7. Convertible Notes Payable

Convertible notes payable consist of the following:

	For The Years Ended March 31,
	2016		2015
9% Senior Subordinated Convertible Notes due February 15, 2016, net of debt discount of $0 (March 31, 2016) and $62,682 (March 31, 2015)	$	-	$	1,037,818

8% Convertible Note Payable to NNA due March 28, 2019, net of debt discount of $0 (March 31, 2016) and $985,255 (March 31, 2015)		-		1,014,745

Conversion feature liability		-		442,358

		-		2,494,921
Less current portion		-		(1,037,818)

Noncurrent	$	-	$	1,457,103

9% Senior Subordinated Convertible Notes due February 15, 2016

The 9% Notes, issued January 31, 2013, bore interest at a rate of 9% per annum, were payable semi-annually on August 15 and February 15, and matured February 15, 2016, and were subordinated. The principal of the 9% Notes, plus any accrued yet unpaid interest, was convertible, at any time by the holder at a conversion price of $4.00 per share, subject to adjustment for stock splits, stock dividends and reverse stock splits, into shares of the Company’s common stock. On 60 days’ prior notice, the 9% Notes were callable in full or in part by the Company at any time after January 31, 2015. If the Average Daily Value of Trades (“ADVT”) during the prior 90 days as reported by Bloomberg is greater than $100,000, the 9% Notes were callable at a price of 105% of the 9% Notes’ par value, and if the ADVT is less than $100,000, the 9% Notes were callable at a price of 110% of the 9% Notes’ par value.

In connection with the issuance of the 9% Notes in 2013, the holders of the 9% Notes received warrants to purchase 82,500 shares of the Company’s common stock at an exercise price of $4.50 per share, subject to adjustment for stock splits, reverse stock splits and stock dividends, which warrants are exercisable at any date prior to January 31, 2018, and were classified in equity. The $186,897 fair value of these 9% Notes warrants was based on the Company’s closing stock price at the transaction date and inputs to the Black-Scholes option pricing model: term of 5.0 years, risk free rate of 0.70%, and volatility of 36.7%.

Certain holders of the 9% Notes converted an aggregate of approximately $554,000 of outstanding principal and accrued interest into 138,463 shares of the Company’s common stock. Prior to conversion, the Company amortized approximately $14,000 of related debt discount and deferred financing costs in fiscal 2016.

8% Convertible Note Payable to NNA

The NNA 8% Convertible Note commitment provided for the Company to borrow up to $2,000,000. On July 31, 2014, the Company exercised its option to borrow $2,000,000, received $2,000,000 of proceeds and recorded a debt discount of $1,065,775 related to the fair value of a conversion feature liability and a warrant liability discussed below. The conversion price was also subject to adjustment in the event of subsequent down-round equity financings, if any, by the Company. The conversion feature included a non-standard anti-dilution feature that has been bifurcated and recorded as a conversion feature liability at the issuance date of $578,155.

On November 17, 2015, the Company entered into the Conversion Agreement with NNA, Warren Hosseinion and Adrian Vazquez. Pursuant to the Conversion Agreement, the Company agreed to issue 275,000 shares of the Company’s Common Stock and to pay accrued and unpaid interest of $47,112, to NNA in full satisfaction of NNA’s conversion and other rights under the 8% Convertible Note dated March 28, 2014, issued by NNA, in the principal amount of $2,000,000. Pursuant to the Conversion Agreement, the Company also agreed to issue a total of 325,000 shares of the Company’s Common Stock to NNA in exchange for all Warrants held by NNA, under which NNA had the right to purchase 300,000 shares of the Company’s Common Stock at an exercise price of $10 per share and 200,000 shares at an exercise price of $20 per share, in each case subject to anti-dilution adjustments.

On the date of conversion, the fair value of the 600,000 shares of common stock was based on the market price of the stock of $6.00 per share, less a 15% discount for marketability or $3,060,000 at $5.10 per share. The fair value of all the existing warrants held by NNA and of the conversion feature liability, converted in exchange for the 600,000 shares of common stock, was $1,624,029 and $482,904, respectively. These amounts together with the carrying amount of the 8% convertible note and accrued interest of approximately $1,124,000 resulted in a gain of approximately $171,000 which is included as an off-set in the net loss on debt extinguishment of approximately $266,000 in the consolidated statements of operations.

Interest expense associated with the convertible notes payable consisted of the following:

	For The Years Ended March 31,
	2016		2015
Interest expense	$	171,027	$	209,369
Amortization of loan fees and discount		188,627		233,918

	$	359,654	$	443,287