CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY

12 Months Ended

Dec. 31, 2015

Debt Disclosure [Abstract]

CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY

NOTE 9 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY

The following is a summary of the convertible notes payable outstanding as of December 31, 2015: 

		December 31, 2015
10% convertible notes payable issued in June 2015	(a)	$	700,000
10% convertible notes payable issued in July 2015	(b)		166,000
12% convertible notes payable issued in September 2015	(c)		172,095
Unamortized discounts on convertible notes			(583,049	)
Unamortized debt issuance costs			(71,700	)
		$	383,346

(a) In June 2015, the Company entered into agreements with nine individual accredited investors, whereby the Company issued separate 10% convertible notes for a total of $700,000 in a private offering and is secured by the assets of the Company. The notes have the following principal terms:

• The principal amount of the notes shall be repaid within 12 months of the issuance date at a 10% interest rate;

• The note holder may convert his or her note into shares of the Company’s common stock at a conversion price of $0.03 per share; however, if certain conditions are met, such as the issuance of new securities at a lower price, the conversion price per share will be adjusted downward to the price of the newly issued securities;

• In connection with the issuance of these notes, the Company also issued warrants for the purchase of 15,400,000 shares of the Company’s common stock at an exercise price of $0.05 per share for a period of five years; however, if certain conditions are met, such as the issuance of new securities at a lower price, the conversion price per share will be adjusted downward to the price of the newly issued securities.

(b) In July 2015, the Company entered into agreements with eight individual accredited investors, whereby the Company issued separate 10% convertible notes for a total of $190,000 in a private offering and is secured by the assets of the Company. The notes have the following principal terms:

• The principal amount of the notes shall be repaid within 12 months of the issuance date at a 10% interest rate;

• The note holder may convert his or her note into shares of the Company’s common stock at a conversion ranging from $0.03 to $0.055 per share; however, if certain conditions are met, such as the issuance of new securities at a lower price, the conversion price per share will be adjusted downward to the price of the newly issued securities;

• In connection with the issuance of these notes, the Company also issued warrants for the purchase of 4,180,000 shares of the Company’s common stock at an exercise price of $0.05 per share for a period of five years; however, if certain conditions are met, such as the issuance of new securities at a lower price, the conversion price per share will be adjusted downward to the price of the newly issued securities.

In December 2015, one of these notes with a principal balance of $24,000 was converted to shares of common stock.

(c) On September 25, 2015, the Company entered into a Letter Agreement with ID Solutions Inc. (“ID Solutions”) pursuant to which the parties agreed to settle a loan previously made to the Company by ID Solutions in the current amount $172,095, including principal and interest, in consideration of the issuance by the Company to ID Solutions of a 12% Convertible Promissory Note in the amount of $172,095 and a common stock purchase warrant to purchase 1,146,667 shares of common stock for a period of five years at an exercise price of $0.15. The note bears interest of 12%, is payable on September 25, 2016. ID Solutions may elect to convert all or part of the principal amount of the note plus interest into shares of common stock of the Company at a conversion rate of $0.10 per share. An officer and director of the Company is also a principal shareholder, executive officer and director of ID Solutions. At December 31, 2015, the outstanding amount due under this note is $172,095. 

In addition, in May 2015, the Company issued two convertible notes to officers and directors of the Company for $150,000 which were subsequently converted to common stock when the notes matured in September 2015. The notes accrued interest at 10% until the date the note was converted. The notes were convertible into shares of common stock at a conversion price of $0.055 per share. The Company also issued warrants to purchase 4,090,909 shares of common stock, exercisable at $0.055 per share for a period of up to five years from the notes original issuance date. Both the notes and the related warrants contained provisions whereby the conversion/exercise price would be adjusted downward if certain conditions were met, such as the issuance of new securities at a lower price.

The balance of all convertible notes payable outstanding as of December 31, 2015 mature in 2016.

Certain of the warrants qualified for equity accounting and were recorded based on their relative fair value with that of the related debt. However, certain of the warrants and conversion features did not qualify for equity accounting because their exercise or conversion price is reduced if common stock or instruments which are convertible/exercisable into common stock are later issued at a price less than the exercise prices of the warrants or conversion price of debt discussed in this Note 9 (“down round features”). Accordingly, those warrants and conversion features have been recorded as derivative liabilities (see Note 10).

The assumptions used in calculating the fair value of warrants accounted for as equity has been estimated using the Black-Scholes option pricing model for warrants granted during the year ended December 31, 2015 are as follows:

Expected Volatility	80	%
Expected Term	5.0 Years
Risk Free Rate	1.48	%
Dividend Rate	0.00	%

The fair value of the warrants accounted for as derivative liabilities have been estimated based on the Monte Carlo Simulation Model because it considers the effect of the down round feature (probability of a triggering capital raise) along with the other assumptions associated with the Black-Scholes option pricing model. The underlying assumptions used in the valuation of the derivative liabilities are included in Note 10.

A summary of the proceeds of the convertible notes payable and a reconciliation of those proceeds to the convertible notes balances at December 31, 2015 is as follows:

Balance as of January 1, 2015	$	-
Proceeds from issuances of convertible notes payable		1,040,000
Conversion of note payable, related party, to convertible note payable		172,095
Less debt discount:
Equity warrants		(129,820	)
Beneficial conversion feature		(42,275	)
Derivative liability warrants and conversion features		(947,899	)
Debt issuance costs		(140,700	)
Amortization of debt discount:
Equity warrants and beneficial conversion feature		45,485
Derivative liability warrants and conversion features		491,460
Amortization of debt issuance costs		69,000
Conversion of notes payable to equity		(174,000	)
Balance as of December 31, 2015	$	383,346