4. CONVERTIBLE PROMISSORY NOTES
As of December 31, 2019, the outstanding convertible promissory notes are summarized as follows:
|
Convertible Promissory Notes
|
|
$ |
203,204 |
|
|
Less current portion
|
|
|
37,324 |
|
|
Total long-term liabilities
|
|
$ |
165,880 |
|
Maturities of long-term debt for the next three years are as follows:
At December 31, 2019, the Company had $203,204 in convertible promissory notes.
On October 20, 2015, the Company entered into a third extension of the Note originally issued September 30, 2013. The extension terms included mandatory payments of $10,000 per month beginning November 1, 2015 until the note in the amount of $143,033 is paid in full. The Note bears interest at 12% annum, and a conversion price of 60% of the lowest volume weighted average price (“VWAP”) occurring during the twenty trading days preceding any conversion date by Holder. The balance of the provisions of the Note remained substantially the same. As of December 31, 2019, the remaining balance of the Note is $37,324, which includes capitalized interest of $24,291. As of December 31, 2019, the Note has matured, and the Company and the Holder have entered into discussions for the repayment of the Note.
On November 20, 2014, the Company issued a 10% unsecured convertible promissory note (the “November Note”) for the principal sum of up to $400,000 plus accrued interest on any advanced principal funds. The November Note matures eighteen months from each advance. The November Note may be converted by the lender into shares of common stock of the Company at the lesser of $.0125 per share or (b) fifty percent (50%) of the lowest trade prices following issuance of the November Note or (c) the lowest effective price per share granted to any person or entity. On November 20, 2014, the lender advanced $50,000 to the Company under the November Note at inception. On various dates from February 18, 2015 through September 30, 2016, the lender advanced an additional $350,000 under the November Note. As of December 31, 2019, there remains an aggregate outstanding principal balance of $50,880.
On May 10, 2017, the Company issued a 10% unsecured convertible promissory note (the “May Note”) for the principal sum of up to $150,000 plus accrued interest on any advanced principal funds. The Lender may pay additional consideration at the Lenders discretion. The Company received a tranche in the amount of $25,000 upon execution of the May Note. On various dates, the Company received additional tranches in the aggregate sum of $90,000. The May Note matured twelve months from each tranche. Within thirty (30) days prior to the maturity date, the Lender may extend the maturity date to sixty (60) months. The May Note may be converted by the lender into shares of common stock of the Company at the lesser of $.01 per share or (b) fifty percent (50%) of the lowest trade price of common stock recorded on any trade day after the effective date, or (c) the lowest effective price per share granted to any person or entity. As of December 31, 2019, the balance remaining on the May Note was $115,000.
We evaluated the financing transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the convertible promissory notes was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The note has no explicit limit on the number of shares issuable so they did not meet the conditions set forth in current accounting standards for equity classification. The Company elected to recognize the note under paragraph 815-15-25-4, whereby, there would be a separation into a host contract and derivative instrument. The Company elected to initially and subsequently measure the note in its entirety at fair value, with changes in fair value recognized in earnings. The Company recorded a derivative liability representing the imputed interest associated with the embedded derivative. The derivative liability is adjusted periodically according to the stock price fluctuations based upon the Binomial lattice model calculation.
The convertible notes issued and described in Note 4 above, do not have fixed settlement provisions because their conversion prices are not fixed. The conversion feature has been characterized as a derivative liability to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
We record the full value of the derivative as a liability at issuance with an offset to valuation discount, which will be amortized over the life of the Notes.
At December 31, 2019, the fair value of the derivative liability was $1,961,729.
For purpose of determining the fair market value of the derivative liability for the embedded conversion, the Company used Binomial lattice valuation model. The significant assumptions used in the Black Scholes valuation of the derivatives are as follows:
|
Risk free interest rate
|
|
Between 1.48% and 1.62%
|
| Stock volatility factor |
|
Between 117.0% and 143.0% |
|
Months to Maturity
|
|
0 - 5 years
|
|
Expected dividend yield
|
|
None
|
