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Convertible Notes Payable

3 Months Ended

Mar. 31, 2020

Note 9 – Convertible Notes Payable

The Company has issued several convertible notes which are outstanding. The note holders shall have the right to convert principal and accrued interest outstanding into shares of common stock at a discounted price to the market price of our common stock. The conversion feature was recognized as an embedded derivative and was valued using a Binomial Option Pricing Model that resulted in a derivative liability of $4,648,746 and $4,834,190 at March 31, 2020 and December 31, 2019, respectively. All notes accrue interest ranging from 8% to 12% and will mature in 2020. In connection with the issuance of certain of these notes, the Company also issued warrants to purchase its common stock.

Several convertible note holders elected to convert their notes to stock during the three months ended March 31, 2020. The table below provides the note payable activity for the three months ended March 31, 2020, and also a reconciliation of the beginning and ending balances for the derivative liabilities measured using fair significant unobservable inputs (Level 3) for the three months ended March 31, 2020:

	Convertible Notes			Discount			Convertible Notes, Net of Discount			Derivative Liabilities
Balance, December 31, 2019	$	3,266,775		$	914,245		$	2,352,530		$	4,834,190
Issuance of convertible notes		103,000			103,000			—			232,013
Conversion of convertible notes		(89,000	)		(25,377	)		(63,623	)		(97,838	)
Repayment of convertible notes		(2,500	)		—			(2,500	)		(3,925	)
Change in fair value of derivatives		—			—			—			(315,692	)
Amortization		—			(452,058	)		452,058			—
Balance March 31, 2020	$	3,278,275		$	539,810		$	2,738,465		$	4,648,748

During the three months ended March 31, 2020, the Company entered into a convertible note in an aggregate amount of $103,000 which a twelve months maturity, bearing 12% interest per annum. The note is convertible at 35% discount to the average of the two lowest Volume Weighted Average Prices (VWAPs) during the previous ten (10) trading days to the date of a Conversion Notice. The conversion feature related were determined in the amount of $135,710 using Binomial Option Pricing Model.

During the three months ended March 31, 2020, $2,500 of note principal and $819 of accrued interest were repaid to a debt holder.

During the three months ended March 31, 2020, $89,000 of notes, $6,282 of accrued interest and $210 additional fee was converted into 13,767,631 shares of common stock. A loss on extinguishment of debt of $1,993, extinguishment of debt discount of $25,377 and reduction of derivative liabilities of $97,838 have been recorded related to these conversions. As of March 31, 2020, several convertible notes in aggregate principal of $215,000 were past their maturity dates, however the Company has not yet received a default notice.

On July 17, 2018, the Company entered into a certain Equity and Debt Restructure Agreement with two, long-time investors in the Company (the “Restructure Agreement”). Pursuant to the material terms of the Restructure Agreement, the investors agreed to return and cancel their collective 2,774,093 restricted Company common shares, which had been received from the prior conversion of their older convertible notes, in exchange for the Company’s issue to them recast convertible promissory notes. Accordingly, on the same date, these investors were each issued a First Priority Secured Promissory Note (the “Note” or “Notes”), in the principal amount of $1,683,558 and $545,607, respectively. In connection with this transaction, one of these investors agreed to loan the Company an additional $700,000. In 2018, the Company has received $220,000 cash proceeds of the additional $700,000 loan. Fair value of 2,774,093 restricted Company common shares were determined in the amount of $443,855 using market price and fair value of the embedded conversion feature were determined in the amount of $3,555,888 using Black Sholes Merton Option Model. As the result of the transaction, the Company recorded $2,892,033 in financing costs, and $2,449,275 as debt discount during year ended December 31, 2018. On March 29, 2019, the Company received $100,000 cash proceeds from the additional $700,000 loan. The conversion feature related to $100,000 were determined in the amount of $154,861 using Binomial Option Pricing Model. During year ended December 31, 2019, the Company received $380,000 cash proceeds from the additional $700,000 loan. The conversion feature related to $380,0000 were determined in the amount of $586,710 using Binomial Option Pricing Model. During the year ended December 31, 2019, we recorded $206,710 loss related to financing costs and $380,000 as debt discount.

The following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current liabilities for the three months ended March 31, 2020 and 2019.

	March 31, 2020		March 31, 2019
Risk-free interest rates	0.11 – 1.58	%		1.53 – 2.60	%
Expected life (years)	0.25 – 1.00			0.08 – 1.25
Expected dividends	0	%		0	%
Expected volatility	179-214	%		70-557	%