| Secured Convertible Note Payable | Note 2 – Secured Convertible
Note Payable Secured Convertible Note (the “Note)
payable consists of the following at June 30, 2017 and December 31, 2016:
June 30, 2017 December 31, 2016
Secured convertible note payable, at fair value $ 1,822,791 $ 141,328
Less: Current maturities (1,822,791 ) (91,736 )
Secured convertible note payable, long-term $ — $ 49,592 Following is an analysis of the activity
in the secured convertible note during the six months ended June 30, 2017:
Amount
Balance at December 31, 2016 $ 141,328
Funding under the Investor Note during the period —
Principal repaid during the period by issuance of common stock —
Change in fair value of secured convertible note during the period 1,681,463
Balance at June 30, 2017 $ 1,822,791 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 Company’s 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”). On May 4, 2017, the Investor notified
the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the Investor Note of the full $9,490,000
principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal outstanding under the Convertible
Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal of the Convertible Note in exchange
for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had an aggregate outstanding principal
balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to deliver a new convertible note (the
“Replacement Note”) with respect to the remaining principal balance of $2,197,231 to replace the Convertible Note.
The aggregate outstanding principal balance of $11,687,231 of the Convertible Note included an approximate $2.0 million original
issue discount; however, the Investor funded only $510,000 under the Investor Note. The Company has recorded the fair value of
the Convertible Note assuming that the remaining par value is $2,197,231 as asserted by the Investor, resulting in a change in
the estimated fair value of $1,681,463 during the six months ended June 30, 2017. The Replacement Note provides for a one-year
maturity from May 7, 2017, a conversion price of $0.50 per share and is due in monthly installment payments through May 2018 either
in cash or stock, among other terms. It is to be secured to the same extent as the Convertible Note. The Company plans to negotiate
with the Investor regarding the issuance of the Replacement Note under the terms of the financing and taking into consideration
the Investor’s minimal funding in the entire transaction, but there can be no assurance that it will be successful in this
regard. Description of
the Secured Convertible Note The Note was secured to the Company’s
existing and future indebtedness and is secured by all the assets of the Company, excluding the Nicaraguan Concessions, and to
the extent and as provided in the related security documents. The Note was convertible at any time
at the option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion Price”).
The Note was to mature 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
bore 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 Company’s common stock, or in a combination of cash and shares of its common stock. The Company’s
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 Company’s 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 Company’s stock it is required to pre-deliver shares of the Company’s 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 had 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 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 Company’s
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 Company’s
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 Company’s 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 Company’s 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 Company’s 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-Scholes model at June 30, 2017. Such assumptions
included the following:
Upon Issuance
As of June 30, 2017
Volatility – range 102.6 % 288.6 %
Risk-free rate 1.00 % 1.55 %
Contractual term 3.0 years 0.8 years
Conversion price $ 5.00 $ 5.00
Par value of note $ 540,000 $ 2,197,231 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, 2017.
The fair market value of the Note was estimated to be $682,400 as of the issuance date, $141,328 at December 31, 2016 and $1,822,791
as of June 30, 2017. The net change in fair market value of the Note of $1,681,463 and $64,784 is included in change in fair value
of senior secured convertible note payable in the accompanying statement of operations for the six months ended June 30, 2017 and
2016, respectively. On May 4, 2017, the Investor notified
the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the Investor Note of the full $9,490,000
principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal outstanding under the Convertible
Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal of the Convertible Note in exchange
for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had an aggregate outstanding principal
balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to deliver the Replacement Note with
respect to the remaining principal balance of $2,197,231 to replace the Convertible Note. The aggregate outstanding principal balance
of $11,687,231 of the Convertible Note included an approximate $2.0 million original issue discount; however, the Investor funded
only $510,000 under the Investor Note. The Company has recorded the fair value of the Convertible Notes assuming that the remaining
par value is $2,197,231 as asserted by the Investor, resulting in a change in the estimated fair value of $1,681,463 during the
six months ended June 30, 2017. The Company plans to negotiate with the Investor regarding the issuance of the Replacement Note
under the terms of the financing and taking into consideration the Investor’s minimal funding in the entire transaction,
but there can be no assurance that it will be successful in this regard. 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. The estimated fair value of the warrant derivative as of June 30, 2017 was $124,584, representing a change
of $30,877 from December 31, 2016, which is included in changes in derivative fair value in the accompanying statement of operations
for the six months ended June 30, 2017. See Note 5. 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 $4,117 (decrease
in the derivative liability) through June 30, 2017, which is included in changes in derivative fair value in the accompanying statement
of operations for the six months ended June 30, 2017. The warrant derivative liability balance related to such warrants was $16,611
and $20,728 as of June 30, 2017 and December 31, 2016, respectively. See Note 5. The Company is required to make monthly
installment payments in the form of cash, common stock or a combination of both. The Holder has suspended such installments during
the third and fourth quarters of 2016 and the first and second quarters of 2017. |
