• Filing Date: 2016-11-15
  • Form Type: 10-Q/A
  • Description: Quarterly report (Amendment)
v3.5.0.2
4. CONVERTIBLE NOTES PAYABLE
9 Months Ended
Sep. 30, 2016
Debt Disclosure [Abstract]  
CONVERTIBLE NOTES PAYABLE

Between July 15, 2014 and December 21, 2015, the Company entered into convertible notes with third parties for use as operating capital for a total of $1,358,500. The convertible notes payable agreements require the Company to repay the principal, together with 10 - 18% annual interest by the agreements’ expiration dates ranging between July 15, 2019 and August 6, 2020. The notes are secured by assets of the Company and mature five years from the issuance date and automatically convert into shares of common stock at a conversion price of 80% of the closing market price on the last day of the month upon which the maturity dates fall, unless an election is made for repayment in cash. One year from the contract date, the holders may elect to convert the note in whole or in part into shares of common stock at a conversion price of 80% of the average closing market price over the prior 30 days of trading. During the three months ended September 30, 2016, a total of $612,000 of these notes were converted into shares of common stock, with a total of $746,500 of these notes remaining as of September 30, 2016.

 

The Company analyzed the conversion option of the notes for derivative accounting consideration under ASC 815-15, Derivatives and Hedging, and determined that the instrument should be classified as a liability once the conversion option becomes effective after one year since there is no explicit limit to the number of shares to be delivered upon settlement of the above conversion options for the notes issued (see Note 6).

 

Between March 9, 2015 and May 11, 2016, the Company entered into convertible notes with third parties for use as operating capital for a total of $2,074,800. The convertible notes payable agreements require the Company to repay the principal, together with 12% annual interest by the agreements’ expiration dates ranging between March 9, 2017 and May 11, 2019. The notes are secured by assets of the Company and mature three years from the issuance date. Six months from the contract date, the holders may elect to convert the note in whole or in part into shares of common stock at $0.15. Two warrants were issued with each note including (1) a warrant to purchase an amount of equal to 50% of face value of the note at an exercise price $0.15 for a period of three years following the note issuance date and (2) a warrant to purchase an amount of equal to 83.33% of face value of the note at an exercise price $0.25 for a period of three years following the note issuance date. The Company recorded an aggregate debt discount of $686,536 for the fair value of these warrants through September 30, 2016, which is being amortized over the term of the notes, and is included in convertible notes on the Company’s balance sheet at an unamortized remaining balance of $276,502. The total debt discount recorded during the nine months ended September 30, 2016 and 2015 was $70,398 and $565,519, respectively. Interest expense related to the amortization of this debt discount for the nine months ended September 30, 2016 and 2015 was $156,426 and $56,859, respectively. During the three months ended September 30, 2016, a total of $690,500 of these notes were converted into shares of common stock, with a total of $1,384,300 of these notes remaining as of September 30, 2016.

 

During the three months ended September 30, 2016, the total of all notes converted was $1,302,500, with the holders receiving an aggregate of 32,562,500 shares of common stock.

 

During the nine months ended September 30, 2016 and 2015, the Company recorded interest expense of $1,769,083 and $256,819, respectively.