Quarterly report pursuant to Section 13 or 15(d)

Note 5 - Convertible Notes

v3.10.0.1
Note 5 - Convertible Notes
9 Months Ended
Sep. 30, 2018
Notes  
Note 5 - Convertible Notes

NOTE 5 – CONVERTIBLE NOTES

 

Short term convertible notes

 

On January 31, 2018, the Company issued a $100,000 convertible note bearing interest at 9% per annum.  The note matures on February 28, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request.  The Company has determined the note to contain a beneficial conversion feature valued at $46,991 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the debt agreement.  The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 312,500 shares of the Company’s common stock at an exercise price of $0.32 per share.  The warrants were valued at $46,991 using the Black-Scholes pricing model and were recorded as a discount to the note.  At September 30, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $38,828. The Company had accrued interest for this note in the amount of $5,304, which is included in accrued interest on the Company’s consolidated balance sheets.

 

On February 23, 2018, the Company issued a $1,000,000 convertible note bearing interest at 9% per annum.  The note matures on February 29, 2019 and is convertible, as amended, into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request.  The Company has determined the note to contain a beneficial conversion feature valued at $459,447 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the debt agreement.  The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,125,000 shares of the company’s common stock at an exercise price of $0.32 per share.  The warrants were valued at $540,553 using the Black-Scholes pricing model and were recorded as a discount to the debt agreement.  At September 30, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $9,284. The Company had accrued interest for this note in the amount of $54,000, which is included in accrued interest on the Company’s consolidated balance sheets.

 

On February 27, 2018, the Company issued a $1,000,000 convertible note bearing interest at 9% per annum.  The note matures on February 29, 2019 and is convertible, as amended, into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request.  The Company has determined the note to contain a beneficial conversion feature valued at $458,756 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the debt agreement.  The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,125,000 shares of the company’s common stock at an exercise price of $0.32 per share.  The warrants were valued at $541,244 using the Black-Scholes pricing model and were recorded as a discount to the note.   At September 30, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $8,625.  The Company had accrued interest for this note in the amount of $53,014, which is included in accrued interest on the Company’s consolidated balance sheets.

 

On April 18, 2018, the Company issued a $2,000,000 convertible note bearing interest at 9% per annum.  The note matures on April 30, 2019 and is convertible, as amended, into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request.  The Company has determined the note to contain a beneficial conversion feature valued at $915,856 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the debt agreement.  The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 6,250,000 shares of the company’s common stock at an exercise price of $0.25 per share.  The warrants were valued at $1,084,144 using the Black-Scholes pricing model and were recorded as a discount to the note.   As additional consideration for this note, the Company issued an aggregate 4,670,138 shares of the Company’s common stock.  Because the value of this stock exceeded the net value after the above discounts, the Company recorded the value of the consideration to additional paid in capital.  At September 30, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $2,515.  The Company had accrued interest for this note in the amount of $81,370, which is included in accrued interest on the Company’s consolidated balance sheets.

 

On May 4, 2018, the Company issued an aggregate $1,500,000 in convertible notes bearing interest at 9% per annum.  These notes mature on May 31, 2019 and are convertible, as amended, into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request.  The Company has determined the notes to contain a beneficial conversion feature valued at $685,856 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the note.  The noteholders were also granted detachable 5 year warrants to purchase an aggregate of 4,687,500 shares of the company’s common stock at an exercise price of $0.25 per share.  The warrants were valued at $814,144 using the Black-Scholes pricing model and were recorded as a discount to the debt agreements.   At September 30, 2018, the principal balances were still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate $944.  The Company had accrued interest for these notes in the amount of $55,110, which is included in accrued interest on the Company’s consolidated balance sheets.

 

On May 9, 2018, the Company issued a $1,028,274 convertible note bearing interest at 9% per annum as replacement for a $1,000,000 note plus accrued interest of $28,274 (see long term convertible notes section of this note).  The note matures on May 31, 2019 and is convertible, as amended, into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request.  The Company has determined the note to contain a beneficial conversion feature valued at $484,684 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the debt agreement.  The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,213,356 shares of the company’s common stock at an exercise price of $0.25 per share.  The warrants were valued at $543,590 using the Black-Scholes pricing model and were recorded as a discount to the note.   At September 30, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $755.  The Company had accrued interest for this note in the amount of $36,511, which is included in accrued interest on the Company’s consolidated balance sheets.

 

On July 5, 2018, the Company issued an aggregate $2,000,000 in convertible notes bearing interest at 9% per annum.  These notes mature on July 5, 2019 and is convertible, as amended, into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request.  The Company has determined the notes to contain a beneficial conversion feature valued at $612,962 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the note.  The noteholders were also granted detachable 5 year warrants to purchase an aggregate of 8,000,000 shares of the company’s common stock at an exercise price of $0.25 per share.  The warrants were valued at $1,386,998 using the Black-Scholes pricing model and were recorded as a discount to the debt agreements.   At September 30, 2018, the principal balances were still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate $480.  The Company had accrued interest for these notes in the amount of $42,411, which is included in accrued interest on the Company’s consolidated balance sheets.

 

On July 10, 2018, the Company issued a $32,000 in convertible notes bearing interest at 9% per annum.  This note matures on July 31, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request.  The Company has determined the notes to contain a beneficial conversion feature valued at $9,764 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the note.  The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 128,000 shares of the company’s common stock at an exercise price of $0.25 per share.  The warrants were valued at $22,226 using the Black-Scholes pricing model and were recorded as a discount to the debt agreements.   At September 30, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate $63.  The Company had accrued interest for these notes in the amount of $647, which is included in accrued interest on the Company’s consolidated balance sheets.

 

On July 13, 2018, the Company issued a $200,000 in convertible notes bearing interest at 9% per annum.  This note matures on July 31, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request.  The Company has determined the note to contain a beneficial conversion feature valued at $61,220 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the note.  The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 800,000 shares of the company’s common stock at an exercise price of $0.25 per share.  The warrants were valued at $138,770 using the Black-Scholes pricing model and were recorded as a discount to the debt agreements.   At September 30, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate $89.  The Company had accrued interest for these notes in the amount of $647, which is included in accrued interest on the Company’s consolidated balance sheets.

 

On September 17, 2018, the Company issued a $3,000,000 in convertible notes bearing interest at 9% per annum.  This note matures on September 17, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.25 per share at the holder’s request.  The Company has determined the note to contain a beneficial conversion feature valued at $1,334,707 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the note.  The noteholder was also granted detachable 7 year warrants to purchase an aggregate of 12,000,000 shares of the company’s common stock at an exercise price of $0.25 per share.  The warrants were valued at $1,665,283 using the Black-Scholes pricing model and were recorded as a discount to the debt agreements.   Additionally, as further inducement to write this this note, the Company agreed to grant all of the investor’s existing notes as well as several other existing noteholders with relationships to the investor the same terms on their existing debt that this debt carries.  Because these new terms were required to write this note, the Company has accounted them as a discount on this note, the value of which is included in the beneficial conversion value.  At September 30, 2018, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at an aggregate $17.  The Company had accrued interest for these notes in the amount of $9,616, which is included in accrued interest on the Company’s consolidated balance sheets.

 

Short term convertible notes – related party

 

On October 31, 2013, the Company agreed to convert balances owed to the Company’s corporate counsel in the amount of $183,172 into a 42 month convertible note bearing interest at 12% annually and convertible into 203,525 shares of convertible preferred stock at the rate of $0.90 per share.  At September 30, 2018 and December 31, 2017, the principal balance was still outstanding, and the Company had accrued interest for this note in the amount of $171,828 and $136,469, respectively, which is included in accrued interest – related party on the Company’s consolidated balance sheets.  The note carries a default rate of 18% for any principal not paid by the maturity date.

 

On November 30, 2015, John Hayes, the Company’s Chief Technology Officer, Director and significant shareholder invested $101,000 via a one year convertible note bearing interest at 12% annually and convertible into 112,223 shares of Series A convertible preferred stock at the rate of $0.90 per share.  On September 1, 2017, $237,000 owed to John Hayes was added to the note.  On September 30, 2018, the note along with interest of $89,366 was converted into 1,709,466 shares of the Company’s common stock at a rate of $0.25 per share.  Additionally, as further inducement to convert the note, the Company issued the note holder 5 year warrants to purchase 1,352,000 shares of the Company’s common stock. The Company recognized a loss on extinguishment of debt of $400,126 related to the decrease in conversion price and warrants granted.

 

On July 6, 2018, the Company issued a $200,000 in convertible notes bearing interest at 9% per annum to John Hayes, the Company’s Chief Technology Officer, Director and significant shareholder.  This note matures on July 31, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request.  The Company has determined the notes to contain a beneficial conversion feature valued at $61,290 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the note.  The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 800,000 shares of the company’s common stock at an exercise price of $0.25 per share.  The warrants were valued at $138,700 using the Black-Scholes pricing model and were recorded as a discount to the debt agreements.   On September 30, 2018, the note along with interest of $4,192 was converted into 816,767 shares of the Company’s common stock at a rate of $0.25 per share.  The Company recognized a loss on extinguishment of debt of  $43,750 related to the decrease in conversion price.

 

On July 10, 2018, the Company issued a $32,000 in convertible notes bearing interest at 9% per annum to J Allen Kosowsky, a Director and related party.  This note matures on July 31, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request.  The Company has determined the notes to contain a beneficial conversion feature valued at $9,764 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the note.  The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 128,000 shares of the company’s common stock at an exercise price of $0.25 per share.  The warrants were valued at $22,226 using the Black-Scholes pricing model and were recorded as a discount to the debt agreements.   On September 30, 2018, the note along with interest of $639 was converted into 130,556 shares of the Company’s common stock at a rate of $0.25 per share.  The Company recognized a loss on extinguishment of debt of  $8,960 related to the decrease in conversion price.

 

Long term convertible notes

On December 21, 2017, the Company issued a $150,000 convertible note bearing interest at 8% per annum.  The note matures on December 31, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request.  The Company has determined the note to contain a beneficial conversion feature valued at $69,935 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the debt agreement.  The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 468,750 shares of the company’s common stock at an exercise price of $0.32 per share.  The warrants were valued at $69,935 using the Black-Scholes pricing model and were recorded as a discount to the note.  At September 30, 2018 and December 31, 2017, the principal balance was still outstanding and is included on the Company’s consolidated balance sheets net of discounts at $28,425 and $10,521, respectively.  The Company had accrued interest for this note in the amount of $9,304 and $329, respectively, which is included in accrued interest on the Company’s consolidated balance sheets.

 

On December 22, 2017, the Company issued a $1,000,000 convertible note bearing interest at 8% per annum.  The note matures on December 31, 2019 and is convertible into the Company’s Series B Preferred Stock at a price of $0.32 per share at the holder’s request.  The Company has determined the note to contain a beneficial conversion feature valued at $466,230 based on the intrinsic per share value of the conversion feature.  This beneficial conversion feature is recorded as a discount to the debt agreement.  The noteholder was also granted detachable 5 year warrants to purchase an aggregate of 3,125,000 shares of the company’s common stock at an exercise price of $0.32 per share.  The warrants were valued at $466,230 using the Black-Scholes pricing model and were recorded as a discount to the note.  On May 9, 2018, this note along with $28,274 was renegotiated into a new short term convertible note and the warrants associated with the original note were cancelled.  The newly negotiated note included an additional warrant benefit valued at $95,804 which was recorded as a loss on extinguishment of debt.

 

Long term convertible notes – related party

 

During 2011 to 2014, the Company’s Chief Technology Officer and significant shareholder of the Company loaned a total of $2,673,200 to the Company.  On October 1, 2014, all prior notes including accrued interest were combined into a single $3,712,637 convertible note bearing interest at 12% annually and convertible into 4,125,154 shares of Series A preferred stock at the rate of $0.90 per share.  On November 9, 2017, the Company converted the note and accrued interest of $1,665,991 into 10,757,254 shares of the Company's common stock at a conversion rate of $0.50 per share.  The Company also issued a 5 year warrant to purchase an additional 5,378,627 shares of the Company s common stock at a purchase price of $0.50 per share as further consideration for this conversion.  The Company recognized a loss on extinguishment of debt related to this transaction of $913,238.

 

Convertible debt holders are entitled, at their option, to convert all or part of the principal and accrued interest into shares of the Company’s common stock at the conversion prices and terms discussed above. The Company has determined that any embedded conversion options do not possess a beneficial conversion feature, and therefore has not separately accounted for their value. 

 

The following table summarizes the Company’s convertible notes payable for the nine months ended September 30, 2018 and the year ended December 31, 2017:

 

 

 

 

September 30, 2018

 

 

December 31, 2017

Beginning Balance

$

601,576

 

$

3,996,810

Proceeds from issuance of convertible notes, net of issuance discounts

 

6,148

 

 

146,669

Proceeds from issuance of convertible notes – related party

 

-

 

 

237,000

Repayments

 

-

 

 

(100,000)

Restructuring of debt

 

(112,017)

 

 

-

Conversion of notes payable into common stock

 

(570,000)

 

 

(3,712,638)

Amortization of discounts

 

347,480

 

 

33,735

Ending Balance

$

273,187

 

$

601,576

Convertible notes, short term

$

11,860,274

 

$

-

Convertible notes, long term

$

150,000

 

$

1,150,000

Convertible notes, short term – related party

$

183,172

 

$

521,172

Debt discounts

$

(11,920,259)

 

$

1,069,596