Convertible Notes Payable
|3 Months Ended|
Mar. 31, 2020
|Debt Disclosure [Abstract]|
|CONVERTIBLE NOTES PAYABLE||
NOTE 6 – CONVERTIBLE NOTES PAYABLE
On September 6, 2019 and on December 9, 2019, the Company closed on Securities Purchase Agreements (the “SPAs”) with an accredited investor. Pursuant to the terms of the September 6, 2019 SPA, the Company issued and sold to this investor a convertible promissory note in the aggregate principal amount of $300,000 and a warrant to purchase up to 750,000 shares of the Company’s common stock. The Company received net proceeds of $267,250, net of original issue discount of $30,000 and origination fees of $2,750. The Note bears interest at 12% per annum and becomes due and payable on June 6, 2020. Pursuant to the terms of the December 9, 2019 SPA, the Company issued and sold to this investor a convertible promissory note in the aggregate principal amount of $130,000, and a warrant to purchase up to 300,000 shares of the Company’s common stock. The Company received net proceeds of $115,000, net of original issue discount of $15,000. These Notes bear interest at 12% per annum. The September 6, 2019 Note becomes due and payable on June 6, 2020 and the December 9, 2019 Note is due and payable on September 9, 2020.
On March 30, 2020, the Company closed on a Securities Purchase Agreement (the “March 2020 SPA”) with an accredited investor. Pursuant to the terms of the March 2020 SPA, the Company issued and sold to this investor a convertible promissory note in the aggregate principal amount of $57,750 and a warrant to purchase up to 144,375 shares of the Company’s common stock. The Company received net proceeds of $50,000, net of original issue discount of $5,000 and origination fees of $2,750. The Note bears interest at 12% per annum and becomes due and payable on December 30, 2020.
In accordance with these SPAs and these Notes, subject to the adjustments as defined in the respective SPA and Note, the conversion price (the “Conversion Price”) shall equal the lesser of: (i) the lowest Trading Price (as defined below) during the previous twenty-five Trading Day period ending on the latest complete Trading Day prior to the date of this Note, and (ii) the Variable Conversion Price (as defined below) (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company). The “Variable Conversion Price” shall mean 60% multiplied by the Market Price (as defined herein) (representing a discount rate of 40%). “Market Price” means the lowest Trading Price (as defined below) for the Company’s common stock during the twenty-five Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means, for any security as of any date, the lesser of: (i) the lowest trade price on the applicable trading market as reported by a reliable reporting service (“Reporting Service”) designated by the Holder or (ii) the closing bid price on the applicable trading market as reported by a Reporting Service designated by the Holder. The Company may prepay the Note at any time prior to its six-month anniversary, subject to pre-payment charges as detailed in the Note.
The SPAs and Notes contain customary representations, warranties and covenants, including certain restrictions on the Company’s ability to sell, lease or otherwise dispose of any significant portion of its assets. The Investor also has the right of first refusal with respect to any future equity (or debt with an equity component) offerings conducted by the Company until the 12-month anniversary of the Closing. The SPA and the Note also provide for certain events of default, including, among other things, payment defaults, breaches of representations and warranties, bankruptcy or insolvency proceedings, delinquency in periodic report filings with the Securities and Exchange Commission, and cross default with other agreements. Upon the occurrence of an event of default, this investor may declare the outstanding obligations due and payable at significant applicable default rates and take such other actions as set forth in the Notes.
The Warrants are exercisable at any time on or after the date of the issuance and entitles this investor to purchase shares of the Company’s common stock for a period of five years from the initial date the warrants become exercisable. Under the terms of the Warrants, the holder is entitled to exercise the Warrant to purchase up to an aggregate of 1,194,375 shares of the Company’s common stock at an initial exercise price of $0.10, subject to adjustment as detailed in the Warrants.
These Notes and related Warrants include a down-round provision under which the Notes conversion price and warrant exercise price could be affected on a full-ratchet basis by future equity offerings undertaken by the Company.
In connection with the issuance of the Notes, the Company determined that the terms of the Note contain terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of ASC 815-40 - Derivatives and Hedging – Contracts in an Entity’s Own Stock, the embedded conversion options contained in the convertible instruments were bifurcated and accounted for as derivative liability at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion option derivatives was determined using the Binomial valuation model. At the end of each period and on the date that debt is converted into common shares, the Company revalues the embedded conversion option derivative liabilities.
In connection with the issuance of the March 30, 2020 Note, during the three months ended March 31, 2020, on the initial measurement date, the fair values of the embedded conversion option derivative of $146,947 was recorded as a derivative liability and was allocated as a debt discount up to the net proceeds of the Note of $41,324, with the remainder of $105,623 charged to current period operations as initial derivative expense. At the end of the period, the Company revalued the embedded conversion option derivative liabilities and recorded a derivative expense of $273,297. In connection with the revaluation and the initial derivative expense, the Company recorded an aggregate derivative expense of $378,920 during the three months ended March 31, 2020.
In connection with the warrants issued in connection with the March 2020 Note, the Company determined that the terms of the warrant contain terms that are fixed monetary amounts at inception and, accordingly, the warrant was not considered a derivative. The fair value of the warrant was determined using the Binomial valuation model. In connection with the issuance of this warrant, on the initial measurement date, the relative fair value of the warrant of $8,676 was recorded as a debt discount and an increase in paid-in capital.
During the three months ended March 31, 2020, the fair value of the derivative liabilities and warrants was estimated using the Binomial valuation model with the following assumptions:
For the three months ended March 31, 2020 and 2019, interest expense related to convertible notes and warrants amounted to $156.236 and $34,547, including amortization of debt discount and debt premium charged to interest expense of $143,334 and $2,883, respectively.
The weighted average interest rate on the above notes and notes payable – related party (see note 7) during the three months ended March 31, 2020 and 2019 was 14.7% and 8.5%, respectively.
At March 31, 2020 and December 31, 2019, convertible notes consisted of the following:
The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef