Annual report pursuant to Section 13 and 15(d)

CONVERTIBLE NOTES PAYABLE

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CONVERTIBLE NOTES PAYABLE
12 Months Ended
Dec. 31, 2018
Debt Disclosure [Abstract]  
CONVERTIBLE NOTES PAYABLE
8. CONVERTIBLE NOTES PAYABLE

 

In August and September 2016, the Company issued senior convertible debentures for an aggregate of $1,600,000 (the “Convertible Debentures”) in exchange for an aggregate net cash proceeds of $1,327,300, net of financing costs. The Convertible Debentures have a stated interest rate of 6% per annum payable quarterly beginning June 30, 2017 and were due two years from the date of issuance, the latest due September 15, 2018 and are convertible into shares of the Company’s common stock at the option of the holder at a conversion price of $0.075 with certain anti-dilutive (reset) provisions and are subject to forced conversion if either i) the volume weighted average common stock price for each of any 10 consecutive trading days equals or exceeds $0.50, or (ii) the Company’s elects to lists a class of securities on a national securities exchange.

 

As long as the convertible notes remain outstanding, the Company is restricted from incurring any indebtedness or liens, except as permitted (as defined), amend its charter in any matter that materially effects rights of noteholders, repay or repurchase more than de minimis number of shares of common stock other than conversion or warrant shares, repay or repurchase all or any portion of any indebtedness or pay cash dividends.

 

In connection with the issuance of the Convertible Debentures, the Company issued an aggregate of 16,000,000 warrants to purchase the Company’s common stock at $0.10 per share, expiring five years from the date of issuance, the latest being September 15, 2021. These warrants contain a cashless exercise and certain anti-dilutive (reset) provisions.

 

The Company determined that certain conversion/exercise option related to a convertible note and issued warrants did not have fixed settlement provisions and are deemed to be derivative financial instruments due to price protection features present in the conversion/ exercise price that are not consistent with a fixed for fixed model.

 

The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivative as of the issuance date of the debenture and warrants and to re-measure the derivatives at fair value as of each subsequent reporting date.

 

The Company recognized the value attributable to the conversion feature of the convertible debenture and issued warrants of $2,203,336 and together with financing costs of $272,700 (aggregate of $2,476,036) as a discount against the notes up to $1,600,000 with the excess of $876,036 charged to current period interest. The Company valued the conversion option and the warrants using the Binomial Lattice pricing model as described in Note 6. The debt discount was amortized over the note’s maturity period as interest expense.

 

On April 11, 2017, one investor converted his Convertible Debenture of $75,000 plus accrued interest of $2,873, into 1,038,301 shares of the Company’s common stock. Upon conversion, a loss on extinguishment was recorded in the amount of $51,267.

 

On July 14, 2017, one investor converted his Convertible Debenture of $50,000 plus accrued interest of $2,482, into 711,755 shares of the Company’s common stock. Upon conversion, a loss on extinguishment was recorded in the amount of $30,274.

 

In August 2018, two investors entered in agreements to extend the due date of convertible debentures held in the amount of $250,000 until August 31, 2019. One of the investors was issued warrants to acquire 375,000 shares of common stock for $0.075 per share. The warrants expire in five years. The fair value of the warrants on the date of issuance was $21,121 which is included in interest expense for the year ended December 31, 2018.

 

During 2018, 29 investors converted their Convertible Debentures totaling $1,225,000 plus accrued interest of $52,066, into 17,027,544 shares of the Company’s common stock. Upon conversion, a loss on extinguishment was recorded in the amount of $2,374.

 

For the year ended December 31, 2018 and 2017, the Company amortized $543,347 and $760,082, respectively, debt discount to operations as interest expense.

 

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

 

    2018     2017  
Principal balance   $ 250,000     $ 1,475,000  
Debt discount           (189,175 )
Deferred finance costs           (78,534 )
Outstanding, net of debt discount   $ 250,000     $ 1,207,291