5. Notes Payable

3 Months Ended

Mar. 31, 2017

Debt Disclosure [Abstract]

5. Notes Payable

The accounting treatment of derivative financial instruments requires that the Company record these instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

As described in Note 3 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, in 2016 and the first quarter of 2017, the Company conducted a private placement (the “Offering”) of Units with each Unit consisting of a convertible promissory note (collectively, the “Notes”) and a warrant to purchase shares of the Company’s common stock (collectively, the “Warrants”) for which Divine Capital Markets, LLC served as the placement agent (the “Placement Agent”). The Company issued in the Offering a total of $2.4 million principal amount of Notes and Warrants to purchase up to 2.4 million shares of the Company’s common stock.

The fair value of the derivative instruments, along with the cash Placement Agent fees, are deducted from the carrying value of the Notes, as original issue discount (“OID”). The OID is amortized over the term of the Notes using the effective interest rate method.

Activity related to the Units during the first quarter of 2017 is as follows:

Gross Proceeds from additional convertible notes	$	800,000
Placement Agent Fees		104,000
Fair Value of Warrants		106,363
Fair Value of Conversion Features		447,586
Fair Value of Placement Agent Warrants		54,650
Net Amount Allocable to Notes	$	87,401

At March 31, 2017, the balance of the Notes is comprised of:

Face Value	$	2,400,000
Unamortized OID		1,497,838
Carrying Value	$	902,162

To measure the fair value of derivative instruments, the Company utilizes Monte Carlo models that value a warrant issued to Kingsway America, Inc. (the “Kingsway Warrant”), the imbedded conversion feature in the Notes (the “Conversion Feature”), the Warrants and the warrants issued to the Placement Agent (the “Placement Agent Warrants”). The Monte Carlo models are based on future projections of the various potential outcomes of each instrument, giving consideration to the terms of each instrument. A discounted average cash flow over the various scenarios is completed to determine the value of the instrument.

The table below provides a summary of the changes in fair value, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the quarter ended March 31, 2017:

	Kingsway Warrant		Conversion Feature			Warrants			Placement Agent Warrants			Total
Balance - December 31, 2016	$	68,335	$	435,672		$	93,387		$	48,684		$	646,078
Issuance during first quarter		-		447,586			106,363			54,650			608,599
Change in Fair Value of Derivative Liabilities		131,508		(72,463	)		(26,219	)		(15,201	)		17,625
Balance – March 31, 2017	$	199,843	$	810,795		$	173,531		$	88,133		$	1,272,302