| Secured Convertible Note Payable | Note 2 Secured Convertible
Note Payable Secured Convertible Note (the Note)
payable consists of the following at June 30, 2016 and December 31, 2015:
June 30, 2016 December 31, 2015
Secured convertible note payable, at fair value $ 145,673 $ 265,929
Less: Current maturities (67,805 ) (130,345 )
Secured convertible note payable, long-term $ 77,868 $ 135,584 Following is an
analysis of the activity in the secured convertible note during the six months ended June 30, 2016:
Amount
Balance at December 31, 2015 $ 265,929
Funding under the Investor Note during the period 35,000
Principal repaid during the period by issuance of common stock (220,040 )
Change in fair value of secured convertible note during the period 64,784
Balance at June 30, 2016 $ 145,673 The funded and unfunded portion of the
Investor Note consists of the following at June 30, 2016:
June 30, 2016
Investor notes - Available funding (subject to limitations) $ 10,000,000
Unfunded amount of investor notes (9,490,000 )
Investor notes - funded (prior to any repayments) $ 510,000 On May 7, 2015, the Company completed
the May 2015 Private Placement of a $12.0 million principal amount secured convertible note (the Note) and Warrant
to purchase 1,800,000 shares of the Companys common stock, $0.0001 par value. The placement agent for the Company in the
transaction will receive a fee of 6% of cash proceeds, or $600,000, if and when the Company receives the full cash proceeds. It
received $27,000 of such amount at the closing. In addition, the placement agent was granted a warrant to purchase 240,000 shares
of common stock at $5.00 per share, which warrant is immediately exercisable. The Note and Warrant were issued pursuant
to a Securities Purchase Agreement, dated May 7, 2015, by and between the Company and the Investor. The May 2015 Private Placement
was made pursuant to an exemption from registration under such Act. At the closing, the Investor acquired the secured convertible
note by paying $450,000 in cash and issuing a secured promissory note, secured by cash, with an aggregate initial principal amount
of $9,550,000 (the Investor Note). Assuming all amounts payable to the Company under the Investor Note are paid without
any offset or default, the May 2015 Private Placement will result in gross proceeds of $10.0 million before placement agent fees
and other expenses associated with the transaction, subject to the satisfaction of certain conditions. The Company used the proceeds
from this offering to retire certain outstanding obligations, including the 2015 area and training fees relating to its Nicaraguan
Concessions, and to provide working capital. As of June 30, 2016, an additional $60,000 was funded under the Investor Note for
a total of $510,000 advanced to the Company prior to any repayments. The Company is to receive the remaining
cash proceeds upon each voluntary or mandatory prepayment of the Investor Note. An Investor may, at its option and at any time,
voluntarily prepay the Investor Note, in whole or in part. The Investor Note is also subject to mandatory prepayment, in whole
or in part, upon the occurrence of one or more of the following mandatory prepayment events: (1) Mandatory
Prepayment upon Conversion (2) Mandatory
Prepayment upon Mandatory Prepayment Notices The Investor Note also contains certain
offset rights, which if executed, would reduce the amount outstanding under the Note and the Investor Note and the cash proceeds
received by the Company. Description of
the Secured Convertible Note The Note is secured to the Companys
existing and future indebtedness and is secured by all of the assets of the Company, excluding the Nicaraguan Concessions, and
to the extent and as provided in the related security documents. The Note is convertible at any time
at the option of the holder into shares of the Companys common stock at $5.00 per share (the Conversion Price).
The Note matures on the three-year anniversary of the issuance date thereof. If the Company issues or sells shares of its common
stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per
share that is less than the Conversion Price then in effect, the then current Conversion Price will be decreased to equal such
lower price. The foregoing adjustments to the Conversion Price for future stock issues will not apply to certain exempt issuances,
including issuances pursuant to certain employee benefit plans. In addition, the Conversion Price is subject to adjustment upon
stock splits, reverse stock splits, and similar capital changes. On the first business day of each month
beginning on the earlier of the (i) effectiveness of a registration statement the Company files to register the shares of common
stock issuable upon conversion of the Note or exercise of the Warrant, as defined below, or (ii) sixth month following the date
of the Note through and including the maturity date (the Installment Dates), the Company will pay to the Note holder
an amount equal to (i) one-thirtieth (1/30th) of the original principal amount of the Note (or the principal outstanding on the
Installment Date, if less) plus (ii) the accrued and unpaid interest with respect to such principal plus (iii) the accrued and
unpaid late charges (if any) with respect to such principal and interest. The Investor has the ability to defer or accelerate such
monthly payments in its sole discretion. Prior to the maturity date, the Note
will bear interest at 8% per annum (or 18% per annum during an event of default) with interest payable in cash or in shares of
Common Stock monthly in arrears on the first business day of each calendar month following the issuance date. Each monthly payment may be made in
cash, in shares of the Companys common stock, or in a combination of cash and shares of its common stock. The Companys
ability to make such payments with shares of its common stock will be subject to various equity conditions, including the existence
of an effective registration statement covering the resale of the shares issued in payment (or, in the alternative, the eligibility
of the shares issuable pursuant to the Note and the Warrant, as defined below, for sale without restriction under Rule 144 and
without the need for the Company to remain current with its public filing obligations) and certain minimum trading price and trading
volume. Such shares will be valued, as of the date on which notice is given by the Company that payment will be made in shares,
at the lower of (1) the then applicable Conversion Price and (2) a price that is 80.0% of the arithmetic average of the three lowest
weighted average prices of the Companys common stock during the twenty-trading day period ending two trading days before
the applicable determination date (the Measurement Period). If the Company elects to pay such monthly payment in
shares of the Companys stock it is required to pre-deliver shares of the Companys common stock and is required to
deliver additional shares, if any, to a true-up such number of shares to the number of shares required to be delivered on the applicable
Installment Date pursuant to the calculation above. At any time after the issuance date,
the Company will have the right to redeem all or any portion of the outstanding principal balance of the Note plus all accrued
but unpaid interest and any other charges at a price equal to 125% of such amount provided that (i) the arithmetic average of the
closing sale price of the common stock for any twenty (20) consecutive Trading Days equals or exceeds 200% of the Conversion Price
and (ii) among other conditions, there is an effective registration statement covering the resale of the shares issued in payment
or, in the alternative, the eligibility of the shares issuable pursuant to the Note and the Warrant for sale without restriction
under Rule 144 and without the need for the Company to remain current with its public filing obligations. The Investor has the
right to convert any or all of the amount to be redeemed into common stock prior to redemption. Upon the occurrence of an event of default
under the Note, the Investor may, so long as the event of default is continuing, require the Company to redeem all or a portion
of its Note. Each portion of the Note subject to such redemption must be redeemed by the Company, in cash, at a price equal to
the greater of (1) 125% of the amount being redeemed, including principal, accrued and unpaid interest, and accrued and unpaid
late charges, and (2) the product of (I) the amount being redeemed and (II) the quotient determined by dividing (A) the greatest
closing sale price of the shares of common stock during the period beginning on the date immediately preceding the event of default
and ending on the date the holder delivers a redemption notice to the Company, by (B) the lowest Conversion Price in effect during
such period. Subject to certain conditions, the Investor
may also require the Company to redeem all or a portion of its Note in connection with a transaction that results in a Change of
Control, as defined in the Note. The Company must redeem each portion of the Note subject to such redemption in cash at a price
equal to the greater of (1) 125% of the amount being redeemed (including principal, accrued and unpaid interest, and accrued and
unpaid late charges), and (2) the product of (I) the amount being redeemed and (II) the quotient determined by dividing (A) the
greatest closing sale price of the shares of common stock during the period beginning on the date immediately preceding the earlier
to occur of (i) the consummation of the Change of Control and (ii) the public announcement of such Change of Control and ending
on the date the holder delivers a redemption notice to the Company, by (B) the lowest Conversion Price in effect during such period. Description of
the Warrant As a part of the May 2015 Private Placement,
the Company issued a Warrant to the Investor giving it the right to purchase up to an aggregate of 1,800,000 shares of the Companys
common stock at an exercise price of $5.00 per share. The Warrant is exercisable commencing six months from the date of issuance
and the exercise prices for the Warrant is subject to adjustment for certain events, such as stock splits and stock dividends.
If the Company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible
into shares of its common stock for a price per share that is less than the exercise price then in effect, the exercise price of
the Warrant will be decreased to equal such lesser price. Upon each such adjustment, the number of the shares of the Companys
common stock issuable upon exercise of the Warrant will increase proportionately. The foregoing adjustments to the exercise price
for future stock issues will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans.
In addition, the Conversion Price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes.
The Warrant will expire on the seventh (7th) anniversary of the date of issuance. 9.99% Restriction
on Conversion of Note and Exercise of Warrant The Investor has no right to convert
the Note or exercise the Warrant to the extent that such conversion or exercise would result in the Investor being the beneficial
owner in excess of 9.99% of the Companys common stock. The Company was required to hold a meeting of its shareholders to
approve increase the number of its authorized shares to meet its obligations under the Purchase Agreement to have reserved 200%
of the shares issuable upon conversion of the Note and exercise of the Warrant. The Company held its Annual Meeting of Shareholders
on September 25, 2015 and the shareholders approved the reverse split of the Companys common stock issued and outstanding
shares, which satisfied this requirement. Registration
Rights Agreement In connection with the May 2015 Private
Placement, the Company and the Investor entered into a Registration Rights Agreement under which the Company is required, on or
before 45 days after the closing of the May 2015 Private Placement, to file a registration statement with the Securities and Exchange
Commission (the SEC) covering the resale of 130% of the shares of the Companys common stock issuable pursuant
to the Note and Warrant and to use its best efforts to have the registration declared effective as soon as practicable. The Company
will be subject to certain monetary penalties, as set forth in the Registration Rights Agreement, if the registration statement
is not filed or does not remain available for the resale (subject to certain allowable grace periods) of the Registrable Securities,
as such term is defined in the Registration Rights Agreement. The Company filed the required registration statement on Form S-1
on June 19, 2015 and the Securities and Exchange Commission declared the Form S-1 effective on October 9, 2015 and has thereby
satisfied this requirement. Participation
Rights If, during the period beginning on the
closing date and ending on the four (4) year anniversary of the closing date, the Company offers, sells, grants any option to purchase,
or otherwise disposes of any of its or its subsidiaries equity or equity equivalent securities (a Subsequent Placement),
the Investor will have the right to participate for 50% of any such future Subsequent Placement. Description of
the Financial Accounting and Reporting The Company elected to account for the
Note on its fair value basis, therefore, the fair value of the Note, including its embedded conversion feature, were estimated
together utilizing a binomial lattice model on its origination date and the Black-Sholes model at June 30, 2016. Such assumptions
included the following:
Upon Issuance As of June 30, 2016
Volatility range 102.6 % 190.2 %
Risk-free rate 1.00 % 0.71 %
Contractual term 3.0 years 1.8 years
Conversion price $ 5.00 $ 5.00
Par value of note $ 540,000 $ 155,952 The Company received $450,000 of proceeds
at the date of issuance and after repayments and additional funding the net principal balance was $129,960 as of June 30, 2016.
The fair market value of the Note was estimated to be $682,400 as of the issuance date, $265,929 at December 31, 2015 and $145,673
as of June 30, 2016. The net $67,784 change in fair market value of the Note is included in change in fair value of secured notes
payable in the accompanying statement of operations for the six months ended June 30, 2016. The Warrant issued to purchase 1,800,000
common shares in connection with the Note was treated as a derivative liability for accounting purposes due to its ratchet and
anti-dilution provisions. Accordingly, the Company has estimated the fair value of the warrant derivative as of the issuance date
of the Note was issued at $8,034,007, which has been charged to non-operating expense during the year ended December 31, 2015.
The estimated fair value of the warrant derivative as of June 30, 2016 was $79,898, representing a change of $102,619 from December
31, 2015 which is included in changes in derivative fair value in the accompanying statement of operations for the six months ended
June 30, 2016. See Note 6. The warrant issued to purchase 240,000
shares issued as part of the placement fee in connection with the Note was treated as a derivative liability for accounting purposes
due to its ratchet and anti-dilution provisions. Changes in the fair value of the warrant derivative liability totaled $13,683
(reduction in the derivative liability) through June 30, 2016, which is included in changes in derivative fair value in the accompanying
statement of operations for the six months ended June 30, 2016. The warrant derivative liability balance related to such warrants
was $10,653 and $24,336 as of June 30, 2016 and December 31, 2015, respectively. See Note 6. The Company is required to make monthly
installment payments in the form of cash, common stock or a combination of both. The Company elected to make such monthly payments
in the form of common stock and has delivered a total of 4,248,068 shares of common stock representing required principal repayments
($220,040 principal balances) and 174,262 representing interest payments ($9,146 interest payments) during the six months ended
June 30, 2016. A total of 317,154 common shares were issued to true-up previous installments which were included
in the shares delivered during the six months ended June 30, 2016. |
