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6. CONVERTIBLE DEBT

3 Months Ended

Mar. 31, 2017

On March 15, 2017, the Company closed a private placement transaction in which it issued to certain accredited investors unregistered senior callable convertible promissory notes (the “Notes”) and three-year warrants to purchase an aggregate of 883,332 shares of common stock at an exercise price of $0.69 per share in exchange for aggregate gross proceeds of $5,300,000. The Notes bear interest at a rate of 4% per annum and mature on August 31, 2018, unless earlier redeemed, repurchased or converted. The Notes rank senior to all of the Company’s unsecured debt. The Notes are convertible at the option of the holder into common stock at a conversion price of $0.54 per share. Subsequent to September 1, 2017, the Company may redeem the Notes at any time prior to maturity at a price equal to 100% of the outstanding principal amount of the Notes to be redeemed, plus accrued and unpaid interest as of the redemption date. Interest on the Notes is payable semi-annually in cash on February 28 and August 31 of each year, beginning on August 31, 2017. Interest expense related to the Notes for the three months ended March 31, 2017 was $14,133.

The warrants were valued at $57,728 using the Black-Scholes pricing model with the following assumptions: expected volatility: 111.54%; expected dividend: $0; expected term: 3 years; and risk free rate: 1.59%. The estimated fair value of the warrants was calculated using the Black-Scholes valuation model. The Company recorded the warrants’ relative fair value of $57,106 as an increase to additional paid-in capital and a discount against the related debt.

The debt discount is being amortized over the life of the Notes using the effective interest method. Amortization expense for the three months ended March 31, 2017 was $137.

Convertible notes consist of the following at March 31, 2017:

	March 31, 2017 (Unaudited)

Convertible notes	$	5,300,000
Initial discount		(57,106	)
Accumulated Amortization		137
Convertible notes, net	$	5,243,031