds of the Convertible Note of $569,779, with the remainder of $57,747 charged
to current period operations as initial derivative expense. At the end of the period, the Company
revalued the embedded conversion option and warrant derivative liabilities. In connection with these revaluations and the initial
derivative expense, the Company recorded derivative income (expense) of $5,355,681 and $(963,529) for the six months ended June
30, 2018 and 2017, respectively. Additional purchaser rights and company
obligations The Securities Purchases Agreements
also requires the Company to pay counsel for the holders $10,000, satisfy the current public information requirements under SEC
Rule 144(c), refrain from issuing securities for a period of 30 days from closing and provides the holders with rights of participation
in future financings for a period of 12 months from the closing. During the six months ended June 30,
2018, the fair value of the derivative liabilities was estimated using the Binomial valuation model with the following assumptions:
Dividend rate 0
Term (in years) 0.01 to 5.00 years
Volatility 188.9% to 197.1 %
Risk-free interest rate 2.07% to 2.94 % At June 30, 2018 and December 31, 2017,
the convertible debt consisted of the following:
June 30, 2018 December 31, 2017
Principal amount $ 1,230,333 $ 840,757
Less: unamortized debt discount (301,126 ) (154,374 )
Convertible note payable, net $ 929,207 $ 686,383 For the six months ended June 30, 2018
and 2017, amortization of debt discounts related to this Convertible Note and the Notes amounted to $501,963 and $291,668, respectively,
which has been included in interest expense on the accompanying consolidated statements of operations. The weighted average interest
rate during the six months ended June 30, 2018 and 2017 was approximately 14.5% and 10.0%, respectively. Termination of October 20, 2015 Agreements On March 13, 2018, the Company and
Lincoln Park Capital Fund, LLC (“Lincoln Park”) entered into a termination agreement (the “Termination Agreement”)
pursuant to which the parties terminated (i) the purchase agreement between them dated October 20, 2015 (the “Equity Line
Agreement”) that provided the Company the right to sell to Lincoln Park, at its sole discretion, up to $10,100,000 of the
Company’s common stock and (ii) the related registration rights agreement pursuant to which the Company had agreed to file
a registration statement with the Securities and Exchange Commission covering the shares issuable under the Equity Line Agreement
and related share issuances. |
