Quarterly report pursuant to Section 13 or 15(d)

4. Convertible Notes Payable

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4. Convertible Notes Payable
6 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
Convertible Notes Payable

NOTE 4 – CONVERTIBLE NOTES PAYABLE

 

On March 29, 2019, the Company entered into an unsecured convertible promissory note which allowed for up to $750,000 of principal, with a total original issue discount of up to $150,000, with a principal amount of $250,000. In April 2019, the Company received net cash proceeds of $200,000 after an original issue discount of $50,000. In July 2019, the Company received additional proceeds of $200,000 after an original issue discount of $50,000, and received an additional $200,000 of net proceeds after $50,000 original issue discount in August 2019. The convertible note bears interest at 8% and all principal amounts matured on September 30, 2019, with interest accruing at a rate of 22% if the Company is in default. Beginning at the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is the lesser of $2 or 70% of the lowest trading price during the 30 trading days prior to the conversion date. During the year ended December 31, 2019, the lender converted $50,000 of principal into 714,296 shares of common stock in accordance with the terms of the agreement. During the six months ended June 30, 2020, the lender converted $161,102 of principal into 22,782,707 shares of common stock. The conversions were in accordance with the terms of the note and no gain or loss was recognized.

 

On March 13, 2020, the lender provided the Company with notice of default of the convertible promissory note. In accordance with the terms of the agreement, an additional $349,534 of principal became due and payable, and the Company began accruing interest expense at the default rate of 22%. The additional principal was recorded as debt discount and amortized to interest expense immediately. As of June 30, 2020, there is $888,432 of principal outstanding on this convertible promissory note in default.

 

On September 6, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $153,000. The Company received net cash proceeds of $150,000 after payment of fees of $3,000. The convertible note bears interest at 10% and matures on September 6, 2021, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 65% of the lowest trading price during the 15 trading days prior to the conversion date. The Company determined that the conversion features should be accounted for as a derivative liability at the time the notes became convertible. During the six months ended June 30, 2020, the holder converted $153,000 of principal and $7,650 of accrued interest into 20,101,064 shares of common stock. These conversions were in accordance with the terms of the note and no gain or loss was recognized. There is not outstanding balance on this convertible note payable.

 

On November 25, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $78,000. The Company received net cash proceeds of $75,000 after payment of fees of $3,000. The convertible note bears interest at 10% and matures on November 25, 2021, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 65% of the lowest trading price during the 15 trading days prior to the conversion date. On April 29, 2020, the Company received a notice of default from the holder of the September 6, 2019 convertible note payable, the November 25, 2019 convertible note payable with $78,000 of principal and the February 7, 2020 convertible note payable, as a result of insufficient shares authorized to settle conversion of these notes payable. As a result of the default notice, each of these notes became due and payable immediately, interest is accrued at the default rate of 22%, and the principal balance outstanding at the time of default is doubled. The September 2019 note increase in principal by $61,100 as a result of this default. During the six months ended June 30, 2020 the lender converted the $139,100 of principal and $3,900 of accrued interest into 22,024,952 shares of common stock. These conversions were in accordance with the terms of the note and no gain or loss was recognized. There is no outstanding balance on this convertible note payable.

 

On November 25, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $150,000. The Company received net cash proceeds of $131,000 after an original issue discount of $15,000 and fees of $4,000. The convertible note bears interest at 5% and matures on November 25, 2020, with interest accruing at a rate of 15% if the Company is in default. The note is convertible upon issuance through the maturity date into shares of common stock at a fixed price of $1.00 per share to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. Beginning six months after the issuance of the note, the holder may convert the note at any time, at a price based on the lower of the fixed price of $1.00 per share or 75% of the lowest trading price during the 15 trading days prior to the conversion date. During the six months ended June 30, 2020 the lender converted the $89,966 of principal and $7,200 of accrued interest and fees into 19,200,000 shares of common stock. These conversions were in accordance with the terms of the note and no gain or loss was recognized. There was $60,034 of principal outstanding on this note as of June 30, 2020.

 

On December 10, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $110,000. The Company received net cash proceeds of $97,000 after an original issue discount of $10,000 and fees of $3,000. The lender also received 35,000 shares of common stock as a deferred finance cost, with a fair value of $8,407. The convertible note bears interest at 10% and matures on December 10, 2020, with interest accruing at a rate of 24% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on the lessor of 1) $0.149, or 2) the lesser of 62% of the lowest trade price or the closing bid price during the 20 trading days prior to the conversion date. During the six months ended June 30, 2020 the lender converted the $35,300 of principal and $4,250 of accrued interest into 37,252,975 shares of common stock. These conversions were in accordance with the terms of the note and no gain or loss was recognized. There was $74,700 of principal outstanding on this note as of June 30, 2020.

 

On February 7, 2020, the Company entered into an unsecured convertible promissory note, with a principal amount of $78,000. The Company received net cash proceeds of $75,000 after payment of fees of $3,000. The convertible note bears interest at 10% and matures on February 7, 2022, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 65% of the lowest trading price during the 15 trading days prior to the conversion date. There was $78,000 of principal outstanding on this note as of June 30, 2020.

 

As a result of the Bankruptcy Petition, all unamortized debt discount and deferred finance costs were amortized to interest expense, with a total of $151,338 included within reorganization costs on the statement of operations for the three and six months ended June 30, 2020. Prior to the bankruptcy filing on June 15, 2020, the Company recognized amortization of debt discount and deferred finance costs of $453,853 and $819,082 during the three and six months ended June 30, 2020, respectively. All unsecured debt is included in Liabilities Subject to Compromise on the Company’s balance sheet as of June 30, 2020. An additional $151,338 of debt discount was written amortized to interest and classified as part of reorganization costs on the statement of operations, for total amortization of debt discount and deferred finance costs of $970,420 during the six months ended June 30, 2020.

 

The following table summarizes outstanding convertible notes as of June 30, 2020 and December 31, 2019:

 

    June 30, 2020     December 31, 2019  
Convertible note dated March 29, 2019, maturing September 30, 2019   $ 888,432     $ 700,000  
Convertible note dated September 6, 2019, maturing September 6, 2021           153,000  
Convertible note dated November 25, 2019, maturing November 25, 2021           78,000  
Convertible note dated November 25, 2019, maturing November 25, 2020     60,034       150,000  
Convertible note dated December 10, 2019, maturing December 10, 2020     74,700       110,000  
Convertible note dated February 7, 2020, maturing February 7, 2022     78,000        
Total     1,101,166       1,191,000  
Debt discount and deferred finance costs on long-term convertible notes           (5,376 )
Debt discount and deferred finance costs on short-term convertible notes           (37,310 )
Current convertible notes payable, net of discount           (922,690 )
                 
Total long-term convertible notes payable, net   $ 1,101,166     $ 225,624  

 

The following table presents information about the Company’s liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of June 30, 2020 and December 31, 2019:

 

Fair value measured at June 30, 2020
    Total carrying value at June 30, 2020    

Quoted prices in

active markets

(Level 1)

   

Significant other observable inputs

(Level 2)

   

Significant Unobservable inputs

(Level 3)

 
Liabilities:                        
Derivative liabilities   $ 874,235     $     $     $ 874,235  

 

Fair value measured at December 31, 2019
    Total carrying value at December 31, 2019    

Quoted prices in active markets

(Level 1)

   

Significant other observable inputs

(Level 2)

   

Significant Unobservable inputs

(Level 3)

 
Liabilities:                        
Derivative liabilities   $ 470,331     $     $     $ 470,331  

 

The fair values of derivatives at the date of issuance during the six months ended June 30, 2020 were estimated using a Black Scholes model and the following assumptions: volatility of between 53% and 78% based on a peer group of comparable companies, a dividend yield of 0%, an expected term of six months to one and a half years, an exercise price of between $0.004 and $0.068, and a risk-free rate of between 0.16% and 0.63%.

 

The fair value of derivatives as of June 30, 2020 was estimated using a Black Scholes model and the following assumptions: volatility of 77% and 80% based on a peer group of comparable companies, a dividend yield of 0%, an expected term of between three and six months, an exercise price of $0.00087 and $0.00105 and, and a risk-free rate of 0.16%-0.18%. There were no transfers between Level 1, 2 or 3 during the six months ended June 30, 2020. As of June 30, 2020, outstanding convertible debt principal is convertible into 989,360,489 shares of common stock.

 

The table below presents the change in the fair value of the derivative liability during the six months ended June 30, 2020:

 

Fair value as of December 31, 2019   $ 470,331  
Fair value on the date of issuance recorded as a debt discount     514,100  
Fair value on the date of issuance recorded as a loss on derivative     504,479  
Extinguishment of liability due to conversion to equity     (631,569 )
Loss on change in fair value of derivatives     16,894  
Fair value as of June 30, 2020   $ 874,235