| Convertible Notes Payable | NOTE 11 CONVERTIBLE
NOTES PAYABLE Convertible notes payable consisted
of the following as of:
September 30, 2015 December 31, 2014
Short term convertible notes
2013 and 2014 convertible notes payable $ 350,000 $ 550,000
Debt discount - (166,668 )
2015 convertible notes payable 937,864 -
Typenex note payable - 342,000
Vista note payable - 132,000
Redwood note payable 892,500 2,184,000
$ 2,180,364 $ 3,041,332
Derivative and warrant liability
Typenex $ - $ 893,347
Vista - 195,506
2015 convertible notes payable 569,550 -
Redwood 270,094 850,439
$ 839,644 $ 1,939,292
September 30, 2015 December 31, 2014
Investor Notes
Typenex $ - $ 255,260
Redwood 1,535,000 1,920,000
Total Investor Notes Receivable $ 1,535,000 $ 2,175,260 Interest expense for the short term
debt for the nine months ended September 30, 2015 and 2014 is summarized as follows:
Nine months ended September 30, 2015 Nine Months ended September 30, 2014
Interest expense on short term convertible notes
2013 and 2014 convertible notes payable $ 36,074 $ 42,551
Debt discount 166,669 353,389
2015 convertible notes payable 41,672 -
Typenex note payable 10,774 1,666
Vista note payable 21,166 14,927
Redwood note payable 135,650 -
$ 412,005 $ 412,533 2013 and 2014 short term convertible
notes payable, net of discount On June 1, 2014, the Company entered
into a subscription agreement with one accredited investor for the issuance of a convertible promissory note in the aggregate principal
amount of $400,000, which is convertible into shares of common stock of the Company at $0.40 per share, and a warrant entitling
the holder to purchase up to an aggregate of 50,000 of shares of common stock of the Company at $0.40 per share. The warrant has
a term of three years and vested immediately. The note bears interest at 12% for the first ninety days of the term and then bears
interest at 18% for the next nine months. The note was due one year after issuance. In connection with this transaction,
a major shareholder and a related party (the Pledgor) signed a pledge and security agreement, which grants a security
interest in one million shares of the Companys common stock owned by the Pledgor. The Company evaluated the embedded conversion
features within the convertible debt under ASC 815 Derivatives and Hedging and determined that neither the embedded
conversion feature nor the warrants qualified for derivative accounting. Additionally, the instruments were evaluated under ASC
470-20 Debt with Conversion and Other Options for consideration of any beneficial conversion features. It was concluded
that a beneficial conversion feature existed for the convertible debt due to the relative fair value of the warrants issued with
the debt. The total debt discount recorded on
the note with the June 1, 2014 date of issuance was $400,000 (warrant relative fair value of approximately $42,000 and the beneficial
conversion feature was approximately $358,000) which is being amortized to interest expense over the term of the note. The warrant
and beneficial conversion feature was recorded as additional paid in capital. The balance outstanding on the above
note was $0 and $200,000 at September 30, 2015 and December 31, 2014, respectively. On June 1, 2015, the Company did not
repay the outstanding principal and accrued interest due on June 1, 2015. In exchange for not declaring a default on the note,
and after transfer of the one million shares of the Companys common stock owned by a related party to the lender, the Company
and the note holder signed Amendment One to the note which reduced the conversion price of $0.40 per share to a price that was
the average of the three (3) lowest closing bid prices per share for the last twenty (20) trading days prior to the date of the
Notice of Conversion, discounted by 20%. Between July 9 and July 27, 2015, the
assignee converted all of the outstanding principal balance and accrued interest into 29,165,277 shares of the Companys
common stock at prices ranging from $0.008 to $0.015 per share. On June 1, 2013, the Company entered
into subscription agreements with five accredited investors for the issuance of convertible promissory notes in the aggregate principal
amount of $550,000, which are convertible into shares of common stock of the Company at $0.25 per share, and warrants entitling
the holder to purchase up to an aggregate of 1,600,000 of shares of common stock of the Company at $0.25 per share. The warrants
have a term of three years and vested immediately. The notes bear interest at 8% and are due in one year. Four notes, with a value
of $200,000 at December 31, 2013, were converted to stock in 2014 as disclosed in Note 14. One note, for $350,000 at December 31,
2013, was not repaid timely and went into default in 2014. The interest rate on this note rose to 12% as a consequence. The Company evaluated the embedded conversion
features within the convertible debt under ASC 815 Derivatives and Hedging and determined that neither the embedded
conversion feature nor the warrants qualified for derivative accounting. Additionally, the instruments were evaluated under ASC
470-20 Debt with Conversion and Other Options for consideration of any beneficial conversion features. It was concluded
that a beneficial conversion feature existed for the convertible debt due to the relative fair value of the warrants issued with
the debt. The total debt discount recorded on
the note with the June 1, 2013 date of issuance was $528,058 (warrant relative fair value of approximately $253,000 and the beneficial
conversion feature was approximately $275,000) which is being amortized to interest expense over the term of the note. The unamortized debt discount balance
at September 30, 2015 and December 31, 2014 was approximately $0 and $167,000, respectively and is being netted against the total
convertible promissory notes principal amount of $350,000 and $550,000, respectively, for presentation in the accompanying Consolidated
Balance Sheets. For the nine months ended September
30, 2015 and 2014, the Company amortized approximately $167,000 and $353,000 (including approximately $64,000 of debt discount
related to notes converted to common stock, see below), respectively, to interest expense. In connection with one of the five debt
issuances in 2013, the Company paid finders fees of approximately $42,000 as well as 140,000 common stock warrants at $0.05
per share. The warrants vest immediately and have a three year term. The fair value of the warrants was determined to be approximately
$48,000 based on the Black Scholes option pricing model, using the same assumptions as those used for the warrants above, except
the exercise price was $0.05 per share. The combined value of the warrants of $48,000 and cash of $42,000 amounted to approximately
$90,000 which was capitalized as a deferred financing cost and is being amortized to interest expense over the life of the notes. Amortization of deferred financing costs,
which has been included interest expense, for the nine months ended September 30, 2015 and 2014, was approximately $0 and $28,000,
respectively. 2015 convertible notes payable LG Capital Financing Note
1 On March 5,
2015, the Company entered into a securities purchase agreement with LG Capital Funding, LLC, an accredited investor (LG)
whereby the Company issued and sold to LG an 8% convertible note (the LG Note) in the principal amount of $105,000
for $105,000. The LG Note is due on the first anniversary
of issuance and bears interest at the rate of 8% per annum. The LG Note is convertible, in whole or in part, into shares of Common
Stock at the option of LG, at a conversion price equal to 60% of the lowest trading price of the Common Stock for the 15 trading
days immediately preceding, and including, the date of conversion, subject to adjustment and further discount upon certain events,
as set forth in the LG Note. The Company
has the right, at any time prior to the six month anniversary of the issuance date of the LG Note to redeem the outstanding LG
Note at a redemption price equal to an amount between 115% and 145% of the amount of principal plus interest being redeemed, depending
on the date of prepayment. The convertibility
of the LG Note may be limited if, upon conversion, the holder thereof or any of its affiliates would beneficially own more than
9.9% of Common Stock. The Company
reimbursed LG for all costs and expenses incurred by it in connection with the transactions in an amount equal to $5,000 and paid
$8,000 to Carter Terry & Company for due diligence fees. See Note 21
for conversions of outstanding debt subsequent to September 30, 2015. JSJ Investments
Financing Note 1 On March 6,
2015, the Company issued and sold to JSJ Investments Inc. (JSJ) a convertible note (the JSJ Note) in
the principal amount of $100,000, for $100,000. The JSJ Note
is due on demand and bears interest at the rate of 12% per annum. The JSJ Note is convertible, in whole or in part, into shares
of Common Stock at the option of JSJ, at a conversion price equal to the lesser of (i) 55% of the lowest trading price of the Common
Stock for the 20 trading days immediately preceding the date of issuance of the JSJ Note or (ii) 55% of the lowest trading price
of the Common Stock for the 20 trading days immediately preceding the date of conversion subject to adjustment and further discount
upon certain events, as set forth in the JSJ Note. The Company
has the right to redeem the outstanding JSJ Note at a redemption price equal to 150% of the amount of principal and interest being
redeemed, provided that any repayment, including at maturity, can only be made with the consent of JSJ. The Company
reimbursed JSJ for all costs and expenses incurred by it in connection with the transactions in an amount equal to $2,000 and paid
$10,000 to Carter Terry & Company in connection with due diligence fees. Since the inception
of Note #1, through September 30, 2015, JSJ converted approximately $59,515 of the outstanding balance of Note #1 into 27,125,836
shares of common stock at prices based on a formula which resulted in prices from $0.0013 to $0.0033. See Note 21 for conversions of outstanding
debt subsequent to September 30, 2015. JMJ Financial
Financing On March 9,
2015, the Company issued and sold to JMJ Financial (JMJ) a convertible note (the JMJ Note) in the principal
amount of $100,000 for $90,000. JMJ has the right to invest an additional $400,000 on the same terms and conditions from time to
time at its sole discretion. Each portion
funded of the JMJ Note is due on the second anniversary of funding and bears no interest for the first three months and then a
one-time interest charge of 12% will be due. The JMJ Note is convertible, in whole or in part, into shares of Common Stock at the
option of JMJ at a conversion price equal to the lesser of (i) $0.084 or (ii) 60% of the lowest trading price of the Common Stock
for the 25 trading days immediately preceding the date of conversion subject to adjustment and further discount upon certain events,
as set forth in the JMJ Note. The convertibility
of the JMJ Note may be limited if, upon conversion, the holder thereof or any of its affiliates would beneficially own more than
4.99% of Common Stock. The Company
granted JMJ piggyback registration rights on the shares issuable upon conversion of the JMJ Note. If the Company fails to include
such shares, the Company shall pay JMJ liquidated damages of 25% of the outstanding principal amount of the JMJ Note, but not less
than $25,000. Since the inception
of the JMJ Note through September 30, 2015, JMJ converted approximately $23,040 of the outstanding balance of the JMJ Note into
approximately 20,000,000 shares of common stock at prices based on a formula which resulted in prices from $0.0006 to $0.0036. See Note 21
for conversions of outstanding debt subsequent to September 30, 2015. EMA Financial
Financing On March 10,
2015, the Company entered into a securities purchase agreement with EMA Financial, LLC, an accredited investor (EMA)
whereby the Company issued and sold to EMA an 8% convertible note (the EMA Note) in the principal amount of $100,000
for $90,000. The EMA Note
is due on the first anniversary of issuance and bears interest at the rate of 10% per annum. The EMA Note is convertible, in whole
or in part, into shares of Common Stock at the option of EMA at a conversion price equal to 60% of the lowest trading price of
the Common Stock for the 15 trading days immediately preceding the date of conversion subject to adjustment and further discount
upon certain events, as set forth in the EMA Note. The Company
has the right, at any time prior to the four month anniversary of the issuance date of the EMA Note, upon at least five trading
days prior written notice, to redeem the outstanding EMA Note at a redemption price equal to 135% of the amount of principal and
interest being redeemed. The convertibility
of the EMA Note may be limited if, upon conversion, the holder thereof or any of its affiliates would beneficially own more than
4.9% of Common Stock. The Company
granted EMA a right of first refusal on all future financings for a year from the date of issuance of the EMA Note. The Company
reimbursed EMA for all costs and expenses incurred by it in connection with the transactions in an amount equal to $3,500. Since the inception
of the EMA Note through September 30, 2015, EMA converted approximately $27,932 of the outstanding balance of the EMA Note into
17,529,855 shares of common stock at prices based on a formula which resulted in prices from $0.00108 to $0.0027. See Note 21 for conversions of outstanding
debt subsequent to September 30, 2015. Adar Bays Financing On March 20,
2015, the Company entered into a securities purchase agreement with Adar Bays, LLC, an accredited investor (Adar)
whereby the Company issued and sold to Adar an 8% convertible note (the Adar Note) in the principal amount of $50,000
for $50,000. The Adar Note
is due on the first anniversary of issuance and bears interest at the rate of 8% per annum. The Adar Note is convertible, in whole
or in part, into shares of Common Stock at the option of Adar at a conversion price equal to 65% of the lowest trading price of
the Common Stock for the 15 trading days immediately preceding and including the date of conversion, subject to adjustment and
further discount upon certain events, as set forth in the Adar Note. The Company
has the right, at any time prior to the six month anniversary of the issuance date of the Adar Note to redeem the outstanding Adar
Note at a redemption price equal to 150% of the amount of principal being redeemed plus interest. The convertibility
of the Adar Note may be limited if, upon conversion, the holder thereof or any of its affiliates would beneficially own more than
9.9% of Common Stock. The Company
reimbursed Adar for all costs and expenses incurred by it in connection with the transaction in an amount equal to $2,500 and paid
$4,000 to Carter Terry & Company in connection with due diligence fees. Union Capital
Note In April 2015,
the Company entered into a securities purchase agreement with Union Capital, LLC, an accredited investor (Union Capital)
whereby the Company issued and sold to Union Capital an 8% convertible note (the Union Capital Note) in the principal
amount of $75,000 for $75,000. The Union Capital
Note is due on the first anniversary of issuance and bears interest at the rate of 8% per annum. The Union Capital Note is convertible,
in whole or in part, into shares of Common Stock at the option of Union Capital, at a conversion price equal to 60% of the lowest
trading price of the Common Stock for the 15 trading days immediately preceding, and including, the date of conversion, subject
to adjustment and further discount upon certain events, as set forth in the Union Capital Note. The Company
reimbursed Union Capital for all costs and expenses incurred by it in connection with the transactions in an amount equal to $3,500
and paid $6,000 to Carter Terry & Company in connection with due diligence fees. See Note 21 for conversions of outstanding
debt subsequent to September 30, 2015. JSJ Investments
Financing Note 2 On April 20,
2015, the Company issued and sold to JSJ Investments a convertible note (the JSJ Note II) in the principal amount
of $112,000, for $112,000. The JSJ Note
II is due on demand and bears interest at the rate of 12% per annum. The JSJ Note II is convertible, in whole or in part, into
shares of Common Stock at the option of JSJ, at a conversion price equal to the lesser of (i) 45% of the lowest trading price of
the Common Stock for the 20 trading days immediately preceding the date of issuance of the JSJ Note II or (ii) 45% of the lowest
trading price of the Common Stock for the 20 trading days immediately preceding the date of conversion subject to adjustment and
further discount upon certain events, as set forth in the JSJ Note II. The Company
has the right to redeem the outstanding JSJ Note II at a redemption price equal to 135% to 145% of the amount of principal and
interest being redeemed, provided that any repayment, including at maturity, can only be made with the consent of JSJ. The Company
reimbursed JSJ for all costs and expenses incurred by it in connection with the transactions in an amount equal to $2,000 and paid
$8,000 to Carter Terry & Company in connection with due diligence fees. Black Forest Capital LLC, Financing On July 16, 2015, the Company issued
and sold to Black Forest Capital LLC (Black Forest) a convertible note (the Black Forest Note) in the
principal amount of $150,000 for $140,000. The Black Forest Note is due on the
first anniversary of funding and bears interest at a rate of 8%. The Black Forest Note is convertible, in whole or in part, into
shares of Common Stock at the option of Black Forest at a conversion price equal to 60% of the lowest trading price of the Common
Stock for the 20 trading days immediately preceding the date of conversion subject to adjustment and further discount upon certain
events, as set forth in the Black Forest Note. The Company has the right within 180
days of the date of the note to redeem the outstanding Black Forest Note at a redemption price equal to 130% of the amount of principal
and interest being redeemed, provided that any repayment, including at maturity, can only be made with the consent of Black Forest. The Company reimbursed Black Forest
for all costs and expenses incurred by it in connection with the transactions in an amount equal to $12,000 and paid $12,000 to
Carter Terry & Company in connection with due diligence fees. GW Holdings Group LLC On August 11, 2015, the Company issued
and sold to GW Holdings Group, LLC. (GW) a convertible note (the GW Note) in the principal amount of
$61,000 for $50,000. The GW Note is due on the first anniversary
of funding and bears interest at a rate of 8%. The GW Note is convertible, in whole or in part, into shares of Common Stock at
the option of GW at a conversion price equal to 60% of the lowest trading price of the Common Stock for the 15 trading days immediately
preceding the date of conversion subject to adjustment and further discount upon certain events, as set forth in the GW Note. The Company has the right within 180
days of the date of the note to redeem the outstanding GW Note at a redemption price starting at 135% to The Company reimbursed GW for all costs
and expenses incurred by it in connection with the transactions in an amount equal to $3,000 and paid $3,000 in connection
with legal fees and an amount equal to $4,000 and paid $4,000 to Carter Terry & Company in connection with due diligence fees. LG Capital Financing Note
2 On August 14,
2015, the Company entered into a securities purchase agreement with LG whereby the Company issued and sold to LG an 8% convertible
note (the LG Note #2) in the principal amount of $105,000 for $90,000. The LG Note #2 is due on the first anniversary
of issuance and bears interest at the rate of 8% per annum. The LG Note #2 is convertible, in whole or in part, into shares of
Common Stock at the option of LG, at a conversion price equal to 60% of the lowest trading price of the Common Stock for the 15
trading days immediately preceding, and including, the date of conversion, subject to adjustment and further discount upon certain
events, as set forth in the LG Note #2. The Company
has the right, at any time prior to the six month anniversary of the issuance date of the LG Note #2 to redeem the outstanding
LG Note at a redemption price equal to an amount between 115% and 145% of the amount of principal plus interest being redeemed,
depending on the date of prepayment. The convertibility
of the LG Note may be limited if, upon conversion, the holder thereof or any of its affiliates would beneficially own more than
9.9% of Common Stock. The Company
reimbursed LG for all costs and expenses incurred by it in connection with the transactions in an amount equal to $5,000 and paid
$5,000 for legal fees and an amount equal to $10,000 paid $10,000 to Carter Terry & Company for due diligence fees. Identification and Valuation
of Derivatives in the Above Ten Notes The Company evaluated the embedded derivative
criteria in ASC 815, and concluded that because the above notes could be readily convertible to cash by the Investor, the conversion
feature meets the definition of an embedded derivative that should be separated from the note and accounted for as a derivative
liability. The Company has not elected to initially
and subsequently measure the note as a hybrid instrument in its entirety at fair value. Therefore, in accordance with ASC 815,
the Company is accounting for all the embedded derivatives identified in the note as a single compound embedded derivative. The fair value of the embedded derivative
liability is measured in accordance with ASC 820, using monte carlo simulation modeling. The compound embedded derivative was
recorded as a derivative liability on the Consolidated Balance Sheet at its fair value of approximately $569,550 at September 30,
2015. At inception, the carrying value of
the above ten notes was as follows:
Face amount of note $ 958,000
Derivative and warrant liability -
$ 958,000 At September 30, 2015, the carrying
value of the above ten notes was as follows:
Face amount of note $ 937,864
Derivative and warrant liability 569,550
$ 1,507,414 Convertible Note Payable to Typenex
Co-Investment, LLC On September 26, 2014 (the Effective
Date), the Company entered into a Securities Purchase Agreement with Typenex Co-Investment, LLC (Investor
or Lender) whereby it sold in a private placement a 10% Collateralized Convertible Promissory note with a $550,000
principal amount, which was issued at a $50,000 discount from the face amount (the OID), and three warrants to purchase
the Companys Common Stock at an exercise price of $.80 per share, exercisable at various dates (the Investor Warrants),
in exchange for $250,000 cash and two 8% Investor Notes (Investor Note #1 and Investor Note #2) with principal
balances of $125,000 each. The note is collateralized by the Investor Notes. The note is separated into three Conversion
Eligible Tranches (discussed under Lender Conversion
Initial Tranche $ 275,000
First Subsequent Tranche 137,500
Second Subsequent Tranche 137,500
$ 550,000 The note accrues interest at 10%, and
is repayable in eight monthly installments beginning March 26, 2015, until the Maturity Date of October 26, 2015 (Installment
Dates). At each of the Installment Dates, the Company is required to pay to the Lender the applicable Installment
Amount due on such date. Installment Amount means $68,750 ($550,000 ÷ 8), plus the sum of any accrued and unpaid
interest that has been added to the lowest-numbered then-current Conversion Eligible Tranche as of the applicable Installment Date
and accrued and unpaid late charges that have been added to the lowest-numbered then current Conversion Eligible Tranche, if any,
under the note as of the applicable Installment Date, and any other amounts accruing or owing to Lender under the note as of such
Installment Date, provided, however, that if the remaining amount owing under all then-existing Conversion Eligible Tranches or
otherwise with respect to the note as of the applicable Installment Date is less than the Installment Amount set forth above, then
the Installment Amount for such Installment Date (and only such Installment Amount) will be reduced by the amount necessary to
cause such Installment Amount to equal such outstanding amount. Installment Conversions At the option of the Company or the
Lender, payments of each Installment Amount may be made (a) in cash, or (b) by converting such Installment Amount into a number
of shares of Common Stock (Installment Conversion Shares) derived by dividing the portion of the applicable Installment
Amount being converted by the Installment Conversion Price) an Installment Conversion), or (c) by any combination
of the foregoing, so long as the cash is delivered to the Lender on the applicable Installment Date and the Installment Conversion
Shares are delivered to the Lender on or before the applicable delivery date. The Installment Conversion Price is
the lesser of (i) the Lender Conversion Price (defined under Lender Conversion On the date that is twenty (20) trading
days (a True-Up Date) from each date Borrower delivers Free Trading (as defined below) Installment Conversion Shares
to the Lender, there will be a true-up where the Company will deliver to the Lender additional Installment Conversion Shares (True-Up
Shares) if the Installment Conversion Price as of the True-Up Date is less than the Installment Conversion Price used in
the applicable Installment Notice. In such event, the Company must deliver to the Lender within three (3) trading days of the True-Up
Date (the True-Up Share Delivery Date) a number of True-Up Shares equal to the difference between the number of Installment
Conversion Shares that would have been delivered to the Lender on the True-Up Date based on the Installment Conversion Price as
of the True-Up Date and the number of Installment Conversion Shares originally delivered to the Lender pursuant to the applicable
Installment Notice. The Company evaluated the note under
the requirements of ASC 480 Distinguishing Liabilities From Equity Derivatives
and Hedging Lender Conversion The Company evaluated the embedded derivative
criteria in ASC 815, and concluded that because the Common Stock that would be delivered by the Company if an Installment Conversion
is elected (including True-Up Shares) would be readily convertible to cash by the Investor, the Installment Conversion feature
meets the definition of an embedded derivative that should be separated from the note and accounted for as a derivative liability. During the nine months ended September
30, 2015, the Company converted the required Installment Amounts into shares of the Companys common stock. Using the formula
outlined above, the Company made installment payments of approximately $279,272, by issuing approximately 20,577,648 shares of
the Companys common stock to the Lender. On August 31, 2015, the Lender provided
the true up notice, as discussed about, for the June 26, 215 installment, installment #4 and the July 26, 2015 installment, installment
#5. Consequently the Company issued 5,767,145 additional shares of the Companys common stock based on the Lenders
calculation of the installment #4 true up and 2,646,216 shares of the Companys common stock based on the Lenders
calculation of the installment #5 true up. See Note 21 for conversions of
outstanding debt subsequent to September 30, 2015. Lender Conversion The Lender has the right at any time
after the Effective Date until the outstanding balance of the note has been paid in full, including without limitation (i) until
any Optional Prepayment Date or at any time thereafter with respect to any amount that is not prepaid, and (ii) during or after
any Fundamental Default Measuring Period, at its election, to convert (each instance of conversion is referred to as a Lender
Conversion) all or any part of the outstanding balance into shares (Lender Conversion Shares) of the Companys
common stock, of the portion of the outstanding balance being converted (the Conversion Amount) divided by the Lender
Conversion Price of $0.80, subject to potential future adjustments described below. The conversion by the Lender of any
portion of the outstanding balance is only exercisable in three (3) tranches (each, a Tranche), consisting of (i)
an initial Tranche in an amount equal to $275,000 and any interest, costs, fees or charges accrued thereon or added thereto under
the terms of the note and the other Transaction Documents (as defined in the Securities Purchase Agreement) (the Initial
Tranche), and (ii) two (2) additional Tranches, each in the amount of $137,500, plus any interest, costs, fees or charges
accrued thereon or added thereto under the terms of the note and the other Transaction Documents (each, a Subsequent Tranche). The Initial Tranche corresponds to the
initial cash proceeds of $250,000 plus $25,000 of the OID, and may be converted any time subsequent to the Effective Date. The
first Subsequent Tranche corresponds to Investor Note #1 plus $12,500 of the OID, and the second Subsequent Tranche corresponds
to Investor Note #2 plus $12,500 of the OID. The Lenders right to convert any portion of any of the Subsequent Tranches
is conditioned upon the Lenders payment in full of the Investor Note corresponding to such Subsequent Tranche (upon the
satisfaction of such condition, such Subsequent Tranche becomes a Conversion Eligible Tranche). The Initial Tranche
was immediately a Conversion Eligible Tranche at the Effective Date. The Company evaluated the note under
the requirements of ASC 815, Derivatives and Hedging The Company also evaluated the embedded
derivative criteria in ASC 815, and concluded that the default and remedy provisions of the note (see Default Provisions The Company evaluated the Companys
option to settle the Lender Conversion in cash in the event the Lender elects to convert subsequent to the occurrence of an Event
of Default under the requirements of ASC 815, and included that it meets the definition of an embedded derivative that should be
separated from the note and accounted for as a derivative liability. The Company evaluated the Lender Conversion
Delay provision under the requirements of ASC 815 and concluded it meets the definition of an embedded derivative that should be
separated from the note and accounted for as a derivative liability. The Company evaluated the embedded derivative
criteria in ASC 815, and concluded that because certain of the Events of Default under the note are factors that are unrelated
to a deterioration of the creditworthiness of the Company, the Events of Default and Default Interest provisions of the note are
not considered clearly and closely related to the characteristics of debt. Based on meeting all the criteria in the definition,
the Company concluded that the Events of Default and Default Interest provisions each meet the definition of an embedded derivative
that should be separated from the note and accounted for as a derivative liability. Company Prepayment Option So long as no Event of Default has occurred
subsequent to the effective date, the Company may at any time up to the maturity date optionally prepay, in full, the outstanding
balance of the note at a price of 125% of the aggregate principal amount of the note, plus accrued and unpaid interest, if any,
at the date of prepayment (Optional Prepayment Amount). The Company evaluated the embedded derivative
criteria in ASC 815, and concluded that the Companys prepayment option is not the type of call option that meets the definition
of an embedded derivative. However, the Optional Prepayment Liquidated Damages clause does meet the definition of an embedded derivative
that should be separated from the note and accounted for as a derivative liability. Investor Warrants The Investor Warrants allow the Investor
to purchase the number of shares of common stock (Warrant Shares) equal to the purchase price allocated to each Investor
Warrant divided by the market price of the Companys common stock immediately preceding the date each Investor Warrant first
becomes exercisable, as such the number may be adjusted from time to time pursuant to the antidilution provisions of the Investor
Warrant. The Purc |
