| CONVERTIBLE DEBT | NOTE 5
– CONVERTIBLE DEBT On
September 19, 2019, the Company completed the closing of $600,000 of secured convertible debentures (the “2019 Debentures”)
for gross proceeds of $540,000 after original issue discounts. As of September 18, 2019 (the “Effective Date”), the
Company entered into two substantially identical securities purchase agreements (the “Securities Purchase Agreements”)
with two purchasers (the “Purchasers”), which provided for the issuance of up to an aggregate of $1.2 million in principal
amount of the 2019 Debentures (the “Bridge Financing”) of which the first tranche of $600,000 was issued. The Securities
Purchase Agreements provided for the issuance of the 2019 Debentures due one year from the dates of issuance in two $600,000 tranches:
the first tranche as described above, and the second tranche, at the discretion of the Purchasers and us, to occur any time after
November 17, 2019. If, at any time after November 17, 2019, the Purchasers elected not to consummate the closing of the second
tranche, then the Company was entitled to raise up to $600,000 from additional investors (including the Company’s affiliates)
who would have a security interest on a pari passu In
connection with the 2019 Debentures, each of the Purchasers received commitment fees of $5,000 and 500,000 restricted shares (the
“Commitment Shares”) of our common stock. The placement agent for the 2019 Debentures received a cash fee of 8% of
the gross proceeds received at the closing and was entitled to receive warrants convertible into shares of common stock until
May 2020 when the placement agent waived its right to receive the warrants. The
2019 Debentures contained provisions that entitled each Purchaser, at any time, to convert all or any portion of the outstanding
principal amount of its 2019 Debenture(s) plus any accrued interest into restricted shares of common stock. If we consummated
a public offering within 180 calendar days of the Effective Date, then the conversion price would be the lesser of (a) $7.50 or
(b) 70% multiplied of the price per share of the common stock we issued in the public offering (the “QPI Discounted Price”),
subject to further adjustment as provided in the 2019 Debentures as well as subject in each case to equitable adjustments resulting
from any stock splits, stock dividends, recapitalizations or similar events. Further, if the Company consummated a public offering
of common stock which resulted in us receiving gross proceeds of at least $5 million within 180 calendar days of the Effective
Date then we would have been obligated to repay the outstanding amounts owed under the 2019 Debentures, to the extent they were
not converted and including the applicable redemption premium then in effect, within three days of consummation of such an offering. If
any portion of the 2019 Debentures was outstanding on the 181st calendar day after the Effective Date, then the conversion price
would equal the lesser of (a) $7.50, (b) the QPI Discounted Price, or (c) 70% of the lowest volume-weighted average price (as
reported by Bloomberg LP) of the common stock on any trading day during the 20 trading days immediately preceding the date of
conversion of the 2019 Debentures (provided, further, that if either we are not DWAC operational at the time of conversion, the
common stock is traded on the OTC Pink at the time of conversion, or the conversion price was less than $0.50 per share, then
70% would automatically adjust to 60%). The
2019 Debentures were subject to a “conversion blocker” such that the each of the Purchasers could not convert the
2019 Debentures to the extent that the conversion would result in the Purchaser and its affiliates holding more than 4.99% of
the outstanding common stock (which the Purchaser could increase to 9.99% upon at least 61 days prior written notice to us). So
long as no event of default had occurred and was continuing under the 2019 Debentures, the Company could at our option call for
redemption all or part of the 2019 Debentures prior to the maturity date, upon not more than two calendar days written notice,
for an amount equal to: (i) if the redemption date was 90 calendar days or less from the date of issuance of the 2019 Debentures,
110% of the sum of the principal amount; (ii) if the redemption date was greater than or equal to 91 calendar days from the date
of issuance of the 2019 Debentures and less than or equal to 150 calendar days from the date of issuance of the 2019 Debentures,
120% of the sum of the principal amount; (iii) if the redemption date was greater than or equal to 151 calendar days from the
date of issuance of the 2019 Debentures and less than or equal to 180 calendar days from the date of issuance of the 2019 Debentures,
125% of the sum of the principal amount; and (iv) if either (1) the 2019 Debentures were in default but the holder consents to
the redemption notwithstanding such default or (2) the redemption date was greater than or equal to 181 calendar days from the
date of issuance of the 2019 Debentures, 130% of the sum of the principal amount. The
2019 Debentures included an adjustment provision that, subject to certain exceptions, would reduce, at the Purchaser’s option,
the conversion price if we issued common stock or common stock equivalents (including in variable rate transactions) at a price
lower than the then-current conversion price of the 2019 Debentures. Any reverse stock split of our outstanding shares would also
have resulted in an adjustment of the conversion price of the 2019 Debentures. The
conversion option, the QPI put and the put that were exercisable upon certain financing events are embedded derivatives that are
collectively bifurcated at fair value, with subsequent changes in fair value recognized in the Statement of Operations. The fair
value estimate is a Level 3 measurement as defined by ASC Topic 820, Fair Value Measurements and Disclosures, as it is based on
significant inputs not observable in the market. The Company estimated the fair value of the monthly payment provision using a
Monte Carlo Simulation, with 10,000 trials, with the following key inputs:
June
30, 2020 December
31, 2019
Stock price - $3.50
- $5.00
Terms (years) - 0.72
– 1.00
Volatility - 153.9%
- 195.7%
Risk-free rate - 1.60%
- 1.87%
Probability
of QPI - 50% As
of December 31, 2019, the Company’s warrants issuable to the Company’s placement agent in relation to the 2019 Debentures
were treated as derivative liabilities and changes in the fair value were recognized in earnings. The Company estimated the
fair value of these potentially issuable warrants using the Black-Scholes method and the following assumptions:
June
30, December
31,
Closing
trade price of Common Stock $ - $ 3.50
Intrinsic value
of conversion option per share $ - $ 3.50
June
30, December
31,
Annual
Dividend Yield - 0.0%
Expected Life (Years) - 5
Risk-Free Interest
Rate - 1.68%-1.69%
Expected Volatility - 445.01%-453.08% Expected
volatility was based primarily on historical volatility. Historical volatility was computed using daily pricing observations for
recent periods. The Company believes this method produced an estimate that was representative of the Company’s expectations
of future volatility over the expected term of these warrants. The Company had no reason to believe future volatility over the
expected remaining life of these warrants was likely to differ materially from historical volatility. The expected life
was based on the expected remaining term of the warrants. The risk-free rate was based on the U.S. Treasury rate that corresponded
to the expected term of the warrants. The
Company recorded a total of $401,957 debt discount upon the closing of the 2019 Debentures, including $171,425 fair value of the
embedded derivative liability, $70,100 fair value of the common stock issued, $78,693 of direct transaction costs incurred, $21,739
related to warrants issuable to the placement agent, and $60,000 original issue discount. The debt discount is amortized to interest
expense over the term of the loan. Amortization of the debt discount associated with the 2019 Debentures was $99,954 for the year
ended December 31, 2019 and was included in interest expense in the Statements of Operations. The
2019 Debentures were fully redeemed on February 26, 2020 for a face value of $600,000 and an early redemption fee of $150,000
resulting in a $280,504 loss on extinguishment of debt included in the Statement of Operations. The
following table summarizes the 2019 Debentures outstanding as of June 30, 2020 and December 31, 2019:
June
30, 2020 December
31, 2019
Convertible Debentures,
due September 18, 2020:
Principal value $ - $ 600,000
Unamortized debt discount - (302,003 )
Carrying value of
convertible notes - 297,997
Total short-term carrying value of Convertible
Debentures $ - $ 297,997
Embedded
Derivative Liability:
Fair
value of derivative liability, December 31, 2019 $ 171,499
Gain
on extinguishment of debt (171,499 )
Fair
value of derivative liability, June 30, 2020 $ - On
March 6, 2020, the Company completed the offering of $1,992,000 of senior secured convertible debentures (the “2020 Debentures”)
and raised $1,992,000 in gross proceeds from the sale of the 2020 Debentures and 2020 Warrants (defined below). Of this amount,
$330,000 was received from four directors and an entity in which one officer of the Company is a majority owner and co-manager.
The Company received $1,747,203 after deducting direct transaction costs. The Company used $750,000 of the net proceeds to redeem
the existing 2019 Debentures prior to maturity, with a face value of $600,000 and an early redemption fee of $150,000. The
2020 Debentures were due eighteen months following issuance as follows; $932,000 on August 26, 2021, $910,000 on August 28, 2021
and $150,000 on September 6, 2021. The
Company’s capital structure after the closing had no outstanding variably-priced convertible instruments on its Balance
Sheets. The 2020 Debentures were secured by a blanket lien on all assets of the Company until such time the 2020 Debentures were
paid in full or converted in full. The
2020 Debentures were automatically convertible into shares of the Company’s common stock upon the earliest to occur of (i)
the commencement of trading of the common stock on the Nasdaq, New York Stock Exchange or NYSE American (an “Uplist”)
at the Uplist Conversion Price (defined below); or (ii) at any time the minimum bid price of the common stock exceeded $25.00
per share for twenty (20) consecutive trading days and the average trading volume during the 10 trading days prior to the conversion
was at least 2,000 shares and the shares were registered under an effective registration statement or the shares were salable
under Rule 144 (“Rule 144”) of the Securities Act of 1933, as amended. The “Uplist Conversion Price” was
the lesser of $4.00 or a 30% discount to the public offering price a share of common stock was offered to the public in a securities
offering resulting in the listing of the common stock on the Nasdaq, New York Stock Exchange or NYSE American. The
2020 Debentures were convertible, at any time, at the option of the holder, into shares of common stock, at a fixed conversion
price equal to $4.00 per share. The
embedded conversion feature was not determined to be a derivative that required bifurcation pursuant to FASB ASC 815, “Derivatives
and Hedging” (“ASC 815”), but was determined to be a beneficial conversion feature that required recognition
within equity on the commitment date. The beneficial conversion feature was recognized at its intrinsic value on the commitment
date, limited to the proceeds allocated to the convertible debt. As such, the Company recorded $649,552 within additional paid-in-capital
on the Balance Sheets for the beneficial conversion feature identified. The debt discount arising from recognition of the beneficial
conversion feature was amortized as interest expense over the term of the convertible debt. In
connection with the issuance of the 2020 Debentures, the Company also issued warrants (“2020 Warrants”) to purchase
498,000 shares of common stock. Each 2020 Warrant had a three-year (3) term and was immediately exercisable at an exercise price
of $7.50 per share. If at any time after six months following the issuance date and prior to the expiration date the Company failed
to maintain an effective registration statement (the “Registration Statement”) with the SEC covering the resale of
the shares of common stock underlying the 2020 Warrants, the 2020 Warrants could have been exercised by means of a “cashless
exercise,” until such time as there was an effective Registration Statement. Each 2020 Warrant contained customary adjustment
provisions in the event of a stock split, reverse stock split or recapitalization. 2020 Warrants for 82,500 shares were issued
to four directors and an entity in which one officer of the Company is a majority owner. The
2020 Warrants were determined to meet equity classification pursuant to FASB ASC 480, “Distinguish by Liabilities from Equity”
and ASC 815. As such, the relative fair value of the 2020 Warrants was recorded as additional paid-in-capital on the Balance Sheets,
which was determined to be $1,063,239, on the issuance date. The debt discount arising from recognition of the 2020 Warrants was
amortized as interest expense over the term of the convertible debt. On
June 22, 2020, the Company cancelled the 2020 Warrants for twenty-three of the twenty-five warrant holders and issued to the holders
of the cancelled 2020 Warrants an aggregate of 179,200 shares of Common Stock. Of this amount, 33,000 shares of Common stock were issued
to four directors and an entity in which one officer of the Company is a majority owner and co-manager. 2020 Warrants to purchase
an aggregate of 81,700 shares of Common Stock at an exercise price of $4.59 per share remain outstanding. Also on such date, the
2020 Debentures were automatically converted into an aggregate of 637,513 shares of common stock and warrants to purchase 573,479
shares of common stock. Of this amount, 105,567 shares of common stock and warrants to purchase 105,567 of shares of common stock
were issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager. See Note 8
– Stock options, Restricted Stock and Warrants. In
connection with the 2020 Debentures, the Company entered into an agreement with a non-exclusive financial advisor and placement
agent for a term of twelve months commencing in January 2020. Upon execution of the agreement, the Company issued 5,000 fully
vested restricted shares of the Company’s common stock and recorded $32,500 included in general and administrative expense
in the accompanying Statements of Operations. On March 6, 2020, in connection with this agreement a cash compensation of $152,960
was made by the Company and an additional 12,285 shares of the Company’s common stock were issued. These amounts were included
in the debt discount for the 2020 Debentures noted above. In
February 2020, the Company entered into an agreement with a non-exclusive financial advisor and placement agent terminating the
later of April 30, 2020 or upon closing a successful private placement. The agreement automatically extended for periods of thirty
days until terminated in writing. The Company agreed to pay 10% of the gross proceeds raised by the financial advisor and placement
agent and agreed to issue an amount of restricted shares equal to 4% of the total securities sold in the private placement divided
by the last reported closing price of the stock on the closing date of the private placement. On March 6, 2020, in connection
with this agreement cash compensation of $25,000 was paid by the Company and 1,923 shares of the Company’s common stock
were issued. These amounts were included in the debt discount for the 2020 Debentures noted above. The
Company recorded a total of $1,992,000 debt discount upon the closing of the 2020 Debentures, including the $649,552 intrinsic
value of the beneficial conversion option, $34,412 relative fair value of the common stock issued to the placement agents, $244,797
of direct transaction costs incurred and $1,063,239 related to the 2020 Warrants. The debt discount was amortized to interest
expense over the term of the loan. On
June 22, 2020, upon the Company’s consummation of the public offering (See Note 7 – Stockholders’ Equity) and
the Company’s commencement of trading on Nasdaq, the 2020 Debentures were automatically converted at $3.22, the QPI Discounted
Price. As a result, the unamortized debt discount was fully amortized and included in interest expense in the accompanying Statements
of Operations. Amortization of the debt discount associated with the 2020 Debentures was $1,868,183 and $1,992,000 for the three
and six months ended June 30, 2020, respectively, and was included in interest expense in the accompanying Statements of Operations.
Interest expense for the three and six months ended June 30, 2020 was $43,202 and $60,802, respectively. On
January 30, 2020 the Company issued an unsecured promissory note payable to a stockholder of the Company with a face value of
$75,000 and an interest rate of 10% per annum payable in full on March 30, 2020, subject to the Company’s right to extend
payment until May 29, 2020. On February 28, 2020, the holder of the $75,000 promissory note which was to become due in March 2020
purchased $80,000 of the 2020 Debentures and 2020 Warrants, which was paid by exchanging the promissory note and paying an additional
$5,000. This is included in the $1,992,000 gross proceeds raised. Interest expense in relation to the unsecured promissory note
of $0 and $1,250 was recorded for the three and six months ended June 30, 2020, respectively. |
