Convertible Debentures and Notes Payable

12 Months Ended

Dec. 31, 2017

Debt Disclosure [Abstract]

Convertible Debentures and Notes Payable

NOTE 7 – CONVERTIBLE DEBENTURES AND NOTES PAYABLE

Convertible debentures

In July 2012, the Company entered into a securities purchase agreement with certain institutional and private investors pursuant to which it sold convertible debentures for an aggregate of $3,069,900. The debentures had a stated interest rate of 8% per annum which was payable semi-annually. The debentures were convertible at any time into shares of the Company's common stock at an initial conversion price of $0.225 per share, subject to adjustment under certain conditions. Each investor also received a common stock purchase warrant to purchase common stock equal to twenty-five percent (25%) of the shares issuable upon conversion of the debentures. The warrants were immediately exercisable at a price of $0.30 per share with a five-year life and matured in July 2017.

In accordance with FASC 470-20, Accounting for Convertible Debt Instruments that may be settled in cash upon conversion, the Company allocated the proceeds to the debentures and warrants based on their relative fair value, which resulted in $2,703,144 being allocated to the debentures and $366,756 being allocated to the warrants. Subsequent to the allocation, the Company calculated a beneficial conversion feature of $25,656. The allocated warrant value and the beneficial conversion feature were recorded as debt discount and was accreted to interest expense over the five-year life of the debentures. During the periods ended December 31, 2017, $42,169 of the allocated fair value of the warrants was accreted to interest expense and $2,566 of the beneficial conversion feature was accreted to interest expense. For the same period in 2016, $73,352 of the allocated fair value of the warrants was accreted to interest expense and $5,131 of the beneficial conversion feature was accreted to interest expense.

In connection with this offering, the Company paid a fee and issued to the placement agent a warrant to purchase 1,091,520 shares of the Company’s common stock. The placement warrant had a fair value of $133,285. The value of the placement warrant and the fees were recorded as offering costs and were amortized to expense over the life of the underlying debentures.

As discussed in Note 9 below, in February 2017, pursuant to a private placement transaction with certain investors, the Company issued 3,433 shares of Series C Preferred Stock and warrants. In connection with the private placement, two investors holding convertible debentures exchanged aggregate principal totaling $205,000 of the convertible debentures for shares of the Series C Preferred Stock and warrants.

On March 24, 2017, the Company entered into an Amendment to the 8% Convertible Notes (the Amendment), pursuant to which the 8% Convertible Notes (the Notes) issued by the Company in July 2012 were amended to give noteholders certain additional rights. Pursuant to the Amendment, the Notes were modified to provide each holder the right, at the holder’s option and exercisable prior to May 12, 2017, to convert all or any portion of the principal amount of the Notes, plus accrued but unpaid interest, into shares of Series C Preferred Stock at a conversion price of $1,000 per share. Holders that elected to convert their Notes into Series C Preferred Stock received a Class N Warrant to purchase up to 3,750 shares of the Company’s common stock for each share of Series C Preferred Stock received upon conversion of the Notes, with each Warrant having a five-year term, a cashless exercise feature, and an exercise price of $0.10 per share of common stock. On May 12, 2017, the Company completed the retirement of $1,835,000 of the Notes in early cash redemptions, and $780,000 of the Notes were converted into an aggregate of 780 shares of Series C Preferred Stock.

Notes payable

In December 2013, the Company borrowed $500,000 from the Company’s Chairman of the Board of Directors (the “Board”) and one of the Company’s major shareholders. The $500,000 note bears interest at 6% and was originally due June 30, 2014. According to the terms of the note, at any time, the lenders may settle any or all of the principal and accrued interest with shares of the Company’s common stock. In connection with the note, each of the two lenders was issued 5,000,000 warrants to purchase shares of the Company’s common stock. In June 2014, the Company renegotiated the terms of this promissory note. Pursuant to the modification, the maturity date was extended to December 31, 2017, and each Lender was granted an additional 7,500,000 warrants to purchase shares of the Company’s common stock at $0.06 per share. The warrants were immediately exercisable. The fair value of these warrants was $384,428 and was recorded as a debt discount and will be amortized to interest expense over the new life of the promissory note. The Company calculated a beneficial conversion feature of $15,464 which will be accreted to interest expense over the new life of the note. As a result, the Company recorded non-cash interest expense in 2017 of $26,822 and $117,042 of non-cash interest was recorded in 2016. In February 2017, the due date of the note was extended to December 31, 2020, with all other terms of the note remaining unchanged.

In September 2016, the Company borrowed an aggregate of $360,000 from the Company’s then Chairman of the Board of Directors and one of the Company’s Directors. The $360,000 note carried stated interest at 6%, which was payable upon maturity of the note on March 31, 2017. Per the terms of the note, at any time, the lenders could settle any or all principal and accrued interest with shares of the Company’s common stock or other securities of the Company. The note was secured by all unencumbered assets. In February 2017, in connection with the offering of series C Preferred Stock and warrants described in Note 9 below, all outstanding principal and accrued interest was converted by the holders into shares of the Series C Preferred Stock and warrants.

In August 2017, the Company borrowed $60,000 from its Chairman of the Board of Directors pursuant to a promissory note. The note accrues interest at 5% per year, which is payable upon maturity of the note. The note is unsecured and matures on June 30, 2018.

Notes payable as of December 31, 2017 and 2016 consist of the following:

	2017		2016
Note payable to related parties bearing interest at 6% all principal and interest due on March 31, 2017, secured by all assets of the company not otherwise encumbered	$	-	$	360,000
Note payable to a financial institution bearing interest at 6.75% Monthly installments of $805, secured by vehicle		36,179		43,132
Note payable to a related party bearing interest at 5% all principal and interest due June 30, 2018 unsecured		60,000		-
Convertible notes payable, net of unamortized debt discount and debt issuance costs of $44,735 at December 31, 2016, bearing interest at 8%, matured July 27, 2017		-		3,025,165
Note payable to related parties net of unamortized debt discount of $80,466 and $107,288 at December 31, 2017 and 2016, respectively, bearing interest at 6% all principal and interest due on December 31, 2020, secured by all assets not otherwise encumbered as collateral for purchase of AOS shipping container		419,533		392,712
Total notes payable		515,712		3,821,009
Less: current maturities		(67,437)		(3,392,118)
Notes payable, net of current installments and debt discount	$	448,275	$	428,891

Maturities of convertible debt and notes payable, excluding debt discount and debt issuance costs, at December 31, 2017, are as follows:

Years ending December 31,
2018	$	67,437
2019		7,956
2020		508,502
2021		9,086
2022		3,197
	$	596,178
Discount		(80,466)
	$	515,712