Annual report pursuant to Section 13 and 15(d)

CONVERTIBLE NOTES PAYABLE

v3.20.4
CONVERTIBLE NOTES PAYABLE
12 Months Ended
Sep. 30, 2020
Debt Disclosure [Abstract]  
CONVERTIBLE NOTES PAYABLE

NOTE 7 – CONVERTIBLE NOTES PAYABLE

 

The Company’s convertible promissory notes consisted of the following as of September 30, 2020 and 2019.

 

    September 30, 2020     September 30, 2019  
    Notes       Discount       Notes, Net
of Discount
      Notes       Discount       Notes Net
of Discount
   
Bridge Financing Notes   $ 227,000       $ (11,209 )     $ 215,791       $ 227,000       $ (99,669 )     $ 127,331    
Delek Note                             1,000,000                 1,000,000    
June 2019 Convertible Debenture     300,000         (54,178 )       245,822         2,500,000         (2,429,365 )       70,635    
Total   $ 527,000       $ (65,387 )     $ 461,613       $ 3,727,000       $ (2,529,034 )     $ 1,197,966    

 

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 at maturity to April 30, 2020 and was extended again during the year ended September 30, 2020 to April 30, 2021), 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 $3.0 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 as of September 30, 2020 and 2019 were $277,000, with remaining unamortized debt discounts of approximately $11,000 and $100,000, respectively. Debt discount amortization for the years ended September 30, 2020 and 2019 was approximately $8,100 and $52,000, respectively. Accrued interest as of September 30, 2020 and 2019 related to these notes was approximately $94,000 and 72,000 respectively. As noted above, the maturity date related to these notes and associated warrants was extended to April 30, 2021. In consideration for the extension of the notes, the Company extended the term of the related warrants until April 30, 2021 and recognized $19,300 of additional debt discount which represented the incremental value of the modified warrants over the pre-modification warrants.

 

Delek Note

 

On March 1, 2019, the Company entered into a term loan agreement with Delek GOM Investments LLC (“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 7.0% 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 matured 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.

 

The Company accounted for the October 2019 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 be required 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.

 

On September 30, 2020, the Company and Delek settled this convertible note and related accrued interest of $129,211 for a cash payment of $1,220,548 and the issuance 17,500,000 shares of common stock. The shares were not issued until October 2020 and are reflected on the balance sheet as additional paid in capital – shares to be issued, The fair value of the embedded conversion option was zero as of September 30, 2020.  The Company recognized a $35,045 gain on extinguishment of debt as a result of the settlement.

 

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

 

 

 

September 30, 2020

 

Stock Price

 

$

0.041

 

 

$

0.006

 

Fixed Exercise Price

 

$

0.050

 

 

$

0.050

 

Volatility

 

 

138

%

 

 

127

%

Term (Years)

 

 

1.00

 

 

 

0.05

 

Risk Free Rate

 

 

1.59

%

 

 

0.08

%

 

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 of convertible debentures (“Convertible Debentures”) and associated warrants. On June 21, 2019, approximately $2,100,000 (“Tranche 1”) of Convertible Debentures were purchased with other tranches closing on August 7, 2019 for $400,000 (“Tranche 2”) and November 6, 2019 (“Tranche 3”) for $500,000. All tranches accrue interest at 8%, and mature one year after each respective closing date, 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.

 

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 upon conversion. In addition, the Company concluded the warrants required treatment as derivative liabilities as the Company could not assert it 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 a gain of approximately $2,400,000 for the year ended September 30, 2020, related to the change in fair value of the embedded conversion feature and warrants, respectively.

 

In June 2020, the Company extended the maturity dates of Tranche 1 and Tranche 2 to August 21, 2020 in exchange for a cash payment of $50,000. The extension was treated as a modification for accounting purposes which resulted in the $50,000 being recognized as an additional debt discount allocated on a pro-rata basis between Tranche 1 and Tranche 2 and will be amortized using the effective interest method over the remaining life of the respective tranches.

 

On July 27, 2020, the Company and the holder agreed to the following cash payments in full satisfaction of the obligations thereunder: (1) $50,000 on the date of the Agreement; (2) $700,000 on or before August 21, 2020; (3) $750,000 on or before September 30, 2020; and (4) any remaining principal amount outstanding on or before November 30, 2020. As of the date of the agreement, the principal balance outstanding on the Convertible Debenture was $1,900,000, which amount may be reduced in the event that holder elects to convert to equity all or any portion of principal prior to repayment. In connection with the agreement, the holder agreed not to convert more than $300,000 of principal of the Debenture between the date of the agreement and November 30, 2020. Upon the timely payment by the Company of the amounts set forth above, all other amounts due on the Debentures, including any interest or fees accrued or that will accrue or become due or payable on the Debentures, will be extinguished. The Company accounted for this arrangement as a modification of the existing debt.

 

The Company further agreed to reduce the exercise price on the warrants held by the holder representing the right to purchase an aggregate of 50,000,000 shares of common stock of the Company from $0.04 per share to $0.02 per share in exchange for the elimination of anti-dilution provisions contained in the warrants. The value of this modification is approximately $16,000.

 

During the year ended September 30, 2020, the lender converted approximately $1,200,000 of principal of Tranche 1 and approximately $139,000 of accrued interest into common stock. The common stock issued was recorded at its fair value on the dates of conversion which totaled approximately $2.2 million and a loss on extinguishment of debt and related derivative liability was recognized for approximately $1.0 million. The remaining balance of the convertible debenture at September 30, 2020 was $300,000.

 

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:

 

 

 

Conversions for the twelve months ended
September 30, 2020

 

 

 At
September 30,
2020

 

Stock Price

 

$0.006 – $0.034

 

 

$0.006

 

Fixed Exercise Price

 

 

0.050

 

 

$0.05

 

Volatility

 

 

77 - 284

%

 

 

122

%

Term (Years)

 

 

0.01 - 0.62

 

 

 

0.17

 

Risk Free Rate

 

 

0.08 – 1.62

%

 

 

.10

%

 

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.