5. Convertible Notes
|9 Months Ended|
Sep. 30, 2019
|Debt Disclosure [Abstract]|
The Company issues convertible notes in exchange for cash. The notes typically do not bear any interest; however, there is an implied interest rate of 10% since the notes are typically issued at a 10% discount. The notes are unsecured, and usually mature twelve months from issuance.
The notes are convertible at the option of the note holder into the Company’s common stock at a conversion price stipulated in the conversion agreement. In addition, the note holders receive fully vested warrants to purchase shares of common stock of the Company and will expire in one year from the date of issuance. As a result, the Company records a note discount to account for the relative fair value of the warrants, the notes’ beneficial conversion feature or BCF, and original issue discount of 10% (OID). The note discounts are amortized over the term of the notes or amortized in full upon its conversion to common stock.
As of December 31, 2018, total outstanding notes payable amounted to $1,886,000 which are due in varying amounts through December 2019, accrued interest of $123,000 and unamortized note discount of $1,100,000.
During the nine-month period ended September 30, 2019, the Company issued similar convertible promissory notes in the aggregate of $1,485,000 for cash of $1,350,000 or a discount of $135,000. The notes do not bear any interest; however, the implied interest rate used was 10% since the notes were issued 10% less than its face value. The notes are unsecured, mature in twelve months from issuance and convertible at $0.05 to $0.15 per share. In addition, the Company also granted these note holders warrants to purchase 10.8 million shares of the Company’s common stock. The warrants are fully vested, exercisable at $0.05 to $0.15 per share and will expire in one year. As a result, the Company recorded a note discount of $1,350,000 to account for the relative fair value of the warrants, the notes’ beneficial conversion feature (BCF), and original issue discount (OID). The note discounts are being amortized over the term of the note or amortized in full upon the conversion to common stock. During the nine-month period ended September 30, 2019 notes payable of $2,354,000 were converted into 42,271,760 shares of common stock.
As of September 30, 2019, total outstanding notes payable amounted to $1,025,000, accrued interest of $160,000 and unamortized note discount of $238,000 for a net balance of $947,000. A total of nine notes in the aggregate of $484,000 have reached maturity and are past due. The remaining notes are due in varying amounts through September 2020.
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