| CONVERTIBLE NOTES PAYABLE | NOTE 3 CONVERTIBLE NOTES PAYABLE THE DOVE FOUNDATION, RELATED PARTY 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 April 29, 2016, CVP and Tonaquint sold and
transferred all of their ownership and rights under the CVP SPA and Note and the Tonaquint SPA and related Purchase documents to
The Dove Foundation (Dove). 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 included 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. A summary of the convertible note payable balance as of March 31,
2017 and December 31, 2016 is as follows:
2017 2016
Beginning balance $ 1,229,360 $ 1,306,007
Convertible notes-newly issued 31,852 205,434
Debt default penalty 344,654
Payments of convertible notes (36,750 )
Conversions of convertible notes (589,985 )
Ending balance $ 1,261,212 $ 1,229,360 The newly issued funded amounts for the three
months ended March 31, 2017 were made directly to various vendors by or on behalf of Dove and includes $2,896 of OID. The Company
has also not recorded the remaining balance of the Investor Notes issued by CVP to the Company. As security for the Note, the Companys
CEO and former COO each pledged to CVP their 50 shares of Class A Preferred Stock (see Note 8). On August 5, 2016, Dove acquired
all of the Class A Preferred Stock. 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. On May 17, 2016, the Company received notification
that Dove has waived the 9.99% ownership limitation contained in the CVP Note, thereby creating a potential change in control of
the Company. On July 27, 2016, the Company received a Notice
of Breach of Secured Convertible Promissory Note from Dove regarding the December 2015 and January 2016 installment payments. Pursuant
to the terms and conditions of the default, the lender elected to multiply the outstanding balance by 125%, or $270,056 for the
December 2015 default and $344,654 for the January 2016 default. The Lender also increased the interest rate to 22% per annum pursuant
to the default. Also on July 27, 2016, Dove sent the Company a conversion notice to issue 1,051,779 shares of common stock in exchange
for the cancellation of $920,306 of interest and principal due. Immediately after the conversion Dove owned approximately 87.6%
of the common stock of the Company. 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 132,000 (the amount of fully diluted shares of Common Stock of the Company on
the date the Company filed its Registration Statement). 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 1,015 shares of common stock. 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. During the year ended December 31, 2015, and prior to the Company becoming a public company,
the Company received $163,000 in new funding and recorded a BCF expense in the amount of $163,000. The Company began 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. The discount was 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. 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 24,000 shares of common stock, with an exercise price of $50.00 per share. As of March 31, 2017, and December
31, 2016, based on the Market Price, the Company estimated the number of shares that can be purchased to be 6,545. 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. On March 31, 2017, the Company revalued the warrant at $25,410 using the Black- Scholes option pricing model
and recorded a derivative liability expense for the three months ended March 31, 2017, and increased the derivative liability
by $12,975 on the balance sheet as of March 301, 2017. |
