NOTE 5. DEBT and Related liabilities | As of December 31, 2015 and 2014, the Company had the following debt and related liability balances: As of December 31, 2015: Debt and Related Liabilities Current Non Current Note Holder Maturity Date Convertible Promissory Notes Notes - Related Party Promissory Notes Line of Credit Due to Related Parties Accrued Interest Convertible Promissory Notes Line of Credit (1) 9% Convertible promissory notes 9/18/16 to 3/28/17 $ 1,575,000 $ - $ - $ - $ - $ 23,064 $ 790,000 $ - (1) Firstfire Global Opportunities Fund 6/16/2016 176,000 - - - - 386 - - (1) Lincoln Park Capital Fund, LLC 12/31/2016 300,000 - - - - 5,464 - - (1) Terry King 10/29/2016 50,000 - - - - 780 - - (1) Lawerence Rutstein, Chairman 5/4/2016 - 250,000 - - - 3,023 - - (2) Michael Turner 3/31/2016 - 250,000 - - - 3,514 - - (3) Various 3/31/2015 - 9/30/2015 - - 170,000 - - 3,193 - - (4) Santander bank line of credit - - - 14,729 - - - 35,681 (5) Various related parties - - - - 320,002 - - - Totals 2,101,000 500,000 170,000 14,729 320,002 39,424 790,000 35,681 (1) Debt discount (1,310,854 ) (124,766 ) - - - - (580,115 ) - Balance $ 790,146 $ 375,234 $ 170,000 $ 14,729 $ 320,002 $ 39,424 $ 209,885 $ 35,681 As of December 31, 2014: Debt and Related Liabilities - Current Note Holder Convertible Promissory Notes Notes - Related Party Promissory Notes Line of Credit Due to Related arties Accrued Interest (6) Amalfi Coast Capital $ 182,500 $ - $ - $ - $ - $ 64,181 (6) MeeshCo, LLC and Amalfi Coast Capital - - 364,727 - - 76,719 (5) Various related parties - 116,175 - - - - (5) Various related parties - - - - 195,575 - Balance $ 182,500 $ 116,175 $ 364,727 $ - $ 195,575 $ 140,900 _____________ (1) See disclosure below. (2) Promissory note with face amount of $250,000, interest of 4.5% and maturity of March 31, 2016 payable to Michael Turner, Director and President of Media Ventures Division pursuant to the purchase of New Frontiers Media, LLC on September 8, 2015, see "NOTE 8 – BUSINESS COMBINATIONS" for additional information. (3) Represents notes acquired with the acquisition of New Frontiers Media Holdings, LLC on September 8, 2015 (the "Frontiers Notes"). There are eight, unsecured promissory notes with principle balances ranging between $3,000 to $50,000 and bearing interest of 2% to 9%. The Frontiers Notes all matured by December 24, 2015 and are currently in default. (4) Represents a bank loan acquired with the acquisition of Columbia Funmap, Inc. on February 27, 2015. The loan was established on December 13, 2012 in the original amount of $75,000. Payments of principal and interest are due monthly at a variable interest rate currently at 4%. Payments are approximately $2,600 per month. (5) Non-interest bearing advances by related parties used to cover operations and overhead costs not covered by advertising revenues. As of December 31, 2015, includes $50,000 due to Lawrence Rutstein, Chairman, $59,710 to Alan Beck, shareholder and consultant, $118,697 to TBG Holdings Corporation owned, in part By Timothy Hart, CFO, $6,595 due to R3 Accounting owned by Timothy Hart, CFO, and $85,000 due to Michael Turner, shareholder and President of our digital media division. (6) Pre Merger debt as of December 31, 2014 totaling $688,138 that was settled in connection with the Merger by the issuance of 4 million shares of Series B Preferred stock. 9% Convertible Promissory Notes Financing of up to $2.5 million From March 2015 to September 2015, the Company entered into certain securities purchase agreements (the " Agreements Investors 9% Convertible Notes Company Warrant Securities Act Regulation D Regulation S The 9% Convertible Notes are due in 18 months and include interest at the rate of 9% per annum, due semi-annually. The initial interest payment is due in advance in cash or common stock (at the discretion of the Company) at $0.30 per share. Subsequent interest payments are payable at the discretion of the Investors in cash or common stock, with stock valued based on the 10 day VWAP for 10 days before the applicable interest due date. In the event of default, the 9% Convertible Notes interest rate shall increase to the lesser of fifteen percent (15%) or the highest rate permissible by law. The 9% Convertible Notes are convertible into common stock, at the Investor's option, at a price of $0.30 per share or 85% of the price common stock is sold at the next equity or convertible debt financing with gross proceeds to the Company of no less than $1,000,000 (the "Subsequent Financing"). Upon default the conversion price shall be permanently reduced to the lesser of $0.25 per share or the 10 day VWAP then in effect on the date of default. At no time may the 9% Convertible Notes be converted into shares of our common stock if such conversion would result in the Investors and its affiliates owning an aggregate of shares of our common stock in excess of 9.99% of the then outstanding shares of our common stock, provided such percentage may increase or decrease upon not less than 61 days prior written notice from the Investor. The Company Warrant has a four year term and an exercise price equal to the lesser of: (i) $0.75 or (ii) 85% of the price of the common stock (or common stock equivalents, or conversion price of debt instruments sold in such offering) sold at the Subsequent Financing. The Company Warrant includes the same ownership limitation described above in connection with the Company Note. The Company Warrant includes cashless exercise rights. During the year ended December 31, 2015, the Company raised $2,365,000 from the issuance of 9% Convertible Notes and issued 7,633,342 of Company Warrants. Also during 2015, the Company repaid $105,975 of accrued interest by issuing 353,250 shares of common stock, recognized $128,786 of interest expense and $896,601 of debt discount accretion. Financing with Firstfire Global Opportunities Fund LLC On December 15, 2015, the Company entered into a Securities Purchase Agreement with Firstfire Global Opportunities Fund LLC (" Firstfire Firstfire Note Firstfire Note Maturity Date · if paid by the Maturity Date, the principal sum of $176,000.00 and interest at the rate of five percent (5%); · if $0.00 of principal is paid by the Firstfire Note Maturity Date, then the principle sum of the face amount will be increased by 50% or $88,000 to the purchase price of $264,000.00 to be paid, at the discretion of Firstfire, in the form of cash or conversion into Common Stock plus interest; or · if a portion of the principal is paid plus interest in cash by the Firstfire Note Maturity Date, the face amount of the purchase price of $264,000 will be reduced by the amount that is 150% of the amount paid in cash by the Firstfire Note Maturity Date. The Firstfire Note is unsecured but is a senior obligation of the Company, with priority over all existing and future indebtedness (as defined in the Firstfire Note) of the Company, except that the Firstfire Note is treated pari passu with future indebtedness that is equal to, or exceeds, $250,000.00. Under the terms of the Firstfire Note, Firstfire has the right to convert at any time beginning on the Firstfire Note Maturity Date. The conversion price is $0.30. If, prior to the repayment or conversion of the Firstfire Note, the Company consummates a registered or unregistered primary offering of its securities for capital raising purposes, Firstfire has the right to (x) demand full repayment as determined under the terms of the note or (y) convert any outstanding principal amount and interest into Common Stock at the closing of such primary offering at a conversion price equal to the $0.30. If an event of default (as defined in the Firstfire Note) occurs, the conversion price shall equal the lower of (A) $0.30 and (B) a 10% discount to the offering price to investors in the primary offering. Under the terms of the Firstfire Note, the Company may pre-pay the outstanding principal amount of the Firstfire Note plus accrued interest upon three (3) Trading Days prior written notice to Firstfire. If the Company exercises its right to prepay the Firstfire Note, the pre-payment amount will be equal to the sum of: (A) within 90 days of the Closing Date, 110% and (B) thereafter, 115%, multiplied by principal amount, plus accrued and default interest. As additional consideration, the Company granted Firstfire a warrant to purchase 176,000 shares of our common stock (the " Firstfire Warran The Firstfire Warrant includes the same ownership limitation described above in connection with the Firstfire Note. The Firstfire Warrant includes cashless exercise rights if a registration statement covering the resale of the Firstfire Warrant shares is not available for the resale of such Firstfire Warrant shares. The Firstfire Note and Firstfire Warrant were issued by the Company under the exemption from registration afforded by Section 4(a)(2) of the Securities Act, as amended and/or Regulation D promulgated thereunder, as the securities were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement. Because the economic characteristics and risks of the equitylinked conversion options contained in the Firstfire Note are not clearly and closely related to a debt-type host, the conversion features require classification and measurement as derivative financial instruments. Additionally, due to the down-round feature contained in the Firstfire Warrant, it too is classified on the balance sheet as a liability with both instruments revalued each period with changes in value recorded as other income (expense). The initial fair value of the Firstfire Note derivative liability was $289,291 and determined using Monte Carlo simulation with the following inputs: quoted market price - $0.70; conversion price - $0.30, volatility - 60%; term - 0.5 years; and risk-free interest rate - 1.50%, resulting in a fair value per share of $0.49 multiplied by the 586,667 shares that would be issued if the Firstfire Note was exercised on the issuance date. The Firstfire Warrant liability was $77,903 and determined using Monte Carlo simulation with the following inputs: quoted market price - $0.70; conversion price - $0.40, volatility - 60%; term - 5 years; and risk-free interest rate - 1.50%, resulting in a fair value per share of $0.44 multiplied by the 176,000 shares that would be issued if the Firstfire Warrant was exercised on the issuance date. During the year ended December 31, 2015, the Company recognized $386 of interest expense and $15,305 of accretion related to the debt discount. Derivative Liability related to the 9% Convertible Notes, Firstfire Note and Related Detachable Warrants ASC Topic No. 815 - Derivatives and Hedging provides guidance on determining what types of instruments or embedded features in an instrument issued by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. These requirements can affect the accounting for warrants and convertible preferred instruments issued by the Company. As the conversion features within the 9% Convertible Notes, Firstfire Note and related detachable warrants issued in connection with said notes do not have fixed settlement provisions because their conversion and exercise prices may be lowered if the Company issues securities at lower prices in the future, the Company concluded that the instruments are not indexed to the Company's stock and are to be treated as derivative liabilities. The accounting treatment of derivative financial instruments requires that the Company record the initial fair value of the derivative first by allocating the fair value of the embedded derivative as a reduction to the face value of the debt recorded as a contra liability or debt discount to be accreted over the term of the note; and if the fair value of the embedded derivative exceeds the face value of the note, the excess embedded derivative fair value is expensed as other expense and the related liability increased. On each reporting date, the fair value of the embedded derivative is calculated with changes in value recorded to other expense. In determining the fair value of the derivative liabilities, the Company used a Monte Carlo simulation at December 31, 2015. A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company's 9% Convertible Notes, Firstfire Note and related warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of December 31, 2015 is as follows: December 31, 2015 Common stock issuable upon conversion of notes 8,549,237 Common stock issuable upon exercise of warrants 7,809,342 Stock price $ 0.16 Volatility (Annual) 60 % Strike price $0.75, 9% Convertible Note warrants; $0.40, Firstfire Note warrants; $0.30 notes Risk-free rate 1.50 % Maturity date 4 - 5 years warrants; 0.5 - 1.5 years notes The following table sets forth, by level within the fair value hierarchy, the Company's derivative liabilities that were accounted for at fair value on a recurring basis as of December 31, 2015: Balance at December 31, 2014 Initial valuation of derivative liabilities upon issuance of new securities during the period Increase (decrease) in fair value of derivative liabilities Fair value of derivatives upon reclass to additional paid-in capital Balance at December 31, 2015 Warrants derivative liability $ - $ 7,249,178 $ (7,012,584 ) $ - $ 236,594 Convertible note conversion derivative liability - 5,289,721 (5,074,993 ) - 214,728 Total $ - $ 12,538,899 $ (12,087,577 ) $ - $ 451,322 Financing with Lincoln Park Capital Fund, LLC On August 21, 2015, the Company issued a Senior Convertible Note (the " Senior Convertible Note Lincoln Park Maturity Date OID The Company has the right to prepay the Senior Convertible Note, pursuant to the terms thereof, at any time, provided it pays a prepayment amount of 120% of the then outstanding balance, accrued interest and interest payable from the date of prepayment to the Maturity Date. The Senior Convertible Note provides for customary events of default such as failing to timely make payments under the Senior Convertible Note when due and the occurrence of certain fundamental defaults, as described in the Senior Convertible Note. The principal amount of the Senior Convertible Note and all accrued interest is convertible at the option of Lincoln Park into shares of our common stock at any time. The conversion price of the Senior Convertible Note is $0.30, as adjusted for stock splits, stock dividends, stock combinations or other similar transactions as provided in the Note. At no time may the Senior Convertible Note be converted into shares of our common stock if such conversion would result in Lincoln Park and its affiliates owning an aggregate of shares of our common stock in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may increase to 9.99% upon not less than 61 days prior written notice. As additional consideration for the loan, the Company granted Lincoln Park a six-year warrant to purchase 1,000,000 shares of our common stock (the "Warrant") at an exercise price of $0.50 per share. The Warrant includes the same ownership limitation described above in connection with the Convertible Note. The Warrant includes cashless exercise rights. The Senior Convertible Note and the Warrant were issued by the Company under the exemption from registration afforded by Section 4(a)(2) of the Securities Act, as amended and/or Regulation D promulgated thereunder, as the securities were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement. The company determined that the Senior Convertible Note's conversion feature is indexed to the Company's stock, which is an input to a fair value measurement of a fixed-for-fixed option on equity shares. Thus, the conversion feature of the notes meets the scope exception under FASB ASC 815-40-15-7 and treatment under ASC 470-20 – Debt with Conversion and Other Options is appropriate. As a result, the Company first allocated Senior Convertible Note principal between the Senior Convertible Note, OID and the warrants based upon their relative fair values. The estimated fair value of the warrants was calculated using the Black-Scholes option pricing model and the following assumptions: market price of common stock - $0.30 per share; estimated volatility – 150%; 5-year risk free interest rate – 1.44%; expected dividend rate - 0% and expected life - 6 years. This resulted in allocating $137,695 to the warrants and $132,305 to the Senior Convertible Note and $30,000 to the OID. Next, the intrinsic value of the beneficial conversion feature (the " BCF During the year ended December 31, 2015, the Company recognized $5,464 of interest expense and $79,518 of accretion related to the debt discount. Financing with Terry King On October 29, 2015, the Company issued a 9% Convertible Promissory Note (the "King Note") to Terry King ("Mr. King") in the amount of $50,000. The King Note was issued pursuant to the terms of a Note Purchase Agreement dated as of the same date. The King Note bears interest at the rate of 9% per annum (or 12% upon the occurrence of an event of default) and the principal and interest is due and payable in 12 months on October 29, 2016 (the "Maturity Date"). The principal and all accrued interest is convertible at the option of Mr. King into shares of our common stock at any time at the conversion price of $0.40, as adjusted for stock splits, stock dividends, stock combinations or other similar transactions as provided in the King Note. At no time may the King Note be converted into shares of our common stock if such conversion would result in the Investors and its affiliates owning an aggregate of shares of our common stock in excess of 9.99% of the then outstanding shares of our common stock, provided such percentage may increase or decrease upon not less than 61 days prior written notice from the Investor. As additional consideration for the loan, the Company granted Mr. King a four-year warrant to purchase 125,000 shares of our common stock (the "King Warrant") at an exercise price of $0.75 per share. The Warrant includes the same ownership limitation described above in connection with the King Note. The King Warrant does not include cashless exercise rights. The King Note and King Warrant were issued by the Company under the exemption from registration afforded by Section 4(a)(2) of the Securities Act, as amended and/or Regulation D promulgated thereunder, as the securities were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement. The company determined that the King Note's conversion feature is indexed to the Company's stock, which is an input to a fair value measurement of a fixed-for-fixed option on equity shares. Thus, the conversion feature of the King Note meets the scope exception under FASB ASC 815-40-15-7 and treatment under ASC 470-20 – Debt with Conversion and Other Options is appropriate. As a result, the Company first allocated King Note principal between the King Note and the King Warrants based upon their relative fair values. The estimated fair value of the King Warrants was calculated using the Black-Scholes option pricing model and the following assumptions: market price of common stock - $0.30 per share; estimated volatility – 150%; 5-year risk free interest rate – 1.53%; expected dividend rate - 0% and expected life - 4 years. This resulted in allocating $18,750 to the King Warrants and $31,250 to the King Note. Next, the intrinsic value of the BCF was computed as the difference between the fair value of the common stock issuable upon conversion of the King Note and the total price to convert based on the effective conversion price. The calculated intrinsic value was $100,000. As this amount resulted in a total debt discount that exceeds the King Note proceeds, the amount recorded for the BCF was limited to principal amount of the King Note. The resulting $50,000 discount is being accreted over the 12 month term of the King Note. During the year ended December 31, 2015, the Company recognized $780 of interest expense and $8,607 of accretion related to the debt discount. Financing with C. Lawrence Rutstein, Chairman On November 6, 2015, the Company issued an 8% Promissory Note (the "Rutstein Note") to C. Lawrence Rutstein, Chairman of the Board of the Company ("Mr. Rutstein ") in the amount of $250,000. The Rutstein Note was issued pursuant to the terms of a Promissory Note dated as of the same date. The Rutstein Note bears interest at the rate of 8% per annum and the principal and interest is due and payable in 180 days on May 4, 2016 (the "Maturity Date"), or upon the consummation of a financing with gross proceeds to the Company of no less than $1,000,000. In consideration for the financing, the Company issued Mr. Rutstein a Common Stock Purchase Warrant (the "Rutstein Financing Warrant"), dated as of November 13, 2015, for 500,000 shares of the Company's common stock, which is exercisable in whole or in part, for an exercise price equal to $0.50 per share. The Rutstein Financing Warrant terminates four years from the date of issuance. The exercise price and number of shares of the Company's common stock issuable under the Rutstein Financing Warrant are subject to adjustments for stock dividends, splits, combinations and certain other events as set forth in the Rutstein Financing Warrant. The Company allocated Rutstein Note principal between the Rutstein Note and the Rutstein Financing Warrant based upon their relative fair values. The estimated fair value of the Rutstein Financing Warrant was calculated using the Black-Scholes option pricing model and the following assumptions: market price of common stock - $1.15 per share; estimated volatility – 149%; 3-year risk free interest rate – 1.20%; expected dividend rate - 0% and expected life - 4 years. This resulted in allocating $169,459 to the Rutstein Financing Warrant and $80,541 to the Rutstein Note. The resulting $169,459 discount is being accreted over the six month term of the Rutstein Note. During the year ended December 31, 2015, the Company recognized $3,023 of interest expense on the Rutstein Note and $44,693 of accretion related to the debt discount. |