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Convertible Notes Payable

6 Months Ended

Jun. 30, 2018

Note 7 – Convertible Notes Payable

Convertible notes payable at June 30, 2018 and December 31, 2017 consist of the following:

	June 30,			December 31,
	2018			2017
Convertible notes payable to Power Up	$	—		$	80,000
Convertible notes payable to Bellridge Capital		1,500,000			—
Total convertible notes payable		1,500,000			80,000
Unamortized debt discount		(1,084,254	)		(54,377	)
Convertible notes payable	$	415,746		$	25,623

Power Up Lending Group Ltd.

On October 2, 2017, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd., an accredited investor (“Power Up”) pursuant to which the Company issued to Power Up a Convertible Promissory Note (the “Power Note”) in the aggregate principal amount of $80,000. The Power Note has a maturity date of July 10, 2018 and the Company has agreed to pay interest on the unpaid principal balance of the Power Note at the rate of ten percent (10%) per annum from the date on which the Power Note is issued (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company shall have the right to prepay the Power Note, provided it makes a payment to Power Up as set forth in the Power Note. The transactions described above closed on October 4, 2017.

The outstanding principal amount of the Power Note is convertible at any time and from time to time at the election of Power Up during the period beginning on the date that is 180 days following the Issue Date into shares of the Company’s common stock at a conversion price equal to 61% of the lowest trading price with a 15 day look back immediately preceding the date of conversion. In addition, upon the occurrence and during the continuation of an Event of Default (as defined in the Power Note), the Power Note shall become immediately due and payable and the Company shall pay to Power Up, in full satisfaction of its obligations hereunder, additional amounts as set forth in the Power Note.

In no event shall Power Up be allowed to effect a conversion if such conversion, along with all other shares of Company common stock beneficially owned by Power Up and its affiliates would exceed 4.9% of the outstanding shares of the common stock of the Company.

As of March 6, 2018, the Company has paid off in full all principal, interest and penalties with respect to the Power Up Note, and there are no further obligations owed with respect to such note.

Bellridge Capital LLC

On March 2, 2018, the Company entered into and closed a Securities Purchase Agreement with Bellridge Capital, LLC (“Bellridge”) pursuant to which Bellridge invested $750,000 into the Company in consideration of a 10% Convertible Debenture (the “Bellridge Debenture”) and common stock purchase warrants to acquire an aggregate of 500,000 shares of common stock exercisable for a period of five years at an exercise price of $2.35 per share. The Bellridge Debenture bears interest of 10% and is payable March 1, 2019. The Bellridge Debenture is convertible into shares of common stock at $0.90 per share subject to antidilution protection. During an event of default, the conversion price in effect on any conversion date means, as of any conversion date or other date of determination, shall be 35% of the lowest trading price for the Company’s common stock during the 20 trading Days immediately preceding the delivery of a notice of conversion. Bellridge has agreed to restrict its ability to convert the Bellridge Debenture or exercise its Common Stock Purchase Warrants and receive shares of common stock such that the number of shares of common stock held by it and its affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.

On March 2, 2018, the Company delivered 1,000,000 shares of Common Stock to an escrow agent. The 1,000,000 escrow shares are to be utilized for the purpose of limited price protection. If, beginning on the 7^th monthly anniversary of the issuance of the 1,000,000 escrow shares, Bellridge has sold shares issuable upon conversion of the Bellridge Debenture at a sales price of less than $1.10 per share, then that number of shares shall be released from escrow to Bellridge as a limited make whole using the following formula:

(($1.00 – closing price on 1 ^st day of each monthly anniversary beginning on the 1 ^st day of the 7 ^thmonth (and continuing monthly until all shares are sold) / closing price of the 1 ^st monthly day in question) * number of shares sold at a price less than $1.10.

As long as the Company is not in default of the Bellridge Debenture or in breach of the Securities Purchase Agreement, at any time during which Bellridge owns the Bellridge Debenture, Bellridge commits to limit in the aggregate all sales of the shares of common stock issued upon conversion of the Bellridge Debenture and the related Common Stock Purchase Warrant to the greater of not more than (i) 10.00% of the daily trading volume for the Company’s common stock as reported for that day or (ii) $35,000. Breach of this leak-out provision will be considered a material breach by Bellridge.

In connection with the Bellridge Debenture, the Company issued 500,000 warrants to purchase shares of the Company’s common stock with an exercise price of $2.35.

The Company first determined the value of the convertible note and the fair value of the detachable warrants issued in connection with this transaction. The estimated value of the warrants of $827,428 and was determined using the Black-Scholes option pricing model with the following assumptions:

●

Expected life of 5.0 years

●

Volatility of 210%;

●

Dividend yield of 0%;

●

Risk free interest rate of 2.65%

The face amount of the convertible note of $750,000 was proportionately allocated to the convertible note and the warrant in the amount of $356,593 and $393,407, respectively. The amount allocated to the warrants of $393,407 was recorded as a discount to the convertible note and as additional paid in capital. The value of the convertible note was then allocated between the convertible note and the beneficial conversion feature, which amounted to $0 and $356,593, respectively. The combined total discount is $750,000, and will be amortized over the year life of the convertible note.

On April 9, 2018, Bellridge elected to exercise the Bellridge Option, and as such the Company and Bellridge closed the second financing as contemplated by the Securities Purchase Agreement entered with Bellridge pursuant to which Bellridge invested an additional $750,000 into the Company in consideration of a 10% Convertible Debenture (the “Second Bellridge Debenture” and together with the First Bellridge Debenture, the “Bellridge Debenture”) and common stock purchase warrants to acquire an aggregate of 500,000 shares of common stock exercisable for a period of five years at an exercise price of $2.35 per share (the “Second Bellridge Warrant” and together with the First Bellridge Warrant, the “Bellridge Warrant”) The Bellridge Debenture bears interest of 10% and is payable one year from issuance. The First Bellridge Debenture and the Second Bellridge Debenture are convertible into shares of common stock at $0.90 per share and $1.00 per share, respectively, subject to limited antidilution protection.

During an event of default, the conversion price for the Bellridge Debenture in effect on any conversion date means, as of any conversion date or other date of determination, shall be 35% of the lowest trading price for the Company’s common stock during the 20 trading Days immediately preceding the delivery of a notice of conversion. Bellridge has agreed to restrict its ability to convert the Bellridge Debenture or exercise the Bellridge Warrant and receive shares of common stock such that the number of shares of common stock held by it and its affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.

In connection with both closings, the Company delivered 1,000,000 shares of common stock to an escrow agent. The escrow shares are to be utilized for the purpose of limited price protection. If, beginning on the 7 ^th monthly anniversary of the issuance of the escrow shares, Bellridge has sold shares issuable upon conversion of the Bellridge Debenture at a sales price of less than $1.10 per share, then that number of shares shall be released from escrow to Bellridge as a limited make whole using the following formula:

In connection with the Second Bellridge Debenture, the Company issued 500,000 warrants to purchase shares of the Company’s common stock with an exercise price of $2.35.

The Company first determined the value of the convertible note and the fair value of the detachable warrants issued in connection with this transaction. The estimated value of the warrants of $2,037,713 and was determined using the Black-Scholes option pricing model with the following assumptions:

●

Expected life of 5.0 years

●

Volatility of 210%;

●

Dividend yield of 0%;

●

Risk free interest rate of 2.60%

The face amount of the convertible note of $750,000 was proportionately allocated to the convertible note and the warrant in the amount of $548,222 and $201,778, respectively. The amount allocated to the warrants of $548,222 was recorded as a discount to the convertible note and as additional paid in capital. The value of the convertible note was then allocated between the convertible note and the beneficial conversion feature, which amounted to $0 and $201,778, respectively. The combined total discount is $750,000, and will be amortized over the year life of the convertible note.

Discounts on convertible notes

The Company recognized interest expense of $470,123 during the six months ended June 30, 2018 related to the amortization of the debt discount. The unamortized debt discount at June 30, 2018 is $1,084,254.

A roll-forward of the convertible note from December 31, 2017 to June 30, 2018 is below:

Convertible notes, December 31, 2017	$	25,623
Issued for cash		1,500,000
Repayment in cash		(80,000	)
Debt discount related to new convertible notes		(1,500,000	)
Amortization of debt discounts		470,123
Convertible notes, June 30, 2018	$	415,746