| CONVERTIBLE NOTES PAYABLE | NOTE 4 CONVERTIBLE NOTES PAYABLE 2014 Convertible Notes In May and June 2014 (the May and June
2014 Notes), the Company issued 3 convertible promissory notes, each in the amount of $22,000. The Company received proceeds
of $60,000 in the aggregate. Each of the May and June 2014 Notes matured on the six month anniversary of its issuance date, carried
interest at 10% and contained a 9.1% original issue discount (OID). The OID was amortized over the earlier of the
conversion of the note or the maturity date. The holders of the note can convert the notes into shares of common stock at any time
from the date of issuance to maturity at $0.20 per share. In December 2014, the Company received conversion notices from the holders
of the May and June 2014 Notes and accordingly, recorded the conversion of $66,000 of principal and $4,177 of accrued and unpaid
interest of the three convertible promissory notes and 352,242 shares of common stock to be issued at a conversion price of $0.20
per share. The shares were issued in January 2015. 2015 Convertible Notes The Company issued three convertible promissory
notes to investors other than CVP, in August 2015 (the August 2015 Notes) in the amounts of $86,250, $11,500 and
$46,000, respectively. The Company received proceeds of $75,000, $10,000 and $40,000. The August 2015 Notes mature on the six month
anniversary of its issuance date, carries interest at 10% and contained a 10% original issue discount (OID). The
Company recorded the OID of $18,750 as a discount to the Note, to be amortized to interest expense over the life of the Note. Each
of the holders of the August 2015 Notes can convert the note into shares of common stock at any time from the date of issuance
to maturity at $0.20 per share. Accordingly, the Company received a conversion notice from each holder of the August 2015 Notes
and issued in the aggregate 718,750 shares of restricted common stock. The company valued and recorded an initial derivative liability
of $168,930 using the Black Scholes valuation methodology of which $125,000 was recorded as a discount to the August Notes and
the remaining $43,930 was recorded as expense. Upon conversion of the August Notes the Company reclassified $168,930 of the derivative
liability to additional paid in capital. On September 30, 2015, (the September
2015 Note) the Company issued a convertible promissory note in the amount of $5,750. The Company received proceeds of $5,750.
The September 2015 Note matures on the six month anniversary of its issuance date and carries interest at 10%. The holder of the
September 2015 Note can convert the note into shares of common stock at any time from the date of issuance to maturity at $0.20
per share. On September 30, 2015, the Company received a conversion notice from the holder of the September 2015 Note to convert
the note amount into 28,750 shares of restricted common stock. The shares were certificated on October 27, 2015. The company valued
and recorded an initial derivative liability of $6,877 using the Black Scholes valuation methodology of which $5,750 was recorded
as a discount to the September Note and the remaining $1,127 was recoded as expense. Upon conversion of the September Note the
Company reclassified $6,877 of the derivative liability to additional paid in capital. On October 26, 2015, (the October 2015
Note) the Company issued a convertible promissory note in the amount of $11,500. The Company received proceeds of $10,000.
The October 2015 Note matures on the six month anniversary of its issuance date, carries interest at 10% and contained a 10% OID.
The Company recorded the OID of $1,500 as a discount to the Note, to be amortized to interest expense over the life of the Note.
The holder of the October 2015 Note can convert the note into shares of common stock at any time from the date of issuance to
maturity at $0.20 per share. On October 26, 2015, the Company received a conversion notice from the holder of the October 2015
Note to convert the note amount into 57,500 shares of restricted common stock. The shares were certificated on October 27, 2015.
The company valued and recorded an initial derivative liability of $13,773 using the Black Scholes valuation methodology of which,
$10,000 was recorded as a discount to the October Note and the remaining $3,773 was recorded as expense. Upon conversion of the
October Note the Company reclassified $13,773 of the derivative liability to additional paid in capital. CHICAGO VENTURE PARTNERS, RELATED PARTY Convertible Note On June 3, 2014, the Board authorized the Company
to enter into a Securities Purchase Agreement (SPA) with Chicago Venture Partners, L.P. (CVP). Pursuant
to the SPA, the Company agreed to issue to CVP a Secured Convertible Promissory Note in the principal amount of $1,657,500 (the
Note). On June 6, 2014, the Company executed the SPA
with CVP, for the sale of the Company Note in the principal amount of up to $1,657,500 (which includes CVPs legal expenses
in the amount of $7,500 and a $150,000 OID) for $1,500,000, consisting of $500,000 paid in cash on June 11, 2014 (the Closing
Date), two $250,000 secured promissory notes and two $250,000 promissory notes (the Investor Notes), aggregating
$1,000,000, bearing interest at the rate of 10% per annum. The Investor Notes are due 30 months from the Closing Date and may be
prepaid, without penalty. Advances received, OID charged and deferred financing costs incurred to CVP are as follows:
Date Funded Amount OID Other Convertible Note Issued
6/11/14 $ 500,000 $ 50,000 $ 7,500 $ 557,500
10/15/14 62,500 6,250 68,750
11/17/14 62,500 6,250 68,750
12/19/14 35,000 3,500 38,500
Balances 12/31/14 660,000 60,000 7,500 733,500
3/18/15 65,000 6,500 71,500
4/14/15 22,500 2,250 24,750
4/23/15 25,500 2,550 28,050
5/20/15 30,000 3,000 33,000
6/22/15 20,000 2,000 22,000
9/21/15 45,000 4,500 7,500 57,000
November 2015 28,886 2,889 31,775
12/9/15 270,057 270,057
December 2015 6,250 625 6,875
Balances 12/31/15 $ 928,136 $ 92,814 $ 285,057 $ 1,306,007 The funded amounts in November and December
2015, were made directly to various vendors from CVP. The Company has recorded only the funded amounts and the associated costs
as convertible notes payable and has also not recorded the $643,177 remaining balance of the Investor Notes issued by CVP to the
Company. On July 27, 2016, the Company received a Notice
of Breach of Secured Convertible Promissory Note from the current noteholder regarding the December 2015 installment payment. Pursuant
to the terms and conditions of the default, the lender elected to multiply the outstanding balance by 125%, or $270,057. The Note bears interest at the rate of 10%
per annum. All interest and principal must be repaid on the date that is 30 months after the Closing Date. The Note may be converted
at the option of the holder, on the date that is six months from the Trading Date (defined in the Purchase Agreement as the date
on which the Common Stock is first trading on an Eligible Market, but in any event the Company shall cause its Common Stock to
be trading on an Eligible Market within nine months of the Closing Date of June 11, 2014) or at any time thereafter at a conversion
price of $0.1976. The conversion price is equal to $6,500,000 divided by 33,000,000 (the amount of fully diluted shares of Common
Stock of the Company on the date the Company filed its Registration Statement). If the holder funds $1,500,000 and elects
to convert the Note into Common Stock, the number of shares issuable upon conversion will be 8,287,500. In the event the Company
elects to prepay all or any portion of the Company Note, the Company is required to pay to CVP an amount in cash equal to 125%
multiplied by the sum of all principal, interest and any other amounts owing. On July 16, 2015, CVP converted $50,000 of accrued
and unpaid interest under the Company Note into 253,846 shares of common stock. The Company also reduced derivative liabilities
for the fair value of the conversion of $70,658 and reclassified the amount to additional paid in capital. Initially, the Company determined that the
conversion feature of the convertible note did not meet the criteria of an embedded derivative and therefore the conversion feature
was not bi-furcated and accounted for as a derivative because the Company was a private company, there was no quoted price and
no active market for the Companys common stock. Since the convertible note included an embedded conversion feature that
did not qualify to be bi-furcated as a derivative, management evaluated this feature to determine whether it meets the definition
of a beneficial conversion feature (BCF) within the scope of ASC 470-20, Debt with Conversion and Other Options,
and determined that a BCF existed. From January 1, 2015, through July 12, 2015, representing the date prior to the Company becoming
a public company, the Company received $163,000 in new funding and increased the Note by $179,300 (including $16,300 of OID) and
recorded a discount on the Note in the amount of $179,300, to be amortized to interest expense over the life of the Note The Company
became trading as a public Company on July 13, 2015, and on that date the Company determined that the conversion feature of the
Note represented an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly,
on July 13, 2015, the Note was not considered to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated
from the debt host and accounted for as a derivative liability. Accordingly, the fair value of the derivative instruments for
the fundings of the Note that occurred prior to July 13, 2015, were recorded as a liability on July 13, 2015, on the consolidated
balance sheet with the corresponding amount recorded as a discount to the Note. Such discount is being amortized from the date
of issuance to the maturity date of the Note. The change in the fair value of the liability for derivative contracts are recorded
in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative
liability on the balance sheet. The embedded feature included in the Note resulted in an additional initial debt discount of $233,500
and initial derivative liability of $1,474,840 and an initial derivative liability expense of $1,241,340 was recorded. Additionally,
from July 13, 2015, through the year ended December 31, 2015, the Company received or was the beneficiary of $105,137 in new fundings
or direct payments to vendors from CVP and increased the Company Note by $123,151 including $18,014 of OID, to be amortized to
interest expense over the life of the Note. The Company recorded an initial derivative liability of $151,535, a discount against
the Note in the amount of $98,900, to be amortized into interest expense over the term of the Note and an initial derivative liability
expense of $52,635. Lastly, as described above, the Company was in default of the Note and incurred a default penalty of $270,057.
The Company recorded an initial discount to reflect the derivative liability associated with the default, in the amount of $205,431.
Amortization of the Note discount for the year ended December 31, 2015 was $579,980. The carrying amount of the Note as of December
31, 2015 and 2014, was $774,820 and $357,478, respectively, net of unamortized discounts of $531,187 and $376,022, respectively. As security for the Note, the Companys
CEO and COO each pledged to CVP their 50 shares of Class A Preferred Stock (see Note 8). The pledge expired upon the shares of
common stock of the Company being publicly traded and listed or designated for quotation on any of The New York Stock Exchange,
NYSE Amex, the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market, the OTC Bulletin Board, the OTCQX,
or the OTCQB. Pursuant to the terms of the Note, the Company
was required to deliver the Installment Amount (as defined in the Note) on or before each Installment Date (as defined in the Note)
until the Note was repaid. The Company failed to deliver the Installment Amount in June 2015, July 2015 and August 2015 (each,
a Breach and collectively, the Breaches). Each such Breach would constitute a separate event of default
pursuant to the terms of the Note if so declared by the Lender. On September 10, 2015, the Company entered
into a forbearance and standstill agreement (the Forbearance and Standstill Agreement) with CVP and Matt Lee and
Sam May, pursuant to which CVP agreed to refrain and forbear temporarily from exercising and enforcing remedies under the Note. Pursuant to the terms of the Forbearance and
Standstill Agreement, CVP agreed to refrain and forbear from exercising and enforcing its remedies with respect to the Breaches
until the earliest occurrence of (a) any breach of the Forbearance and Standstill Agreement, or (b) any event of default after
the effective date of the Forbearance and Standstill Agreement other than the Breaches. Assuming that no additional events of default
occur under the Note and no breaches of the Forbearance and Standstill Agreement occur, CVP agreed, for a period of 90 days from
September 10, 2015 (the Standstill Period), that it will not seek to convert any portion of the outstanding balance
of the Note without the Companys prior written consent, nor will the Company be required to deliver any Installment Amount
to CVP during the Standstill Period. In addition, CVP agreed that for a period of
180 days following September 10, 2015 (the Modified Conversion Period), CVPs conversion price shall be equal
to $0.40 per share, and that during the Modified Conversion Period, CVP will not made any conversions without the Companys
prior written consent. Also, any conversion amount applicable to any CVP conversion made during the Modified Conversion Period
will automatically be applied toward and reduce the next Installment Amount due and payable to CVP. Upon conclusion of the Modified
Conversion Period, CVPs conversion rights set forth in the Note shall revert to the terms and conditions set forth in Note. Pursuant to the terms of the Forbearance and
Standstill Agreement, the next Installment Date will be the date that is 90 days from the date of the Forbearance and Standstill
Agreement and each subsequent Installment Date will be on the same day of each month thereafter until the Notes maturity
date. In addition, the Installment Amount due on the next three Installment Dates shall be equal to $50,000. The Company agreed that so long as the Note
remains outstanding and the warrant issued to CVP in connection with the Note is not fully exercised or expired pursuant to its
terms, the Company will not (i) issue any new shares of Class A preferred stock, (ii) issue any debt, (iii) issue other securities
that have redemption rights, rights of first refusal, preemptive rights or similar rights not associated with the Companys
common stock, or (iv) consummate any transaction pursuant to Section 3(a)(9) or 3(a)(10) of the Securities Act of 1933, as amended,
equity line of credit or financing arrangement or other transaction that involves issuing securities convertible into Company common
stock with a conversion price that varies with the market price of the common stock, without CVPs prior written consent. CVP granted to the Company the right to repurchase
the Note, the Warrant and the other transaction documents for $978,500 within 90 days of September 10, 2015. CVP also agreed to
pay to the Company $5,000, which payment will constitute a partial payment of the Investor Notes. The Company agreed to pay CVP
$7,500, which shall be added to and included as part of the outstanding balance of the Note. A summary of the convertible note payable balance as of December
31, 2015 and 2014 is as follows:
2015 2014
Beginning balance $ 733,500 $ -0-
Convertible notes-newly issued 463,450 799,500
Debt default penalty 270,057
Conversion of convertible notes (161,000 ) (66,000 )
Unamortized discount (531,187 ) (376,022 )
Total $ 774,820 $ 357,478 WARRANT The Company also issued a five year warrant
to CVP to purchase the number of shares equal to $420,000 divided by 70% of the average of the three lowest closing bid prices
in the 20 trading days immediately after becoming public (the Market Price). Since the Company was not public and
could not determine the Market Price, based on the current discounted cash flow valuation, the Company initially estimated that
CVP can purchase 6,000,000 shares of common stock, with an exercise price of $0.20 per share. As of December 31, 2015, based on
the Market Price, the Company estimated the number of shares that CVP can purchase to be 1,636,362. Accounting Standard Codification ASC
815 Derivatives and Hedging The warrants were
valued using the Black-Scholes option pricing model. In order to calculate the fair value of the warrants, certain assumptions
were made regarding components of the model, including the closing price of the underlying common stock, risk-free interest rate,
volatility, expected dividend yield, and expected life. Changes to the assumptions could cause significant adjustments to valuation.
Since the Company was not public, an estimated a volatility factor utilizing an average of comparable published volatilities of
peer companies was utilized. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant
for treasury securities of similar maturity. The warrants associated with the Note were initially valued and recorded a derivative
liability of $577,100 using the Black-Scholes valuation methodology and the Company also recorded an initial derivative liability
expense of $77,100 and a discount to the Note of $500,000. Amortization of the warrant discount for the years ended December 31,
2015 and 2014, was $376,022 and $123,968, respectively. On December 31, 2014, the Company revalued
the warrant at $581,373 using the Black- Scholes option pricing model and recorded an additional derivative liability expense
of $4,273 for the year ended December 31, 2014. On December 31, 2015, the Company revalued the warrant at $13,700 using the Black-
Scholes option pricing model and recorded a credit to derivative liability expense of $567,673 for the year ended December 31,
2015 and reduced the derivative liability on the balance sheet as of December 31, 2015. |
