10. CONVERTIBLE NOTES PAYABLE

12 Months Ended

Dec. 31, 2019

Debt Disclosure [Abstract]

CONVERTIBLE NOTES PAYABLE

10. CONVERTIBLE NOTES PAYABLE

As of December 31, 2019, the following summarizes gross amounts owed under convertible notes payable:

	December 31,
	2019		2018
Evey Note	$	–	$	50,616
“Lender” Note	$	–	$	1,500,000
Pegasus Note	$	–	$	100,000

As of December 31, 2018, the following summarizes amounts owed under convertible notes payable:

	Amount		Unamortized Discount		Convertible Notes Payable, net of discount
Evey Note	$	50,616	$	15,480	$	35,136
“Lender” Note		1,500,000		430,901		1,069,099
Convertible Notes Payable - Current Portion	$	1,550,616	$	446,381	$	1,104,235
Pegasus Note	$	100,000	$	–	$	100,000
Convertible Notes Payable - Long Term Portion	$	100,000	$	–	$	100,000

In April 2019, the Company used proceeds from its public offering to pay off the entire balances of all outstanding convertible notes payable, except for Mr. Wheatley’s convertible note as discussed in Note 9, totaling $1,650,616 in principle, and $192,191 of accrued and unpaid interest. As of December 31, 2019, the following summarizes those convertible notes payable:

Pegasus Note

On December 19, 2009, the Company entered into a convertible promissory note for $100,000 to a new landlord in lieu of paying rent for one year for new office space. The interest was 10% per annum with the note principal and interest originally due December 18, 2010. If the Company receives greater than $1,000,000 of proceeds from debt or equity financing, 25% of the amount in excess of $1,000,000 would be used to pay down the note. This note was subordinate to all existing senior indebtedness of the Company. This note was convertible at $16.50 per share and had no beneficial conversion feature at the note date.

Through a series of amendments, the term of the note was extended until December 31, 2016, and the lender waived, through December 31, 2015, the requirement to pay down the note with financing proceeds received by the Company.

Effective June 13, 2018, the Company entered into a further amendment to extend the maturity date of this note to December 31, 2019, and the lender waived the past requirements to pay the note with financing proceeds received by the Company. There were no additional fees or discounts associated with this amendment. This modification was treated as an extinguishment as the change in fair value of the embedded conversion option just before and just after the modification was more than 10% of the carrying amount of the note. The market price of the Company’s stock was below the conversion price at the time of the modification, therefore no beneficial conversion feature needed to be recorded.

As of December 31, 2018, the note had a balance of $100,000 with accrued interest of $90,137 included in accrued expenses.

As of March 31, 2019, the note had a balance of $100,000 with accrued and unpaid interest amounting to $92,603.

In April 2019, the Company repaid the $100,000 note, and unpaid interest of $93,096, of which $493 was expensed in that quarter.

Evey Note

Prior to fiscal 2011, the Company was advanced monies by John Evey, our former director, and executed a 10% convertible promissory note with compounding interest which was convertible into shares of common stock at $16.50 per share. There was no beneficial conversion feature at the note date and this note was subordinate to the then existing notes. Through a series of amendments from the original due date, the conversion price of the convertible note was reduced to $10.00 and the maturity date was extended to December 31, 2017.

Effective June 27, 2018, the Company entered into a further extension agreement to extend the maturity date of this note to July 1, 2019. There were no additional fees or discounts associated with this extension. This modification was treated as an extinguishment as the change in fair value of the embedded conversion option just before and just after the modification was more than 10% of the carrying amount of the note. The Company recorded debt discount amounting to $30,960 for the value of the beneficial conversion feature and is amortizing this to interest expense over the remaining term of the loan.

At December 31, 2018, this note had a balance of $35,136, net of a discount of $15,480 and accrued interest of $73,382 included in accrued expenses.

As of March 31, 2019, this note had a balance, net of $7,740 of discount, amounting to $42,876 with accrued interest amounting to $76,440 which is included in accrued expenses. The note continued to bear interest at a rate of 10%.

In April 2019, the Company repaid the note balance of $50,616, and unpaid interest of $77,066, of which $627 was expensed in that quarter. In addition, the Company paid $80,000 to Mr. Evey in April 2019 for consulting services.

“Lender” Note

On September 18, 2017, in addition to entering into a revolving convertible line of credit (See Note 8), the Company also entered into a $1,500,000 secured convertible promissory note with the same unaffiliated lender (the “Lender”). The Note bears simple interest at the floating rate per annum equal to the 12-month USD LIBOR index rate quoted from time to time in New York, New York by the Bloomberg Service plus 400 basis points (the “Interest Rate”). The Interest Rate will be adjusted on the first day of each calendar month during the term of the Note to reflect any changes in the 12 month LIBOR rate as quoted at on that day, or if that day is not a business day, on the next business day thereafter. Interest will only accrue on outstanding principal. Accrued unpaid interest was payable monthly on the first calendar day of each month for interest accrued during the previous month, with all outstanding principal and accrued unpaid interest originally payable in full on or before September 17, 2018 to the extent not converted into shares of the Company’s common stock. This note was initially amended to be payable in full by December 1, 2018 but the Company did not make the December 1, 2018 principal payment. In March 2019, and effective as of December 1, 2018, the Company entered into second amendment to extend the term of the note to be payable in full by (i) June 30, 2019 or (ii) the closing of the public offering by the Company. This modification was treated as a debt extinguishment as the change in fair value of the embedded conversion option just before and just after the modification was more than 10% of the carrying amount of the note. The Company recorded debt discount amounting to $472,718 for the value of the beneficial conversion feature and is amortizing this to interest expense over the remaining term of the note. Additionally, the Company paid $30,000 of lender fees which were also recorded as debt discount and are also being amortized to interest expense over the term of the note. The Note is secured by a perfected recorded first priority security interest in all of the Company’s assets, as set forth in a certain Security Agreement by and between the Company and the Lender, dated September 18, 2017. At any time until the maturity date, and provided Lender gives the Company written notice of Lender’s election to convert prior to any prepayment of this Note by the Company with respect to converting that portion of this Note covered by the prepayment, the Lender has the right to convert all or any portion of the outstanding principal and accrued interest (the “Conversion Amount”), into such number of shares of the Company’s common stock as is determined by dividing the Conversion Amount by the greater of (i) seven dollars and fifty cents ($7.50) or (ii) 75% of the Volume Weighted Average Price of the Company’s common stock that is quoted on a public securities trading market (if more than one, the one with the then highest trading volume), during the five (5) consecutive trading days immediately prior to the date of the Lender’s written notice of its election to convert.

As additional consideration for the loan evidenced by the Note, the Company agreed to issue to the Lender common stock purchase warrants exercisable for a period of three years from the date of issuance with an exercise price equal to $7.50 per share. The number of warrants issuable to the Lender is equal to 25% of the loan Amount divided by seven dollars and fifty cents ($7.50). As of September 18, 2017, the Company issued warrants to purchase up to 50,000 shares of common stock under this provision with a $7.50 exercise price having a fair value of $187,142 using the Black-Scholes valuation methodology. As a result of this transaction, the Company recorded $232,768 of debt discount consisting of the relative fair value of the warrants of $166,384 and a beneficial conversion feature of $66,384, which was amortized to interest expense over the original term of the note.

During any time when the Note is outstanding, or when the Lender holds any Company stock, or any warrants to acquire Company stock where the combination of both could result in the Lender owning stock with a current value of one million dollars or greater, in the Company, the Lender will have certain review and consulting rights as described in the Note.

At December 31, 2018, this convertible note had a balance of $1,069,099, net of a discount of $430,901 and accrued interest of $9,094 included in accrued expenses.

As of March 31, 2019, the convertible note had a balance, net of discount of $215,450, amounting to $1,284,550 with accrued interest amounting to $16,774.

In April 2019, the Company repaid the note balance of $1,500,000, unpaid interest of $22,029, of which $5,255 of interest was expensed in that quarter.