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Convertible Notes
 6 Months Ended
Sep. 30, 2013
Notes Payable Long Term and Convertible Notes [Abstract]  
CONVERTIBLE NOTES

NOTE 4 — CONVERTIBLE NOTES

 

At September 30, 2013 and March 31, 2013 convertible notes consisted of the following:

 

  

September 30,

2013

  March 31, 
2013		 
  (unaudited)    
Convertible notes payable $543,837  $- 
Unamortized debt discount  (37,400)  - 
Loss on default  250,669   - 
Total $757,106  $- 

 

Note issued on July 26, 2013:

 

On July 26, 2013, the Company entered into a securities purchase agreement (the " July 2013 Agreement") with an accredited investor (the "July 2013 Investor") pursuant to which the Investor purchased an 8% Convertible Debenture for an aggregate purchase price of $100,000 (the "July 2013 Debenture"). The July 2013 Debenture bears interest at a rate of 8% per annum and is payable upon any principal being converted on any voluntary conversion date (as to that principal amount then being converted) and the earlier of (i) July 26, 2014 or (ii) one (1) business day after the consummation of a Subsequent Financing (as defined and described in the July 2013 Agreement). The Company may pay interest due either in cash or, at its option, through an increase in the principal amount of the Debenture then outstanding by an amount equal to the interest then due and payable. The July 2013 Debenture will be convertible at the option of the Investor at any time into shares of the Company's common stock, par value $0.0001 per share (the "Common Stock") at a conversion price equal to sixty-five percent (65%) of the average of the lowest three closing bid prices of the Company's Common Stock for the ten trading days immediately prior to a voluntary conversion date, subject to adjustment.

In connection with the July 2013 Agreement, the July 2013 Investor received a warrant to purchase five hundred thousand (500,000) shares of Common Stock (the “July 2013 Warrant”). The July 2013 Warrant is exercisable for a period of three years from the date of issuance at exercise price of $0.04, subject to adjustment. The July 2013 Investor may exercise the July 2013 Warrant on a cashless basis at any time after the date of issuance. In the event the July 2013Investor exercises the July 2013 Warrant on a cashless basis the Company will not receive any proceeds.

 

Note issued on August 28, 2013:

 

On August 28, 2013, the Company issued an 8% convertible promissory note in the aggregate principal amount of $42,500 to an accredited investor. The note has a maturity date of May 30, 2014. The note is convertible into shares of our common stock at a conversion price of 55% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date. During the three and six months ended September 30, 2013, the Company recorded an interest expense of $307.

 

During the three and six months ended September 30, 2013, the Company amortized debt discount of $5,100 to current period operations as an expense.

 

Notes issued on September 10, 2013:

 

On September 10, 2013 (the “Effective Date”), the Company entered into securities purchase agreements (collectively, the “September 2013Agreement”) with accredited investors (collectively, the “September 2013 Investors”) pursuant to which the September 2013 Investors purchased 12% Senior Convertible Debentures for aggregate gross proceeds of $501,337, which consisted of $400,000 of cash and the exchange and cancellation of an 8% convertible debenture (bearing principal and interest totaling $101,337 (collectively, the “September 2013 Debentures”). The September 2013 Debentures bears interest at a rate of 12% per annum and their principal amounts are due on September 10, 2014. The September 2013 Debentures are payable upon any principal being converted on any voluntary conversion date (as to that principal amount then being converted). The Company may pay interest due either in cash or, at its option, through an increase in the principal amount of the September 2013 Debentures then outstanding by an amount equal to the interest then due and payable. The September 2013 Debenture will be convertible at the option of the Investor at any time into shares of the Company’s Common Stock at a conversion price equal to (i) $0.02, on any conversion date through the date that is one hundred eighty (180) days from the Effective Date, subject to adjustment (the “Initial Conversion Price”) and (ii) beginning one hundred eighty one (181) days after the Effective Date, it shall be equal to the lower of (A) the Initial Conversion Price or (B) 65% of the average of the lowest three closing bid prices of the Common Stock for the ten trading days immediately prior to a conversion date, subject to adjustment.

 

In connection with the September 2013 Agreement, the September 2013 Investors collectively received warrants to purchase up to an aggregate of twenty-five million sixty-six thousand eight hundred fifty (25,066,850) shares of Common Stock (collectively, the “September 2013 Warrants”). The September 2013 Warrants are exercisable for a period of three years from the date of issuance at exercise price of $0.05, subject to adjustment. The September 2013 Investors may exercise the September 2013 Warrants on a cashless basis at any time after the date of issuance. In the event the September 2013 Investors exercise the September 2013 Warrant on a cashless basis we will not receive any proceeds.

 

In connection with the above $501,337 Senior Convertible Debentures, the Company made certain statements or omissions, in the transaction documents, that were incorrect as of the date made. Such statements or omissions resulted in an event of default under the terms of the transaction documents and 12% Debentures. Upon such event of default: (i) the principal and accrued interest balance on the 12% Debentures increased to 150%, (ii) the interest rate increased to 18% (commencing 5 days after the event of default), and (iii) the amounts due under the 12% Debentures were accelerated and became immediately due and payable. Accordingly, the Company charged to operations loss on default of convertible note of $250,669 during the three and six months ended September 30, 2013 and increased the principal amount of convertible debenture to $752,006. During the three and six months ended September 30, 2013, the Company recorded an interest expense of $17,759.

 

Derivative Instruments:

 

Note issued on July 26, 2013:

 

The Company identified embedded derivatives related to the July 2013 Debenture entered into on July 26, 2013.  These embedded derivatives included certain conversion features. At the inception of the July 2013 Debenture, the Company determined a fair value of $155,502 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 0.11%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 288%; and (4) an expected life of 1 year. 

 

The initial fair value of the embedded debt derivative of $155,502 was allocated as a debt discount up to the proceeds of the note ($100,000) with the remainder ($55,502) charged to operations during the six months ended September 30, 2013 as interest expense.

 

On September 10, 2013, the Company cancelled this note of $100,000 along with accrued interest on it of $1,337 and issued new convertible note of $101,337 with fixed conversion price of $0.02 per share as described below under “Notes issued on September 10, 2013”. Also, the Company cancelled the warrants issued along with the note. Accordingly, the Company extinguished derivative liability on this note and transfer the balance of $155,502 to additional paid in capital and charged to operations debt discount of $100,000 during the three and six months ended September 30, 2013.

 

Note issued on August 28, 2013:

 

The Company identified embedded derivatives related to the convertible promissory notes entered into on August 28, 2013.  These embedded derivatives included certain conversion features.  At the inception of the convertible promissory note, the Company determined a fair value of $69,488 of the embedded derivative.  The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 0.11%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 280%; and (4) an expected life of 0.75 year. 

 

The initial fair value of the embedded debt derivative of $69,488 was allocated as a debt discount up to the proceeds of the note ($42,500) with the remainder ($26,988) charged to operations as interest expense.

 

The fair value of the remaining embedded derivative was $49,995 at September 30, 2013, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.07%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 195%; and (4) an expected life of 0.67 year. 

 

During the three and six months ended September 30, 2013, the Company recorded $19,493 of income related to the change in the fair value of the derivative.

 

Notes issued on September 10, 2013:

 

The Company identified embedded derivatives related to the September 2013 Debentures, resulting from the price reset features of these instruments.  At the inception of the convertible promissory note, the Company determined a fair value of $1,086,647 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 0.122%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 195%; and (4) an expected life of 1 year. 

 

The initial fair value of the embedded debt derivative of $1,086,647 was allocated as a debt discount up to the proceeds of the note ($501,337) with the remainder ($585,310) charged to operations as interest expense.

 

During the three and six months ended September 30, 2013, the Company recorded $119,111 of income related to the change in the fair value of the derivative.

 

The fair value of the remaining embedded derivative was $967,536 at September 30, 2013, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.162%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 204%; and (4) an expected life of 0.938 year. 

 

Debt Warrants issued on September 10, 2013:

 

The Company issued 25,066,850 warrants in conjunction with debt incurred in September 2013. The warrants had an initial exercise price of $0.05 per shares and a term of three years. The Company identified embedded derivatives related to these 25,066,850 September 2013 Warrants, resulting from the price reset features of these instruments. As a result, we have classified these instruments as derivative liabilities in the financial statements. At issue, we have recorded a warrant liability of $796,471, with a corresponding charge to interest expense. The value of the warrant liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 171%; and (4) an expected life of 3 years.

 

During the three and six months ended September 30, 2013, the Company recorded $82,718 of income related to the change in the fair value of the derivative.

 

The fair value of the embedded derivative was $713,753 at September 30, 2013, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.625%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 174%; and (4) an expected life of 2.938 years. 

 

Compensation Warrants issued on September 10, 2013:

 

During September 2013 the Company granted 2,506,685 warrants as compensation for consulting services. The warrants had an initial exercise price of $0.05 per shares and a term of three years. The Company identified embedded derivatives related to these 2,506,685 September 2013 Compensation Warrants, resulting from the price reset features of these instruments. As a result, we have classified these instruments as derivative liabilities in the financial statements. At issue, we have recorded a warrant liability of $79,647, with a corresponding charge to consulting fees. The value of the warrant liability was determined using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 0.875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 171%; and (4) an expected life of 3 years.

 

During the three and six months ended September 30, 2013, the Company recorded $8,272 of income related to the change in the fair value of the derivative.

 

The fair value of the embedded derivative was $71,375 at September 30, 2013, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.625%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 174%; and (4) an expected life of 2.938 years.