| Convertible Promissory Notes Payable and Notes Payable | NOTE
7 – CONVERTIBLE PROMISSORY NOTES PAYABLE AND NOTES PAYABLE Red
Diamond Partners LLC and RDW Capital, LLC On
April 25, 2017, the Company entered into a Securities Purchase Agreement with RedDiamond Partners LLC (“RedDiamond”)
pursuant to which the Company would issue to RedDiamond Convertible Promissory Notes in an aggregate principal amount of up to
$355,000, which includes a purchase price of $350,000 and transaction costs of $5,000. Pursuant to this securities purchase agreement,
on April 25, 2017, the Company entered into a convertible promissory note in the aggregate principal amount of $100,000 and the
Company received $95,000 after giving effect to the original issue discount of $5,000. This note matured on April 25, 2018 and
each tranche matured one year after the date of such funding. The second Tranche was received on June 2, 2017 for $85,000 and
the third Tranche for $85,000 was received on August 8, 2017 upon filing of the Registration Statement. The fourth Tranche was
to be for $85,000, however, as of the date of this filing, the fourth tranche has not yet been received. The Purchaser is not
required to fund any Tranche subsequent to the first Tranche if there is an event of default as described in the promissory notes.
Through date of default, the RedDiamond Notes bore interest at a rate of 12% per annum and were convertible into shares of the
Company’s common stock at RedDiamond’s option at 65% of the lowest VWAP for the previous ten trading days preceding
the conversion. During 2018, the Company failed to make its required maturity date payments of principal and interest on Convertible
Promissory Notes of $270,000. In accordance with these notes, the Company entered into default in 2018, which increased the interest
rate to 18.0% per annum. These convertible promissory notes contain cross default provisions whereby a default in any one note
greater than $25,000 will cause a default in all the notes, however, this provision is only effective if there is a formal notice
of default by the lender. On
June 30, 2017, the Company issued RDW Capital, LLC a senior convertible note in the aggregate principal amount of $240,000, for
an aggregate purchase price of $30,000 of which $15,000 had been recorded as advance from lender as of March 31, 2017 and the
remaining $15,000 received on June 30, 2017. Through date of default, the principal due under the Note accrued interest at a rate
of 12% per annum. All principal and accrued interest under the Note was due six months following the issue date of the Note, and
is convertible into shares of the Company’s common stock, at a conversion price equal to fifty (50%) of the lowest volume-weighted
average price for the previous ten trading days immediately preceding the conversion. The Note includes anti-dilution protection,
including a down-round provision under which the conversion price could be affected by future equity offerings undertaken by the
Company, as well as customary events of default, including non-payment of the principal or accrued interest due on the Note. Upon
an event of default, all obligations under the Note will become immediately due and payable and the Company will be required to
make certain payments to the Lender. On December 31, 2017 the Company failed to make its required maturity date payment of principal
and interest. In accordance with the note, the Company entered into default on January 3, 2018, which increased the interest rate
to 24% per annum. In
connection with the issuance of these Convertible Promissory Notes above, the Company determined that the terms of these Convertible
Promissory Notes included a down-round provision under which the conversion price could be affected by future equity offerings
undertaken by the Company. The
Company evaluated these convertible promissory note transactions in accordance with ASC Topic 815, Derivatives and Hedging. Through
December 31, 2018, the Company determined that the conversion feature of the convertible promissory notes were not afforded the
exemption for conventional convertible instruments due to their respective variable conversion rate and price protection provision.
Accordingly, through December 31, 2018, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging –
Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instruments were
accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting
date. On January 1, 2019, the Company adopted ASU No. 2017-11, Earnings Per Share Distinguishing Liabilities
from Equity Derivatives and Hedging Accounting for Certain Financial Instruments
with Down Round Features, On
April 9, 2019, the Company entered into agreements with RedDiamond, holding these convertible notes representing an aggregate
principal amount of $510,000, and agreed with such holder to:
● extend
the maturity date of the notes to December 31, 2020;
● remove
all convertibility features of the notes; and
● if
the Company completes an offering of equity or equity linked securities (including warrants, convertible preferred stock,
convertible debentures or convertible promissory note) which results in gross proceeds to the Company of at least $4,000,000,
then the Company shall use a portion of the proceeds thereof to repay not less than half of the obligations then outstanding
pursuant to the notes. The
aggregate principal amounts due as of June 30, 2019 and December 31, 2018 amounted to $510,000 and $510,000, respectively. At
December 31, 2018, the principal balance of $510,000 was included in convertible notes payable, a current liability, on
the accompanying consolidated balance sheet. At June 30, 2019, the principal balance of $510,000 was included in notes payable
– related party, a long-term liability, on the accompanying consolidated balance sheet since on April 9, 2019, the
conversion features on the notes were removed and RedDiamond became a principal shareholder of the Company when
they converted their preferred shares to common stock (See Note 9). In connection with this debt modification, the Company
recorded a gain on debt extinguishment of $432,589, which consists of the removal of debt put premium of $385,385 since the debt
is no longer convertible, and $47,205 related to the reversal of default interest payable. Bellridge
Capital, LLC On
June 18, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”), whereby it issued
to an institutional investor (the “Lender”) a senior secured convertible note in the aggregate principal amount of
$2,497,503 (the “Note”), for an aggregate purchase price of $1,665,000, net of an original issue discount of $832,503.
In addition, the Company paid issue costs of $177,212. The original issue discount and issue costs were recorded as a debt discount
to be amortized over the Note term. The principal due under the Note accrues interest at a rate of 10% per annum. Principal and
interest payments of $232,940 were payable monthly beginning on December 18, 2018 and were due monthly over the term of the Note
in cash or common stock of the Company, at the Lender’s discretion. In
connection with the Purchase Agreement, the Lender was issued a warrant, with a term of two years, to purchase up to 4.75% of
the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100. Additionally, the placement
agent was issued a warrant, with a term of two years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of
the Company, for an aggregate purchase price of $100. In
August 2018, the Company defaulted on its convertible note payable with Bellridge due to (i) default on the payment of monthly
interest payments due, (ii) default caused by the late filing of the Company’s report on Form 10-Q for the periods ended
June 30, 2018 and September 30, 2018 and (iii) default of filing of a registration statement. Upon an event of default, all principal,
accrued interest, and liquating damages and penalties were due upon request of the lender at 125% of such amounts. On
December 27, 2018, the lender waived any and all defaults in existence on the Note and the Company agreed to issue a warrant that
is convertible into 2% of the issued and outstanding shares existing as the time the Company files a registration statement or
makes an application to up list to a national stock exchange. Pursuant to this warrant, at any time on or before the date that
the Company files a registration statement on form S-l or applies for up-listing to a National Exchange, and on or prior to the
close of business on the early of the first year anniversary of the issuance of December 27, 2018 (the “Termination Date”),
Bellridge could have chosen to subscribe for and purchase from the Company up to 2% in shares of common stock for an aggregate
exercise price of $100. Additionally, the principal interest amount due under the Note was modified with a monthly payment of
principal and interests due beginning on January 18, 2019 of $156,219 with all remaining principal and interest amounts on the
Note due on December 18, 2019. This modification was not considered a debt extinguishment. On
April 9, 2019, the Company entered into a new agreement with this lender that modified these Notes and cancelled these warrants
(see below). Through
April 9, 2019, all principal and accrued interest under the Note was convertible into shares of the Company’s common stock,
at a conversion price equal to the lower of $1.50 and 65% of the lowest traded price during the fifteen trading days immediately
prior to the conversion date. The Note includes anti-dilution protection, as well as customary events of default, including, but
not limited to, non-payment of the principal or accrued interest due on the Note and cross default provisions on other Company
obligations or contracts. Upon an event of default, all obligations under the Note will become immediately due and payable and
the Company will be required to make certain payments to the Lender. The
Lender was granted a right of first refusal on future financing transactions of the Company while the Note remains outstanding,
plus an additional three months thereafter. In connection with the issuance of the Note, the Company entered into a security agreement
with the Lender (the “Security Agreement”) pursuant to which the Company agreed that obligations under the Note and
related documents will be secured by all of the assets of the Company. In addition, all of the Company’s subsidiaries are
guarantors of the Company’s obligations to the Lender pursuant to the Note and have granted a similar security interest
over substantially all of their assets. A portion of the proceeds of the Note were used to acquire 100% of the membership interests
of Prime. During
the term of this Note, in the event that the Company consummates any public or private offering or other financing or capital
raising transaction of any kind ( each a “Subsequent Offering”), in which the Company receives, in one or more contemporaneous
transactions, gross proceeds of at least $5,000,000, at any time upon ten (10) days written notice to the Holder, but subject
to the Holder’s conversion rights set forth in the Purchase Agreement, then the Company shall use 20% of the gross proceeds
of the Subsequent Offering and shall make payment to the Holder of an amount in cash equal to the product of (i) the sum of (x)
the then outstanding principal amount of this Note and (y) all accrued but unpaid interest, multiplied by (ii) (x) 110%, if the
Prepayment Date is within 90 days of the date hereof the Closing Date (as defined in the Purchase Agreement), or (y) 125%, if
the Prepayment Date is after the 90th day following the Closing Date, to which calculated amount the Company shall add all other
amounts owed pursuant to this Note, including, but not limited to, all Late Fees and liquidated damages. In
connection with the Purchase agreement, the Company entered into a registration rights agreement which, among other things, required
the Company to file a registration statement with the Securities and Exchange Commission no later than 120 days after June 18,
2018. The Company failed to file such registration statement. Accordingly, in addition to any other rights the Holders may have
hereunder or under applicable law, on the default date and on each monthly anniversary of each such default date (if the applicable
event shall not have been cured by such date) until the ninetieth day from such Event Date, the Company shall pay to each Holder
an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of one percent (1%) multiplied by
the aggregate subscription amount paid by the Holder pursuant to the Purchase Agreement. Subsequent to the ninetieth day from
such default date, the one percent (1%) penalty shall increase to two percent (2%), with an aggregate cap of twenty percent (20%)
per annum. If the Company fails to pay any of these partial liquidated damages in full within seven days after the date payable,
the Company will pay interest thereon at a rate of 18% per annum to the Holder, accruing daily from the date such partial liquidated
damages are due until such amounts, plus all such interest thereon, are paid in full. On December 27, 2018, the lender waived
any and all defaults. In
connection with this Purchase Agreement, the Company paid a placement agent $120,000 in cash which is included in issue costs
previously discussed above and this placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of
the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100 (the “Placement Warrant”).
On April 9, 2019, the Company entered into an agreement with this placement agent that cancelled these warrant. In
connection with the issuance of this Note, Warrants, and Placement Warrant, the Company determined that this Note and there Warrants
contains terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of ASC Topic No. 815-40, “Derivatives
and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible
instrument and the Warrant and Placement Warrant were accounted for as derivative liabilities at the date of issuance and shall
be adjusted to fair value through earnings at each reporting date. The fair value of this embedded conversion option derivative,
and the Warrant and Placement Warrant were determined using the Binomial valuation model and Monte-Carlo simulation model, respectively. Convertible
debt modifications and warrant cancellations On
April 9, 2019 (the “Modification Date”), the Company entered into an agreement with Bellridge Capital, L.P. (“Bellridge”)
that modifies its existing obligations to Bellridge as follows:
● the
overall principal amount of that certain Convertible Promissory Note, dated June 18, 2018, issued by the Company in favor
of Bellridge (the “Note”) was reduced from the original principal amount of $2,497,502 (principal amount was $2,223,918
at April 9, 2019) to $1,800,000, in exchange for the issuance to Bellridge of 800,000 shares of restricted common stock, which
shall be delivered to Bellridge, either in whole or in part, at such time or times as when the beneficial ownership of such
shares by Bellridge will not result in Bellridge’s beneficial ownership of more than the Beneficial Ownership Limitation
and such shares will be issued within three business days of the date the Bellridge has represented to the Company that it
is below the Beneficial Ownership Limitation. Such issuances will occur in increments of no fewer than the lesser of (i) 50,000
shares and (ii) the balance of the 800,000 shares owed. The “Beneficial Ownership Limitation” shall be 4.99% of
the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares
of common stock issuable pursuant to this Agreement. As of August 19, 2019, 100,000 of these shares have been issued;
● the
maturity date of the Note was extended to August 31, 2020;
● the
interest rate was reduced from 10% to 5% per annum;
● if
the Company completes an offering of equity or equity linked securities (including warrants, convertible preferred stock,
convertible debentures or convertible promissory note) which results in gross proceeds to the Company of at least $4,000,000,
then the Company shall use a portion of the proceeds thereof to repay not less than half of the obligations then outstanding
pursuant to the Note;
● if
the Company completes an offering of debt which results in gross proceeds to the Company of at least $3,000,000, then the
Company shall use a portion of the proceeds thereof to repay any remaining obligations then outstanding pursuant to the Note;
● the
convertibility of the Note will now be amended such that the Note shall only be convertible at a conversion price to be mutually
agreed upon between the Company and the Holder. As of the date of this report, the Company and Holder have not mutually agreed
on a conversion price, Since the conversion terms are unknown, the Company will account for this conversion feature when the
contingency is resolved;
● the
registration rights previously granted to Bellridge have now been eliminated; and
● those
certain Warrants, dated June 18, 2018 and December 27, 2018, respectively, issued by the Company in favor of Bellridge shall
be cancelled and of no further force or effect. In exchange, the Company will issue Bellridge 360,000 shares of restricted
common stock. In
addition, on the Modification Date, warrant holders holding warrants exercisable into an aggregate of 4.75% of the outstanding
common stock of the Company all agreed to exercise such warrants for an aggregate of 240,000 shares of common stock of the Company. In
connection with the modification of the Bellridge Note and the cancellation of the related warrants, under the provisions of ASC
Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion
option contained in the convertible instrument and the Warrant and Placement Warrant were adjusted to fair value through earnings
on the Modification Date. The fair value of this embedded conversion option derivative, and the Warrant and Placement Warrant
were determined using the Binomial valuation model and Monte-Carlo simulation model, respectively. For the period from April 1,
2019 to April 9, 2019, the change of fair value of derivative liabilities associated with these instruments amounted to $41,653,345,
which was recorded as derivative expense on the Modification date. The increase in derivative liabilities was caused by an increase
in the Company’s stock price, as quoted on OTC Markets. Additionally, on the Modification Date, the Company analyzed the
Bellridge Note modification and the cancellation of the warrants and pursuant to ASC 470-50, the modifications were treated as
a debt extinguishment. Gain
on debt extinguishment In
connections with the RedDiamond and Bellridge debt modifications and warrants cancellations discussed above, on the Modification
Date, the Company recorded a gain on debt extinguishment of $43,823,897 which consists of the following.
Gain on Extinguishment
Gain from reversal of derivative liabilities on Modification Date $ 61,841,708
Fair value of common shares issued on Modification Date (17,934,000 )
Write-off of remaining debt discount (1,013,118 )
Reversal of put premium on stock-settled debt related to cancellation of conversion terms 385,385
Reduction of principal and interest balances due 543,922
Gain of debt extinguishment $ 43,823,897 Summary
of derivative liabilities Through
April 9, 2019, the Company revalued the embedded conversion option and warrant derivative liabilities. In connection with these
revaluations, the Company recorded derivative expense of $55,037,605 and $9,505,352 for the six months ended June 30, 2019 and
2018, respectively During
the six months ended June 30, 2019 and 2018, the fair value of the derivative liabilities was estimated using the Black-Sholes
valuation model, Binomial valuation model, and the Monte-Carlo simulation model with the following assumptions:
2019 2018
Expected dividend rate - -
Expected term (in years) 0.05 to 0.75 0.01 to 2.00
Volatility 228.1 % 261.2% to 307.75 %
Risk-free interest rate 2.23% to 2.40 % 1.32% to 2.11 % Convertible
note payable – related parties On
March 13, 2019, the Company entered into a convertible note agreement with an individual, who is affiliated to the Company’s
chief executive officer, in the amount of $500,000. Commencing on April 11, 2019, and continuing on the eleventh day of each month
thereafter, payments of interest only on the outstanding principal balance of this Note of $7,500 shall be due and payable. Commencing
on October 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021, payments of principal
and interest of $31,902 shall be made, if not sooner converted as provided in the note agreement. The payment of all or any portion
of the principal and accrued interest may be paid prior to the April 11, 2021. Interest shall accrue with respect to the unpaid
principal sum identified above until such principal is paid or converted as provided below at a rate equal to 18% per annum compounded
annually. All past due principal and interest on this Note shall bear interest from maturity of such principal or interest (in
whatever manner same may be brought about) until paid at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate
allowed by applicable law. This Note may be converted by Holder at any time in principal amounts of $100,000 in accordance with
the terms by delivery of written notice to the Company, into that number of shares of common stock equal to the amount obtained
by dividing the portion of the aggregate principal amount of this Note that is being converted by $1.37. In connection with the
issuance of this Note, the Company determined that this Note contains terms that are fixed monetary amounts at inception. Since
the conversion price of $1.37 was equal to the quoted closing of the Company’s common shares on the note date, no beneficial
feature conversion was recorded. On
April 11, 2019, the Company entered into a convertible note agreement with an entity affiliated with the Company’s chief
executive officer in the amount of $2,000,000. Commencing on May 11, 2019, and continuing on the eleventh day of each month thereafter,
payments of interest only on the outstanding principal balance of this Note of $30,000 shall be due and payable. Commencing on
November 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021, payments of principal and
interest of $117,611 are due, if the note is not sooner converted as provided in the note agreement. The payment of all or any
portion of the principal and accrued interest may be prepaid prior to April 11, 2021. Interest shall accrue with respect to the
unpaid principal sum identified above until such principal is paid or converted as provided below at a rate equal to 18% per annum
compounded annually. All past due principal and interest on this Note shall bear interest from maturity of such principal or interest
until paid at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate allowed by applicable law. This Note may
be converted by Holder at any time in principal amounts of $100,000 in accordance with the terms by delivery of written notice
to the Company, into that number of shares of common stock equal to the amount obtained by dividing the portion of the aggregate
principal amount of this Note that is being converted by $11.81. Since the conversion price of $11.81 was equal to the quoted
closing of the Company’s common shares on the note date, no beneficial feature conversion was recorded. At
June 30, 2019 and December 31, 2018, convertible promissory notes (third party and related parties) are as follows:
June 30, 2019 December 31, 2018
Principal amount $ 1,800,000 $ 3,007,503
Principal amounts – related parties 2,500,000 -
Total principal amount 4,300,000 3,007,503
Less: unamortized debt discount - (1,595,627 )
Convertible notes payable, net 4,300,000 1,411,876
Less: current portion of convertible notes payable (4,300,000 ) (1,411,876 )
Convertible notes payable, net – long-term $ - $ - For
the six months ended June 30, 2019 and 2018, amortization of debt discounts related to these convertible notes amounted to $430,268
and $332,364, respectively, which has been included in interest expense on the accompanying unaudited condensed consolidated statements
of operations. |
