Quarterly report pursuant to Section 13 or 15(d)

CONVERTIBLE NOTES PAYABLE

v3.20.2
CONVERTIBLE NOTES PAYABLE
6 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
CONVERTIBLE NOTES PAYABLE

The Company’s convertible notes, net of debt discount, consisted of the following as of June 30, 2020 and December 31, 2019: 

 

 

 
June 30, 2020 (Unaudited)

 

 

December 31, 2019

 

 

Convertible Notes in the aggregate amount of $100,000, issued on March 22, 2018. The Notes bear interest at a rate of 5% per annum and will mature on February 1, 2023. If a qualified financing from which at least $5 million of gross proceeds are raised occurs prior to the maturity date, then the outstanding principal balance of the notes, together with all accrued and unpaid interest thereon, shall be automatically converted into a number of shares of the Company’s Common Stock at $0.40 per Share. The Notes offer registration rights wherein the Company agrees that within 45 days of a Qualified Offering, prior to the Maturity Date, the Company shall file a registration statement with the SEC registering for resale of the shares of Company’s Common Stock into which the Notes are convertible. The Company shall send a written conversion notice to the lender pursuant to the note agreement during fiscal 2020 and as such the principal balance of the convertible note remains outstanding as of June 30, 2020 and December 31, 2019. The Company reclassed the principal balance to current portion as of June 30, 2020.

 

 

 

 

 

$100,000

 

 

 

 

 

 

$100,000

 

 

Convertible Note in the amount of $833,333, issued on November 27, 2019. The Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with a single institutional investor (the “Purchaser”), pursuant to which the Company agreed to sell to Purchaser in a series of 3 closings up to $1,944,444 in aggregate principal amount of the Company’s senior secured convertible promissory notes (the “Notes”) and warrants to purchase shares of the Company’s Common Stock (the “Warrants”). On November 27, 2019 (the “Initial Closing Date”), the Company issued a Note in the principal amount of $833,333, and a two-year Warrant to purchase 275,612 shares of Common Stock at an exercise price of $0.756 per share (see Note 10). The Notes will be issued at a 10% original issue discount and bear an interest rate of 8%. The Notes mature one year after their issuance unless accelerated due to an event of default. The Notes are redeemable, in whole or in part, at any time at the discretion of the Company. At the Initial Closing Date, the Company received net proceeds, after the original issue discount and the Purchaser’s counsel fees, of $730,000. Each note is convertible at the option of the note holder at any time into shares of our common stock at the fixed conversion rate of $0.50 per share. However, the conversion rate is subject to adjustment in the event of default, redemption and upon the occurrence of certain events affecting stockholders generally, such as stock splits and recapitalizations. The Company must pay amortization redemption payments equaling one-ninth of the original principal amount due on each note commencing 90 days after issuance and continuing during the following eight months (each an “Amortization Redemption”). The note holder may at its option accelerate up to six future amortization redemption payments, in which case the note holder may demand the accelerated amortization amounts be paid in shares of the Company’s common stock at the lesser of i) the fixed conversion rate of $0.50 per share of common stock, or (ii) the rate equal to 80% of the lowest volume weighted average price, or VWAP, during the 10 trading days immediately before the applicable date of the amortization redemption payment (“Amortization Conversion Rate”). Amortization redemption payment amount is equivalent to 110% of the sum of (i) one-ninth (1/9th) of the Original Principal Amount of this Note, (ii) 100% of all accrued and unpaid interest on the principal amount of this Note that is subject to such Amortization Redemption, (iii) 100% of the Make-Whole Amount payable in respect of the principal amount of this Note that is subject to such Amortization Redemption (as applicable), and (iv) all liquidated damages, costs of collection and other amounts payable in respect of this Note as of the applicable amortization redemption payment Date for such Amortization Redemption. If the Company fails to make a redemption payment, the note holder may demand the amortization amounts be paid in shares of the Company’s common stock at the lesser of fixed conversion rate of $0.50 per share of common stock or the Amortization Conversion Rate. In addition, in the event of a subsequent issuance of the Company’s common stock or debt, the Company is subject to mandatory redemption provisions as defined in the note agreement. The Company may not issue shares of the Company’s common stock to third parties at a price lower than the fixed conversion rate of $0.50 per share of common stock without the consent of the note holder. At this time, the Company is delinquent in its payments under the initial convertible note, with the May 1, 2020, April 1, 2020, and a portion of the February 25, 2020 payments currently in arrears. The Company intends to make these payments and the upcoming monthly payments with receipts from product sales and/or the proceeds of additional equity funding. The Company paid original issuance cost of $83,333, cash commission and loan fees of $92,055, and recorded redemption premium of $88,889 related to the amortization redemption payment in connection with this note payable and are being amortized over the term of the note. On the Initial Closing Date, certain FINRA broker-dealers who acted on behalf of the Company were paid aggregate cash commissions of approximately $72,055 and were granted a four-year warrant to acquire an aggregate of 84,187 shares of Common Stock at an exercise price of $0.792 per share of common stock at any time before the close of business four years after their issuance, subject to adjustment in the event of stock dividends, splits, fundamental transactions, or other changes in our capital structure.

 

 

475,979

 

 

 

85,906

 

 

Carrying Amount of Convertible Debt, net of debt discount

 

 

$575,979

 

 

 

$185,906

 

Less: Current Portion, net of debt discount

 

(575,979)

 

 

(85,906)

 

Convertible Notes, Long Term

 

$ -

 

 

$100,000

 

  

The following is a summary of the carrying amounts of convertible notes as of June 30, 2020 and December 31, 2019:

    June 30, 2020 (Unaudited)     December 31, 2019  
Principal Amount   $ 933,333     $ 933,333  
Add: amortization of redemption premium     63,902       8,280  
Less: principal payments and conversions     (187,000)       -  
Less: unamortized debt discount and debt issuance costs     (234,256)       (755,707
Total convertible debt less unamortized debt discount and debt issuance costs   $ 575,979     $ 185,906  

 

Conversion of Notes

 

On May 27, 2020, the Company issued 247,588 shares of its common stock at a contractual conversion price of $0.13, as a result of the conversion of principal of $30,000 and interest of $2,400 of the convertible note.

 

On June 10, 2020, the Company issued 564,000 shares of its common stock at a contractual conversion price of $0.09, as a result of the conversion of principal of $47,000 and interest of $3,760 of the convertible note.

 

Notice of Delinquent Payment

 

At this time, the Company is delinquent in its payments under the initial convertible note executed on November 27, 2019 (see Note 9), with the May 1, 2020 and April 1, 2020 payments currently in arrears. The Company intends to make these payments and the upcoming monthly payments with receipts from product sales and/or the proceeds of additional equity funding. On May 20, 2020, the Company entered into a Forbearance Agreement with the investor (the “Holder”) regarding the initial convertible note. Under the Forbearance Agreement, the investor has agreed to forebear from exercising any default-related rights and remedies subject to the following conditions and material terms:

 

The Company has paid the Holder $60,000 in cash before July 1, 2020. Additional monthly payments required under the Amortization Schedule for the note shall continue to be due on or before the first day of each calendar month thereafter, commencing with the $110,000 payment originally due April 1, 2020 now due on or before August 1, 2020, and the subsequent monthly payments listed on the Amortization Schedule to be paid monthly in the sequence listed. Interest shall continue to accrue on the principal balance of the Note at the rate(s) stated therein, with all additional accrued interest resulting from this extension of payment deadlines to be paid as part of the last monthly payment. The Company paid the $110,000 on August 1, 2020.
   
The payments that are in arrears from February, April and May can be paid in whole or in part at any time at the sole election of the Holder in shares of common stock at the Amortization Conversion Price (defined as 80% of the lowest volume weighted average price, or VWAP, during the 10 trading days immediately before the applicable date of the amortization redemption payment).
     

 

Unless or until a default under the Forbearance Agreement occurs, the fixed conversion price under the note will remain $0.50 per share, and the note shall continue to bear interest at the non-default rate of 8% per annum.

 

Unless or until a default under the Forbearance Agreement occurs, the contractual limit on issuances of shares to issue shares of common stock or options to employees, officers, directors, consultants, advisors or contractors will be increased from 5% to 10% or our issued an outstanding common stock.

 

The Company has issued the Holder 500,000 shares of the Company’s common stock in consideration for the forbearance.

 

Derivative Liabilities Pursuant to Securities Purchase Agreement

 

In connection with the issuance of notes during fiscal 2019, on the initial measurement date of the notes, the fair values of the embedded conversion option of $1,457,290 was recorded as derivative liabilities of which $786,823 was charged to current period operations as initial derivative expense and $670,467 was recorded as a debt discount which was amortized into interest expense over the term of the note.

 

The Company recognized change in fair value of derivative liabilities of $249,982 and $356,468 during the three and six months ended June 30, 2020, respectively. Upon conversions during the six months ended June 30, 2020, the derivative liability was marked to fair value at the conversion, and then a related fair value amount of $55,555 relating to the portion of debt converted was reclassified to other income as part of gain on debt extinguishment. Additionally, the Company recorded loss on debt extinguishment of $16,413, in connection with the conversions (see Note 10) during the six months ended June 30, 2020 resulting in a net gain on extinguishment of debt of $39,142 during the six months ended June 30, 2020, as reflected in the accompanying unaudited condensed consolidated statements of operations.

 

The Company recognized gain on extinguishment of debt due to repayment and conversions of notes into shares of common and preferred stock of $3,007,629 and change in fair value of derivative liabilities of $896,000 during the six months ended June 30, 2019. The Company determined that the conversion options embedded in the convertible notes require liability presentation at fair value. Each of these instruments provide the holder with the right to convert into Common Stock at a fixed discount market, with certain notes subject to a cap on the conversion price. These clauses cause uncertainty as to the number of shares issuable upon conversion of convertible debt and accordingly require liability presentation on the balance sheet in accordance with US GAAP. For the six months ended June 30, 2020 and 2019, the Company measured the fair value of the embedded derivatives using a binomial model and Monte Carlo simulations, and the following assumptions:

 

 

June 30, 2020

(Unaudited)

    December 31, 2019
Expected Volatility 228.22 to 230.26%     376.76% to 567.11%
Expected Term 0.41 to 0.66 Years     0.25 to 1.0 Years
Risk Free Rate 0.15% to 0.18%     2.41% to 2.54%
Dividend Rate 0.00%     0.00%

 

During the six months ended June 30, 2020 and 2019, the Company recognized $34,431 and $25,780, respectively, of interest expense. During the three months ended June 30, 2020 and 2019, the Company recognized $16,555 and $1,246, respectively, of interest expense. During the six months ended June 30, 2020 and 2019, the Company amortized debt discount of $579,115 and $339,806, respectively, of interest expense. During the three months ended June 30, 2020 and 2019, the Company amortized debt discount of $312,807 and $0, respectively, of interest expense.

 

As of June 30, 2020 and December 31, 2019, the notes had accrued interest balances of $32,559 and $15,399, respectively.