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 CVP’s 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 December 31, 2017 and 2016, is as follows: 2017 2016 Beginning balance $ 1,229,360 $ 1,306,007 Convertible notes-newly issued 149,885 205,434 Debt default penalty — 344,654 Payments of convertible notes — (36,750 ) Conversions of convertible notes — (589,985 ) Total $ 1,379,245 $ 1,229,360 The newly issued funded amounts for the year ended December 31, 2017, were made directly to various vendors from Dove and includes $13,621 of OID. The Company has also not recorded the remaining balance of the Investor Notes issued by Dove to the Company. The OID is amortized immediately to interest expense, due to the Note being in default. 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 during the year ended December 31, 2017, were recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the Note. The discount was amortized immediately to interest expense, due to the Note being in default. 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. As security for the Note, the Company’s 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. 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 contains provisions that automatically reduce the conversion price. 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. 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 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 May 17, 2016, the Company received notification that Dove waived the 9.99% ownership limitation contained in the CVP Note. On July 8, 2016, Dove acquired all of the Class A Preferred Stock. 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 33,000,000 (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. WARRANT The Company also issued a five- year warrant to CVP (the “CVP Warrant”) 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 per share. As of December 31, 2017, and 2016, based on the Market Price, the Company estimated the number of shares that CVP can purchase 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. 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. On December 31, 2017, the Company revalued the warrant at $9,745 using the Black- Scholes option pricing model and recorded a credit to derivative liability expense for the year ended December 31, 2017, and decreased the derivative liability by $2,598 on the balance sheet as of December 31, 2017. |