Convertible Notes Payable | 8. CONVERTIBLE NOTES PAYABLE Convertible notes payable were comprised of the following as of December 31, 2017 and March 31, 2017: December 31, 2017 March 31, 2017 Auctus Fund LLC notes payable $ 259,500 $ - EMA Financial LLC 259,500 - Total notes payable 519,000 - Less unamortized debt discount (156,959 ) - Total notes payable net of unamortized debt discount 362,041 - Less current portion (362,041 ) - Long term portion $ - $ - Auctus Fund LLC During the nine months ended September 30, 2017, the Company entered into Securities Purchase Agreements with Auctus Fund LLC (“Auctus”) for the sale of 12% convertible promissory notes in aggregate principal amount of $259,500. On April 7, 2017, the Company issued Auctus a convertible promissory note in the principal amount of $175,000 (the “Auctus April Note”) and on May 15, 2017, the Company issued Auctus a convertible promissory note in the principal amount of $84,500 (the “Auctus May Note” and together with the Auctus April Note, the “Auctus Notes”). In connection with the issuance of the Auctus Notes, the Company issued five-year warrants (the “Auctus Warrants”) to purchase up to 125,000 shares of the Company’s common stock at an exercise price of $2.00 per share, subject to adjustment. The Auctus Notes bear interest at the rate of 12% per annum. Any amount of principal or interest on the Auctus Notes which is not paid when due shall bear interest at the rate of 24% per annum from the due date thereof until the same is paid (the “Auctus Default Interest”). All interest and principal must be repaid one year from the issuance date. The Auctus May Note is due on May 15, 2018 and the Auctus April Note is due on April 7, 2018. The Company has identified the embedded derivatives related to the Auctus Notes and Auctus Warrants. These embedded derivatives included certain conversion features and reset provisions. The Auctus May Note is convertible into shares of the Company’s common stock at any time at a conversion price equal to the lesser of (i) a 50% discount to the lesser of the lowest traded price and closing bid price of the common stock during the 25 trading days prior to May 15, 2017 and (ii) 50% of the lesser of the lowest traded price and closing bid price of the common stock during the 25 trading day period prior to conversion. The Auctus April Note is convertible into shares of the Company’s common stock at any time at a conversion price equal to the lesser of (i) a 60% discount to the lesser of the lowest traded price and closing bid price of the common stock during the 25 trading days prior to April 7, 2017 and (ii) 60% of the lesser of the lowest traded price and closing bid price of the common stock during the 25 trading day period prior to conversion. If, at any time while the Auctus Notes are issued and outstanding, the Company issues or sells, or is deemed to have issued or sold shares of common stock, except for shares of common stock issued directly to vendors or suppliers of the Company in satisfaction of amounts owed to such vendors or suppliers (provided, however, that such vendors or suppliers shall not have an arrangement to transfer, sell or assign such shares of common stock prior to the issuance of such shares), for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the conversion price of the Auctus Notes that is then in effect on the date of such issuance of such shares of common stock (a “Auctus Dilutive Issuance”), then immediately upon the Auctus Dilutive Issuance, the conversion price of the Auctus Notes will be reduced to the amount of the consideration per share received by the Company in such Auctus Dilutive Issuance. Auctus does not have the right to convert the Auctus Notes into shares of the Company’s common stock if such conversion would result in Auctus’ beneficial ownership exceeding 4.99% of our outstanding common stock at such time. All amounts due under the Auctus Note become immediately due and payable by us upon the occurrence of an event of default, including but not limited to, (i) our sale of all or substantially all of our assets, (ii) our failure to pay the amounts due at maturity, (iii) our failure to issue shares of common stock upon any conversion of the Auctus Notes, (iv) our breach of the covenants, representations or warranties pursuant to the Auctus Notes, (v) our appointment of a trustee, (vi) a judgment against us in excess of $100,000 (subject to a 20 day cure period), (vii) our liquidation, (viii) the filing of a bankruptcy petition by us or against us, (ix) our failure to comply with the reporting requirements of the Securities Exchange Act of 1934, (x) the delisting of our common stock from the OTC Pink or equivalent exchange, (xi) a restatement of our financial statements for any period from two years prior to the issuance date of the Auctus Notes until such notes have been paid in full, or (xi) our effectuation of a reverse stock split without 20 days prior written notice to Auctus. We are required to pay an amount equal to 150% times the sum of the then outstanding principal amount of the Auctus Notes together with accrued interest thereon with Auctus Default Interest (collectively, the “Default Sum”) for failure to pay the principal amount of the Auctus Notes together with interest accrued thereon when due at the maturity date. In addition, we shall be required to pay Auctus $2,000 per day, for each day beyond the date that we are required to deliver shares of common stock to Auctus upon conversion of the Auctus notes. Pursuant to the Auctus May Note, at any time the Company consummates a financing transaction, the Company is required to apply at least 60% of the proceeds from such sales towards the payment of the Auctus May Note. In addition, the Auctus May Note contains a prohibition with respect to the consummation of a transaction involving capital raising or financing from any party through the sale of debt and/or equity securities for a period of at least 90 days after the issuance date of the Auctus May Note, or until August 13, 2017, without the consent of Auctus. Finally, the Auctus Notes have a cross-default provision whereby a default of the Auctus May Note constitutes a default of the Auctus April Note. See Note 14. – Commitments and Contingencies. The Company agreed to reserve an aggregate of 2,445,000 shares of common stock for conversions of the Auctus Notes (the “Auctus Reserve”), and also agreed to adjust the Auctus Reserve to ensure that such reserve always equals at least ten times the total number of shares of common stock that is issuable upon conversion of the Auctus Notes. The Auctus Warrants are immediately exercisable and may be exercised on a cashless basis in the event that the shares of common stock underlying the Auctus Warrants are not registered for resale with the SEC on an effective registration statement. The exercise price of the Auctus Warrants is subject to adjustment for stock dividends and splits, and also subject to dilution protection in the event that the Company issues shares of common stock or securities convertible into common stock at an effective price per share that is less than the original exercise price of the Auctus Warrants. On November 9, 2017, the Company received a notice of default from Auctus with respect to the Auctus Notes, and Auctus commenced a lawsuit against the Company on November 27, 2017. Auctus alleged the Company failed to apply at least 60% of the proceeds from financing transactions consummated during its second quarter ended September 30, 2017 towards the repayment of the Auctus May Note and the Company also failed to adhere to the prohibition of the Auctus May Note, which prohibited financing transactions by the Company for at least 90 days following the issuance of such note, without prior written consent of Auctus, giving rise to an event of default. In addition, Auctus alleged a breach of the Auctus May Note resulted in a breach of the Auctus April Note by virtue of the cross-default provision contained in the Auctus April Note. At December 31, 2017, the Auctus Notes were disputed, contingent and unliquidated, and the Company intended to litigate such allegations if a resolution could not be agreed upon by all of the parties involved. At that time, it could not be determined whether the court would find the Auctus Notes in default as alleged in the Auctus compliant. In addition, the amount of any prejudgment cost, fees or penalties were not determinable and were not accrued for by the Company as of December 31, 2017. The Company has recorded the Auctus Notes as a liability at its principal balance and continued to accrue interest as of December 31, 2017. The parties entered into a settlement agreement on January 24, 2018. See Note 14. – Subsequent Events. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of Auctus Notes and to fair value as of each subsequent reporting date which at December 31, 2017 was $502,590 and $1,241,360 for the debt derivative and warrant liability, respectively. At the inception of the Auctus Notes, the Company determined the aggregate fair value of $811,555 and $423,011 of the embedded debt derivatives and warrant liability, respectively. EMA Financial LLC During the nine months ended September 30, 2017, the Company entered into Securities Purchase Agreements with EMA Financial LLC (“EMA”) for the sale of 12% convertible promissory notes in aggregate principal amount of $259,500. On April 10, 2017, the Company issued EMA a convertible promissory note in the principal amount of $175,000 (the “EMA April Note”) and on May 15, 2017, the Company issued EMA a convertible promissory note in the principal amount of $84,500 (the “EMA May Note” and together with the EMA April Note, the “EMA Notes”). In connection with the issuance of the EMA Notes, the Company issued five-year warrants (the “EMA Warrants”) to purchase up to 125,000 shares of the Company’s common stock at an exercise price of $2.00 per share, subject to adjustment. The EMA Notes bear interest at the rate of 12% per annum. Any amount of principal or interest on the EMA Notes which is not paid when due shall bear interest at the rate of 24% per annum from the due date thereof until the same is paid (the “EMA Default Interest”). All interest and principal must be repaid one year from the issuance date. The EMA May Note is due on May 15, 2018 and the EMA April Note is due on April 7, 2018. The Company has identified the embedded derivatives related to the EMA Notes and EMA Warrants. These embedded derivatives included certain conversion features and reset provisions. The EMA May Note is convertible into shares of the Company’s common stock at any time on or after 180 days following May 15, 2017 at the lower of (i) the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date and (ii) 50% of the lowest sale price for the common stock on the principal market during the 25 consecutive trading days immediately preceding the date of conversion. If the Company fails to register the shares of common stock underlying the EMA May Note within 180 days of the closing date, the conversion price will be permanently reduced to: (i) the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date and (ii) 50% of the lowest sale price for the common stock on the principal market during the 25 consecutive trading days immediately preceding the conversion date. As of December 31, 2017, the Company has not registered the shares of common stock underlying the EMA May Note. The EMA April Note is convertible into shares of the Company’s common stock at any time on or after 180 days following April 10, 2017 at the lower of (i) the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date and (ii) 60% of the lowest sale price for the common stock on the principal market during the 25 consecutive trading days immediately preceding the date of conversion. If the Company fails to register the shares of common stock underlying the EMA May Note within 180 days of the issue date, the conversion price will be permanently reduced to: (i) the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date and (ii) 40% of the lowest sale price for the common stock on the principal market during the 25 consecutive trading days immediately preceding the conversion date. As of December 31, 2017, the Company has not registered the shares of common stock underlying the EMA April Note. EMA does not have the right to convert the EMA Notes into shares of the Company’s common stock if such conversion would result in EMA’s beneficial ownership exceeding 4.99% of our outstanding common stock at such time. All amounts due under the EMA Notes become immediately due and payable by us upon the occurrence of an event of default, including but not limited to, (i) our sale of all or substantially all of our assets, (ii) our failure to pay the amounts due at maturity, (iii) our failure to issue shares of common stock upon any conversion of the EMA Notes, (iv) our breach of the covenants, representations or warranties pursuant to the EMA Notes, (v) our appointment of a trustee, (vi) a judgment against us in excess of $50,000 (subject to a 20 day cure period), (vii) our liquidation, (viii) the filing of a bankruptcy petition by us or against us, (ix) our failure to comply with the reporting requirements of the Securities Exchange Act of 1934, (x) the delisting of our Common Stock from the OTC Pink or equivalent exchange, (xi) a restatement of our financial statements for any period from two years prior to the issuance date of the EMA Notes until the EMA Notes have been paid in full, or (xi) our effectuation of a reverse stock split without 10 days prior written notice to EMA. We are required to pay an amount equal to 150% times the sum of the then outstanding principal amount of the EMA Notes together with accrued interest thereon with EMA Default Interest (collectively, the “EMA Default Sum”) for failure to pay the principal amount of the EMA Notes together with interest accrued thereon when due at the maturity date. In addition, we shall be required to pay EMA $1,000 per day, for each day beyond the date that we are required to deliver shares of common stock to EMA upon conversion of the EMA notes. If at any time the Company enters into any capital raising transaction, including without limitation an equity line transaction, a loan transaction or the sale of shares of common stock or securities convertible into or exercisable or exchangeable for common stock, then five trading days following the closing of such subsequent financing, at least 60% of the gross proceeds therefrom shall be paid to EMA to redeem a portion of the EMA Notes pursuant to the terms thereof. The Company agreed to reserve an aggregate of 2,445,000 shares of common stock for conversions of the EMA Notes (the “EMA Reserve”), and also agreed to adjust the EMA Reserve to ensure that such reserve always equals at least ten times the total number of common stock that is issuable upon conversion of the EMA Notes. The EMA Warrants are immediately exercisable and may be exercised on a cashless basis in the event that the shares of common stock underlying the EMA Warrants are not registered for resale with the SEC on an effective registration statement. The exercise price of the EMA Warrants is subject to adjustment for stock dividends and splits, and also subject to dilution protection in the event that the Company issues shares of common stock or securities convertible into common stock at an effective price per share that is less than the original exercise price of the EMA Warrants. Pursuant to the EMA Securities Purchase Agreements, in the event that at any time on or prior to the date which is six months following the issuance date, the Company desires to borrow funds, raise additional capital and/or issue additional promissory notes, whether convertible into shares of securities of the Company or otherwise (a “Prospective Financing”), EMA shall have the right of first refusal to participate in the Prospective Financing, and the Company shall provide written notice containing the terms of such Prospective Financing to EMA prior to effectuating any such transaction, provided that this right shall not apply to (a) any transaction in which the Company receives more than $250,000 of net proceeds in a single transaction or (b) any transaction that does not involve the issuance of any securities which are directly or indirectly convertible, exercisable or exchangeable into or for capital stock of the Company. On September 1, 2017, the Company received a notice of default from EMA with respect to the EMA Notes, and EMA commenced a lawsuit against the Company on October 19, 2017. EMA alleges that the Company failed to file a registration statement covering the resale of the shares of common stock underlying the EMA Notes thus giving rise to an event of default. The EMA Notes are disputed, contingent and unliquidated, and the Company intends to litigate such allegations if a resolution cannot be agreed upon by all of the parties involved. It cannot be determined at this time whether the court will find the EMA Notes in default as alleged in the EMA compliant. In addition, the amount of any prejudgment cost, fees or penalties are not determinable at this time and have not been accrued for by the Company as of December 31, 2017. The Company has recorded the EMA Notes as a liability at its principal balance and continues to accrue interest at the stated rate of 12% per annum. The Company filed a Motion to Dismiss the Complaint based on the criminal usury defense under New York law on January 18, 2018. EMA filed a Motion for Summary Judgment on the Complaint on February 2, 2018. The Company cannot determine at this time whether the court will agree with the Company’s position; however, the Company intends to litigate such allegations if a resolution cannot be agreed upon by the Company and EMA. The actions are still pending. See Note 14. – Commitments and Contingencies. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of EMA Notes and to fair value as of each subsequent reporting date which at December 31, 2017 was $584,914 and $1,241,360 for the debt derivative and warrant liability, respectively. At the inception of the EMA Notes, the Company determined the aggregate fair value of $979,651 and $419,280 of the embedded debt derivatives and warrant liability, respectively. Summary: The Company has identified the embedded derivatives and warrant liability related to the Auctus and EMA promissory notes and related issued warrants. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of these notes and to fair value as of each subsequent reporting date which at December 31, 2017 was $1,087,504 and $2,482.719 for the debt derivative and warrant liability, respectively. The fair value of the embedded derivatives and warrant liability at issuance of the Auctus and EMA promissory notes, were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 234.00% to 245.43%, (3) weighted average risk-free interest rate of 1.07% to 1.92%, (4) expected lives of 1.00 to 5.00 years, and (5) estimated fair value of the Company’s common stock from $1.50 to $3.74 per share. The initial fair value of the embedded debt derivative and warrant liability in aggregate of $2,633,498 was allocated as a debt discount up to the proceeds of the notes ($470,500) with the remainder ($2,162,998) charged to current period operations as interest expense. For the three and nine months ended December 31, 2017, the Company amortized an aggregate of $130,816 and $362,041 of debt discounts to current period operations as interest expense, respectively. |