Quarterly report pursuant to Section 13 or 15(d)

Convertible Notes Payable

v3.20.2
Convertible Notes Payable
9 Months Ended
Sep. 30, 2020
Debt Disclosure [Abstract]  
CONVERTIBLE NOTES PAYABLE

NOTE 4 – CONVERTIBLE NOTES PAYABLE


In January 2019, the Company commenced an offering of up to $500,000 pursuant to which the Company will issue convertible notes to investors. On January 18, 2019, February 5, 2019 and July 23, 2019, the Company issued three such convertible notes payable to three investors for $100,000, $130,000 and $150,000, respectively. The notes bear interest at a fixed rate of 10% per annum, computed based on a 360-day year and mature on the earlier of one year from the date of issuance or the consummation of an equity or equity-linked round of financing of the Company in excess of $1,000,000 (“Qualified Financing”) or other event pursuant to which conversion shares are to be issued pursuant to the terms of the note. On February 28, 2020, the Company and the holder of the January 18, 2019 convertible note agreed to extend the maturity date of the January 18, 2019 convertible note to January 18, 2021. Also, on February 28, 2020, the Company and the holder of the February 5, 2019 convertible note agreed to extend the maturity date of the February 5, 2019 convertible note to February 5, 2021. On July 29, 2020 the Company and the holder of the July 23, 2019 convertible note agreed to extend the maturity date of July 23, 2020 to February 21, 2021.


The notes are convertible into common stock of the Company following events on the following terms: with no action on the part of the note holder upon the consummation of a Qualified Financing, the debt will be converted to new round stock based on the product of the outstanding principal and accrued interest multiplied by 1.35, then divided by the accrual per share price of the new round common stock. If a change of control occurs or if the Company completes a firmly underwritten public offering of its common stock prior to the Qualified Financing the notes would, at the election of the holders of a majority of the outstanding principal of the notes, be either payable on demand as of the closing of such change of control or Initial Public Offering (‘IPO”) or convertible into shares of common stock immediately prior to such change of control transaction or IPO transaction at a price per share equal to the lesser of the per share value of the common stock as determined by the Company’s Board of Directors or the per share consideration to be received by the holders of the common stock in such change of control or IPO transaction. Based on the terms of the conversion, the holders may receive a discount, and the notes are considered to have a contingent beneficial conversion feature. If conversion of the debt occurs, the Company will recognize an expense related to the intrinsic value. The Company recorded $56,537 of accrued interest and has a total outstanding principal balance of $380,000 as of September 30, 2020.


In the event that the Company consummates a financing prior to the maturity date, other than a Qualified Financing, and the economic terms thereof are more favorable to the investors in such financing than the terms of the note, the note shall automatically be amended to reflect such more favorable economic terms.


December 31, 2019 Securities Purchase Agreement


On December 31, 2019, the Company entered into a Securities Purchase Agreement and issued and sold to a third party investor a Convertible Note in the original principal amount of $275,000 (the “Note”), and a warrant to purchase 100,000 shares of the Company’s common stock (the “Warrant”). The aggregate purchase price received by the Company was $250,000 after an original issue discount of $25,000. A one-time interest charge of 8% was applied on December 31, 2019 and will be payable, along with the Principal, on July 31, 2020, as may be extended at the option of the Investor.


 On August 5, 2020, the Company entered into an Allonge to Convertible Note, dated as of August 8, 2020, which amended the Note. The allonge amended the Note by, among other things, extending the maturity date of the loan until October 31, 2020 (this date was further amended on October 29, 2020, see Note 11. As consideration for the allonge, the original principal amount was increased by ten percent, and the Company agreed to issue 50,000 shares of its common stock to the investor that were valued at fair market value of $75,000. The Company evaluated the allonge for debt modification in accordance with ASC 470-50 and concluded that the debt qualified for debt extinguishment as the 10% cash flow test was met. As a result, the $297,000 of principal and accrued interest was written off and the new debt was recorded at fair value as of August 5, 2020 in the amount of $324,500. For the nine months ended September 30, 2020, the Company recorded a net loss on extinguishment of debt in the amount of $176,467. The Company has a total outstanding principal balance under the Note of $324,500 as of September 30, 2020.


The unpaid outstanding principal amount and accrued and unpaid interest under the Note shall be convertible into shares of the Company’s common stock at any time at the option of the investor. The conversion price shall be equal to 80% multiplied by the price per share paid by the investors in the next capital raising transaction consummated by the Company in the amount of $1,000,000 or more (the “Qualified Financing”), subject to adjustments as provided in the Note. In the event the investor elects to convert the Note prior to a Qualified Financing, the conversion price shall be the effective exercise price per share from time to time pursuant to the Warrant. At any time prior to the maturity date of the Note, upon 10 business days’ notice to the investor, the Company shall have the right to pre-pay the entire remaining principal amount of the Note subject to the pre-payment terms contained in the Note. The note is valued at face value and not considered a derivative since the Qualified Financing is at the control of the Company.


The Note contains a price-based anti-dilution provision, pursuant to which the conversion price of the Note shall be reduced upon the occurrence of certain dilutive issuances of Company securities as set forth in the Note. The conversion of the Note is also subject to a beneficial ownership limitation of 4.99% of the number of shares of common stock outstanding immediately after giving effect to such conversion. In the event the Company, prior to the maturity date of the Note, issues any Security (as defined in the Note) with any term more favorable to the holder of such Security or with a term in favor of the holder of such Security that was not similarly provided to the Investor, then at the Investor’s option such term shall become a part of the Note. The Company also agreed to provide piggy-back registration rights to the investor pursuant to which the Company shall include all shares issuable upon conversion of the Note on the next registration statement the Company files with the Securities and Exchange Commission.


The Note contains events of default which, among other things, entitle the Investor to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the Note. Upon the occurrence of any event of default, the outstanding balance shall immediately and automatically increase to 130% of the outstanding balance immediately prior to the event of default, and the conversion price of the Note shall be redefined to equal 65% of the lowest trade accruing during the 10 consecutive Trading Days (as defined in the Note) immediately preceding the applicable Conversion Date (as defined in the Note). Nickolay Kukekov, a director of the Company, and a third party, each has personally guaranteed the repayment of the Note.


The Warrant has an exercise price of $1.25 per share (the “Exercise Price”), subject to adjustments as provided in the Warrant, and has a term of five years. The Warrant contains a price-based anti-dilution provision, pursuant to which the exercise price of the Warrant shall be reduced upon the occurrence of certain dilutive issuances of securities as set forth in the Warrant, with a corresponding increase in the number of shares underlying the Warrant if the dilutive event occurs during the first three years of the Warrant, and a cashless exercise provision. The exercise of the Warrant is subject to a beneficial ownership limitation of 9.99% of the number of shares of common stock outstanding immediately after giving effect to such exercise. The Company calculated the Warrants at fair value of $130,768 using the Monte Carlo model, which was recognized as a discount to the Note and is being amortized as interest expense over the remaining term of the notes. The Note is considered a derivative liability due to the variable market-based conversion price upon default. The Warrant is accounted for as a discount to the Note, and therefore fair valued and recorded as a derivative liability as well. On March 18, 2020, the Warrant was revalued and recorded as a derivative liability in the amount of $255,899. On September 30, 2020, the Warrant derivative was valued at $109,102. For the three and nine months ended September 30, 2020, the Company recorded a gain on the change in fair market value of derivative liabilities in the amount of $53,503 and $146,797, respectively, in relation to the Warrant derivative.


In the year ended December 31, 2019, the Company recorded a total debt discount of $155,768 related to the above convertible notes. During the nine months ended September 30, 2020, the Company recorded an additional debt discount of $176,274 related to the above convertible notes. Amortization of the debt discount is recorded as interest expense and a total of $332,042 was amortized during the nine months ended September 30, 2020.


Convertible Grid Notes


On April 21, 2020, the Company issued a Convertible Grid Promissory Note (the “Caleca Note”) to Thomas J. Caleca (“Caleca”), an existing stockholder of the Company, pursuant to which Caleca agreed to advance to the Company the aggregate principal amount of $125,000 (the “Caleca Aggregate Advance”). The Company also issued to Caleca a common stock purchase warrant (the “Caleca Warrant”), granting Caleca the right to purchase up to 750,000 shares of the Company’s common stock at a per share exercise price of $0.80 (subject to adjustment as set forth in the Caleca Warrant).


Also on April 21, 2020, the Company issued a Convertible Grid Promissory Note (the “Brown Note”, and together with the Caleca Note, the “Grid Notes”) to Andrew Brown (“Brown”, and together with Caleca, the “Grid Investors”), an existing stockholder of the Company, pursuant to which Brown agreed to advance to the Company the aggregate principal amount of $125,000 (the “Brown Aggregate Advance”, and together with the Caleca Aggregate Advance, the “Aggregate Advance”). The Company also issued to Brown a common stock purchase warrant (the “Brown Warrant”, and together with the Caleca Warrant, the “2020 Warrants”), granting Brown the right to purchase up to 750,000 shares of the Company’s common stock at a per share exercise price of $0.80 (subject to adjustment as set forth in the Brown Warrant). The 2020 Warrants are exercisable at any time commencing on the eighteen-month anniversary of the issuance of the 2020 Warrants (as may be accelerated pursuant to the terms of the 2020 Warrants) and expiring on the five-year anniversary of the issuance of the 2020 Warrants. 


On April 22, 2020, the Grid Investors each made their first cash advance of $25,000 pursuant to the terms of the Grid Notes, for an aggregate cash advance to the Company of $50,000 (the “First Advance”). The Grid Investors made additional cash advances to the Company pursuant to the terms of their Grid Notes. As of September 30, 2020, a total of $250,000 in principal was advanced to the Company. During the nine months ended September 30, 2020, the Company recorded debt discount of $233,893 related to the Grid Notes. Amortization of the debt discount is recorded as interest expense and a total of $98,603 was amortized during the nine months ended September 30, 2020.


The Grid Notes bear interest on the unpaid balances at a fixed simple rate of twelve percent (12%) per annum (subject to a rate increase if the Company commits an Event of Default (as defined in the Grid Notes)), computed based on a 360-day year of twelve 30-day months, commencing on the date of the respective advance and payable quarterly. The principal amount of the Aggregate Advance, or so much thereof as has been advanced to the Company by the Grid Investors from time to time pursuant to the Grid Notes, will be payable on April 21, 2021, unless sooner converted into shares of the Company’s common stock pursuant to the terms of the Grid Notes. The Company recorded $6,283 of accrued interest and has a total outstanding principal balance of $250,000 as of September 30, 2020.


The unpaid outstanding principal amount and accrued and unpaid interest under the Grid Notes shall be convertible at any time prior to the maturity date of the Grid Notes at the election of the Grid Investors into such number of shares of the Company’s common stock obtained by dividing the amount so converted by $1.00 (the “Conversion Price”). At the maturity date of the Grid Notes, all of the remaining unpaid outstanding principal amount and accrued and unpaid interest (the “Outstanding Balance”) under the Grid Notes shall automatically convert into such number of shares of the Company’s common stock obtained by dividing the Outstanding Balance by the Conversion Price. The Grid Notes may not be prepaid by the Company in whole or in part without the prior written consent of the respective Grid Investor.


The Grid Notes contain customary events of default, which, if uncured, entitle the Grid Investors to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, their Grid Notes.


September 1, 2020 Securities Purchase Agreement


On September 1, 2020 (the “September 1 Issuance Date”), the Company entered into a Securities Purchase Agreement and issued and sold to an investor an 8% Convertible Redeemable Note in the original principal amount of $157,500 (the “September 1 Note”). The net amount received by the Company for the sale of the September 1 Note was $142,500 after an original issue discount of $15,000 and after payment of the investor’s legal fees.


The September 1 Note bears interest commencing on the September 1 Issuance Date at a fixed rate of 8% per annum on any unpaid principal balance, and will be payable, along with the principal amount, on September 1, 2021, unless such interest is earlier converted into shares of the Company’s common stock pursuant to the conversion terms contained in the September 1 Note. During the nine months ended September 30, 2020, the Company recorded debt discount of 157,500 related to the September 1 Note. Amortization of the debt discount is recorded as interest expense and a total of $14,671 was amortized during the nine months ended September 30, 2020. The Company recorded $1,093 of accrued interest and has a total outstanding principal balance of $157,500 as of September 30, 2020.


The unpaid outstanding principal amount and accrued and unpaid interest under the September 1 Note shall be convertible into shares of common stock at any time on or after the September 1 Issuance Date at the option of the investor. The conversion price shall be equal to 60% of the lowest closing bid price for the common stock, subject to certain exceptions and adjustments contained in the September 1 Note, for the fifteen prior trading day period. From the September 1 Issuance Date until 180 days after the September 1 Issuance Date, upon 3 days’ notice to the investor, the Company shall have the right to pre-pay the entire remaining principal amount of the September 1 Note, subject to the pre-payment terms contained in the September 1 Note.


The conversion of the September 1 Note is subject to a beneficial ownership limitation of 4.99% (or 9.9% upon notice of the investor) of the number of shares of common stock outstanding immediately after giving effect to such conversion. The September 1 Note is further subject to a “most-favored nation” clause in the event the Company offers a more favorable conversion discount, interest rate, look back period or other more favorable term to another party for any financings while the September 1 Note is in effect, subject to certain exceptions contained in the September 1 Note.


The September 1 Note contains customary events of default which entitle the investor, among other things, to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the September 1 Note. Upon an event of default, interest shall accrue at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law. The September 1 Note further contains monetary penalties in the event of certain events of default.


At the investor’s election, if the Company fails for any reason to deliver to the investor underlying shares upon conversion by the 3rd business day thereafter and if the investor incurs a Failure to Deliver Loss (as defined in the September 1 Note), then the Company must make the investor whole in relation to such loss.


Upon certain sale events as specified in the September 1 Note, the Company shall, upon request of the investor, redeem the September 1 Note in cash for 150% of the principal amount, plus accrued but unpaid interest through the date of redemption, or at the election of the investor, such Holder may convert the unpaid principal amount of the September 1 Note (together with the amount of accrued but unpaid interest) into shares of Company common stock immediately prior to such sale event at the conversion price specified in the September 1 Note.


September 23, 2020 Securities Purchase Agreement


On September 23, 2020, the Company entered into a Securities Purchase Agreement (the “September Purchase Agreement”) dated as of September 22, 2020 (the “September 23 Issuance Date”) and issued and sold to an investor a Promissory Note (the “September 23 Note”) in the aggregate original principal amount of $600,000, of which $100,000 aggregate principal amount was borrowed as of the Issuance Date with the balance of the principal to be borrowed on October 19, 2020. Also pursuant to the September Purchase Agreement, in connection with the issuance of the September Note, the Company issued two common stock purchase warrants (separately, “Warrant A” and “Warrant B”, and together, the “September Warrants”) to the investor, allowing the investor to purchase an aggregate of 1,411,764 shares of the Company’s common stock, with Warrant A being a commitment fee of 705,882 shares of common stock, and Warrant B being fully earned upon issuance as an additional commitment fee of 705,882 shares of common stock, provide that Warrant B is returnable to the Company upon the repayment of the September 23 Note, as an additional incentive for the repayment of the September 23 Note.


The net amount received by the Company on September 23, 2020 was approximately $84,000 after payment of certain fees to the investor or on behalf of the investor. Additionally, on October 19, 2020 $421,000 was received by the Company after payment of certain fees to the investor on behalf of the investor.


In the event the Company breaches any of the covenants set forth in Section 4 of the Purchase Agreement, and in addition to any other remedies available to the Buyer pursuant to the Purchase Agreement, it will be considered an Event of Default under the September 23 Note and the Company shall pay to the Buyer certain liquidated damages as set forth in the September 23 Note in cash or in shares of common stock at the option of the Buyer. If the Buyer elects to have the Company pay such liquidated damages in shares of common stock, such shares shall be issued at the conversion price at the time of payment.


The September 23 Note bears interest commencing on the September 23 Issuance Date at a fixed rate of 12% per annum on any unpaid principal balance, and will be payable, along with the principal amount, on September 22, 2021, unless such interest is earlier converted into shares of the common stock pursuant to the conversion terms contained in the September 23 Note.


A lump-sum interest payment for one year is due on the September 23 Issuance Date and added to the principal balance and payable on the maturity date of the September 23 Note or upon acceleration or by prepayment or otherwise, notwithstanding the number of days which the principal is outstanding. Principal payments shall be made in 6 installments each in the amount of $100,000 commencing 180 days following the applicable Issue Date (as defined in the Note) and continuing thereafter each 30 days for 5 months. During the nine months ended September 30, 2020, the Company recorded debt discount of 112,000 related to the September 1 Note. Amortization of the debt discount is recorded as interest expense and a total of $2,455 was amortized during the nine months ended September 30, 2020. The Company has a total outstanding principal balance of $112,000 as of September 30, 2020.


The unpaid outstanding principal amount and accrued and unpaid interest under the September 23 Note shall be convertible into shares of common stock at any time on or after the September 23 Issuance Date at the option of the investor. The conversion price shall be equal to the lesser of (subject to equitable adjustments): (i) the lowest Market Price (as defined in the September 23 Note) during the previous five Trading Day (as defined in the September 23 Note) period ending on the latest complete Trading Day prior to the September 23 Issuance Date, and (ii) the Variable Conversion Price (as defined in the September 23 Note). The conversion price shall be adjusted downwards upon certain events as set forth in the September 23 Note.


The September 23 Note is subject to adjustment in the event of certain events, including mergers or consolidations of the Company, distributions of assets to holders of common stock, stock repurchases, and dilutive issuances (other than “Exempt Issuances” as defined in the September 23 Note).


Provided that an event of default under the September 23 Note has not occurred, the Company may prepay in whole or in part the amounts outstanding under the September 23 Note by making a payment to the investor of an amount in cash equal to the sum of: (w) the then outstanding principal amount of the September 23 Note plus (x) accrued and unpaid interest on the unpaid principal amount of the September 23 Note plus (y) default interest, if any.


The conversion of the September 23 Note and the exercise of the Warrants are subject to a beneficial ownership limitation of 4.99% of the number of shares of common stock outstanding immediately after giving effect to such conversion or exercise, as the case may be.


The September 23 Note contains customary events of default which entitle the investor, among other things, to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the September 23 Note. Upon an event of default, interest shall accrue at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law. The September 23 Note further contains monetary penalties in the event of certain events of default or breaches.


The September 23 Note is further subject to a “most-favored nation” clause in the event the Company issues any security with any term more favorable to the holder of such security.


The September Warrants each have an exercise price of $1.28, subject to customary adjustments, and may be exercised at any time until the three year anniversary of the September Warrants; provided, however, in the event the Company repays the September 23 Note in its entirety on or prior to the maturity date of the September 23 Note, Warrant B shall automatically expire and may only be exercised in the event it does not so automatically expire. The September Warrants include a cashless exercise provision as set forth therein.


Derivative Accounting for the Convertible Notes Payable


The Company evaluated the terms and conditions of the Note, the Grid Notes, the September 1 Note and the September 23 Note under the guidance of ASC 815. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Due to the fact that the number of shares of common stock issuable could exceed the Company’s authorized share limit, the equity environment is tainted, and all additional convertible debentures and warrants are included in the value of the derivative liabilities. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion options and warrants and shares to be issued were recorded as derivative liabilities on the issuance date and revalued at each reporting period.


Certain of the Company’s embedded conversion features on debt and outstanding warrants are treated as derivative liabilities for accounting purposes under ASC 815 due to insufficient authorized shares to settle these outstanding contracts, or due to other rights connected with these contracts, such as registration rights. In the case of insufficient authorized share capital available to fully settle outstanding contracts, the Company utilizes the issuance date sequencing method to reclassify outstanding contracts as derivative instruments. These instruments do not trade in an active securities market.


Derivative Liabilities


The table below provides a summary of the changes in fair value, including net transfers in and/or out of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2020:


    Amount  
Balance on December 31, 2019   $ -  
Issuances to debt discount     679,667  
Issuances to interest expense     2,431,289  
Net extinguishment     73,967  
Change in fair value of derivative liabilities     (479,314 )
Change in fair value of warrant liabilities     (237,790 )
Balance on September 30, 2020   $ 2,467,819  

The fair value of the derivative conversion features and warrant liabilities as of September 30, 2020 were calculated using a Monte-Carlo option model valued with the following assumptions:


    September 30,
2020
 
Dividend yield     0 %
Expected volatility     82% - 100 %
Risk free interest rate     0.12% - 0.47 %
Contractual terms (in years)     0.06 – 4.56  
Conversion/Exercise price   $ 0.80 - $1.28