• Filing Date: 2018-04-17
  • Form Type: 10-K
  • Description: Annual report
v3.8.0.1
4. CONVERTIBLE DEBT AND DERIVATIVE LIABILITIES
12 Months Ended
Dec. 31, 2017
Debt Disclosure [Abstract]  
CONVERTIBLE PROMISSORY NOTE

Summary of Convertible Promissory Notes:

 

   2017   2016 
Arnost Note  $   $322,000 
CAVU Notes, net of $0 for 2017 and $8,379 for 2016   100,000    241,621 
Berg Notes (a)   50,000    3,722,000 
Investor Notes, net of discounts of $0 and $529,107, respectively       6,546,654 
Secured Notes (b) net of discounts of $234,502 for 2017 and $0 for 2016   2,999,498     
Total Debt   3,149,498    10,832,275 
Current portion of debt   3,149,498    10,832,275 
Long-term portion of debt  $   $ 

 

 

(a)

Between August and December 2015, the Company borrowed $3,675,000 from accredited investors. These loans are due and payable the earlier of December 31, 2016 or the completion of an equity financing of at least $2,500,000. Upon the sale of the unsecured promissory notes, the Company issued $1 of principal, one share of common stock and a warrant to purchase one share of common stock at an exercise price of $0.40 per share through August 31, 2017. Accordingly, an aggregate of 3,675,000 shares of common stock and warrants to purchase a like amount were issued in the last six months of 2015. Each noteholder has the right to convert the principal of their note and accrued interest thereon at a conversion price of $0.30 per share or at the noteholder’s option, into equity securities of the Company on the same terms as the last equity transaction completed by the Company prior to each respective conversion date.
     
  (b) On February 28, 2017, the Company entered into an agreement with two non-affiliated persons to provide $1.6 million of short term secured debt financing in three monthly tranches. The Company will issue in connection with each tranche, a six-month secured convertible promissory note. In connection with this transaction, the Company agreed to issue an origination fee of 3,200,000 warrants. Alexander Capital L.P. acted as Placement Agent and Advisor for this transaction. In August, September and October 2017, the noteholders exchanged their $1,600,000 of notes that were coming due in August through October 2017 plus a 30% premium and accrued interest for new six-month notes in the principal amount of $2,184,000. As additional consideration for the exchange, the Company issued 533,334 shares of common stock..

 

The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting related to 15 convertible notes issued totaling $3,234,000 which included a ratchet provision in the conversion price of $.05 or $.30 or a price equal to the last equity transaction completed by the Company as part of a subscription agreement. The notes have maturity dates ranging from July 31, 2017 – June 13, 2018. The Company also has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting related to 2,200,000 warrants which included a ratchet provision in the conversion price of $.05 as part of a conversion of preferred AAA shares, and 1,000,000 warrants which included a ratchet provision in the conversion price of $.055 as part of a placement fee related to a note. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Company’s balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. The Company has estimated the fair value of these embedded derivatives for convertible debentures and associated warrants using a multinomial lattice model as of December 31, 2017. The fair values of the derivative instruments are measured each quarter, which resulted in a gain of $3,376,620 and initial derivative expense of $1,284,704 during the period ended December 31, 2017. As of December 31, 2017, the fair market value of the derivatives aggregated $666,123 using the following assumptions: estimated 0.1 to 4.33-year term, estimated volatility of 183.70% to 415.83%, and a discount rate of 0.00% to 1.87%.

    

In February 2017, The Company debt holders converted $3,672,000 of notes being converted at 0.05 per share into 73,440,000 shares of common stock.

 

In February 2017, the Company reported that substantially all of its outstanding debt both secured and unsecured have been converted into equity securities of the Company as outlined below. It should be noted that the capital transactions below were based on a premium to the average closing sale price of $0.045 per share during the 60 day period prior to February 08, 2017. The Company had outstanding 882,588 shares of newly designated Series AAA preferred stock and $1,350,000 of convertible notes. The convertible notes consisted of $1,200,000 of secured notes and $150,000 of unsecured notes. The 882,588 shares of Series AAA preferred stock were issued in exchange for the conversion of principal and accrued interest of approximately $9,147,891 of unsecured debt. This conversion resulted in a loss on extinguishment of debt of $2,706,197. Between August and December 2017, the Company issued $3,234,000 of secured notes due in six months to various investors. The notes are convertible at $.05 per share through the maturity date, subject to adjustment in the event of default. A total of 3,234,000 origination shares of common stock were issued to the noteholders. Thomas Arnost, Chairman of the Company, invested $100,000 in the loan transaction. The terms of the Series AAA preferred stock can be summarized as follows:

 

The price of each preferred share shall be, at the option of the holder, convertible into 100 shares of Common Stock. If the preferred shares are converted, the subscriber will then receive 100% warrant coverage, with each warrant exercisable at $.05 per share with a cash payment to the Company through the close of business on December 31, 2019. The preferred shares have no voting or other preferences except as required by law other than the right of conversion described above and a liquidation preference equal to $.01 per share.

 

In February 2017, Thomas Arnost, our Executive Vice Chairman, and another principal stockholder agreed to convert letters of credit in the principal amount of $2,700,000 and $322,000 of secured debt into shares of common stock at the then marketing price of $.05 per share. Accrued interest on these obligations were either previously converted into our common stock or were upon conversion of the principal, converted into common stock at the fair market value of our common stock at each interest accrual date.

   

A recap of the derivative instruments is as follows:

 

Derivative Liability 2016
Beginning balance  $(576,557)
New Issuances   (1,079,016)
Discount on new derivative in excess of note face value   (565,780)
Gain on revaluation of derivatives   1,870,653 
Ending balance  $(350,700)

 

Derivative Liability 2017
Beginning balance  $(350,700)
Discount on new issuances   (1,867,287)
Discount on new derivatives in excess of note face value   (1,284,704)
Gain on revaluation of derivatives   3,376,620 
Conversions   229,939 
Effect of debt extinguishment   (769,991
Ending balance  $(666,123)