Annual report pursuant to Section 13 and 15(d)

5. Convertible Notes and Warrants

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5. Convertible Notes and Warrants
12 Months Ended
Dec. 31, 2020
Debt Disclosure [Abstract]  
Convertible Notes and Warrants
5. Convertible Notes and Warrants

 

    December 31,  
    2020     2019  
             
Convertible notes   $ 953,000     $ 1,019,000  
Accrued interest     313,000       184,000  
Subtotal     1,266,000       1,203,000  
Convertible note discount     (83,000 )     (153,000 )
Total   $ 1,183,000     $ 1,050,000  

 

As of December 31, 2018, there were $1,886,000 convertible notes and $123,000 accrued interest outstanding and unamortized debt discount of $1,100,000.

 

During the year ended December 31, 2019, the Company issued similar convertible promissory notes in the aggregate of $1,498,000 for cash proceeds of $1,362,000, net of OID of $136,000. 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, 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 10,913,420 shares of the Company’ common stock. The warrants are fully vested, exercisable at $0.05 to $0.15 per share and expire one year from the date of issuance. As a result, the Company recorded a note discount of $1,362,000 to account for the relative fair value of the warrants, the notes’ BCF and OID. The note discounts are being amortized over the life of the notes or were amortized in full upon the conversion of the corresponding notes to common stock. During 2019, a total of $2,373,000 of notes and accrued interest payable were converted into 42,570,331 shares of common stock, and note discount amortization of $2,446,000 was recorded as interest expense. As of December 31, 2019, total outstanding notes payable amounted to $1,019,000 which are due through December 2020 and unamortized note discount of $153,000.

 

During the year ended December 31, 2019, the Company accrued interest of $69,000 related to certain past due notes payable. As of December 31, 2019 total accrued interest amounted to $184,000 which was included as part of convertible notes payable in the accompanying consolidated balance sheet.

 

As of December 31, 2019, these notes payable are convertible to approximately 12,914,110 shares of common stock at conversion rates ranging from $0.05 to $0.48 per share.

 

During the year ended December 31, 2020, the Company issued similar convertible promissory notes in the aggregate of $329,000 for cash proceeds of $299,000, net of OID of $30,000. 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, are unsecured, mature in twelve months from issuance and convertible at $0.02 to $0.035 per share. In addition, the Company also granted these note holders warrants to purchase 5,717,017 shares of the Company’s common stock. The warrants are fully vested, exercisable at $0.03 to $0.035 per share and expire one year from the date of issuance. As a result, the Company recorded a note discount of $329,000 to account for the relative fair value of the warrants, the notes’ BCF and OID. The note discounts are being amortized over the life of the notes or were amortized in full upon the conversion of the corresponding notes to common stock. During 2020, a total of $410,000 of notes and accrued interest payable were converted into 9,854,707 shares of common stock, and note discount amortization of $398,000 was recorded as interest expense. As of December 31, 2020, total outstanding notes payable amounted to $953,000 which are due through December 2020 and unamortized note discount of $83,000.

 

During the year ended December 31, 2020, the Company accrued interest of $145,000 related to certain past due notes payable. As of December 31, 2020 total accrued interest amounted to $313,000 which was included as part of convertible notes payable in the accompanying consolidated balance sheet. As of December 31, 2020, twenty-two notes payable with an aggregate balance of $1,128,000 are past due. In addition, subsequent to December 31, 2020, five notes payable with an aggregate balance of $77,000 became past due. The Company is currently in negotiations with these note holders to settle these past due notes payable.

 

As of December 31, 2020, these notes payable are convertible to approximately 13,184,099 shares of common stock at conversion rates ranging from $0.05 to $0.48 per share.

 

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 intends to use 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 December 31, 2020.