Quarterly report pursuant to Section 13 or 15(d)

TERM LOAN AND CONVERTIBLE PROMISSORY NOTES

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TERM LOAN AND CONVERTIBLE PROMISSORY NOTES
3 Months Ended
Dec. 31, 2019
Debt Disclosure [Abstract]  
TERM LOAN AND CONVERTIBLE PROMISSORY NOTES

NOTE 5 – TERM LOAN AND CONVERTIBLE PROMISSORY NOTES

 

Bridge Financing Notes

 

Between June and November 2016, the Company issued eleven convertible promissory notes (“Bridge Financing Notes”) with associated warrants in a private placement to accredited investors for total gross proceeds of $837,000, including $222,000 from related parties. These notes had a maturity of one year (which has been extended to April 30, 2020), an annual interest rate of 8% and can be converted at the option of the holder at a conversion price of $0.025 per share. In addition, the convertible notes will automatically convert if a qualified equity financing of at least $3 million occurs before maturity and such mandatory conversion price will equal the effective price per share paid in the qualified equity financing. The remaining note balances at December 31, 2019 and 2018 are $277,000, respectively, with remaining unamortized debt discounts of $56,620 and zero, respectively. Debt discount amortization for the three months ended December 31, 2019 and 2018 was approximately $43,000 and zero, respectively. Accrued interest for the quarter ended December 31, 2019, was approximately $6,000 and cumulative accrued interest was approximately $77,000.

 

Delek Note

 

On March 1, 2019, the Company entered into a term loan agreement with Delek, where Delek agreed to provide the Company with multiple draw term loans in an aggregate stated principal amount of up to $11.0 million, of which $10.0 million was initially advanced and subsequently converted to equity through the exercise of a warrant. The maturity date of the facility was September 4, 2019, and until such time any loans would bear interest at a rate per annum equal to 5.0% or 7% upon the occurrence of default. Amounts outstanding under the Term Loan Agreement are secured by a security interest in substantially all of the properties and assets of the Company. On April 19, 2019, the Company borrowed the remaining $1.0 million under this agreement.

 

The term loan facility expired as of September 4, 2019, and in October 2019, the Company signed a Post-Drilling Agreement with Delek modifying this arrangement. The Post-Drilling Agreement states that as payoff for the Company’s outstanding obligations of $1,000,000 plus accrued interest (and additional fees of approximately $200,000), the Company shall issue a convertible note payable to Delek in the amount of $1,220,548. The new note is convertible at the option of Delek at a conversion price of $0.05 per share, and in the event of default the conversion rate adjusts to 60% of the lowest volume weighted average price in the previous 20 trading days. Interest on the note accrues at 12% per annum (15% upon default) and the maturity of the note is October 22, 2020. The Company has a right to prepay all principal and accrued interest prior to maturity. At December 31, 2019, the accrued interest payable related to this note was approximately $30,000.

 

The Company accounted for this transaction as an extinguishment of the prior note given the addition of the substantive conversion feature discussed above. In addition, The Company concluded that the embedded conversion feature within the note requires derivative accounting treatment under ASC 815, Derivatives and Hedging due to the potential variable conversion feature which lacks an explicit limit on the number of shares that may require upon conversion. Accordingly, the Company valued the embedded conversion feature and host instrument at their fair values of $479,498 and $1,220,548, respectively, and recognized a loss on extinguishment of $676,785. The fair value of the host note was determined by discounting the future cash flows of the note at a market participant-based rate of interest. Further, since the embedded conversion feature is a derivative liability, it is subsequently remeasured to fair value each reporting period. The fair value of the embedded conversion option was $119,647 at December 31, 2019.

 

The fair value of the embedded conversion feature was determined utilizing a Geometric Brownian Motion Stock Path Based Monte Carlo Simulation that utilized the following key assumptions:

 

    October 17,
2019
  December 31,
2019
 
Stock Price   $ 0.041   $ 0.025  
Fixed Exercise Price   $ 0.050   $ 0.050  
Volatility     138 %   110 %
Term (Years)     1.00     0.80  
Risk Free Rate     1.59 %   1.59 %

 

June 2019 Convertible Debenture

 

On June 21, 2019, the Company entered into a securities purchase agreement to borrow up to $3,000,000 through the issuance convertible debentures (“Convertible Debentures”) and associated warrants. On June 21, 2019, approximately $2,100,000 of Convertible Debentures were purchased with other tranches closing on August 7, 2019 for $400,000 and November 6, 2019 for $500,000. All tranches accrue interest at eight percent per annum, mature on June 21, 2020, and are convertible at the option of the holder any time after issuance into common stock at a conversion rate of the lesser of: (1) $0.05 per share; or (2) 80% of the lowest volume weighted adjusted price (as reported by Bloomberg, LP) for the ten consecutive trading days immediately preceding conversion, and in the event of default the conversion rate adjusts to 60% of the lowest volume weighted average price in the previous 20 trading days.

 

In addition, the holder received warrants to purchase an aggregate of 50 million shares of common stock at an exercise price of $0.04 per share. Such warrants expire on the fifth anniversary of issuance. In total the offering costs incurred related to this convertible debenture were approximately $398,000 ($65,000 incurred during the three months ended December 31, 2019). 

 

The Company evaluated the conversion feature and concluded that it should be bifurcated and accounted for as a derivative liability due to the variable conversion feature which does not contain an explicit limit on the number of shares that are required to be issued. In addition, the Company concluded the warrants required treatment as derivative liabilities as the Company could not assert in has sufficient authorized but unissued shares to settle the warrants upon exercise when taking into account other stock-based commitments including the Convertible Debentures. Accordingly, the embedded conversion feature and warrants were recorded at fair value at issuance and are subsequently remeasured to fair value each reporting period. The Company recognized gains of approximately $770,000 and $131,000 for the three months ended December 31, 2019 related to the change in fair value of the embedded conversion feature and warrants, respectively.

 

In addition, during the three months ended December 31, 2019, the lender converted $300,000 of principal and $83,637 of accrued interest. Given the embedded conversion feature for the debenture is bifurcated for accounting purposes, this represents the issuance of common stock to extinguish two liabilities. The common stock issued was recorded at its fair value on the dates of issuance ($548,391) and a loss on extinguishment of debt was recognized for approximately $279,584.

 

The fair value of the embedded conversion feature was determined utilizing a Geometric Brownian Motion Stock Path Based Monte Carlo Simulation that utilized the following key assumptions:

 

    Conversion for the quarters
ended December 31, 2019
  December 31,
2019
 
Stock Price   $ 0.030 – 0.034   $ 0.025  
Fixed Exercise Price   $ 0.050   $ 0.050  
Volatility     77- 115 %   82 -111 %
Term (Years)     0.5 - 0 .62     0.47 - 0.85  
Risk Free Rate     1.58 – 1.62 %   1.59 – 1.60 %

 

In addition to the fixed exercise price noted above, the model incorporates the variable conversion price which is simulated as 80% of the lowest trading price within the ten consecutive days preceding presumed conversion.

 

The Company’s convertible promissory notes consisted of the following as of December 31, 2019.

 

  Notes Discount Notes, Net of Discount
Convertible Notes Payable $ 4,147,548   $ (2,444,907 ) $ 1,702,641  
Total $ 4,147,548   $ (2,444,907 ) $ 1,702,641