Quarterly report pursuant to Section 13 or 15(d)

Convertible Notes

v3.21.2
Convertible Notes
9 Months Ended
Sep. 30, 2021
Debt Disclosure [Abstract]  
Convertible Notes

  

  5. Convertible Notes

               
   

September 30,
2021

(unaudited)

   

December 31,

2020

 
Balance due on convertible notes   $ 1,075,000     $ 953,000  
Accrued interest     404,000       313,000  
Subtotal (including $1,285,000 past due at September 30, 2021)     1,479,000       1,266,000  
Convertible note discount     (56,000 )     (83,000 )
Balance on convertible notes, net of note discounts   $ 1,423,000     $ 1,183,000  

 

The Company issues convertible notes in exchange for cash. The notes typically do not bear any interest; however, since the notes are typically issued at a 10% discount, there is an implied interest rate of 10%. 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 warrants to purchase shares of common stock that are fully vested upon issuance and expire one year from the date of issuance. As a result, upon issuance, the Company records a note discount to account for the relative fair value of the warrants, and original issue discount of 10% (OID). The note discounts are amortized over the term of the related note or amortized in full upon its conversion into common stock.

 

As of December 31, 2020, total outstanding notes payable and accrued interest totaled $1,266,000. During the nine-month period ended September 30, 2021, the Company issued convertible promissory notes in the aggregate of $453,000, for cash of $411,000 or a discount of $42,000. 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 one year from issuance, and are convertible at $0.02 to $0.03 per share. In addition, the Company also granted these note holders warrants to purchase 9,887,163 shares of the Company’s common stock. The warrants are fully vested, exercisable at $0.03 to $0.04 per share and will expire one year from the date of issuance. In addition convertible notes payable and accrued interest of $332,000 were converted into 15,617,653 shares of common stock, and accrued interest of $92,000 was recorded. As of September 30, 2021, total outstanding convertible notes payable and accrued interest totaled $1,479,000. A total of twenty-six notes in the aggregate of $1,285,000 including accrued interest have reached maturity and are past due.

 

As of December 31, 2020, unamortized discount totaled $83,000. Effective January 1, 2021, the adoption of ASU 2020-06 resulted in a decrease to debt discount of $30,000 During the nine-months ended September 30, 2021, the Company recorded $42,000 discount related to the issuance of convertible notes, and $156,000 discount related to the value of warrants issued with convertible notes. Also during the nine-months ended September 30, 2021, the Company recorded amortization of debt discount of $194,000. As of September 30, 2021, unamortized discount totaled $56,000. Note discounts are amortized over the term of the related note or amortized in full upon the notes conversion to common stock.

 

As of September 30, 2021, these convertible notes payable are convertible at conversion rates ranging from $0.02 to $0.48 per share into approximately 21,143,000 shares of common stock.

 

The Company early adopted ASU No. 2020-06 effective January 1, 2021 using the modified retrospective approach. Upon adoption, the following changes resulted: (i) the value of the beneficial conversion features recorded in 2020 was reversed resulting in an increase in convertible notes payable with an offsetting adjustment to additional paid in capital and (ii) interest expense recorded in 2020 that was related to the amortization of the discount related to the beneficial conversion feature was reversed against opening accumulated deficit. Accordingly, the adoption of ASU 2020-06 resulted in a decrease to accumulated deficit of $30,000, a decrease in addition paid in capital of $60,000, and an increase in total stockholders’ deficit of $30,000 on January 1, 2021.

 

PPP loan payable

 

In June 2020, the Company was granted a loan (the “PPP loan”) from Cadence Bank in the aggregate amount of $151,000, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act.

 

The PPP loan agreement is dated June 18, 2020, matures on June 18, 2025, bears interest at a rate of 1% per annum, with the first six months of interest deferred, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). The Company applied ASC 470, Debt, to account for the PPP loan. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. Funds from the PPP loan may only be used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, qualifying group health care benefits, qualifying rent and debt obligations, and qualifying utilities. The Company used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. The Company intends to apply for forgiveness of the PPP loan with respect to these qualifying expenses, however, it cannot assure that such forgiveness of any portion of the PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. The terms of the PPP loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The Company was in compliance with the terms of the PPP loan as of September 30, 2021.