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Convertible Notes Payable

3 Months Ended

Mar. 31, 2019

Note 6 – Convertible Notes Payable

Convertible notes payable at March 31, 2019 and December 31, 2018 consist of the following:

	March 31,			December 31,
	2019			2018
Convertible notes payable to Power Up	$	427,200		$	427,200
Convertible notes payable to Discover Growth Fund		5,410,000			3,004,000
Total convertible notes payable		5,837,200			3,431,200
Unamortized debt discount		(5,064,946	)		(3,233,124	)
Convertible notes payable	$	772,254		$	198,076

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 No. 1”) in the aggregate principal amount of $80,000. The Power Note No. 1 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 No. 1 at the rate of ten percent (10%) per annum from the date on which the Power Note No. 1 is issued 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 that it makes a payment to Power Up as set forth in the Power Note No. 1.

The outstanding principal amount of the Power Note No. 1 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 No. 1 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 No. 1.

Due to the variable conversion price associated with the Power Note No. 1, the Company has determined that the conversion feature is considered a derivative liability. The embedded conversion feature was initially calculated to be $172,282, which is recorded as a derivative liability as of the date of issuance. The derivative liability was first recorded as a debt discount up to the face amount of the Power Note No. 1, with the remainder being charged to financing cost during the period. The debt discount is being amortized over the terms of the Power Note No. 1.

As of March 6, 2018, the Company has paid off in full all principal, interest and penalties with respect to the Power Note No. 1, and there are no further obligations owed with respect to such note.

On September 28, 2018, the Company entered into a Securities Purchase Agreement with Power Up pursuant to which the Company issued to Power Up a Convertible Promissory Note (the “Power Note No. 2”) in the aggregate principal amount of $243,600 for a purchase price of $203,000. The Power Note No. 2 has a maturity date of December 24, 2019 and the Company has agreed to pay interest on the unpaid principal balance of the Power Note No. 2 at the rate of six percent (6%) per annum from the date on which the Power Note No. 2 is issued 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 No. 2, provided it makes a payment to Power Up as set forth in the Power Note No. 2.

The outstanding principal amount of the Power Note No. 2 may not be converted prior to the period beginning on the date that is 180 days following the issue date. Following the 180^th day, Power Up may convert the Power Note No. 2 into shares of the Company’s common stock at a conversion price equal to 85% 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 No. 2), the Power Note No. 2 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 No. 2.

Due to the variable conversion price associated with the Power Note No. 2, the Company has determined that the conversion feature is considered a derivative liability. The embedded conversion feature was initially calculated to be $337,669, which is recorded as a derivative liability as of the date of issuance. The derivative liability was first recorded as a debt discount up to the face amount of the Power Note No. 2, with the remainder being charged to financing cost during the period. The debt discount is being amortized over the terms of the Power Note No. 2.

At March 31, 2019 and December 31, 2018, the principal amount outstanding under the Power Note No. 2 was $243,600.

On November 6, 2018, the Company entered into a Securities Purchase Agreement with Power Up pursuant to which the Company issued to Power Up a Convertible Promissory Note (the “Power Note No. 3”) in the aggregate principal amount of $183,600 for a purchase price of $153,000. The Power Note No. 3 has a maturity date of February 6, 2020 and the Company has agreed to pay interest on the unpaid principal balance of the Power Note No. 3 at the rate of six percent (6%) per annum from the date on which the Power Note No. 3 is issued 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 No. 3, provided it makes a payment to Power Up as set forth in the Power Note No. 3.

The outstanding principal amount of the Power Note No. 3 may not be converted prior to the period beginning on the date that is 180 days following the issue date. Following the 180^th day, Power Up may convert the Power Note No. 3 into shares of the Company’s common stock at a conversion price equal to 85% 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 No. 3), the Power Note No. 3 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 No.3.

Due to the variable conversion price associated with the Power Note No. 3, the Company has determined that the conversion feature is considered a derivative liability. The embedded conversion feature was initially calculated to be $171,942, which is recorded as a derivative liability as of the date of issuance. The derivative liability was first recorded as a debt discount up to the face amount of the Power Note No. 3, with the remainder being charged to financing cost during the period. The debt discount is being amortized over the terms of the Power Note No. 3.

At March 31, 2019 and December 31, 2018, the principal amount outstanding under the Power Note No. 2 was $183,600.

$8,340,000 Senior Secured Redeemable Convertible Debenture

On December 3, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with an otherwise unaffiliated third-party institutional investor, pursuant to which the Company issued a Senior Secured Redeemable Convertible Debenture (the “Debenture”) in the aggregate face value of $8,340,000. The Debenture has a maturity date two years from the issuance date and the Company has agreed to pay compounded interest on the unpaid principal balance of the Debenture at the rate equal to the Wall Street Journal Prime Rate plus 2% per annum (Wall Street Journal Prime Rate plus 12% per annum upon the occurrence of a Triggering Event). Interest is payable on the date the applicable principal is converted or on maturity. The interest must be paid in cash and, in certain circumstances, may be paid in shares of common stock. In connection with the issuance of the Debenture and pursuant to the terms of the SPA, the Company issued a Common Stock Purchase Warrant to acquire up to 22,500,000 shares of common stock for a term of three years (the “Warrant”) on a cash-only basis at an exercise price of $1.00 per share with respect to 5,000,000 Warrant Shares, $0.75 with respect to 7,500,000 Warrant Shares and $0.50 with respect to 10,000,000 Warrant Shares. Pursuant to the terms of the SPA, the investor agreed to tender to the Company the sum of $7,500,000, of which the Company received the sum of $4,500,000 as of the closing, $1,000,000 on January 4, 2019, $1,000,000 on February 5, 2019 and $1,000,000 on March 5, 2019. As of the closing, the face value of the Debenture was $5,004,000.00; as of the first month’s anniversary of the closing, the face value of the Debenture increased to $6,116,000.00; as of the second month’s anniversary of the closing, the face value of the Debenture increased to $7,228,000.00; and as of the third month’s anniversary of the closing, the face value of the Debenture increased to $8,340,000.00. As of the closing, the number of Warrant Shares was 13,500,000; as of the first month’s anniversary of the closing, the number of Warrant Shares increased to 16,500,000; as of the second month’s anniversary of the closing, the number of Warrant Shares increased to 19,500,000; as of the third month’s anniversary of the closing, the number of Warrant Shares increased to 22,500,000. As of March 31, 2019, the Company had issued a Debenture for $8,340,000 and had issued 22,500,000 Warrant Shares.

The outstanding principal amount may be converted at any time into shares of the Company’s common stock at a conversion price equal to 95% of the Market Price less $0.05 (The conversion price is lowered by 10% upon the occurrence of each Triggering Event – the current conversion price is 75% of the Market Price less $0.05). The Market Price is the average of the 5 lowest individual daily volume weighted average prices during the period the Debenture is outstanding.

In connection with the Debenture, the Company issued 22,500,000 warrants to purchase shares of the Company’s common stock with an exercise prices ranging from $0.50 to $1.00. 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 $7,832,697 and was determined using the Black-Scholes option pricing model with the following assumptions:

Expected life of 3.0 years

Volatility of 190%;

Dividend yield of 0%;

Risk free interest rate of 2.47% to 2.84%

The face amount of the convertible note of $8,340,000 was proportionately allocated to the convertible note and the warrant in the amount of $4,310,085 and $4,029,915, respectively. The amount allocated to the warrants of $4,029,915 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. Due to the variable conversion price associated with the Debenture, the Company has determined that the conversion feature is considered derivative liabilities. The embedded conversion feature was initially calculated to be $11,212,573, which is recorded as a derivative liability as of the dates of issuance. The derivative liability was first recorded as a debt discount up to value allocated to the convertible note, with the remainder being charged to financing cost during the period. The combined total discount is $8,340,000 and will be amortized over the year life of the convertible note.

In December 2018, the investor converted $2,000,000 in principal and $6,616 in accrued interest into 9,499,271 shares of common stock. In January 2019, the investor converted $350,000 in principal and $1,158 in accrued interest into 1,662,372 shares of common stock. In March 2019, the investor converted $580,000 in principal and $51,096 in accrued interest into 3,496,278 shares of common stock.

At March 31, 2019 and December 31, 2018, the principal amount outstanding under the Debenture was $5,410,000 and $3,004,000, respectively.

Discounts on convertible notes

The Company recognized interest expense of $1,504,178 and $114,130 during the three months ended March 31, 2019 and 2018, respectively, related to the amortization of the debt discount. The unamortized debt discount at March 31, 2019 was $5,064,946.

A roll-forward of the convertible note from December 31, 2018 to March 31, 2019 is below:

Convertible notes, December 31, 2018	$	198,076
Issued for cash		3,000,000
Original issue discount		336,000
Conversion to common stock		(930,000	)
Debt discount related to new convertible notes		(3,336,000	)
Amortization of debt discounts		1,504,178
Convertible notes, March 31, 2019	$	772,254