NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION
Ascent Solar Technologies, Inc. (“Ascent”) was incorporated on October 18, 2005 from the separation of ITN Energy Systems, Inc's (“ITN”) Advanced Photovoltaic Division and all of that division’s key personnel and core technologies. ITN, a private company incorporated in 1994, is an incubator dedicated to the development of thin-film, photovoltaic (“PV”), battery, fuel cell, and nano technologies. Through its work on research and development contracts for private and governmental entities, ITN developed proprietary processing and manufacturing know-how applicable to PV products generally, and to Copper-Indium-Gallium-diSelenide (“CIGS”) PV products in particular. ITN formed Ascent to commercialize its investment in CIGS PV technologies. In January 2006, in exchange for
5,140
shares of common stock of Ascent, ITN assigned to Ascent certain CIGS PV technologies and trade secrets and granted to Ascent a perpetual, exclusive, royalty-free worldwide license to use, in connection with the manufacture, development, marketing and commercialization of CIGS PV to produce solar power, certain of ITN’s existing and future proprietary and control technologies that, although non-specific to CIGS PV, Ascent believes will be useful in its production of PV modules for its target markets. Upon receipt of the necessary government approvals and pursuant to novation in early 2007, ITN assigned government-funded research and development contracts to Ascent and also transferred the key personnel working on the contracts to Ascent.
Currently, the Company is focusing on integrating its PV products into high value markets such as aerospace, satellites, near earth orbiting vehicles, fixed-wing unmanned aerial vehicles (UAV), military, and emergency preparedness. Ascent has the capability to design and develop finished products for end users in these areas as well as collaborate with strategic partners to design and develop custom integrated solutions for products like fixed-wing UAVs. Ascent sees significant overlap of the needs of end users across some of these industries and can achieve economies of scale in sourcing, development, and production in commercializing products for these customers.
Sale of EnerPlex Brand
In February 2017, Ascent announced the sale of our EnerPlex brand and related intellectual properties and trademarks associated with EnerPlex to our battery product supplier, Sun Pleasure Co. Limited (“SPCL”), in an effort to better allocate its resources and to continue to focus on its core strength in the high-value specialty PV market. Effective February 27, 2017, Ascent no longer produces or sells Enerplex-branded consumer products. Ascent will supply solar PV products to SPCL, supporting the continuous growth of EnerPlex™ with Ascent’s proprietary and award-winning thin-film solar technologies and products.
During the third quarter of 2018, Ascent greatly reduced production in an effort to meet cash flow challenges. The Company stopped manufacturing PV in anticipation of projects and started producing PV on a per project basis. Ascent continues to design PV integrated consumer electronics as well as portable power applications for commercial and military users. Due to the high durability enabled by the monolithic integration employed by our technology, the capability to customize modules into different form factors and the industry leading light weight and flexibility provided by our modules, the Company believes that the potential applications for our products are numerous.
NOTE 2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been derived from the accounting records of Ascent Solar Technologies, Inc., Ascent Solar (Asia) Pte. Ltd., and Ascent Solar (Shenzhen) Co., Ltd. (collectively, "the Company") as of
September 30, 2018
and
December 31, 2017
, and the results of operations for the
three and nine
months ended
September 30, 2018
and
2017
. Ascent Solar (Shenzhen) Co., Ltd. is wholly owned by Ascent Solar (Asia) Pte. Ltd., which is wholly owned by Ascent Solar Technologies, Inc. All significant inter-company balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.
The accompanying, unaudited, condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, these interim financial statements do not include all of the information and footnotes typically found in U.S. GAAP audited annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. The Condensed Consolidated Balance Sheet at
December 31, 2017
has been derived from the audited financial statements as of that date but does not include all of the information and footnotes included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
. These condensed consolidated financial statements and notes should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Operating results for the
nine
months ended
September 30, 2018
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies were described in Note 3 to the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
. There have been no significant changes to our accounting policies as of
September 30, 2018
.
Recently Adopted or to be Adopted Accounting Policies
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, and has issued a number of clarifying ASUs subsequently, all of which outline a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The standard provides enhancements to the quality and consistency of how revenue is reported by companies, while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or U.S. GAAP. The new standard also will require enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. This accounting standard becomes effective for the Company for reporting periods beginning after December 15, 2017, and interim reporting periods thereafter. Early adoption is permitted for annual reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of either the retrospective or cumulative effect transition method. The implementation of ASU 2014-09 did not have a material effect on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. ASU 2016-02 requires lessees to recognize all leases, including operating leases, on the balance sheet as a lease asset or lease liability, unless the lease is a short-term lease. ASU 2016-02 also requires additional disclosures regarding leasing arrangements. ASU 2016-02 is effective for interim periods and fiscal years beginning after December 15, 2018, and early application is permitted. The Company has evaluated the adoption of this guidance and has determined there will not be a material impact on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718)
. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for interim periods and fiscal years beginning after December 15, 2017, and early application is permitted. The implementation of ASU 2017-09 did not have a material effect on the Company's consolidated financial statements.
In July 2017, the FASB issued ASU No. 2017-11
Part I, Earnings Per Share (Topic 260), Distinguishing Liabilities from
Equity (Topic 480), Derivatives and Hedging (Topic 815)
. ASU 2017-11 Part I changes the classification analysis of certain equity linked financial instruments with down round features. ASU 2017-11 Part I is effective, for public business entities, for interim periods and fiscal years beginning after December 15, 2018, and early application is permitted. The Company is currently evaluating the impact, if any, that the adoption of this guidance will have on its consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation-Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting
, which simplifies the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with specified exceptions. This standard is effective for the Company in the first quarter of 2020, and early adoption is permitted. The Company expects the adoption of this standard will not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
, which modifies the disclosure requirements of fair value measurements. This standard is effective for the Company in the first quarter of 2020, and early adoption is permitted. The Company is currently evaluating the impact of the effect adoption of this standard will have on its consolidated financial statements.
Other new pronouncements issued but not effective as of September 30, 2018 are not expected to have a material impact on the Company’s condensed consolidated financial statements.
NOTE 4. LIQUIDITY AND CONTINUED OPERATIONS
During the
nine
months ended
September 30, 2018
and the year ended
December 31, 2017
, the Company entered into multiple financing agreements to fund operations. Further discussion of these transactions can be found in Notes 7 through 13, and Note 16 of the financial statements presented as of, and for, the
nine
months ended,
September 30, 2018
, and in Notes 8 through 22 and Note 30 of the financial statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
.
The Company has continued limited PV production at its manufacturing facility. The Company does not expect that sales revenue and cash flows will be sufficient to support operations and cash requirements until it has fully implemented its product strategy. During the
nine
months ended
September 30, 2018
the Company used
$3.0 million
in cash for operations. The Company's primary significant long term cash obligation consists of a note payable of
$5.4 million
to a financial institution secured by a mortgage on its headquarters and manufacturing building in Thornton, Colorado. Total payments of approximately
$0.1 million
, including principal and interest, will come due in the remainder of 2018.
Additional projected product revenues are not anticipated to result in a positive cash flow position for the year
2018
overall and, as of
September 30, 2018
, the Company has negative working capital. As such, cash liquidity sufficient for the year ending
December 31, 2018
will require additional financing.
The Company continues to accelerate sales and marketing efforts related to its consumer and military solar products and specialty PV application strategies through expansion of its sales and distribution channels. The Company has begun activities related to securing additional financing through strategic or financial investors, but there is no assurance the Company will be able to raise additional capital on acceptable terms or at all. If the Company's revenues do not increase rapidly, and/or additional financing is not obtained, the Company will be required to significantly curtail operations to reduce costs and/or sell assets. Such actions would likely have an adverse impact on the Company's future operations.
As a result of the Company’s recurring losses from operations, and the need for additional financing to fund its operating and capital requirements, there is uncertainty regarding the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to the Company’s ability to continue as a going concern. The Company has scaled down its operations, due to cash flow issues, and does not expect to ramp up until significant financing is obtained.
Management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. These condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
The following table summarizes property, plant and equipment as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Building
|
|
$
|
5,828,960
|
|
|
$
|
5,828,960
|
|
Furniture, fixtures, computer hardware and computer software
|
|
489,421
|
|
|
489,421
|
|
Manufacturing machinery and equipment
|
|
30,302,806
|
|
|
30,327,481
|
|
Property, plant and equipment
|
|
36,621,187
|
|
|
36,645,862
|
|
Less: Accumulated depreciation and amortization
|
|
(32,158,632
|
)
|
|
(32,013,686
|
)
|
Net property, plant and equipment
|
|
$
|
4,462,555
|
|
|
$
|
4,632,176
|
|
The Company analyzes its long-lived assets for impairment, both individually and as a group, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. No assets were impaired for the
three and nine
months ended
September 30, 2018
.
Depreciation expense for the
three and nine
months ended
September 30, 2018
was
$52,319
and
$169,621
, respectively, compared to depreciation expense of
$266,489
and
$889,606
for the
three and nine
months ended
September 30, 2017
, respectively. Depreciation expense is recorded under “Depreciation and amortization expense” in the Condensed Consolidated Statements of Operations.
NOTE 6. INVENTORIES
Inventories consisted of the following at
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Raw materials
|
|
$
|
644,944
|
|
|
$
|
688,904
|
|
Work in process
|
|
23,750
|
|
|
11,878
|
|
Finished goods
|
|
300,401
|
|
|
337,072
|
|
Total
|
|
$
|
969,095
|
|
|
$
|
1,037,854
|
|
The Company analyzes its inventory for impairment, both categorically and as a group, whenever events or changes in circumstances indicate that the carrying amount of the inventory may not be recoverable. During the
nine
months ended
September 30, 2018
, the Company did not impair inventory, compared to an impairment of
$363,758
, for the
nine
months ended
September 30, 2017
.
Inventory amounts are shown net of allowance of
$515,864
and
$562,140
as of
September 30, 2018
and
December 31, 2017
, respectively.
NOTE 7. NOTES PAYABLE
On
February 24, 2017
, the Company entered into an agreement with a vendor to convert the balance of their account into
three
notes payable in the aggregate amount of
$765,784
. The notes bear interest of
6%
per annum and matured on
February 24, 2018
; all outstanding principal and accrued interest is due and payable upon maturity. On June 5, 2018, the Company entered into another agreement with the same vendor to convert the balance of their account into a fourth note payable with a principal amount of
$308,041
, this note also bears interest at a rate of
6%
per annum, and matured on July 31, 2018. As of
September 30, 2018
, the Company had not made any payments on these notes; the total outstanding principal and accrued interest were
$1,073,825
and $
80,415
, respectively, and the note is due upon demand.
On
March 23, 2017
, the Company entered into an agreement with a vendor to convert the balance of their account into a note payable in the amount of $
356,742
. The note bears interest of
5%
per annum and matured on
March 31, 2018
; all outstanding principal and accrued interest is due and payable upon maturity. As of
September 30, 2018
, the note had been redeemed in stock; on July 25, 2018, the investor, elected to redeem the note, along with
$23,897
in accrued interest, for
2,138,421
shares of common stock. The conversion rate was based on the average of the prior
five
trading days' closing price.
On June 30, 2017, the Company entered into an agreement with a vendor to convert the balance of their account into a note payable in the amount of $
250,000
. The note bears interest of
5%
per annum and matured on
February 28, 2018
; all outstanding principal and accrued interest is due and payable upon maturity. As of
September 30, 2018
, the Company had not made any payments on these notes, the accrued interest was
$15,651
, and the note is due upon demand.
On September 30, 2017, the Company entered into a settlement agreement with a customer to convert the credit balance of their account into a note payable in the amount of $
215,234
. The note bears interest of
5%
per annum and matures on
September 30, 2018
. The Company has not made the monthly payments of
$18,426
that were to commence on October 30, 2017; as of
September 30, 2018
the company had paid principal of
$22,529
and interest of
$897
. The remaining principal and interest balances, as of
September 30, 2018
, were
$192,705
and
$9,129
, respectively.
NOTE 8. DEBT
On February 8, 2008, the Company acquired a manufacturing and office facility in Thornton, Colorado, for approximately
$5.5 million
. The purchase was financed by a promissory note, deed of trust and construction loan agreement (the “Construction Loan”) with the Colorado Housing and Finance Authority (“CHFA”), which provided the Company borrowing availability of up to
$7.5 million
for the building and building improvements. In 2009, the Construction Loan was converted to a permanent loan pursuant to a Loan Modification Agreement between the Company and CHFA (the “Permanent Loan”). The Permanent Loan, collateralized by the building, has an interest rate of
6.6%
and the principal will be amortized through its term to January 2028. Further, pursuant to certain negative covenants in the Permanent Loan, the Company may not, among other things, without CHFA’s prior written consent (which by the terms of the deed of trust is subject to a reasonableness requirement): create or incur additional indebtedness (other than obligations created or incurred in the ordinary course of business); merge or consolidate with any other entity; or make loans or advances to the Company’s officers, shareholders, directors or employees.
On November 1, 2016, the Company and the CHFA agreed to modify the original agreement described above with the addition of a forbearance period. Per the modification agreement, no payments of principal and interest shall be due under the note during the forbearance period commencing on November 1, 2016 and continuing through April 1, 2017. The amount of interest that should have been paid by the Company during the forbearance period in the total amount of
$180,043
shall be added to the outstanding principal balance of the note. As a result, on May 1, 2017, the principal balance of the note was
$5,704,932
. Commencing on May 1, 2017, the monthly payments of principal and interest due under the note resumed at
$57,801
, and the Company shall continue to make such monthly payments over the remaining term of the note ending on February 1, 2028.
On August 24, 2018, the Company and the CHFA agreed to modify the original agreement with an additional forbearance period. Per the modification agreement, no payments of principal shall be due under the note during the forbearance period commencing on June 1, 2018 and continuing through November 30, 2018. For each month of forbearance, partial interest of
$15,000
per month must be paid, and the remaining unpaid interest of the forbearance period of
$84,187
will be added to the outstanding principal balance of the note. As a result, on December 1, 2018, the principal balance of the note will be
$5,434,042
and monthly payments of principal and interest of
$57,801
will resume, continuing through the remaining term of the note ending on February 1, 2028.
The outstanding principal balance of the Permanent Loan was
$5,434,042
and
$5,461,819
as of
September 30, 2018
and
December 31, 2017
, respectively.
As of
September 30, 2018
, remaining future principal payments on long-term debt are due as follows:
|
|
|
|
|
|
|
2018
|
$
|
55,981
|
|
2019
|
349,093
|
|
2020
|
372,843
|
|
2021
|
398,209
|
|
2022
|
425,301
|
|
Thereafter
|
3,832,615
|
|
|
$
|
5,434,042
|
|
NOTE 9. SECURED PROMISSORY AND CONVERTIBLE NOTES
Global Ichiban Secured Promissory Notes
On
November 30, 2017
, the Company, entered into a note purchase and exchange agreement with Global Ichiban Ltd., for the private placement of up to
$2,000,000
of the Company’s secured convertible promissory notes in exchange for
$2,000,000
of gross proceeds in several tranches through June 2018, The closing of each tranche is conditioned upon the Company having an average daily trading volume for its Common Stock of at least
$50,000
for the
20
trading day period preceding such future tranche closing dates.
Pursuant to the terms of the note purchase and exchange agreement, the Company and the investor also agreed to exchange certain outstanding securities held by the investor for additional notes. As of
November 30, 2017
, the investor surrendered for cancellation (i) its outstanding promissory note dated
September 13, 2017
(
$3,359,539
principal and accrued interest), (ii) its outstanding promissory note dated
October 31, 2017
(
$252,466
principal and accrued interest), and (iii) its
400
shares of outstanding Series J Preferred Stock (
$445,222
of capital and accrued dividends). In exchange, the Company issued to the investor
$4,057,227
aggregate principal amount of additional Notes. Please refer to Note 11 and Note 21 of the financial statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
for further discussion on the canceled promissory notes and the canceled Series J Preferred Stock shares.
All principal and accrued interest on the notes are convertible at any time, in whole or in part, at the option of the investor into shares of common stock at a variable conversion price equal to the lowest of (i)
85%
of the average VWAP for the shares over the prior
5
trading days, (ii) the closing bid price for the shares on the prior trading day, or (iii)
$2.00
per share
The notes may not be converted, and shares of common stock may not be issued pursuant to the notes, if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
9.99%
of the outstanding shares of common stock.
Of the notes issued on
November 30, 2017
,
$3,359,539
aggregate principal amount will mature on
December 15, 2020
. Principal and interest was originally to be payable in
36
equal monthly installments of
$111,585
beginning
January 15, 2018
. During the nine months ended
September 30, 2018
, principal of
$1,426,000
was converted into
3,486,276
shares of common stock, and during the
nine
months ended
September 30, 2018
$140,355
of interest was converted to principal. The remaining note is payable in
30
equal monthly installments of
$80,360
beginning
July 15, 2018
. The following table summarizes the conversion activity of this note:
|
|
|
|
|
|
|
|
|
|
Conversion Period
|
Principal Converted
|
Interest Converted
|
Common Shares Issued
|
Q1 2018
|
$
|
1,250,000
|
|
$
|
—
|
|
2,450,981
|
|
Q2 2018
|
$
|
176,000
|
|
$
|
—
|
|
1,035,295
|
|
|
$
|
1,426,000
|
|
$
|
—
|
|
3,486,276
|
|
Of the notes issued on
November 30, 2017
,
$697,688
aggregate principal amount will mature on
November 30, 2018
. Principal and interest will be payable upon maturity.
The
$2,000,000
aggregate principal amount of notes, issued in eight tranches, will mature on the first anniversary of the respective issuance date. Principal and interest will be payable upon maturity. As of
September 30, 2018
, the closing dates, closing amounts, and maturity dates on completed note tranches are as follows:
|
|
|
|
|
|
Closing Date
|
Closing Amount
|
Maturity Date
|
11/30/2017
|
$
|
250,000
|
|
11/30/2018
|
12/28/2017
|
$
|
250,000
|
|
12/28/2018
|
1/11/2018
|
$
|
250,000
|
|
1/11/2019
|
1/25/2018
|
$
|
250,000
|
|
1/25/2019
|
2/8/2018
|
$
|
250,000
|
|
2/8/2019
|
2/21/2018
|
$
|
250,000
|
|
2/21/2019
|
3/7/2018
|
$
|
250,000
|
|
3/7/2019
|
3/21/2018
|
$
|
250,000
|
|
3/21/2019
|
The notes will be secured by a security interest on substantially all of the Company’s assets, bear interest at a rate of
12%
per annum and contain standard and customary events of default including but not limited to: (i) failure to make payments when due under the notes, and (ii) bankruptcy or insolvency of the Company. There are no registration rights applicable to the notes.
On July 6, 2018, the Company issued a non-convertible promissory note to Global Ichiban Ltd., pursuant to the note purchase and exchange agreement dated November 30, 2017. In accordance with the agreement, the Company issued a note with a principal balance of
$135,000
in exchange for gross proceeds of
$120,000
. This note bears interest at a rate of
12%
per annum and matures on
July 6, 2019
. Principal and interest on this note are payable at maturity. The original issue discount of
$15,000
will be allocated to interest expense, ratably, over the life of the note.
As of
September 30, 2018
, the aggregate principal and interest balance of the Notes were
$4,906,582
and
$331,758
, respectively.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the notes were deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. The fair value measurements rely primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the notes approximates management’s estimate of the fair value of the embedded derivative liability based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions identified below.
Due to the varying terms and varying issue dates, the tranches of this instrument were broken into four separate instruments for valuation purposes.
|
|
1)
|
The first valuation was done on the November 30, 2017 note with term of
three
years. The derivative value of this note was
$3,742,002
as of
December 31, 2017
.
|
|
|
1)
|
The second valuation was done on the group of notes dated November 30, 2017, that had a term of
one
year. The derivative value of this group of notes was
$888,168
as of
December 31, 2017
.
|
|
|
2)
|
The third valuation was done on the note dated December 28, 2017, which had a term of
one
year. The derivative value of this note was
$267,008
on
December 31, 2017
.
|
|
|
3)
|
For the notes dated in the first quarter of
2018
, we did a fourth valuation. Although the notes were entered into at various dates, we used a weighted average issuance date of
February 15, 2018
for a combined valuation purpose. Management's analysis, using the following assumptions: annual volatility of
54%
present value discount rate of
12%
and a dividend yield of
0%
, resulted in a fair value of the embedded derivative associated with these Notes of
$1,151,162
as of
February 15, 2018
. The value of the embedded derivative associated with these Notes was recorded as a debt discount.
|
The derivative liability associated with the notes is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
September 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the three valuation groups discussed above.
|
|
1)
|
For the November 30, 2017 3yr note: Management conducted a fair value assessment with the following assumptions: annual volatility of
65%
present value discount rate of
12%
and a dividend yield of
0%
as of
September 30, 2018
. As a result of the fair value assessment, the Company recorded a net gain of
$2,440,427
as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Consolidated Statements of Operations to properly reflect the fair value of the embedded derivative of
$1,301,575
as of
September 30, 2018
.
|
|
|
2)
|
For the November 30, 2017 1yr notes: Management conducted a fair value assessment with the following assumptions: annual volatility of
104%
present value discount rate of
12%
and a dividend yield of
0%
as of
September 30, 2018
. As a result of the fair value assessment, the Company recorded a net gain of
$436,920
as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Consolidated Statements of Operations to properly reflect the fair value of the embedded derivative of
$451,248
as of
September 30, 2018
.
|
|
|
3)
|
For the December 28, 2017 1yr note: Management conducted a fair value assessment with the following assumptions: annual volatility of
104%
present value discount rate of
12%
and a dividend yield of
0%
as of
September 30, 2018
. As a result of the fair value assessment, the Company recorded a net gain of
$147,969
as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Consolidated Statements of Operations to properly reflect the fair value of the embedded derivative of
$119,039
as of
September 30, 2018
.
|
|
|
4)
|
For the first quarter
2018
1yr notes: Management conducted a fair value assessment with the following assumptions: annual volatility of
104%
present value discount rate of
12%
and a dividend yield of
0%
as of
September 30, 2018
. As a result of the fair value assessment, the Company recorded a net gain of
$436,927
as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Consolidated Statements of Operations to properly reflect the fair value of the embedded derivative of
$714,235
as of
September 30, 2018
.
|
During the three months ended
September 30, 2018
, a cumulative net gain of
$2,676,943
was recorded as a change in fair value. The total cumulative net gain for the nine months ended
September 30, 2018
was
$3,462,243
to reflect a total derivative liability of
$2,586,097
as of
September 30, 2018
. Subsequent to the date of this report, the Company entered into another promissory note under this security agreement. Please refer to Note 16 for more information.
St. George Secured Convertible Note
On May 8, 2018, the Company, entered into a note purchase agreement with St. George Investments LLC, for the private placement of a
$575,000
secured convertible promissory note. The Company received
$500,000
in aggregate proceeds for the note in two tranches and recorded and original issue discount of
$50,000
and debt financing costs of
$25,000
. The original issue discount and the financing costs will be recognized as interest expense, ratably, over the life of the note. The note bears interest at a rate of
10%
per annum and matures on May 9, 2019. All unredeemed principal and accrued interest is payable upon maturity. The note contains standard and customary events of default including but not limited to: (i) failure to make payments when due under the note, and (ii) bankruptcy or insolvency of the Company. In the event of default the interest rate increases to
22%
per annum. The note is secured by a junior security interest on the Company's headquarters building, located in Thonrton, Colorado. There are no registration rights applicable to this agreement.
As of
September 30, 2018
, the aggregate principal and interest balance of the note were
$575,000
and
$22,842
, respectively.
Beginning in early November 2018, St. George shall have the option to require the Company to redeem all or a portion of the amounts outstanding under the note. The Company may pay the requested redemption amounts in cash or in the form of shares of common stock (subject to certain specified equity conditions). Payments in the form of Common Stock shall be calculated using a variable conversion price equal to (i)
60%
of the average of the
two
lowest closing bid prices for the shares over (ii) the prior
ten
day trading period immediately preceding the redemption.
Shares of common stock may not be issued pursuant to the note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of common stock. This ownership limitation will be automatically increased to
9.99%
if the Company’s market capitalization is less than
$10 million
. The ownership limitation can also be increased at the option of the Investor (up to a maximum of
9.99%
) upon
61
days advance written notice.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the redemption option in the note was deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the redemption option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. The fair value measurements rely primarily on company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the note approximates management’s estimate of the fair value of the embedded derivative liability based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
50%
, present value discount rate of
12%
, and a dividend yield rate of
0%
. These assumption resulted in the fair value of the embedded derivative of
$862,439
, associated with this note at inception.
The derivative liability associated with the note is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
September 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the note. As a result of the fair value assessment, the Company recorded a
$339,078
gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations, to properly reflect the fair value of the embedded derivative of
$523,361
as of
September 30, 2018
.
The fair value measurements rely primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the note approximates management’s estimate of the fair value of the embedded derivative liability at
September 30, 2018
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
86%
, present value discount rate of
12%
and dividend yield of
0%
.
NOTE 10. PROMISSORY NOTES
Offering of Unsecured, Non-Convertible Notes to Investor 1
During October 2016, the Company received
$420,000
from a private investor "Investor 1". These funds, along with
$250,000
of additional funding, were rolled into a promissory note, executed on January 17, 2017, in the amount of
$700,000
issued with a discount of
$30,000
which will be charged to interest expense ratably over the term of the note. The note bears interest at
12%
per annum and matures on
July 17, 2017
. Principal and interest on this note are payable at maturity. This note is not convertible into equity shares of the Company and is unsecured.
On June 30, 2017, the Company and Investor 1 agreed to a
12
month payment plan on the balance of this promissory note. Interest will continue to accrue on this note at
12%
per annum and payments of approximately
$62,000
will be made monthly beginning in July 2017. The Company has not made all the payments according to this payment plan, and the note is payable upon demand.
As of
September 30, 2018
, $
205,563
of principal and $
45,414
of interest had been paid on this note. The outstanding principal and accrued interest balances on the note as of
September 30, 2018
were
$494,437
and $
71,503
, respectively.
Offering of Unsecured, Non-Convertible Notes to Investor 2
On
November 16, 2017
, the Company initiated a non-convertible, unsecured promissory note with another private investor ("Investor 2") for
$275,000
. The promissory note was issued with an original issue discount of
$25,000
, resulting in proceeds to the company of
$250,000
. The note does not have a stated interest rate and matured on
December 18, 2017
.
On July 25, 2018, the Company, entered into a new securities exchange agreement with Investor 2. Pursuant to the terms of the Exchange Agreement, Investor 2 agreed to surrender and exchange the promissory note with a principal balance of
$275,000
in exchange for a convertible note. See Note 11 for further discussion on the new convertible note.
Offering of Unsecured, Non-Convertible Notes to Investor 3
On
January 31, 2018
, the Company initiated a non-convertible, unsecured promissory note with another private investor ("Investor 3") for an aggregate principal amount of
$200,000
. The promissory note was issued with an original issue discount of
$22,500
, which will be recorded as interest expense ratably over the term of the note, resulting in proceeds to the company of
$177,500
, which was received in December 2017. The note bears interest at
12%
per annum and matures on
December 29, 2018
. All principal and interest is payable upon maturity.
On September 7, 2018, the Company, entered into a new securities exchange agreement with Investor 3. Pursuant to the terms of the Exchange Agreement, Investor 3 agreed to surrender and exchange the promissory note with a principal balance of
$200,000
, plus accrued interest of
$16,800
, in exchange for a convertible note. See Note 11 for further discussion on the new convertible note.
On
June 6, 2018
, the Company initiated a non-convertible, unsecured promissory note with Investor 3 for an aggregate principal amount of
$315,000
. The promissory note was issued with an original issue discount of
$55,000
, which will be recorded as interest expense ratably over the term of the note, resulting in proceeds to the company of
$260,000
, that was received in several tranches between February 2018 and April 2018. This note bears interest at
12%
per annum and matures on
June 6, 2019
. All principal and interest is payable upon maturity. As of
September 30, 2018
, the remaining principal and interest on on this note were
$315,000
and
$17,430
, respectively.
On
July 24, 2018
, the Company initiated a non-convertible, unsecured promissory note with Investor 3 for an aggregate principal amount of
$115,000
. The promissory note was issued with an original issue discount of
$27,500
, which will be recorded as interest expense ratably over the term of the note, resulting in proceeds to the company of
$87,500
, that was received in several tranches between May 2018 and June 2018. This note bears interest at
12%
per annum and matures on
January 24, 2019
. All principal and interest is payable upon maturity. As of
September 30, 2018
, the remaining principal and interest on on this note were
$115,000
and
$4,397
, respectively.
On
September 10, 2018
, the Company initiated a non-convertible, unsecured promissory note with Investor 3 for an aggregate principal amount of
$120,000
. The promissory note was issued with an original issue discount of
$20,000
, which will be recorded as interest expense ratably over the term of the note, resulting in proceeds to the company of
$100,000
, that was received in several tranches between June 2018 and September 2018. This note bears interest at
12%
per annum and matures on
March 10, 2019
. All principal and interest is payable upon maturity. As of
September 30, 2018
, the remaining principal and interest on on this note were
$120,000
and
$1,349
, respectively.
As of
September 30, 2018
, the Company had also received undocumented proceeds of
$70,000
from Investor 3. The Company has accrued interest on these proceeds at the rate of
12%
per annum and had recorded
$212
of accrued interest as of
September 30, 2018
.
NOTE 11. CONVERTIBLE NOTES
October 2016 Convertible Notes
On October 5, 2016, the Company entered into a securities purchase agreement with a private investor for the private placement of
$330,000
principal amount of convertible notes. At Closing, the Company sold and issued
$330,000
principal amount of convertible notes in exchange for
$330,000
of gross proceeds.
The convertible notes matured on December 31, 2017 and bear interest at a rate of
6
% per annum, subject to increase to
24%
per annum upon the occurrence and continuance of an event of default. Principal and accrued interest on the convertible notes is payable upon demand.
All principal and accrued interest on the convertible notes is convertible at any time, in whole or in part, at the option of the investor, into shares of common stock at a variable conversion price equal to
80%
of the lowest closing bid price of the Company’s common stock for the
fifteen
consecutive trading day period prior to the conversion date. After the six month anniversary of the issuance of any convertible note, the conversion price for such note shall thereafter be equal to
50%
of the lowest closing bid price of the Company’s common stock for the
fifteen
consecutive trading day period prior to the conversion date.
The convertible notes contain standard and customary events of default including but not limited to: (i) failure to make payments when due under the convertible notes; and (ii) bankruptcy or insolvency of the Company.
Outstanding principal and accrued interest on the convertible notes were
$330,000
and
$39,875
, respectively as of
September 30, 2018
.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the convertible notes were deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At closing, a derivative liability and a corresponding debt discount in the amount of
$330,000
was recorded. The fair value of the derivative was greater than the face value at issuance and the difference of
$341,114
was charged to interest expense at issuance. The remaining debt discount will be charged to interest expense ratably over the life of the October 2016 Convertible Notes. As of
December 31, 2017
, the fair value of the derivative liability was
$572,643
.
The derivative liability associated with the convertible notes is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
September 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the convertible notes. As a result of the fair value assessment, the Company recorded a
$275,517
gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the three months ended
September 30, 2018
. A total net gain of
$137,666
was recorded for the nine months ended
September 30, 2018
, to properly reflect the fair value of the embedded derivative of
$434,977
as of
September 30, 2018
.
The fair value measurements rely primarily on company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the convertible notes approximates management’s estimate of the fair value of the embedded derivative liability at
September 30, 2018
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
106%
present value discount rate of
12%
and dividend yield of
0%
.
St. George Convertible Note
On
September 8, 2017
, the Company entered into a securities purchase agreement with St. George Investments LLC for the private placement of $
1,725,000
principal amount of the Company’s original issue discount convertible notes.
On
September 11, 2017
, the Company sold and issued a $
1,725,000
principal convertible notes to St. George in exchange for $
1,500,000
of gross proceeds, and paid
$20,000
in financing costs. The original issue discount of
$225,000
, and the financing costs, will be charged to interest expense, ratably, over the life of the note.
Unless earlier converted or prepaid, the convertible notes will mature on
March 11, 2019
. The note does not bear interest in the absence of an event of default.
For the first six months after the issuance of the convertible note, the Company will make a monthly cash repayment on the note of approximately
$96,000
. Thereafter, St. George may request that the Company make monthly partial redemptions of the note up to
$150,000
per month. If St. George does not request the full
$150,000
redemption amount in any one month, the unused portion of such monthly redemption amount can be added to future monthly redemption amounts; however, in no event, can the amount requested for any one month exceed
$275,000
.
Redemption amounts are payable by the Company in cash. Beginning ten months after the issuance of the convertible note, cash redemption payments by the Company will be subject to a
15%
redemption premium.
Beginning six months after the issuance of the convertible note, the Company also has the option (subject to customary equity conditions) to pay redemption amounts in the form of shares of common stock. Payments in the form of shares would be calculated using a variable conversion price equal to the lower of (i)
85%
of the average VWAP for the shares over the prior
five
trading days or (ii) the closing bid price for the shares on the prior trading day.
In lieu of making the December 2017 through March 2018 cash payments, the share reserve was increased by
5 million
shares, and on May 1, 2018, effective as of April 3, 2018, the parties agreed to amend the variable conversion price formula outlined in the securities purchase agreement. As amended, payments in the form of shares would be calculated using a variable conversion price equal to the lower of (i)
60%
of the lowest VWAP for the shares during the prior
five
trading days or (ii) the closing bid price for the shares on the prior trading day.
All principal and accrued interest on the convertible note is convertible at any time, in whole or in part, at the option of St. George into shares of common stock at a fixed conversion price of
$4
per share.
The convertible note contains standard and customary events of default including but not limited to: (i) failure to make payments when due under the Note; and (ii) bankruptcy or insolvency of the Company. Upon the occurrence of an event of default, the convertible note will begin to bear interest at the rate of
22%
per annum. In addition, upon the occurrence of an event of default, St. George has the option to increase the outstanding balance of the convertible note by
25%
.
In connection with the closing under the securities purchase agreement, the Company issued
37,500
unregistered shares of common stock to St. George as an origination fee. The closing stock price on the date of close was
$1.7
resulting in an interest expense of $
63,750
being recorded as of the date of close.
The convertible note may not be converted, and shares of common stock may not be issued pursuant to the convertible note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of common stock.
As of
September 30, 2018
, cash payments of
$191,667
had been made on the convertible note, and
$494,100
had been converted into
5,412,611
shares of the Company's common stock. The remaining balance on the note was
$1,039,233
as of
September 30, 2018
. The following table summarizes the conversion activity of this note:
|
|
|
|
|
|
|
|
Conversion Period
|
Principal Converted
|
Common Shares Issued
|
Q1 2018
|
$
|
75,000
|
|
187,500
|
|
Q2 2018
|
$
|
316,600
|
|
2,082,778
|
|
Q3 2018
|
$
|
102,500
|
|
3,142,333
|
|
|
$
|
494,100
|
|
$
|
5,412,611
|
|
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the convertible note was deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible note issuance and appropriately recorded that value as a derivative liability. As of
December 31, 2017
, the derivative liability was
$394,280
.
The derivative liability associated with the convertible note is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
September 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the convertible note. As a result of the fair value assessment, the Company recorded a
$579,411
net gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the three months ended
September 30, 2018
. The total net gain recorded for the nine months ended
September 30, 2018
was
$71,147
, to properly reflect the fair value of the embedded derivative of
$323,133
as of
September 30, 2018
.
The fair value measurements rely primarily on company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the convertible note approximates management’s estimate of the fair value of the embedded derivative liability at
September 30, 2018
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
86%
present value discount rate of
12%
and dividend yield of
0%
.
BayBridge Convertible Note
On
December 6, 2017
, the Company entered into a securities exchange agreement (“Exchange Agreement 1”) with BayBridge Capital Fund LP.
Pursuant to the terms of the Exchange Agreement 1, BayBridge agreed to surrender and exchange
675
shares of outstanding Series J Preferred Stock (
$755,417
of capital and accrued dividends) for a convertible note with an aggregate principal amount of
$840,000
and an original issue discount of
$84,583
("Exchange Note 1"). Please refer to Note 21 of the financial statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
for further discussion on the Series J Preferred Stock.
Exchange Note 1 is unsecured, has no applicable registration rights, bears interest at a rate of
12%
per annum, matures on
December 6, 2018
, and contains standard and customary events of default including but not limited to: (i) failure to make payments when due under the convertible note, and (ii) bankruptcy or insolvency of the Company. Principal and interest are payable upon maturity.
Payments of principal and accrued interest on Exchange Note 1 are payable in cash or, at the option of the Company, in shares of common stock at a variable conversion price equal to the lowest of (i)
85%
of the average VWAP for the shares over the prior
5
trading days, (ii) the closing bid price for the shares on the prior trading day, or (iii)
$3.00
per share. Payments in shares of common stock may not be issued pursuant to the note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
9.99%
of the outstanding shares of Common Stock.
On September 7, 2018, as described in Note 10., the Company, entered into an additional securities exchange agreement (“Exchange Agreement 2”) with Baybridge.
Pursuant to the terms of Exchange Agreement 2, BayBridge agreed to surrender and exchanged an outstanding promissory note with a principal balance of
$200,000
, plus accrued interest of
$16,800
, for a convertible note with an aggregate principal amount of
$270,000
(“Exchange Note 2”).
Exchange Note 2 is unsecured, has no applicable registration rights, bears interest at a rate of
12%
per annum, matures on September 7, 2019, and contains standard and customary events of default including but not limited to: (i) failure to make payments when due under the Exchange Note, and (ii) bankruptcy or insolvency of the Company. Principal and interest are payable upon maturity.
BayBridge shall have the right, from and after the date of issuance of Exchange Note 2, and then at any time until Exchange Note 2 is fully paid, to convert any outstanding and unpaid principal and interest into shares of common stock at a variable conversion price equal to the lesser of (i) a price equal to
$0.15
, or (ii)
70%
of the lowest traded price for the shares over the prior
five
trading days.
Conversion to shares of common stock may not be issued pursuant to Exchange Note 2 if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of common stock.
As of
September 30, 2018
, aggregate principal of
$840,000
and interest of
$28,610
had been converted into
4,808,703
shares of common stock and no cash payments of principal or interest had been made on these exchange notes. The aggregate principal and accrued interest balances as of
September 30, 2018
were
$270,000
and
$2,069
, respectively. The following table summarizes the conversion activity of these notes:
|
|
|
|
|
|
|
|
|
|
Conversion Period
|
Principal Converted
|
Interest Converted
|
Common Shares Issued
|
Q4 2017
|
$
|
275,000
|
|
$
|
—
|
|
404,412
|
|
Q1 2018
|
$
|
105,000
|
|
$
|
20,717
|
|
493,007
|
|
Q2 2018
|
$
|
408,000
|
|
$
|
6,090
|
|
2,435,823
|
|
Q3 2018
|
$
|
52,000
|
|
$
|
1,803
|
|
1,475,461
|
|
|
$
|
840,000
|
|
$
|
28,610
|
|
4,808,703
|
|
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in Exchange Note 1 was deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At
December 31, 2017
, the derivative liability associated with Exchange Note 1 was
$542,733
. At
September 30, 2018
, Exchange Note 1 had been fully converted and the derivative liability had been reduced to zero.
The conversion option in Exchange Note 2 was deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At September 7, 2018, the derivative liability associated with Exchange Note 2 was
$276,179
.
The derivative liability associated with these notes is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
September 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the Exchange Note 2. As a result of the fair value assessment, the Company recorded a
$152,315
gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the three months ended
September 30, 2018
to properly reflect the fair value of the embedded derivative of
$123,864
as of
September 30, 2018
.
The fair value measurements rely primarily on company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with Exchange Note 2 approximates management’s estimate of the fair value of the embedded derivative liability at
September 30, 2018
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
62%
, present value discount rate of
12%
and dividend yield of
0%
.
Bellridge Convertible Notes
On July 25, 2018, as described in Note 10., the Company, entered into a securities exchange agreement (the “Exchange Agreement”) with Bellridge Capital, LP ("Bellridge"). Pursuant to the terms of the Exchange Agreement, the investor agreed to surrender and exchange a promissory note with a principal balance of
$275,000
. In exchange, the Company issued to the investor an unsecured convertible note with an aggregate principal amount of
$300,000
(the “Exchange Note”).
The Exchange Note is not secured, bears interest at a rate of
12%
per annum, and will mature on January 25, 2019; principal and interest on the Exchange Note are due upon maturity.
The investor shall have the right, from and after the date of issuance of this note and then at any time until the note is fully paid, to convert any outstanding and unpaid principal into shares of the Company's common stock at a variable conversion price equal to the lesser of (i) a price equal to
$0.20
, or (ii)
80%
of the lowest traded price for the shares over the prior
ten
trading days.
Conversion to shares of common stock may not be issued pursuant to the Exchange Note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of Common Stock.
On September 14, 2018, the “Company, issued a new
$150,000
convertible note in a private placement to Bellridge.
The note is not secured, contains no registration rights, bears interest at a rate of
12%
per annum, will mature on September 14, 2019, and contains standard and customary events of default including but not limited to: (i) failure to make payments when due under the note, and (ii) bankruptcy or insolvency of the Company. All principal and interest on the note are due upon maturity.
Bellridge shall have the option to convert all or a portion of the amounts outstanding under the note, into shares of the Company's common stock. Conversions into common stock shall be calculated using a variable conversion price equal to the lesser of (i)
$0.20
or (ii)
70%
of the lowest closing bid price for the shares over the prior
five
day trading period immediately preceding the conversion.
Shares of common stock may not be issued pursuant to note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of Common Stock.
As of
September 30, 2018
, an aggregate principal of
$137,500
and interest of
$2,104
, on the Bellridge convertible notes had been converted into
3,716,105
shares of common stock and no cash payments of principal or interest had been made. The aggregate principal and accrued interest balances as of
September 30, 2018
were
$312,500
and
$4,429
, respectively. The following table summarizes the conversion activity of these notes:
|
|
|
|
|
|
|
|
|
|
Conversion Period
|
Principal Converted
|
Interest Converted
|
Common Shares Issued
|
Q3 2018
|
$
|
137,500
|
|
$
|
2,104
|
|
3,716,105
|
|
|
$
|
137,500
|
|
$
|
2,104
|
|
3,716,105
|
|
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the Exchange Note was deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At July 25, 2018, the derivative liability associated with the Exchange Note was
$203,859
.
The conversion option in the new convertible note was deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At September 14, 2018, the derivative liability associated with the convertible note was
$32,145
.
The derivative liability associated with these notes is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
September 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the notes. As a result of the fair value assessment, the Company recorded a
$143,226
loss as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the three months ended
September 30, 2018
to properly reflect the fair value of the embedded derivative of
$379,230
as of
September 30, 2018
.
The fair value measurements rely primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the notes approximates management’s estimate of the fair value of the embedded derivative liability at
September 30, 2018
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
62%
, present value discount rate of
12%
and dividend yield of
0%
.
PowerUp Convertible Notes
On August 1, 2018, the Company, entered into a securities purchase agreement with Power Up Lending Group LTD, for the private placement of a
$130,000
convertible note . This note is unsecured, bears interest at a rate of
8%
per annum, and matures on August 1, 2019; principal and interest is due upon maturity. In the event of default, the interest rate per annum increases to
22%
.
Beginning in February 2019, Power Up shall have the option to convert all or a portion of the amounts outstanding under the convertible note, into shares of the Company's common stock. Conversions into common stock shall be calculated using a variable conversion price equal to
65%
of the average of the three lowest closing bid prices for the shares over the prior
ten
day trading period immediately preceding the conversion.
Shares of common stock may not be issued pursuant to the note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of common stock.
On September 4, 2018, the Company entered into a second securities purchase agreement with Power Up , for the private placement of a
$52,500
another convertible note. This note is unsecured, bears interest at a rate of
8%
per annum, and matures on September 14, 2019; principal and interest is due upon maturity. In the event of default, the interest rate per annum increases to
22%
.
Beginning in March 2019, Power Up shall have the option to convert all or a portion of the amounts outstanding under the convertible note, into shares of the Company's common stock. Conversions into common stock shall be calculated using a variable conversion price equal to
65%
of the average of the three lowest closing bid prices for the shares over the prior
ten
day trading period immediately preceding the conversion.
Shares of common stock may not be issued pursuant to Note 2 if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of Common Stock.
As of
September 30, 2018
, no principal or interest had been converted into shares of common stock and no cash payments of principal or interest had been made. The aggregate principal and accrued interest balances as of
September 30, 2018
were
$182,500
and
$2,009
, respectively.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the first note was deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At August 1, 2018, the derivative liability associated with the first note was
$78,382
.
The conversion option in the second note was deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At September 4, 2018, the derivative liability associated with the second note was
$128,613
.
The derivative liability associated with these notes is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
September 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the notes. As a result of the fair value assessment, the Company recorded a
$62,870
gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the three months ended
September 30, 2018
to properly reflect the fair value of the embedded derivative of
$144,125
as of
September 30, 2018
.
The fair value measurements rely primarily on company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the convertible notes approximates management’s estimate of the fair value of the embedded derivative liability at
September 30, 2018
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
63%
, present value discount rate of
12%
and dividend yield of
0%
.
EMA Convertible Note
On August 29, 2018, the Company, entered into a securities purchase agreement with EMA Financial, LLC, for the private placement of a
$75,000
convertible note. The note is unsecured, bears interest at a rate of
8%
per annum, and matures on May 29, 2019; principal and interest is due upon maturity. In the event of default, the interest rate per annum increases to
22%
.
Beginning in March 2019, EMA shall have the option to convert all or a portion of the amounts outstanding under the note, into shares of the Company's Common Stock. Conversions into Common Stock shall be calculated using a variable conversion price equal to
65%
of the average of the three lowest closing bid prices for the shares over the prior
ten
day trading period immediately preceding the conversion.
Shares of common stock may not be issued pursuant to the note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.9%
of the outstanding shares of common stock.
As of
September 30, 2018
, no principal or interest had been converted into shares of common stock and no cash payments of principal or interest had been made. The principal and accrued interest balances as of
September 30, 2018
were
$75,000
and
$526
, respectively.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the note was deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At August 29, 2018, the derivative liability associated with the note was
$3,945
.
The derivative liability associated with the note is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
September 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the note. As a result of the fair value assessment, the Company recorded a
$64,992
loss as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the three months ended
September 30, 2018
to properly reflect the fair value of the embedded derivative of
$68,937
as of
September 30, 2018
.
The fair value measurements rely primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the Notes approximates management’s estimate of the fair value of the embedded derivative liability at
September 30, 2018
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
72%
, present value discount rate of
12%
and dividend yield of
0%
.
NOTE 12. SERIES A PREFERRED STOCK
In June 2013, the Company entered into a Securities Purchase Agreement with an investor to sell an aggregate of
750,000
shares of Series A Preferred Stock at a price of
$8.00
per share, resulting in gross proceeds of
$6,000,000
. This purchase agreement included warrants to purchase up to
13,125
shares of common stock of the Company. The transfer of cash and securities took place incrementally, the first closing occurring on June 17, 2013 with the transfer of
125,000
shares of Series A Preferred Stock and a warrant to purchase
2,187
shares of common stock for
$1,000,000
. The final closings took place in August 2013, with the transfer of
625,000
shares of Series A Preferred Stock and a warrant to purchase
10,938
shares of common stock for
$5,000,000
.
Holders of Series A Preferred Stock are entitled to cumulative dividends at a rate of
8%
per annum when and if declared by the Board of Directors in its sole discretion. The dividends may be paid in cash or in the form of common stock (valued at
10%
below market price, but not to exceed the lowest closing price during the applicable measurement period), at the discretion of the Board of Directors. The dividend rate on the Series A Preferred Stock is indexed to the Company's stock price and subject to adjustment. In addition, the Series A Preferred Stock contains a make-whole provision whereby, conversion or redemption of the preferred stock within
4 years
of issuance will require dividends for the full
four
year period to be paid by the Company in cash or common stock (valued at
10%
below market price, but not to exceed the lowest closing price during the applicable measurement period). This make-whole provision expired in June 2017 and future conversions and redemptions will be paid out with accrued dividends per the holding period of the shares of Series A Preferred stock. Please see Note 23 of the financial statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
for more information.
The Series A Preferred Stock may be converted into shares of common stock at the option of the Company if the closing price of the common stock exceeds
$232
, as adjusted, for
20
consecutive trading days, or by the holder at any time. The Company has the right to redeem the Series A Preferred Stock at a price of
$8.00
per share, plus any accrued and unpaid dividends, plus the make-whole amount (if applicable). At
September 30, 2018
, the preferred shares were not eligible for conversion to common shares at the option of the Company. The holder of the preferred shares may convert to common shares at any time, at no cost, at a ratio of
1
preferred share into 1 common share (subject to standard ratable anti-dilution adjustments). Upon any conversion (whether at the option of the Company or the holder), the holder is entitled to receive any accrued but unpaid dividends.
On October 6, 2016, the Series A Holder entered into an exchange agreement with a private investor. Pursuant to the exchange agreement, beginning December 5, 2016, the investor has the option to exchange, from time to time, all or any portion of the October 2016 Convertible Notes (see Note 11) for outstanding shares of Series A Preferred Stock from the Series A Holder.
As of March 31, 2017, the investor had elected to exchange all outstanding October 2016 Convertible Notes, in accordance with the exchange agreement, resulting in the exchange of
104,785
shares of Series A Preferred Stock. As of March 31, 2017, the investor had also converted their
104,785
shares of Series A Preferred Stock, and the related make whole dividend, which resulted in the issuance of
173,947
shares of common stock.
Except as otherwise required by law (or with respect to approval of certain actions), the Series A Preferred Stock shall have no voting rights. Upon any liquidation, dissolution or winding up of the Company, after payment or provision for payment of debts and other liabilities of the Company, the holders of Series A Preferred Stock shall be entitled to receive, pari passu with any distribution to the holders of common stock of the Company, an amount equal to
$8.00
per share of Series A Preferred Stock plus any accrued and unpaid dividends.
As of
September 30, 2018
, there were
60,756
shares of Series A Preferred Stock outstanding and accrued and unpaid dividends of
$325,888
.
NOTE 13. SERIES K PREFERRED STOCK
On February 8, 2017, the Company, entered into a securities purchase agreement (“Series K SPA”) with a private investor, for the private placement of up to
$20,000,000
of the Company’s newly designated Series K Convertible Preferred Stock (“Series K Preferred Stock”).
Per the terms of the Series K SPA, the Company was scheduled to sell
1,000
shares of Series K Preferred Stock to the investor in exchange for
$1,000,000
of gross proceeds on or before each of (i) February 24, 2017, (ii) March 27, 2017, (iii) April 27, 2017, (iv) May 27, 2017 and (v) June 27, 2017. The Company was also scheduled to sell
15,000
shares of Series K Preferred Stock to the investor in exchange for
$15,000,000
of gross proceeds on or before July 27, 2017. As of
September 30, 2018
, the Company had sold
9,010
shares of Series K Preferred Stock in exchange for
$9,010,000
in cash proceeds from the private investor. The Company does not expect to receive any more funding from this investor. The following summarizes the closings and proceeds received as of
September 30, 2018
:
|
|
|
|
|
|
|
Closing Period
|
Preferred Series K Shares Purchased
|
Closing Amount
|
Q1 2017
|
150
|
|
$
|
150,000
|
|
Q2 2017
|
4,100
|
|
4,100,000
|
|
Q3 2017
|
4,760
|
|
4,760,000
|
|
|
9,010
|
|
$
|
9,010,000
|
|
The Series K Preferred Stock ranks senior to the Company’s common stock in respect to dividends and rights upon liquidation. The Series K Preferred Stock will not have voting rights and the holders of the Series K Preferred Stock will not be entitled to any fixed rate of dividends.
The shares of the Series K Preferred Stock will be convertible at the option of the holder into common stock at a fixed conversion price equal to
$0.004
. At no time may the Series K Preferred Stock be converted if the number of shares of common stock to be received by Investor pursuant to such conversion, when aggregated with all other shares of common stock then beneficially (or deemed beneficially) owned by Investor, would result in Investor beneficially owning more than
19.99%
of all common stock then outstanding. As of
September 30, 2018
, the investor had converted all of the Series K Preferred Stock into shares of common stock. The following table summarizes the conversion activity of Series K Preferred Stock:
|
|
|
|
|
|
|
|
|
Conversion Period
|
Preferred Series K Shares Converted
|
Value of Series K Preferred Shares
|
Common Shares Issued
|
Q2 2017
|
3,200
|
|
$
|
3,200,000
|
|
800,000
|
|
Q3 2017
|
3,000
|
|
$
|
3,000,000
|
|
750,000
|
|
Q2 2018
|
2,810
|
|
$
|
2,810,000
|
|
702,500
|
|
|
9,010
|
|
$
|
9,010,000
|
|
2,252,500
|
|
As of
September 30, 2018
, the investor owned approximately
8%
of the Company's outstanding common stock.
The Company is required to redeem for cash any outstanding shares of the Series K Preferred Stock at a price per share equal to
$1,000
plus any accrued but unpaid dividends (if any) thereon on the fifth anniversary of the date of the original issue of such shares.
Upon our liquidation, dissolution or winding up, holders of Series K Preferred Stock will be entitled to be paid out of our assets, prior to the holders of our common stock, an amount equal to
$1,000
per share plus any accrued but unpaid dividends (if any) thereon.
Upon issuance, in accordance with ASC 480-10, the Series K Preferred Stock was classified as a liability on the Consolidated Balance Sheets. Pursuant to a number of factors outlined in ASC Topic 815, the conversion option in the Series K Preferred Stock was deemed to not require bifurcation or separate accounting treatment.
NOTE 14. STOCKHOLDERS’ DEFICIT
Common Stock
Reverse Stock Split
On July 19, 2018, the Company, filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (the “Certificate of Amendment”) with the Secretary of State of the State of Delaware to effect a reverse stock split of the Company’s common stock, at a ratio of one-for-one thousand (the “Reverse Stock Split”).
The Certificate of Amendment provides that the Reverse Stock Split became effective as of 5:00 p.m. Eastern Time on July 20, 2018 (the “Effective Time”), at which time every thousand shares of the Company’s issued and outstanding Common Stock were automatically combined into one issued and outstanding share of Common Stock, without any change in the par value per share. The Certificate of Amendment provides that in the event a stockholder would otherwise be entitled to receive a fraction of a share of Common Stock, such stockholder shall receive one whole share of Common Stock in lieu of such fractional share and no fractional shares shall be issued.
Immediately following the Reverse Stock Split, the Company had approximately
19 million
shares of Common Stock issued and outstanding. The number of authorized shares of the Company’s Common Stock remains at
20 billion
. The number of shares of the Company’s Series A preferred stock outstanding was not affected by the Reverse Stock Split. However, the number of shares of Common Stock into which each outstanding share of Series A preferred stock is convertible will be adjusted proportionately as a result of the Reverse Stock Split. All outstanding RSUs, stock options, warrants and rights to purchase shares of Common Stock was adjusted proportionately.
Trading of the Company’s Common Stock continued on the OTC Marketplace on a split-adjusted basis on July 23, 2018.
The Company's Common Stock will temporarily trade under the symbol "ASTID," with a "D" added for
20
trading days to signify that the Reverse Stock Split has occurred. After
20
trading days, the trading symbol will revert back to ASTI.
The new CUSIP number for the Common Stock following the Reverse Stock Split is 043635507.
At the Company’s 2018 Annual Meeting of Stockholders, the Company’s stockholders approved a reverse stock split of the Common Stock at a ratio ranging from one-for-one hundred to one-for-one thousand, with such ratio to be determined by the Company’s Board of Directors in its discretion without further approval from the Company’s stockholders. The Board of Directors of the Company subsequently authorized proceeding with the Reverse Stock Split at a ratio of one-for-one thousand.
At
September 30, 2018
, the Company had
20,000,000,000
shares of common stock,
$0.0001
par value, authorized for issuance. Each share of common stock has the right to
one
vote. As of
September 30, 2018
, the Company had
29,538,241
shares of common stock outstanding. The Company has not declared or paid any dividends related to the common stock through
September 30, 2018
.
Preferred Stock
At
September 30, 2018
, the Company had
750,000
shares of preferred stock,
$0.0001
par value, authorized for issuance. Preferred stock may be issued in classes or series. Designations, powers, preferences, rights, qualifications, limitations and restrictions are determined by the Company’s Board of Directors.
The following table summarizes the designations, shares authorized, and shares outstanding for the Company's Preferred Stock:
|
|
|
|
Preferred Stock Series Designation
|
Shares Outstanding
|
Series A
|
60,756
|
|
Series K
|
—
|
|
Series A Preferred Stock
Refer to Note 12 descriptions of Series A Preferred Stock.
Series K Preferred Stock
Refer to Note 13 descriptions of Series K Preferred Stock.
Warrants
As of December 31, 2017, the Company had
three
outstanding warrants for an aggregate of
700,000
shares of common stock: i) a warrant for
250,000
shares of common stock which is exercisable at a fixed strike price of
$4.00
and expires on
July 24, 2018
; ii) a warrant for
250,000
shares of common stock which is exercisable at a fixed strike price of
$3.00
and expires on
August 10, 2018
; and iii) a warrant for
200,000
shares of common stock which is exercisable at a fixed strike price of
$1.80
and expires on
June 30, 2018
. None of the warrants may not be exercised if, after giving effect to the exercise, the holder, together with its affiliates, would beneficially own in excess of
9.99%
of the Company's outstanding shares of common stock. Please refer to Note 24 of the financial statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
for further information about each warrant issuance.
As of
September 30, 2018
, the warrants described above had expired unexercised.
The following table summarizes warrant activity:
|
|
|
|
|
|
|
|
Warrant
Shares
|
Warrant
Weighted
Average
Exercise Price
|
Outstanding at December 31, 2016
|
—
|
|
$
|
—
|
|
Granted
|
700,000
|
|
$
|
3.01
|
|
Exercised
|
—
|
|
$
|
—
|
|
Canceled/Expired
|
—
|
|
$
|
—
|
|
Outstanding at December 31, 2017
|
700,000
|
|
$
|
3.01
|
|
Granted
|
—
|
|
$
|
—
|
|
Exercised
|
—
|
|
$
|
—
|
|
Canceled/Expired
|
(700,000
|
)
|
$
|
3.01
|
|
Outstanding at September 30, 2018
|
—
|
|
$
|
—
|
|
Exercisable at September 30, 2018
|
—
|
|
$
|
—
|
|
NOTE 15. EQUITY PLANS AND SHARE-BASED COMPENSATION
Share-Based Compensation:
The Company measures share-based compensation cost at the grant date based on the fair value of the award and recognizes this cost as an expense over the grant recipients’ requisite service periods for all awards made to employees, officers, directors and consultants.
The share-based compensation expense recognized in the Condensed Consolidated Statements of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Share-based compensation cost included in:
|
|
|
|
|
|
Research and development
|
|
$
|
642
|
|
|
$
|
17,555
|
|
|
Selling, general and administrative
|
|
24,180
|
|
|
91,163
|
|
|
Total share-based compensation cost
|
|
$
|
24,822
|
|
|
$
|
108,718
|
|
|
The following table presents share-based compensation expense by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Type of Award:
|
|
|
|
|
|
Stock Options
|
|
$
|
24,822
|
|
|
$
|
82,388
|
|
|
Restricted Stock Units and Awards
|
|
—
|
|
|
26,330
|
|
|
Total share-based compensation cost
|
|
$
|
24,822
|
|
|
$
|
108,718
|
|
|
Stock Options:
The Company recognized share-based compensation expense for stock options of approximately
$25,000
to officers, directors and employees for the
nine
months ended
September 30, 2018
related to stock option awards ultimately expected to vest. There were no stock options granted during the
nine
months ended
September 30, 2018
or during the
nine
months ended
September 30, 2017
.
As of
September 30, 2018
, total compensation cost related to non-vested stock options not yet recognized was approximately
$13,000
which is expected to be recognized over a weighted average period of approximately
0.7
year,
15
shares were vested or expected to vest and
51
shares remained available for future grants under the Option Plan.
Restricted Stock:
The Company did not recognized share-based compensation expense related to restricted stock grants for the
nine
months ended
September 30, 2018
. During the
nine
months ended
September 30, 2017
, the Company recognized approximately
$26,000
in share-based compensation related to restricted stock grants. There were no restricted stock grants for the
nine
months ended
September 30, 2018
or the
nine
months ended
September 30, 2017
.
As of
September 30, 2018
, there was no unrecognized share-based compensation expense from unvested restricted stock, no shares were expected to vest in the future, and
519
shares remained available for future grants under the Restricted Stock Plan.
NOTE 16. SUBSEQUENT EVENTS
Offering of Secured Convertible Note
On October 2, 2018, the Company, issued a
$150,000
convertible note, in a private placement to Global Ichiban Ltd., in exchange for
$125,000
of gross proceeds.
The note is secured, bears interest at a rate of
12%
per annum, and matures on October 2, 2019. All principal and interest are due upon maturity.
The note contains standard and customary events of default including but not limited to: (i) failure to make payments when due under the note, and (ii) bankruptcy or insolvency of the Company. In the event of default, the interest rate increases to
18%
per annum.
Beginning six months after the date of issue, the Company shall have the option to make payment to all or a portion of the amounts outstanding under the note in shares of the Company's Common Stock. Payment in Common Stock shall be calculated using a variable conversion price equal to the lesser of (i)
$0.20
or (ii)
75%
of the lowest closing bid price for the shares over the prior
five
day trading period immediately preceding the conversion.
Shares of Common Stock may not be issued pursuant to the note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
9.9%
of the outstanding shares of the Company’s Common Stock.
Offering of Promissory Note
On October 16, 2018, the Company, entered into a securities purchase agreement with Power Up Lending Group LTD for the private placement of a
$42,500
Convertible Promissory Note in exchange for
$42,500
of gross proceeds.
The note bears interest at a rate of
8%
per annum and matures on October 16, 2019. All principal and interest is due upon maturity.
The note contains standard and customary events of default including but not limited to: (i) failure to make payments when due under the note, and (ii) bankruptcy or insolvency of the Company. In the event of default, the interest rate increases to
22%
per annum.
Beginning in March 2019, Power Up shall have the option to convert all or a portion of the amounts outstanding under the note, into shares of the Company's Common Stock. Conversions into Common Stock shall be calculated using a variable conversion price equal to
65%
of the average of the three lowest closing bid prices for the shares over the prior
ten
day trading period immediately preceding the conversion.
Shares of Common Stock may not be issued pursuant to the note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of Common Stock.
Offering of Secured Promissory Note
On October 22, 2018, the Company issued a
$150,000
promissory note, in a private placement to Global Ichiban Ltd., in exchange for
$125,000
of gross proceeds.
The note is secured, bears interest at a rate of
12%
per annum, and matures on October 22, 2019. All principal and interest are due upon maturity.
The note contains standard and customary events of default including but not limited to: (i) failure to make payments when due under the note, and (ii) bankruptcy or insolvency of the Company.
Beginning six months after the date of issue, the Company shall have the option to make payments on the note in the form of shares of the Company's Common Stock. Payments in the form of Common Stock shall be calculated using a variable conversion price equal to the lowest of (i)
$0.20
or (ii)
75%
of the lowest closing bid price for the shares over the prior
five
day trading period immediately preceding the conversion.
Shares of Common Stock may not be issued pursuant to the note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
9.9%
of the outstanding shares of the Company’s Common Stock.
Offering of Secured Convertible Note
On November 5, 2018, the Company entered into a securities purchase agreement with St. George Investments LLC, for the private placement of a
$1,220,000
convertible note.
On November 7, 2018, the Company received
$200,000
of gross proceeds from the offering of the note. In addition, the Company received additional consideration for the note in the form of
eight
separate promissory notes of St. George (the “Investor Notes”) having an aggregate principal amount of
$800,000
.
The Company may receive additional cash proceeds of up to an aggregate of
$800,000
through cash payments made from time to time by St. George of principal and interest under the eight Investor Notes. Under certain circumstances, both the Company and the Investor are entitled to offset amounts owed under the note against the corresponding amounts owed under the Investor Notes. Each of the Investor Notes is unsecured, bears interest at a rate of
10%
per annum, and matures on November 5, 2019. All principal and interest is due upon maturity. The Investor Notes contain standard and customary events of default including but not limited to failure to make payments when due under the Investor Notes.
The aggregate principal amount of the note is divided into nine tranches, which tranches correspond to (i) the cash funding received on November 7, 2018 and (ii) the principal amounts of the eight Investor Notes.
The note is secured, bears interest at a rate of
10%
per annum and matures on November 5, 2019. All principal and interest are due upon maturity.
The note contains standard and customary events of default including but not limited to: (i) failure to make payments when due under the Note, and (ii) bankruptcy or insolvency of the Company. In the event of default, the interest rate increases to
22%
per annum.
Beginning six months after the date of issue, Investor shall have the option to redeem all or a portion of the amounts outstanding under the note. At St. George's option, redemption amounts are payable by the Company in the form of (x) cash or (y) conversion
of such amounts into shares of the Company's common stock. Conversions into common stock shall be calculated using a variable conversion price equal to
60%
of the average of the two lowest closing bid price for the shares over the prior
ten
day trading period immediately preceding the conversion.
Shares of common stock may not be issued pursuant to the note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of the Company’s common stock.